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Executives

Christine Jacobs - Chairman and Chief Executive Officer

Frank Tarallo – Chief Financial Officer

Analysts

Joe Munda - Sidoti & Company

Rob Longnecker - Joe Street Capital

Theragenics Corporation (TGX) Q1 2012 Earnings Call May 10, 2012 11:00 AM ET

Operator

Greetings and welcome to the Theragenics' First Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].

It is now my pleasure to introduce, Ms. Christine Jacobs, Chairman and CEO of Theragenics. Thank you, Ms. Jacobs. You may begin.

Christine Jacobs

Thank you, Claudia. Good morning and welcome to Theragenics' first quarter 2012 conference call. Those of you that join us regularly for these calls will recognize that this conference call will be in a new format, and a little longer than normal.

We met and talked to several of our shareholders this past quarter, and this new format reflects their feedback. Both Frank and I will provide a fresh approach providing both context and insight to the recently completed quarter.

We will also provide strategic positioning and additional forward-looking comments. We're going to spend less time repeating financial information that we assume that you have read or you are going to read in our earnings release that was issued this morning.

This new format is a work-in-progress, which we expect is going to evolve as we progress into 2012. So with that, let me turn it over to Frank for his comments on the first quarter.

Frank Tarallo

Thank you, Chris. Let me add that I hope as investors, you find our new format more insightful and useful as well. Now, unfortunately, one format change we cannot make is what the lawyers tell us we have to say about forward-looking information. So, here it goes.

Before I begin my review, please be aware that some comments made during this conference call may contain forward-looking statements involving risks and uncertainties regarding our operations and future results.

Please see our press release issued today and our filings with the Securities and Exchange Commission, including without limitation, our Form 10-K and Forms 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Now I'd like to comment on our results. Our consolidated revenue of $21.6 million is our highest quarterly revenue ever, and up 7% over last year's first quarter. Our revenue is best understood by looking at segment results, so let's do that.

Our Surgical Product segment revenue was up 8% over last year, the $15.5 million in revenue is also our highest quarterly surgical products revenue ever. We had strong orders and fresh demand in Q1, driving this growth.

First quarter also benefitted from circumstances that existed in Q4 of last year. Back then, we had customers that delayed ship dates on existing orders. We also had customers that did not order what expected them to order in Q4. We mentioned in our last call that we expected those orders would come in Q1, and they did.

We were also unable to ship some Vascular Access orders in Q4 last year, because of operational issues related to our ERP system. All that said, the takeaway from this is that demand for our surgical products is there.

Chris is going to talk more about this in a few minutes.

Turning to our Brachytherapy business, Q1 revenue was up 6% versus last year. The acquisition of the core customer base in February had the impact we expected it to have. Incremental sales from this acquired customer base was $586,000. We had just 29 business days in first quarter after closing that transaction. So, if you annualize this number, you get a run rate of about $5 million.

Now, this business does not necessarily work on a straight line basis, but it at least gives you an idea of the potential effect of the transaction. We spent most of the first quarter ramping up, visiting new customers and seeing to a smooth transition.

I think it's fair to say that this transaction has at least so far in its early stage lived up to our expectations. The next big step is transitioning these customers to our new iodine based seed called the AgX100. This should lower our production cost. It's currently being supplied by Core under a temporary supply agreement. Once fully transitioned and ramped up, we expect gross profit margins to be in the range of 40% to 45% for this incremental business.

Let's turn to profitability now. First, EPS. Our EPS was $0.03 in the quarter compared to $0.01 last year. We did have special items last year, which reduced EPS by $0.01 in 2011. Those special items are listed in our press release. Nonetheless in Q1, we tripled EPS over last year.

Turning to segment profitability, our Surgical segment reported operating income of $199,000, nearly a $400,000 improvement over the 2011's Q1 operating loss. So, how did we accomplish this improvement? Along with our 8% revenue growth, our gross profit margin on sales was 35% in Q1. This is a slight improvement over last year's 34%.

SG&A in our Surgical segment was 27% of revenue in Q1, which is the same as last year. So that means on an absolute dollar basis, SG&A was up. We had increases in depreciation and other costs related to our IT initiatives, including our new ERP systems.

