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Executives

Joe Newcomb - VP and General Counsel

Josh Levine - President and CEO

Mike O’Neill - VP and CFO

Ed Northup - VP and COO

Analysts

Frank Pinkerton - Banc of America Securities

Tom Gunderson - Piper Jaffray

Peter Bye - Jefferies & Company

Eli Kammerman - Cowen & Company

Greg Gilbert - Merrill Lynch

Larry Biegelsen - Wachovia

Gary Nachman - Leerink Swann

Anthony Vendetti - Maxim Group

Julie Hoggatt - Noble Financial

Jonathan Block - SunTrust Robinson Humphrey

Edward Han-Burgess - Raymond James & Associates

Amit Hazan - Oppenheimer

Mentor Corporation (MNT) F1Q09 (Qtr End 06/27/08) Earnings Call July 31, 2008 5:00 AM ET

Operator

Welcome to the Mentor Corporation's financial results for the first quarter and fiscal year 2009. At this time all participants are in a listen-only mode. Later on during the program there will be an opportunity to ask questions. (Operator Instructions). Please note, today’s call is being recorded.

At this time, I would like to turn the call over to Mr. Joe Newcomb, Vice President and General Counsel for Mentor Corporation.

Joe Newcomb

Good afternoon everyone, and thank you for joining us today. 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 31st, and when we make reference to any quarter or year today on the call, we will be referring to our fiscal year unless otherwise noted. During this call, we will discuss, among other matters, our financial results for the first quarter ended June 27, 2008.

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 financial results for the first quarter and 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 would like to turn the call over to Josh Levine.

Josh Levine

Thanks, Joe. Good afternoon everyone and thank you for joining us. As we reported in today’s press release, in spite of a weak domestic economic environment, Mentor generated record net sales of $105.5 million in our first quarter. I would like to take a few minutes to highlight some of the key drivers for the quarter.

We are seeing improved international revenue momentum as a result of our strategic focus to deploy greater resources on that side of our business. We have been communicating our belief about the growth opportunities that are available to us in the international market, since our acquisition of Perouse Plastie.

As you may recall, the strategic intent of this acquisition was to broaden our international product offerings, provide options for segmented branding strategies, and to establish a platform that would improve our positioning in key markets. We are seeing the tangible benefits of these capabilities starting to play out, in terms of market share gains.

In addition to the positive impact of Perouse, during the quarter we continued to build out and strengthen our international marketing infrastructure, and we now have marketing resources dedicated solely to this business.

Another growth driver during the quarter was the reconstruction business. As you may be aware, this segment of our surgical breast franchise is not dependent on the health of the US economy and has continued to provide steady growth.

From a product portfolio standpoint, we are well positioned in this market segment, and have expanded our portfolio with products that have increased our selling time and presence in the operating room. An example is NeoForm, which our dermis tissue sling used in reconstructing procedures.

On the expense side, we have made, and will continue to make, sales and marketing related investments in domestic MemoryGel conversion, and programs designed to help surgeons grow their practices. As I stated, during the quarter we also invested in strengthening of our international marketing capabilities.

Before I turn the call over to Mike, I would like to give you an overview of the quarter’s activities with respect to our first dermal filler in the US, Prevelle Silk. Prevelle Silk is the first in our family of hyaluronic acid based dermal filler products, all containing lidocaine. Prevelle Silk is a soft for giving filler with minimal bruising and swelling post treatment. It has also demonstrated significantly increased patient comfort in the PMA study.

While it is early in the selling process, we are pleased with the reception that this product has received. We have so far been focused on product sampling and creating awareness about the applications for this product with the primary goal of ensuring adoption in targeted few accounts.

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

Mike O'Neill

Thanks Josh. As required on the generally accepted accounting principles, the operating results to that discontinued businesses are reported below net income from continuing operations. Unless explicitly noted, my comments today will cover our continuing operations.

We finished the first quarter with sales of $105.5 million, an increase of 10% over the $95.6 million in the first quarter of 2008. This represents our first quarter ever since the divestiture of our urology business, with sales exceeding $100 million. The quarter includes $6.2 million of sales of Perouse products and $1.6 million of positive currency effects.

As a reminder to everyone, we acquired Perouse at the beginning of Q2, 2008. Therefore, excluding the effect of the Perouse acquisition, our growth rate was 4%. Further excluding the effects of foreign exchange, our growth rate was 2%.

