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Executives

John Barr – President and CEO

Brigid Makes – SVP and CFO

Analysts

Larry Biegelsen – Wells Fargo

Rick Wise – Leerink Swann

Bob Hopkins – Banc of America/Merrill Lynch

Matthew Dodds – Citigroup

Tao Levy – Deutsche Bank

Joshua Zable – Natixis

AGA Medical Holdings, Inc. (AGAM) Q1 2010 Earnings Call Transcript May 6, 2010 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the AGA Medical's first quarter 2010 conference call. Hosting the call today is Mr. John Barr, President and CEO of AGA Medical. My name is Amica and I will be your coordinator for today. As a reminder, this conference is being recorded for replay purposes. Before we begin, the company has asked me to read the following statement.

The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that include risks and uncertainties. Such forward-looking statements include the expectations, plan and prospects for the company including potential clinic – clinical successes, anticipated regulatory approvals and future product launches and product revenues, margins, earnings and market shares. The statements made by the company are based upon management's current expectations, and are subject to certain risk and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors of other cautionary statements described in the company's filings with the SEC, including those described in the Risk Factors and Cautionary Statements sections of the company's most recent earnings release as filed on Form 8-K this morning and its annual report on Form 10-K. The company's does not intent to update this statement and undertakes no duty to any person to provide any such updates under any circumstances.

Additionally, this presentation includes a discussion of certain non-GAAP financial measures, including EBITDA, constant currency and non-GAAP earnings per share, which management finds useful and evaluating its businesses. A reconciliation to the most comparable non-GAAP measures can be found in the company's earnings release.

At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) It is now my pleasure to turn the floor over to Mr. John Barr. Please go ahead, sir.

John Barr

Well, thank you. And welcome to the AGA Medical first quarter 2010 earning conference call. With me on the call today are Brigid Makes, Chief Financial Officer, Roland Lund, our General Counsel and Rachel Ellingson, Senior Director of Business Development and Investor Relations.

Our plan this morning is for Brigid to provide a review of our financial results for the fourth quarter 2010. I will then provide some business highlights from the quarter and we will open up the call for your questions.

Before I turn the call over to Brigid, I would like to start the call by saying that we're off to a very strong start for 2010 and pleased with our first quarter results. We had solid sales growth across all products and all geographies, clearly demonstrating the benefit of our investment in developing strong global sales channels.

In addition, we had strong recruitment results in our PFO trials demonstrating the strength of our clinical team. Our spending was inline with our expectations and our strong gross margins continue to allow us to invest in the pipeline programs which are key to our mission of developing innovative medical devices that can change the status of careful patients.

In this quarter, we successfully achieved two significant milestones for the company, one clinical milestone with FDA approval to begin the clinical trial in the U.S. to evaluate the safety in efficacy of our AMPLATZER Cardiac Plug to close the left atrial appendage and one business milestone with the settlement of our path litigation with Medtronic or to which we will discuss in further detail later in the call.

With that I'd like to turn the call over to Brigid.

Brigid Makes

Thanks, John. And again, welcome to everyone on the call this morning. The first quarter of 2010 was a strong sales quarter for AGA Medical with reported net sales of $51.3 million versus $44.4 million in the prior year. This represents a year-over-year net sales growth of 15.4% as reported in 11.9% on a constant currency basis.

For the quarter, atrial septal occluder sales represented 50.9% of sales, PFO Occluder sales represented 14.8% of net sales, Vascular plug represent a 10% of net sales. In other devices including devices to close ventricular septal defects, patent ductus arteriosus and the AMPLATZER Cardiac Plug to close the left atrial appendage, accounted for 12.7% of net sales. Accessories that are used in the procedure, such as delivery systems and sizing balloons, represented 11.6% of net sales.

Direct sales in North America represented 38.9% of net sales. Direct sales in Europe accounted for 42.3% of net sales and distributors who cover the rest of the world accounted for 18.8% of net sales. As we have reported, we converted six distributors at the beginning of January 2009 with our distributor converging largely completed our first quarter of 2010 versus 2009 is a clean comparison in terms of growth rate.

Sales in North America grew 11.9% versus the prior year. Direct sales in Europe grew 17.8% largely due to the availability certain product sold outside the U.S. and not yet approved in the U.S. Those products include Patent Foramen Ovale or PFO device. Our second product that close patent ductus arteriosus is the AMPLATZER Duct Occluder II.