As we continue to centralize some of our back-office functions across the company, we expect to see some economies of scale in the SG&A area. It's difficult to predict the timing on when we'll see significant economies of scale, but we are clearly moving towards these benefits.

R&D expenses declined in Q1 compared to last year and although R&D declined, we have not reduced the amount of R&D activity. We're more focused and better organized right now than we were last year at this time. Chris is going to talk more about this in her remarks in a few minutes.

Let's turn to our Brachy business now. We delivered $1.4 million in operating income in Q1, up 28% from last year going up to 30,000 seed, our Brachy strategy, which is increasing market share and taking advantage of our cost structure to increase cash flow continues to deliver.

Turning to consolidated cash flow related information. Cash flow from operations was $2.4 million in Q1. Capital expenditures were $329,000. Looking forward, we expect our CapEx spend to be around $1.5 million to $2 million for the full year of this year. This of course excludes the acquisition of the Core customer base. So let's talk about that acquisition, because it's a significant cash flow item for us.

We used $4.1 million in cash on the acquisition of the core customer base in Q1 this year. As we discussed in our call last quarter, the total purchase price is earn-out based, and it's based on one times actual revenue generated from the acquired customers.

We estimate we'll use another $5.2 million in cash for this earn-out based acquisition over the next 18 months. That is through September of 2013.

We expect to fund these earn-out payments through cash flow from operations and existing cash balances. Of course the actual amount we end up paying could be materially different based on the actual revenue that we generate from these acquired customers.

One comment on cash flows looking forward. We expect to build inventory in our Surgical Products business over the next few months. This will be based on the orders we've received to-date and anticipated orders. We're trying to smooth our production and avoid the incremental expenses of being in a reactive mode. The inventory build for this initiative could be up to another $400,000.

I'd like to wrap up my comments by discussing our credit facility. We will finish paying on our term loan this June. Over the last three years, we paid down $10 million under this term loan. Our revolving credit facility, which provides for maximum borrowings of $30 million, matures this October.

Currently, we have $22 million outstanding under the facility and we have $38.3 million held in cash, cash equivalents and marketable securities. You should know that we are currently in active discussions to renew or replace this credit facility.

This wraps up my comments and I'd like to turn the call back to Chris.

Christine Jacobs

Thank you, Frank. Results first quarter show a nice improvement year-over-year and a reasonable recovery from the fourth quarter of 2011. The Brachy and Surgical Products delivered growth in sales and earnings.

Net earnings more than doubled year-over-year, all of this leading to a promising beginning for 2012. So, let's begin a discussion of segments and finish with our prospects for this year and beyond. Surgical Product, revenues were up 8% year-over-year and operating income was about $200,000, compared to a loss last year.

We attribute this to orders from one of our product line who had a stumble in the fourth quarter that has recovered nicely since then. We also attribute the growth to strong demand and organic growth in our future, in our Vascular Access product line. Margin improvement was modest but headed in the right direction and make no mistake, this remains a challenge as demand is still volatile in all of our business.

Now, we had a couple of comments about specific product line. In our specialty needle unit, we continue to recover from one customer who ordered in excess of $1 million annually with us and they took their business overseas.

It’s interesting but I guess I shouldn't be surprised that this customer has been calling and wishing to reorder with us, because their oversea manufacturer has experienced delays among other issues. Nonetheless, inquiries are strong and these strong inquiries emanate from some of the largest names in the medical device industry. So, we're encouraged that we are viewed as a quality go-to-manufacturer.

In on our Vascular Access unit, we were making up for some inefficiencies that we identified implementing the new ERP system. However, new orders in the first quarter of ‘12 were much higher than normal. These orders were in the OEM area, and they represent higher volumes with lower margins. Yet this is a large contributor to our overall margin improvement.

Now in our wound closure unit, we experienced greater than 10% increase in revenue and sales from the top-three of our large best customers increased year-over-year. We attribute this to our new sales activities, and the popularity of our private label program. We had an honor bestowed on us this past quarter, our CP Medical unit was awarded the 2011 Private Label Vendor of the Year, by the prestigious device company, Butler Schein.

