Datascope Corporation Q3 2008 Earnings Call Transcript

| About: Datascope Corp. (DSCP)

Datascope Corporation (DSCP) Q3 2008 Earnings Call Transcript May 9, 2008 12:00 PM ET

Executives

Hank Scaramelli – VP and CFO

Larry Saper – Chairman and CEO

Dr. Nino Laudani – VP and COO

Analysts

Jinsong Du – Credit Suisse

Greg Brash – Sidoti & Co.

Brad Evans – Heartland

Operator

Good day, ladies and gentlemen, and welcome to the Datascope Corp. third quarter earnings release conference call. Today's call is being recorded. At this time all lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation.

The comments that we will be making will include forward-looking statements that are intended to fall within the Safe Harbor provisions of the Securities Litigation Reform Act. Actual results may differ from those forward-looking statements due to various risk and uncertainties, including those that are disclosed in our press release and regular filings with the SEC.

This conference is being webcast live over the Internet. A replay of this will be available in the Investor Relations page of our website for ten days. At this time, I would like to turn the conference over to Mr. Hank Scaramelli, CFO of Datascope. Please go ahead.

Hank Scaramelli

Okay, thank you. Good afternoon, everybody. Welcome to Datascope's conference call to review the business results for the third quarter of fiscal 2008. I am Hank Scaramelli, CFO of the company. Joining me on the call is Larry Saper, Chairman and CEO of Datascope, and Dr. Nino Laudani, Datascope's Chief Operating Officer.

First, we will have some comments by Larry, then I will give a brief financial review, and Dr. Laudani will comment on the operations of the continuing business. At this point, I would like to turn it over to Larry Saper.

Larry Saper

Thanks, Hank, and good afternoon, everyone. In mid-March we announced the agreement to sell the assets of the Patient Monitoring business to Mindray International. In light of that pending sale, we have reported operating results and net income for the continuing operations in Q3 and net earnings for discontinued operations, which, of course, refers to the Patient Monitoring business.

Now, the administration of the sale process has been challenging. It meant apportioning what were common functions into separate ones for our continuing business, field service for the balloon pumps in the U.S. and abroad, customer service, IT, regulatory, and so on, but it has been managed extremely well. So I'd just like to take a moment to complement our management and staff who participated in that process for doing a really terrific job.

In the Q3 press release we noted that all of the conditions to the closing of the sale of the Patient Monitoring division have been satisfied. The closing documents have been approved by both parties and are being held in escrow. We have now been advised by Mindray that they have given drawdown notices to their banks for funding. Given the mechanics of the drawdown and money transfers, and given also that Monday happens to be a bank holiday – in Hong Kong we can't tell you the exact date of the legal closing when funds and title will pass – we expect it to be sometime next week.

After a working capital adjustment as at April 30th, 2008, we get, as a result of the sale, $209 million in cash, and we keep $31 million of patient monitoring accounts receivable. That makes a total of $240 million, which is exactly the number we reported before. The net proceeds we currently estimate will be about $185 million. The Board intends to use this cash for the benefit of stockholders.

We were a financially strong company before the sale. We will be an even stronger company after the sale. But more importantly, we are now a company with two high-margin – high gross margin businesses focused on growth in the world cardiovascular space. And (inaudible) I should say gross margin in Q3 was 65.8%, almost 66%, compared with 56.4% for Datascope before the PM sale.

Cardiac Assist holds a very strong leading position in the world counterpulsation market and Intervascular is a significant player in vascular grafts in European and Asian markets. We have really got opportunities to expand our business in each of these cardiovascular areas. And we have sales growth from major products from both major products in both Cardiac Assist and Intervascular. IAB, the intra-aortic balloon single use device is a big source of revenue and profit and this is now growing worldwide, and U.S. sales are in the beginning of an up trend. Intervascular surgical graft sales are growing in double digits. Intervascular Sorin peripheral stent sales are growing double digits. And Safeguard, the device that's used to control bleeding post-cardiac catheterization procedures, is growing worldwide in strong double digits. And of course we have exciting new products in our R&D pipeline.

My summary says simply one statement. Datascope's future looks very bright indeed. Hank?

