AngioDynamics Inc (ANGO) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, welcome to the AngioDynamics, fiscal 2006, third quarter conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question and answer session.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Jennifer Chase. Please go ahead.

Thank you, this is Jennifer Chase with AngioDynamics. Thank you all for participating in today's call. Joining me this afternoon from AngioDynamics are Eamonn Hobbs, President and Chief Executive Officer and Joseph Gerardi, Chief Financial Officer.

Earlier this afternoon, AngioDynamics announced financial results for the first quarter of fiscal year 2006 which ended on February 25th 2006. If you have not received this news release, or if you would be like to be added to the Company's distribution list, please call Lippert/Heilshorn in New York at 212-838-3777 and speak with [Lydia Pertia].

This call is being broadcast live over the Internet and a recording of the call will be available for the next 12 months on the Company's website at www.angiodynamics.com. Instructions for listening to the replay are contained in today's new release. This call will follow the standard format beginning with prepared remarks by management and then we will open up the call to your questions.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of AngioDynamics. I encourage you to review the Company's past and future filings with the Securities and Exchange Commission including without limitations, the Company's Form 10-K and 10-Q which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 21st 2006. AngioDynamics undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Eamonn Hobbs. Eamonn?

Thanks Jennifer, good afternoon everyone. Thank you for taking the time to participate in our third quarter financial results conference call. We had an outstanding fiscal third quarter, and are extremely proud of our financial performance, especially our record sales of $19.8 million. Continued market share gains across our entire diversified product portfolio along with sales from our newest products led to an excellent profit growth for the fiscal third quarter.

Our operating profit and gross profit were both up 35% over the third quarter of fiscal year 2005. Our gross profit margin reached 58%. Net earnings were up 73%. And our diluted earnings per share were $0.14 up 56% compared to the same period last year. We are very pleased with our third quarter results and expect to continue to drive this momentum to our fiscal fourth quarter. Before I touch upon the highlights of the quarter and share the details on our future plans, I will turn the call over to Joe Gerardi our CFO. Joe is going to share with you our financial results for the fiscal third quarter.

Thanks, Eamonn. I would like to also thank everyone for participating in today's conference call. We experienced an exceptional fiscal third quarter in terms of sales performance, net income, operating profit and gross profit improvements. I will comment on the results of the fiscal third quarter and the 39 weeks ended February 25th 2006. I'll also present highlights of the income statement, and discuss how some of the key product lines have performed.

As Eamonn indicated, net shares for the third quarter increased a solid 28% to $19.8 million up from $15.4 million for the third quarter of fiscal 2005. The increase was primarily due to strong growth with the Company's newest products, along with continuing market share gains across our diversified product portfolio. All the revenue gains were due to increases in our unit sales. Gross profit for the quarter was up 35% to $11.5 million, compared with gross profit of $8.6 million for the prior year third quarter. Gross profit margin for the fiscal year 2006 quarter increased 300 basis points to 58% up from 55% for the comparable fiscal 2005 quarter.

The increase in gross profit margin was largely due to the result of favorable product mix from increased sales of higher margin products such as the Morpheus CT PICC, EvenMore dialysis catheters and our VenaCure disposable kits, as well as production efficiency has resulted from continuous efforts to streamline the manufacturing process. Operating profit for the fiscal third quarter increased 35% to $2.9 million or 15% of net sales compared with $2.1 million or 14% of net sales for the third quarter of fiscal 2005.

Selling, general and administrative expenses for the third quarter totaled $7.2 million or 36% of net sales in line with our current guidance of 35 to 36%. Personnel expenses related to the increased number of territories and commissions on higher sales totaled $997,000 of this increase. Marketing expenses for product promotions and market research contributed $152,000 of the total. Increased legal and consulting fees, typical accounting charges and internal controls review, required by Section 404 of the Sarbanes-Oxley Act, as well as implementation of a recently implemented business software platform, comprise $675,000 of this amount. This represents 34% increase from SG&A expenses of $5.4 million for the prior year third quarter.

SG&A expenses included onetime non-recurring consultant fees of $189,000 incurred in conjunction with our initial efforts to comply with Section 404 of Sarbanes-Oxley Act, and legal defense expenses associated with our present lawsuits of $146,000. These expenses were not incurred in the prior fiscal year. Overall, we expect SG&A expenses to be in line with our guidance of approximately 36% for the fiscal year. R&D expenses was $1.4 million or 7% of net sales for the current quarter, compared to $1 million, or 7% of net sales recorded in the 2005 third quarter. R&D expenses increased $420,000 due to expenses associated with our ongoing projects.

Overall, we expect R&D expenses to be in line with our guidance of approximately 8% for the fiscal year. The effective tax rate for the 2006 quarter was 40% compared with the 43% for the third quarter of fiscal 2005. The decrease is attributed to non deductible capital loss incurred in 2005 fiscal quarter, offset by additional income taxes incurred in conjunction with the filing of our consolidated fiscal year 2005 federal income tax return with our former parent company EZM under our tax sharing arrangement prior to a spin off, as well as our sub period federal return for the remainder of fiscal 2005.