The award was given to us out of 50 competitors in the category and we couldn't be more proud of our CP Medical group as in the fine job that they've done in a very competitive and tough market. You may have seen our two press releases announcing the launch of two new products this quarter.

The first was the announcement of FDA clearance to market our Valved Tearaway product in the Vascular Access area. This is an exciting and what we hope to be a new beginning for this unit. The Valved Tearaway is a product that we developed with patent pending to compete with the juggernaut, who has maintained nearly a 100% market share and is now off-patent.

This is a great demand and a great beginning, because there is demand for additional choices among our doctors and the companies that we supply. Early interest in the product is brisk. With initial sales expected to be about $300,000 this year and in excess of $1 million, annually in the out years.

The second product was our Pediatric Microslide Introducer. This product has an interesting history, in that we didn't have it on our wish list of new products to develop.

Pediatric nurses repeatedly asked us for help and our astute marketing and our sales team made the internal case for developing the product. The product line itself will not be a world beater of sales, but let me explain why we are excited. First, the pediatric nursing industry has been screaming for devices to use on their tiny population, and we're one of the few companies who listened.

Second, while there might not be many pediatric specific suppliers, we are gaining access to accounts for our other vascular products for which we have never been given or allowed access to compete. We are gaining access, because we listened to the nurses and we made the pediatric introducer that they asked for. Listening is getting us in the door.

Third, like our Brachy seeds to cure cancer, making this tiny introducer is the right thing to do.

We plan more product development in the future and believe this area is going to hold potential for increasing margins and cash flow, continued positioning as a quality manufacturer producing products our OEM and our distributors can sell into their highly competitive markets. Don't expect CapEx spend to expand beyond historic figures.

Now, under the Brachy business, Brachy enjoyed only 29 days of the Core agreement, but already we're seeing dramatic effects. Brachy revenues were up 6% year-over-year. Operating income was up 28% year-over-year. And as we have already said, we've got a large fixed cost component to our Brachy business, so any incremental sales result in appreciable contribution to profit.

The $586,000 of revenue from Core was as expected accretive to income and operating cash flow. Now, also this quarter, we began production of our new iodine seed. The AgX100 that Frank mentioned, this is an iodine seed that is identically configured to the market leading seed and will replace the Core iodine seed in customers that we've acquired. As of today, all of our in-house Theragenics' previously existing iodine accounts have been converted to the new AgX100 seed with only one small volume customer lost.

As Frank mentioned, once we convert the customer's acquired from Core, anticipated to be in the July-August timeframe, we expect to appreciably add income and cash flow from operations. This then makes the Core transaction even more attractive to the company and our shareholders. Well, on the subject of transition and converting customers, I'd like to report that we have kept 99% of the acquired Core customers post transaction. Like other disruptions that we have experienced in years past, we have a knack and an ability to see disruptive situations and maintain market share throughout.

Now, I'd like to change focus. As I said, at the outset of the call, we decided to report differently going forward, and then here's the information that we provide to you. The following comments will include strategic positioning, challenges both micro and macro, future plans, prospects and goals in the surgical product area.

We began amassing assets back in 2005 and diversify Theragenics into specialty medical devices. We intended to remain a medical device manufacturer and to serve a specific sector of that market. If you visualize the United States' medical device sector it ranges from the most sophisticated devices such as stents and defibrillators to the most mundane of devices like hospital gowns, gloves and syringes.

In the center of this continuum is a vast area of potential need where somewhat specialized devices reside, and this is the area where we dwell. There are hundreds of medical device manufacturers with sales of $10 to $20 million. There are only a handful of diversified manufacturers in the $100 million to $300 million sales category.

Our intention is to be in the latter category and why? We're not interested in being at the low end of this spectrum of manufacturers with high volume, low margin products competing with overseas competition. On the flipside, we don't want to manufacture drug eluding stents and defibrillators. These are very specialized devices that take millions to develop and we believe it's foolish to go after a strategy that competes head-to-head a J&J or a Medtronic in that kind of marketplace. It's simply not a realistic goal.

What we can do is compete in the middle, where the margins are more attractive than these low end products and specialized enough where customers need accountability and quality output from their vendors that they can depend on long-term.