Hank Scaramelli

Okay. Alright, thank you, Larry. I'm going to give a brief financial result of the third quarter, but as Larry just discussed, our continuing operations had a very strong quarter as well as year-to-date results being very positive. As I mentioned before, I will provide a brief financial overview of these results. I would like to start with the third quarter sales. I'm going to focus primarily on the continuing operations. Continuing operations generated $61.3 million in sales. That's a 6% increase above last year, including favorable FX of $1.4 million. Our non-GAAP, non-GAAP, I want to repeat, earnings were $9 million versus $6.4 million last year, an increase of 40%. Our earnings per share diluted were $0.58 versus $0.41 last year. And we did have a favorable tax rate of $21.2% versus 30.5% last year, which we will discuss later in the financial presentation. One thing I want to point out is that we had very strong pre-tax earnings growing 24% in the third quarter over last year.

Regarding our GAAP earnings, we generated $9 million in earnings versus $7 million last year. That's an increase of 29%. And our earnings per diluted share were $0.58 versus $0.45. So very proud about the financial results for the quarter.

Regarding our sales by division, and Nino is going to go into a lot more detail than I will, but I'll start with Cardiac Assist, which had a great quarter, was actually a record of $49.2 million, 6% above last year. It did include 800,000 of favorable FX. The thing that we are really positive about is that we had worldwide catheter, or IAB growth of 12% versus last year. And in the U.S., our IAB demand increased 6%, which is the strongest year-over-year quarterly growth that we've had in many years. We've actually gone back beyond 2000, and we have not had a quarter to this strength, and it's continuing in the fourth quarter as well. So we are pretty excited about that.

We started off with a great relationship in Japan with our new distributor USCI. And we started to see the benefit of that in the first quarter. Larry mentioned Safeguard. We continue to show double-digit growth with that product. And regarding our balloon pumps, which were flat during the quarter – and it has to do with the initial launch last year of CS300 towards the end of the third quarter. So sales worldwide were flat on CS300 pump. All in all, we are very pleased about the Cardiac Assist performance in the quarter.

Our Intervascular sales were also extremely positive. We did $10.6 million in sales, 19% above last year, including 600,000 of favorable FX, and two really positives. Our peripheral stents continue to grow and represent now almost 15% of our total Intervascular sales, and our vascular grafts, which Nino will get into detail in minute, grew 15% for the quarter, despite going up against a planned inventory reduction in the U.S. by our distributor. We do expect that inventory reduction plan to end by the end of the first quarter, but as we spoke in prior press releases it has been a detriment. But again, despite that 15% growth is pretty darn good, and Nino, again, will express the reasons why.

I do want to make a comment on our sales of our interventional products division. As you know, we phased out of this during the second quarter of last year. And the impact on this quarter was a decrease of $1 million.

Now I would like to take a minute and kind of walk through the P&L, and discuss the earnings. Very strong gross margin with gross margin percentage of 65.8%. That goes up against 64.1% last year. It's an increase of 1.7 points, and I think one of the major factors here was the positive mix. We grew 3.3 million in dollars which was 9%. And the gross margin percentage in the mix we are talking about is we had a very favorable strong mix of intra-aortic balloons, very high margins as a disposable, and vascular grafts, which also very high margins as a disposable product, versus lesser sales of capital equipment, and now when we refer to capital equipment, we are referring to the balloon pumps in the Cardiac Assist business.

The other thing we are happy about was the startup in Japan with our new distributor USCI. We are generating higher gross margins from that business, so we are also happy about that transition that again started in January 1st.

Our R&D expense was 9.8% of sales. It was slightly above last year at 9.6%, but there is two reasons. It's only 475,000. 150,000 had to do with unfavorable FX. The rest has to do with our startup regulatory costs with our new distributor USCI in Japan. SG&A expense was 38.7%, slightly down from last year of 39.2%.

The thing that we were hit with in terms of negative; we had unfavorable FX of 900,000, which increased our percentage of sales by 1.5%. So if it wasn't for FX, we would have been down to 37.2% versus 39.2. And the contribution in the lower expenses was across the whole company. Both divisions, Cardiac Assist and Intervascular were able to their decrease SG&A expense despite higher sales volume and also the startup costs related to our venture in Japan with USCI.

Another positive was we were able to reduce our corporate costs. We've talked about this in the past. We reduced headcount, and in this particular quarter we had lower legal fees. So I really think pretty decent sales numbers, very positive gross margins. For the most part we are definitely controlling our expenses, and you can see how it's all dropping down to the bottom line and pushing that earnings number up that I mentioned before to 24% pre-tax for the continuing business.

