Mentor Corporation F4Q08 (Qtr End 03/31/08) Earnings Call Transcript

May.15.08 | About: Mentor Corp. (MNT)

Mentor Corporation (MNT) F4Q08 Earnings Call May 15, 2008 5:00 PM ET

Executives

Joseph A. Newcomb - Vice President, General Counsel, Secretary

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

Michael O'Neill - Chief Financial Officer, Vice President

Edward S. Northup - Chief Operating Officer, Vice President

Analysts

Gregory B. Gilbert - Merrill Lynch

Thomas J. Gunderson - Piper Jaffray

Larry Biegelsen - Wachovia Capital Markets, Llc

Amit Hazan - Oppenheimer & Co.

Anthony Vendetti - Maxim Group

Peter J. Bye - Jefferies & Co.

Jayson T. Bedford - Raymond James & Associates

Jonathan Block - Suntrust Robinson Humphrey

Gary Nachman - Leerink Swann

Jose J. Haresco - Merriman Curhan Ford & Co.

Operator

Welcome to the Mentor Corporation financial results for the fourth quarter and fiscal year 2008 and guidance for 2009. (Operator Instructions) At this time I would like to turn the call over to Joe Newcomb, Vice President and General Counsel for Mentor Corporation.

Joseph Newcomb

With me are Josh Levine, President and Chief Executive Officer, Ed Northup, Vice President and Chief Operating Officer and Mike 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 a copy of our press release, please call Vicky Johnson at 805-879-6082 and she will fax or email a copy to you. The press release may also be found on our website www.mentorcorp.com.

As a reminder, Mentor has a fiscal year that ends March 31 and when we make reference to any quarter or year-to-date on the call, we will be referring to our fiscal year unless otherwise noted.

During this call we will discuss, among other matters, our financial results for the fourth quarter and full year ended March 31, 2008 and guidance for fiscal year 2009.

Before we begin I have been asked to read the following Safe Harbor Statement pertaining to forward-looking statements which we will be making during the course of our conference call. Today’s conference call includes statements regarding Mentor’s finance results for the fourth quarter and full fiscal year 2008; guidance for full fiscal year 2009; 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.

Joshua Levine

We are pleased with the results of our fourth quarter and full fiscal year. During this quarter we aggressively managed our company with a challenging economic environment in the US. Turning to the results, we recorded strong sales in the quarter in our breast aesthetics franchise on a global basis. Sales to the US market continue to be supported by conversion from saline filled breast implants, to our MemoryGel product line and the business exhibited resiliency.

Sales of reconstruction products which, are not as economically sensitive or dependent as elective procedures, were very strong. As we have been communicating, a key area of our marketing focus in the US has been the roll out of several marketing initiatives designed to support our surgeon’s practices and help support conversion of MemoryGel implants. There programs are focused on patient acquisition and strengthening patient relationships. Customer feedback indicates that these programs are having an impact.

On the international side of the business we saw continued sales growth and made investments in strengthening and expanding our international management infrastructure to take full advantage of the market opportunities that exist. With our combined market position in both the Mentor and Perouse products offerings, we are well positioned in key international markets.

In our clinical studies area we made excellent progress during the quarter in advancing our strategic initiatives. As an example, the FDA approved the first of our hyaluronic acid dermal fillers with lidocaine, Prevelle Silk. We have just launched this product at the American Society of Aesthetic Plastic Surgery meeting in San Diego last week and are pleased with the initial customer feedback.

Regarding our Botulinum Toxin project, during the quarter all patients enrolled in the Phase IIIa clinical trial for the cosmetic indication completed their six-month follow up and we also completed patient enrollment in all remaining pivotal studies.

We also are pleased to report that we completed patient enrollment in the Phase I study for the treatment of torticollis and cervical dystonia.

Regarding our MemoryGel post approval study, as of yesterday we can report that we have now enrolled approximately 35,000 patients towards our total target of 42,900 patients as required by the PMA post approval conditions. This enrollment level suggests that we are on track to complete patient enrollment in the post approval study prior to calendar year end 2008.

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

Michael O'Neill

As required from the generally accepted accounting principles, the operating results of our discontinued urology business are reporting to low net income from continuing operations. Other than where explicitly noted my comments today will cover our continuing operations.

We finished the fourth quarter with $99.4 million in sales an increase of 24% over the $80.3 million in the fourth quarter of 2007. The quarter includes $5.9 million in sales related to our Perouse acquisition and includes $1.9 million of positive currency effect. Excluding the Perouse acquisition our growth rate was 16% and further excluding the effects of foreign exchange, that growth rate was 14%.

We finished the year at $373.2 million in sales an increase of 24% of the sales of $302 million in fiscal ’07. Fiscal ’08 includes $15.5 million in sales related to our Perouse acquisition and $5.1 million of positive currency effects. Please note that the Perouse sales represent only nine months post-acquisition.

Excluding the effect of the Perouse acquisition our growth rate was 18% and further excluding the effects of foreign exchange, our growth rate was 17%.

Let me now walk you through the results by product franchise. Breast aesthetics sales were $87.5 million in the fourth quarter, an increase of 26% over the $69.3 million in the fourth quarter of fiscal ’07. US sales were favorably impacted by the product mix shift from saline to MemoryGel implants. For the fourth quarter, MemoryGels units represented approximately 45% of our domestic breast implant unit volume. Also contributing to sales growth were increases in our breast reconstructive products.

