Mentor Corp. Q3 2008 Earnings Call Transcript.

| About: Mentor Corp. (MNT)

Mentor Corp. (MNT) Q3 2008 Earnings Call January 31, 2008 5:00 PM ET


Joe Newcomb – Vice President and General Counsel.

Josh Levine - President and Chief Executive Officer.

Edward S. Northup – Vice President and Chief Operating Officer.

Michael O'Neill - Vice President and Chief Financial Officer.


Frank Pinkerton - Banc of America

Larry Biegelsen - Wachovia

Amit Hazan - Oppenheimer

Greg Gilbert - Merrill Lynch

Anthony Vendetti - Maxim Group

Julie Hoggatt - Noble Financial

Jason Bedford - Raymond James

Hesham Shaaban - Maxim Group


Welcome to today's Mentor Corporation Fiscal Q3 Earnings Conference. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during our Q&A session. Please note this call may be recorded.

I'll now turn the call over to Mr. Joe Newcomb, Mentor's General Counsel.

Joe Newcomb – Vice President and General Counsel

Thank you, Devin. Good afternoon, everyone, and thank you for joining us today. With me are Josh Levine, President and Chief Executive Officer, Edward Northup, Vice President and Chief Operating Officer and Michael O'Neill, Vice President and Chief Financial Officer.

This conference call elaborates on a press release that was issued earlier today. If you have not already received the copy of our press release, please call Vicky Johnson at 805-879-6082 and she will fax or e-mail a copy to you. The press release may also be found on our website,

As a reminder, Mentor has a fiscal year that ends March 31st and we make reference to any quarter or year today on the call, we will be referring to our fiscal year unless otherwise noted. During this call, we'll discuss among other matters our financial results for the third quarter ended December 31, 2007, which is our fiscal year 2008.

This conference call will include a discussion of non-GAAP financial measures as that term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results in accordance with GAAP have been provided with the press release and posted on the company's website.

Before we begin, I've been asked to read the following Safe Harbor statement pertaining to forward-looking statements, which we'll be making during the course of our conference call.

Today's conference call includes statements regarding Mentor's financial results for the third quarter, certain results for the first nine months of fiscal year 2008, guidance for full fiscal year 2008, the MemoryGel silicone gel-filled breast implants post approval study and several product development and clinical programs as well as other forward-looking statements within the meaning of the Federal Securities Law.

It should be clearly understood that these forward-looking statements and our assumptions about the factors that influence them are based on the limited information available to us at this date. Such information is subject to change and we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Actual results may differ substantially from those anticipated.

Specific factors that may affect our business and future results are discussed in our SEC Forms 10-K, 10-Q, 8-K and other SEC filings. A partial list of these important risk factors is set forth at the end of today's press release.

Now I'd like to turn the call over to Josh Levine.

Josh Levine - President and Chief Executive Officer

Thanks, Joe. Good afternoon, everyone and thank you for joining us. We are pleased with our third quarter results. During the past quarter, we continue to seek conversion to our MemoryGel line of silicone gel filled breast implants and the positive impact of price leverage.

We finished the third quarter with $92.9 million in sales, an increase of 23% over sales of $75.3 million in the third quarter 2007. The quarter includes $4.7 million of sales related to our Perouse acquisition and includes 1.6 million of positive currency effects. Excluding the effect of the Perouse acquisition, our organic growth rate was 17%. Further excluding the effects of foreign exchange, our organic growth rate was 15%.

From a strategic standpoint, we continue to invest heavily on R&D to position the company to be a larger and more diversified player in the aesthetics space. During the quarter, we made substantial progress in initiation of Phase IIIB of our Botulinum Toxin trial. Over the span of abruptly 8 weeks culminating in mid-January, we enrolled and treated 700 patients in this critical phase of the clinical trial.

Now, I'll walk through the results by reporting segment. The breast aesthetics sales were 81 million in the third quarter, an increase of 24% over sales of 65.6 million in the third quarter of fiscal 2007. U.S. sales were favorably impacted by the increased market penetration of MemoryGel implants.

For the third quarter MemoryGel represented 46% of our domestic sales, while saline represented the remaining 54%. This 46% compared to an average of 42% for the fiscal second quarter. As we've previously stated, we expect that MemoryGel demand will be approximately half of all domestic breast implant unit volume by the end of the fourth quarter of fiscal year 2008.

