Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

AngioDynamics, Inc. (NASDAQ:ANGO)

F2Q08 Earnings Call

January 3, 2008 4:30 pm ET


Doug Sherk - The EVC Group

Eamomm P. Hobbs - President, Chief Executive Officer,Director

D. Joseph Gersuk - Chief Financial Officer, Executive VicePresident, Treasurer

Robert D. Mitchell - Chief Operating Officer, Executive VicePresident


Phillip E. Nalbone - RBC Capital Markets

Jayson T. Bedford - Raymond James & Associates

Jason R. Mills - Canaccord Adams

Suraj Kalia - Piper Jaffray

Jeffrey Cohen - Jesup & Lamont

Brooks E. West - Craig-Hallum Capital

Christopher Warren - Friedman, Billings, Ramsey

Larry Haimovitch - HMTC

Gregory R. Brash - Sidoti & Company


Welcome to the AngioDynamics conference call to review thesecond fiscal quarter financial results. My name is Joshua and I will be yourconference coordinator today. (Operator Instructions) I would now like to turnthe conference over to your host for today’s presentation, Mr. Doug Sherk ofthe EVC Group. Sir, please proceed.

Doug Sherk

Thank you, Operator and good afternoon, everyone. This isDoug Sherk with The EVC Group and thank you for joining us for theAngioDynamics conference call to review the financial results for the secondquarter of fiscal 2008, which ended on November 30, 2007.

The news release announcing the second quarter resultscrossed the wire this afternoon shortly after the market closed. If you haven’treceived a copy of the release and would like one, please call our office at415-896-6820 and we’ll get one to you immediately.

Additionally, we’ve arranged for a taped replay of this callwhich may be accessed by phone. A telephone replay of the call will becomeavailable from 7:30 p.m. Eastern Time this evening and remain available forseven days. The dial-in number to access the replay is 800-405-2236 from theUnited States or for international callers, 303-590-3000. Both numbers willneed the passcode of 11104157 followed by the pound sign.

This call is being broadcast live and archived replay willbe also available. To access the webcast, go to the AngioDynamics website Before we get started, during the course of thisconference call, the company will make projections and other forward-lookingstatements regarding future events, including statements about the sales andthe company’s beliefs about its sales and earnings for fiscal 2008. Weencourage 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 identifyspecific factors that may cause actual results or events to differ materiallyfrom those described in forward-looking statements.

In addition, management will review various non-GAAPmeasures during today’s call. Investors should consider these non-GAAP measuresin addition to, not as a substitute for or superior to financial reportingmeasures prepared in accordance with GAAP.

During today’s call, the company will discuss non-GAAPmeasures, adjusted income and adjusted EPS. Adjusted income and adjusted EPSexcludes certain expenses relating to the acquisition of RITA Medical,litigation damages, and others, including the cash benefit from the use of acquirednet operating losses and assumed taxes on net income where applicable.

Management believes these measures provide investors withuseful information in comparing the company’s performance over differentperiods, particularly when comparing this period to periods in which thecompany did incur any expenses related to these activities or items.

A reconciliation of all GAAP measures used during today’scall was provided in the news release distributed this afternoon and isavailable on the company’s website.

Finally, during the question-and-answer period today, werequest each caller to limit themselves to two questions and then encourage are-queue to ask additional questions. In advance, we appreciate everyone’scooperation with this procedure.

Now I’d like to turn the call over to Eamomm Hobbs, Presidentand Chief Executive Officer of AngioDynamics.

Eamomm P. Hobbs

Thanks, Doug, and a happy new year to everyone. Thank youfor joining us today to review another great quarter in AngioDynamics. With meis Bob Mitchell, our Chief Operating Officer; and Joe Gersuk, our ChiefFinancial Officer. After my opening remarks, Joe will review the financialhighlights of the second fiscal quarter and our reaffirmed outlook for thefiscal year. Then we will take your questions.

We generated net sales of $41.5 million for the secondquarter of fiscal 2008, which is 70% higher than the $24.4 million reported forthe second quarter of fiscal 2007. We executed our plan and delivered resultsright in line with our expectations for the quarter.

Our overall sales performance was accomplished by growingthe RITA product line sales by 18% to $15.3 million and the AngioDynamicsproduct line sales by 7% to $26.2 million. Last year, during the fiscal secondquarter, we grew AngioDynamics product sales by 30%, so we faced a very toughcomparison this year.

We are optimistic that our AngioDynamics product sales willreturn to our normal growth rate of at least 15% during the current fiscalthird quarter as compared to a year-ago period.