The AMPLATZER Cardiac Plug to close the left atrial appendage and our latest version of the vascular plug III and AMPLATZER vascular plug IV or AVP IV. Our distributor sales representing the rest of the world grew 17.9%. Overall gross for the first quarter was principally driven by higher unit growth with some benefit from currency.

Our fastest growing product line continues to be our vascular business, which experience strong revenue growth in the first quarter of 2010, up 67% worldwide. While, the vascular business on impressive revenue growth in North America at 42%, Europe continuous to experience significant momentum with a 103% revenue growth versus the first quarter of 2009. All versions of the vascular plug are approved in Europe, in each plug product, we saw an increase in volume, but Europe's impressive performance continuous to be driven by sales of the AVP IV which was launched in Europe in the third quarter of 2009.

Our PFO business continuous to perform as we see the benefit of having direct sales force in terms of our ability to better understand our customers and undertake market development initiative. In Q1, PFO sales grew 11% from the prior period. In terms of our AMPLATZER Cardiac Plug, we continue to be pleased with the performance of this device and acceptance by the physician community outside of the United States. As previously stated we hope to break our sale of this device as the separate line item by the end of 2010.

Now, let me move down the P&L to gross margins. Our performance at the gross margin line was strong for the quarter with gross margin at 85.9% versus 80.2% in the same quarter last year. When you look at last year, remember that we've repurchased inventory from distributor for our conversation to direct distribution in January of 2009. The excess cost of that inventory was amortized to our cost of good, which was completed in May of 2009. Without this impact, gross margin would have been 85.6% in the first quarter of 2009 versus 85.9% in the first quarter 2010.

Total operating expense for the quarter was $40.6 million including $31.9 million one time $1 million charge – one-time charge associated with Medtronic litigation settlement. The $40.6 million compares to $35.7 million for the first quarter of 2009 and $42.4 million in the fourth quarter of 2009.

In March, 2010, we settled our path litigation with Medtronic relating to the January 2007 patent infringement action brought against us. The settlement agreement calls for us to paying Medtronic $35 million in four payments over the next four years. As a result, we are taking a $31.9 million charge in the first quarter reflecting the discounted value of the total settlement amount.

The $3.1 million difference between the $35 million and the $31.9 million will be accredited to interest expense over the next four years. The agreement calls for payment of $7.5 million in April of 2010, which we have made and additional payments of $7.5 million in January 2012 and payments of $10 million in January of 2013 and in 2014.

Selling, general and administrative expenses for the first quarter were $25.4 million, up from $22.7 million in the prior year period, but down $1.6 million sequentially from $27 million reported in Q4 2009. This is primarily due to lower legal fee. The increase in expenses from the prior year was associated with strengthening our sales force in Europe as well as North America.

R&D expenses increased to $10.2 million in Q1 of 2010 as compared to $7.9 million in Q1 of 2009, largely due to increase spending on our clinical trials as a result of strong patient enrollment. Specifically, enrollment in the RESPECT trial, our PFO stroke trial was ahead of plan in the first quarter and contributed to the year-over-year increase. We also effectively re-launched premium, our PFO-Migraine trial in the U.S. in the first quarter, which contributed to increase expenses.

Remember that we've received FDA approval for a significant change to our enrollment protocol last year, which we believe has the potential to accelerate patient recruitment into the trial on a sustained basis. It is important to know that spending in our clinical trials is driven by enrollment.

In the future, there maybe some limited volatility in R&D spending based on the rate of enrollment in the trial. In this case, the faster pace of enrollment in respect is clearly a highlight for the quarter as it hopefully gets us closer to the end of the trial. We are pleased with our patient recruitment effort and John will provide a further update on our clinical trial later in the call.

EBITDA excluding the litigation settlement charge was $9.4 million for Q1 of 2010 – excuse me – versus $4.3 million in the prior year. The difference in EBITDA has driven primarily by our higher sales in margin, currently offset by the investment and infrastructure that I described previously.

The favorable comparison is also held by the write-off of $2.3 million of an investment in an early stage of the company that we took in the first quarter of 2009. We reported a net loss under GAAP of $21.2 million for the first quarter in 2010, which included a charge of $31.9 million for Medtronic settlement. Excluding that charge, net income before dividend was $0.7 million in the first quarter of 2010 as compared to a net loss before dividend of $6.4 million in the same period a year ago.