Also contributing to sales growth were increases in sales of our breast reconstructive products, including our contour profile breast expander and our new NeoForm reconstructive dermis. For body contouring, sales of liposuction equipment and disposables were flat with last year at 3.9 million for the third quarter.

Sales of our other aesthetic products, which includes our facial products for the third quarter were $8 million, an increase of 36% over the same period prior year. During the quarter we saw growth in international markets for our derma fillers and strong domestic sales of our NIA line and skin care products. Also, included in the growth is $600,000 of non-breast implant Perouse products.

I'll now turn the call over to Mike, who'll provide you a more detailed review of our financial results.

Michael O'Neill - Vice President and Chief Financial Officer

Thanks, Josh. As required under generally accepted accounting principals, the operating results of our discontinued urology business are reported below net income from continuing operations. My comments today will only cover our continuing operations. Josh has already reviewed the sales number so I'll begin with our margins.

Gross margin for the third quarter of fiscal 2008 was 71.9% compared to 74.9% for the comparable period in fiscal 2007.

Cost of sales for the third quarter of fiscal 2008 included $1 million for costs related to the step-up valuation of inventory associated with our Perouse acquisition.

On a non-GAAP basis, excluding these extra costs, gross margin was 72.9% of sales. The gross margin percentage was primarily adversely affected by sales of Perouse products.

Selling, General, and Administrative expense for the third quarter of fiscal 2008 was $38.9 million, or 41.9% of sales, compared to $32.4 million, or 43% of sales in the third quarter of fiscal 2007. SG&A in the third quarter of fiscal 2008 included $1.8 million of severance expenses.

Research and development expenses in the third quarter of fiscal 2008 were $9.7 million, an increase of 25% over the $7.8 million reported in the third quarter of fiscal year 2007. For Q3 year to date R&D expenses were $32.2 million for fiscal 2008 reflecting a 31% increase over the prior year. Our investment in R&D includes clinical trials and ongoing related program expenses in support of our breast and facial aesthetics initiatives.

Operating income for the third quarter was $18.1 million, an increase of 12% over the $16.2 million reported in the third quarter of the prior year. For the nine months ended December 31, 2007, operating income was $60.4 million, an increase of 29% when compared to the $46.7 million in the same period last year.

Interest expense net of interest income in the third quarter was an expense of $200,000 as interest income has decreased significantly as a result of lower cash balances due to our share repurchase program.

Moving onto taxes; the effective tax rate for continuing operations in the third quarter of fiscal 2008 was 30.9% compared to 29.4% in the third quarter of fiscal 2007. Year-to-date, our effective tax rate was 29.3% compared to last year at 29.8%. We reported diluted earnings per share from continuing operations of $0.32 in the third quarter of fiscal 2008, which is equivalent to the $0.32 per share in the third quarter of last year.

Included in diluted GAAP EPS from continuing operations for the third quarter of fiscal 2008 was approximately $0.05 per share of combined costs consisting of severance and cost related for the step-up valuation of inventory associated with the Perouse acquisition. Excluding these charges, diluted non-GAAP EPS from continuing operations was $0.37 per share in the third quarter of fiscal 2008, an increase of 16% over the $0.32 per share diluted non-GAAP EPS from continuing operations reported in the third quarter of fiscal 2007.

Turning to our cash position and cash flow, we reported cash and marketable securities of $107 million as of December 31st. A substantial decrease from our March 31st balance of $488 million primarily as a result of share repurchase program.

In the first nine months of the FY, we repurchased 9 million shares for approximately $368 million. We also had funded the cash portion of the acquisition of Perouse Plastie for approximately $53 million and paid dividends of $23 million. For the third quarter, our operating cash flow from continuing operations was approximately $25.4.

Depreciation and amortization were approximately $3.6 million and our capital spending on property plant and equipment was $6 million. For the full year, we expect depreciation and amortization for fiscal 2008 to be in the range of $12 to 14 million Investment in capital spending in fiscal 2008 includes an expansion of our Botulinum Toxin facility to support the vertical integration of certain processes that are currently outsourced.