Perhaps the highlight from the quarter from a salesperspective was the growth of our vascular access port sales. This product linegrew an impressive 20% on a year-over-year basis. This progress was especiallygratifying because one of the key attributes of the acquisition of RITA was thebenefits we thought could be gained by having our sales team manage the RITAport sales.

You may recall that last quarter, the growth of thisparticular business was flat on a pro forma basis when compared to theexceptional sales performance of the first quarter of fiscal 2007. However, thebenefits we thought this product line would gain from the focus inrelationships of our AngioDynamics sales force are now being generated and webelieve we are well positioned to have positive year-over-year sales gains forthe ports business for the last half of the current fiscal year.

The RITA product sales performance was also favorablyimpacted by continued growth in our electrode business combined with strongdemand for the LC Beads products for tumor embolization and our HABIB resectiondevices.

The overall RITA product line sales growth of 18% came onequarter after two of our domestic distributors sold through the last of theirremaining inventory and those territories were absorbed by our direct salesforce. From a sales perspective, the RITA product line continues to performvery well, thanks to solid execution from the sales organization.

As we enter 2008, we are rapidly approaching the one-yearanniversary of the closing of the acquisition of RITA Medical Systems andduring the second fiscal quarter, we completed the integration of RITAoperations into AngioDynamics.

While there are challenges and potential pitfalls associatedwith any acquisition, I am pleased to report that this one has fully met ourexpectations and can offer the following facts to support our case.

We set out to fully integrate RITA into AngioDynamics whilemaintaining RITA’s efficient and low cost manufacturing operation in Manchester,Georgia, and their very capable R&D center in Freemont, California. Productmanufacturing and product development have continued smoothly.

That said, we established a goal of $9 million incost-savings in fiscal 2008 from the elimination of overhead and duplicatecosts. Halfway through fiscal 2008, I can report that we are well on our way toachieving that objective.

In addition, we believe there was considerable opportunityto strengthen our image-guided vascular access business with the addition ofRITA’s vascular port business. This was nearly half of RITA’s revenue streambut had been a secondary focus to their oncology products and the vascular portbusiness was generating declining revenues of 4% to 6% prior to theacquisition.

We have made several improvements to the design of the RITAports, improved the manufacturing process, and most importantly, given theproduct to the AngioDynamics interventional sales force to sell. With a largersales force and an opportunity to bundle it with other related products, we areseeing excellent sales performance in the ports business. Our second quarterwas a clear indication of this success and I believe you will see more of thistrend continue in coming quarters.

On the oncology side of the RITA business, we’ve kept thestrong development team in place and they continue to make strong progress. Inaddition, we now have a sales force dedicated entirely to the oncology familyof products which is perfectly positioned to launch new oncology products asthey are introduced. This side of the business is today the fastest growingpart of the company.

Let me turn for a moment to the AngioDynamics product lines.As I mentioned earlier, we had a very tough comp during the fiscal secondquarter. A year ago, AngioDynamics products generated an impressive 30% growthrate compared to 7% this quarter. That being said, we had exceptionally goodquarters for Morpheus CT PICCs and bedside insertion kits and the new Profilerballoon catheters. We believe we are in a very good position to growAngioDynamics product line sales by at least 15% on a year-over-year basisduring the third quarter of fiscal 2008.

I’d like to now update you on the VNUS litigation. As mostof you are well aware, VNUS has sued AngioDynamics, Diomed and VascularSolutions for allegedly infringing their patents covering radio frequencyoblation technology used in the treatment of varicose veins. This suit relatesto our VenaCure product that uses a laser-based system to treat varicose veins.

Over the past six months, we prepared extensively for atrial that was scheduled to begin in mid-October. However, the judge hasdelayed the trial several times due to court matters unrelated to thelitigation. Our view today is that the trial is not likely to begin before Mayof this year.

As part of the litigation process, in early October, thejudge heard and ruled on a number of motions for summary judgment that werefiled by the parties in the case. In one of the motions, the judge ruled thatwillful infringement is not a matter that is triable for AngioDynamics,therefore eliminating the potential for any troubling advantages. This rulingsignificantly reduces our maximum potential exposure in the event of an adverseoutcome in the litigation.

Regardless of the outcome of the case, we believe that wehave developed new, innovative products that will allow us to provide ourcustomers with an uninterrupted supply of products for the treatment ofvaricose veins.

At this point, I need to limit our comments on VNUS to thosethat I just offered and we will keep you updated on any developments.

Over the years, one of the distinguishing characteristics ofour company has been our consistent ability to successfully develop and bringto market new technologies and products. In total during the fiscal secondquarter, approximately 50% of our sales were generated from new productsintroduced over the last five years and over half of our growth was attributedto new products introduced during the last fiscal year. We believe we are wellpoised to continue that trend.