For the full year, breast aesthetic sales were $328 million, an increase of 25% over sales of $262.6 million for fiscal ’07, of which $37 million relates to higher breast implant sales, $14 million relates to Perouse and another $14 million relates to our breast reconstruction products.

For body contouring, sales of our liposuction equipment and disposables were $3.6 million in the fourth quarter, down slightly from last year at $3.9 million. Full year sales were $15.2 million compared to $16.7 million last year.

Sales of our other aesthetics products, which includes our facial products, for the fourth quarter, were $8.3 million, an increase of 17% over the same period of last year. For the full fiscal year our aesthetic products were $30 million, an increase of 32% over last year. This represents a $7 million increase, about half of which is facial product related.

Our gross margin for the fourth quarter of fiscal 2008 was 73.7% compared to 76.1% for the comparable period of fiscal ’07. The gross margin was primarily affected by low gross margins from our Perouse business.

Gross margin for the full year of 2008 was 73.5% compared to the 74% for fiscal ’07. Cost of sales for fiscal ’08 included $2.3 million of costs related to the step up valuation of inventory associated with our Perouse acquisition.

Selling, general and administrative expenses in the fourth quarter of fiscal ’08 were $41.8 million or 42.1% of sales. SG&A expenses were $29.3 million or 36.5% of sales in the fourth quarter of fiscal 2007. The increase included higher marketing costs, compensation, and additional costs associated with the Perouse acquisition.

SG&A expenses in fiscal year 2008 were $150.2 million or 40.2% of sales compared to $120.1 million or 39.8% of sales for fiscal year 2007. The increase was attributable to higher compensation costs, marketing costs, consulting and professional fees and again, additional costs associated with Perouse.

Research and development expenses in the fourth quarter of fiscal 2008 were $12.8 million an increase of 23% over the $10.4 million reported in the fourth quarter of fiscal year ’07. For fiscal year ’08, R&D expenses were $45 million reflecting a 28% increase over last years $35 million.

Our investment in R&D includes clinical trials and related program expenses in support of our breast and face aesthetics initiatives, as well as our Botulinum Toxin development program and as a reminder, expenses associated with our MemoryGel post approval study commitments are included in R&D.

Operating income for the fourth quarter was $18.6 million a decrease of 1% from the $18.9 million reported in the fourth quarter of the prior year. For full year, operating incomes was $79.1 million, an increase of 20% when compared to $65.6 million last year.

Interest income in the fourth quarter of fiscal 2008 was $800,000, versus interest income of $6.3 million in the fourth quarter of fiscal 2007.

For the full fiscal year ’08, interest income was $8 million compared to the $22.5 million in interest income last year. Interest income has decreased significantly as a result of lower tax balances due to our share repurchase program.

Other income and expenses consists primarily of gains and losses on foreign exchange. Other expense was $1.7 million and $0.3 million for the fourth quarter of fiscal ’08 and fiscal ’07 respectively. Other income and expense of $3.1 million and income of $0.2 million for the full fiscal year of ’08 and ’07 respectively, is principally as a result of the continuing strength of the euro.

Moving to taxes, the effective tax rate for continuing operations in the fourth quarter of fiscal ’08 was 31.9% compared to 30.1% in the fourth quarter of fiscal year 2007. Year-to-date our effective tax rate was 29.8% compared to last year at 29.9%.

We reported diluted earnings per share from continuing operations of $0.30 in the fourth quarter of fiscal ’08 compared to $0.35 per share in the fourth quarter of last year and for the full fiscal year 2008 we reported $1.40 per share compared to $1.24 per share last year.

Diluted GAAP EPS from discontinued operations was $0.22 and $0.19 in the fourth quarter of fiscal year ‘08 and ’07 respectively. For the full year of 2008 and 2007 diluted GAAP EPS from discontinued operations was $0.20 and $4.75 per share respectively. The fourth quarter of fiscal ‘08 included an $8.7 million tax benefit mainly related to the gain on the sale of the urology business. The fiscal 2007 amount included the net gain on the sale of the urology business.

Now turning to our tax division and tax flow, we reported cash and marketable securities of $110 million as of March 31, 2008, a substantial decrease from our prior year-end balance of $488 million, primarily as a result of our share repurchase program.

During the year we repurchased 9 million shares for approximately $368 million. We also funded the cash portion of the acquisition of Perouse Plastie for approximately $53 million and we paid debt dividends of $30 million.

For the fourth quarter our operating cash flow from continuing operations was approximately $15.9 million. Depreciation and amortization were approximately $3.9 million and our capital spending and milestone payments were $14 million.

Thank you and now Ed will provide a review of our product development programs.

Edward Northup

Starting first with our breast aesthetics pipeline, the PMA application for our contour profile gel anatomical breast implant remains under active FDA review. It remains unclear whether or not the FDA will require an expert advisory panel to review this PMA.

Moving to our dermal filler programs, as a result of the recent FDA approval we have begun sales in the US of Prevelle Silk, the first of our proposed line of HA dermal fillers with lidocaine. Multiple international registrations are underway for this product.

For Puragen Plus our PMA is currently under review by the FDA and we expect approval in the fourth quarter of fiscal 2009. We continue to make progress in our development of our next generation HA dermal filler DGE. We’ve completed enrollment for this study in August 2007 and anticipate completion of follow up this month.