Now, let me talk about non-GAAP EPS, given the high amortization expenses associated with our business and the expenses associated with Medtronic litigation settlement, we thought it would be helpful to provide non-GAAP net income in earnings per share information that would adjust for this charges.

As details in our press release, non-GAAP adjusted net income applicable for common shareholders for the three months ended March 31, 2010 with $4.2 million versus $3.4 million in a same period of the prior year and for fully diluted share was $0.08 for the three months ended March 31, 2010 versus $0.08 for the prior year period. I'd like to remind you that these earnings per share number is not adjusted to reflect legal fees associated with Medtronic in the first quarter of 2010.

Now, let me make a few comments relating to the balance sheet. We ended the first quarter with $13.2 million in cash, a decrease of $11.3 million from our cash position as of December 31, 2009. The decrease was primarily due to approximately $8 million of cash payment in accordance with our distributor conversion agreement, $5.8 million associated with lower working capital primarily due to payment to employee under the company's annual incentive compensation plan and $2.8 million in higher restricted cash associated with certain litigation appeal.

Accounts receivable totaled $50.3 million, an increase of $1.6 million from December 31, 2009, the company's day sales outstanding or DSO is 88 days, however, if the associate – if the activity associated with our Southern European business were excluded, the DSO would be 58 days for North America, the remainder of Europe and our distributors itself to the rest of the world.

We are aggressively managing collection to various programs such factoring in certain country and we'll continue to do so. Inventory doing stable to $12.4 million as of March 31, 2010. There are also two new line items on our balance sheet as a result of our litigation settlement. We have recorded a short-term liability of $7.5 million to reflect payments due Medtronic in April of 2010, which I mentioned we already paid and a long-term liability of approximately, 24.4 million to reflect the discounted remaining payments due over the next four years.

In summary, we are very pleased with the quarter, highlighted by strong sales and gross margin, and operating expenses that were overall in line with our expectation. R&D was high – quietly higher than expected primarily due to strong performance of our clinical group in the enrollment or our RESPECT trial. Our legal expenses were lower than expected primarily due to the timing of the litigation settlement with Medtronic.

Now, let me provide a few comments and guidance for 2010. We are reaffirming our financial guidance for 2010, which was provided on our Q4 2009 earnings call. Although, the U.S. dollar has strengthen since providing our prior guidance, in preparing our full year guidance, the 2010 guidance, we had used exchange rates, which assume the euro would be in the range of $1.32 to $1.38.

We continue to expect net sales for 2010 to be in the range of $221 million to $226 million, which represents an 11% to 14% growth over 2009. However, a further strengthening of the U.S. dollar, could impact our results throughout the year.

We expect our gross margin to be approximately 85%, excluding the charges associated with the settlement of our patent litigation. We expect EBITDA to be in the range of $56 million to $59 million and non-GAAP as adjusted net income for diluted share, which also exclude approximately $20.5 million of amortization expenses to be in the range of $0.49 to $0.54 per share, assuming approximately $51 million diluted, a fully diluted shares outstanding.

Now, let me now turn the call back to John to review some of the operational highlights.

John Barr

Thank you, Brigid. Brigid has covered many of the financial highlights of our business. Let me shift the focus a bit and update you on some of our clinical programs that are intended to expand the market opportunities of two of our products that are sold in Europe today, our PFO occlusion device and our AMPLATZER Cardiac Plug.

Our RESPECT study is designed to study whether PFO closure is superior to medical management in preventing recurring stroke. There is one to one randomization in the two arms. The study uses an adaptive model, permitting periodic looks at the data by an independent data safety monitoring board, sometime referred to as DSMB. The study may be stopped by the DSMB if certain pre-defined stopping rules are achieved, indicating that the end point has been met.

Due to the strong performance of our clinical team and study centers, we have seen strong and steady enrollment in the last several quarters. The last three months were strong than any comparable period of the trial. As of April 30, 2010, 726 patients have been enrolled in the study and 1,352 patient follow-up years have been accrued. We are very proud of this performance and believe our team can maintain this momentum going forward.

We have filed two of the three modules for our PMA submission for RESPECT and are working with the FDA to move through that process. The third and final, excuse me, PMA submission contains the clinical data, which will be filed when the trial is complete.