For example, on our last call, we mentioned that we launchedthe UniBlate electrode, a scalable, single needle radio frequency ablationelectrode used to coagulate lesions during percutaneous, laparoscopic, andintraoperative surgical procedures. We’ve been pleased to see that the producthas been well-received during industry conferences and sales are beinggenerated.

Two other new product lines recently introduced were SmartPort CT and the Profiler angioplasty catheters, both of which are doing verywell.

As we look to the future, we have several programs underway.For example, in November we announced the first 10 year study which highlightedthe three-year and five-year survival rates of 234 patients who had undergoneradio frequency ablation of colorectal hepatic metastases published in theOctober 2007 issue of the Annals of Surgery.

The significant five-year survival rate in patients withnon-resectable disease is a major selling point for RFA and also paves the wayfor potential use of focal ablation in other disease states.

Another trial that was very recently completed is theRAPTURE trial. RAPTURE involves a study of the impact of RFA technology totreat lung malignancies. This trial involved 106 patients from Europe,Australia, and the United States and we expect the results to be publishedduring the first half of 2008.

I think it is important to note that given all the attentionreceived due to the FDA’s December 11th public health notification regardingthe deaths associated with the use of radio frequency ablation for lung tumors,no AngioDynamics/RITA radio frequency ablation probes were used in thesestudies and during the RAPTURE trial, there were no deaths reported.

Based on these results, we are now in an excellent positionto evaluate the potential for pursuing a specific indication and favorablereimbursement for lung RFA.

On the intellectual property front, during the secondquarter of fiscal 2008 we announced that the U.S. patent office issued a patentto us covering an endovascular laser treatment device with a spacer, whichfurther prevents contact with the vessel wall. This patent, along with otherpending patent applications covering venous disease treatments demonstrates ourcontinued commitment to maintaining our innovative leadership in this marketsegment.

With regard to our Irreversible Electroporation, or IRE,development program with Oncobionic, it continues to progress. We are veryexcited about IRE, which uses needles and image guidance similar to existingthermal ablation technologies. The most interesting thing about IRE is that insteadof cooking or freezing the targeted tissue, IRE disrupts the cell membranewhich in turn destroys the targeted cells. Working alongside with Oncobionic,the developer of IRE, we added important new parameters and stricter investigatorindependence requirements to our human trials. Investigator independence isvery important to our study and to the validation of the technology.

Our malignant prostate cancer pilot study is now expected toget underway in the early part of calendar 2008. It is designed to assess thesafety and efficacy of using IRE to ablate localized prostate cancer. As wehave stated, the successful completion of this study will trigger thecompletion of the acquisition of Oncobionic. This will be completed with a $20million payment.

We continue to aim to provide IRE systems to thought leadersin the field of focal tumor ablations in the U.S. and Europe. We expect tobegin placing units in Q4 fiscal 2008 with a total of 20 units placed by theend of the first quarter of fiscal 2009. The thought leaders will begin usingour systems to treat patients and develop clinical data to demonstrate the technology’stherapeutic effectiveness.

We believe that IRE is a very broad-based platformtechnology. We anticipate researching a broad range of applications, includingboth malignant and benign tumor therapy, cardiovascular disease therapies, electro-physiologydisorder therapies, and other procedures. We will prioritize our plans based onthe feedback we receive from these 20 leading physicians who are pioneering theclinical use of the IRE system. We expect that malignant prostate will be theinitial area of specific interest that will lead to definitive clinical trials.

With that, I would like to turn the call over to Joe.

D. Joseph Gersuk

Thank you, Eamomm and good afternoon, ladies and gentlemen.We continued our strong operating performance in the second fiscal quarter andachieved our financial objectives. Operating cash flow was particularly strongthis quarter and exceeded our expectations. Our first half operatingperformance indicates we are well-positioned to achieve the financial goals weset at the beginning of the year.

Second quarter net sales increased by $17.1 million, or 70%to $41.5 million; $15.3 million of the increase was attributable to the sale ofproducts acquired from RITA Medical Systems and the balance was inAngioDynamics products.

From a product group perspective, the interventionalproducts group grew by 32% to $32.1 million and constituted 77% of our totalsales. RITA’s port product line is now included in the interventional productsgroup, as are all of the products sold by AngioDynamics prior to the RITAMedical acquisition.

The oncology products group produced sales of $9.4 millionin the quarter and constituted 23% of total company sales. International saleswere $3.9 million or 9% of total sales.