Finally, a quick update of our Botulinum Toxin project, for patients enrolled in the Phase IIIa clinical trial, six month follow up was completed mid March. We expect a study report for this phase to be completed and submitted to the agency in fiscal Q2 at which time the data will be made available to the clinical community.

During the quarter we completed the enrollment of the Phase IIId study, the repeat dosing trial randomized to placebo with a 13 month follow up with three treatments administered, to confirm that initial responders will react to active drug, but no to placebo. We will be measuring the degree of frown line reduction, which is assessed by both the investigator and the subject using a validate scale.

In addition, during the quarter we completed enrollment of Phase IIIc and openly will repeat dosing safety trial and follow up on this study is three years and will run concurrently with Phase IIIa in the b studies. The timing or our regulatory filings with FDA for approval of this product is driven by the completion of the IIIb study.

In the last quarter we also completed enrollment in the Phase I multi-center dose escalation trial using our Botulinum Toxin for the treatment of torticollis or cervical dystonia. Data from this study are encouraging and will provide the basis for future study of this orphan indication.

In July 2007 we broke ground for a $37,000 square foot manufacturing facility in Madison, Wisconsin to support commercialization of our Botulinum Toxin product. This new facility will compliment our existing Madison based drug substance manufacturing plant provide a fully integrated program.

Michael O'Neill

Having concluded the review of fiscal 2008 I would now like to provide fiscal 2009 guidance for the full year.

Total net sales are in a range of $405 to $425 million. Gross margin percentage is in the range of 71% to 73%. SG&A as a percentage of sales is 41% to 43% and this is consistent with our prior public comments. We’ve been consciously increasing our sales and marketing investment in an effort to grow our breast aesthetic business and to prepare for the commercialization of our facial aesthetics portfolio.

R&D as a percentage of sales is 10% to 12%. Our effective tax rate is 30%. Diluted EPS from continuing operations is a range from $1.40 to $1.50 assuming $39.5 million shares outstanding. For the full year we expect deprecation and amortization for fiscal ’09 to be in the range of $15 to $17 million. Investment in capital spending and new product milestones for fiscal ’09 is expected to be in the range of $30 to $40 million and this includes the expansion of our Botulinum Toxin facility to support the vertical integration of certain properties partly being outsourced.

I will not turn the call back over to Josh who will provide some context for our full year fiscal ’09 guidance.

Joshua Levine

As we transition into fiscal 2009 we will continue to be investing at an accelerated rate in contrast to historical levels in both R&D and marketing. While we are incurring costs related to the launch of our dermal fillers, we have taken a measured approach to this investment and believe this is a prudent strategy to minimize significant financial [velusho].

The initial cost of our Prevelle Silk launch is focused on the plastic surgery channel where we have the ability to leverage existing customer relationships. The FY09 guidance that we have presented to you support the basic business model capable of generating at or close to 20% operating margins while accommodating an increased investment in resources and programs.

We see strong growth in the international market and we are increasing our investments in the OUS franchise to exploit the opportunities that we see present. Our continued focus in FY09 will be on those elements of the business that we can influence and control. Specifically competing to grow market share, facilitating the continued adoption of the MemoryGel products in the US, executing our entry into the domestic facial filler market, accelerating our international breast implant growth and market share and continuing to build out our product portfolio and create an incremental product funding opportunities that will allow us to better serve customers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Greg Gilbert - Merrill Lynch.

Gregory Gilbert - Merrill Lynch

Allergan indicated that you may have gained share in the quarter helped by pricing strategies. Can you comment on that and secondly what are you seeing in terms of procedure growth and what have you factored in for fiscal ’09 sales guidance and procedure growth?

Michael O'Neill

I think it’s fair to say that our return on external data sources do not support the competitive statements with respect to discounting by Mentor in our fiscal Q4.

Edward Northup

On the procedure growth, we don’t see any real substantial changes in the domestic marketplace. I think our view going into ’09 in terms of the guidance is that procedure activity is still going to remain relatively flat year on year.

Again, we look at the same macro economic data that you guys are and right now we’re not seeing any data that suggests that we’re in the beginnings of some kind of an economic turn around and consequently the assumption we’ve built into the ’09 guidance around procedure activity is that it remains relatively flat.

Operator

Your next question comes from Tom Gunderson - Piper Jaffray.

Thomas Gunderson - Piper Jaffray

Can you give us a sense as you look at those numbers that you’re giving for 2009 as to what you think the silicone penetration will be in the US relative to where you ended up ’08?

Edward Northup

I think that we have been pretty public over the course of ‘08 that we were expecting at year-end that we’d be exiting fiscal year ’08 at approximately a 50% penetration rate. We ended up actually, from a fourth quarter average standpoint averaging about 45% and we believe that there was some impact there by essentially the price sensitivity pressures brought on by the slow down in the US economy.

Generally I think we are pleased with the progress we made in ’08 and believe that we look at the adoption of MemoryGel or a gel uptake, it was actually stronger in the last fiscal year than we originally predicted following PMA approval back in November 2006.

When you think about it going forward, the practical implication is that while silicone gel adoption is going to continue to grow, it may in fact be at a slower rate based on the impact of the economy.