This rolling submission will allow us to work on approval of the non-clinical aspects of the application, while continuing enrollment in the study. Following what we hope will be a successful outcome of the study. We will only need to file the final module of the PMA.

In addition to our stroke trial, our clinical trial Premium is designed to measure whether PFO closure can result in a meaningful reduction in the number and severity of migraine headaches in patients that have a significant PFO, while experiencing the significant number of headache days per month and have failed at least three medications.

As we mentioned in our fourth 2009 call, we gained approval of a significant change to that protocol that we believe has the potential to accelerate enrollment in the study on a sustain basis, that protocol has been approved at all sites and we have enrolled patients under that protocol at multiple sites.

In parallel, we have invested and we’ll continue to invest in patients recruiting programs and based on early results. We are cautiously optimistic that the protocol changes along with our recruiting efforts will enable us to accelerate enrollment. We hope to be in the position update our shareholders in the second half of this year on enrollment and study, and also forecast when the study is likely to be completed.

Next, I’ll switch gears and discuss the AMPLATZER Cardiac Plug. To remind you again, this is for left atrial appendage closure. In March, we received conditional Investigational Device Exemption or IDE approval from the FDA to evaluate the safety and efficacy of the AMPLATZER Cardiac Plug to close the left atrial appendage. This trial is designed to demonstrate efficacy and preventing stroke in atrial fibrillation patients who are eligible to receive Warfarin, as well as safety of the device and the procedure.

The clinical study will be a multi-center study up to 90 centers, with two to one randomization between AMPLATZER Cardiac Plug and patients continuing on Warfarin. This trial design includes a feasibility phase to be followed by a pivotal phase.

Up to 10 clinical sites will participate in the feasibility phase of the study and we are started investigational review, board reviews at these sites. We expect to randomize, excuse me again, we expect to randomize our first patient in the feasibility phase of the clinical trial by the end of the second quarter of 2010.

As you are aware, the AMPLATZER Cardiac Plug is CE marked, and we are currently selling the device throughout Europe, South America and the Pacific Rim. We are pleased with the performance of the device to date and excuse me, we are pleased with performance of the device to date and the reaction to position that use this device.

The trend suggest a learning curve for safety and technical success that is comparable to other AMPLATZER devices. We are working in parallel to implement our focus marketing effort targeting electrophysiologists that treat the underlying disease atrial fibrillation. We believe that inventional cardiologist, trained and experience in repairing structural heart defects, along with electrophysiologists represent the two most important physician groups to educate and train on left atrial appendage closure.

In parallel, we are working hard on obtaining reimbursement on a country-by-country basis in Europe, both efforts expanding physician use the electrophysiologist and reimbursement approval should have a positive impact on making left atrial appendage closure and more routine procedure in the market we have targeted.

Let me now shift focus again and provide a brief legal update, which will be shorter than the legal updates on our last two quarterly earnings call. As you may recall, in August 2009 we announced a jury verdict in the first part of the Medtronic trial. Medtronic alleged that our products infringed two patents.

In March 2010, we settle this patent litigation for $35 million to repay in four payments over four years. We believe this is a very favorable outcome for us as it eliminates much of the expense and uncertainty associate with the litigation. In addition it provides us with a fully paid up license for the patents and dispute known as the Jervis patents. This license not only covers existing products but also any future products that we develop and commercialized which use nitinol.

In summary, the first quarter of 2010 was a strong start to the year. Our financial performance was solid with strong sales results and discipline investment in areas that provide the most significant opportunities to accelerate our growth rates.

Our clinical and regulatory teams have done an outstanding job with patient recruitment efforts in our ongoing PFO clinical trials and in obtaining FDA approval to begin our AMPLATZER Cardiac Plug trial in the U.S. We look forward to continuing the momentum for the balance of the year, and continuing to update the shareholders on our progress.

With that, operator, could you please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.

Larry Biegelsen – Wells Fargo

Good morning. Thanks for taking the question. First, John, it would be helpful to get your reaction to NMT’s comment, that referrals are slowing in Europe PFO stroke closure, ahead of the closure one results, is that consistent with what you are seeing?

