AngioDynamics CEO Discusses F2Q11 Results - Earnings Call Transcript

Jan. 4.11 | About: AngioDynamics, Inc. (ANGO)

AngioDynamics (NASDAQ:ANGO)

F2Q11 Earnings Call

January 4, 2010 4:30 p.m. ET

Executives

Greg Gin - Investor Relations

Jan Keltjens – President and CEO

Joseph Gersuk – EVP and CFO

Analysts

Brooks West – Craig-Hallum Capital

Jayson Bedford – Raymond James

Jason Mills – Canaccord Genuity

Tom Kouchoukos – Stifel Nicolaus

Robert Goldman – CL King

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the AngioDynamics second quarter 2011 financial earnings conference call. [Operator Instructions.] This conference is being recorded today, Tuesday, January 4, 2011, and I would now like to turn the conference over to Greg Gin. Please go ahead, sir.

Greg Gin

Thank you operator, and thank you everyone for joining us today for the AngioDynamics conference call to review the results of the fiscal second quarter, which ended on November 30, 2010.

The news release announcing the second quarter earnings crossed the wire this afternoon after the market closed and is available on the AngioDynamics website. The call is being broadcast live on the web at www.angiodynamics.com, and a replay of the call will also be archived on the website.

Before we get started, during the course of this conference call the company will make projections or forward-looking statements regarding future events including the statements about revenue and earnings for fiscal 2011. We encourage you to review the company’s past and future filings with the SEC, including without limitation the company’s Forms 10-Q and 10-K, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

In addition, today’s presentation includes certain financial measures used to better understand our business that have not been prepared in accordance with the Generally Accepted Accounting Principles, better known as GAAP. An explanation and reconciliation of these non-GAAP measures has been provided in today’s news release issued by the company and is available on the website at www.angiodynamics.com.

AngioDynamics uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing the underlying trends of the company’s business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP.

On today's call, the company has reported non-GAAP EBITDA and EBITDA per share and has reviewed these measures as an internal analysis and review of operational performance.

Finally, during the question-and-answer period today, we’d like to request each caller to limit themselves to two questions and encourage callers to re-queue to ask additional questions. We appreciate everyone’s cooperation with this procedure.

And now, I’d like to turn the call over to Jan Keltjens, president and chief executive officer of AngioDynamics.

Jan Keltjens

Thank you Greg, and good afternoon everyone. Thank you for joining us on our second quarter conference call. With me today is Joe Gersuk, our chief financial officer. The discussion this afternoon will go as follows. I will start with an overview of our fiscal 2011 second quarter results. Then, I will provide an update on the progress of the NanoKnife program and review our strategy to achieve our long-term goal to grow at a rate that is significantly faster than the markets in which we operate. Joe will then review our financial highlights for the quarter before we close with Q&A.

This afternoon, after the market closed, we reported net sales for the second quarter of $53.4 million, virtually identical to the $53.5 million reported in the prior year period. Net income for the quarter increased 5% to $3.3 million compared with a year ago, and diluted earnings were $0.13 per share.

Our improvement on the bottom line resulted mostly from continued strong expense management, and during his comments Joe will provide more information on all this as well as on the encouraging gross margin gains versus the first quarter. I would like to emphasize that we increased our net income while continuing to make substantial investments in key areas to build for future growth, like our international business, NanoKnife, and our R&D pipeline.

On the top line, our second quarter results were affected by the sustained challenging operating environment that we faced during our first quarter as well as the effects of the transition to a single U.S. vascular sales force initiated at the start of the first quarter. We did begin to see some signs of market stability in certain segments during the period, although overall I would characterize the market and relating pricing as generally being soft .

Our expectation is that with a gradual improvement of the economy, and the labor market, procedure volume growth will recover. We do expect markets, however, to remain very competitive, and that innovation, a competitive cost structure, and organizational efficiency are key attributes for strong and profitable growth.

In our remarks last quarter we indicated that the sales force transition would take 6-9 months to fully implement. Since initiating the creation of a unified vascular sales force at the start of Q1, we have focused on fully training our reps on all the company's vascular products and allowing them to build the customer relationships necessary to achieve and sustain a high level of productivity.

To further strengthen our sales operations, we have increased marketing as well as corporate sales support. We are continuing to build momentum in our sales force effectiveness and we expect to continue to see our growth rate accelerate as the second half of the year progresses.