One thing I want to talk about is the tax rate. We did mention this earlier that the rate was 21.2% versus 30.5% last year. And we had a couple of favorable tax adjustments that occurred this quarter. For those who are familiar with FIN 48, we had an adjustment related to the expiration of the federal and foreign statute of limitations in March of the third quarter for fiscal 2004. So that was a positive impact on the rate. And we were also able to recognize some other tax benefits as of the result of the pending sale and the income from the Patient Monitoring division. I will note when we talk about – or if there's questions on the fourth quarter, we expect the rate to go back up to 33.5% to 34%.

Year to date basis, also very strong. Sales were $170.8 million for the continuing business. That's a 4% increase over last year. FX contributed 2%. Cardiac Assist grew 5%. Intervascular grafts grew 20%, 14% without FX. So we are pretty pleased about those two numbers.

And regarding our non-GAAP earnings, we generated $18.7 million in profit versus $15.3 million last year, which was an increase of 22%. Our earnings per share per diluted share were $1.21 versus $0.99. And I think one of the good news our ratios here is our tax rate year-to-date is flat to last year at 29%.

I would like to shift to the balance sheet for a minute. The company's financial position remained very strong in the third quarter. We had cash and marketable securities of $63 million. Our accounts receivable did decrease from $90 million in Q2 to $86.5 million in this quarter. And the major reason for the decrease is we didn't get our initial payment from our Japanese distributor, USCI. As noted, the decrease in DSOs went from 77 days down to 72. And if you go back to when we were a full Corporation with Patient Monitoring, we were generally in the mid- to- upper 80 range in terms of DSOs. The company continued to have no debt at the end of the quarter.

And we also declared a dividend on February 27th, 2008. The Board declared a regular cash dividend of $0.10 per share, which is payable on March 26, 2008 to stockholders of record as of March 10th, 2008.

That really concludes my prepared remarks. And we'll take questions later on but at this point I'll pass it over to Nino for the business review.

Dr. Nino Laudani

Thank you, Hank, and good afternoon to the audience. As said by Hank, our Q3 continuing operation sales grew by 6% to $61.3 million. And our gross margin grew almost double digits thanks to the sales increase of more profitable products such as the counterpulsation balloon and the vascular graft.

I'd like now to spend a little bit more time to give you more details at the divisional level. The total sales of Cardiac Assist in Q3 increased 6% versus last year mainly thanks to the very positive results of the balloon sales in both domestic and international marks. Cardiac Assist sales continue to be very strong in international markets where we have achieved double-digit growth in almost every region. In order to give you a better understanding of the very positive performance of our balloons in the domestic market, I would like to spend a few minutes to describe our strategy and activities.

About nine months ago we started a program intended to refocus our sales and clinical resources to support the growth of the counterpulsation therapy. I said before in other occasions, we believe that the counterpulsation therapy is underutilized in both surgical and cath lab settings. For those who are not familiar with counterpulsation I would like to spend a few words about counterpulsation to clarify what counterpulsation is. The heart's counterpulsation is obtained thanks to the intra-aortic balloon system. And this is a system simply because this is a combination of two elements, a pump and a balloon catheter. The system is used for the treatment in the high-risk cardiac conditions resulting from ischemic heart disease or heart failure. Patients experiencing acute coronary syndrome such as acute myocardial infarction, cardiogenic shock and unstable angina might require intra-aortic balloon therapy. This is also the other way we refer to the counterpulsation therapy, the intra-aortic balloon therapy, to support and stabilize the cardiac status.

The intra-aortic balloon therapy is also used for high-risk patients who require reverse curarisation procedure such as percutaneous coronary interventions or coronary artery bypass procedures, including both on-pump and off-pump techniques. Both groups account for almost two million procedures in U.S. only. This is a huge opportunity. This product and therapy might be used before or during coronary arteries, bypass grafting, or percutaneous coronary interventions for hemodynamic support.

In other words, counterpulsation is a therapy that will create the condition for a better oxygenation of myocardial tissue and this will reduce potential damage to myocardial tissue and future health complication for the patient.

I said before we believe that counterpulsation therapy is underutilized. And this is supported by the analysis of several elements. And one element is the sales data of – our sales data in major accounts, the number of procedures performed by interventional cardiologists and cardiac surgeons, and last but not least, the continuous feedback we receive from our customers about the positive outcomes they observe after the utilization of the counterpulsation therapy.

So all of this has given us a very clear indication that there is a huge opportunity for us in major markets, and as I said before, about nine months ago we started a program intended to re-launch the utilization of the therapy. The program's main objectives were very simple. We've retrained our sales force to increase their clinical knowledge of counterpulsation. We started to target high potential hospitals. We developed specific plan for each hospital. And this was a continuous process. It was not just a short-term initiative.