Now, I will walk you through some of the results by product franchise. Breast aesthetic sales were $93.9 million in the first quarter, an increase of 11% over sales of $84.5 million in the first quarter of fiscal 2008.

Our domestic breast aesthetic business was flat year-on-year, with procedure volume declines being offset by the price impact of MemoryGel conversions and strong reconstruction sales.

Conversions from saline to MemoryGel represented approximately 45% of our domestic units for the quarter. International sales increased significantly over the prior year.

Perouse products contributed $5.5 million of growth in the first quarter with strong leverage occurring from Mentor's broad distribution channels. Sales of liposuction equipment and disposables were $3.7 million for the first quarter, down slightly from last year at $4 million.

Sales of our other aesthetic products, which include our facial products for the first quarter, were $7.9 million. This category does include $700,000 worth of Perouse products, not captured within Breast aesthetics.

In an effort to streamline our prepared remarks, starting with today's call and going forward, I am not going to walk through each line item of the P&L, as this information can be found in our earnings release text.

Instead, I will be focusing my comments to those items that we feel require additional commentary. Specifically, relating to the quarter-over-quarter comparison it is important to recognize the differences between last year’s quarterly results and this year's comp performance. In comparing year-to-year performance it should be remembered that Q1 FY'08 was an exceptionally strong quarter and predates our acquisition of Perouse Plastie in July of 2007.

Our quarter-to-quarter reflect both the revenues and expenses associated with the Perouse business. With respect to gross margin, last year's quarter was positively impacted by the mix of our business between the US and international, in addition to a number of other favorable impacts.

Our selling, general and administrative spending in Q1 FY'08 was substantially below Q1 FY'09 levels, as we now seek to expand our international presence and strengthen our core capabilities to support the breast implant business and our entry into facial aesthetics.

Of particular note, below operating income, interest income has declined by $4.2 million. The impact of that share repurchase program in FY'08, and a corresponding reduction in cash balances that drove our interest income, have had negligible impact, when comparing EPS on a year-to-year basis.

In general our gross margin and expense ratios in the current quarter were in line with the annual guidance that we have provided. We reported diluted earnings per share from continuing operations of $0.40 in the first quarter of fiscal 2009, compared to $0.48 per share in the first quarter last year.

Turning to our cash position and cash flow, we reported cash and marketable securities of a $106 million as of June 27, 2008, a slight decrease from our March 31, 2008 balance of a $110 million. For the first quarter our operating cash flow from continuing operations was approximately $18 million. Depreciation and amortization were approximately $4 million and capitol spending of milestone payments were $15.2 million.

We reported inventory and net account receivable balances of 51.3 million and $85.9 million respectively versus prior year-end balances of $49.9 million and $82.1 million.

Our days supply and days sales outstanding metrics are not materially different than Q4 of FY'08. Finally, we are affirming our full year FY'09 guidance.

Thanks and now Ed will provide a review of some product development programs.

Ed Northup

Thanks, Mike. Starting first, with our breast aesthetics pipeline, as we reported last quarter, the PMA application for our contour profile gel anatomical breast implant, remains under active FDA review. It also remains to be seen whether or not the FDA will require an expert advisory panel to review this PMA.

Moving on to our dermal filler programs, we are continuing to advance the build out of our dermal filler portfolio. During the quarter, we announced the launch and commencement of sales of Prevelle Silk in the US, the first of our Prevelle family of HA dermal fillers with lidocaine. We can report that the presence of lidocaine has demonstrated a more comfortable treatment experience for our patients. Multiple international registrations are underway for this product and CE approval is anticipated in the near term.

For Prevelle Shape, formally referred to as Puragen Plus, our PMA is currently under review by FDA, and we continue to believe this product will be approved in the fourth quarter of fiscal 2009.

We continue to make progress in our development of our next generation HA dermal filler, Prevelle Volume, formally DGE. We completed follow-up for this study in this month, and we expect PMA submission in fiscal Q4, 2009.

And finally, a quick update on our Botulinum Toxin project; we have now completed enrollment in all three of the Phase III trials required to support the cosmetic indication. The first of these, a randomized study with six months follow-up, is fully completed and in the analysis phase. We expect a steady report for this phase to be completed and submitted to the FDA in fiscal Q2, 2009.

Likewise, the second study, a randomized repeat-dose trial, is in the follow-up phase with completion anticipated in fiscal Q4, 2009. We expect to file the BLA in Q3, fiscal 2010, and approximately one year later to have the approval.