John Barr

No. It’s not. We see no change in the patent referrals and the patent of use of the product. If anything, we are working on market development programs with neurologist even advance of the trials to try to convert them to – except PFO closure, neurology community as I think, we’ve talked about in the past is the key gatekeeper and we are working hard on the – last holdouts, so the holdouts that won’t refer their patients to try convince them that with the data available that is a good idea for that particular part of the patient that experienced cryptogenic stroke to refer their patients for closure. So we continue to remain as I said optimistic about our potential for growth in the near-term.

Larry Biegelsen – Wells Fargo

On the ACP pivotal trial or clinical trial, are you, at this point in time are you prepared to give us some color on the trial design. How it might differ from to protect their study, in terms of the primary end point and other key differences?

John Barr

Actually, Larry, I think, when you keep our powder dry in the near-term, I think we want to wait till Occlutech [ph] navigates the approval process with the FDA and again, we don’t want to help our competition in anyway and we will as soon as that happens, we’ll be happy to update you on our, more details on the end points.

Larry Biegelsen – Wells Fargo

Okay. Then just lastly for Brigid. FX, I think, if I remember correctly, that FX is going to be somewhat neutral for 2010, I assume now, it’s probably have the negative impact on the full year sales. Can you give us a rough number Brigid?

And on that same topic the flow through on the P&L, since you don’t hedge on the P&L, it’s roughly 40% to 50% of an operating margin hit, could you confirm that? Thanks.

Brigid Makes

Yeah. Larry, it’s relates to the first part of the question, the range we guided the $221 to $226 million included assumptions with the euro in the range of $132 to $138. And so, I think, given today, we still in that range, so we reaffirming that guidance.

As it relates to the hedging, your second part of the question was, what flow-through and what’s you’re talking about is, what’s an offset and I think, we’ve said in the past, our expenses that are non-dollar expenses are roughly 35% to 40% of our non-dollar revenue exposure, so the net exposure there is 40% to 50% – 55% to 60%.

Larry Biegelsen – Wells Fargo

So the flow-through would be 55% to 60%, am I understanding that correctly, sorry.

Brigid Makes

Yeah, yeah.

Larry Biegelsen – Wells Fargo

Okay. Thank you very much.

Operator

Your next question comes from the line of Rick Wise with Leerink Swann. Please proceed.

Rick Wise – Leerink Swann

Good morning, everybody. A couple of questions. First, John, you’re talking about in the ACP working on EU reimbursement. Just help us understand where you are in the process, timing and just the implications over there?

John Barr

Yeah. It’s a country-by-country exercise, each country has its own dynamics. In some countries like, Italy, you go on a region by region basis. There we have approval in several regions. Spain and similar in that you have states that are fairly independent and there again we have some level of reimbursement.

Key markets that we are focus really on are Germany and the U.K., NICE, their National Comparative Effectiveness group is going to review left atrial appendage in the next couple of months, and we have submitted documents to support a – hopefully a positive decision there.

France is always the most complex, we will probably have to arrange to do a small trial of some sort there not a clinical trial per se but more of a usage and effectiveness study that probably will be the most troublesome over the longer term.

But each one is a separate dynamic. We’ve got, I fact, higher the corporate resource who will start shortly to coordinate all our reimbursement work and development of economic models for not only for the cardiac plug but for other new devices as well. And so, we’ll update you as, we achieve success in any of these countries.

Rick Wise – Leerink Swann

All right. In back to the RESPECT trial and I’m thinking, I asked about what would be implication be for AGAC, NMT data doesn’t try to be as positive as they would hope in November. Can you just refresh us on your thinking there, what it might mean or not mean for AGA?

John Barr

Well, I think, well, it’s tough, I get the question as well, Rick, and it’s tough to conjecture as to what the nature of the – it will really depend on the nature of the results. For example, if it's the safety issue is likely to be device specific. If it's – they don't meet their end points is that because the closure rates we don't know, we'll have to take a look at that. There – we also we know that they – I don't think they publish the detail, although they will shortly publish, I think the details of their protocol, based on my understanding and comments they have made publicly they also include TIA's in their primary end-point.

TIA is a basically, could be called a mini-stoke, a stroke that resolve within 24 hours, this is somewhat controversial in neurology community because they believe that what defines the TIA can be somewhat ambiguous. And so, we do not include that as a primary, in part of our primary end-point, so I think we have potentially a more robust end-point. So I think we'll have to wait and let it play out. Again we are – we're making good progress in our trial and hopefully we get to our end-point and not to just the future and become somewhat of them a move point.