While total sales were flat as compared to last year, we did generate solid growth from certain product categories and business areas. For example, our oncology product sales were up 16% from a year ago, and we grew NanoKnife system sales to $1.6 million, which represented a 42% sequential increase from our first fiscal quarter. Included in the NanoKnife result this quarter was system sales to customers both in Taiwan and Hong Kong, which represented the first sales of the NanoKnife system in the ever so important Asia-Pacific market.

Also, international sales, which had been an area of strategic focus for our company, were up 12% as compared to the same period last year. Our bright spots during the quarter beyond that were the growth in sales of our Micro-Introducer kits, VenaCure EVLT laser fibers, LC Beads, as well as our [port] product lines.

We remain confident about the long-term growth prospects of our company and continue to execute on our programs to create sustainable long-term growth and profitability. Our core businesses, oncology and vascular intervention, each represent significant growth opportunities. Our principal growth strategy is investing resources to drive innovation, and we directed approximately 10% of total revenue to new product development in the second quarter. As a result, we remain on track to launch approximately 10 new products in this fiscal year. I will provide more details on our new product development efforts in a few moments.

We're also pleased with some recent developments in the market for varicose vein ablation. We continue to see this area as an attractive growth opportunity and are pleased with the core strength of our franchise. Our NeverTouch laser fiber platform continues its strong performance and it benefits from several product line extensions.

We welcome the recent settlement of a patent dispute with Vascular Solutions, which underlines the strength of our VenaCure EVLT [IP] and will generate a per-unit royalty payment to us. We're also pleased with the recent jury award on the litigation with Total Vein Solutions and Biolitec by Covidien/VNUS. Although any impact may be delayed, we do believe that share gain opportunities may open up.

NanoKnife continues to gain clinical and commercial momentum in both the U.S. and abroad. During the second quarter, four new commercial agreements for the NanoKnife system were entered into and in total 23 hospitals around the world are now performing procedures either as part of a clinical program or on a commercial basis. Physicians treated an additional 90 patients since October 1, 2010, bringing the total number of patients treated with NanoKnife to 412.

A pivotal driver for future NanoKnife success is clinical outcome data. That is why evidence-based medicine is a core strategy in our NanoKnife program. We're making steady progress in this area. A total of four clinical studies have been completed and reported in the professional literature. Two additional clinical studies are currently enrolling, and in addition, in the U.S. the University of Louisville, under the direction of Professor Rob Martin, is administering a soft tissue ablation registry, or STAR registry, which will collect data on up to 200 patients across liver, pancreas, lung, prostate, and kidney treatments as well as other soft tissues.

The STAR registry currently contains data from 16 patients from two sites. Six more sites are currently going through the IRB approval process. And finally, it continues to be encouraging to see positive early and anecdotal clinical results on the use of NanoKnife being reported, and this now includes a growing number of pancreatic procedures.

In the international [HEC] multi-sample study, five patients have been treated in three enrolling samples. The further two samples are being trained in January, or will start enrolling subsequently. The pace of enrollment is being impacted due to the high scientific standards of this study and the corresponding strict patient inclusion criteria, which were established in order to gain specific end points related to the efficacy of NanoKnife. We plan to further expand the number of enrolling sites.

Several studies are planned for the next calendar year, including the prostate and pancreas IDE studies, and we do remain on track to submit IDE applications for these studies to the FDA before the end of this fiscal year. We expect the number of clinical studies and resulting publications around the world to continue to increase and thus create an increasingly strong body of clinical evidence underlining the safety and efficacy of the NanoKnife system for current as well as future potentially expanded indications. This belief is rooted in the continuing strong clinical feedback we receive from our customers as well as the broad and deep interest from the clinician side to participate in the programs.

As mentioned earlier, our goal for the company is to grow significantly faster than the market and this goal has not changed in light of the current soft market environment. We believe the markets in which we operate allow significant growth opportunities for our company regardless of the macroeconomic market trends.

Underlying our growth strategies is a continued focus on innovation and in the second quarter we launched an important expansion to our Morpheus Smart PICC product line with the introduction of a 5-French dual-lumen interventional radiology kit. To date, during fiscal year 2011, we have launched four significant new products in addition to a number of line extensions, and we do continue to expect approximately 10 product launches to come from our internal R&D organization for this fiscal year.