Longer term our view is that it hasn’t changed in terms of where we think the endpoint level of silicone gel adoption in the US, where it ultimately lands, we said that we think there’s every reason to believe that the domestic market will eventually approximate what the gel mix looks like in Europe and our view of that has not changed. We predicted it was going to be a several year transition to get there, and I think that that’s still the case and we still have that view. Along the way, based on things like the influence of the economy, we may see some lumpiness in this ramp.

Again, just to reinforce the key takeaway here, MemoryGel and gel product mix is a very, very important metric for us. It’s key to our performance next year and the growth in the domestic revenue component. We’ve got several things focused on continued support of MemoryGel conversion.

Thomas Gunderson - Piper Jaffray

I was surprised in the press release and then in your prepared remarks as well that you thought you did strongly in the recon market. Do you think that’s just an anomaly for your final quarter or is there something else going on, new products, or backlog from some other procedure? What do you think is going on?

Edward Northup

I think one of the most important things that’s happening over the course of the last quarter or two is that, in the reconstruction segment specifically, our NeoForm sling, which is that dermal based product that’s used in breast reconstruction procedures has brought an increased selling focus and presence from part of our TMs, ETBOR, which really is help driving that piece of the business.

In those dual stage breast reconstruction procedures, if you get the front end, the first stage of those recons in terms of the tissue expanders, you get a pull to effect of the implant in the second stage of the procedure and we had very, very strong expander sales in the quarter. I think that our presence in the OR with NeoForm is absolutely making the difference. I think that’s the primary thing we point to as it relates to the strength in the recon segment.

Operator

Your next question comes from Larry Biegelsen - Wachovia Securities.

Larry Biegelsen - Wachovia Capital Markets, Llc

Josh, did you say what was baked into your fiscal 2009 guidance on the conversion in the US from saline to silicone?

Joshua Levine

No we did not and I don’t think, at this point, for a variety of reasons, we’re going to give a defined metric for where we see ’09 gel penetration target levels. We’re seeing continued growth, although in fairness I think we saw some of that growth slow in the last quarter, again probably due to economic pressure.

Larry Biegelsen - Wachovia Capital Markets, Llc

The gross margin guidance, 71% to 73% was considerably lower than what we were modeling for 2009. If you could just talk a little bit about what’s going on there. Then second on the dermatology side, could you talk a little bit about how many reps you’ve hired, what the plan is going forward and any update on your search for a co-promotion partner on the durum side.

Michael O'Neill

With respect to gross margin, a couple of impacts here: first and foremost is that in fiscal ;08 we only have nine months of Perouse and in fiscal ’09 we have 12 months of Perouse. So on a full year basis, the gross margins are traditionally lower than what we experience in the US, so that is having an impact in gross margins. Secondly, as we expand beyond the core breast implant business and we get into the filler business the gross margins in that business are a lot less than our core breast implants and those are two major impacts.

Michael O'Neill

On the second half of that one with regards to the filler launch and the sales infrastructure build up, I think we said in our prepared remarks that the initial thrust for the launch of Prevelle Silk, which is the first product into the market of that multi-product portfolio is in plastic surgery. Again, not rocket science. We want to be able to leverage the existing relationships we have in that space and we see that as really a measured, most prudent approach to how we want to participate in this business.

The other thing is, it’s difficult to cost justify a really heavy infrastructure investment when you’re talking about only the first product in the bag in the US market. I think as the portfolio gets built out, over time we’ll be evaluating infrastructure needs. We are still keeping options open and have some active conversations taking place with regards to the potential commercial partnerships, but it’s premature at this point to talk about anything specific there.

We have added some additional full line territory managers coming into the fiscal ’09 year. Again, those people are not necessarily dedicated derm reps, but those are full line reps, so they’re taking responsibility for the surgical franchise and the facial products that are being sold in plastic surgery. We have ramped up an inside sales team to support the launch of Prevelle Silk from an outbound telemarketing effort, to both support the launch of the new product and to focus on initial sales on a telemarketing basis into the derm channel.

I think the key take away is that we’re not going to add infrastructure costs in the derm space on a bet on the come basis and hope that we see the revenue impact follow. We’re going to be prudent in our investment activity for the Prevelle launch, leverage what we can in plastic surgery, and see where we are and evaluate where we are as the other products in the portfolio start to roll out.

Operator

Your next question comes from Amit Hazan - Oppenheimer.

Amit Hazan - Oppenheimer & Co.

I’m trying to figure out, in the US market if you gained market share. In answering that question, I’m wondering if you can help with a follow up on US recon and explain to us, I always thought that that market in general is a market that’s declining based on all the ASAPS data we’ve seen, etc. If that’s the case, is that where you’re taking market share or has there been a change in cosmetic or do you even have a sense of that?

Edward Northup

In answer to the first question, we believe we took share in Q4. I think that in general, the view has been very heavily weighted to the domestic augmentation business. While the domestic augmentation business is a very big piece of impact on the overall performance, it’s one piece of a bigger discussion.

As we indicated in our prepared remarks, the sales in the international marketplace were substantial and the sales in the recon area were substantial.

Your take on the general procedure trends in reconstruction is not inaccurate. I think that generally that has slowed and it’s flat and through the result of early detection, skin sparing procedures and lumpectomy’s that this has certainly slowed down.