The last of the three studies, a three-year open label repeat-dose safety study, is in the follow-up phase and will provide supplemental safety data, which will be resubmitted to the FDA at a date subsequent to the filing dates that I previously mentioned.

With the completion of the enrollment in Phase I of the torticollis/cervical dystonia study, we are in the follow-up phase in the early stages of data analysis. Early clinical results are encouraging, and are being used in the design of the next phase of the clinical study.

Construction of a 37,000 square foot manufacturing facility in Madison, Wisconsin; is essentially complete, with most major equipment in place, and commissioning and validation activities currently underway.

With that operator, I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). At this time, our first question comes from Frank Pinkerton with Banc of America Securities.

Frank Pinkerton - Banc of America Securities

Hi. Thank you for taking the question and the first one on the finance side. Can you please speak to SG&A? As it looks like we have come into a period where the organic sales growth is coming in a little bit. I know there are expansions in Europe, but what is the possibilities of controlling or leveraging SG&A down in the US or in other ways to continue to keep the cash flow up?

Mike O’Neill

Yeah I think, we communicated when we came out with guidance around our SG&A ratios. I think we were clear at the time that there is the degree of manageable expenses within our discretionary sales and marketing. I think we alluded to the fact that we continue to build out some of our international expenses, that is both headcount, as well as discretionary spending. And obviously, as we look at our marketing programs to determine the success of those programs, if something is not working we have the opportunity to dial back expenses relatively quickly.

Frank Pinkerton - Banc of America Securities

Okay, great. And then just as a follow-up, you made a comment about the volume declines being offset by silicone adoption. But would you care to state first exactly kind of where do we stand from a procedure volume standpoint, growth rates or any changes to the comments you made historically about procedure volume growth to the rest of the year? Thank you.

Josh Levine

Frank this is Josh. I will take that one. Obviously, the economy is the economy. It is clear to everyone at this point probably that that is a variable that we do not have a lot of influence over. I think the primary focus on our end is really at this point towards those things that we have the ability to influence. I am not going to get specific about unit volume specific declines. Those declines are being offset by several components. And I think that that is really what we would like to focus on in terms of the things that we can influence.

Our international growth clearly is one. Our reconstruction part of business, which is now about 20% of the overall mix of the surgical breast franchise, represents strictly some of the highest margin products that we sell; products like our Contour Profile Breast Expander, which is used in the first stage of dual-stage reconstruction procedures, is a very, very high margin product and that product is growing nicely.

Some of the other products we have added in reconstruction like NeoForm, which is also doing well from a growth standpoint, is contributing from a margin perspective. So, we have offsets we believe to the unit volume declines that we have seen in the US and we are doing our very best to exploit those opportunities in those areas where we have growth occurring.

Operator

Thank you. Our next question comes from Tom Gunderson with Piper Jaffray. Go ahead please.

Tom Gunderson - Piper Jaffray

Hi. Good afternoon. Before I get to my two questions, just to clarify on your answer to the last one, Josh. 20% mix of recon by revenue?

Josh Levine

Yes.

Tom Gunderson - Piper Jaffray

I guess I would like to focus then on the international since you brought it up. What was -- can you break out US and OUS force and what was the international growth rate ex-Perouse and ex-FX?

Mike O’Neill

Tom this is Mike. We historically have not specifically broken out within either our total revenue or our breast aesthetics revenue, the distinction between US and international and that is principally for competitive reasons, given the contribution it makes to our overall business.

Josh Levine

Tom I think to amplify on that just a bit, I think it is comfortable for us to say that we have growth occurring in the international segments of our business that exceeds category growth rates in those parts of the world. And again we have been saying over time that its a fragmented market. In some places of the international marketplace, on a comparative basis our current presence is relatively small, that gives us opportunities to grow, and we are really focused on this international side of the business.

We are seeing accelerating revenue growth at Perouse. We think that that was a -- all that we hoped it would be in terms of platform opportunities for us. And that has certainly in our view, played true. So we are growing faster than market growth on an international basis.

Tom Gunderson - Piper Jaffray

Thanks and a follow-up would stick with the international and that is -- international is, there is a lot of the rest of the planet out there, can you give us a sense of where some of the growth spots are? I have been hearing Perouse is particularly good in Asia-Pacific, is that true or not true?

Josh Levine

There is a lot of truth to that statement about Perouse, but it is not just limited to Asia-Pacific. Let me give you a little bit of color, I guess, by regions of the world. They are clearly in Latin America, South America. We have some major market opportunities that we are seeing, more double digit unit volume growth occurring in, actually in a couple markets may be in the low teens growth. Similarly in Asia-Pacific, there are pockets of the market on a regional basis that I described as Asia-Pacific that are growing again in those low double digit kind of rates.