Over the balance of this fiscal year, we expect launches of new products that further strengthen our successful NeverTouch platform as well as broaden our Smart PICC and port, as well as dialysis franchises. We also plan to launch an upgrade to our NanoKnife platform and continue to expand our RF ablation product lineup. In addition, we continue to make solid progress on longer-term R&D programs that we anticipate will result in new product launches during fiscal 2012 and beyond that will support and accelerate long-term growth for our company.

In summary, we remain confident in the long-term potential of AngioDynamics, and we are focused on executing our long-term growth strategies even during this period of softer growth. As we move toward completion of the sales force transition and build on the momentum from our international operations, we're optimistic about improved results in the second half of fiscal 2011 and beyond.

We remain committed to innovation to drive long-term sustainable growth. Our financial strength gives us the flexibility to make disciplined investments to pursue additional growth opportunities. In the second quarter we continued our track record of delivering significant cash flow. We have a profitable business model despite current market pressures and continue to demonstrate improved operational excellence to enhance profitability.

I would like to once again thank our global AngioDynamics team for their continued hard work, and for their dedication and commitment to building our future, and I would like also to thank our shareholders and our board of directors for their ongoing support and confidence.

At this point, Joe will now take you through a more detailed look at our quarterly results. Joe?

Joseph Gersuk

Thank you Jan, and good afternoon ladies and gentlemen. Despite the challenges of the operating environment, our second quarter was highlighted by measurable improvement in gross margins, good operating expense management, excellent cash flow, growth in net income, healthy growth in sales of our NanoKnife product, and double-digit growth in our international business. We accomplished this progress while continuing to work through the transition in the U.S. vascular sales force, which has been underway now for two quarters.

Reported sales in the second quarter of $53.4 million are slightly lower than the prior year result. However, net sales increased by $64 million on a constant currency basis after adjusting for an unfavorable foreign currency translation impact of $150,000. Still flat, but slightly up rather than slightly down.

We believe the 6% decrease in vascular product sales in the second quarter is mainly attributable to the near term disruption from the sales force transition, with the balance generally related to the broader slowdown in hospital admissions and procedure volumes that has been widely reported.

We saw softness in sales across most vascular product categories, including a slowing in the sale of capital equipment in the laser vein ablation business. However, we did enjoy another quarter of double-digit unit sales growth in the disposable kits used in vein ablation, although the volume growth was partially offset by lower ASPs on the kits.

Turning to the oncology business, we achieved 16% sales growth in the quarter, led by strong sales of LC Beads and NanoKnife products. Beyond the strength in Beads and NanoKnife, we are also seeing the effect of the slowdown in hospital admissions and procedure volumes on the sale of other oncology products.

NanoKnife sales of $1.6 million in the quarter marked our third consecutive quarter with more than $1 million in sales of this exciting new technology, as four additional sites entered the commercial program in the quarter. This included sites in Taiwan and Hong Kong, marking the first of what we hope will be many NanoKnife systems in Asia.

From a geographic perspective, 88% of second-quarter sales were in the U.S. and 12%, or $6.7 million, came from international markets. International sales grew 12% from the prior year on a reported basis, and 14% on a constant-currency basis. This is our second consecutive quarter of double-digit sales growth in our international operations, and reflects the progress we are making in one of our key growth initiatives. International growth this quarter was led by strong sales of oncology products in the Asia-Pacific region, including the NanoKnife systems just mentioned.

Continuing down the income statement, gross profit totaled $31.5 million, or 59.1% of sales in the quarter. This is the same gross margin we reported a year ago, and is an 80 basis point improvement from our first quarter margin.

While we continue to see pricing pressure on the vascular side of our business, the sequential quarter improvement reflects material, labor productivity, and efficiencies in our manufacturing processes under the programs that we started last year. We expect this favorable margin trend to continue in the second half of the year, although not necessarily at the rate of 80 basis points a quarter that we just reported.

Operating expenses totaled $26.1 million in the second quarter, which is lower than the first quarter and lower than the second quarter a year ago as we strive to minimize the impact of the sales shortfall by limiting our operating expenses. The $772,000 in nonrecurring costs reported this quarter includes severance and relocation costs relating to organizational changes following recent executive appointments to the company.

The total operating expense impact of the NanoKnife program for the quarter was $2.8 million. Including the sales revenue and operating costs, the net loss impact of the NanoKnife program declined to $0.04 per share in the quarter compared with $0.06 per share a year ago.