Again, I think that there has been a very, very different level of focus, selling focus wise on our sales organizations part in the domestic marketplace as it relates to the recon business because of the NeoForm product. If you look at what has to happen in the sale of that product, you can’t just introduce that product on the front side of the practice. You’ve got to go into the OR with the doc’s and help them understand where that product can be used to get better outcomes in terms of reconstruction, surgical technique and procedures.

Our reps are spending a lot of time in surgery with NeoForm and I think that’s having an impact. I’d say in general, the procedure for recon is flat and we’re taking share in that space.

Amit Hazan - Oppenheimer & Co.

I know you commented on average selling prices, but I’d like to get you to maybe comment more specifically on the US market and just give us a direct comment as to whether, at all, you have been discounting at any level, maybe to your high volume customers, etc…more so than you did let’s say in the December quarter. So in the March quarter did you do anything differently as it relates to average selling prices?

Michael O'Neill

We did not do anything materially different with pricing in the fourth quarter versus what was happening in the previous quarters. There is no head office directed aggressive pricing strategies. It is clear, however, we’ve been focusing on ensuring that we retain our key customers, and where appropriate aggressively pursuing converting customers.

The mix may have changed in the quarter, versus previous quarters; so that may have through high-volume rebates distorted some of the underlying pricing.

I think in answer to the question directly, have we directed our sales organization to take prices down to compete? That would not be a fair conclusion.

Operator

Your next question comes from Anthony Vendetti - Maxim Group

Anthony Vendetti - Maxim Group

Could you share with us the marketing initiatives that you said were having some impact and enabled you to gain some market share this quarter? Than if you could just give us a timeline, or a range for when PurTox should be through the clinical trials and potentially approved and how available to your client base?

Joshua Levine

The marketing programs that we’ve referenced have been rolling out over the last two quarters in terms of timing. For competitor reasons, I’m not going to get very, very in depth in this. I would say in general I characterize them as a patient acquisition related in terms of assisting out practices or encouraging a flow of patients to our practices, that’s area number one.

Area number two is programs that are designed to strengthen, essentially, the relationship between the practice and the patient themselves; so consumer support, patient support in nature.

We also have some programs that, as I’ve referenced in the prepared remarks, are focused on the driving of silicone gel or memory gel as a selection choice for patients with obvious reasons around the price uplift and leverage that we get from that impact when those patients choose silicone versus saline.

Those are the primary areas where we have marketing initiatives being utilized and rolled out.

Edward Northup

We’re expecting submission for our cosmetic BLA to be in Q3 of FY10 and forecasting approval in Q3 of FY11.For the BLA for therapeutic application, about a quarter later for both submission and approval.

Operator

Your next question comes from Peter J. Bye - Jefferies & Co.

Peter J. Bye - Jefferies & Co.

One follow-up on the gross margin, certainly Perouse and the dermal fillers have lowered a bit. I was just wondering if you could give us some color on what your expectations are for dermal fillers in fiscal ’09, either specifically or just more generally.

Michael O'Neill

We have not been forecasting, we’ve not been forthcoming with that gross margin within the product franchises that we were testing clear revenue for although clearly the gross margin for dermal fillers is, I would characterize, substantially different than what we enjoy in the US on our core silicone gel breast implant business.

Peter J. Bye - Jefferies & Co.

What you were maybe looking at from a revenue standpoint from that product group?

Michael O'Neill

Again, we have not been forthcoming on the revenue expectations that we have for our filler business. We provide these things and will be reported as part of our other aesthetics products, but we do not foresee ourselves providing guidance on a go forward basis with respect to filler revenue.

Peter J. Bye - Jefferies & Co.

On the Phase IIIc Botox program, I’m just curious how many patients are in that and how did you enroll it so quickly?

Edward Northup

First of all, I probably wouldn’t give you the total number of patients, it is substantial, and the reason we were able to enroll so quickly is because we had agreement from the agency to be able to enroll prior injected patients that have come in on stage IIIa and IIIb. We were able to roll some of those patients forward into IIIc and that’s how we got it done so quickly.

Peter J. Bye - Jefferies & Co.

On the SG&A side, Josh maybe you could just give us some color on how many more bodies or how much bigger the infrastructure is going to get in ’09 and where those dollars may be going from a body count standpoint or?

Joshua Levine

Well again, I think we said we’re going to be very prudent about how we go about the, I assume you’re referring to the infrastructure related to fillers?

Peter J. Bye - Jefferies & Co.

All of the above, I think you’ve expanded a bit internationally as well. There is probably still some more there. I was just curious on what the size of the organization would probably look like this time next year.

Joshua Levine

It’s difficult to say. Again, our view on the infrastructure will be balanced with what happens as far as timing and impact of the filler portfolio roll out. We know on the surgical aesthetics side of the house that we had some areas where from a market penetration standpoint we probably could pick it up a notch or two.

I think that we have, appropriately so, coming into this fiscal year looked to split some territories where we thought that added feet on the street and added selling resources would be able to get us some better focus and better impact on the surgical franchise side of the house. We’ve increased, I would say, the existing sales organization modestly and are prepared to pay for that as we go.

Again, the goal here is not to add infrastructure and then bet on the come that the revenue impact is going to come to cover it. We want to make sure that we’re doing our best to balance the investment and the cost of that investment with the revenue impact that it can generate.

Operator

Your next question comes from Jayson T. Bedford - Raymond James & Associates.