We expect the effective tax rate for the fiscal year to be approximately 38% of taxable income. The effective income tax rate is expected to return to 37% in the near future. Looking at the bottom line, net income for the fiscal 2006 third quarter was $1.9 million or $0.14 per diluted share. Compared with the prior year this represents a 73% increase in net earnings, and a 56% in diluted earnings per share. Now I'd like to give you some insight into the performance of our premier product segments, compared with the fiscal 2005 third quarter.

Angiographic products increased 16% from the third quarter of fiscal 2005, with sales of $5.3 million for the third quarter of fiscal 2006. The Mariner, our newest hydrophilically-coated catheter, accounted for more than $338,000, an increase of 187% for the fiscal third quarter compared with the same quarter last year. Our SOFT-VU sizing catheters continue to show strong sales with $2.2 million and $1.6 million in sales respectively. Sales of our dialysis products rose [19]% or $801,000 over the prior year third quarter to $5 million.

The Dura-Flow Chronic dialysis catheter and the Schon XL Acute dialysis catheter were responsible for substantially all the increase in dialysis products sales for the 2006 fiscal third quarter, with sales of $3 million and $935,000 respectively. Sales of the image-guided vascular access line which include the Morpheus CT PICC were up 59% to $3.2 million, compared to the 2005 fiscal third quarter. Morpheus CT PICC continues to be a significant contributor to our net sales accounting for $2.1 million, an increase of 107% or $1.1 million over the fiscal third quarter of 2005.

Sales of our venous products grew 81% to $3.1 million, a $1.4 million increase over the prior year third quarter. During fiscal 2006 third quarter the Company sold 29 lasers, bringing the total units in the field to 361. We sold 22 lasers in the third quarter of fiscal 2005. Sales of VenaCure disposable kits, which provide a source of high margin recurring revenues, increased 117% to $2.1 million, compared to the fiscal 2005 third quarter. As of February 25th 2006, cash and short-term investments were $28.9 million, compared with $27.1 million as of May 28th 2005. During the fiscal third quarter, the Company made a final installment payment of $800,000 to Bioniche Pharma Group Limited to obtain the licensing rights to distribute Sotradecol.

Cash flows continue to be quite strong, as the Company generated $2.4 million in cash from operations during the fiscal third quarter. We generated $4.7 million in cash from operations for the 39 weeks ended fiscal 2006, compared to $3 million from the same period last fiscal year. For the 39 weeks ended February 25th 2006 net sales were $54.9 million up 28% from $43 million for the comparable 2005 period. The increase was due to extended sales across our diversified product line, most notably, our Morpheus CT PICC, Dura-Flow dialysis catheters and our VenaCure product line.

Net income for the 39 week period ended February 25th was $4.8 million up 68%, the net income of $2.9 million for the comparable fiscal 2005 period. And diluted earnings per share increased to $0.37 from $0.24 for the prior fiscal year period up 54%. Gross profit for the nine months ended February 25th 2006 was $31.9 million or 58% of net sales, compared with $23.6 million or 55% of net sales for the comparable fiscal 2005 period.

With that summary, I would like to turn it back to Eamonn.

Thanks, Joe. We're very excited about our third quarter results and accomplishments today. Our solid financial results are indicative of how well all facets of our business are running, and the strength of the management and sales teams at AngioDynamics. Sales growth from the Company's newest products in conjunction with market share gains across our diversified product lines have contributed to our outstanding financial performance for the fiscal third quarter. And I'd like to touch on some of our achievements this afternoon.

Unit growth was excellent across our key product lines. The Company's broad line of angiographic catheters continues to grow at double-digit rate. We're very pleased with the sales growth of the Mariner Hydrophilic coated catheter, which increased 188% quarter-over-quarter. We anticipate sales in the Mariner catheter to continue to increase significantly in the future.

We're also thrilled with the $5 million in sales from our dialysis products. Both the Dura-Flow chronic dialysis catheters and the Schon XL Acute dialysis catheters contributed significantly to this increase in the 2006 fiscal third quarter. And we believe these catheters will continue to be strong performers for us. We continue to see solid growth among our image-guided vascular access products, which includes the Morpheus CT PICC.

The uptake of our Morpheus CT PICC has been exceptional with sales more than doubling this fiscal quarter compared to the same period last year. We expect to maintain strong sales of the Morpheus CT PICC in the future. Our venous product line for the treatment of varicose veins continue to be a strong contributor to our top and bottom line. The 81% increase in sales this quarter over the prior year's third quarter is especially gratifying.

We continue to increase the number of lasers sold each quarter. And sales of our VenaCure disposable kits, which provide a significant source of high margin recurring revenues, more than doubled over the third quarter of fiscal 2005. We anticipate that our laser sales will continue to generate significant kit revenue going forward. We remain committed to expanding our sales force. We currently have 49 sales territories and seven regional managers. Due to the anticipated expansion of our sales organization we're pleased to announce that we created two zone director positions that report directly to the Vice President of Sales.

We anticipate each zone director to have responsibility for four regions and approximately 26 sales territories by June 1st 2006. We plan to add four field sales representatives in the fourth quarter of this fiscal year for a total of 53 field sales reps by May 27, 2006. We intend to increase our total number of dedicated field sales reps to 70 by 2008. We are presently restructuring the current seven regions to create eight regions, and expect to add one more regional manager for a total of eight regional managers by June 1st 2006.