Operating income was $5.4 million in the second quarter, a slight increase over the prior year, while the operating margin was 10.1% compared with 10% a year ago. EBITDA was $8.4 million, or $0.34 per share in the quarter compared with $8.5 million or $0.34 a year ago.

The income tax provision was recorded at a 36% rate in the quarter, compared with 38% a year ago. The rate reduction was primarily attributable to manufacturing tax credit.

Turning to the balance sheet and cash flow statement, we entered the quarter with cash and liquid investments of $110.6 million, an increase of $8.6 million in the quarter and $10.5 million in the first half of the fiscal year. We enjoyed a particularly strong quarter in cash flow, generating $9.9 million in cash flow from operations in the second quarter.

We reiterated our guidance for the fiscal year in the press release, and it is unchanged from the last earnings release. We expect net sales in the range of $220-$225 million, which is 2-4% organic growth, gross margin in the range of 58-59%, GAAP operating income in the range of $20.5-$22 million, EBITDA in the range of $33-$34.5 million, and GAAP EPS of $0.47-$0.50 per share, inclusive of a $0.21-$0.23 per share impact of the NanoKnife program, of which $0.04 is a noncash intangible amortization cost.

Additionally, we expect a tax rate of 35% for the fiscal year, and cash tax savings of $3.1 million from the use of [inaudible] NOLs. Please note that our third fiscal quarter has 59 business days, which is 2 fewer days than our second fiscal quarter. We plan to report Q3 financial results on Thursday, March 31, after the market closes.

And now, operator, we are ready for your questions.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question and answer session. [Operator Instructions.] And our first question comes from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Brooks West – Craig-Hallum Capital

I wanted to start with some questions on the varicose vein business. You said capital was soft, but you did see an increase in disposables. Net-net did that business grow this quarter year-over-year?

Jan Keltjens

Yes it did. The balance of all that is it's different moving parts. Indeed, as you say, capital equipment is tougher, and this negative disposable actually very encouraging. In Europe, in particular, in the British market, because of some austerity measures over there, it's a little tougher as well, but the overall business is growing.

Brooks West – Craig-Hallum Capital

And do you feel now, with all of the litigation that's happened, or some of the results from some of the litigation that's happened over the last 3-4 months, are we finally through the litigation side on the laser side? And can we return to more of a normalized competitive market? And is that going to be a positive going forward? And then I've got a question on Biocompatibles.

Jan Keltjens

On the litigation, I'd say the litigation for us it has been a pretty stable environment, frankly. I think we did the right thing - Joe, what, about two years ago? Maybe a little longer than that, in settling with at that time VNUS. It was a painful decision, but it was the right decision. Certainly looking at the jury verdict we felt good about the decision and that has allowed us to focus entirely on driving the business over the last two years. Beyond that, we spent a lot of money on creating IP and we will defend that if needed, and that's what happened. But I wouldn't call it a major, major distraction for the business - for us at least.

Joseph Gersuk

And certainly we're through with litigation from our perspective. We're at peace with everyone in the industry, but certainly Biolitec and Total Vein Solutions are not through with litigation and what may come out of that could certainly have an impact on the marketplace in the future.

Brooks West – Craig-Hallum Capital

Can you quantify the savings in litigation going forward?

Joseph Gersuk

No. It's not a large amount of money, but it's something in terms of reduced legal fees as well as the economic impact of the settlement.

Brooks West – Craig-Hallum Capital

Okay. And then if I could just sneak one more in on the Biocompatibles. Have you seen with the announcement of the acquisition of Biocompatibles by BTG any impact in the marketplace in terms of maybe some negative perception on your ability to continue to carry that product? And then are you any farther along in understanding beyond the guarantee through the end of '11 how that might resolve itself or when could we know something from the BTG side there?

Jan Keltjens

Great questions, Brooks. I would qualify the current business environment as business as usual on two fronts, both our relationship with Biocompatibles as well as our relationship with customers here in the U.S. market. Cooperation with Biocompatibles has been great over the last couple of years and continues to be great under their negotiating process and now the pending deal with BTG. And on the customers very, very transparent to customers. I think we have a joint interest in developing a healthy market and continue to drive that going forward. Beyond that, hard to give you guidance on when you could expect significant news. I think it's in the public domain that BTG and Biocompatibles expect the deal to close I believe early February. We would expect to not engage in serious conversations with them about a possible extension until after that closing. So I would say it's going to be easily late spring, maybe into early summer before we get some material news on a potential continuation there.