So our strategy in the Surgical Device division is to grow in the middle. In the U.S. market for disposable medical supplies, it's expected to reach nearly $59 billion in 2013 and we have more than enough potential in this area.

Now, on a macroeconomic level, there are challenges. For instance, economic uncertainty and the demand volatility that has made it difficult to stock or deliver product. We don't see this abating. In fact, we think it's the new norm. Another example is the cost to compliance. It's a material burden, especially after Dodd-Frank. I'm doing what I can in my role as the co-chair of the SEC's small business advisory council and I'm doing what I can to lighten the load on companies like Theragenics but it's still a material burden and a heavy lift.

On a microeconomic level, we have multiple issues. For instance, the price of some of our raw materials has skyrocketed, especially platinum. As our products revenue becomes a larger portion of our consolidated revenue, this segment bares a larger portion of corporate overhead. The more we sell to OEM customers in relative terms, the more pressure on our gross profit margins. For example, in the past three years, our mix has gone from 84% OEM sale to 88% OEM, which will affect margins and cash flow, both in the short and the long-term. Another example is last quarter's implementation of ERP in one of the business units.

And lastly, the Affordable Care Act, known to many of you as ObamaCare levies a 2.3% tax on medical devices beginning in January of 2013. This tax is on revenues, not earnings. Have the tax been in effect in 2011, and been applicable to all of our product sales, the burden would have been in the $2 million range.

For Q1 of this year, that tax would have amounted to nearly $0.5 million. Now I don't mean to over-dramatize, but this tax threatens to potentially have a material impact on us and the entire industry. So, what's Theragenics intend to do in the face of all of this?

Well, integrate, thrive and prosper. We delivered 8.3% CAGR through the worst recession in 40 years, and we found our customers intact, supportive and in some cases patient as we ramped up for increased demand.

We see this as a thrive and prosper presided results. Yes, margins and cash flow took a hit during this four-year timeframe, but some of that hit was self-inflected and self-inflected to invest so as to position ourselves for the future and we disclosed this as we went along, and yet we got some challenges that we need to address. The medical device tax, the ERP of fourth quarter and the changing mix of our product sales to OEMs.

We can't change the medical device tax, nor will we lobby Washington to do so and the reason is the expense is too high and the outcome too fleeting. So, our go-forward goal is two-fold. Grow the top line and take cost out of operations.

Now, about the cost, we're in the midst of contemplating any and all operational tasks that improve margin and cash flow. We already see some opportunities to centralize and/or consolidate certain functions and as such, reduce redundancies and the associated expenses. And if we have any news to announce, we will but right now, we're in active planning stages and consolidating functions.

We do plan to continue to ramp up product development without spending outrageous sums in R&D. The two products that we just launched are the beginning of a process that we hope will deliver a pipeline of higher margin, non-PMA burden devices that both our distributors and our OEM customers continue to ask us.

Now, about the top line. Demand for surgical products is high. Open orders of $14.1 million at the end of March. We intend to carve out and prosper in a segment of the market that's cluttered, but not so cluttered that we can't succeed. After all, we have five years of showing that we can acquire, grow and integrate small companies with high potential.

What remains is the type of operational tweaking that we're experienced at accomplishing. Those of you who were around in the 2005 timeframe will remember that Theragenics made some substantive moves to improve margins and cash flow in the Brachy business. So take a look at the margins and the cash flow for that segment today and you get a comfort level that we're going to do what needs to be done.

Our Surgical segment is a fine collection of assets that serve exact markets that we want for the company. The physicians that we serve are varied and they served to insulate us from either mitten slowing in any one specialty. Remember, Theragenics was a one-product, one-application company dependent on one medical specialty.

No more. That's not who we are. We're coming out of the recession, our time to attend to product and development and tuck-ins is now improving operating income and cash flow is the next goal.

Now, under the Brachy business. Brachy strategy has been somewhat simpler and long-lived. In 2005, we forced our competing technologies and Medicare pressure on pricing. We changed operations in anticipation of tough times and decided that we are going to weather the declining revenues and rather than sell off the Brachy business, we would be one of the last man standing and we do so by refusing to pay outrageous multiples to consolidate the industry and instead wait out our other competitors and their erratic pricing schemes.