We believe that the plan is now starting to deliver the first results and the increase in demand of 6% in Q3 in the domestic market of balloon versus last year's demand is just the first sign that the strategy we have implemented is working. We are very excited. And this is the first time since several years, as Hank said before, we went back to 2000. This is the first time that we see in the domestic market, in our major market, a substantial increase in sales for the high-margin balloon product range. We also see the strength continuing in Q4.

In addition to that, we also believe that the introduction of new and fully automated pumps such as the CS100 and CS100, joined by the introduction of the true 7.5 Fr. Linear and the 7 Fr fiber optic Sensation balloon has made the utilization of counterpulsation therapy easier so that has reduced substantially the complication rate. Our new balloons, Linear and Sensation represent now more than 30% of the total sales of balloons, and this is sharply growing. Last year, the percentage was only 22%.

Internationally, in Q3, we have kept the growth trend of previous quarters, and we also expect this to continue in the next quarters. Regarding the other products, which are part of the Cardiac Assist division, I would like to report that pumps remain almost flat versus last year due to very good quarter of last year related to the launch of our new pump CS300. CS-300, just to remind the audience, is our first fully automated pump, which incorporates the fiber-optic technology.

EVH sales, on the other side, were down versus last year, mainly due to manufacturing issues, which has been now resolved. Notwithstanding the double-digit growth we have seen in our international business, the worldwide sales were down.

Safeguard, on the other side – Safeguard sales have increased double digits due to a strong performance in our domestic market and even a stronger performance in our international markets. At this point actually I would like to expand a little bit on Safeguard sales performance. Our domestic Cardiac Assist sales team has been given just at the beginning of this fiscal year the responsibility for sales of our non-invasive closure device, Safeguard. The device can be used in both cath lab for primary hemostasis after interventional or diagnostic procedures. What we have observed, which is very interesting to be modest here, is that the increased presence and qualified presence of our sales team in the cath lab has not only increased our sales for Safeguard, but also had a very important synergistic effect on the sales of our balloons. While our reps are in the cath lab they have a great opportunity to promote counterpulsation with the interventional cardiologists. And this has been a big and important factor in the growth of balloon sales in the domestic market.

But now let's move to the Intervascular division. We can report that in Q3 the sales increased by 19% to $10.6 million. And I would like to underline that this is the first time in the history of this division that sales have exceeded $10 million in a quarter. The majority of the growth, as been said before by Hank, is coming from the peripheral stent, but there is a big (inaudible) because we have seen a double-digit growth in surgical graft sales. This is of particular importance if we consider that the worldwide graft market is declining each year by 4% to 5%.

Another element that has been underlined before by Hank is that we have seen a lower shipment this quarter to our U.S. distributor. As described in other occasions, notwithstanding lower shipments from us to our domestic distributor, sales from our distributor to the market are growing, almost double-digit. And we foresee this continue in the future. Just to explain the reduction in shipment toward domestic distributor, I would like to underline that this is mainly due to the nature of the business. The vascular graft business requires consignment stock in each account. And this is what our U.S. distributor has done so far. While we see this as finishing at the beginning of if fiscal ‘09. As I said this is normal practice for surgical graft.

So according to our analysis, the surgical graft is mainly – the growth of surgical graft is mainly due to the launch of our silver graft, and to remind those that are not familiar with the vascular graft, Silver is the first antimicrobial graft which was launched in vascular surgery. There is another important factor that we want to underline here, which is the synergistic effect of the launch of polyester graft, the ePTFE graft, (inaudible) polyester. We are now able to supply our accounts with both materials giving our accounts the possibility to choose the product they want to use for each specific need.

In conclusion, we feel that Datascope is now a renewed company, which will be able to focus its resources on the growing cardiovascular market. We believe that the very positive achievement in Q3 witness our ability to grow both Cardiac Assist and Intervascular businesses in major markets as well as to introduce new products in new markets such as the peripheral stent line. Thank you.

With that I think we go to the questions.

Question-and-Answer Session

Operator

(Operator instructions) We'll take our first question with Jinsong Du with Credit Suisse. Please go ahead.

Jinsong Du – Credit Suisse

Hi. Congratulations for the quarter.

Larry Saper

Thank you.

