AngioDynamics Inc. F4Q08 (Qtr End 5/31/08) Earnings Call Transcript

Jul.28.08 | About: AngioDynamics, Inc. (ANGO)

AngioDynamics Inc. (NASDAQ:ANGO)

F4Q08 (Qtr End 5/31/08) Earnings Call

July 24, 2008 4:30 pm ET

Executives

Doug Sherk - IR, EVC Group

Eamonn Hobbs - President and CEO

Joe Gersuk - EVP and CFO

Analysts

Phil Nalbone - RBC Capital Markets

Jason Mills - Canaccord Adams

Brooks West - Craig-Hallum Capital

Jayson Bedford - Raymond James

Greg Brash - Sidoti & Company

Larry Haimovitch - HMTC

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the AngioDynamics' Fourth Quarter Fiscal 2008 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, July 24, 2008.

I would now like to turn the conference over to Mr. Doug Sherk with EVC.

Doug Sherk

Thank you, Operator, and good afternoon, everyone. Thank you for joining us this afternoon for the AngioDynamics' conference call to review the fourth quarter and full fiscal year 2008 financial results.

As you know, both periods ended on May 31, 2008. The news release announcing the fourth quarter results crossed the wires this afternoon, shortly after the market closed and is available on the AngioDynamics' website.

We've arranged for a tape replay of this call, which maybe accessed by phone. The replay will become available approximately 6:30 p.m. Eastern Standard Time, this evening and remain available for seven days. The dial-in number to access the replay is 800-405-2236 or for international callers, 303-590-3000. Both numbers will need the passcode of 11110709 followed by the pound sign.

The call is being broadcast live and an archived replay will also be available. To access the webcast, go to AngioDynamics' website at www.angiodynamics.com.

Before we get started, during the course of this conference call, the company will make projections or other forward-looking statements regarding future events, including the statements about the sales and the company's beliefs about its revenues and earnings for fiscal 2009 and certain financial metrics for fiscal year 2010.

We encourage you to review the company's past and future filings with the SEC, including without limitation, the company's Forms 10-Q and 10-K, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

In addition, management will be reviewing various non-GAAP measures during today's call. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP.

During today's call, the company will discuss non-GAAP measures, adjusted income and adjusted EPS. Adjusted income and adjusted EPS exclude certain expenses relating to the acquisition of RITA Medical, stock-based compensation expense, litigation damages, and others, including the cash benefits from the use of acquired net operating losses and assumed taxes on net income where applicable.

Management believes these measures provide investors with useful information in comparing the company's performance over different periods, particularly when comparing this period to periods in which the company did incur any expenses relating to these activities or items. A reconciliation of all GAAP measures used during today's call was provided in the news release distributed this afternoon and is available on the c company's website.

Finally, during the question-and-answer period today, we request each caller to limit themselves to two questions and then encourage a re-queue to ask additional questions. In advance, we appreciate everyone's cooperation with this procedure.

Now, I'd like to turn the call over to Eamonn Hobbs, President and Chief Executive Officer of AngioDynamics.

Eamonn Hobbs

Thanks, Doug, and good afternoon, everyone. Thank you for joining us today. With me is Joe Gersuk, our Chief Financial Officer. We've got a lot of positive news to share with you today.

First, we want to review our strong fourth quarter results. Second, we want to detail for you the investments we are making to drive core operations growth through sales force expansion and improved organizational focus. Third, we want to review our investments in our recently launched NanoKnife and other IRE product development. Finally, we want to provide our fiscal 2009 financial performance guidance as well as some preliminary thoughts on fiscal 2010.

Let's begin by reviewing our fourth quarter results. We achieved expectations for our financial performance by generating an overall increase in revenue of 14%. And we achieved profitability of $0.02 a share on a GAAP basis, despite the costs recorded in association with the settlement of all patent litigation with VNUS Medical. If you exclude the VNUS Medical settlement costs, our operating margin of 15.1% was the best for any quarterly period in the company's history.

Since we last talked with you in early April, we've successfully closed the acquisition of the Diomed U.S. and Diomed U.K. assets and entered into the settlement with VNUS.

As a result of these two developments, AngioDynamics has substantially strengthened its position in the worldwide market for the treatment of varicose veins. And we expect that combined venous product sales during fiscal 2009 will almost triple from the fiscal 2008 total of $13 million.

The first human clinical trial of IRE technology was successfully completed in April. And as a result of this milestone, we completed the acquisition of Oncobionic in May. IRE is the single biggest growth opportunity for our company, and we believe it has tremendous potential across the very broad market of surgical resection, in addition to a wide range of other applications.

For example, we are seeing very encouraging results in the early stages of development for applications outside of surgical resection, including cardiovascular applications, such as angioplasty and cardiac arrhythmia.

As a result of the progress to date, we feel we have a tiger by the tail with IRE opportunities and we have decided to increase our investment in R&D for IRE clinical programs during fiscal 2009. I will provide you with more detail on our effort and the investment in that area in a few minutes.

With the significant expansion of our venous product lines, with the enormous potential for IRE and with the need to keep our eye on the ball by successfully managing the growth of our other product lines, we also developed plans during the fourth quarter to create three business units to increase our focus and growth. We are in the midst of implementing this strategy, and I will review this new structure with our IRE plans after Joe provides you with a review of the fourth quarter operating performance. Joe?

Joe Gersuk

Thank you, Eamonn, and good afternoon, ladies and gentlemen. Following our June 5th sales preannouncement, today we are reporting final financial results for the fourth quarter and 2008 fiscal year. As you saw in the release, our fourth quarter operating results demonstrate a strong finish to the fiscal year. Net sales were at the high end of our guidance and we are reporting our highest ever gross profit margin.

Additionally, if we exclude the impact of the VNUS and Diomed settlements, the fourth quarter marked records for operating income, operating margin, and cash flows from operations.

Fourth quarter net sales increased by $5.9 million, or 14% to $46.8 million. From a product group perspective, the interventional products group constituted $35.9 million, or 77% of total sales. While the oncology products group constituted $10.9 million, or 23% of total sales.