We believe and we still do that cash is King. Knowing our competitors would becoming desperate, we would weigh them out and we would garner our market share when they stumble. This strategy has been spot on, and it's delivered as promised. Our future prospects with Brachy remain exciting and dynamic, in that we have a new customer base, we're launching our own new product in the space and the team has managed to maintain nearly a 100% of the acquired Core customers.

The news just keeps getting better on our 25-year old product line that continues to deliver. Yes. We deliver cash flow and profit, but we deliver a cure with every shipment and that is an honor. So to close, we've had a nice beginning to 2012, both segments delivered revenue and profit, we're changing up how we communicate with you and while we have some operational and some external challenges, we're bullish on the prospects. Our customers continue to place orders with our company and they have steadily done so while many much larger and better capitalized companies have faltered.

Theragenics is well positioned right now, and we plan to take full advantage with all the resources that we've got.

So, with that, it wraps up my comments. Thank you for your attention. We will open it up for questions. Claudia?

Question-and-Answer Session

[Operator Instructions]. Our first question is coming from the line of Joe Munda with Sidoti & Company. Please state your question.

Joe Munda - Sidoti & Company

Good morning, guys. Thanks for taking my question.

Frank Tarallo

Hey, Joe.

Joe Munda - Sidoti & Company

I appreciate the updated version of the call.

Christine Jacobs

Thank you.

Frank Tarallo

Thank you.

Joe Munda - Sidoti & Company

Real quick, Frank. I'm just going through the numbers here. You talked about the acquisition, how much guys spent in Q1.

Frank Tarallo

Right.

Joe Munda - Sidoti & Company

It was $4.1 million, right?

Frank Tarallo

Correct.

Joe Munda - Sidoti & Company

Hitting the cash flow statement, and then you are saying, so there was $4.1 million of hit to cash flow statement in Q1?

Frank Tarallo

That's right. Yes.

Joe Munda - Sidoti & Company

Okay, and then you said there's another $5.2 million dependent on an earn-out over the next 18 months, so just rough numbers here I'm looking at for let's say that's the case $4.1 million for the year. Does that sound right? I get total number of $7.6 million.

Frank Tarallo

So, $4.1 million is what we paid when we closed the deal in February, in Q1.

Joe Munda - Sidoti & Company

Yes.

Frank Tarallo

Then we're going to make quarterly earn-out payments going forward over 18 months, so we got about another 5 or 6, sorry of quarterly earn-out payments to make, so some of that 5.3 that we say we have remaining to pay will be paid over the next 12 months.

I think it's about $3.3 million it will be over the next 12 months and then $1.5 million in the last six months, which are months 13 through 18.

Joe Munda - Sidoti & Company

Okay. So, $3.3 million next 12.

Frank Tarallo

Yes.

Joe Munda - Sidoti & Company

And then, I'm sorry. What was for the next six?

Frank Tarallo

And then the six after that is, I think it's 1.5. Is that right? Sorry 1.9.

Joe Munda - Sidoti & Company

1.9.

Frank Tarallo

Sorry. Yes. I'm leaving up the transaction cost. I'm strictly thinking of the earn-outs, so it's 1.9. Yes.

Joe Munda - Sidoti & Company

Okay, and then you talked about the credit line. So the credit line is going to be paid off in total this year? Is that what you are saying?

Frank Tarallo

No. We had a $10 million term loan, and we finished paying that off in June this year.

Joe Munda - Sidoti & Company

Yes.

Frank Tarallo

And then we'll have $22 million left outstanding on the revolver portion of the credit facility, where we've got $30 million available, we got $22 million drawn on it.

Joe Munda - Sidoti & Company

Yes.

Frank Tarallo

And so, we're actively discussing the renewal or replacement of that facility. It's not our current intent to pay off the remaining balance of that facility. It’s our intent is to replace the facility with something probably very similar.

Joe Munda - Sidoti & Company

Okay, and, do you guys think you're going to pay down at all on that facility this year?

Frank Tarallo

Joe, there's no current to do that, but Chris mentioned and this is, she had an operational comment that talked about turning over every stone, if you will, and looking at cost reductions and inefficiencies etcetera, and I think we're going to do the same thing in terms of capital allocation, so I want never say never, but there is no current intent right now.