Jinsong Du – Credit Suisse

Just like to understand for the discontinued operations, could you explain a little bit detail on the reasons for a sharp decline in the net profits from the discontinued operations from one year ago, in the first three months and also in the last quarter.

Hank Scaramelli

Well, I can provide a few comments. I think as we all know, the gross margins are a little light. We did have a – an acceleration of stock options that we had to expense because of the sale to Mindray, and we also had a receivable that was written off for about $400,000 or $500,000. Those two items definitely impacted their earnings by approximately $0.04 in the quarter.

Jinsong Du – Credit Suisse

Does that mean that the sale was especially not kind of – the sales did not decline?

Hank Scaramelli

No, the sales grew 9%. Systems, I believe, were up 22% but their bedside monitors were down about 7% or 8% in the quarter.

Larry Saper

This is Larry Saper. Basically, really the comparison in earnings has little to do with the fundamentals in the business. Momentum in that business continues.

Jinsong Du – Credit Suisse

All right. Thank you.

Operator

We'll take our next question with Greg Brash with Sidoti & Co. Please go ahead.

Greg Brash – Sidoti & Co.

Good afternoon, guys. Thanks for taking my call.

Larry Saper

Thank you.

Greg Brash – Sidoti & Co.

You mentioned on the last call that you were considering issuing guidance going forward. Is that something you are still considering maybe after you report the fourth quarter?

Larry Saper

Yes. And we haven't – we've made no decision on that. As I indicated that before that in the coming months we'll be looking at that and at some point we'll make a decision about giving guidance.

Greg Brash – Sidoti & Co.

Okay. And is there any way you could give us a little more insight on which way you are leaning on how to handle the cash from the sale of Patient Monitoring, either through a dividend or a buyback?

Larry Saper

No, there's nothing that I as an individual – I am simply the Chairman of the Board, but I am not the entire board and only the entire Board will make such a judgment. There's a meeting coming up later this month. My expectation is that some opinions will be considered [ph] and there may well be a decision by the Board at that time. But we'll only know after that Board meeting.

Greg Brash – Sidoti & Co.

Is a Dutch auction a possibility?

Larry Saper

Any – any use of the proceeds which benefits shareholders is a possibility. Now, there are two broad possibilities. One is the payment of a large dividend to stockholders. The other is some form of buyback.

Greg Brash – Sidoti & Co.

Okay. And then just looking at the SG&A, also on the last call you mentioned that there may be some Patient Monitoring cost in there with the continuing operations, just some of the HR personnel that you may not have been able to strip out. Was that the case here or are we looking at true continuing operations?

Hank Scaramelli

No, that still is the case, Greg, until – and it will even be the case for the first month of Q4. Those costs that support both businesses, while some of them may be going to Mindray, they are – those are still continued in our continuing operations SG&A.

Greg Brash – Sidoti & Co.

Would it be possible to quantify those costs just for modeling purposes for me going forward?

Hank Scaramelli

No, we really do not do that.

Larry Saper

As soon as we have a clearer idea of exactly what steps we can take and the steps that are really in the best interest of the business, and we'll be able to comment on that probably better at the conclusion of the fourth quarter.

Greg Brash – Sidoti & Co.

Okay, okay. That's fair enough.

Hank Scaramelli

I want to say this. I think if you look at the comparison to last year, which is continuing to continuing and everything was restated the same way, and if you take into effect that FX, and take that out, we are still several points below what we have run last year.

Greg Brash – Sidoti & Co.

Okay.

Hank Scaramelli

And that has again to do with our diligence here in trying to control expenses.

Larry Saper

Also, Greg, bear this in mind that in accordance with our agreement with the Mindray people, they will be manufacturing balloon pumps for us probably through about nine months of this year. So we'll be paying about 3–

Hank Scaramelli

350 a month.

Larry Saper

$350,000 a month for that. Now, that will obviously – that's a fee, manufacturing fee. We expect sometime this year to take over the manufacturing in another facility we have that's also in Montvale and once we do that, that $350,000 a month, or a little over a million dollars a quarter, goes away. So there's a number of savings that we would anticipate but we're not in position now to quantify those things.

Greg Brash – Sidoti & Co.

Okay, okay.

Larry Saper

But they're all good.

Greg Brash – Sidoti & Co.

It sounds like it. And then on the Cardiac Assist side you mentioned flat pump sales in the quarter. There's a tough comp from last year with the launch. Just wondering, last quarter you also mentioned some of your – the smaller hospitals, the community hospitals out there were tightening up their budgets and delaying purchases of some of the Patient Monitoring. Are you seeing any of that at all with your balloon pumps?