Before I turn the call over to Ed, I wanted to finish off with the final thoughts regarding my first few months with Mentor. I have been thoroughly impressed with the depth and quality of what is a relatively new executive leadership team at Mentor that has been established over the last 12 months. Third quarter financial results are solid and we enjoy a healthy financial position that afford us the opportunity to invest in both internal and external development program to grow the business into the future.

For those of you in the investment community that I have met today, I wanted to acknowledge the strong sentiments of support that you have provided to me and I sincerely appreciate it. For those of you that I have yet to meet in person,. I look forward to making your appointment in the not too distant future and I am looking forward to working with all of you as I continue my transition into Mentor.

Thanks. And I will hand over to Ed for a review of our product development programs.

Edward S Northup- Chief Operating Officer, Vice President

Thanks Mike. Starting first with our anatomical gel PMA, the submission for a Contour Profile Gel Anatomical Breast Implant remains under active FDA review. It remains unclear at this time, whether or not the FDA will require expert advisory panel to review this PMA. With regards to our dermal fillers all of which are formulated with lidocaine for patient comfort, for Prevelle Plus, we anticipate FDA approval in late FY '08. Our Puragen Plus PMA is currently under review by FDA and we expect approval in mid fiscal 2009.

We continue to make progress in our development of our next generation of hyaluronic acid-based dermal filler or DGE and during the quarter, we completed patient enrolment in the clinical trial. We expect to complete follow up for this study in early fiscal 2009 and projected product will be available internationally during fiscal 2009 and domestically in fiscal 2010.

I will now update our Botulinum Toxin initiatives. As we now seen in our press release, Tuesday, initiation and substantial enrollment in the IIIb phase of our pivotal trial was accomplished in the quarter with completion of the required 700 patient's in mid January. The IIIb phase is a repeat dose trial, randomized the placebo with a thirteen month follow up with three treatments administered to confirm that initial responders will react to active drug, but not to Placebo.

We will be measuring the degree of front-line reduction which is assessed by both the investigator and the patient using a validated scale. For Phase IIIc, we've begun study startup activities for this open label repeat dosing safety trial and anticipate patient enrollment to begin by mid February. Follow up on this study is three years and the study can run concurrently with phase IIIa and IIIb.

Lastly we expect to complete enrollment in the fourth quarter of our Phase I multi-center dose escalation study, which is our Botulinum Toxin for the treatment of pain from torticollis or cervical dystonia. We remain pleased with the dose response we are seeing thus far.

And again finally, I would like to give you a quick update of our progress with the MemoryGel post approval study. We submitted our first annual report to FDA on November 16th and as of January 30th, we have enrolled in excess of 27,000 patients towards the eventual target of 42,900 patients.

I would now like to turn the call back to Josh for some final thoughts,

Joshua H. Levine – President, Chief Executive Officer, Director

Thanks Ed. So I would like to take the next few minutes to talk about some of the trends in the overall business and then discuss guidance for the fourth fiscal year. In our last quarter's earning update, we identified what we though might be the first signs of a slow down in cosmetic breast surgical procedures.

Over the course of our fiscal third quarter while we continued to benefit from the impact of price leverage that results from conversion to our MemoryGel products from saline implants, it have seen a slight decline in domestic unit volume in our core breast implant business when we compare it with the prior year's third quarter.

Over the past several weeks, we have had opportunities to update both the third party US survey data that we track as well as interface with our top accounts at a number of key customer marketing events both here at Santa Barbara and other locations. The survey data and anecdotal customer's feedback from some of the largest volume cosmetic surgery practices across the country are consistent in the picture that they paint.

Surgical procedure activity that tends to have a high degree of price sensitivity in terms of patient perception appears to be slowing down. Our survey data and customer input has shaped our view that this slowing business momentum is due to the state and uncertainties associated with the US economy and discretionary consumer spending.

For competitive reasons, we won't be discussing specific unit volume levels. I should note that this appears to be a domestic market only trend because on the international side of our business we show that procedure and unit volume trends are still showing healthy growth. Not withstanding our observations regarding the third quarter, our internal analysis shows that our domestic unit market share has remained relatively stable over the first three quarters of fiscal 2008.

As we have stated before, we believe that there are significant upside opportunities available to us in the international markets through organic growth. We are positioned well in emerging markets in Asia and Latin and South America and see accelerating business momentum in other key international markets.