Sales of RITA Medical products were strong across the board,from the recently introduced Smart Port CT, which drove a 20% pro formaincrease in port sales in the quarter, to the entire line of oncology products,which grew 26% over the prior year on a pro forma basis.

We continue to see strong market demand for the entire lineof oncology products, with market leading devices and an excellent sales forceselling them. The pro forma rate of growth of all RITA Medical products in thesecond quarter was 18%, which reflects the discontinuation of a few low marginproducts following the acquisition.

As mentioned in the release, we attribute the modest 7%organic growth rate in the sale of AngioDynamics products primarily to adifficult comparison to the year-ago quarter when the company reported 30%sales growth. Another way to look at it is that the sale of core AngioDynamicsproducts has grown 40% from the second quarter two years ago.

Comparisons aside, however, we are continuing to seeconsiderable price competition in the dialysis market today, which we believeis constraining revenue growth for all competitors in this market.

As a company, we remain very committed to the dialysismarket. Over the years, we have introduced a variety of highly differentiatedproducts in all markets we serve, so as to compete on features and performanceand not on price. This will also be our strategy in the dialysis market as weplan to continue to innovate and introduce new products in the coming monthsthat we hope will set new standards in patient care.

Continuing down the income statement, the gross profitmargin improved to 61.3% from 60% in the first quarter and 58.5% a year ago.The improvement from one year ago reflects the higher gross margin on theacquired RITA Medical products and the improvement from the first quarterreflects a favorable sales mix. We continue to believe that our margin goal forthe year of 61% to 62% is achievable as we are at 60.7% at the halfway point.

Total operating expenses were $20.7 million in the quarterand as detailed in the release, include $2.8 million in non-cash charges forstock-based compensation and amortization of purchased intangibles. Excludingthe amortization of purchased intangibles, operating expenses were 45.8% ofsales in the quarter and a similar percent of sales a year ago.

The successful integration of RITA Medical has enabled us toreduce G&A costs from 12% of sales last year to 9.8% of sales in thecurrent quarter. This 2.2 percentage point operating efficiency has enabled usto significantly increase R&D spending from 6.7% to 8.9% of sales insupport of new product development activities without increasing totaloperating expenses as a percentage of sales. This increase in R&D spendingis consistent with our previous guidance that we would spend 8% to 9% of saleson R&D this year.

Legal fees were high again this quarter, totaling $1.3million, with nearly half of that cost related to patent litigation matterswith Diomed and VNUS and the balance related to the customary level of IP andnormal corporate legal work.

Operating income rose by 59% in the quarter to $4.8 million.Excluding the amortization of purchased intangibles and stock-basedcompensation, operating income improved to $7.8 million or 18.7% of sales forthe quarter. The comparable prior year margin is 15.9%. This 2.8 percentagepoint improvement is again indicative of the success of our ongoing integrationefforts.

Below the operating profit line, you will note that ourother income declined by nearly $900,000 from a year ago. This decline reflectsinterest expense on the convertible debts assumed in the RITA Medicalacquisition, interest expense on the litigation award, and a $215,000 declinein the value of an interest rate hedge that does not qualify for hedgeaccounting under the accounting rules. Nonetheless, the hedge is effective froman economic standpoint.

After income taxes are taken into account, the result is$3.1 million in net income or $0.13 in diluted earnings per share. As noted inthe release, non-GAAP adjusted income was $7.3 million in the quarter, or $0.30per share, demonstrating the strong cash generating capability of our businessmodel as we integrate RITA into AngioDynamics.

The balance sheet remains very strong as we ended the quarterwith nearly $80 million of cash and marketable securities, $95 million inworking capital, and just $7 million in long-term debt. Accounts receivablerepresent 48 days sales outstanding.

Cash flow was exceptionally strong in the second quarter, asshown on the cash flow statement in the release. In the quarter, we generatedmore than $9 million in cash flow from operations, bringing the year-to-datetotal to $10.2 million, or more than double the cash flow from operations inthe first half of the prior year.

Finally, you will note in the release that we arereiterating our guidance for the fiscal year. The guidance is unchanged fromwhat we provided earlier in the year and I’ll briefly repeat it for the benefitof those who didn’t join that call.

We continue to expect sales for the year in the range of$170 million to $175 million; gross profit margin in the 61% to 62% range; GAAPoperating income of $20 million to $22 million; GAAP EPS of $0.56 to $0.60; andnon-GAAP adjusted income of at least $30 million.

Adjusted income is defined as net income plus stock-basedcompensation, amortization of purchased intangibles, and cash tax savingsarising from the use of RITA’s net operating losses.

I will now turn the call back to the operator to start theQ&A.