Larry Saper

I'll ask Nino to handle that.

Dr. Nino Laudani

No – I can answer the question – no, we don't see this affecting our sales of pumps. It's more probably specific to the PM business.

Larry Saper

In fact, it maybe on a sooner than early stage, but there is a beginning of a trend that we see in community hospitals getting into the interventional space that is beginning to practice interventional cardiology without the backup of cardiac surgery. And that's positive for us because it does point to a future potential sales of balloon pumps and balloons. So that's a plus. We see a lot of possibilities, unexplored possibilities. In the U.S. markets, and particularly in – an I think to perhaps also to an extent in the European market – for growth of use. Particularly in terms of the application of counterpulsation. Bear this in mind, there are many papers published and this is something that Nino explored during his comments, there are many papers published that teach or ratify, I should say, applications for intervention with counterpulsation. And there is not a uniform practice among clinicians. Some clinicians on a percentage basis use more of the therapy than others, and what we are trying to do is obviously increase using a model for the high unit users. That model is to move other people into that same model. And we think we see evidence of that in the first quarter through the work of Nino and his Cardiac Assist management group and the selling activities. We are now broadly involved in teaching that. There are other opportunities as yet undeveloped, which has to do with the initiatives that we might well take with respect to funding new studies that would enlarge the market for counterpulsation. The counterpulsation market, very important to recognize this, the counterpulsation therapy intervenes in a state for the patient of precarious balance between supply and demand. So even though you may get a misleading impression from people who make complete pumps you don't need – nor do they have a decisive significant if not decisive effect in the health of a patient, or the cardiac status of a patient, you don't have to take over the entire work load. You simply have to add something, which is what the balloon does, to the precarious balance between supply of oxygen and demand for oxygen, which is obviously carried by blood, and when a patient is in an unbalanced condition such as, for example, acute myocardial – I know an acute occlusion of the coronary arteries.

Greg Brash – Sidoti & Co.

And, Larry, I think you mentioned once before that maybe about 30% of the potential procedures out there were using counterpulsation.

Larry Saper

In what? Now you have to say that.

Dr. Nino Laudani

Oh yes, probably we can clarify on the 30%. This is related to just cardiogenic shock.

Greg Brash – Sidoti & Co.

Okay.

Dr. Nino Laudani

So this means in the U.S. only there are about 55,000 cases of cardiogenic shock per year. Only one-third of the patients would receive a balloon and the counterpulsation therapy is a Class 1 indication. So this is – the 30% just to clarify, is really to the cardiogenic shock only.

Greg Brash – Sidoti & Co.

Okay.

Larry Saper

There are so many – many applications. What it turns out, it really comes down to – so, in a certain way to an observation that if you intervene early, you are going to do much better. I mean that same observation applies to many therapies. You don't wait for it to get into trouble, you anticipate trouble. And that's what's happening with one of the applications for the therapy, which is to protect what is considered a high-risk patient, high-risk patient for surgery. It's better if you start it before the procedure, not when you run into trouble, in a high-risk patient for a coronary interventional procedure. And that is adopted, but it isn't adopted to the extent that it could be and there's a big business opportunity for that, and that's spread between what is and what could be.

Greg Brash – Sidoti & Co.

It sounds very promising. And just want to hear your thoughts on, say, you are at 30% of cardiogenic shock procedures in the U.S. How long does it take you to get to 40%, and would further clinical data be necessary to, say, take you to 40%?

Dr. Nino Laudani

Yeah, Greg, it is very hard to say, but we'll, of course, this is a continuous process. The only thing we can say that we started the program, and we have seen very positive results this quarter. We believe this will continue, but we cannot perceive that, well, the 30% will become 40% in a quarter or two quarters. This is a long process. But the other thing I want to add, there are many other areas, like the high-risk PCI's. This is only in U.S., 140,000 patients per year that could benefit from counterpulsation. There's another huge opportunity. And, of course, we are working in all those directions. We will, of course, continue to support our, let's say, work with clinical studies, but it's a process which we started, as I said, about nine months ago, and we see the first results coming in Q3 of this year.

Greg Brash – Sidoti & Co.

I'll just have one more question, and then I'll hop back into the queue. The relaunch of the Silver product, was that the Silverguard? I just wasn't aware that that was discontinued at any point.

Dr. Nino Laudani

No this has never been discontinued. We have relaunched the product in Europe mainly, and this is where the bulk of the business is for Silver. We still don't have the product available in U.S.