Joe Munda - Sidoti & Company

Okay, and then, Chris, in regards to the iodine seeds, the new iodine seeds saying July and August, when they'll be launched with the customers that you guys acquired? What kind of sales opportunity we are looking at there?

Christine Jacobs

Frank is the President of this division and he's sitting right here with me, so I'm going to let him take that.

Frank Tarallo

So, here's what we're doing, Joe. We had a relatively small portion of the iodine segment of the Brachy therapy market previously, previous to the Core transaction. With Core, I think I mentioned in my comments that the $586,000 of incremental revenue in Q1 that's about $5 million annual run rate if you annualize that.

So, these are customers we have on the books. What we are saying is, although that business is profitable today, it's going to become more profitable once we start manufacturing our own seed and transition these customers to the new seed, so again all data was in my comments, but let me just pick out what I think is significant annualized run rate of $5 million and we expect incremental margins into 40% to 45% range. So, if you do that math, it's a pretty healthy contribution to profit.

Joe Munda - Sidoti & Company

Okay.

Frank Tarallo

That makes sense?

Joe Munda - Sidoti & Company

Yes, that makes sense. Seeing any updates on reimbursement, Brachy versus alternative options out there?

Christine Jacobs

You mean, have had they knocked off IMRT. No, they haven't done that yet. We continue to see press about the over-utilization and the elevated fees that CMS and Medicare reimburse for IMRT, which for those are the callers understand that has been the most significant competitive threat to Brachy. I continue to see articles about it, Joe, but nothing seems to come out of Washington in the way of policy.

So, on a go-forward basis, we're just going to assume that's the way it is. Now, in Brachy, specifically, I'm not active in Washington anymore where fee reimbursement is concerned, because the fees come out in August, the proposed fees and they get locked in November, Joe. And, we now have an industry organization called CAB that has really done a good job of networking, reacting, commenting and having dialogues directly with the insiders at CMS, and for the past three years, we've been able to live with the fees, schedules and reimbursement for the Brachy seeds.

If CMS ever comes off the straight narrow giving us what the industry needs is adequate reimbursement, then I will get back on and go up there but for right now, our industry group is doing what I think is a good job.

Joe Munda - Sidoti & Company

And what is that they are doing now?

Christine Jacobs

Well, they protect the average selling. It's the average selling price and for both iodine and palladium. Now, when it comes to fighting the battle with IMRT, no. I don't think that's their charter.

Frank Tarallo

Now, what they've done a particularly good job of, Joe, is we've seen very little change in the fixed reimbursement amounts for both, palladium and iodine over the last couple of years, and so that to a larger extent, that trade group has really seen to that.

Joe Munda - Sidoti & Company

Are you saying without them the price could have dropped then?

Christine Jacobs

No, I think it could have.

Joe Munda - Sidoti & Company

Yes, it's okay.

Christine Jacobs

Yes. and the other thing is, it's a well known fact there is flawed data up there, where CMS is concerned and the CAB organization is particularly astute at identifying flawed data, bringing it to the attention of the agency and getting it corrected, and that's been invaluable in my eyes. They've been doing that for four or five years.

Joe Munda - Sidoti & Company

Has there been any response basically on any of their flawed data that you guys are saying?

Christine Jacobs

Yes, they have repaired it in-house and CMS then works off correct data. Yes. They have corrected the data when it's wrong.

Joe Munda - Sidoti & Company

Okay, all right. Thanks, guys.

Frank Tarallo

Thanks, Joe.

Christine Jacobs

Thank you. Claudia, any other questions?

Operator

Yes. We do have a question coming from the line of Rob Longnecker with Joe Street Capital. Please state your question.

Rob Longnecker - Joe Street Capital

Along the line of that same Brachy question. Why don't you give us a 30,000 foot view of what the market shares of a competing technologies have been maybe over the last three years or five years, or whatever the data you guys have available on that front?