Turning to guidance, given the general trends that we are observing and the domestic market contribution to Mentor's overall market position, we believe it's appropriate to update our full year guidance for fiscal 2008.

We now expect that sales will be in the range of $365 to $370 million and GAAP EPS from continued operations will be in the range of $1.36 to $1.40 earnings per share. All other aspects of our financial guidance remained unchanged.

And now we are ready to take your questions.

Question-and-Answer Session


(Operator Instructions). And our first question comes from Frank Pinkerton with Banc of America. Go ahead please.

Frank Pinkerton

Great, thanks for taking my question. The first question comes on the R&D spending side. It looks like you guys are tracking very well on the enrollment studies for your botuline toxin product and some other things there. But R&D was pretty much below the trend here. Can you map out for us, is it going to be this and consistently going forward. How can you guys speak to all that you are getting done and how that spending is going to come forward in the next several quarters?

Edward S. Northup

Yes. The R&D spending is lumpy a little bit due to the enrollment of trials and also specific required for example in Q4 we will be having re-enrollment or re-registration for the clinical sites for trials that happens. So, it’s a little bit difficult to level load the R&D spending. Its activity based.

Josh Levine

Frank I think just to the point of reference, I think if nothing else, if you look at where we are at through three quarters of fiscal '08, there is a very clear trend here that we have accelerated versus prior year in a fairly substantial way. The magnitude of the investment we have made in R&D and I think we have been consistent at, we have said that we, in order to get to the place that we need to get to in terms of product portfolio diversification and critical mass as a company, these are investments that are -- they are basically price of admission kind of discussions. And again that was one of the reasons why we increased the spend rate and guidance to an increased spending ratio on R&D over the course of fiscal '08. So again, if you look at the up-lift from where it has been historically we probably traditionally ran as a percentage of sales and R&D investment profile was strongly 6 or 7% on rolling basis of revenue. And clearly we have taken a step up this year you know, we are probably running at close to twice that. Again, as Ed pointed out because it's activity based it gets a little lumpy quarter-to-quarter. But there shouldn't be any interpretation at the commitment on the spending has wavered at all because that's not the case.

Frank Pinkerton

Okay great and then just the followup here, if I read the release in your comments correctly with Preville Plus launching in late fiscal 2008, we have only got about a couple of more months there here. So, when I look at the EPS guidance it looks a little lower. Can you speak to, what is marketing and launch cause for Preville in that and then also just generally, as you roll this out is there any type of an impact you can guide us to for sales in the US, especially versus what we have seen out of some products that you have done here internationally? Thanks.

Josh Levine

A couple of different parts of that question obviously so. Let me start out with, we don’t intend on this call to speak to any information that would be characterized as full year FY'09 fiscal guidance. So, with that as kind of a blanket statement. Let me give you little bit more color into how we're thinking about Preville Plus and the rollout of the facial products and maybe thought process on your end in terms of how you should be expecting these things to roll out.

As Ed talked about in his prepared remarks, we are on track with both Preville Plus and Puragen Plus on the timelines that we’ve talked about. We have in fact begun the initial recruiting for our facial filler organization on the first of these products. So, we are expecting that basically the first product Preville Plus to be approved hopefully by the end of this fiscal cycle and basically a go-to-market set of activities in terms of commercial launch to follow in Q1 of our fiscal '09.

I think the way; again, we're not going to give guidance in terms of absolute revenue impact on either one of these new products. I think in terms of thought process B2B positioning you know, we're looking at Preville Plus in its initial launch as the niche product. It's got a short duration then the products that are in the market right now in terms of the gold standard or excellence in the (inaudible) but this product was never intended to take on those products in a head-up type of competition.

It has short duration but it has got a number of attributes that we are excited about. It has got great touch up capabilities for additional volume filling. It has got great application in fine lines and we think its going to be a very comfortable product to use given the fact that it has got the lidocaine. Interestingly enough, it has the lowest adverse event profile of any product you have looked out. And it is very forgiving if you are a new injector in terms of being new to the space for providing this procedure.

So, I think the way you should thinking about this product as it rolls out is that again it is going to be a niche positioning early on. And I think as we get closer to as we launch Puragen Plus, which is kind of the anchor product in this line, at least the next product out, that's the product that really will compete favorably with the products that are in the gold standards on the market. And we think that there will be a fair amount of combination used between Puragen Plus and Preville Plus.

