AngioDynamics Inc. Presents at The 30th Annual JPMorgan Chase Healthcare Conference, Jan-12-2012 10:30 AM

| About: AngioDynamics, Inc. (ANGO)

AngioDynamics, Inc. (NASDAQ:ANGO)

January 12, 2012 1:30 pm ET


Joseph M. DeVivo - Chief Executive Officer, President and Director


Unknown Analyst

Unknown Analyst

Okay, I think we're ready to get started with our next presentation. Just a couple of announcements. First, please, if anyone has a cellphone in the audience, if you could just mute it so we don't have any distractions, and then the Q&A for this session will take place in the Sussex Room which is right down the hall.

Coming to the stage now, we have AngioDynamics, and presenting for them is Joe DeVivo, the company's President and CEO. Joe?

Joseph M. DeVivo

Well, thank you very much for being here. It's a pleasure. I want to thank our host, JPMorgan, for inviting AngioDynamics to this esteemed conference. With me today, I also have Joe Gersuk, who is our Chief Financial Officer. And both of us will be available to you all for a Q&A session after the presentation.

So I'll just jump right into the presentation. I've been -- but first of all, there'll be forward-looking statements. Read the slide as fast as you can because I won't dwell on it. AngioDynamics, for those of you who don't know the company, is a company that was founded in 1998, NASDAQ traded. We have roughly 700 employees worldwide, multiple locations, operations and our headquarters are up in the Albany area. Our 2011 fiscal sales around $216 million. We're about a 58% gross margin company. We closed a pretty good quarter. I'll talk to you about our quarter in just a bit. But we're a company that is in the Vascular Access, vascular business, as well as Oncology, and we're pretty excited about our future.

On the history side, AngioDynamics was spun out of E-Z-EM, and then we've had some pretty good organic growth as well as some business development. And as far as the business development in 2007, the company acquired RITA Medical. We acquired Oncobionic, which brings us the NanoKnife technology, I'll talk to you about in a bit. In 2008, the company acquired Diomed which helped strengthened the venous ablation business, which is a big part of our growth. And then from key milestones in 2008, we've crossed the 500,000 patients treated with our VenaCure EVLT system, 1,000 patients treated with NanoKnife in 2010 and 100,000 of our Smart Port, which is a really nice growth product for us in our Vascular Access business, so some key milestones in AngioDynamics' history.

To know AngioDynamics, it's really 3 different segments of our business. We have a Peripheral Vascular business, which I'll go to you -- go through with you in just a moment. We have a Vascular Access business and an Oncology/Surgery business. Oncology for interventional radiologists and also surgeons. The split of the business, if you look specifically at the second quarter, is our Peripheral Vascular business is roughly 39% of the company, Vascular Access roughly 28% and our Oncology/Surgery is roughly 33%. You see in the second quarter, we are, as a company, re-accelerating our growth in the first quarter. The company overall had about a 6% revenue growth quarter in the second quarter. And just for all of your purposes, we are in a fiscal calendar that ends in May and starts in June. So our second quarter ended in November. So that's why if you're hearing second quarter, and here we are in what would be a calendar first quarter time.

So as you see the 3 different businesses with our 9% growth, we feel good about our sales trajectory and we feel good about where we are in the future, and I'll go through our guidance too.

Peripheral Vascular. So the first third that you saw is really driven by our varicose vein ablation technology, VenaCure. This is a large, still a large unaddressed need. You may know that the company has been in this market and are the leader in the laser ablation portion of it. Covidien leads the radio frequency portion of it, and there's been a long patent litigation that was settled 1.5 years, 2 years back, which is great to have behind us, and this area has been a wonderful growth for us. We do have catheter-directed thrombectomy and a new research and development project that we're very excited to start talking about that will give us future growth in thrombus management. And as you know, the company is named AngioDynamics, one our legacy products. We're #2 in the world in angiographic catheters. It's not the highest growth product for us today, but we have a pretty good penetration and high differentiation. We;d love to be able to get that business growing more in the future. But our VenaCure EVLT, venous ablation product, the 1470 laser was launched this past summer. We are placing a lot of new boxes and growing some share, and we believe our category growth is above market at the moment.