I would like to turn now to Sotradecol, a new product that we officially launched this quarter. In October of 2005 we entered into an exclusive agreement with Bioniche Pharma Group Limited to distribute the drug Sotradecol for the treatment of small, uncomplicated varicose veins, to interventional radiologists, vascular surgeons and general surgeons in the United States. Following our pre-launch activities we began selling Sotradecol in mid January to our physician customers following its showcase at the 19th Annual Congress of the American College of Phlebology meeting held in November 2005.

We have embarked on the education of our physician customers so that they are aware that Sotradecol is an FDA approved sclerosing agent preferred by physicians in U.S. for the treatment of small uncomplicated varicose veins. And that they no longer need to rely on the vagaries of compounded sodium tetradecyl sulfate or illegal importation. An estimated 1.7 million patients undergo sclerotherapy each year in the United States. The sclerotherapy market is anticipated to grow as the number of procedures increased especially among the baby boomer generation, many of whom may opt for sclerotherapy as a quick and less painful treatment for their unsightly spider veins.

We continue to provide advanced sales training on Sotradecol to our sales reps and have undertaken several key marketing initiatives that should help increase awareness of Sotradecol among our physician customers. In addition, there is now a temporary [J-code] for Sotradecol that will allow for physician reimbursement of the drug when used during insurance covered procedures.

We are very excited about this drug and anticipate that Sotradecol will be an important contributor to our vein treatment segment in the future. Looking ahead we are working to optimize our patented precision [inaudible] catheter technology for the delivery of Sotradecol for potential use in the ablation of larger veins including the great saphenous vein, which could experiment with Sotradecol and the vein treatment market overall. Shifting gears we began our nationwide launch of the TOTAL ABSCESSION general drainage catheter in December, with sales of $221,000 for the fiscal quarter, we are off to a healthy start.

We're very pleased with the positive physician response and quick uptake to date and expect sales of the TOTAL ABSCESSION to increase significantly going forward. The TOTAL ABSCESSION reflects our continued dedication and commitment to providing new innovative and proven solutions to our physician customers. Another new product the profiler PTA balloon catheter is in test market and we intend to release this new product in national market in the near future. I would now like to provide an update on our patent litigation related to the VenaCure laser products.

As you're probably aware Diomed has brought patent litigation against AngioDynamics concerning the [Novaro] 777 patent. Both parties filed motions for summary judgment on December 21st 2005. Opposition briefs to the motions for summary judgment were followed on February 13th 2006. The judge has scheduled oral arguments for May 11, 2006. At that time we expect to learn whether or not the judge will rule or if the case will go to jury trial.

In addition on January 3rd 2006 AngioDynamics filed a compliant in the United States Districts Court for the District of Delaware against Diomed, seeking a judgment declaring that the claims of a Diomed patent are invalid, unenforceable and not infringed by AngioDynamics' VenaCure system. The complaint was amended to include a second Diomed patent on January 17th 2006. The patents relate to a method and device for endovenous laser treatment that include graduated markings along a [sheaf].

We expect oral arguments to be scheduled shortly. I would also like to address the suit filed by VNUS Medical Technologies on October 12, 2005. The suit involves four patents flexibly related to endovascular treatment of varicose veins with RF technology and alleged infringement by the AngioDynamics VenaCure laser products along with those of Vascular Solutions and Diomed. Discovery related to claim construction began this month and should be completed by July 31st 2006 with briefing on claim construction to be completed by October 31st 2006.

As noted during our previous conference call Biolitec Inc., the supplier of lasers and laser fibers used in our VenaCure laser systems under a supply and distribution agreement notified us that it believes that it is not required to indemnify AngioDynamics with respect to the patent infringement lawsuits filed against us by Diomed Inc. and VNUS Medical Technologies, Inc. We have been paying a premium to Biolitec for these products, primarily in return for the indemnification provisions in the supply agreement covering third-party patent infringement actions.

We have ongoing discussions with Biolitec management with the goal of avoiding a breach of contract and subsequent legal action to enforce our rights under the agreement. In the event we have to terminate the agreement because of the breach by Biolitec, we expect to be able to source these products at lower prices. On another note, we are very saddened by the loss of our co-founder and former Chairman of the Board of Directors Howard Stern. Howard's insight into the possibilities for the treatment of peripheral vascular disease made him a difference in the lives of patients and in the physicians who treat them.

He was instrumental in guiding AngioDynamics from a development stage company to its present position as a publicly-traded leader in [inaudible] products for the peripheral vascular disease marketplace. In January Peter Graham was named to our Board of Directors to replace Mr. Stern and to serve the remainder of his term which expires at the annual shareholder meeting in October 2006. Mr. Graham served as corporate counsel and secretary of AngioDynamics from 1997 to 2004.

Now, I'd like to discuss guidance for the rest of fiscal 2006. As many of you are aware our business is subject to seasonality and our fourth fiscal quarter, which will end on June 3rd, is typically the strongest. Given our strong financial performance for fiscal 2006 to date we're pleased to be in a position where we are increasing our guidance. The Company, as we're rising upward its fiscal 2006 financial guidance. AngioDynamics now expects net sales growth to exceed 29% over fiscal 2005 to at least $78 million.