Operator

Your next question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford – Raymond James

Just a couple quick questions, and the first one may be simplistic here, but what will it really take to grow the top line? Is it a sales force issue? Is it an issue of new products, gaining traction? Or is it market related? What are the key factors there to get you on a growth trajectory?

Jan Keltjens

Well, that's a very fair question Jayson. Very, very fair question. It's a little bit all of the above. In a way we got hit somewhat by the perfect storm, the two key waves there being the sales force integration that created the situation where a good portion of the U.S. sales force - the entire vascular sales force in the U.S. - had to look at a lot more new products and to be trained on that, had to recreate relationships with customers and accounts, and I think that got compounded by undoubtedly a softening of procedure volumes in the U.S. And I think various companies have been reporting on that.

As I said in my remarks, we think the market is stabilizing. I wouldn't call it strong yet, but certainly more encouraging signals coming out of the market. I think the sales force is getting through this whole training cycle and relationship development cycle.

And I think those are the two fundamental issues and that's why we're comfortable maintaining the guidance, which implies that there's going to be - I would call it a substantial uptick in sales and growth rates for our company in the back half of the year.

On top of that, innovation continues to be important, and that's why we continue to provide the investment community and you as analysts with an update on our R&D progress. And I see two big buckets there - NanoKnife is a significant growth opportunity. There's a million [fixed] on a $53 million quarter. I mean that's noticeable. The other one is launching ten products beside NanoKnife for supporting the rest of the business, and that is even shy of introducing existing products in the international space on top of that. That will fuel the sustained growth.

We would frame the aggregate of the markets in which we compete today growing in the mid-single digits, maybe 6% or so give a take a point. We have said we want to substantially outgrow that, so we want to be in the high single digits or even a bit more than that as an organic core. And then of course through acquisitions and maybe some other things we could accelerate beyond that. So I think it's not too far away, but these things have to fall in line.

Jayson Bedford – Raymond James

And maybe can you just comment on the traction or the uptake of Centros and then the triple-lumen PICC, which seemed to be kind of highlighted new products over the last year?

Jan Keltjens

Yeah, I think in the access space in general there have been three buckets of products. Centros indeed was one. Triple-lumen PICC and now more recently the dual-lumen smart PICC, but that was just very, very recent actually. And then I also want to reiterate the two smart ports that we launched at the beginning of fiscal Q1. Frankly, the last one has done best. In the port business the smart port line is doing very, very well and has become a real engine of growth. We're losing some of the port business in the more classical, conventional older port models, but as a whole our port franchise has been growing in Q2, which it has been a while that we could say that. So we're very pleased with that. The triple-lumen smart PICC, we've always said that's going to be in itself is going to be a limited revenue source, but it does round out the PICC product line and makes us more competitive in corporate accounts. I think - and I think Joe you made some comments in your remarks as well on this - we are making inroads in corporate accounts, but I think the selling cycle has become much, much longer and I would call the impact of triple-lumen PICC right now marginal. And I would say actually the same for Centros. I'd say it has not been bringing us the success we were anticipating. You know, there's a new wave of launches coming up in the next few months that gives us a new shot at the whole thing. But Centros in itself has certainly not been bringing us what we were hoping and expecting, frankly.

Joseph Gersuk

As we get through this transition with the sales force, we are optimistic. We think those are good products that will sell well in the future, but it's all part of the whole transition that we're going through - the sales organization.

Jayson Bedford – Raymond James

And if I may just sneak in a last one on gross margin, can you just maybe comment on 1) the pricing environment, and 2) the source of gross margin strength in the quarter? Thanks.

Joseph Gersuk

The pricing environment continues to be difficult on the vascular side, and it has been like that for the last four or five quarters now, and hasn't gotten any worse, hasn't gotten better. And in the aggregate we're seeing about a 2% point ASP erosion overall impact on the company. No negative impact of pricing on the oncology side, actually slightly positive there. And in terms of the gross margin, we've got the favorable mix impact within the oncology business of NanoKnife representing an increasing percentage of total sales on very strong gross margins that that product represents. And then the factory utilization and efficiency program that is beginning to really show some good fruit here and a lot of good work that our operations teams have been doing here in Queensbury and in Manchester, Georgia. So all of those things are coming together well and then material cost reductions have also had a significant impact as well. We've got an active program to reduce our material costs and are going back to our vendors and seeking improved terms from them and that is also very improved.