Larry Saper

I think what Nino means by relaunch I mean that the product was never taken off the market. The product was on the market, but a product – when people become accustomed to a product and there is insufficient market promotion, I think what Nino is referring that they – they began a renewed promotional effort to sell to market.

Dr. Nino Laudani

The benefits of the Silver–

Larry Saper

And it tells the benefits–

Dr. Nino Laudani

Of the Silver graft.

Greg Brash – Sidoti & Co.

Okay, that makes more sense. And then I know I've asked you this before, but what do you think the chances are of getting approval here in the U.S. market. I know Silver has been gaining some acceptance here in some of the larger companies like Baxter. Baxter is starting to coat some products in silver. Is that something where you feel like within the next year or two, possibly have a U.S. launch?

Dr. Nino Laudani

Again, it's very hard to say here. We do have, of course, plans to relaunch – to launch the product in U.S. but it's very hard to say. We might think different options, but well we cannot give you a date.

Greg Brash – Sidoti & Co.

Okay, well, thank you very much.

Larry Saper

Thank you.

Operator

(Operator instructions) We'll take our next with Brad Evans with Heartland. Please go ahead.

Brad Evans – Heartland

Yes, good morning. Thank you for taking the question.

Larry Saper

Thank you.

Brad Evans – Heartland

Just a couple of bookkeeping items maybe for Hank. Could you please give us depreciation and amortization for the third quarter?

Hank Scaramelli

Give us one second. We are going to have to look that up. Okay, depreciation expense was $10.4 million.

Brad Evans – Heartland

I'm sorry, that's on a year-to-date basis?

Hank Scaramelli

Yes.

Brad Evans – Heartland

Would you happen to have –

Hank Scaramelli

It's $3.2 million in Q3. And year-to-date it's $10.4 million.

Brad Evans – Heartland

I'm sorry, Hank, was that just depreciation or was that – that included amortization?

Hank Scaramelli

It's just depreciation.

Brad Evans – Heartland

Okay.

Hank Scaramelli

We really do not have the depreciation at this point to – right, we don't have the amortization at this point to give out.

Brad Evans – Heartland

Is there any reason why it will be substantially different than the $1.5 million per quarter that we were running at before the transaction?

Hank Scaramelli

No, I don't think so. It's probably flat to that.

Brad Evans – Heartland

Okay.

Hank Scaramelli

There was nothing else – there was nothing unusual in the quarter that would have driven that number.

Brad Evans – Heartland

Okay. So it's been – in total call it roughly 4.5 to 4.7 million of depreciation plus amortization. So, if you were to add that to your operating income it would lead one to a run rate of EBITDA of between $15.5 and $16 million I guess on a quarterly basis. Would there be significant – if you were to annualize that number what are the – are there major things that I'm missing there in terms of trying to understand the go-forward cash flow power of the remaining business?

Hank Scaramelli

No, that's not a bad number, but the EBITDA going forward into '09 will be higher than that. I'm just not at liberty to tell what you that number is.

Brad Evans – Heartland

No, I realize you're not giving guidance. So that's fine. So, I guess I'm just really curious about it. I mean you'll have roughly $260 million, $250 million in cash. So your market cap less your cash currently is about $350 million. And even if you don't grow that sixty [ph], which it sounds like you are going to you – you are being valued at less than six times forward EBITDA, I guess. Your peer group would trade at a multiple that is closer to high-single digits to low-double digits, is that correct?

Hank Scaramelli

Our multiple is around 21 to 22.

Larry Saper

Now, that's to earnings. You're talking about multiple of EBITDA?

Brad Evans – Heartland

Yes, sir.

Hank Scaramelli

Okay.

Larry Saper

We realize we're on the low end. We think when – it's up to the market, when the markets really takes a look at us, that multiple may change.

Brad Evans – Heartland

Larry, can I ask you who you benchmark the business to? I mean you look at Datascope, I mean who due try to emulate within the marketplace? Who do you admire?

Larry Saper

Well, from an earnings standpoint, I admire Arrow until they got bought. Really, we're – we could be compared to just about anybody who is in the cardiovascular space, but most of the people in cardiovascular are very big, and I'm not sure that – I think what matters is the financial strength of the company, and the rate of growth, rate of bottom line growth.