Year over year net income growth is expected to exceed 60% to $7.3 million, which includes an anticipated onetime charge totaling $400,000, net of income taxes to be incurred in conjunction with the Company's requirements to comply by May 2006 with Section 404 of the Sarbanes-Oxley Act. This compares with the Company's prior guidance for net sales of at least $76 million and net income of at least $6.7 million for fiscal 2006. We now expect diluted earnings per share to increase to $0.57 rather than the $0.52 per diluted share we guided you to last October.

Without the effect of these onetime expenses, net income would be expected to reach $7.7 million representing 69% growth over fiscal 2005. The Company is providing this guidance to aid investors in understanding the Company's projected operating results, absent non-recurring expenses and to enable investors to more accurately compare future period results to the current period results without the effect of these onetime expenses.

AngioDynamics expects R&D and SG&A expenses for the fiscal year 2006 to be approximately 8% and 36% of net sales respectively. The Company is revising its effective tax rate for fiscal year 2006 to approximately 38%. As a final topic I want to highlight our upcoming industry conference calendar. We'll be participating in two important industry conferences. The Society of Interventional Radiology in Toronto, Canada where we expect to showcase TOTAL ABSCESSION and Sotradecol which runs from March 31st to April 4th. And the fourth International Vein Congress in Miami, Florida from April 20th through April 22nd.

That ends our formal remarks. Operator, we would like to now open up the call to questions.

[OPERATOR INSTRUCTIONS].

Sir, your first question is from the line of Phil Nalbone with RBC Capital Markets.

Good afternoon, Eamonn. Good afternoon, Joe. First just a couple of questions to clarify some of the numbers. Joe, can you explain in a little more detail why the tax rate was what it was in the quarter? It was a full 2.5 percentage points above what our expectation had been. I'm wondering what the variance was.

Well, we had to make adjustments to our fiscal 2005 tax return. And in that had to incur additional expenses for some deductions that we had that were disqualified based on the consolidation with EZM.

Okay. Great. And then, Eamonn, if you could walk us through the sales force head count numbers again. I missed a lot of what you were saying. Can you start with what that head count was during the February quarter? And how that changed sequentially?

Sure, Phil. We have the 49 sales reps during the third quarter. And by that I mean we have 49 sales territories plus managers. We're expecting to increase that by four additional sales territories during Q4. We are also adding significantly to our sales force management in that we're, we have added two district zone managers. These zone manager positions did not exist before. So that's another layer of management between the regional manager level and the Vice President of Sales. We've done this because of the increase in size and the number of regions we have in our sales force in order to increase efficiency.

Okay. And what had that head count been or what were the number of territories during the second quarter?

Second quarter was approximately 44.

Okay. So, an addition of five bodies -- five territories during the fiscal third quarter.

That's right.

Final question. I'll go back into the queue. Sotradecol -- can you give us an idea of what the actual sales performance was during the fiscal third quarter, and what kind of expectations you have built into your upward revised guidance for the fiscal fourth quarter? In other words really, Eamonn, how much of this depends on the Sotradecol ramp at this point?

The sales in Q3 were really not material. We really didn't get into an inventory position to start selling the product until mid January. So we had six weeks in the quarter to introduce the product and that really wasn't enough time to generate any significant sales. In Q4, we have very minimal Sotradecol sales baked into our guidance numbers that we've issued. So again it's very early in the introduction of Sotradecol to be confident in our forecast there. So we've been very conservative in our Sotradecol expectations. And hopefully that will change after a couple of quarters of -- a couple of full quarters of Sotradecol sales.

And what was responsible for that inventory situation? Was it just all of the import steps involved in gaining access to the drug?

That's exactly correct. We had some logistics issues getting our first inventory shipment where the inventory was tied up in customs due to some paperwork which is that -- ended up getting worked out. They were very minor issues, not on our end. But they have been worked out and hopefully we don't see any further problems like that going forward.

Okay, thank you.

And sir, our next question is from the line of Arnold Kaufman with Brean Murray.

Thank you, hi guys.

Hi Arnie.

The question I have is regarding most of your products here have really grown dramatically year over year. And obviously market's not growing that fast. And I was just wondering, Eamonn, if you could give a little more color on what you would attribute this growth to.

Well, clearly we are increasing our market shares because we are growing at a clip faster than the marketing areas like angiographic catheters and vascular access catheters. The reason that we are growing at a rate that's much higher than the marketplace is because of our really product features and benefits that are tied to our innovative technology that is proprietary.

In areas such as VenaCure, the market is growing at a very, very large rate. So 100% growth in our VenaCure consumables over the prior year or 107% I think, was the exact number, is somewhere near where the market's growing. Now we may have gained some against some of our competitors. We may not. Things are happening so fast there I'm not really sure. But that market is booming.

As I think we are growing at or slightly above the market growth rate of the dialysis market. There is a lot of expansion there due to the increase in the number of dialysis patients. Dialysis patients are increasing due to two factors. The disease is increasing as a percentage of the population and patients with the disease are living longer requiring more therapy and products that we make.