Operator

And our next question comes from the line of Jason Mills with Canaccord Genuity. Please go ahead.

Jason Mills – Canaccord Genuity

Couple questions. Let's start with your guidance and building on Jayson Bedford's question a second ago on the top line, specifically what do you think needs to happen in the second half of the year to get you to the top end of your guidance? Because to your point, Jan, getting to the bottom end will show percentagewise positive growth and acceleration, but to the top end of your guidance it would be material and I think would get people's attention more so, obviously. So could you give us a couple of things that would maybe get you to the top end of that guidance range?

Jan Keltjens

If the math on my [feet] works, I think that means in the back half on average we have to run at about 5-6% growth to hit the top end of the range of 4%. You know, we kept the upper end on the guidance as it was because we think it's conceivable that we hit the number, obviously. And it's our best guess on the upper end of the range. What needs to happen is, I'd say, ongoing good development on NanoKnife. Let's put it this way, the key growth drivers that we have leaned on for the last year, year and a half, is the varicose vein business has been very strong. For that to come back, I think, is important. And there's two answers to the question. I'm sorry for being a little convoluted. [inaudible] an operational capability dimension. So on the product side, I would say corporate accounts coming through, that would be mostly in access. I think first in ports. We do expect over time a bit of an uptick in PICCs. Some of the product launches that are around the corner for dialysis will help. We feel very good about the potential of NanoKnife. Good momentum in the business, good buzz. And we think we can continue to look at that as a source of growth. And the two other ones as I said before, the varicose vein business and the international business. These growth percentages of double digits become more and more meaningful off a bigger base, and they will help us. But I think the biggest single parameter is probably just sales force effectiveness. That's where we've been taking the biggest hit. I'd say oncology growth is probably a few points down from last year, but the bigger hit was clearly in vascular, where we'd been seeing -6%. Just correcting that and stopping the bleeding there will certainly get us back into some space with more oxygen.

Jason Mills – Canaccord Genuity

That's very helpful. Let me target in on a couple things you mentioned within that answer. NanoKnife - wondered if you could give us a sense for where you think on a quarterly basis you'll be running at exiting the year. On the corporate accounts side, maybe give us a little bit more color of the opportunity. And then you mentioned the traditional oncology procedures at the hospital level was down a bit. Can you give us just maybe one or two points on each? And then I have one more followup and I promise not to go beyond that.

Jan Keltjens

There's a lot of questions there, and I'm not sure I wrote them all down.

Jason Mills – Canaccord Genuity

So NanoKnife run rate exiting the year. Maybe a little bit more color on opportunity in corporate account coming through. And then the oncology procedures.

Jan Keltjens

Yeah, you know, we don't give quarterly guidance and there's a good reason for that, because it's hard to do it for the company. It's even harder to do individual product lines. And although we'd liked the [million ticks in revenue] for NanoKnife, it is still very much contingent on being able to have a capital equipment sale - yes or no. It's going to be a little lumpy from that point of view. So I'd like to stay away from any guidance on the run rates at the end of the year for NanoKnife, except for that we believe that the step forward we had in Q2 over Q1 is not a coincidence. And this is sort of a new baseline going forward. And we continue to see significant growth in this business.

On corporate accounts, a bit of a mixed bag I'd say. It's becoming undoubtedly more important for us as a company, and Joe, you may want to weigh in here on certain elements as well. And I don't have the stats here in front of me, but we do know that there's an increasing portion of our revenue in the vascular business in particular, in the U.S., is subject to what you would qualify as corporate accounts, whether that's an individual contract, [IBN], or a GPO, but it's becoming more and more important.

We're actually putting more and more resources in that and that is professionals in the field - corporate account executives that are able to work in that world. And I would say our whole [inaudible] capabilities as an organization to what some people would call work in the [fee suite] in the hospitals rather than just at the clinical level is being enhanced and I think it's yielding success. And I think in the recent quarter also two, what we believe were significant contracts, were closed. And that will help drive that business.

The other thing we see, as opposed to also my reference from a few years ago in the U.S., I think the discipline of many of these corporate organizations is becoming much, much higher. So the compliance with agreements is stronger than it used to be. And that helps also, I think.

Jason Mills – Canaccord Genuity

And then on the oncology procedures side?