From a geographic perspective, 90% of sales were in the US, and 10%, or $4.8 million, came from international markets.

From a growth perspective, oncology products led the way again this quarter, growing 22% over the prior year. This growth brought the full year pro forma growth rate for these products to 24%. Our RF ablation, chemoembolization, and surgical resection products all produced strong growth in the quarter and in the fiscal year, reflecting a leading market positions we enjoy in the segments in which we compete.

Interventional products grew by 12% over the fourth quarter a year ago, bringing the full year pro forma growth rate for this product group to 10%. Sales of Smart Port CT were particularly strong in this quarter, as this recently introduced product continues to enjoy excellent market acceptance.

Total port sales grew 32% in the quarter, demonstrating the success of our product development and sales efforts since we acquired this product group from RITA Medical. The Morpheus bedside insertion kit also sold well this quarter, as did our angiographic catheters.

Continuing down the income statement, the gross profit margin improved to 62.7% from 62.2% in the third quarter and 58.9% a year ago. The prior year margin included a one-time charge relating to the acquired RITA inventory, which reduced the gross margin by 2.2 percentage points.

Further improvement from a year ago and from this year's third quarter reflects improved overall manufacturing utilization rates in Queensbury, as well as improved VenaCure margins after vertically integrating that product.

You will recall that we began in-house manufacture of VenaCure procedure kits earlier this year and we are now fully efficient in building them. This capability will serve us well now that we own the Diomed business.

We've reported steadily improving gross margins throughout the year and the full fiscal year margin of 61.6%, was well within our original stated margin goal of 61% to 62% for the fiscal year.

Operating expenses were $29 million in the fourth quarter and $22.2 million, excluding the VNUS litigation settlement. Excluding this charge, operating expenses were 47.6% of sales in the quarter, compared to 49% a year ago.

G&A costs declined in absolute terms from the year ago and by 1.8 percentage points of sales. This was accomplished despite spending $400,000 on litigation fees in the quarter. For the fiscal year, we spent nearly $2 million on litigation fees.

Needless to say, we expect to spend a great deal less on litigation in fiscal 2009 following the Diomed and VNUS Medical litigation settlements.

Operating income was $322,000 in the quarter. Excluding the litigation settlement charge, operating income was $7.1 million, or 15.1% of sales, the highest quarterly operating margin in company history and well ahead of the 9.9% margin one year ago.

Further, excluding amortization of purchased intangibles and stock-based compensation, in addition to the litigation charge, operating income is $10.2 million, or 21.7% of sales for the quarter. The comparable fourth quarter margin a year ago was 19%, excluding the inventory step-up related to the RITA acquisition.

This nearly two percentage point improvement is indicative of the success of our ongoing integration efforts and the cost savings from the acquisition of RITA Medical. At this point, it is fair to say that the integration of RITA Medical has been completed successfully, and we achieved all of the $9 million in cost savings that we expected.

Below the operating profit line, you'll note that other income declined by nearly $400,000 from a year ago, primarily as a result of lower investment returns. After income taxes are taken into account, the result is $519,000 in net income, or $0.02 in diluted earnings per share. Excluding the after tax costs of the VNUS settlement, net income was $4.7 million, or $0.19 per share, compared to $0.12 in earnings per share a year ago.

As noted in the release, non-GAAP adjusted income was $10.1 million in the quarter, or $0.41 per diluted share, which is a 28% increase on the prior year result. For the full year, non-GAAP adjusted income has totaled $30.8 million, or $1.26 per diluted share.

This slightly exceeded our original goal for the year and is a clear indication of the cash generating power of our business model and the success of our integration of RITA Medical.

Turning to the balance sheet and cash flow statement, we ended the fiscal year with cash and liquid investments of $78.3 million. This balance is after the $7 million litigation settlement payment to Diomed but not the $6.7 million payment to VNUS Medical that was made in June.

A total of $17.1 million in debt was outstanding at year end. As mentioned in the release, we generated $25.9 million of cash flows from operations in fiscal 2008, the highest in company history and considerable improvement over the prior year result of $8.8 million.

DSOs were 49 day sales outstanding in the quarter. And finally, I will note that the product inventories have declined by more than $5 million over the course of the fiscal year. A year ago, we started a program to improve the management of inventories. And this program has been very successful as you see on the cash flow statement.

I will now turn the call back to Eamonn.

Eamonn Hobbs

Thanks, Joe. Back in April, we reviewed our five-point plan to build consistent revenue growth, and our team has certainly made great strides toward implementing that plan.

Step one, I think the fourth quarter financial performance illustrates that we have improved our ability to forecast the trends of the business. Now, we're taking steps to address the impact of not continuously investing in the sales team to maintain maximum rep productivity.

For example, we found that our interventional product group revenues slowed significantly as average sales per rep exceeded $1.8 million. As I have noted in the recent past, we did not add enough sales territory since prior to the RITA acquisition in late 2006, as we wanted to integrate the sales forces before expanding. In retrospect, we should have continued to increase the sales territories to drive revenue growth more efficiently.

In the fiscal fourth quarter, the average sales per rep in the interventional products group was $2.4 million. In analyzing the data, it became apparent that some of our very best reps were overstretched when it came to serving accounts in the AngioDynamics way. They were carrying a bag that was far too broad in product bandwidth and servicing far too many customers to be very efficient.

To address this issue, as well as to capitalize on the growth potential of our product lines, we've launched an initiative to create three focused business units. We have divided our interventional products group into the Peripheral Vascular Division and the Access Division. As a result, total domestic sales territories for the two divisions have moved from 58 to 80. There are 41 territories in the Peripheral Vascular Division and 39 in the Access Division.

We have also added two regional managers and three new clinical specialists. When fully staffed, the increase in territories reduces the average sales per rep for both Peripheral Vascular and Access divisions to a much more manageable level. This brings our total USA sales force to 108 territories, supported by 14 clinical specialists and 14 regional managers.