Frank Tarallo

Yes. We have some internal estimates, Rob. Nobody really covers this industry, so some of the data is a little difficult to get. We think generally speaking today, the state of the industry is such that Brachy is probably plus or minus maybe 20% that active surveillance, which used to be called watchful waiting, used to be a low single-digit number. It might be as high has 10% now and then what's left over is probably equally divided between external radiation and the robotic/surgery. In external radiation, the biggest piece would be IMRT, so that's our best guess right now. Now, if you look back five years, Brachy had a larger share. It was probably closer to 30% maybe even 33%, so that's the trend you've seen over the last five to 10 years.

Rob Longnecker - Joe Street Capital

And, sort of from a rate of changed perspective, what's your best guess on, has it bottomed out, is it still continuing to decline?

Frank Tarallo

Yes. That's a great question. I don't think that neither Chris, nor I think that it had completely bottomed out, but clearly the rate of decline has slowed, so the rate of decline five, six, seven years ago, the slope of the line was much steeper, where in the last probably 12 to 18 months, maybe two years, the rate of decline has clearly slowed and we expect to continue to see that decline slow.

We don't think we've hit bottom. You never really know when you hit bottom until you have gone past it, right? But we don't think we're there yet.

Christine Jacobs

I'm going to also add to, I think, maybe the follow-up question not to anticipate you would be, do you ever see it going to zero? And, I'll be honest, nobody back here believes that and, I'm coming off of experience there, because when we launched the palladium seeds in 1987, we were competing with iodine back then who was the only permanent implant that had any appreciable market share and iodine had been around since 1940.

And so, as long as there are programs like Memorial Sloan-Kettering, University of Florida in Gainesville, UCSF in San Francisco, putting up radiation oncologists that are the best in the world at Brachy therapy, I don't think it's ever going to go to zero.

Rob Longnecker - Joe Street Capital

Got it, that's good to know. And then on the surgical products, you guys talked about the potential hit from the tax does that imply that for example on the most recent quarter that you guys actually have been losing money if that tax had been in effect.

Frank Tarallo

I think in the step tax by way would have also apply to our Brachy business, Rob, because it applies to finished goods. If that tax had applied to 100% of our products, which is probably not going to apply to the 100%, then it would have been a $2 million burden last year and $0.5 million this year.

If you look at the two segments, more than likely 100% of the Brachy product revenue would be subject to the medical device tax, and let's just use a number for estimating purposes, maybe half, maybe a little bit less on the surgical side. So, no, I don't think, we would have lost money, but to Chris's point, clearly, it's going to be a material burden going forward if in fact it becomes effective on January 2013.

Rob Longnecker - Joe Street Capital

Okay. I didn't realize it was applicable to Brachy, is what I thought it's just Surgical, so you guys did call a $1.5 million of EBIT in this quarter and there will be roughly, so it would have been a $1 million under the numbers you just put out?

Frank Tarallo

If a 100% of the products were applicable, then yes, but, if you're trying to model it, the best guess is that maybe half of our sales might actually be applicable, but the issue is all the detailed regulations have not been issued yet, so we can't even sit back here and tell you exactly what it would be.

Rob Longnecker - Joe Street Capital

So, the $500,000 estimate that you put out, that's assuming that everything is going to take that tax?

Frank Tarallo

Yes. So, you're trying to model it, I would use something more into $200,000 to $300,000 range.

Rob Longnecker - Joe Street Capital

Got you.

Frank Tarallo

Yes.

Christine Jacobs

Yes. We feel that it's prudent to let you all know what's coming.

Rob Longnecker - Joe Street Capital

Right.

Christine Jacobs

But also recognized that the supreme court ruling in June is going to have a great deal of effect on this, because whether they throw out ObamaCare or they amend it somehow going forward, all of this is a work-in-progress, but we just thought, we'd let you know in advance. This is what we know.

Rob Longnecker - Joe Street Capital

Okay. Great. Thank you.

Frank Tarallo

Thanks, Rob.

Operator

We have no further questions at this time. I will now turn the floor back over to management for closing remarks.

Christine Jacobs

Well, thank you all for listening. I recognize it was a long call. Frank and I figured it would be 27 minutes, instead I think, we went 31. So, I apologize for the long call, but however hope that you all have enjoyed the content. Thank you very much. We look forward to talking with you next quarter.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.

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