We have an opportunity with Perouse now, to play in a substantially bigger way than we have been positioned to prior to the acquisition and we really are focused on those marketplaces. We have got again I think we said probably Perouse one of the bigger export markets by example for Perouse outside of France was Brazil. When you add their unit volume to the unit volume that Mentor did on its own in Brazil, we are pushing Sillimed now, for the number one share position in the country. Big market, economy is healthy; it is growing nicely, we have got some opportunities there that are worth exploring. That would be a good example of the kind of benefits that we have derived from the Perouse acquisition.

Operator

Thank you. Our next question comes from Peter Bye with Jefferies & Company. Go ahead, please.

Peter Bye - Jefferies & Company

Thanks. I will stick with international too. Have you seen any change in may be underlying growth rate in Europe with some of the increasing economic environment over there? It seems to be worsening of little bit.

Josh Levine

Peter, I think it is safe to say that there is no single Pan-European answer to that question. There are countries, there are markets where there are starting to be some visible strain if you will in terms of downward pressure. But, I can tell you that some of the market gains that we are making in this last quarter are in Western Europe. One of the things that really even in the face of a -- maybe in certain markets in Europe, all our growth rates, based on economic impact, we still have a lot of upside opportunities because we do not have comparatively big current market positions and we are dealing with fragmented markets not as a wobbly situation like it is here in the US.

Peter Bye - Jefferies & Company

I pray it is and just may be -- just on that as well. What is the opportunity for distributor consolidation go-direct? Can you just may be remind us -- may be how much of that opportunity were left and How many regions you might be able to go direct and what is the decision to go critical mass? And is there anything in your guidance assuming capturing direct revenue and margins visa-a-vis distributor revenue margins?

Ed Northup

Peter this is Ed Northup. We have significant opportunity for that consolidation in areas where we have the critical mass with the Perouse business. We clearly have critical mass in a number of markets both in Latin America and in Asia where that is an opportunity we are pursuing. So, there is some upside there.

Peter Bye - Jefferies & Company

Just to clarify, sorry it maybe a second follow-up but there is nothing in your guidance that suggests going direct is within your guidance that would be just sort of upside?

Ed Northup

Our plan is based on all of those strategies.

Operator

Thank you. Our next question comes from Eli Kammerman with Cowen & Company. Go ahead please.

Eli Kammerman - Cowen & Company

Thank you. Good afternoon. The first question is can you just compare the size of the revenue benefit from gel conversion to the increase in international sales and tell us which one was larger?

Josh Levine

On an absolute dollar basis?

Eli Kammerman - Cowen & Company

Yes.

Josh Levine

International.

Eli Kammerman - Cowen & Company

Okay and as far as your guidance, I think I heard you correctly saying that you are reaffirming the guidance and if so, what is the assumption behind that guidance for the full year silicone gel conversion in the US.?

Mike O’Neill

We made a very conscious decision with our FY'09 guidance, not to provide forward-looking guidance on our silicone get conversion ratio. So what we are doing is we are reporting it quarter-by-quarter on an actual basis but we are not providing any forward guidance as it relates to what the rest of the year looks like.

Operator

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

Greg Gilbert - Merrill Lynch

Thanks. Good afternoon. First one Josh, I know you will not quantify the volume declines in US but can you at least comment on whether those declines have gotten better or worse in the last month or two versus the prior month or two and how that fits with your guidance assumptions for the year?

Josh Levine

We basically said, if I remember the discussion Greg from the conversation we had during guidance in the last quarter's call. We basically said that we assume that on a full-year basis, the domestic market was probably, unit volume margin was probably flat. I think it is safe to say that we are probably a little beyond flat in Q1. But there was again in previous, the thinking in the previous quarter's comments were that we were probably lower in Q1 and Q2 and improving in the back-half of the year.

I am not surprised by where we are at in Q1 with regards to unit volumes. I do not think it is getting worse. I would say -- where we reasonably expect it to be, because again, we thought that Q1 and Q2 were going to be probably on a unit volume basis negative to some degree earlier in the year and improving towards the back-half of the year. So, there was that a back-half improvement assumption that was kind of factored into the calculus in the guidance discussions.

Greg Gilbert - Merrill Lynch

Okay.