Our Vascular Access business comprises implantable ports, PICCs and dialysis. Within our port business, the fastest growing product is our Smart Port, which is our CT injectable port, which uses a proprietary Vortex technology. Our Vortex technology helps self -- helps flush the well on inspiration and aspiration of fluids, and that is something that's been very unique to the company and what we believe reduces thrombosis and has allowed us historically to maintain some differentiation as well as some nice margins.

This business is not growing as strong. Our dialysis business is a very mature business and has been relatively flat. Our PICC business has also been relatively flat. So we are looking at ways organically and inorganically to grow in our Vascular Access segment, which has historically been a very valuable segment for us.

The third part of the business is our Oncology/Surgery business. The Oncology/Surgery business is the legacy RITA business, which is a leader in worldwide radio frequency therapy. Just as you go -- we're going to go through the financials in a little bit. And for those of you who don't know the AngioDynamics story, one of the key products in the Oncology/Surgery bag is an embolization product called the LC Bead. And in our numbers and annualizing in our numbers, the LC Bead was a product that the company enjoyed probably almost about $30 million worth of revenue in a distribution contract in the United States. That distribution agreement has now ended as our partner was acquired and that partner which has developed their own channel. So on this side, we are refocusing our efforts on our legacy products. And when we show you our guidance, it will show those revenues coming out of AngioDynamics corporately and we'll just discuss a little bit what we're doing for growth in the future.

So aside from the radio frequency part that's in our numbers and in the business, we have a radio frequency surgical resection device,collar Habib resection, which is a niche product for surgical oncologists who are doing liver resection. But then the other cornerstone of the thing that gets us very excited about our future in Oncology/Surgery is NanoKnife. NanoKnife is a very novel technology. If you -- for those of you who understand the radio frequency ablation business in Radiofrequency Ablation, many companies, including ourselves, have been trying to find ways to help treat patients with inoperable lesions or inoperable tissue that surgeons or radiologist would want to destroy. And the mechanism of that destruction had been using thermal energy, and you're all probably familiar with Cryo and what Cryo has done with the prostate and what Cryo has done in liver and kidney and other organs. Well, radio frequency is the other type of thermal which uses heat. And those energies are pretty pervasive throughout inoperable cancer therapy.

One Of the future promising technologies that the company has been investing very heavily in, that we've been making progress in from a clinical side and from a revenue side and that we have very high hopes for in our future clinical development is a technology called NanoKnife. For those of you in the audience who don't know about NanoKnife, I'm just going to show you a brief animation that will discuss the mechanisms. And the basic mechanisms are we are not using a thermal energy to create cell death. We're using an electropulse of current, which under a phenomena that was studied, that's been used, it's called irreversible electroporation. Reversible electroporation is a concept of using energy to help drugs uptake into a cell. Irreversible helps energy to open a cell to allow fluid to get into the cell to the extent that the when the energy subsides, that cell then dies. So it's irreversible. Meaning now that we are not using a thermal energy to create cell death, we're using an electro energy to create that cell death. And let me show you what that means and why it's applicable in the next generation of doing inoperable care. So right now, we're showing this in a radiology suite, but it's also in a surgery suite. But the concept is that if you create this energy that can create cell death, because it's nonthermal and because also we've identified out of research out of Cal Berkeley that as the energy is deployed, it doesn't affect all different tissue types the same way. It will affect what we've identified as lesions, as well as normal tissue based upon this mechanism of apoptosis of opening and closing the cell. But interestingly enough, that mechanism does not affect the blood vessel wall or also does not affect the nerve endings. And so what happens is you almost have the potential of a magic device that you'd want to go in and destroy a certain amount of tissue but leave other vital structures in place. And then when you've seen cell death, the body will then absorb those cells as you see that's being created here in this animation. And then over time, the body recovers itself and replaces the dead cells with new cells. And the artifacts that would potentially create this inoperability are no longer potentially a barrier, where the vessels and the nerves then survive this kind of injury. But what does that really mean? Well, if you look at the standard thermal energy sources being cryo and radio frequency today, if there is a -- if it's in a location where it cannot be surgically resected, those therapies provide a benefit for the patient. But if those lesions are in areas where you cannot surgically resect it, which wraps around a vessel or it's near something that the heat may cause additional damage, they're contraindicated. So this allows us to help additional patients, which may be inoperable due to where their lesions are in very sensitive settings. Now what does this mean from a business standpoint? Well, the company does have a general regulatory clearance for soft tissue. But we believe in order to turn this into a real opportunity for AngioDynamics, we need to do the necessary clinical work to bring one particular organ standard of care. And we've identified a desire to go and make our top opportunity and priority inoperable pancreatic cancer.