Rick Wise – Leerink Swann

Exactly. Two last questions, Brigid maybe you can give us little perspective on cash use from here, obviously, first quarter was somewhat unusual, but yet $50 million, where the cash balances go, are your cash expensing front on the income statement SG&A, can you help us, I think about how SG&A works for the rest of the year, maybe quantifying first quarter legal expense and what's normal now. Thanks so much.

Brigid Makes

Okay. First, as it relates to cash. Cash historically for the company has always been sort of, down to neutral in the first quarter because of certain timing and payment, I think also it's the trend of our P&L, we expect just continue to generate positive cash flow from now to the end of the year.

And from our financing site, really we see no issues on that front, as well. And it relates to SG&A probably, as I said we said on our last call, legal fees were down in the quarter, they will continue and that was in power plan but again, for the quarter we came in favorable to that and I think relative to the estimate that was in the $1 million range.

But going forward we should continue to see legal fees [ph], probably in the $3 million range for quarter, there are still cases that we're depending, but certainly it's going to be well below what we experienced in 2009.

Rick Wise – Leerink Swann

Thank you.

John Barr

Yeah. And just – Rick, let me just add additional color which Brigid mention in her comments and this is about cash used in the first quarter. It was relatively high due to couple of things. Number one is, we've made incentive payments that were payable under our agreement with our distributors, this were the distributors we terminated more then a year ago and that amounted to $8 million.

And then also payout our cooperate bonus programs in the first quarter to broad based employees and that was about $5.8 million, obviously, those are not going to be repeated, in later quarter.

Rick Wise – Leerink Swann

Thanks again.

Operator

Your next question comes from the line of Bob Hopkins with Banc of America/Merrill Lynch. Please proceed.

Bob Hopkins – Banc of America/Merrill Lynch

Hi. Thanks. Can you hear me okay.

John Barr

Yes, we can.

Brigid Makes

Yeah.

Bob Hopkins – Banc of America/Merrill Lynch

Great. So first just a question on guidance, Brigid you may not have this math rate in front of you, because things are moving very rapidly, but this exchange rate stayed where they are right now, which is about 128 versus where you're guiding for the euro, was that attractive by an incremental $2 to $3 million from the current guidance.

Brigit Makes

Yes. I think, I'd like to allow throwing a number out there, probably provide that after looking at a little more – a bit more closely.

Bob Hopkins – Banc of America/Merrill Lynch

Sure. And then, just want to confirm what you're saying for expand level, the SG&A and R&D over the course of this year, is what you're saying roughly that R&D will stay in this $10 million per quarter range and SG&A will kind of stay in this $25 million per quarter range or should we see some meaningful variation from that throughout the course of the year.

Brigit Makes

I don't think you'll see meaningful variation, but as John, as we said in our comments R&D, I think we've guided in the $40, $41 million range and that will again will fluctuate based upon driven largely by the enrollment in the clinical trial. And then, I think the guidance we head during the comment we made on SG&A, we said this would be comfortable in this range with probably modest increases over the course of the year from quarter-to-quarter there'll be some growth in SG&A.

Bob Hopkins – Banc of America/Merrill Lynch

Okay. And then – thank you for that. And John, I just want to get some colors from you on Europe and what's you're seeing right now, obviously a lot of uncertainty in several countries and you mentioned the DSO issue in Southern Europe. But how confident are you, given the term-loan in Europe right now in the outlook for the rest of the year for your business, do you think it's pretty much a 100% immune to this given the nature of the disease that you're treating or perhaps is there some risk in terms of rationing and what have you given what's going on?

John Barr

Yeah. I think, you got to book on it, as country-by-country basis right now. Greece, as I think you may remember is the only country we go through a distributor. That distributor actually has done a great job for us and continues to actually hit their plan in the first quarter. So I think they would be much better position to navigate and if we were directly, so there, I think in that respect it was a very good decision.

The other countries on the south, we don’t see any real change right now. And Italy, Spain and Portugal, what you see is the procedures are getting done but what happens is you have to wrestle with administration to get a PL. So they are not delaying the procedures and it’s somewhat of a cash flow game for them.

I don’t think that we haven’t see that change in the last three months and there again are decision to be direct get closer to the hospital, have people on a ground dealing day to day with administration positions us in a much better position to make this happen. Also we leverage our relationships with the physicians because if it becomes an issue, we just go to our physician to implant it [ph] and say, yeah guys, this is making as very hard, can you help us with administration and get them to release the PLs and generally they do.