Thanks. The other question I had was regarding -- one thing actually going back on the tax rate. Joe, I believe last quarter you were looking for 37% going forward. Now you're saying 38% is the right number now here?

Yes. Again, we needed to adjust based on prior year tax returns as we, as we settled out and split away from EZM.

Right.

We have taken some additional R&D credits that were not going to be allowed.

Okay.

That's for this fiscal year.

This fiscal year, going forward they will be coming out about 37%.

Yeah, we expect to get back to 37%.

So for the remainder of fiscal '06 you're looking at 38?

Right, because of the spike in the third quarter and then only having a fourth quarter left, it will -- I think it's like 37.7%, 37.5%.

Okay and another thing is your gross margin has been increasing nicely. You still looking, if I remember correctly, you said the low to mid 60's by I think '08. Is that still, what you --

Yes, what we said is that we're going to grow on average 2% a year. We've been growing the last two years at over 2%. But on average for the five years, since our IPO, we figured that we would be in the low to mid-60's.

Okay. And one last question Eamonn, in the past you have discussed possible looking at acquisitions. And I just wanted to know without too much detail of any color, you can give on that right now? Thanks.

Well, we are still very interested in conducting acquisitions that are accretive. And we are and have been looking at a number of opportunities. We are very selective in that we believe that acquisitions should be accretive in certainly less than 18 months, if not immediately. And we're going to take our time and do that very well.

Thanks a lot, guys.

Thank you.

And our next question is from the line of Robert Goldman with KeyBanc.

Okay, thank you. Hi Eamonn and Joe.

Hi Rob. How are you?

I'm good, thank you. Couple of questions. First, with the passing of Mr. Stern, can you just remind us how much stock that family owns and what the family's intention might be on that stock with his passing?

Yes. The Stern family owns approximately 1.7 million shares of AngioDynamics. And they are locked up by -- via the terms of the private letter ruling from the IRS. That was part of the tax free spin off from EZM until November 1st of this year, in 2006. They do have the ability to sell de minimus amounts of their stock in the meantime, less than 2% of the outstanding stock of the Company during any year.

So if you see them trading that's the level that they are trading at. Although they are -- Howard Stern's passing was very recent. We expect that the Stern family is very happy with their investment in AngioDynamics. And we don't anticipate that they are going to be extremely eager to get out of their investment because it's been performing so well.

Okay, thank you. And two more questions. The next is, you mentioned the May 26th date on the judge to how to decide the case with Diomed or send it to a jury. What are your lawyers suggesting? Is it likely to be decided or likely to go to jury?

Well, that's an excellent question. In the context of trying to pin a lawyer down I'll try to provide some color. The summary judgments are a difficult thing to obtain. And our counsel has told us that it's certainly not likely that on a majority situation that we're going to get a summary judgment. Because judges tend to hesitate to decide a case if they have any doubt about the structure and merits of the case at all.

So we anticipate that this will go to trial. But having said that, as our lawyers, are extremely confident that we have an excellent chance in the context of summary judgments in general to actually get a summary judgment because our case is so strong. So on a percentage basis, to try and put some quantification on it, it's maybe 30% chance we'll get a summary judgment in favor of our position. So and of course there's a lot of guesswork in that. But our feeling is and expectation is that this will go to a trial.

Okay and then one final question which is perhaps the most difficult. But as you know, Eamonn, last month in February, when you changed some plans in presenting at an investment bank conference, it brought up a certain amount of uncertainty only because folks didn't know the rationale. But now with the benefit of some time passing, is there anything you can say to clear the air as to why the need to change the schedule?

No, there's really not. The reason we had to cancel that meeting in February really had to do with a very busy schedule here at the Company. Needless to say, as the quarter has now come out, it's pretty obvious everything is great with the Company. And we're running on all cylinders and expect to continue to do so. But we just had [tasks to] perform at home that kept us to our [knitting].

Okay, thank you.

Thank you.

And sir, our next question is from Matthew Scalo with Canaccord.

Hi, congratulations on the quarter here.

Thank you, Matt.

Hey, Matt.

I wanted to ask you about Morpheus a little bit here. Sequential growth over the last couple of quarters in roughly 200, 300, 1000, can we kind of project that going forward at that similar rate into let's just say fiscal '07 or is there going to be some point in time in which we start to see some seasonality in that sales?

Well, first off, we don't give guidance going forward on individual products. But we did try and frame this marketplace as Morpheus could be -- ultimately be a $20 million product for us. And at its current run rates I think there's still a lot of upside potential in Morpheus. We are not expecting Morpheus sales to start to slow considerably for quite some time because there is so much opportunity out there.

Okay and I guess just switching gears, maybe to the laser box sales. We had kind of expected maybe going back to a longer term, 20 to 25 boxes per quarter. It seems sequentially that has also increased. Maybe that's due to some seasonality. But I always assume that due to competitors' calendar year ends it might be tougher competition to place boxes. Maybe you could just kind of describe maybe looking forward, what is kind of the run rate of box sales per quarter. Is it still going to be in that 20 to 25 boxes? Or is it moving up maybe into that 30 range?

Well, I -- we are not forecasting in our own models to go into the 30s. We have done that in Q4s in the past. And that has more to do with seasonality than I think our running rate. There are two factors that I think are important to consider in trying to forecast lasers going forward.