I would like to point out that we are accomplishing all of this while maintaining our projected sales and marketing operating expenses between 27% and 28% of sales, which has been our historic level of sales and marketing expense as a percentage of revenue.

So, with the creation of the three business units, the Peripheral Vascular Division will be comprised of our venous, angiographic, PTA, drainage, and thrombolytic product lines. The Access division will be comprised of our dialysis, ports, and PICC product lines.

The third division is our Oncology/Surgery Division, which includes our RFA, embolization, and Habib product lines. NanoKnife, our IRE product, will operate under the Oncology/Surgery Division. But keep in mind that IRE is a platform technology that will eventually lead to products for all the business units that are far outside of NanoKnife.

Each division will be led by a Senior Vice President and General Manager with full P&L responsibility. In addition, each division has its own sales and marketing team and its own product development team. Sean Morris, who has been an award winning member of the AngioDynamics organization for eight years and was most recently our Vice President of Marketing, will now lead the Peripheral Vascular Division; while Rob Rossell, an 18-year veteran of AngioDynamics who has led our national account sales effort, will lead the Access Division.

We currently have a search underway for the leader of the Oncology/Surgery Division.To support the three divisions, we will share a variety of corporate functions, including operations and manufacturing, marketing services, international sales, advanced R&D and administration. As the three business units come up to speed, we are expecting our revenue growths to increase and approach 20% in fiscal 2010. And we are going to get there without increasing the percentage of our revenue allocated to sales and marketing expense. Again, that is anticipated to remain between 27 and 28% in fiscal 2009 and beyond.

Step two of our five-step plan, corporate accounts. Our five-point plan also called for us to focus on corporate accounts, GPOs, and IDNs. And during the fourth quarter, we signed our first contract with a major GPO, MedAssets, which is a multi-source three-year agreement for dialysis catheters and entered agreements with many IDNs as a result of this focus. These agreements provide our salespeople with a hunting license, which we believe will translate into additional revenues.

Step three, improve our R&D pipeline conversion efficiency. The progress with Centros, the publication of the RAPTURE trial and NanoKnife illustrates the progress we are making with product development. While we've had a temporary small setback with our Centros test market, the issue was totally related to a failure of a subcontractor unfamiliar to us that we had inherited. We are in the process of moving the manufacturing to a trusted partner. And we are still very excited about the full launch of Centros in December, as planned.

The good news is that the initial reaction from customers to the product was very positive. The doctors loved Centros. This reaction combined with our expanded sales team leads us to expect that we will have a very modest, immaterial impact to our fiscal 2009 topline results as the result of the delay.

We were very excited to announce the publication in The Lancet Oncology of the RAPTURE clinical trial, which was conducted to identify the feasibility, efficacy, and safety of percutaneous radiofrequency ablation, or RFA, of malignant lung tumors.

The result of the trial showed a high proportion of sustained complete tumor response in treatment with RFA. This multinational, seven-center prospective trial enrolled 106 patients that were considered to be unsuitable for surgery, radiotherapy or chemotherapy.

We believe that the results prove that RFA can treat patients with small non-resectable lung tumors with a very high degree of success. Since lung cancer is the single leading cause of cancer death, as the leader in RFA technology, we intend to advance the use of RFA as a very important treatment option for this very terrible disease.

I would like to now turn to a review of our plans for IRE, which we believe has the potential to become our largest product group within a few years. As we announced in April, the first six patients were successfully treated with our IRE system, with prostate tissue being resected with no side effects. This triggered our acquisition of the developer of the technology, Oncobionic.

We have branded the initial applications of IRE as NanoKnife and have begun rolling out NanoKnife to the surgical community as a surgical resection system. We're in the process of placing 20 NanoKnife systems with key thought leaders around the globe and began to build a strong database of very broad applications for soft tissue resection. We anticipate having 17 systems in place by the end of the current fiscal quarter, and the remaining three will be in place in September.

I should also note that we received word this week that a total of 15 patients had been treated with the NanoKnife, and the acute results of the additional nine patients mirror those of the first six treated back in April. We've also learned that the PSA test data from two of the first six patients has come in and represents outstanding results.

We've come to realize that NanoKnife is not just another thermal ablation modality, like RFA, microwave, or cryo. These ablation modalities destroy all the cells and critical structures in the targeted tissue, and this destroyed material remains in place for years.

The body struggles to remove the material, which is largely denatured proteins, by slowly and painstakingly attacking it from the outside because all the normal pathway is to remove damaged tissue have been destroyed.

NanoKnife is quite different in what it accomplishes. With NanoKnife, only the membranes of cells and the targeted tissue are affected, sparing critical structures, such as nerves, blood vessels, and the lymphatic system. This allows for the targeted cells to be removed by the body via the normal mechanisms and pathways, such as blood vessels and the lymphatic system.

So, unlike thermal ablation modalities like RFA, microwave, and cryo, the targeted tissue does not remain in place for more than a few days. The body actually resects the cells one-by-one and cuts them away via normal processes.

In a regenerating organ like the liver, the body will actually replace the treated cells. In animal models, we actually saw no scar in treated liver tissue two weeks post NanoKnife treatment. We're branding NanoKnife as surgery at the cellular level. And therefore, are positioning NanoKnife as the next generation in precision surgery. It is the next generation scalpel and will be applicable whenever and wherever a surgeon intends to resect any kind of tissue.

To get to this goal, we need to make investments in developing the clinical data that will drive market demand. To support this very exciting opportunity, we've increased our total R&D investment to 9.1% of total revenue in fiscal year 2009. Of which about 40% of this budget will be dedicated to IRE.

Historically, we have targeted 8% of revenue on R&D, and, while we will be increasing our investment during fiscal 2009, we expect to return to this level of investment in 2010.

The additional resources in fiscal 2009 will be focused on driving the generation of NanoKnife surgical resection in clinical data in a broad range of soft tissue areas, such as prostate, liver, pancreas, lung, kidney, brain, and others. Since NanoKnife will be compared to standard surgical resection, we do not anticipate the studies will require long follow-up periods.