So, our expectations for timing on both products have not changed. And we are excited to get moving into this space. We know that there is a lot of opportunity there. We know it’s a growing market and we are looking forward to starting to participate in it.


Thank you. And our next question comes from Larry Biegelsen with Wachovia. Go ahead please.

Larry Biegelsen

Hi. Thanks for taking my question. The first question is on your market share and breast implants Josh, I think you said that your domestic share has been stable over the past three quarters. But when I look at with and without the Perouse sales, it looks like on a global basis you have lost some share over the past three quarters. Could you speak on that a little bit Josh and are my numbers inaccurate?

Josh Levine

No Larry, I don't think your numbers are inaccurate. I think there needs to be some color provided on some of these things. But I think that the general observation you have made is that on a competitive basis from a global share standpoint in terms of absolute global dollars, I would agree with your assessment. It looks to me like in absolute dollars, while it has been lumpy over the quarters, we have given up some share. And it’s something that we're focused on. It's something that we're aware of. I think that these things run clearly in cycles, momentum wise. I think we had an opportunity to make some ground up after Allergan acquired the business from Intermed. I think during that period of distraction, we took advantage of that and I think that quite frankly they have gotten their house in order so to speak and focused on this business. They're taking advantage in some sense of their scale, their size, their ability to bond with a bigger portfolio. So, no one here is dunking the fact I think we've up some ground.

I would point at a couple of things just as a reference before anyone thinks our business is going off the clip. #1, I don't think it's a trend. I think on a quarter-to-quarter basis, I think you've got again movement back and forth of share, which is consistent with quite frankly what we have seen over a long period of time. I mean you guys track the same numbers that we do. I have been in this business for quite a while. If you go back to calendar year 2002-2003, this business over the years has always kind of generally settled out at roughly 50:50 kind of market split in absolute dollar terms for the two primary companies.

Again, I think at point in time shares slips back and forth and it clearly looks like in the last quarter or two our primary competitor has gotten best of us. But we're not looking at this in panic competitor terms. And quite frankly we're focused on in the next quarter rolling out a number of customer programs and marketing programs, focused on customer attention and competitor conversion that we feel strongly about in terms of changing the momentum.

So, while your point is as a reference or benchmark, I think is valid. It's not something that at this point we're looking at as in panic terms. And, again I think on a snapshot basis our unit share is actually from our view is relatively stable. I think that we have some pressure in the domestic market. We had I think traditionally a bigger share position domestically than our competitor. And, I think that correspondingly in the current economic climate we may be a little bit more susceptible to some of the pressure than they are.

Larry Biegelsen

Thank you. My second question is on clinical data for new product. The phase on Botulinum Toxin Phase IIIa data and on DGE, Josh can you tell us when we should expect to see some clinical data presented quickly on those products?

Josh Levine

Well, currently it's going to take, you know, after the study is closed we have to finish the followup. Your first question was that DGE or IIIA.

Edward S Northup

I think the answer to your question is we recognize that the optical value of getting the critical data, especially when it's positive news, getting it out in to the public domain and I think that they have seen at over time we have had some public scientific conferences and trade conferences. We have had some presentations made. I can think of not this past year but in past two years ago in Paris. Initial information from the early on stages of the Botulinum Toxin study presented publicly. So, I mean, it's certainly out of head to be able to make the information more visible. We are excited about what we're seeing and I think we've got at least by at this stage of the clinical trial is comparatively, I think we feel good about on Botulinum Toxin and what we're seeing in terms of product attributes and product performance.


Thank you. Our next question comes from Amit Hazan with Oppenheimer. Go ahead please.

Amit Hazan

Thanks and good afternoon guys. Just first again in the U.S. market in terms of pricing whether it's silicone or saline. Are you seeing any changes in pricing? Are you implementing any or is your competitor?

Josh Levine

I think you probably remembered our conversations and the points we referenced in last quarter's call where at that point we saw I think probably a little more aggressive pricing than we had seen prior to that. I can't identify anything that has changed or accelerated or become more aggressive in any visible way since last quarter. So, sequentially from Q2 through this reported Q3, I would say generally we see a relatively stable situation to where we had been. The second part of your question is we have never wanted to lead with price. We've been I think reasonably disciplined in terms of being premium priced and very value-proposition driven in terms of our products, programs, and services. And, I think quite frankly you're going to see us change that stance going forward. I think that we have continued to drive value for customers and we want to try to capture that value and how we price our product. So, I don't think you're going to see us respond in anyway from a price perspective to anything that we see on the horizon competitively.