(Operator Instructions) Our first question comes from theline of Phillip Nalbone with RBC Capital Markets. Please go ahead.

Phillip E. Nalbone -RBC Capital Markets

Thank you very much. Good afternoon, guys. Eamomm, you lostme a little bit in your recitation about the IRE timelines, particularly thetiming of placement of some of the generator units. Can you go back throughthat and specifically when do we expect revenue generation from those boxplacements?

Eamomm P. Hobbs

The IRE timeline is we are going to start placing boxes inQ4 of this fiscal year, which is spring, and our intent is to place 20 units,which we will have completed by well before the end of Q1, which is thesummertime, this calendar year.

Phillip E. Nalbone -RBC Capital Markets

Okay, and does that equate to the recognition of anyrevenues in that timeframe?

Eamomm P. Hobbs

The revenues from IRE are going to be modest until weanalyze the data we get from the 20 leading centers and that revenue will beassociated with the consumables that those clinical leadership centers consumeas they do clinical cases with the IRE boxes.


Our next question is from the line of Jayson Bedford withRaymond James. Please go ahead.

Jayson T. Bedford -Raymond James & Associates

Good afternoon. Just a quick question for you; in terms ofthe 20% port growth, I’m just wondering, what drove that? Meaning if you takeout the contribution from Smart Port, did you see true base port businessgrowth?

Eamomm P. Hobbs

Well, Smart Port was definitely the shining star in the portsales and it’s hard to carve out Smart Port and then look at the base business.The majority of the Smart Port business was new port sales but we did convertsome existing customers to Smart Port.


Our next question comes from the line of Jason Mills withCanaccord Adams. Please go ahead.

Jason R. Mills -Canaccord Adams

These questions are rolling too quickly here, Eamomm. Happynew year. I’m going to follow on Jayson’s question on the -- well, moregenerally on the image guided vascular access business; could you give us asense for in total what the sales force, the AngioDynamics sales force did withthe entire vascular access business in terms of pro forma year-over-yeargrowth? And then help us understand or give us a little bit more color on whatyou are expecting in that specific franchise as we move into the back half ofyour fiscal year and in fiscal ’09, given that now you have seemingly some momentumwith a sales force selling the entire line and couple that with at least myunderstanding is you have not achieved any national accounts yet, which is over50% of the opportunity there.

Eamomm P. Hobbs

Well, the image guided vascular access products, which areprimarily the Morpheus bedside insertion kit and the port product lines, grewat approximately 20% overall, so we were pleased with all the products in thosegroups and that was a solid reflection of the AngioDynamics sales force, or ourinterventional products group sales force, as we call them now, executing as weexpected they would when we gave them the port product line, which not only isan excellent product line but we’ve added new products and improvements,coupled with the great success we were having with CT injectable PICCs with theMorpheus and bedside insertion kit.

Jason R. Mills -Canaccord Adams

So did the existing non-port business, did that grow aboveor below the 20% level?

Eamomm P. Hobbs

About the same.


Our next question is from the line of Suraj Kalia with PiperJaffray. Please go ahead.

Suraj Kalia - PiperJaffray

Congratulations on a good quarter. Eamomm, Joe, one quickquestion; in terms of the implied guidance for Q4 and the whole year, afollow-up on Jason’s question, the RITA business drove the Angio port businessand there was growth of 20%. Did any organic Angio product lines see anysoftness in the quarter? And if you could tie that to what is the impliedacceleration in Q4?

Eamomm P. Hobbs

That’s a difficult question to answer from the perspectiveof we are comparing to an extraordinary Q2 the prior fiscal year, so with thatin mind -- and by extraordinary, I mean that we had peak sales in Q2 in many ofour product lines for that fiscal year, so the -- but the standouts as far asthe softest side of the Angio business was the dialysis segment and the venoussegment. Both were working against, as I said, extremely difficult comps anddialysis we’re, as we said in our presentation, we are expecting to deal withthat by innovating, as we’ve done in the past, and venous we’re very pleased,actually, with the way the venous business is going and think that venous isgoing to have -- be at or above average growth, company growth in Q3 andthereafter.

D. Joseph Gersuk

And with respect to the implied growth rate in the guidance,it would work out arithmetically at the low end of the guidance, we would haveto grow 19% year-over-year pro forma in the second half of the year and at thehigh end, 25% in order to end in that $170 million to $175 million in total forthe full fiscal year. S


Our next question comes from the line of Jeffrey Cohen withJesup & Lamont. Please go ahead.

Jeffrey Cohen - Jesup& Lamont

I just have two quick questions; first, can you run throughthe sales force breakdown as currently configured? And I guess the second shortquestion is do you have any comments regarding Sotradecol from the pastquarter?