Now there's been several series internationally where people have used NanoKnife for this and one of the -- we all are aware that in pancreatic cancer there is a vary from diagnosis to, unfortunately, for many people, expiration. There's usually a pretty quick expiration time. And it's due to the fact that there's not many -- because of the structure of the pancreas, because of the vasculature and how quickly -- as that tumor spreads, it becomes inoperable, there really hasn't been many opportunities with other types of therapies, whether they be drug therapies, whether if you radiate it, you're radiating all these other vital structures that need to be maintained. But if you can imagine, if it can possibly-- if this energy source can be as selective as only killing the tissue and cancerous cells but allowing the key vasculature, collection systems and nerve endings to exist, if that is possible, we may be on to something very, very special. There has been some early anecdotal work. What you see here on the slide is we've actually just completed enrollment of our first phase. It's a pilot study using NanoKnife for Stage III inoperable pancreatic cancer patients. We've enrolled the first 10 patients and we are now on follow-up. Our intention is to follow these patients and then go when we have the necessary information that makes us feel comfortable. We will then enroll a pivotal trial in Europe, which will allow us to move towards the concept of standard of care. We want to see statistically significant benefits. We believe there may be a survival benefit. We believe there may be a relatively immediate quality-of-life improvements for these patients. And if you can imagine, if we can accomplish this goal from a societal benefit, it would be huge because we know there's not many options for these patients. And I think, ultimately, if we accomplish these clinical goals from a commercial standpoint, it would be an enormous opportunity for the company. We are also working closely with the U.S. FDA. Our desire is to get an IDE approved. We do not have one approved yet. We have continual ongoing dialogue. And when we get one approved, we will follow that pilot study through its completion. And then our intention with the successful completion of that U.S. pilot study, we will then invest in a U.S. pivotal trial, again with the sole desire to bring the technology towards a conclusive statistically significant benefit with a full FDA claim on that with a reimbursement indication and then the ability of driving that opportunity through. Now, we all talk about our market opportunities and while I can add up all the organs and talk about all the inoperability and it could be a multi-billion dollar opportunity for all of NanoKnife. I believe pancreas, specifically, is a $500 million opportunity for the company and I think if we accomplish the goals that I just mentioned to you, I think within the next 3 to 5 years, it could be a $200 million to $300 million revenue opportunity for the company. That's how big, how applicable and how explosive it can be. But we have a high clinical burden or hurdle to get over and we intend to walk in the front door and do our clinical work to get there. But as you'll see in a bit, that the company has invested probably about 10% of our R&D in our -- 10% of our sales in overall research and development and a big part of that is our clinical efforts to bring NanoKnife to that standard of care. And while we're still in our infancy, there are many centers who are excited and believing in the technology. There are -- I think the technology started off kind of mimicking the ablation path, so many people who are doing liver ablations would start to use IRE in areas that they considered contraindicated for ablation, of course, near a blood vessel or near other anatomy. And many sites have picked this up and we continue our revenues in the second quarter. Our fiscal second quarter, we're up 100% year-over-year and we're very pleased with the excitement in the marketplace and the uptake. But personally, I don't believe this is really a business for the company until we get our regulatory, specifically labeling approvals, and until we get our clearances and reimbursements and the type of data that can really move the market. And that's what we intend to move down.

So I mentioned to you our -- and the growth drivers within our Peripheral Vascular business being laser and our Access business being ports and our Oncology business being our NanoKnife. But another growth driver is our international team. We've been investing heavily in building out a direct channel and also building out more executives for AngioDynamics to increase our penetration internationally. I think given the demographics, given the economy, given the future, having 85% of our sales in U.S. alone is an opportunity for growth to be moving outside. Last quarter, our international sales grew 27%, and that's a lot about development of channel and about executing on some underpenetration to be chronicity of that, that I think our international team has a lot of gas in their tank and I would expect 20% growth rates from our international business. So from a technology standpoint, we have growth drivers. We have our science project with NanoKnife that can be a significant amount of future upside for the company. And then from a day-to-day blocking and tackling, we have a lot of upside growth in building out our worldwide channel. Just a year ago, it was 12% of our overall corporate sales, now it's 15% of our corporate sales. And I'll do everything I possibly can to get it 50-50, and if not more and we currently have 20 direct salespeople. We're direct in the U.K., we're direct in the Netherlands and in Germany and France, and we're looking for other opportunities to partner or acquire and vertically integrate using a pretty strong balance sheet that we have.