Amit Hazan

Okay. And in terms of market share I'm just going to ask you to follow up, just for a second, I'm a little bit confused. It sounds like you were kind of talking about worldwide market share and saying may be you gave up some worldwide, but may be in the U.S. it was stable. Can you give us a sense of whether you thinking you lost market share in the U.S. and if you did generally what type of account it is that you're losing share at or any kind of color like that or if it is all US, because (inaudible) about gaining share from MediCor outside the U.S., I'm just wondering if that's where they gain their share et cetera?

Josh Levine

Fair question. I will say that in general the international business has been a very healthy story for us in terms of business momentum and trend, and I see a lot of growth drivers in demographics there that give me great optimism going forward in terms of how we can continue to growth and the growth opportunities that exist on U.S. I think as I alluded to before, if you look at where the two companies historically have been in terms of comparative position in the marketplace, I think the general impression is that we have had a stronger piece of share domestically. I think that they have probably had a stronger piece of share internationally. I think that given that historical kind of positioning, and given some of the things we're seeing in the context of downward pressure on the economy or from the economy, we definitely are feeling probably more of a pinch in the U.S. marketplace than they are. I will also say as I alluded to and I take the response to Larry Biegelsen's question. I think it is possible that they climb into our knickers in terms of share shift in the domestic market, although I would tell you that it isn't readily observable for us by account where that is taking place, which is kind of an interesting side bar to all this. So, I think that we're suffering in the U.S. market from a combination of downward pressure in the economy and some share loss as well. But I can't get specific or point that anything definitive in terms of competitive programs, competitive pricing that I will be able to illuminate definitively where that’s occurring.


Thank you. Our next question comes from Greg Gilbert with Merrill Lynch. Go ahead please.

Greg Gilbert

Thanks. I will ask my two right upfront. First josh, what are the priorities at this point for the use of your cash and cash flow? What's your stock at these levels? And secondly do you get the sense that your customer is concerned about the economic picture is more focused on the present or the future? Is it hard to tell? Just curious how you're asking those questions?

Josh Levine

Yes. Well, the first part of question is, I mean we have really taken a stance historically that we will be opportunistic in terms of looking for the right ways to return cash and value to shareholders. I think we obviously were very, very aggressive at share repurchase over the course of the last four months. And again price is probably averaging around 40 or $41. We have to be balanced going forward about use of capital. We think that there may be some opportunities strategically that we want to stay flexible on as the market over roll and multiples in the market in terms valuations for companies in the space have maybe started to settle a little bit or come back down to earth. We think that there's certain things that we want to maintain a degree of flexibility for. And probably maintain a flexible position in terms ideal or optimal capital structure based on that.

On the latter part or the second question in terms of customer sentiment we have a very large -- the top customers that we have in the country in terms of geographic cross section in Santa Barbara this past weekend. And actually in the previous week, we were at Orlando at the American Academy of Cosmetic Surgery Show with a large cross section of fairly large customers. And the feedback is reasonably consistent that people saw for the first eight or nine months of calendar year 2007, they saw their business activity especially in the surgical procedures growing reasonably robustly in terms of transit and versus prior year.

And in the lateral portion of 2007, maybe the last three or fourth months on average would be associated with the last quarter of the calendar year. They saw the beginnings of some pretty visible slowdowns. Again we were in third week of January last week that clearly was the feedback that we got last week in this customer event that we held in Santa Barbara.

There isn't a clear cut cap to warmer term timeline here in terms of feedback from customers. We know the people are seeing and how they're businesses are reacting and practices are been affected by to date. But there isn't a distinct or clear path in that feedback to longer range, how long it lasts, how deep it is et cetera. Difficult to predict.

I think the one thing I would say is that there appears right now to be certainly some distinction in terms of price sensitivity between those procedures that are more surgically oriented at a higher price point than when compared to or what we're hearing from customers around the injectable facial products. So there is a seemingly a clear distinction between the trends in those two businesses.