Josh Levine

I would call out again. While it’s really easy to get myopic around the economy and its impact on the domestic augmentation business, I think it is important to kind of reinforce that, when you look at our global breast franchise, you need to look at it on a broader basis than just domestic augmentation.

There is the international component; there are the mix issues of reconstruction, and the impact of higher margin products. We have launched Pervelle Silk, which takes into a brand new product category and we expect the resulting revenue impact to ramp there over the course of the year.

So, we have I think a lot of other areas that we are looking at in offsets to the unit volume situation, we are dealing with domestically.

Greg Gilbert - Merrill Lynch

Sure. I was just asking about one important guidance input. I understand that.

Josh Levine

Yeah.

Greg Gilbert - Merrill Lynch

My follow-up question Josh is, what do you think the commercial implications are for your enrolling your study before Allergan? They mentioned on their call that you seemed to be clearly ahead. So what do you think the commercial implications are if any there in the domestic markets?

Josh Levine

Let me start and I will give it to Ed to wrap up or to finish on a more practical-like things. I think just from my view, we are proud of what we have done. We owe a big thanks to the plastic surgery community clearly. Their support and involvement here has helped us drive to the finish line, so to speak. And we took this seriously. We basically believed that we had until February 2009 essentially a two-year window to get the enrollment completed and it certainly appears it will finish considerably before calendar year-end.

Lot of thoughts on what the implications are, in terms of business impact or then commercial impact would be. Some of which we are doing research on right now. But Greg, why not give Ed a chance to answer on a more practical level what that might look like?

Ed Northup

Greg, we believe there are several benefits for completing the post-approval study. First, and a very important thing is that both our clinical and selling teams will be able to redirect valuable resources to new studies and in increased selling time. Secondly, we think they will be able to market and sell MemoryGel without any additional requirements to renewal patients in post-approval studies or incur the significant administrative burden on the part of doctors and patients.

And lastly, we think it will reinforce our commitment to the clinical community, the regulatory authorities, and the general public to execute one of the largest post-approval studies in the history to support the safety of our products. So we think there are several benefits to getting this thing behind us.

Operator

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

Larry Biegelsen - Wachovia

Thanks for taking my question. First, just on the conversion to silicone. In the past Josh, I think you said, you think the US market is going to approximate the European market. And do you still believe that from your market research, the conversion is stalled. Do you think it stalled all because of the economy or do you think long term we might not get to that 90%? And then I have one follow-up. Thanks

Josh Levine

Larry, just as a point of reference. One, that 90% number never came from me or came from Mentor. I am not sure where 90% came from, because that is not really where Europe is at right now. It is probably in the low to mid 80s. But, in any event, the answer is that gel penetration continues to be a major focus for us in terms of program support for our accounts and customers and everyone in our company is focused on this. We understand very closely and clearly what the implication is, the price leverage and impact that comes from converting to silicone gel. Let me give you a little bit of a sense about where we are at and may be how we would be thinking about it longer term. We averaged as Mike alluded to it in his prepared remarks we averaged about 45% penetration for the quarter.

I think it is noteworthy to identify that we actually saw a linear ramp during the quarter because April was at 44%, May was at 45%, June came in at 46%. Now, I am not prepared to go out on the limb and say that that quarter represents a trend that is going to continue. I think that the economy is having an impact and I think that anecdotal customer feedback supports the belief that some of the slowdown in conversion is economically driven. But I think it is our view that it is clearly not the only factor in this discussion.

I think that we got a little bit spoilt last year with conversions right out of the box post-approval because in some sense we finished the first year at about 45% penetration, which when you think about the original forecast for penetration, it was probably significantly more aggressive than we would have projected. And I think that this was kind of the -- we skimmed the cream off the top, so to speak, on the conversion activity last year.

I think now there are other elements of this that are probably longer developing and require a little bit heavier lifting. One of the things like physician technique, surgical technique, transitioning from saline to silicone gel. If Docs were using saline exclusively, prior to approval, there is an adoption curve around surgical technique and timing for physicians to go through it. It requires physician training and education and it takes some time for physician confidence to build over time. That is one example of one of these other mitigators.

I think the other thing that we have looked and really had validated the researches, there continues to be some degree of overhang in the marketplace around questions about what the post-approval studies mean or say about the safety of the products. In one sense, the that FDA approved the products and then they quickly followed that up with the post-approval requirements, which certainly have created doubt in the minds of some prospective patients and forced doctors into having to explain and handle patients through, what all this means.