Brad Evans – Heartland

I guess Teleflex acquired Arrow for about 14 times trailing 12-month EBITDA. So I guess, I realize that we are in a different world today relative to maybe–

Larry Saper

Yeah, but, I mean, people still respect growth, and they still respect financial strength, and I think, we don't really spend our time worrying about our valuation, but I think we are a very valuable company, and I think we are undervalued, but that's just my opinion. Like what's his name says, I could be wrong.

Brad Evans – Heartland

Okay, I agree with you. Thank you very much.

Larry Saper

Okay, thank you.

Operator

(Operator instructions)

Larry Saper

While we are waiting for a question, just let me say that I think one of the problems with our valuation is in the past it's been the relative unpredictability of our earnings, or maintaining a consistent rate of growth. I think we are in a better position now to obtain that consistent rate of growth. And having that, I think that will change opinions about the valuation of Datascope. If you look back, there was a time in the '90s when we had explosive growth, in 1991 when we developed the – we were first to open up the market for vascular sealing devices, and the multiple then just exploded in advance of any real financial performance from that news. I think we are in a better position now and I think the market will gradually take that recognition that we are not only a very, very strong company but we are capable of growth. This growth that you see and the potential that you don't see that when those are ready to be talked about we'll talk about them. And we have a very good record of introducing new things and growing businesses. And much of what you have seen over the past – well, since roughly 2001 – the past five, six years, have been an unevenness due principally to our first – our success of the vascular sealing business, and then the decline and ultimately the elimination, the closing of the vascular sealing business. Now we don't have that problem any more. That's almost gone. Still a little bit left, even though we are earning money and getting cash flow from what's left of vascular sealing, in a certain way it hurts our comparisons because that money is declining. We'll take another question.

Operator

We'll take our next question with Jinsong Du with Credit Suisse. Please go ahead.

Jinsong Du – Credit Suisse

Thanks for taking my question. Just now you mentioned that the separation of the continued operations from the discontinued operations have been very successful. Could you elaborate a little bit on that? Like, for example, has anyone in the company left as a result of the separation of the two businesses?

Larry Saper

I couldn't speak for every last employee of the company, but no, there has been no significant – no – as anybody in this – and I think the operating people can answer it better than I.

Dr. Nino Laudani

Well, we have seen no significant (inaudible).

Larry Saper

No, we haven't, no, because the Patient Monitoring people have remained intact, and obviously the remainder of the company, the continuing business has remained quite intact. No, we have had absolutely – all I meant was that the work involved in doing it was not trivial, and we have terrific people here, and they've done a terrific job. Particularly I have to single out IT and the financial side. I mean, a whole bunch – I did little or none of it. These guys know what they are doing and they did a terrific job.

Hank Scaramelli

We did move some corporate people down to the Mindray division to help support out their startup, but for the most part, what Larry said is, nobody was let go or terminated because of this, at this point.

Larry Saper

From a housekeeping standpoint, and maybe it would be instructive to know that we have this second facility. It's a 90,000 square foot facility in Montvale about two or three minutes away by walking, almost, from the facility that's going with – to Mindray from the transaction, and that facility will now be taken up with cardiac manufacturing and customer service, and what else?

Hank Scaramelli

IT.

Larry Saper

And IT.

Hank Scaramelli

Service organization–

Larry Saper

We really have a terrific infrastructure in this company. And I say that with the highest respect, and I'm not biased.

Jinsong Du – Credit Suisse

Right. So do you think there are still things down the road that need to be done to make sure the separations of the operations are clean or do you think that most of the difficult part has already been done?

Larry Saper

I couldn't express it in percentage terms. Very high. I mean we are almost – am I right? We are almost done.

Hank Scaramelli

Yeah.

Dr. Nino Laudani

Yeah.

Larry Saper

I mean, it's remarkable because really what's great, we are able to produce a terrific quarter, and while nobody knew that we were in the – I mean nobody would know without us saying that we are really involved in a sale process, which is very demanding. So we are able to do that plus conduct business as usual.

Jinsong Du – Credit Suisse

Great. Thank you.

Dr. Nino Laudani

In a successful manner.

Operator

(Operator instructions) And we have no further questions. I'd like to turn it back over to Mr. Scaramelli for any additional or closing remarks.

Hank Scaramelli

Okay. It's Hank Scaramelli again. We just want to thank everybody for participating on the call. We are looking for a positive fourth quarter, and we will look forward to speaking to everybody at the end of the year in August. So, thanks again for your attendance.

Dr. Nino Laudani

Thank you.

Larry Saper

Okay, have a good afternoon, everybody.

Operator

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.

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