One is that the market is continuing to expand very vigorously as the laser treatment for saphenous vein insufficiency has become really the standard now. And that word has gotten out to the market in general. We're seeing a lot less inertia to overcome to get customers interested in performing the procedure and purchasing a laser. The market is hardly saturated. So there is tremendous upside here. We really still haven't scratched the surface on the market potential here.

And two, is that because we have a balanced portfolio and our strategy is to keep all our strategically important products going at rational rates that we try and balance all the time, we don't want to become a laser box company by any stretch of the imagination. So there may be quarters where we highlight laser sales. And there may be quarters where we highlight another product which we've done in the past. And we'll really be deciding that based on the criteria of what's best for the business.

Okay. And so I guess going back to a previous question in regards to the cause of the 2 million bump up in guidance for the fiscal year, kind of coming into the fiscal fourth quarter. Can we assume it's the new product, Sotradecol, Abscess, as well as your PTA the profiler? Is that being launched in fiscal fourth quarter here?

The profiler is still in test market. We're still learning from the test market and tweaking the product as we normally do during a test market period. I do not anticipate a release in Q4, although it's possible that it could happen late in Q4. It will probably be in Q1 or Q2.

The reason for our increase in guidance really has to do with strength across our entire portfolio. It is not materially dependent on any one product, especially, Sotradecol, because Sotradecol is just too new for us to hang the quarter on in our guidance.

So there is some upside on the Sotradecol side. But it's very, very hard to predict it at this stage. We don't have enough history. What we are basing our confidence in Q4 on in our increased guidance is, or are the products that got us to overachieve in Q3. And those are the really all of our major segments -- Morpheus, the dialysis catheters, the angiographic catheters and VenaCure.

Okay, terrific. And can you refresh my memory, last question here. Just as far as the manufacturing of Sotradecol, is that done in the Ireland facility and then imported into this country? Is that --

That's correct. It's manufactured in Galway Ireland by Bioniche Pharma and then imported into the United States directly to us.

Okay, and as far as third-party payment for I guess Sotradecol in Varicose veins -- small veracious vein procedures. Is that 100% across the border? Is that very localized payer by payer kind of process for...

Well, it's more generalized than localized. And I would want to clarify that the drug is only reimbursed when the procedure is reimbursed. So if this is purely a cosmetic procedure, there is no reimbursement for the drug or the procedure. But in a case where the insurance is paying for the procedure of larger symptomatic veins, then the drug has a code. And it is being reimbursed in general terms.

Okay, thank you very much guys.

You're welcome.

And our next question is Nelson Scharadin, Punk Ziegel.

Good evening Eamonn and Joe. Two quick questions. Can you provide any detail on how you plan to identify and track the market share or the penetration rate of Sotradecol versus the generic or the illegally compounded version?

That's quite a challenge for us. We're doing that with surveys by our sales force and marketing teams. We're also getting information from the American College of Phlebology and other societies through their membership surveys. And any other means we can. From Bioniche Pharma themselves, who are also conducting surveys. But the majority of the market as of today is still converting, still going through their inventories and converting from their prior supply to the now legally marketed Sotradecol.

Do you think in the future it's possible to get some INS data on that?

It's going to be, it's potentially possible. It's just imagining someone conducting a survey asking how much illegal drugs you use. It may -- it may be difficult to get good information on that. But I wouldn't put it past INS; they're pretty good.

And lastly here. You made mention here, correct me if I'm wrong, about potentially moving into larger veins. I assume that's the SFA. How much of the market is expanded in that regard?

Well, we are indeed looking to expand the usage of Sotradecol into larger veins. It's -- Sotradecol's primary use is for extremely small veins for cosmetic purposes, called spider veins or telangiectasias. And the drug works very well in mid-sized veins and potentially can work very well in large veins like the great saphenous vein, which is one of the larger veins, with our proprietary slit catheter technology delivery.

We anticipate that that's going to expand the market for vein treatment in general by offering lower entry points for physicians to perform vein therapy quickly and easily. And that could really accelerate market growth. There are a lot of contingencies to factor into that statement in that reimbursement for the use of Sotradecol for large veins like the great saphenous vein would have to be established and be competitive with laser treatments.

And also there will be the technology competition between a laser and a drug therapy. Some physicians will prefer drug therapy. Some will prefer laser therapy. Patients think lasers are sexy and often ask for it by name. So we don't anticipate that this is going to cannibalize the laser market for quite some time, if ever. But we'll potentially open significant avenues of expanding the market, accelerating the expansion on the market by offering those lower barriers or entry points.

Thanks a lot, Eamonn.

And sir, we have a question from the line of Larry [inaudible] with HMTC.

Good afternoon, Eamonn.

Hey Larry, how are you?

Great, how are you? Looking forward to seeing you at SIR. I joined the call a little bit late. Are you planning to feature any new product of service, if you've talked about it, we can talk offline about it. But if you haven't, are there any new introductions you want to talk about that we might look for at SIR?