So these are examples of the some of the -- what were the developing factors or mitigating drivers around convergence. We continue to believe that the upside penetration level is significant.

I do not know today, that again I do not know where your 90% number came from but I will tell you that I think longer term, there is every reason to believe that we can get to a level of penetration that approximates what we see in other parts of the world where silicone and saline are available concurrently.

But it is clear now, that the ramp to get there probably is a longer ramp than we expected early on and it is also clear that the economy has, certainly in the near term taken a toll on that ramp.

Larry Biegelsen - Wachovia

Thank you. And for my follow-up, do you expect to maintain your free warranty program on silicone implants even after you complete enrollments for the post-approval study later this year? Thank you.

Josh Levine

Yes.

Operator

Thank you. Our next question comes from Gary Nachman with Leerink Swann. Go ahead please.

Gary Nachman - Leerink Swann

Hi, it is Gary Nachman. Josh could you give us a little more n the uptake of Prevelle Silk, some anecdotal feedback there, and what is the average price? I actually heard one physician say they could get it for 99 bucks? And what sort of program is there in place and at what point will you recognize some more revenue from that product?

Josh Levine

Again I think that the initial feedback Gary has been very, very positive. I think we appropriately tempered our expectations and hopefully the market's expectations about this product. We think that there is and are we are getting feedback to this effect that there is absolutely a niche for this product. It is very forgiving, it is very much of a product comparatively, that -- you are not going to see the kind of bruising and swelling that you see with the use of some of the mainstream products immediately post-treatment, which means that it really lent itself to the kind of timing where if you are on a short-term time frame and you want to get corrected or treated, you can get corrected or treated before some kind of major event and not worry about having to use a lot of cover up to deal with some of the adverse events, swelling, redness, et cetera.

We are in a heavy sampling mode right now. We have launched the product, as I think you probably remember, in our discussion last quarter, we launched the product into the plastic surgery channel using our existing sales organization. We have not added anything derm reps at all at this point. We have added internal telemarketing capabilities and have I think, about seven or eight inside sales representatives that are selling that product, again they are supporting the launch and a sampling program into plastic surgery and there is some initial contact and information being provided by that group to the cosmetic derm community. But again at this point I would have to characterize that foray into derm as modest.

This product is starting to ramp. Where it lands, where it gets too, I think at this point is probably way too early to project. But all of the feedback to-date has been very, very positive. No one really went into this with the expectation that this product was going to compete head up with Restylane or Juvederm in terms of longevity. This product is the equal of anything on the market right now as it relates to its adverse event profile and what that translates to really is, is a forgiving product.

If a patient is a new patient to the treatment, wants to be able to test drive this correction without a long-term commitment, Pervelle Silk is a great way to go about it. It is also great for new [injectives], because it is very, very forgiving. It is light. You can move it around. So, I think on all of those fronts, we feel good about where we are at., at this point.

Gary Nachman - Leerink Swann

And how are you guys preparing for the potential launch of Juvederm with lidocaine? Does that change your strategy once the Prevelle Shape I think is involved. Once that launched, just in terms of how you are going to go after the Doc, the authorities, will have the same strategy there?

Ed Northup

Yeah. Gary, this is Ed. It does not really change our strategy at all. I mean that's a workhorse product kind of in the middle of the adoption curve and we do not believe that that is going to replace the meaningful segment that Prevelle Silk is targeted at.

Operator

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

Anthony Vendetti - Maxim Group

Thanks. Good afternoon. Perouse, the $5.5 million that was driving international sales, is that something that you, that Josh you think is something that can continue at this rate or grow for the rest of the year, since that seems to be doing better than initially expected? And then I just wondered if you could comment a little on market share vis-à-vis, Allergan in the breast implant?

Josh Levine

I think we have great belief in the legs, if you want to call it that that Perouse platform offers us. We have launched new products in that product line in the last quarter or two. We are taking their existing products Anthony into our distribution channels, both our branch operations and a much broader independent distributor network than they had on their own. I think I referenced earlier just as an example, the situation we have been dealing with and have at our feet in Brazil, which is I think a wonderful opportunity. It probably represents the best near-term opportunity for us in terms of direct distribution conversion overtime.

So, I think we feel very good about Perouse. We had high expectations for Perouse from the outset. So, I do not think a lot of this or much of this at all surprises us. And I think that, given the fragmented nature of the international marketplace, we are pretty well positioned to continue to grow our ex-US.