We will be releasing NanoKnife in the USA in August and expect to obtain our CE mark in August. We've priced the NanoKnife generator at $395,000 in the United States and slightly higher in international markets. Consumables per procedure are priced at $3,000 to $9,000.

Because of the relatively long selling cycle, we would expect NanoKnife revenues to be only about $1 million in fiscal year 2009. This revenue generation is more likely to occur in Q4 than earlier this fiscal year. At the same time, in fiscal 2010, we believe NanoKnife will be a meaningful contributor and play a significant role in our expected approach to 20% year-over-year growth.

All totaled, between R&D, sales and marketing, the investment in NanoKnife and other IRE applications is expected to be approximately $0.13 per share in fiscal 2009.

Step four and five of our five-step plan have to do with the business development activities, namely to initiate Produce Lifecycle Management and to pursue tuck-in acquisitions. Product Lifecycle Management is necessary because some of our legacy products have evolved into market leading positions in markets that are experiencing single-digit growth. We are finding it more challenging to grow at faster rates than the market. In fact, we've become victims of our own success in these product areas.

With this in mind, we're reviewing strategic alternatives for certain businesses in favor of advancing faster growing product segments.

To spearhead these business development activities, we have brought Dave McDonald in as our Senior Vice President of Business Development to facilitate that effort. Dave will also be addressing Product Lifecycle Management and leveraging our asset base.

Please note that Dave's focus is on tuck-in acquisitions with near term revenue potential. And we aren't looking for any major acquisitions, as we have plenty of high value assets to manage. As a result, we anticipate that in fiscal 2010, our amortization expense as a percentage of total revenue will decline.

During the past few weeks, we have also taken steps to foster our growth by making much needed investments in our infrastructure. We've significantly strengthened our international sales team through the creation of a new position of VP of International IRE Sales to help drive NanoKnife sales in international markets through our current distribution channels. Agustin Gago has joined the team in this new position. Agustin is a proven performer in the international markets.

With the Diomed acquisition, we've also acquired additional salespeople in Latin America and the UK, which adds to our international team. And we expect that company-wide, our highest revenue growth will come from international. And as I just mentioned, we have also created the new position of Senior Vice President of Business Development. Dave McDonald has joined our team in that role, and he brings a wealth of experience in strategy, M&A, and general deal-making.

Dave knows our company very well, as he assisted us with our IPO, secondary in the RITA acquisition. In addition to his other responsibilities, Dave will be looking at the possibilities to license certain IRE technology to other medical device manufacturers for markets and indications, where it wouldn't be cost effective for us to establish our presence.

Because of the outstanding opportunities in IRE, we've made a strategic decision to hold the line on our bottomline profits with the prior year and to invest the additional profits into IRE development and marketing.

If it weren't for the additional strategic investment in IRE, the guidance we are providing today, would have exceeded analysts' current estimates for the year. In addition, we still expect to generate substantial operating cash flow and EBITDA during fiscal 2009 and add prior to any acquisitions to our fiscal year end cash position of $78 million.

What we are presenting you today is our plan to approach 20% plus revenue growth and increase returns to shareholders. We are very excited about the possibilities, and I look forward to updating you on our progress.

Now, I would like to turn the call back to Joe, so he can provide you with our fiscal 2009 guidance and some preliminary thoughts on fiscal 2010.

Joe Gersuk

Thanks, Eamonn. As far as guidance for fiscal 2009, we anticipate net sales in the range of $205 million to $210 million, which implies a 23% to 26% rate of growth. The Diomed acquisition, which closed on June 18th, is expected to contribute $19 million to $20 million in sales this fiscal year.

This reflects Diomed's loss of momentum during the bankruptcy and sale process that occurred over the past several months, resulting in our lower expectations. The guidance also includes $1 million in sales of our first IRE product, NanoKnife. This too is prudent and reflects our expectation of a long sales cycle for this product.

We expect gross margins to be in the 60% to 61% range, or close to the gross margin of 61.6% that we reported in fiscal 2008. This reflects the significantly increased sales mix that the vein therapy products will represent in 2009 following the acquisition of Diomed. We've raised prices to compensate for royalty payments to VNUS. We expect to return to 1 to 2 percentage points improvement in annual gross margin in fiscal 2010.

Operating expenses are forecasted to be approximately $102 million to $106 million. As Eamonn mentioned, we're dedicating significant R&D resources to the development of IRE technology this year. In addition, we'll begin to ramp-up our NanoKnife sales and marketing activities as the year progresses. Also, as detailed earlier, we intend to expand our Peripheral Vascular and Access sales forces.

Even with these noteworthy investments, we anticipate generating GAAP operating income of $21 million to $22 million in fiscal 2009, representing a 31% to 37% increase over the prior year result, or a 5% to 10% increase, excluding the 2008 litigation settlements.

Our fiscal 2009 GAAP earnings are expected to approximate $0.55 per share, which is consistent with the prior year result absent the litigation charges, despite the impact of the IRE and sales force expansion initiatives.

We expect the Diomed acquisition to have a $0.01 per share dilutive effect on fiscal 2009 results. However, there will be some one-time integration costs absorbed in the first or second quarter that will reduce EPS by $0.04 to $0.05 per share. Thereafter, we expect the acquisition to be accretive to earnings every quarter.

Finally, we believe the significant investments we are making in IRE and the expansion of the sales force will enable us to accelerate organic sales growth to approach 20% in fiscal 2010 and for operating income to increase by 2 to 4 percentage points in that year.

I'll now turn the call back to the operator to start the Q&A.

Questions-and-Answers Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from the line of Phil Nalbone with RBC Capital Markets. Please go ahead, sir.

Phil Nalbone - RBC Capital Markets

Hi, guys. Congratulations on such a strong finish to a very turbulent fiscal year.