Jayson T. Bedford - Raymond James & Associates

I’m just trying to reconcile the gross margin, especially versus last year. It looks like revenue is up year-over-year; gross margin’s down about 250 basis points, is that all Perouse, or is there something else that’s impacting the gross margin line

Michael O'Neill

It is Perouse, is a piece of it. It’s also that our projected growth generally speaking in our international markets is higher than in 2008. That is also diluted to gross margin. The dermal filler business I want to come back to. Our milestone amortization is also going through the gross margin line as well.

Jayson T. Bedford - Raymond James & Associates

The milestone amortization did that impact this quarter and it didn’t impact 4Q07?

Michael O'Neill

A part of it impacted the fourth quarter of ’08 and a lot more of it impacted ’09 on a go forward basis.

Jayson T. Bedford - Raymond James & Associates

Josh, in the past you’ve talked about patient consultations as somewhat of a leading indicator of procedural growth. Have you seen any increase in patient consultations over the last few months?

Joshua Levine

No, I would say Jason that our view right now is unchanged from what we had communicated last quarter and the last several months.

Operator

Your next question comes from Jonathan Block - SunTrust Robinson Humphrey.

Jonathan Block - SunTrust Robinson Humphrey

Here we are during tough economic times and you’re trying to slug out flattish procedure growth. I’m just wondering if we take a step back and you look at some of the figures from ASPS, you go back to ‘02, to ’04. This was healthy augmentation growing mid-teens and then ’05, ’06, ’07 you saw it slow down to mid-single digits. Where do you think that snap back is? In other words, once we slug through this tough time and if we assume the economy comes back, where is this market, is it a single digit grower, is it a 10% grower, what should we look forward to there?

Joshua Levine

I think the challenge, John is that you’ve had several years now with what I’ll call not normalized situation. You’ve got certainly the economy is an impact. You’ve got this snapshot in time of silicone gel approval and all of the strange dynamics related to the post approval studies on the tale end of that. So, you’ve got an awful lot of, I think, strategic and environmental drivers impacting this thing.

Again, I’m going to go back historically and say, if you took a line back and said, before all of these more recent events, where was the market? You were probably in high single digits, low double-digit procedure growth and at this point I don’t think that that’s an unrealistic expectation. The question is when do you get back there? In the US market you’ve got so many of these environmental things banging away on and impacting that, that it’s difficult to say what normalized looks like and when it will occur or when we’ll get back there.

Jonathan Block - SunTrust Robinson Humphrey

SG&A was a little bit higher than we were expecting for fiscal year ’09. Is that just a continuation of and maybe a little bit more aggressive on the breast side or is there anything from a facial sales force that’s embedded in that 41% or 43% of revenues?

Joshua Levine

I’d say in general it’s much more heavy S than the G&A, as a matter of fact it is predominantly S as opposed to G&A and it has it’s roots in a couple of different areas. One is the build out of the infrastructure and continued expansion in the OUS marketplace. We see great opportunities there in terms of market dynamics that we want to capture and we think that the investments we’ve made already are starting to yield the results we’d like and we’re going to keep going there.

That’s one area. The other is, we have added some additional headcount in the US breast implant, in the core surgical breast aesthetics area in the US market. Again, not huge in terms of numbers, but modest and appropriate given the opportunity, in terms of the increased market penetration that we see.

There have been, again, on the dermal filler side, really nothing added or no heads added specific to fillers, specific to derms. We have the inside sales organization that I referenced, which is an outbound telemarketing effort and the other area is not in infrastructure, but in marketing programs, which we’ve talked about over the last several quarters and which are going to figure prominently in FY ’09.

The reality is we’re going to monitor those programs to ensure they’re getting the results that they need to be getting. If they’re not, we aren’t going to continue to spend money to have no impact.

Some of this is, call it, fixed overhead in terms of feet on the street and some of it is in the form of programs which I think we have a greater degree of flexibility and control over as it relates to, do we keep the faucet running longer-term if we’re getting impact or not getting impact.

Operator

Your next question comes from Gary Nachman - Leerink Swann.

Gary Nachman - Leerink Swann

First on that growth OUS, will most of that come organically or should we expect some more acquisitions XUS going forward?

Michael O'Neill

So far it’s been organic; well it’s been a combination. It’s been organic and clearly the Perouse acquisition itself, that clearly has catapulted us in a number of key markets around the world. I thing going forward I wouldn’t rule anything out. As I think we’ve alluded to in the past, we’ve gone through a fairly deep dive on the available opportunities in terms of other companies, other potential acquisitions.

We have some great opportunities at this point going forward on the organic growth side. I think that’s probably where the focus will be.

Gary Nachman - Leerink Swann

Have you actually been gaining share XUS over the last few quarters, even including the acquisitions?

Michael O'Neill

Yes, obviously the acquisition brought some bolt on share with it, but we have been gaining share in using the Legacy Mentor channel to distribute the approved products in a wider area. We are using that product to drive share organically, basically.

Gary Nachman - Leerink Swann

I know it’s early, but could you give us some of the anecdotal feedback on Prevelle Silk and is there a slight delay in Puragen Plus by a couple of quarters? I think last time you had told us calendar third quarter this year for approval and if so, why is that?

Michael O'Neill

I’m going to answer just this more recent question and then I’ll give you a little color on Silk.