Eamomm P. Hobbs

I’ll take the Sotradecol aspect. Sotradecol had a verystrong quarter. It is still one of our fastest growing products and we continueto gain traction based on our educational programs of educating physicians onthe benefits of using the only FDA approved sodium Sotradecol sulfate, whichyou’ve heard before. So it was a very solid, solid quarter for Sotradecol andwe expect that trend to continue throughout the rest of the fiscal year andbeyond.

D. Joseph Gersuk

With regard to the sales force, the total sales organizationat the end of the fiscal quarter was 119 strong, and then within that, thenumber of quota carrying sales reps in the U.S. and Europe totaled 96.

Jeffrey Cohen - Jesup& Lamont

And what was the break-up -- the breakdown between RITAproducts and the interventional?

D. Joseph Gersuk

The numbers in the oncology products group numbered 27 andthe interventional group in the U.S. numbered 61, and then eight others inEurope.

Jeffrey Cohen - Jesup& Lamont

Thank you.


Our next question comes from the line of Brooks West withCraig-Hallum Capital. Please go ahead.

Brooks E. West -Craig-Hallum Capital

I actually had a question on sales force size that was justanswered. Can you comment, Joe, a little bit more on plans for growth of thesales force and where you are trending in terms of sales per rep and what somegoals might be there?

D. Joseph Gersuk

We’ll add a few more this fiscal year, not too many, and atthe moment, we don’t have any open spots but I’m sure we’ll be adding somelater in the year.

In terms of the productivity level, this quarter we were atabout a $1.7 million per quota carrying rep level of sales on an annualizedbasis, so good productivity and it continues to step up nicely throughout theyear.

Brooks E. West -Craig-Hallum Capital

Great. Thank you.


Our next question comes from the line of Christopher Warrenwith Friedman, Billings, Ramsey. Please go ahead.

Christopher Warren -Friedman, Billings, Ramsey

Thank you for taking the question. I just wanted to askabout the contract revenue opportunity. Did you see much incremental revenuefrom the [IVN] network and where are you as far as hiring that sort of tacticalteam?

Robert D. Mitchell

Basically, we’re just getting started to push forward ournational accounts, or group purchase opportunities. As we stand right now,we’ve identified a vice president of the organization and he’s building theorganization around him right now. So we haven’t recognized much by way ofrevenues with the organization thus far.

Christopher Warren -Friedman, Billings, Ramsey

Thank you so much. I appreciate it.


Our next question is from the line of Larry Haimovitch withHMTC. Please go ahead.

Larry Haimovitch -HMTC

A couple of questions; one is can you give us a little morecolor on the performance of the oncology division? I’m thinking specifically ofgrowth rates of radio frequency ablation vis-à-vis the drug eluting beads, andI’ll come back with my second question when you answer that.

Eamomm P. Hobbs

The drug eluting beads are really a star performer in theoncology segment and they are a relatively new product, so you would expectthey’d have a higher growth rate over the much more well-established radiofrequency ablation.

Larry Haimovitch -HMTC

Any color? Is it growing 30, 40 -- would you give any coloron the actual growth rate of the drug eluting bead business?

Eamomm P. Hobbs

Well, we don’t give specific product information forcompetitive reasons but having said that, it’s multiples above our corporateaverage growth rate.

Larry Haimovitch -HMTC

Okay, and then on the Oncobionics, what are some of thetriggers for -- you talked about a $20 million payment, which has previouslybeen discussed. What are the key triggers that get you to a full milestonepayment or milestone payments, Eamomm?

Eamomm P. Hobbs

Well, the $20 million is broken up into a $10 millionpayment followed by two $5 million payments that are time-based, so really theclosing of the acquisition happens after the milestone of a successful demonstrationin malignant prostate, so the malignant prostate study that we’re going to beconducting in Italy with a world-leading urologist who is completelyindependent of the development of IRE, is going to we anticipate trigger theclosing of the acquisition of Oncobionic. We pay $10 million and then over thenext 12 months, pay another $10 million, which is just simply time-based, sothe closing would be complete I would anticipate this fiscal year.


Our next question comes from the line of Greg Brash withSidoti & Company. Please go ahead.

Gregory R. Brash -Sidoti & Company

I was curious, and I know you don’t like to break outindividual sales, what you’ve done in the past. Would you be willing to commenton the laser sales in the quarter?

Eamomm P. Hobbs

Well, we really stopped giving detailed product performancebased on competitive issues. We were giving our competition really a tremendousamount of competitive advantage by telling them exactly how we did and hencewhy we are doing what we are doing.