Eamonn Hobbs

Thank you very much, Phil

Phil Nalbone - RBC Capital Markets

Looking ahead, the question really pertains to your decision here to ramp-up the investment for NanoKnife. Everything that I've seen in the preclinical literature and my discussions with physicians would suggest tremendous promise here. But, to date, we have 15 patients as part of a prostate cancer pilot study.

You're ramping up spending and building a lot of infrastructure around this product opportunity in sort of one fell swoop.The question is, why not take a more cautious, gradual approach to your investments in this area and sort of spending commensurate with additional progress in clinical development and further observations about the potential here?

And the second part to that question is really, what happens here if IRE doesn't pan out quite the way you're expecting? What can you do to restore the costs structure to a more normalized pace?

Eamonn Hobbs

Well, in answer to your first question, Phil, why not be more cautious? Of course, we have access to a lot more information than is public. So, needless to say, we are feeling extremely comfortable with the potential for the NanoKnife and the IRE technology. The results to-date have been really exemplary, very comforting from the perspective of meeting and exceeding our expectations. We are very, very comfortable with the level of investment that we are putting forward.

With regard to your second question, what happens if it doesn't work out? The answer is that our investments at this stage really center around R&D programs that can be shifted to other things. So we really have not burnt any bridges at all with regard to moving to other types of products that we have in the pipeline. The doomsday scenario with the IRE in general, I suppose, is that the infrastructure we have in place is sales and marketing oriented and can sell whatever we give them along the lines of the same customer.

So, we are not taking that big a risk. In fact, we've considered much larger risks. And, really, the limiting factor here was, we think we've created the perfect balance between what we would like to do and what we practically can do. But at the end of the day, we are very, very, very excited by all the uniform interest in IRE. We have 60 of the top sites in the world for cancer therapy and benign disease therapy, very, very interested in actually, chopping it a bit to take on NanoKnife and put it through its paces. So, I guess we are pretty confident.

Phil Nalbone - RBC Capital Markets

Great. Thanks for the thoughtful response, and congratulations on the addition of Dave McDonald.

Eamonn Hobbs

Thanks very much.

Operator

Thank you, sir. Our next question comes from the line of Jason Mills with Canaccord Adams. Please go ahead, sir.

Jason Mills - Canaccord Adams

Hi, Eamonn and Joe, congratulations, as well, on a good quarter...

Eamonn Hobbs

Thanks you, Jason.

Jason Mills - Canaccord Adams

….out the year. Eamonn, I want to follow up on Phil's question, a very thoughtful question from him. And your answer included some thoughts on some information that perhaps we don't have access to that you do. Perhaps, you could elaborate on that because it would seem that any clinical data or patients that have been done on NanoKnife either have been reported on or should be.

So that would imply we should see additional data sets from the IRE technology going forward. Perhaps, you could give us an idea of what you know that makes you excited, if you are in a position to do that now, or perhaps, when we could expect to see additional data sets published in the public domain.

Eamonn Hobbs

Well, the data that we find compelling is that, so far, the extensive preclinical work that we've done has been mirrored exactly as we would have expected in the human clinical work. So the first 15 patients that we have done now have presented absolutely zero curve balls that one would expect, if they were going to happen with regard to unexpected events from our extensive preclinical experience.

We have also brought into the fold a tremendous amount of thought leaders in the area of surgical resection, ablation, focal therapy, et cetera, et cetera. Everybody in the area that really is a thought leader and gotten their input as to the potential for this technology. And the ones that have witnessed the technology in use have been extraordinarily excited. And, if you will, they've become believers upon seeing it for themselves.

Well, I, frankly, have never been involved with anything that's been this consistently a performer. There is always something. And we have yet to find what that is with NanoKnife.

Jason Mills - Canaccord Adams

We will look forward to more data sets being published. Do we have an idea of either trade shows or publications, Lancet, et cetera, perhaps even moving up the curve in terms of the publication reputation going forward over the next, let's call it, 12 months in terms of data sets published? It is the first question. And I just have one more follow-up, and I'll get back in queue after you answer.

Eamonn Hobbs

Sure. With the rollout of the 20 NanoKnife systems to thought leaders, I would expect that, by our next conference call, we're going to have a tremendous amount of surgical resection data that is going to be anecdotal in itself. But it will give some insight into interim results in multiple protocols that are ongoing for a broad base of surgical resection trials.

For instance, I would expect that by our next call, we had have made initial progress on a protocol in liver, lung, potentially uterine fibroids, certainly, a lot more prostate cases for prostate resection, potentially brain and others, as well kidney.

So, I think there is going to be a real ramp-up in the amount of independent clinical data that is going to start to come out. And we are going to do our best to present that. Of course, keeping in mind that, the investigators are going to want to publish that. So we will walk the line as best we can. But, clearly, we want to get the information out as quickly as we can.

Jason Mills - Canaccord Adams

That's great. And just a follow-up and I promise, I will get back in queue. Is the technology of the NanoKnife the console and the consumables, the entire package as it's currently being shipped to the 17 and then, ultimately 20 over the September timeframe. Is this package, if you will, commercial ready to the extent that, as you roll into fiscal 2010 and you do expect, I think in your words, a meaningful contribution to that 20% growth from IRE?

So will we see or do you need to do significant or even somewhat minor tweaks or changes to the technology, either the console or the consumables to get it where you want it to be to launch it sort of to the masses, if you will, beyond 2009?

Eamonn Hobbs

No. I think it's ready to go. Commercially viable the way it is today. It has been released for commercial distribution as it is today. Now, having said that, I mean all products evolve and I would expect that there will be a NanoKnife II and III and IV, as the years go by with added bells and whistles, but it is ready to go as it is.

Jason Mills - Canaccord Adams

Great. Thanks, Eamonn.

Eamonn Hobbs

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Brooks West - Craig-Hallum Capital

Hi, guys.

Eamonn Hobbs

Hi, Brooks.

Joe Gersuk

Hi.