Yes, at SIR, we're going to be featuring our Sotradecol because we're really, really just introducing that product, especially to the interventional radiology community. This will be the first large meeting of the interventional radiology community that we have attended since we were in an inventory position. And many interventional radiologists are still not aware that Sotradecol has been approved by the FDA and is readily available from AngioDynamics. So we're anticipating that that's going to be a big meeting for us.

In addition, we are now in full marketing mode for our TOTAL ABSCESSION drainage catheter which was released from test market in December, late December and is getting rave reviews from physicians. It's a -- drainage catheter has a very easy to use locking mechanism and is very patient-friendly in that it's very, very comfortable for the patient to have for long periods of time. So we're also going to be beating that drum very loudly at the SIR meeting in Toronto.

And then a follow-up question in competitive issues. How do you, do you see any particular competitors being particularly pesky or strong or anyone where you're seeing that they're perhaps not dedicating as much resources to the market?

Well, we definitely have seen a shift over the years of our major competitors away from the interventional radiology marketplace towards the cardiac cath lab. And that would go for Boston Scientific, Cook Incorporated and [Cordis], J&J very much so. They have focused their resources and their A teams on the cardiac cath lab and really put really minimal resources into the PVD marketplace and the interventional radiologist specifically. And that's created a real opportunity for us asince we focus on the interventional radiologist as the real centerpiece of our business strategy.

We have now another major competitor in Bard. Bard has focused more on the PVD space than they have in the past. At least we have noticed them more, and they're doing a fine job of servicing the marketplace. So we're paying a lot more attention to Bard these days than we did let's say five or certainly 10 years ago. And a little, a little less attention to Boston Scientific and Cook and Cordis than we used to, although we still pay a lot of attention to them. And don't take them for granted. They do fine work. It's just their real focus has been the cardiac cath lab as of late.

Great, I look forward to seeing you next week. Thanks much.

Thank you.

And our next question is from the line of Jason Mills with First Albany.

Thanks, Eamonn, thanks Joe. Can you hear me okay?

I can hear you fine. How are you doing, Jason?

Good. Thank you very much for taking the question. Eamonn, I couldn't help but notice the aggressive plans to continue to build your sales force. And I wanted to ask you, I know AngioDynamics does a very good job of covering the United States market. But could you talk about the plans for the additional 14 or so in fiscal '07?

Are you going to be refining the territories and focusing sales reps in the smaller territory and going deeper? Or is there sort of "dirt" so to speak that you're not covering that would provide an opportunity for de novo sales if you will in regions that you'll be adding a field territory manager?

Well, it's more a case of us going deeper than covering new ground. We're looking to increase our call frequency on the ground we're covering right now. And we are investing in sales force expansion at a rate that's commensurate with our sales or revenue growth. So if we grow our revenues 29%, we're growing our sales force approximately 29%.

And we are trying to get to 70 territories to cover the United States as quickly as we can while staying within those parameters of investing in our sales force. Because we really feel there is a rule of thumb that we'll hit an optimal return on investment at about a 100 physicians to each rep. So when we get to 70 that should cover the 7,000 physicians that we target at a very efficient rate.

Again, that's very helpful. Moving back to the Morpheus for a second and specifically the (indiscernible) inserted catheter market, are there -- are there planned iterations to the Morpheus that are coming in the next 12 to 18 months as you continue to try to focus on that market? And what are the opportunities, number two? And number three, are there other products that can be sold along with Morpheus that either you will develop or acquire that may provide a synergistic effect to your business in the PICC space?

Well, Morpheus has been and continues to be a tremendous success story for AngioDynamics. And we are definitely planning on adding to our Morpheus product line with line extensions that really leverage the excellent features and benefits that the Morpheus provides and our strong intellectual property that covers those features and benefits.

The opportunities for line extensions are actually as large or bigger than the Morpheus opportunity themselves or itself. The primary user of PICC lines in the hospital are the nursing staff. And the Morpheus is currently optimized for image-guided interventional radiology placement. And we are definitely interested in optimizing a Morpheus that would be optimized for the nursing staff our non image-guided placement as well. And that opportunity is actually much bigger than the image-guided placement.

Great. That's precisely what I was getting at. And I'm wondering if you could help [inaudible] and then also provide any if you want to I suppose, you didn't want it to give it away. But if you wanted to some timing for an expanded product line. It looks like to us an interesting growth area for the Company.

It definitely is an interesting growth area. We're really not in a position to give out dates at this time. But you can rest assured that we're working on that diligently and expect that we'll have numerous product lines -- product line extensions in the Morpheus area in fiscal 2007.

Okay.

We are, to answer the third part of your question, we are definitely interested in additions to that line and are looking internally and externally for ways to supplement it.

And what additions specifically your product areas would make sense? Just help us there.

Products in vascular access would match the Morpheus and complement it very well. So when you say PICC, the next word is [inaudible]. It is very, very large market in vascular access that's growing and has opportunities as well that are right along the same call point.

Got it. And last question, I appreciate the time. On the Sotradecol front, you're obviously working to optimize the slit catheter. When will that be ready to go and when will you distribute the Sotradecol with the slit catheter, how will that combination work together?