Thank you. And our next question comes from Anthony Vendetti with Maxim Group. Go ahead please.

Anthony Vendetti

Thanks. Josh, can you just give us the international domestic spilt in terms of breast implant (valves). And then also is it possible since its results were so favorably for the Puretox is it possible that that could be a little bit ahead of schedule?

Joshua H. Levine

The answer to the first question Anthony is we for competitive reasons we've been reluctant over time and I don't know that we will change that right now to get to more granular about the mix of the business. Fortunately, again I think just in directional terms the international business we think is an opportunity for us to continue to see good growth. I think the acquisition of Perouse Plastie some of the things we're doing in emerging markets are all growth drivers for us going forward. And I think a combination of emerging market opportunity and improvement of our competitive position in some key existing international markets are both likely scenarios for us in terms of growth impacting the international market going forward.

The timing on the Botulinum Toxin study, I mean we're very proud and we are excited about the rate of progress we're making with the study. I think that the feedback we got from investigators about the products and about the product performance has been very positive. Many of them are saying that they've not had any trouble at all in enrolling patients in this study and there tends to be word of mouth friend to friend kind of encouragement to recruitment in terms of patient enrollment when people start having good results with the product.

So again, nothing that we see on the horizon right now that we suggest that we got anything on the horizon that will slow us down. Right now we believe, we are still on track for submission of the BLA in late calendar year 2009. So that still little bit of a ways off, I mean we believe we are still executing against the clinical milestone and all the feedback we are getting from interactions with the FDA are pretty positive.


Thank you. Our next question comes from Julie Hoggatt with Noble Financial. Go ahead, please.

Julie Hoggatt

Yes, continuing on the dermal fillers, I was wondering since you mention that Prevelle is going to be more of a niche product, if Puragen plus is going to be more main stream and you plan on that competing directly with sale like Resylane and Jupiter.

Josh Levine

Yes, Julie. That is absolutely the case. If you look at the product profile of Puragen Plus, if you look at the attributes of that products, it offers competitive duration with the Restylane and Jupiter. We believe it's got a little bit of leg up in terms of patient's comfort due to the fact that the product will have lidocaine in it, as a topical anesthetic, and we think that the product has a comparable adverse event profile with those benchmark products in the market too. So, if you would ask me, in this first wave of product launches, clearly Puragen Plus is the anchor product, Prevelle Plus though we think has some pretty interesting positioning opportunities. It was never our intent to take Prevelle Plus into the market and do a head-up type of competitional positioning with those benchmark products like Jupiter and Restylane, but if you talked to most physicians that are active in using these products, I think you will hear fairly consistently that the need for touch up, the need for adding volume after a full treatment has been done is a fairly common occurrence. And rather than go back to the same base product using a product that might be a little bit different in configuration in terms of a gel war HA particle ratio is a bit advantage. And again this product has when you look at the adverse event data, it's got a very, very low adverse event profile. It is easy to use, it's forgiving, it's got great application with the fine lines and touch-up type application. So we are excited about it. We think it has got pretty definitive place in our product line up.

Julie Hoggatt

Okay. And on your derma filler and other line, this quarter it grew, it actually came in, quite a bit above what I was expecting. Can you describe where the growth was from, was it primarily from NIA 24 or was it from your fillers in the European market.

Josh Levine

It's probably a healthy percentage from the NIA counter suitable line, although, you know, again the products that we have on the dermal filler side out in the market internationally right now, is a Puragen product without lidocaine, it's a product, it's a base product. And I think that our view is what we are seeing sales there and there is some growth to it, it's not the product from the ultimate configuration competitively that we really need to compete effectively in the international market with. So you know, we are looking forward obviously to getting these products launched both domestically and internationally, that the lidocaine version that is, so we are the more competitor product line up

Julie Hoggatt

Okay. Thank you.


And our next question comes from Jason Bedford with Raymond James. Go ahead plese.

Jason Bedford

Hi. Good Afternoon. I guess just a couple of quick questions and I apologize for beaten a dead horse here. But I am just trying to reconcile the market dynamics, Allergan seems that there's in something a lot different in the market and I am just wondering can you identify account you have lost to Allergan or what's really accounting for the differences in market discrepancies, I guess.