Brooks West - Craig-Hallum Capital

A couple questions here. Joe, can you give us some idea, as you breakout into these business units for '09, kind of expected growth rates within these categories that gets us to your revenue?

Joe Gersuk

Sure. As we said, the three are Peripheral Vascular, Access, and Surgery/Oncology. And, I would mention that we will be reporting in segments starting in the first quarter on our filings and that we will also be offering some historical perspective. So I will offer the baseline fiscal '08 numbers.

The Peripheral Vascular business was about a $64 million business in fiscal '08. That includes the venous, angiographic, PTA, drainage, and thrombolytic products. The Access group was also about a $64 million business in '08. That includes dialysis, PICC, and ports. And the Surgery/Oncology was $38 million in '08, and that, of course, includes the RFA, the chemoembolization, Habib, and now the NanoKnife product in '09.

In terms of our growth expectations, Peripheral Vascular, which will have the benefit of the Diomed acquisition in it, should grow about 40% to 45%. Access should grow 12% to 15%. And Surgery/Oncology should grow 18% to 20% over those figures. And that gets you to the range of about $205 million to $210 million, and overall revenue growth of 23% to 26%.

Joe Gersuk

Okay. Great. Thank you. And Eamonn, going back to your five-point plan, on the national accounts, with Rob switching over to manage the, what is it, the Access Division, how are you going to approach that? Is that going to stick with him as he goes into Access? Or are you going to have some other centralized position to pursue the national accounts?

Eamonn Hobbs

That is going to stick with him and one of his direct reports, because the vast majority of our national account activity centers around dialysis and Access products.

Brooks West - Craig-Hallum Capital

Okay. And, with the MedAssets contract, can you give us an idea of the scale of that?

Joe Gersuk

Well, the MedAssets is one of the biggest GPOs in the country. Its very, very hard to translate that into what it means as far as upside revenue. But, you can certainly measure it in millions of dollars.

Brooks West - Craig-Hallum Capital

Let me ask it a different way. I mean what do you guys targeting for a national account number in terms of what's the potential market? What do you think is achievable in the next year or two?

Eamonn Hobbs

Well, the national accounts, the GPOs and the IDNs, the corporate accounts, the contract business is the majority of the marketplace that we have really not been a player in the Access and the dialysis products, or any of our other products, for that matter. In fact, we've historically run away from that business because we felt there was enough low hanging fruit that we could deal direct and go around these contracts when possible and keep growing our business.

Well, of the non-contract business, we've reached a point where we have gotten a large share. And now, as of last year, we decided we had to go after the contract business. So the upside here is extremely significant. For example, in PICCs and ports, for instance, Bard is the market leader with the better part of a 60% to 65% market share in the United States, most of that being contract based. We have about a 20% market share. The vast majority of that being non-contract based. So you can see the magnitude of the market that we are going after.

And we think we have the right tools to do it with better mousetraps in our PICCs and ports. They stand up very, very well in the clinical environment. The customers prefer them on many occasions. So, we think it's well worth our while to go after the contract business.

And it was also a bit counterintuitive to us to believe that contract business could be available at a selling price. That would still be attractive to us. And, in fact, that Bard doesn't discount very much in their contracts they have been awarded. So it's a very, very attractive piece of business, as well as being very large in volume.

Brooks West - Craig-Hallum Capital

Okay. One last question, I guess, on what investors kind of think about as your legacy business, which would now, I guess, fall into peripheral vascular. Reflecting on your last answer, that's where we have had slowdowns. How much of that is really a new phenomenon in the market, increased competition and anything else?

And how much of it is just not having enough guys on the street, not really going after GPOs? And when you think about that lower growth portion of the business, what can that really be? I guess you have given us the growth rate here, I guess it is 45. Breaking out Diomed, I mean, what is the growth of that business in '09?

Eamonn Hobbs

Well, we think that the growth is about 10% to 12%....

Joe Gersuk

In peripheral vascular

Eamonn Hobbs

…in peripheral vascular

Brooks West - Craig-Hallum Capital

Okay, yeah.

Joe Gersuk

Absent the acquisition impact.

Eamonn Hobbs

Yes. And we think that's appropriately conservative, because we think there is upside based on the dramatically increased focus and dramatically reduced average sales per representative by making the sales force expansion. But we do not want to count those chickens before they are hatched. And I think an excellent example would be in our IPG sales force last year, not only did they have a volume of business that was unwieldy, but also, the product bandwidth was tremendously taxing in that.

Why would you spent time really fighting the battles to sell angiographic catheters or PTA or drainage, when you could focus on Smart Port? It was very, very hard to manage the guys and incentivize them in such a way that they would sell the whole bag. So the legacy products, I think, are going to benefit tremendously from the added focus of the SBU structure.

Brooks West - Craig-Hallum Capital

Great. Thanks, guys.

Operator

Thank you, sir. Our next question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford - Raymond James

Hi. Good afternoon, guys.

Eamonn Hobbs

Hi, Jason.

Jayson Bedford - Raymond James

A couple of questions. Just in terms of the new business unit structure, besides ahead of oncology sales, what is left in the build out? And then, I think you mentioned 108 reps in the Access and Peripheral, how many in Oncology? And, then, how does that compare to, say, three or six months ago?

Eamonn Hobbs

Well, for the most part, the SBUs are filled out with regard to all positions except for the -- there are a few odds and ends. But the SVP General Manager is a big position to fill and we have a retain and recruit going on since May to fill that position. So I am hopeful, we will have it filled before the next time we talk.

As far as the Oncology/Surgery Division, they have 28 reps and four clinical specialists and four regional managers. The Access Division has 39 territories, and the Peripheral Vascular has 41. And the total complement for those 108 territories are; we have 14 field clinical specialists and 14 field regional managers. And then, we shouldn't forget our international sales force, which we have 15 people in that.

Jayson Bedford - Raymond James

Okay. And I guess, simply, in the last three months, how many salespeople have you added?

Eamonn Hobbs

We started the sales force build out in April/May timeframe. And we have added about 12 or 13.