Joshua Levine

On Silk the feedback actually has been very, very interesting. We’ve done a lot of research in advance of launching this product and here’s what we found. Many patients are interested in a facial filler procedure or treatment prior to some kind of a special, key event. Often they don’t take action on that until just prior to the event. You’ve heard us talk in the past about the fact that there’s a trade off between longevity or product persistence and immunogenic response with patients.

One of the interesting things that we’re hearing about Prevelle Silk is that you have the ability to treat a patient today, let’s say over a lunch hour and tonight they can go out without any bruising, without any redness, without any swelling, which is a pretty unique situation. I think we’ve said in the past that from our view, with regards to all of the clinical data in the HA space, Prevelle Silk actually has the lowest adverse event profile of any of the products out there. I think that’s unique in the context of what I just described with regards to being able to use this product on a very short-term basis and have the patient out that sane night or early the next day with no swelling and redness.

The other thing we’re hearing is that it’s good for layering. It’s good as a touch up product with other existing fillers and I think one of the more interesting pieces of feedback is, if you look at the cycle time in terms of the longevity, it would appear that the Prevelle Silk treatment cycle compliments the Botox treatment cycle. In other words, they mimic one another in terms of timing. So it would be convenient for patient to have both Prevelle Silk and Botox in the same appointment and one of the things that’s happening, has been happening over time is a growing number of procedures where combinations of Botulinum Toxin and fillers are being administered in the same treatment at the same time.

I’d say that probably captures the bulk of the early feedback that we’ve heard.

Edward Northup

On the second question, we have reforecast the approval for the Puragen product with lidocaine into Q4 and the reality is that this is a much more complex submission than a completely internally developed program. You remember that we did acquire this technology from a European facility and we recently, about a year ago, transferred this to a US development partner and we frankly believe that Q4 represents a more realistic timeline for the US approval.

Gary Nachman - Leerink Swann

Your guidance this year, I know you don’t want to be specific, but does it include both products? So you’re assuming, you factored in a launch of Puragen in your guidance?

Michael O'Neill

Yes, we have Q4 launch revenue.

Gary Nachman - Leerink Swann

Pricing for Prevelle, Josh, could you disclose that, is it, how competitive is it versus the other fillers?

Joshua Levine

Yes, we wanted to make sure of two things: we wanted to make sure that we had a essentially a value proposition that would resonate with physicians and patients. A lot of feedback that came back, again, in research about the product early on was that because it has a different longevity profile or duration then some of the more common products in the marketplace like Restalin and duvaderm that our pricing strategy really needed to take into account that situation.

We have a list price on a per syringe basis for Prevelle sales of $149.00, we think that actually reflects a value proposition for physicians and patients that makes sense, gives an opportunity to have that product in some pretty reasonable volumes clear the market at that price. When you look at it on a price per day or cost per syringe or cost per day basis, it’s very competitive in how it’s positioned.

Operator

Your next question comes from Jose Haresco - Merriman.

Jose J. Haresco - Merriman Curhan Ford & Co.

With regards to the guidance you gave a range of $405 to $425, I believe. How much of that is currency, how much of that is Perouse?

Michael O'Neill

The currency versus ’08, very limited, based upon the forecast exchange rate that we have.

With respect to Perouse, we’re not going to disclose the absolute revenue number for guidance purposes. I think we’ve been transparent and said that contribution that Perouse has made to our 2008 top line, so you can work out I think pretty clearly what ’08 was and you can apply a growth factor on that. We’ve been clear that we have high expectations.

Jose J. Haresco - Merriman Curhan Ford & Co.

Is the growth rate then for the Perouse business similar to what we see in other foreign areas such as Europe and South America or is it altogether very different?

Michael O'Neill

The Perouse footprint was basically a European company with some presence in Latin America. We expect to be able to leverage their product line globally, not just Europe or Latin America but globally into expanding markets in Asia.

Jose J. Haresco - Merriman Curhan Ford & Co.

Could you remind us again of the position you intend to take with regards to Puragen Plus when it hits the market and also VGE?

Joshua Levine

Puritan Plus, part of that would be patients for in contrast to or alongside of basically the Duvaderms and the Restalins. A product that has a good longevity, good duration, comparable adverse event profiles to those types of products. So, that’s where the Puritan Plus product would line up in position.

DermalGel extra really is a next generation by design, a next generation HA, which would probably be a longer duration product, maybe thought of as a volumizer or a deep cleaning type of product, so you’ve got a, kind of at that point a sweep. Prevelle Silk on the short end the new Puritan Plus head-to-head competitor type of position with Restalin, Duvaderm, and then DermalGel extra, or whatever we decide to call that as a trade name, is really more of a volumizer, deep cleaning, bulking type of product.

Jose J. Haresco - Merriman Curhan Ford & Co.

Given the overlap or the similarities you just mentioned between Puritan Plus and some of the other fillers, which you obviously have a much more dominant market share right now, which of those factors do you think is going to get your captive surgeon pull the switch over. Is it going to be price, is it going to be longevity, injectability, do you have a sense of that at this point?

Joshua Levine

At this point what we know about the product suggests that is functions and operates very similarly to a Restalin type of product. It has the benefit obviously of having lidocaine in it. That’s probably the best way to be thinking about it.

Again, we’ve got a very strong position on the plastic surgery channel that we think we can leverage to our best interests and I think, that the Puragen Plus product will allow us to do that. I think you’re going to see, before we get there, the Prevelle Silk product that we’ve just launched, I think you’re going to see Prevelle Silk in many more plastic surgery accounts than people may be expecting.