On the share situation with Allergan, you did not ask or specify whether you were talking about domestic or international. I will tell you that, our belief is that domestic share was stable during the quarter and that we were actually taking share ex-US. And, whether that share was coming from Allergan or whether it was coming from some of the other international competitors, is less clear at this point. But I would say generally our view was that shared within the context of the Allergan discussion, was relatively stable.

Anthony Vendetti - Maxim Group

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Julie Hoggatt with Noble Financial.

Julie Hoggatt - Noble Financial

Thanks for taking the question. My question is on pricing in the United States. Can you give me an idea where that was with the scaling in silicone breast implants?

Mike O’Neill

Yes Julie. It’s Mike. I can probably say is that our pricings for saline and for gels in the US, and I will do a sequential comparison here. At Q1 compared to at Q4'08, is no material change down with, that we could detected at this point in time. So, I would say that our pricing has been relatively stable. Josh, the above question do you want to comment more generally on change in pricings?

Josh Levine

Yeah. Julie, we are contrary to some of the questions or some of the rumors, if you will, but I think Mike and I have both been asked about and there was this impression I think, at the end of last quarter that pricing was going off a cliff or that we were using price as a primary tool to convert accounts. I will tell you that none of those observations are true.

Pricing is not going off. What has Mike just identified and I will tell you that we are not leading with price. There is no benefit to me to start a price war with much larger competitors. We are focused on value proposition. We are focused on value-add in terms of services and non-product-related capabilities for our customers. So, we want to try and hold the pricing umbrella up to the greatest degree we can and the way we do that is increase the value proposition.

But I will tell you that in places where we have been in attacked or where we had a need to respond, we have responded competitively. We are not going to lose the share. So, I guess that is how I would characterize or reference the broader discussion about pricing.

Julie Hoggatt - Noble Financial

Okay. And my last question has to do with the operating expenses. Have you begun in your build out of the dermatology sales force in the US? How many have you added this last quarter if any?

Josh Levine

None Julie. We have not added any reps focused on the dermatology business at all and at this point it probably is unlikely that we would until we get further into the portfolios of the Prevelle family. So I think probably in terms of towards Q4, but I do not even quite frankly at this point know, that it will be in FY'09. I think we are going to need to see where we are in terms of critical mass with the portfolio before we work to head aggressively down the path of adding sales infrastructure for the derm space.

Operator

Thank you. Our next question comes from Jonathan Block with SunTrust Robinson Humphrey.

Jonathan Block - SunTrust Robinson Humphrey

Thank you and good afternoon.

Josh Levine

Good afternoon John.

Jonathan Block - SunTrust Robinson Humphrey

First question is a little big picture, and Mike may be this is for you, when I look back at your fiscal year ‘09 guidance, just the top line of 405 to 425, it seems to imply 9% to 14% growth. And I know it was 10% this year if you strip out acquisitions, it was 4% organic. So, without giving too much detail can you help us out? What part of the equation is going to be reaccelerate or accelerate further? Is it going to be conversion here in the US? Is it procedures? Is it some areas of dramatic growth in specific markets internationally?

Mike O’Neill

Yes John, good question. And I think the first thing I would say is as we look at the business is, it is very tempting to look at each individual assumption that is built into out models and the your models and if something goes off the road [radars], what happens? Here the practical reality is we have multiple sets of assumptions that on depend our sales guidance for 2009. And as we have looked to all of those variables, we are comfortable and that is why we affirmed our FY'09 guidance.

So I think we have been clear and Josh has alluded to the assumptions that we used as it relates to US procedure overall. We have also been very clear that silicone gel conversion is a critical assumption for literally everybody sitting in this room. So, throughout our entire company, the organization is focused on garnering share, domestically and internationally, moving silicone gel in the US, and as we have probably alluded to on numerous occasions on this call, we look at our international arena as an opportunity for us to drive substantial growth and we can do that within the context of garnering share, even in the face of economies that may be having a slowdown in terms of total procedural growth.

I think the Perouse story is a very good story. It is making major contributions to our business. We recognize from a prospective of gross margin, its “dilutive to the margin”, that the international distributor network that Mentor has and rolling them with Perouse products through there, we see continuing to evolve over time.

So, I guess what I am saying is I do not want to go down the line of looking at each assumption, and what impact does that have on your guidance. We are looking at the overall portfolio of assumptions that we use to map out the business.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. Very helpful Mike. And may be just one other still P&L related; when you look at the other line, and if I look at that other line for fiscal year ‘08, even if you exit out Perouse, may be that revenue line was growing around 25% to 30% and then this quarter if you exit it out, it was relatively flat year-over-year. So can you speak, to help us out, what are the other products that make up that revenue line? And has something gone on there on why are you seeing the revenue decelerate there?