Jayson Bedford - Raymond James

Okay. That's all. I thought it was more. And then, just a quick question for Joe. Joe, you mentioned $0.04 to $0.05 in restructuring costs related to the Diomed acquisition. Is that assumed in the $0.55 guidance?

Joe Gersuk

Yes

Jayson Bedford - Raymond James

Okay.

Joe Gersuk

Just one-time costs for rebranding and alike.

Jayson Bedford - Raymond James

Great. Thank you.

Operator

Thank you, sir. Our next question comes from the line of Greg Brash with Sidoti & Company. Please go ahead.

Greg Brash - Sidoti & Company

Hi, guys. Thanks for taking my call.

Eamonn Hobbs

Hi, Greg

Greg Brash - Sidoti & Company

Just a little bit of questions on Diomed here. When do you plan to sell both NeverTouch and the Dio kits. When do you think you can move production of these kits in-house? I know you would get a nice gross margin boost by doing so. And are there any plans to raise the prices on your kits now that you have this royalty payment?

Eamonn Hobbs

Well, we've already raised the prices on the kits commensurate with completely compensating for the royalty payments. So our gross margin in the US on kits is going to be at least, at or above where it was the year before. The impact to our overall gross margins really has to do with the fact that the volume has nearly tripled, which is a mix issue.

We are going to offer both types of kits. And we are definitely going to look to reduce costs and increase gross margins up to the low-to-mid 60s by vertical integration and by continuing to innovate and raise the bar in performance. So there may very well be an evolution towards a unified product. But, we haven't made that decision yet.

Greg Brash - Sidoti & Company

How long does it take to move those products in-house? And is that something that's included in your guidance?

Eamonn Hobbs

It is not included in the guidance. The team is committed to get the gross margins up to the low-to-mid 60s over the next two-year period.

Greg Brash - Sidoti & Company

Okay. And then I don't know if you mentioned the R&D, what percent that is of revenue. And then, I was just curious, with IRE. How many studies are you funding here? What are the sizes? And when can we expect to see data?

Eamonn Hobbs

The R&D investment corporate wide is 9.1%, which is slightly higher than our normal target of 8%. And we think it will go back to 8% in fiscal 2010 and thereafter. So, this is sort of an one-time bump up to handle the driving clinical data. The exact number of clinical programs is a work-in-progress. Because, although, we're putting 20 units out to drive clinical data, we are not going to have 20 independent studies. There will be collaboration between some of the sites on different studies. But there will be, I would say, half a dozen going by the end of the calendar year.

And, as I mentioned earlier, I would expect that we would be presenting interim data on those studies at every opportunity we can. Since we are out marketing this system, we are really driving the clinical data for marketing purposes, as well as advancing the science here. So, we're going to be looking to leverage it as it develops.

Greg Brash - Sidoti & Company

Okay. Thanks, Eamonn.

Eamonn Hobbs

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Larry Haimovitch with HMTC. Please go ahead.

Larry Haimovitch - HMTC

Good afternoon, gentlemen.

Eamonn Hobbs

Hi, Larry, how are you?

Larry Haimovitch - HMTC

Terrific. Eamonn, yourself?

Eamonn Hobbs

Very well, thanks.

Larry Haimovitch - HMTC

I have few, not too many questions for you. I want to harass Joe a little bit. Joe, I am looking at balance sheet questions. One, the year end cash, is that approximately what we are now? Are all the cash payments, litigation and all the bills and expenses behind us, and the cash balance is a real balance, so to speak?

Joe Gersuk

Well yes, the balance is real, but…

Larry Haimovitch - HMTC

Not a reason. That's it, it's not a real. Are there any other things that are not there that were post the year?

Joe Gersuk

Yeah, no it does. The one that is not included there is the VNUS Medical settlement, and that will be about $7 million that actually was paid in June. This, of course, is a May 31st balance sheet.

Larry Haimovitch - HMTC

Right.

Joe Gersuk

And there would be a subsequent payment in August of about $10 million associated with the convertible debt instrument that we took on with the RITA acquisition.

Larry Haimovitch - HMTC

Okay. That's why you have it in the liabilities or current portion of long-term debt, because you are going to be paying it fairly soon?

Joe Gersuk

Right.

Larry Haimovitch - HMTC

So cash balance is actually, we adjust for those two before any cash generated in the current quarter, it's roughly $60 million.

Joe Gersuk

Well, yes, those two items. That's right.

Larry Haimovitch - HMTC

Okay. And then, on the receivables and inventories it was interesting to me to see your receivables up 30%, which seems about right, considering your sales were up obviously, not quite that strong. But then your inventories were down significantly. I was trying to understand why receivables would have been up so much and inventories down so much.

Joe Gersuk

Sure. Well, the receivables were, as we look at it, in terms of day sales outstanding, and they stood at 49 days outstanding. So that was quite a reasonable level. But as I mentioned in the comments, we have actually had a program going to work very hard to manage the inventory balances better. And we've been very successful with that. Primarily, the inventory balances here in Queensbury, which is about two-thirds of our inventory. The other third being down in Manchester, Georgia.

And we just found, as we continue to peel back the onion, we found a lot of ways to buy less inventory and work balances down. And the only requirement we set is that we could never have a stock-out and did not want to ever impact on customer service. And I think we have been able to that this past year to get it down to the level you see. I don't think it's going to go down $5 million next year, but I think we've established some good principles that will stand us in good stead in the future with inventory management.

Larry Haimovitch - HMTC

And going back to the cash for a second, the press release is obviously very thorough. You provide some nice guidance for '09 and '10. Did you provide any guidance on prepared remarks, because I was a little bit late jumping in, on cash flow expectations for fiscal '09?

Joe Gersuk

Well, we did indicate EBITDA expectations at $33 million to $35 million.

Larry Haimovitch - HMTC

Okay.

Joe Gersuk

That is as much as we offered with respect to…

Larry Haimovitch - HMTC

Is that a reasonable proxy, Joe, of cash generation, sort of, ballparkish, so to speak?