Again, it’s by positioning and profile product attributes has a lot of range, a lot of applications [inaudible] and has some interesting possibility attached to it.

Jose J. Haresco - Merriman Curhan Ford & Co.

The second calendar quarter tends to be strong for the industry. Now that we’re a little bit into it can you comment on seeing that typical sequential uptick into the second quarter that we normally see and how does that compare to last year or the year before that in terms of just sequential ramp?

Joshua Levine

We’re not going to comment on anything at this point, anything other than fiscal Q4 our actual and our guidance for ’09.

Operator

Your next question comes from Greg Gilbert - Merrill Lynch.

Gregory Gilbert - Merrill Lynch

Josh, by the way we’re having trouble hearing part of what you’re saying. I don’t know if you’re far from the phone but.

Josh when you talked about procedure growth being flat in your’09 guidance is that a US comment or is that a blend of US being down and international being up?

Joshua Levine

No it was really more about US.

Gregory Gilbert - Merrill Lynch

And what about XUS, if you could ballpark that for us?

Joshua Levine

I think procedure growth, again, it varies from region to region, and it varies from market to market. On a blended basis you’re probably looking at mid-single digit maybe 5% to 7.5% range.

Gregory Gilbert - Merrill Lynch

As you think about possible partners for the derm channel at some point, it sounds like that’s not necessarily near term thing, but is PurTox part of your thinking there?

Joshua Levine

I think it’s too early to talk about what we would or wouldn’t do with the Botulinum Toxin.

Gregory Gilbert - Merrill Lynch

That’s not really a consideration that would affect the timing of picking a partner for dermal fillers?

Joshua Levine

No.

Gregory Gilbert - Merrill Lynch

What’s your flexibility to reduce spending on R&D, or willingness on R&D and SG&A in the event that procedure growth is much more negative than you think going forward over the next 12, 18 months? I understand the guidance is on a percentage of sales basis, but does that really hold true if absolute sales are light? You’d still need to spend on R&D what you need to spend. Really the question is how much cushion or willingness is there to reduce SG&A if need be?

Michael O'Neill

A couple of things there and Josh has alluded to some of them earlier on. I think I can relate specifically to R&D, obviously all of you are aware that once we embark on a clinical trial the costs of that are pretty much driven by the enrollment and then the trailing costs of the program.

We do have the flexibility to delay trials, so we have that discretion. Then we also, for our internal R&D projects and programs, we have the ability to flex that spend up and down. But, clearly the clinical trial component is a significant piece of R&D. Once we commit to the trial, we’re pretty much committed to this spending over time, but there is some flexibility there.

I will add also, in the SG&A line, Josh mentioned this earlier, as it relates to discretionary marketing programs, I feel pretty comfortable that if we run into a volume issue in terms of revenue that we can be out ahead of managing the expenses in accordance with that revenue projection.

Operator

Your next question comes from Amit Hazan - Oppenheimer.

Amit Hazan - Oppenheimer & Co.

Maybe this is a little bit too early to ask this question, but since you say you’ve gained share in the US, I’m just wondering as it relates to the post approval studies, we know Allergan has a much more complex study design.

I’m wondering if you guys have a sense at all, or if it’s too much granularity, but if you have a sense at all if Allergan is running into the issues, in a similar way, that you had earlier on when you had your mandatory, that they’re really trying to get folks into the study now that you’re over 80% already in the study.

Do you have any thoughts on where Allergan is, or if that had any impact on market share, or is that too early?

Michael O'Neill

We really don’t have any idea where they are. They have not publicly disclosed their numbers. You can look at the numbers as we can. They clearly have a mountain to climb. We know that their out there trying to get enrolled. I can’t forecast when or how they’ll get that done.

Amit Hazan - Oppenheimer & Co.

I’m just wondering in the international markets, with regard to Medicore, do you still see them losing market share, have they started to stabilize at all, or are they still bleeding? What’s your sense of what’s going on with them as it relates to your share gains versus theirs?

Michael O'Neill

They’re continuing to take some share over the quarter. I’m not sure if it’s as fast a rate as it was possibly in the middle or end of last year.

Operator

Your last question comes from Peter Bye - Jefferies & Co.

Peter Bye - Jefferies & Co.

Could you give us any color on the magnitude on the amortization running through call outs on the payment? Is it like a 50 basis point impact, 150, 200, 25?

Joshua Levine

When we talked about the Genzyme relationship, when we talked about that a while back, we said that this was the very best and most prudent way we thought to commercialize a portfolio of hyaluronic acid based fillers. I think at that point, did we give a general range? I’m reluctant to get very specific about it or have Mike get specific about it.

I think the thought process is this though: we did not make investments in brick and mortar of our own. It think the more we learned about this market segment, it’s an interesting segment, there are a lot of players, there is pressure today and there will probably be more pressure on price going forward. How we want to participate in this business is an important discussion in terms of us being able to protect profitability and mitigate financial dilution here. Whatever the impact is in terms of the amortization, I still think it’s the better course that we could have pursued.

Peter Bye - Jefferies & Co.

I agree, it’s just an accounting thing, so it’s not really cash from a previous quarter.

Michael O'Neill

Right.

Joshua Levine

I want to thank everyone for joining us and we look forward to talking to you on the release next quarter.

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