Jan Keltjens

You know, I think oncology's an interesting disease from that point of view. I mean, it's not an elective disease by any stretch of the imagination, although the point at which one receives actual therapy is variable. And we do believe that there's a delay at least in the referrals. I'm not saying there's no referrals, but there's certainly been a step back in the number of referrals and patients get treated at later stages. And typically RF ablation and those kinds of procedures are done in earlier stages of oncology. The very first stage would be surgery, then you see an ablation, then you might see an embolization, etc., etc. And yeah, we've seen broad feedback and also from physicians that they see fewer patients in this space. We think those patients will come back, because again it's a disease that it's not going to go away and such, but they may be receiving treatment at more severe stages of the disease.

Jason Mills – Canaccord Genuity

And Joe, on the operating expense side, really nice op ex management in the quarter, especially on the SG&A line. Can this level of op ex be continued into the back half of the year at least as a percentage of revenue?

Joseph Gersuk

It's likely to actually rise a bit as a percentage of revenue and what we saw in the second quarter was the situation where given the shortfall in sales against our plan, it drives lower variable compensation, which lowers the operating expenses in particular in the SG&A area. And we expect to be on a better path in the second half of the year in terms of performance relative to our plans, and that will drive higher commissions levels and variable compensation levels. So not likely to continue at the efficiency level that you saw in the second quarter, but hopefully driving the achievement of the expectations on the strength of better revenue performance as Jan was talking about and therefore the earnings expectations as well.

Operator

[Operator Instructions.] And our next question comes from the line of Thomas Kouchoukos with Stifel Nicolaus. Please go ahead.

Tom Kouchoukos – Stifel Nicolaus

Can I turn back to the vein side? We've been hearing going into the Covidien VNUS trial against the lower tier players that there was some pretty heavy discounting going on into that, and given the magnitude - you had mentioned you had pricing pressure on your fibers - can you quantify kind of what the magnitude of what your pricing impact was? Assuming the trial goes the way you'd like it to through the appeals process, do you think the market could come back to where were historically? Or do you think we have long-term lower prices going forward?

Joseph Gersuk

Well, we can't quantify specifically the pricing on a single product line. Just for competitive reasons we wouldn't be inclined to do that. We did say, though, that there was downward pressure on the kit side of the business. We've seen that now for about five or six quarters in a pretty persistent way and so it's unclear as to what the outcome of all the litigation is going to be. But certainly we think we're driving toward the level playing field and everybody that has been in litigation with VNUS Medical over their patents has either settled with them or been the subject of a judgment against them. So we think it is beneficial to the marketplace for it to be a level playing field, and that's where we're heading, and that could certainly have an impact on the pricing environment.

Jan Keltjens

And just to add to that, of course what we had been enjoying - the pricing environment that you describe - the launch of NeverTouch about six quarters ago really was a very important launch for us, certainly looking back now, has allowed it to generate significant volume growth that certainly if you add it to the last six quarter has been significantly outweighing any price erosion as such. So it continues to be a very attractive market, even under those circumstances. If anything there's going to be some opportunity coming out of this whole litigation situation, for us at least.

Tom Kouchoukos – Stifel Nicolaus

And maybe if I could follow on, I think you'd said that as a whole, maybe pricing in your vascular business might have been down 2%, something like that. And I guess what I'm trying to figure out too is - I know there's some deep discounters on the PICC side as well - is it irrational pricing that is forcing your pricing down, or is it hospitals pressuring you? Can you just describe maybe the balances there? Because certainly it seems like there's some irrational pricing going on on the vein side as well.

Jan Keltjens

I think it's good old capitalism and free market enterprise at work here. So all the [inaudible] customers are getting stronger. I think companies are focusing on the cost of doing business. I think all in all it's a tremendous efficiency gain. So here we are, on one hand, reporting price pressures in the market, yet making a sequential quarter increase in gross margins.

So, so far it works for both parties I'd say and you know, price erosion as such is not the end of the world, as long as it's managed, as long as it's stable and predictable, reasonable numbers, it's certainly something that we can deal with. And certainly in a normal market environment the volume growth would allow it to offset it. Again, it doesn't mean that we want to be a price fighter or drive it down, but there's forces at work and I think hospitals are getting more confident. I think the administration in hospitals is getting more influential in the purchasing decisions, and they're using that power.

Tom Kouchoukos – Stifel Nicolaus

And then one last one on the - you'd mentioned a NanoKnife upgrade that's coming. Is that hardware or software? And then could you describe a little bit about what that will bring to your customers?

Jan Keltjens

It's actually both software and hardware, and it's bringing the hardware to the next level, adjusting the software to that. I don't think the market is going to notice that big of a difference, but for us to support the platform and maintenance, being able to support it remotely, upgrade the abilities, and overall stability will significantly enhanced. So it's going to help us run a much more efficient organization in developing this. It's going to be ready for some potential future product launches as well, but of course that has to wait until we get approval or there's specific indications.

Tom Kouchoukos – Stifel Nicolaus

Okay. And I'm sorry, I told you this was the last one. I have one more if it's okay. Just in terms of the sales force transition, I would assume you already have some pockets that things are going well. Based on where you are in this transition, are you liking what you're seeing in the areas that seem to be up and running and finding their stride? I mean, do you think this will all work down the road as the integration completes?

Jan Keltjens

Yes. You know, that's all summarized and condensed in the guidance [we get], which implies a significant uptick in the business in the back half of the year. Is that based on some factual knowledge and some perception and keeping your finger on the pulse of the organization? Yes. There's a saying in my home country that spotting one sparrow doesn't necessarily mean it's springtime yet, but we've seen a couple of sparrows and there's good buzz in the air.

Operator

And our next question comes from the line of Robert Goldman with CL King. Please go ahead.

Robert Goldman – CL King

Couple questions. First on NanoKnife, I might have missed it but how many units did you place in the quarter?

Joseph Gersuk

Four. Two in the Asia region and two in the U.S.

Robert Goldman – CL King

And the other question is on the SG&A again. First on that, this nonrecurring expense, this $772,000 for severance, who did you sever? Or what kinds of folks and why?

Joseph Gersuk

We covered it, and it was some reorganization of the company following some executive appointments to AngioDynamics and don't want to talk about it any more specifically than that. And it was not only severance. It was relocation costs and other items.

Robert Goldman – CL King

But these were executive level people you're saying?

Joseph Gersuk

Yes.

Robert Goldman – CL King

And can you offer any more commentary as far as who's going to be doing those jobs or why executive level folks had to leave?

Jan Keltjens

Well, first of all, this is obviously over the last three or four months now, and I think very simply if you look at the officers and executives of the company today as opposed to four months ago, I think you'll get a pretty good feeling for it. That's kind of the gist.

So all those positions are filled. We consolidated some roles and trying to also run at the senior level a lean organization. The people coming in in the last four or five months I guess at the executive level, meaning reporting to me, is Scott Solano, CTO, senior vice president R&D; Scott Etlinger, senior vice president, worldwide operations; Lynda Wallace, SVP, global business development. Those positions were filled somewhere in the past as well.

Robert Goldman – CL King

Then just one last question is on the balance sheet and the use of cash. You obviously have a good cash level. It strikes me that your bias for that cash was to sort of save it for potential acquisitions. Is that still the bias, or why not have a nice share repurchase here to show some board level faith in the strategy?

Jan Keltjens

I think there's different ways of showing faith in the strategy, and never say never, but I think our current belief is that by redeploying this money into top line growth and developing some of the key elements of the business is going to yield a better return for shareholders, and that's our current strategy. Let's put it that way.

Robert Goldman – CL King

And what about the acquisition part? What's your current thinking there?

Jan Keltjens

Our current thinking is not much different from the last quarter. We have obviously fairly extensive pipelines ranging from early conversations with prospects to more involving conversations. And we're picky. Picky not because we're nervous or scared or anything like that, but we only want to buy stuff that works for us, and working for us means that it fits our strategy and to drive the top line. We said on prior occasions that we want it to be accretive in a reasonably short time frame - four to six quarters I think we mentioned - and things like that. We're certainly not in a panic to buy. We don't have a back against the wall buy scenario. So we're looking at a couple things here, and again as I said, some of them are more advanced conversations, and the right thing will come.

Operator

And at this time I am showing no further questions in my queue. Please continue.

Joseph Gersuk

Just one more thing before Jan wraps it up. I just want to point out that the net sales increase was $64,000 on a constant currency basis after adjusting for the foreign currency translation impact in the quarter. I misspoke when I said $64 million. I wish it were $64 million.

Jan Keltjens

I think Joe has his head in the New York Lottery, which is drawing tonight I think, which is closer to that number. So thanks Joe, thanks operator. Thank you everybody for participating today in this call, and we do look forward to keeping you abreast of our progress. And we'll talk with you again in early April 2011. Thank you all.

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