So we will continue to work through that. I don’t think it’s slowing down AR [ph] other than if you are in southern Europe, as I think you probably know from dealing with all the different medical device companies, the DSOs are longer and the trade – implicit trade of as you get higher ASPs in that area as a result. So again I don’t think we’ve seen any difference or change in the collection patterns.

Bob Hopkins – Bank of America/Merrill Lynch

Okay. And then – so that’s been kind – basically being contemplating your guidance for revenues, is that the current environment, is that fair?

John Barr

Yes. Yeah. And we have to radically change for us to alter it based on that.

Bob Hopkins – Bank of America/Merrill Lynch

And then last question from me is just any update, John, on your thinking as far as your PFO stroke trial and when we might see the data, any update there or same commentary as you given previously?

John Barr

I think it’s the same commentary. To remind you at the time of the IPO, we said that we thought, as – with the end of October, we thought that it would take – again a year to 18 months from that point and that’s again based on statistical models and what we – how we project out enrollment rates. And so far nothing’s changed in our underlying assumptions, so nothing has changed in our view that we could hit it in that timeframe, of course, with a stopping rules types study, there is no guarantees.

Bob Hopkins – Bank of America/Merrill Lynch

Great. Thanks very much.

Operator

Your next question comes from the line of Matthew Dodds with Citigroup. Please proceed.

Matthew Dodds – Citigroup

Hey good morning, John. Couple of questions for you. If you look at vascular and the EU growth, it seems like largely driven by the AVP 4, is that still on track for approval pretty soon here? And when you look at the U.S. opportunity, is there reason to think that there is something limiting the U.S. that you wouldn’t see a big uptick in that business when the AVP 4 launches? That’s the first question.

John Barr

That’s a good question. We’re working with the FDA to the 510(k) process. We are down to a number of questions. I am hopeful it gets done this quarter and that hasn’t changed. The – no, I think that we will see the same phenomena. And in fact, because several years ago we started a process of putting a dedicated vascular sales force in place, that I think will give them the AVP 4, they are going to just run with it and I think it’s going to be very exciting. I think it’s going to – we’re going to see the same thing that we see in Europe that it completes the toolbox that it really gets people thinking that I should have plug as my primary embolization tool and that’s really how we are going to sell it. So I know our team is anxious to get their hands on that product. The other thing has been great is we have seen no cannibalization in Europe over other products. So it really reinforces the fact that we do have a toolbox and it’s complementary to our other vascular plugs.

Matthew Dodds – Citigroup

In the U.S., what’s driving the vascular growth and is it hard to sales forces or is it one of the other recent products that –?

John Barr

Well, the sales growth and across the board?

Matthew Dodds – Citigroup

No. Yeah – no, vascular in the U.S.

John Barr

In vascular, it’s the sales force. This is a real good group. We’ve added on the margin over the last couple of years. We have reduced territories as a result and when we reduced territories, we have actually seen an increase in sales and we – because I think that the vascular typically have, most of these procedures are done in larger hospitals and there are bunch of different interventional radiologists. So going deeper into some of these larger hospitals which the rep can have the time to do that when you shrink their territory, has worked extremely well and we got a very good group and we’re going to continue to look at that and analyze where we can continue to do that on the margin in terms of reducing territories and the launch of the AVP 4 will be another opportunity to continue that analysis.

Matthew Dodds – Citigroup

Then my last one on the ACP. I know you don’t want to give any color until later in the year. Can you at least say, maybe sequentially from Q4 to Q1, did you see growth or at least a decent trend?

John Barr

Yeah. We had – we really track the per unit as much they ship the procedures that are done as much as the shipments and I think we saw growth quarter-to-quarter in both.

Matthew Dodds – Citigroup

Great. Thanks, John.

John Barr

Thank you.

Operator

Your next question comes from the line of Tao Levy with Deutsche Bank. Please proceed.

Tao Levy – Deutsche Bank

Hi, good morning. I also wanted ask on the Vascular Plug but the growth in Europe for AVP is that AVP 4, is that sold for premium and there are a price contribution to performance we saw out of Europe?