Mike O’Neill

Yes, we have a couple products. You should be number that for our OUS business we actually do have dermal facial fillers that are in our numbers. So, we have a very modest business internationally. That is tracked in there. We have some skin cream business that is in there as well, and obviously the 700,000 that Perouse [bolted] on.

So, its really -- the way we break out the business is as clear as we can, breast aesthetics, is obviously the core breast implant and reconstruction business as well as NeoForm, which is part of the recon business and then obviously body contouring is the lyco business everything else goes into other. And it is probably three or four things that are in there.

Operator

Thank you. Our next question comes from Edward Han-Burgess with Raymond James & Associates.

Edward Han-Burgess - Raymond James & Associates

Hi this is Eddie Han-Burgess and I am calling on behalf of Jayson Bedford. Can we move on to gross margin and try to figure out the impact from Perouse lower margin, as well as non-cash portion cost of goods sold. Can you walk us through there?

Mike O’Neill

Yeah, I think you can -- the impact of Perouse is probably a full margin point in a year-to-year comparison and the impact of incremental amortization, aka non-cash, is probably less than half a margin point.

Edward Hamburger - Raymond James Associates

Great, thank you.

Mike O’Neill

Thank you.

Operator

Thank you. Our final question today comes from Amit Hazan with Oppenheimer. Go ahead, please.

Amit Hazan - Oppenheimer

Thanks actually for taking my question. I guess if I can start, I think what some of us are concerned about are asking you, is not the specific assumptions that you are putting in to your model for fiscal ‘09 but how you are getting to those assumptions. So, I am looking at your procedure volume being down about 8% this quarter, which is your strongest quarter and I am looking at silicone conversion that has been flat for three quarters and I am hearing you say that is going to improve and that's your assumptions.

What I am not hearing you say is why you think that is going to happen. I am wondering if you can clarify for us what it is that you are seeing in the market that gives you confidence that procedure volume is going to improve or that silicone conversion is going to improve, as we go through the rest of this year?

Josh Levine

Amit, this is Josh. You may have misheard or misinterpreted what I said before. I talked about the silicone gel conversion or penetration rate for the quarter averaging 45%. I said I thought it was noteworthy to at least say that or identify that we had some linear ramping occurring during the quarter. We saw April at 44, May at 45 and June at 46%. But I said at that point, I am not sure today or right now, I am prepared to step out on a limb and use that as a proxy for extrapolating that out on a straight line.

Every person in this company up to and including the people in this room tied to incentive compensation drivers and performance measurement criteria that is tied to bonuses, very focused on, the most important metrics that our business is relying on this year. One of those in priority is silicone gel conversion.

So, we understand as well as anybody that the importance of this. We have got the programs that we talked about overtime, focused on this, but I think it is the wrong assumption to just cut away from this believing that we are hanging our entire top-line revenue guidance on silicone gel conversion. That is not what we said. What we said is that is one component of it. We have a long fiscal year to go. We are through Q1. We have a long fiscal year to go on the gel conversion. I am not prepared today nor is anyone in our company to throw the towel in our [math]. But the on the other thing is we tried very hard to focus people on, those elements of the business that we are very focused on right now, that will offer other avenues for growth for us in terms of revenue expansion.

I do not know how else to put it. We are not counting on silicone gel conversion or a turnaround in US economy, as a chance to get home in terms of the top-line revenue guidance.

Amit Hazan - Oppenheimer

Okay, fair enough. And then just the last question I guess is on Puragen or Prevelle Shape, I am wondering if you can give us an update? I think you had talked about before with Genzyme, you are going to have to go through these FDA. They are going to have to go through the FDA audits for manufacturing. Is there anything planned yet or planned going forward?

Ed Northup

We still think that's Q4 based on the way the process is going. So we still are hanging our head on Q4.

Operator

Thank you. At this time I would like to turn our conference back to Josh Levine for any closing remarks.

Josh Levine

Great. I would just like to thank all of our employees for their contributions that supported Q1 performance. Thanks to everyone who joined us on the call today and we look forward to talking to you next quarter.

Operator

This concludes today’s conference call. You may disconnect your lines at any time. We thank you for joining us and enjoy the rest of your day.

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Source: Mentor Corporation F1Q09 (Qtr End 06/27/08) Earnings Call Transcript
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