Josh Levine

Jason. I am not going to speak for Allergan. I can't account for what they are seeing or what their view in the market is. You will have to ask them. I do know that again it's like communicated in my preliminary remarks, there is no question that we were probably in a more vulnerable position, given our share in the U.S. market place and that share translating in to susceptibility to both the combination of economic down turn and perhaps the competitive activity from our competitor. But I can not point at definitive counts that are going away on us in terms of distinct and clearly identifiable share loss. So, you say, it maybe a confusing situation. Again I think the growth that we've had internationally, it has been robust. It has been substantial. We feel good about trends. But we are clearly in a dog fight in the US market and I don't think at this point we're number one. I don't think the final chapter of this has been written, that's clear form our view, number one.

Number two, again as you go back over a longer window of time, this business has always had, historically, share shifts back and forth. And I'm willing to admit that now, into a couple of quarters what would appear to be in absolute dollar terms then growing faster then us and that troubles me. It troubles me in a large, large way. The people who are in the sales and marketing side of our company know that it troubles me in a large way.

So it has got our full attention. And again I think that in the fourth quarter of this fiscal year, we will be rolling out some programs that we think are going to start to be able to put some traction to shifting the momentum and provide some better traction for us going forward in the US market.

Jason Bedford

Okay, that's fair. I guess my second question is just, it sounds like you started recruiting on the derm side. Is that kind of a decision to go direct or is the partnership off the table? Thank you.

Josh Levine

The answer is yes. We did start recruiting. It is, I'll tell you its preliminary and I think that the way we are thinking about the way the cost of the recruitment will probably impact us. I don't think you should be thinking about it in terms of all of it being taken as a kind of a bonus type of hit in Q4. Its activity that we are starting in Q4. Its probably activity that will not be completed until, maybe the end of Q1 and it will up for ramp up.

Those original or additional selling resources are going to be focussed on both plastics; the facial plastics market and the cosmetics marketplace. But we have not ruled out some type of selling alliance or co-promotion type of relationship. If we can find a partner that makes good strategic and tactical sense with. So, as I think I have said in the past, I don't think you should be thinking about us ramping up a standalone sales organization that would be comparable in size to what either Medicis or Allergen have in this phase. I don't think that's likely on our own from a direct cost standpoint. But which again, lends itself to leading ourselves open and flexible to the possibility that we could get to a place where we have some kind of co-promotion type of relationship with a strategic partner.


Thank you. And our final question comes from Hesham Shaaban of Maxim Group. Go ahead please.

Hesham Shaaban

Hi. I just have a couple of questions, one specifically on Perouse. It seems that sales for Perouse have tracked down this quarter from last and given that this is typically a seasonally strong quarter, I'm wondering what your outlook is going forward, maybe through the next quarter possibly into fiscal '09?

Edward S. Northup

A majority of the Perouse business, there is only two direct operations. The majority of the rest was through distributors and if you have been following the business, the distributor business can be lumpy quarter to quarter. We expect a strong Q4 from Perouse. They are launching new products and we feel that Q4 will be very strong form.

Hesham Shaaban

Okay. And one final question on gross margin, I'm wondering if the weakness from this year to last as far as the gross margin and I am wondering how much of that is Perouse. I'm wondering if there is any pricing pressure either domestically or internationally that might be contributing to that weakness.

Michael O'Neill

If you adjusted out Perouse from the gross margin for the quarter in fiscal '08, your comparable period would be 74.4%. So that will be pretty much in line with the same period prior year base business to base business.


Thank you. And this concludes today's question and answer session. At this time, I would like to turn the program back over to Mr. Josh Levine, Mentor's President and Chief Executive Officer for any closing remarks.

Josh Levine

Thanks Devin. I just wanted to thank everyone for participates in the call. I wanted to reiterate we are really focused on growing and strengthening our position in the core business and positioning ourselves as premier service provider in surgical aesthetics space. I think, as I alluded to in some of my earlier comments, we historically have been a premium based price of our products and services and I don't think you should expect that to change.

Our focus going forward is going to be on driving conversion to MemoryGel products and to continue to build out a portfolio of high-value products, programs and services that we can use to assist physician partners in better serving their patients and growing their practices. We look forward to talking to you again, when we report full year earnings.

Thank you.


This concludes today teleconference. You may disconnect at any time. Thank you and have a great day.

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