John Barr

No. Its price in the same ranges of other plugs. In some cases, it maybe even a little bit lower. So its not, this is much really a unit story in terms of growth, which is what we want to see because our goal again is to make this product to standard of care.

Tao Levy – Deutsche Bank

And if you bridge it, that the currency does that have any impact on gross margins for you guys?

Brigid Makes

Only but yes, they would – I mean they would hit us only from the fact that is it a top line we have no costs of goods that are in sort of non-dollar. So just as it hits the top line, it would close to gross margin.

Tao Levy – Deutsche Bank

So the gross margin this quarter there’s a little bit of benefit from currency, is that fair?

Brigid Makes

From the prior year, yes.

Tao Levy – Deutsche Bank

On a prior year and I guess that potentially one of the reasons, why you kind of keeping that 85% in your guidance versus 86 that you put up this quarter?

Brigid Makes

Yeah. I think that again we said that we feel comfortable with the 85%.

Tao Levy – Deutsche Bank

And then just lastly, no, you have settled with Medtronic. I think before you talked about setting of facility in Ireland to potentially substantial do some manufacturing. Is that something you guys don’t have to think too much about or you still want to set that up given the growth that you have in Europe?

John Barr

Actually, we’ve sort of step to took taken a step back Tao and we reevaluating that – as I think we told most of you is that we don’t need the capacity, the great news here is we have a single ship in our Plymouth headquarters manufacturing for the world, so we can more than triple our volume in the initial – and still have a capacity in our facility.

However, there are reasons that it make sense to consider some place in the EU whether Ireland or some plays sales. One is this concept to country of origin, there are number of major countries outside the U.S. where if you have both regulatory approval and you manufacturing the jurisdiction in this case EU. You get a immediate approval and there is a fairly, significant large countries for example, Brazil, Columbia, Korea, China is moving to that and so with the natural lag in getting FDA approval on most devices, it wouldn’t, it might make sense to do that because we get a quicker run up in sales outside.

The second obviously would be nice to have a second facility just in case of disaster purposes and contingency planning but we are going to proceed deliberately and we have no near-term plans to accelerate that process.

Tao Levy – Deutsche Bank

Great. Thank you.

Operator

The next question comes from the line of Joshua Zable with Natixis. Please proceed.

Joshua Zable – Natixis

Hey, guys. Congrats on a great quarter and thanks for taking my questions here. Most of the med actually been answered but just the kind of follow-up on obviously the PFO trial you said you got a lot of med that last three months have been sort of better than any other previous three months, is there any thing going on I mean there is anything you guys are doing differently just obviously December 26. I think you said, 700 was your goal by first half. So obviously you are moving a lot faster than that, so any color around that? Thanks.

John Barr

Yeah. I think that – I pointed that I pointed to our team in-house. They've done a great job. There is no one thing, you do just. There is no magic bullet here. A lot of it in a long clinical trial is about keeping sites engaged and I think they've done a great job in communicating and keeping the enthusiasm up. And so we've seen just places that perhaps hadn't enrolled in a while because of strong effort and management on the part of our team, to continue to do that.

We have added some new sites in Canada as an example, recently that they contributed but there is no single thing. And I think that's kind of a good news, situation because it just said that if you do hard work and you keep good communications up with your sites and you have good sites of course that you can accelerate, enroll in the studies.

Joshua Zable – Natixis

Great. And then just, I know you guys have goal, your keen, European approval that peripheral graft, is that still on track, I know it's – for this year but just any changes?

John Barr

We think so. The only hedge it will have is because of the new MDD medical device directive in Europe, regulations that kicked in March. We may have to do a small, very small feasibility types study which is really a use study because this is a pretty new area for us, it's not just another occluder. So we are researching that if we did then it could slide into the first half, but I'm not prepared to say that right yet, because we are continuing to work on that. From a engineering standpoint, from all the R&D work, we are right on track and we still think we have the same timeline again. The only variations could be because we have to do a small feasibility trial. And when we make that decision, we will update you, folks.

Joshua Zable – Natixis

Great. Thanks very much. Congrats, guys.

John Barr

Thank you.

Operator

At this time, there are no further questions. I will now like to turn the call back over to John Barr for closing remarks.

John Barr

Thank you all for participating in the call. Again, we are very pleased with the results and we sincerely appreciate your interest in AGA Medical and hope you have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: AGA Medical Holdings, Inc. Q1 2010 Earnings Call Transcript

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