Joe Gersuk

Yes. Well, it's before, of course, any normal capital expenditures or…..

Larry Haimovitch - HMTC

Yes.

Joe Gersuk

…anything else, of course.

Larry Haimovitch - HMTC

Yes. And your CapEx are pretty low though?

Joe Gersuk

Correct.

Larry Haimovitch - HMTC

Yes. And then, finally, I think it was Brooks who asked the question earlier about the different divisions. Are you going to breakout, now that you have gone to three SBUs, the product sales by the three SBUs as opposed to interventional versus oncology as we go forward?

Joe Gersuk

Yes, we will. Both sales and gross profit and, actually down to a fully allocated operating income level for the three business units.

Larry Haimovitch - HMTC

Well, on behalf of the analysts, thank you. And on behalf of all your competitors, thank you, too. They love me, of course, don’t they.

Joe Gersuk

Yes, indeed.

Larry Haimovitch - HMTC

Okay. I'll jump back and give. Congrats on all the progress, guys.

Eamonn Hobbs

Thank you.

Joe Gersuk

Thank you.

Operator

Thank you, sir. Our next question is a follow-up question from the line of Jason Mills. Please, go ahead.

Jason Mills - Canaccord Adams

Thanks for taking the follow-up guys. I just wanted to clarify or make sure I understand adjacent about first question, Joe, on the charge associated with Diomed. So your guidance of $0.55 includes $0.04 to $0.05 from Diomed. Could you just remind me because, supposedly I guess I didn't catch it clearly enough. What exactly that is and confirm that that is part of the $0.55 and it will all fall in the first quarter. Is that all right?

Joe Gersuk

Well, are we talking in fiscal '09?

Jason Mills - Canaccord Adams

Yes.

Joe Gersuk

The settlement payment to VNUS will take place. But are you talking about the Diomed…

Eamonn Hobbs

Accretive or dilutive aspect.

Jason Mills - Canaccord Adams

Yes. The dilutive aspect of it.

Joe Gersuk

Yes. That is included in the $0.55.

Jason Mills - Canaccord Adams

And how much is that again?

Joe Gersuk

That was $0.03 or $0.04. Well, it's in the first couple quarter, as we said.

Eamonn Hobbs

That's right. It is $0.01 dilutive on a year.

Jason Mills - Canaccord Adams

Okay.

Eamonn Hobbs

And it's only dilutive in Q1 and then becomes….

Joe Gersuk

Yes.

Eamonn Hobbs

So it nets out to about $0.01.

Jason Mills - Canaccord Adams

Okay. So the $0.55 is inclusive of about $0.01?

Eamonn Hobbs

That is right.

Jason Mills - Canaccord Adams

And the $0.05 was associated with last year, right ? Okay. I got it now. And then the last question I have is with respect to your R&D budget, Eamonn and Joe. So if I am understanding this correctly, you are looking at the midpoint of your guidance at about $19 million in spending this year on R&D. And assuming, as Joe mentioned, approaching 20% in 2010, 20% growth off that midpoint is an 8% R&D budget. It's about $20 million. So is it about accurate to assume that, within $1 million, you will be spending similarly on the R&D franchise in 2010 that you plan to spend in 2009?

Eamonn Hobbs

Yes. We think that's exactly the way it will rollout.

Jason Mills - Canaccord Adams

Okay. So what I just want to make sure of is, it seems like the R&D franchise should grow slower if you are growing 20%. But I guess, in my own mind that seems a little bit conservative, that perhaps we could see more growth in 2010. What am I missing? And what am I not getting clearly enough to be able to wrap my mind around spending the same amount on R&D in 2010, especially giving that IRE will still be relatively in its infancy in 2010, having done roughly $1 million in 2009. So you are probably going to be driving that, I would say.

Eamonn Hobbs

Yes. This year about 40% of that $19 million is going into IRE.

Jason Mills - Canaccord Adams

Okay.

Eamonn Hobbs

The reason for that is really a big bolus going into driving these clinical programs going forward.

Jason Mills - Canaccord Adams

Okay.

Eamonn Hobbs

As these clinical programs progress, the amount of investment we are going to need to make to generate more clinical data, we expect to decline because it will take on a life of its own because this is an approved product. And these are resection studies. So we're not out trying to prove five-year survival data. We are out trying to show that this is a better scalpel. So the clinicians will take this on with a life of its own and start doing their own studies. And we expect it to evolve much more alike that.

And the amount of investment that we're putting into, in fiscal 2010 into IRE should be a lower percentage of the overall R&D budget, for a NanoKnife anyway. There will be other things that may pop up. But the net-net is we went through a pretty detailed review of what the R&D budget was going to look like in 2010 and felt that it could live at 8% of revenues, assuming that we're growing at something close to 20% revenue growth.

Jason Mills - Canaccord Adams

Okay. So nominally, it sounds like, Eamonn, that you'll be spending less not only as a percentage of that $20 million on IRE, but nominally it would stand to reason, given what you said, that you would be spending less on IRE in 2010 as well, right?

Eamonn Hobbs

Yes.

Jason Mills - Canaccord Adams

Okay.

Eamonn Hobbs

Yes. On the R&D side. I would expect marketing expenses will ramp-up as sales do.

Jason Mills - Canaccord Adams

Okay, great. Thanks, guys.

Operator

Thank you, sir. And that does conclude our question-and-answer session today. I'd like to turn it back to management for any closing remarks.

Eamonn Hobbs

Well, I would like to thank you all for your attention today. We look forward to updating you on our progress and appreciate your interest in AngioDynamics. Have a great evening. Thanks very much.

Operator

Ladies and gentlemen, this concludes the AngioDynamics fourth quarter fiscal 2008 conference call. If you would like to listen to a replay of today's call, please dial 303-590-3000, or 1-800-405-2236 entering passcode 11117392. Once again, if you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 entering passcode 11117392. ACT would like to thank you for your participation. You may now disconnect. Have a pleasant day.

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