Well, it's hard. It's premature really to say when that will be ready to go. We're in the stages of really optimizing the catheter, forward delivery of Sotradecol. As far as to the question of whether it'll be packaged together, that is an option that we're considering very strongly. There are a lot of imperial entanglements when you mix a drug and device from a regulatory perspective. So we're trying to consider those very thoughtfully.

But that is definitely one of the options and we are very excited about that opportunity. It really leverages two major assets that we have and provides a lot of synergy between the two of them.

Great. Well, I appreciate your taking the time with me. Thanks.

Thank you Jason.

Your next question is from the line of Chris Warren from Janney Montgomery Scott.

Thanks so much for taking the question. Just if you would please remind me again the point at which the TOTAL ABSCESSION was approved and the point at which the market versus the time that Sotradecol was approved? And the point that it actually reached the market.

The TOTAL ABSCESSION was approved in the spring, I believe, of 2005. I believe we got our 510(k) approximately that time. And we released it to national marketing in late December. The Sotradecol was approved in, that was approved in, I believe--

In August --

I believe it was spring also of the --

2005.

2005. Might have actually been earlier than that.

December [inaudible].

And product was released for sale by us in December. We didn't have any inventory to speak of until mid January.

Okay thank you on that. And just continuing on the Sotradecol front. In the marketplace when you've been speaking or your sales force have been speaking with docs, has there been a difference in the interest level between hospital interventional radiology suite and the vein center outside the hospital?

There is a difference. The focus of our sales effort is definitely gravitating towards the office based practice. We believe that office based practice is best suited to provide the best service for patients who have, or are suffering from venous disease. On top of that the reimbursements for the VenaCure procedure are far more attractive in an office based setting than they are within the hospitals. So there's another incentive for the physician to move towards an office based practice.

So we're definitely focusing our sales efforts more towards the office based practice of the clinicians, the interventional radiologists and vascular surgeons then in the hospital. Having said that, we spend a lot of time in the hospital with many of our other products with the same customer base, so we are definitely on both sides of that coin.

Is conversion proceeding more rapidly in one of those areas than the other?

The, definitely office based practices are expanding more rapidly than hospital base.

And their uses of Sotradecol is also expanding more rapidly than a hospital?

That it's early for us to say. But what I've seen so far with very little data, I'd agree with that.

Okay and then final question for you. I know it's tough. It's early days. What do you think peak penetration of the Sotradecol opportunity that you spoke of in your conference call might be in terms of percent?

In terms of percent of sclerotherapy?

Yes as defined by your preceding comments.

Well, we think that Sotradecol being the only approved Sotradecol. There is only one other sclerosing agent that is approved by the FDA and that's sodium morrhuate. It's been approved for a very, very long time. And is not used for a number of reasons very often. It's almost never used these days. So Sotradecol really has a preeminent position. And it being the only FDA approved sclerosing agent that is desirable and FDA approved, we think it's going to be preeminent in the marketplace until there is competition.

We don't see competition in the pipeline. [Polydocanol] is not in the pipeline as far we can tell. And since Polydocanol has never been approved in the United States in the past that would require a full blown NDA to become approved as opposed to the abbreviated NDA that Sotradecol enjoyed. So we see Sotradecol really being dominant. It's really a question of the market evolving away from illegal or compounded agents and moving towards mainstream day and day out legally approved drugs. And a drug in Sotradecol.

Then how do you move against the pharmacies that continue to use, or continue to compound the illegal stuff?

Well, Bioniche Pharma has been getting more and more aggressive in enlightening the local compounders that this is the, not a legally count down practice once an FDA approved drug is available. They've been getting more and more aggressive at pursuing their rightful position in the marketplace. And we're certainly doing everything we can to assist them in that effort.

Are they calling the pharmacies and saying look this is the illegal or what tactically are they doing that is making them more aggressive?

They have been sending out written notifications. And I've -- we've seen those routinely. And I really don't know if they've been also calling. But they have been doing a written campaign.

Okay. Thank you, very much. I appreciate all the time.

You're very welcome.

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And our next question is a follow-up from the line of Phil Nalbone with RBC.

Eamonn, just looking for clarification on the indemnification clause with Biolytic. Are they continuing to pay the attorneys fees real time as this debate continues or, have they ceased to doing that?

They are continuing to pay them. And as our negotiations go forward, we anticipate that they're going to continue to do that. They've told us that they're very interested in keeping our business. And have been accommodating in our negotiations. So we're hopeful we can reach an accord that suits both parties.

Very good. Thank you. Good night.

Great.

And with that ladies and gentlemen, I would now like to turn the call back over to Eamonn Hobbs for any closing remarks.

Thank you. In closing, I would like to say that this has been an extremely gratifying quarter where on the financial side, we managed a 73% growth in net income. A 35% increase in operating and gross profit, as well as a 56% rise in earnings. On the product side, we experienced very strong growth from the company's newest products and continued market share gains of our existing products. In addition, we launched Sotradecol and TOTAL ABSCESSION, which have the potential to be strong additions to our product portfolio.

The uniqueness of AngioDynamics within our industry is a result of our innovation, our diversified product offering and our strong physician relationships. We look forward to continuing to develop in all these areas in the future. On behalf of AngioDynamics, I want to thank you all for your continued support, and I'm looking forward to seeing some of you at our upcoming conference events. Good night.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.