But lasers had a very strong quarter. They were up againstan extremely strong comp and that’s about the only unusual thing about Q2. Wewere pleased with how the laser box sales and laser consumables performedduring Q2 and expect that that trend is going to continue. NeverTouch, ourproduct that we introduced in Q1, is still performing really well, getting verysolid positive feedback from the clinicians who are using it and we’re pleasedall around with our venous sales performance.

Gregory R. Brash -Sidoti & Company

Okay. Is it fair to assume that there was sequential growth?

Eamomm P. Hobbs

There was indeed.


(Operator Instructions) Our next question is a follow-upquestion from the line of Jayson Bedford. Please go ahead.

Jayson T. Bedford -Raymond James & Associates

Thanks, guys. I’ll just make it quick. First, Eamomm, youalluded when talking about the size of the oncology sales force to potentialnew product introductions in the oncology segment, outside of the IREtechnology, is there anything else we should look forward to?

And then, just so I get it in, to Joe, in terms of theinterest income, it sounds like that hedge had an impact. I’m just wondering,does that hedge reverse in the third quarter? And then, just from an interestincome, what -- should we look at it as growing? I guess I’m just a littleunclear as to what’s happening with that line item on the P&L.

Eamomm P. Hobbs

Well, as far as new products outside of IRE for the oncologysales force, we have a very full pipeline of new products that are associatedwith the radio frequency ablation area, both for in terms of additionalelectrodes and the box, adding features to the boxes for future generationmachines.

In addition, we are very actively involved in thedevelopment of surgical, electro surgical devices that, along the lines of thevery successful HABIB Electrocautery systems and there are other things in thepipeline as well that we’re really not ready to talk about yet.

But be that as it may, we are very committed to the oncologyspace and adding new products to the -- in the bag of the existing oncologysales force and also working up programs to expand the markets of the existingproducts and things we are looking at that are very potentially significant arelung RFA, getting a specific indication for that and a favorable reimbursementwould allow us to dramatically increase the market for our existing RFAproducts.


Our next question is a follow-up question from the line of GregBrash. Please go ahead.

Gregory R. Brash -Sidoti & Company

I was just curious if you’ve been gaining any tractionselling some of the Angio products overseas, now that you have a sales forceover there.

D. Joseph Gersuk

Yeah, I think we’re definitely leveraging the sales force aswe continue to expand our global operations and that’s reflected in our salesnumbers, so definitely.

Eamomm P. Hobbs

You know, we’ve got a ways to go that I think it’s stillearly with regard to integrating our -- getting full value out of our directsales force with regard to the Angio products. We are direct in the U.K.,Germany, and France and we have plans in various stages in those threecountries of execution, of leveraging that direct sales force to push the Europeansales of the AngioDynamics products forward.

D. Joseph Gersuk

The other thing I would comment on that is the actual proforma growth rate on the old U.S. business was actually about twice the rate ofgrowth in the domestic business, so we are in fact seeing very strong growththere, even before we get up to full speed in terms of ramping up our sales andmarketing activities in Europe.

If I could also answer the question with regard to the hedgethat Jason brought up, we recognized $215,000 worth of expense in other expensebelow the operating profit line, which is the mark-to-market adjustment of thathedge to flow that through the balance sheet and that stems from the verysignificant drop in interest rates that occurred in our second quarter as partof the turmoil in the credit markets.

And in the past few quarters, it had actually been a verysmall amount of either a gain or an expense and this quarter just happened tobe a very significant expense by virtue of the sharp drop in interest rates.And so we wouldn’t expect that to repeat just because it’s unlikely that therecould be a further precipitous decline in interest rates in the comingquarters, if you’ll accept our view of interest rate forecasting.


Our next question is a follow-up question from the line ofPhil Nalbone. Please go ahead.

Phillip E. Nalbone -RBC Capital Markets

Thank you. Eamomm, I’m interested in your thought on this --what do you think it’s going to take operationally for AngioDynamics to getback to a position where it can routinely exceed expectations? You had a coupleof sort of sloppy quarters around the time of the RITA acquisition. You’ve nowhad two very strong on-target quarters, but what needs to happen for us to seeshades of the old AngioDynamics, which was none for beating expectations on apretty consistent basis?

Eamomm P. Hobbs

Well, it’s a fair question that I would say that we are wellon our way to doing that. We are very pleased with Q2 but our overall growth isnot back to, as you say, the old AngioDynamics. We think Q3 is going to, as Joepointed out, if we hit our guidance for the last half of the fiscal year in Q3and Q4, we’ll be back to growth rates that are much more in line with thehistorical growth rates that Angio enjoyed and put forward.