So I mentioned to you that we do have a pretty a significant, for a company our size, R&D investment. The pipeline includes, of course, the costs for all the clinical trials that we are doing. We are looking for ways of building new electrodes for NanoKnife that make it easier and faster to use. We're looking at all these new kinds of fibers for our laser business that allow it to be quicker and more efficient, so we're excited about, and also to reduce the pain for patients in the procedures where there's some slight discomfort, so focusing on that by making that work. There are some very novel technology. We continue to invest in our Vascular Access business, and also we're initiating an investment in a thrombectomy device that helps reinforce a legacy thrombus management business that we have and a real novel concept of using ultrasound for an advanced thrombectomy side. So that will be an area of investment and growth for the business.

We continue to vertically integrate, and we have used a lot of OEMs in the past in order to improve our gross margins. We do have some R&D programs to insource, which we think protects not only from a margin but protects us strategically. And that's another part of our future investment and growth.

Just to give you a little view on the income statement showing the second quarter, you can see the 9% year-over-year growth. You can also see in operation expenses the increased investment, that's virtually dollar for dollar the incremental investment in our international channel, which is at a wonderful ROI for us. And you can see probably the one negative that we had in the quarters that we did have a recall, and that recall was a little bit bigger than a normal recall. We did have a window of time where we did not supply customers and that bled into the third quarter. We have, on our conference call, guided to our investors that our third quarter will be a bit softer than we early guided specifically due to the revenue lost -- due to the recall. And that kind of signaled to us that as a company, we have had these types of issues in the past as a new CEO. We've initiated a very significant quality call to action where we're going to build and reinforce and invest in our processes so we don't allow something like that to happen again because we should have had a real, I won't call it a blowout quarter, but a real strong quarter. If you look at Angio's past, there's been questions of execution, questions of consistency and after a 6% growth, 9% growth, we have a great oncology sales team, fantastic vascular sales team in the U.S. Obviously, our international organization is delivering. And as an operations group, we have to back them up and allow that growth to continue. So we're going to invest in the infrastructure necessary to get ourselves to not have that kind of issue again and to be able to set the stage for sustained above market growth into the future.

With that, we have a very strong balance sheet. The company, on average generates about $30 million of free cash flow a year. We have a cash balance of $136 million. And if you do your math and you look at our stock price and our market valuation, we're not getting a lot of credit on the street. Maybe we haven't earned it yet but we will. But there's a lot of cash, I don't know, maybe $5 a share of cash on the books today. And when we look at these strong sales forces, especially in some of the segments that I've mentioned to you that are mature, we are looking to do some tuck-in acquisitions to help -- to give some more opportunities to our sales force. And we're looking to -- we're basically getting no return for our cash today. So our balance sheet may also be one of our strongest leverage for growth and how we do that in the type of transactions that we are looking at when we get them done, you'll know about it. But it's a focus of ourselves to build ourselves into a growth company, bring more opportunities in and we're looking at all different types of ways to do so. So our balance sheet has been a great positive. The guidance that we have out here is what we published in our earnings call just a week, 1.5 weeks ago. It shows the third quarter being a little bit lighter due to that recall issue. It also shows if you see the top line sales growth, a negative 5% quarter-over-quarter, it doesn't look great. But what we're showing is the distribution of that $30 million revenue coming out. So even with that $30 million coming out, which is 7 of the 12 months in those numbers, we're still showing a moderate growth for the year and we'll be able to create additional growth within our organic business as well as additional PD to fuel in the future.

As you see in the Q4 down where it shows a pro forma sales growth without the LC Beads and without that just on a net-net, what's left in the bag, we're looking at about -- although we had a weaker than normal fourth quarter last year from an annualizing standpoint, we're looking for about 10% to 15% net year-over-year apples-to-apples growth. And we hope to deliver these numbers to you.

So I very much appreciate your attention. I hope you've learned a bit more about AngioDynamics, where we think we have a lot of opportunities for growth and investment. We hope you follow us, and I look forward to your questions in the breakout room. So thank you for your time.

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