So I think we are very close to being able to execute andhopefully exceed expectations routinely.

Phillip E. Nalbone -RBC Capital Markets

Great. Thanks, good luck in the new year.


Our next question is a follow-up question from the line ofBrooks West. Please go ahead.

Brooks E. West -Craig-Hallum Capital

Eamomm, specifically on the lung RF ablation, it was nice tosee you coming through that unscathed. You talk about going after a specificindication, which would be pretty nice. Any timeline on when you might try toapply for that and is that trial complete or nearing completion?

Eamomm P. Hobbs

Well, that RAPTURE trial that we mentioned is completed andis going to be published shortly and we really can’t get into too much detailon that study due to our consideration for the authors of the study. But weare, as of today, considering the plans for going forward with the pursuit of aspecific lung indication and a favorable reimbursement. So it’s premature to begiving, putting a timeline on that but it’s definitely on our short-term radarscreen as far as being in a better position to give a timeline on it.

Brooks E. West -Craig-Hallum Capital

And would that give you the only indication for RF in lung?

Eamomm P. Hobbs

That would.

Brooks E. West -Craig-Hallum Capital

Okay, great. Thank you.


Our next question is a follow-up question from the line ofJason Mills. Please go ahead.

Jason R. Mills -Canaccord Adams

A couple of quick questions here; Eamomm, we were keen tothe progress here of the Profile balloon. You said sort of in general terms itwas going well. That product, at least when you were -- before Bob came alongand prevented us from hearing all the good stuff in each division, it seems tohave been doing -- sorry, Bob -- about $1 million, $1.5 million a quarter. Iguess just generally speaking, what could Profiler mean to PTA catheter linesort of two or three years out? Are we talking about something that could be a$5 million, $6 million a quarter business? Maybe talk about the competitivelandscape there that may or may not allow that.

And then secondly, gross margins were really strong thisquarter. My guess is it was partly driven by new product launches in additionto obviously acquiring RITA, but as we look forward, and I know you probably,Joe, aren’t ready to give 2009 fiscal gross margin guidance but my guess isalso that you want to continue to expand that. Sort of in general terms, whatsort of year-over-year margin expansion can we expect over the next couple ofyears on the gross margin line?

D. Joseph Gersuk

All right. Why don’t I let Bob talk to you about theProfiler opportunity first --

Robert D. Mitchell

Why don’t you go first with the gross margin --

D. Joseph Gersuk

Okay. On the gross margin this past quarter, it was not somuch new product, actually and typically with a new product, we’ll see aramp-up as we work through the manufacturing process, if you will. So thisquarter, it really was primarily just sales mix and in the first quarter of theyear, the sales mix was less favorable and in this quarter, it was morefavorable. So that really primarily accounts for the improved margin thisquarter.

If you look at our past, of course, we have historicallyimproved gross margins by about two percentage points every year and we think,at least the guidance we’ve offered is that we expect going forward to be ableto improve them at last one percentage point a year from the current levels.But we continue to work on all the aspects to improve margins from materialcost efficiencies to better manufacturing processes, and most importantly tojust the sales mix. And to the extent we invent our own product and build andsell that, there is a much better margin on that than one that we might beselling that somebody else would have created in the first place.

Robert D. Mitchell

Well, thanks, Jason. I really thought we were beyond this inour relationship.

Jason R. Mills -Canaccord Adams

We are. I just dig up old bones.

Robert D. Mitchell

No, I appreciate that. But specific to the Profiler, I cansay in general that we are very impressed with the growth that we experiencingand the market penetration that we are also experiencing alongside that growth.It’s an exciting product line and relative to your question, four and fiveyears out, you bet. We plan to be a major contender in this space and the waywe are going to do that is through continuous innovation. So within our R&Dpipeline, we plan to continually innovated on the Profiler line.

Jason R. Mills -Canaccord Adams

Should we expect an iteration this year, next year?

Robert D. Mitchell

Probably not this year, but we are close.

Jason R. Mills -Canaccord Adams

Okay. Thanks, guys.


Ladies and gentlemen, there are no further questions at thistime. I would like to turn the conference back over to management for anyclosing remarks.

Eamomm P. Hobbs

I’d like to thank you all today for your attention. Wecontinue to look forward to a successful fiscal 2008. Have a great evening andI look forward to speaking to you again at our next conference call.


Ladies and gentlemen, this concludes the AngioDynamicsconference call to review the second fiscal quarter financial results. ACTwould like to thank you for your participation. Have a pleasant day. You maynow disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Source: AngioDynamics F2Q08 (Qtr End 11/30/07) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts