AngioDynamics Inc (ANGO) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the AngioDynamics Fiscal 2006 Fourth Quarter Financial Results Conference Call. My name is Carlo, and I will be your coordinator for today's presentation.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's conference, Kim Golodetz. Please proceed, ma'am.

Thank you. This is Kim Golodetz with Lippert/Heilshorn & Associates. 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 its financial results for the fourth quarter of fiscal year 2006, which ended on June 3rd, 2006. If you have not received this news release, or if you would like to be added to the company's distribution list, please call up at Heilshorn in New York at 212-838-3777 and speak with [Nydia Fortia]. This call is being broadcast 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.

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 limitation, the company's Forms 10-K and 10-Q, which identity 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, August 10th, 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, Kim, and good afternoon, everyone. Thank you for taking the time to participate in our year-end conference call. We've had an extremely active year, introducing three new products and building market share for several products introduced in fiscal 2005. All told, our sales were $78.5 million in fiscal 2006, a record for our company and an increase of 30% over the prior fiscal year. Our fourth quarter sales were a record as well, at $23.6 million, up 36% from the prior year fiscal quarter. During the quarter, we completed a $62 million follow-on equity offering, which will help us greatly to accelerate our growth going forward, particularly via acquisitions.

I will talk about our initiatives, where we are, and where we intend to be, during this conference call, including financial guidance for fiscal 2007. But before I do, I would like to turn the call over to Joe Gerardi, who will go into the financial results for the quarter and year in greater detail. Joe?

Thanks, Eamonn. I'd also like to thank everyone for participating in today's conference call. While it's been a very strong quarter for our core business, several nonrecurring items impacted our bottom line. I will therefore go through the income statement with you, and also give you a pro forma look at numbers to quantify the effects of nonrecurring items.

I also will discuss the excellent unit growth in our key product lines. Net sales for the fourth quarter of fiscal year 2006 increased 36% to $23.6 million, up from $17.3 million for the fiscal fourth quarter of 2005. The increase is primarily due to the growth of our many product lines within our diverse product portfolio. Also, because the fiscal calendar, which ends on the Saturday closest to the last day of May, the fiscal 2006 fourth quarter ran from February 26th through June 3rd, meaning we benefited from an extra week during the quarter and the fiscal year.

Gross profit for the quarter was 39% to $13.6 million, compared with gross profit of $9.8 million for the prior-year fourth quarter. Gross margin increased 140 basis points to 57.7, up from 56.3% for the comparable fiscal 2005 quarter. The increase in gross margin was largely the result of a product mix favoring sales of higher-margin products, such as our Morpheus CT PICCs, even more dialysis catheters and VenaCure disposable kits.

On a sequential quarter basis, gross margin was slightly lower than the third quarter, largely because we sold a record 50 lasers during the fiscal fourth quarter; that compares to 29 lasers in the preceding quarter and 37 lasers for the fourth quarter of fiscal 2005. As of June 3rd, 2006, we've had 411 lasers in the field. The lasers carry lower margins, but, of course, laser sales drive future sales of disposable kits, which have a higher gross margin.

Operating profit for fiscal 2006 fourth quarter increased 23% to $3.1 million, or 13% of net sales. This compares with operating profit in the prior-year quarter of $2.5 million, or 15% of net sales. Selling and administrative expenses were $9.1 million for the quarter, or 39% of net sales, up from $5.9 million, or 34% of net sales, for the prior-year period. Selling expenses were proportionately higher largely due to the expansion of our direct sales force. Research and development expenses was $1.4 million for the quarter, or 5.7% of net sales, which is slightly higher than the $1.3 million, or 7.4% of net sales reported in the fiscal 2005 fourth quarter.

Several nonrecurring costs were incurred in operating expenses in fiscal 2006 fourth quarter. These include expenses related to an attempt to make an acquisition that was not consummated, expenses related to our initial compliance with Sarbanes-Oxley Act, and miscellaneous legal expenses. These nonrecurring expenses were approximately $476,000 net of taxes, higher than we had previously anticipated, or 4% per diluted share. The effective tax rate for the 2006 quarter was 39%, compared with 36% for the fourth quarter of fiscal 2005.

The higher tax rate in fiscal 2006, resulted from recording the fiscal year's research credit evenly throughout the fiscal year, compared with accounting for all of fiscal 2005's research credit during the fourth quarter of that fiscal year. The effective tax rates for both periods would have been approximately 39% had the research credits been recorded consistently throughout fiscal 2005. Taking a look at our bottom line, net income for fiscal 2006 fourth quarter was $2 million, or $0.15 per diluted share, this compares to a net income of $1.7 million, or $0.13 per diluted share, in the prior-year quarter.

This represents a 22% increase in net income and a 15% increase in diluted EPS. Just a reminder, the fiscal 2006 diluted EPS figures includes the one-time expenses, which total about $0.04 per diluted share. Now I'd like to give you some insight on the performance of our premier product segments. The sales of endovascular products were $6.3 million in the quarter, up 27%, or $1.3 million, over the prior year on growth and procedure volume and market share gains over several products in that category. Sales of dialysis products grew 21%, or $936,000, to $5.4 million, with the sales of the DURA-FLOW catheter being the leading contributor to the sales in that category.

Sales of venous products were $4.3 million in he quarter, up 64%, or $1.7 million, over the fourth quarter of fiscal 2005, with VenaCure procedure kits growing 78% over the prior year quarter. Vascular access product sales increased 55%, or $1.3 million, to $3.6 million in the quarter, with the Morpheus CT PICC accounting for the most of the gain in the product line. We recorded a again of 53% in sales of the thrombolytic products, to $1.5 million, from $1 million last fiscal year. Sales of drainage products were $820,000 for the quarter, up 84%, or $375,000, with the Total Abscession catheter comprising 100% of the growth. The Total Abscession was launched nationwide during fiscal 2006.

Turning now to our fiscal year results, net sales for the 53 weeks ended June 3rd, 2006, was $78.5 million, up 30% from net sales of $60.3 million for the 52 weeks ended May 28, 2005. The increase was primarily due to higher sales across our diversified product line, most notably our Mariner Hydrophilic Catheter, Morpheus CT PICC, DURA-FLOW, and even more dialysis catheters, and the VenaCure product line, basically, the same products that sold well during the fourth quarter of the fiscal year.

Net income for the fiscal year 2006 was $6.9 million, up 51% from net income of $4.5 million for fiscal 2005, and diluted EPS increased to $0.53 from $0.37 last fiscal year, up 43%. Just a reminder, the fiscal year 2006 diluted EPS figures included one-time expenses which totaled $0.04 a share. Gross profit for fiscal 2006 was $45.5 million, or 58% of net sales, compared with gross profit of $33.4 million, or 55% of net sales for fiscal 2005. The fiscal 2006 gross profit margin of 58% represents an improvement over the prior year of 266 basis points. The company generated $3.2 million in cash from operations during fiscal 2006. This compares with $4.8 million in cash from operations during fiscal 2005.

The reduction in cash was due in large part to the increase in receivables arising from our record-breaking quarter and inventory purchased in advance of our national release of the Morpheus insertion kits. As of June 3rd, 2006, AngioDynamics had cash and investments of $89.8 million, compared to $27.1 million at the end of fiscal 2005. The significant increase in cash was largely due to the completion of the follow-on equity offering of 2.76 million shares, which raised net proceeds of $62.2 million. Our day sales outstanding was 49 in the fourth quarter of fiscal 2006, compared with 48 in the fourth quarter of fiscal 2005.

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

Thanks, Joe. I am very proud of the AngioDynamics team and the solid fourth quarter and year we're reporting to you today. Our strategy is to harness our technological expertise in conjunction with our keen understanding of the marketplace and the highly specific needs of our physician customers. Our pledge is to continue to introduce at least two new products a year.

As I said earlier, we introduced three new products during the past fiscal year, including the Total Abscession drainage catheter, which went into nationwide launch during the fiscal year, the Morpheus CT PICC insertion kit, and Sotradecol, an FDA-approved drug for the treatment of uncomplicated varicose veins. In addition, we had excellent unit growth across our key product lines as products introduced in fiscal 2004 and 2005 posted strong results.

For example, sales of our Mariner Hydrophilic Catheter more than doubled quarter-over-quarter. We anticipate sales of the Mariner Catheter to continue to exhibit strong growth as our broad line of angiographic catheters grows at double-digit rates. We are also very pleased with our sales efforts for our line of sizing catheters. Sales were up 52% in the quarter. Overall, angiographic sales were up almost 27% in the fourth quarter, compared with the same period last year. We are very encouraged by the $5.3 million in sales from our dialysis products during the quarter. The DURA-FLOW, and even more chronic dialysis catheters, for example, are particular standouts,. And we believe these catheters will continue to be strong performers for us.

We're seeing solid growth among our image-guided vascular access products, including the Morpheus CT PICC, which we introduced in the second half of fiscal 2004. I realize that I have devoted a lot of time in the past talking about the Morpheus CT PICC, but this product just continues to be a top performer, with sales up 79% in the fourth quarter, to $2.4 million. This catheter allows both imaging agents and chemotherapy drug to be delivered through these same catheter, avoiding the need to put in a second line in the patient in order to perform a CT study.

We launched a Morpheus CT PICC insertion kit nationwide during the fourth quarter. This allows nursing staff to insert the Morpheus CT PICC at the patient's bedside, if necessary. We have very high expectations for this product offering. Although our thrombolytic products account for a small portion of our total sales, we are getting excellent interest from our customers on a couple of products in this area, resulting in a 53% increase in our thrombolytic product sales. Our Uni*Fuse catheter is being used to deliver a thrombolytic drug that is the subject of a phase III clinical trial by a pharmaceutical company.

Of course, we believe that the course of our Uni*Fuse catheter is a clear one, and this reinforces why physicians have made our thrombolytic catheter delivery systems the leader in the market. Our drainage catheter products are starting to make strides in the marketplace, with excellent reception to our Total Abscession drainage catheter, which we launched in December. Sales have ramped up from $221,000 in the fiscal third quarter, to $437,000 in the fiscal fourth quarter.

Our venous product lines for the treatment of varicose veins are strong contributors to our top and bottom lines, growing 64% over the prior year's fourth quarter. We continued to increase the number of lasers sold each quarter. Our installed base now numbers 411 as of June 3rd. Sales of our lasers are exceeding our expectations, and we sold a record-breaking 50 units in the fourth quarter. Sales of our VenaCure disposable kits, which provide a significant source of high-margin recurring revenues were up 78% over the fourth quarter of fiscal 2005.

We anticipate that our laser sales will continue to generate significant disposable kit revenue going forward. I would also like to review our strategy regarding Sotradecol, which we launched in November 2005 following the signing of a seven-year agreement with Bioniche Pharma. Sotradecol is the only FDA-approved sodium tetradecyl sulfate injection and a well-known molecule in the U.S. sclerotherapy market. Sotradecol fits hand in glove with our existing VenaCure product portfolio. Sales of Sotradecol were approximately $200,000 in the fourth quarter.

This was lower than anticipated, because the product continued to be available to our physician customers through other distribution channels. Accordingly, we took steps in the fourth quarter to ensure that our marketing of Sotradecol would be successful, by amending our agreement with Bioniche Pharma. This amended agreement gives AngioDynamics sole distribution rights of Sotradecol to all customers in the United States. Because of the amendment, we are now clearly positioned to focus our efforts on converting the market from illegal importation and custom compounding sources, to our FDA-approved Sotradecol.

Our original agreement limited sales to interventional radiologists, vascular surgeons, general surgeons and certain other physician specialties. Moreover, Bioniche could sell Sotradecol through wholesalers, hospital pharmacies and other select specialties. This confused the market. In many cases, AngioDynamics would convert customers to Sotradecol, only to have a the order placed through a Bioniche wholesaler. The amended agreement clarifies to the market that AngioDynamics is now the exclusive source of Sotradecol in the United States.

We will continue to educate physicians that Sotradecol is the only FDA-approved sodium tetradecyl sulfate injection, and that it is available only from AngioDynamics. The practice of illegal importation, or pharmacy compounding of sodium tetradecyl sulfate that is not subject to stringent FDA manufacturing quality controls cannot be tolerated. AngioDynamics will continue to educate physical customers that purchasing compounded versions of an FDA-approved sodium tetradecyl sulfate injection is a high liability risk.

We will remind our customers that it is illegal to copy an FDA-approved drug. We are confident that our Sotradecol offering fulfills all the customer's sclerotherapy needs, and there should be no acceptable reason to compound Sotradecol for a patient. As we disclosed previously, we expect that the new agreement will result in approximately $3 million of incremental Sotradecol sales in fiscal 2007. The sclerotherapy is quite large, with 1.7 million procedures annually and glowing with the aging of the baby boomers.

We are optimistic that Sotradecol will become a major product for us. However, to educate physicians and displace compounders, and illegally imported drugs could be a lengthy process. Looking ahead, we're looking to optimize our catheter technology for delivery of Sotradecol for potential use in the ablation of larger veins, including the great saphenous vein, which could transform the vein treatment market.

I'd like to mention a source of some frustration for us during the quarter, which had a modest impact on our financial results. It is the stated objective of AngioDynamics to supplement strong internal growth with strategic acquisitions. During the fourth quarter, we incurred some additional expenses related to an acquisition of a company we were bidding on at an auction. As it turned out, we were unable to consummate the acquisition. More importantly, we believe that the recent follow-on offering, in which we raised $62 million, puts us in a much better position to move swiftly when we locate promising acquisitions.

I also want to emphasize here, as I have in the past, that we have a conservative acquisition strategy that focuses on acquiring businesses that will be accretive to earnings in a reasonable amount of time. Turning now to progress in ramping up our sales force, last quarter, we told you that we expected to have 53 sales representatives at the end of the fiscal year, up from 49 at the end of the third quarter. We have met this goal and currently have 53 sales representatives. We also have eight regional managers.

Last quarter, we announced our expansion would include the creation of two zone director positions that report directly to the Vice President of Sales, both of whom started in the fourth quarter. We intend to increase our total number of field sales representatives to 70 by the close of fiscal 2008. Regarding new products, our stated goal is to launch at least two new products a year. The Profiler PTA Dilation Balloon Catheter is currently in the test market phase of launch, and we intend to release this new product on a nationwide basis later this fiscal year.

As a final topic before taking your question, I'd like to introduce our financial guidance for fiscal 2007. AngioDynamics expects net sales growth to exceed 28% compared to fiscal 2006, to approximately $101 million. Year-over-year net income growth, including the impact of FAS-123R, is expected to exceed 42%, to $9.8 million. R&D expenses are projected to be approximately 8.3% of net sales, while SG&A expenses are projected to be approximately 38.2% of net sales.

Without the effect of FAS-123R, net income would be expected to reach $11.5 million, representing 68% growth from fiscal 2006 and reducing R&D and SG&A approximately 7.8% and 36.3% of net sales, respectively. The total impact of FAS-123R is expected to decrease net income by $0.11 per diluted share. Gross margins have increased nicely, according to plan, and we see gross margins improving in fiscal 2007 by approximately 40 basis points, continuing our goal to achieve gross margins in the low to mid 60% range. Without the impact of FAS-123R, gross margins are expected to improve by 80 basis points.

Operator, we would now like to open up the call to questions.

[OPERATOR INSTRUCTIONS]

And our first question is from the line of Phil Nalbone with RBC Capital Markets.

Good afternoon. Let's start with the one-time items in the quarter. Joe, we were expecting about a $225,000 hit from the unsuccessful acquisition bid. Can you kind of break out what those other items were, and in particular you cited certain legal expenses? Could you talk about what those were?

Most of the other stuff was related to our 404 compliance, trying to consummate that, and finalize that -- the certification of 404, the legal issues. We had a -- Phil, we had a confidential issue with a prior employee that we had to settle.

Okay, all right. So, certainly a nonrecurring legal expense issue.

Yes, for sure.

And then did we kind of have that one-time item related to the acquisition right? Is that about a 225K expense?

It was more than that, actually, when it finalized, yes.

Let's talk a little bit about the gross margins in the quarter. They were down just a touch sequentially, although up nicely on a year-over-year basis. I would assume this was a reflection of the higher than expected number of VenaCure box placements, or were there other issues at work on the gross margin?

No, you had that exactly right, Phil. It was totally due to the record-breaking sales we had in VenaCure laser boxes. 50 was substantially higher than we'd ever done before.

Okay. Correct me if I'm wrong, Eamonn, but I think that the company's stated objective has been to increase the gross margin by a couple of percentage points each year. Your guidance for fiscal '07 falls a bit below that. Why don't you talk a little bit about the expectations there and the mix?

Yes, you're absolutely right in that we look to increase gross margins, on average, approximately 200 basis points per year. We've been tracking way ahead of that in recent years, so we're actually ahead of our plan to reach the mid 60s. This year, we have a pretty substantial incremental component of sales in Sotradecol, which is at a 50% gross margin, which knocks us down really quite substantially. We're looking to manage our business to leverage that Sotradecol relatively lower gross margin in order to get an equal contribution margin out of it as we achieve some success with it.

Okay, so your comments just now would seem to suggest that you're expecting that full contribution in fiscal '07 of the around $3 million from Sotradecol. Is that correct that your guidance of around 101 million bakes in about 3 million of Sotradecol?

Actually, it bakes in more than that, and we don't give individual product guidance, but because we signed the amended agreement with Bioniche, we felt it was appropriate to, in our guidance, reflect what the incremental impact of that was. So Sotradecol sales we anticipate are going to be higher than $3 million. The new contract addendum with Bioniche provides an incremental $3 million upside.

Since really becoming the sole source of Sotradecol in the U.S. market, and I realize it's only measured now in weeks or days, can you talk about what trends you've seen? Have you noticed a meaningful pick up in your Sotradecol orders. Basically, are you tracking to that $3 million plus number already?

No, not yet, and the ink really, as you stated, is not very dry on that contract. We are seeing some progress, certainly some steps in the right directions with sales results, but nowhere near yet what the anticipated impact of that is. As I stated earlier, we were very frustrated by our efforts in converting accounts to Sotradecol, and only to have those orders go through distribution channels that Bioniche had retained.

And as much as we both tried to police that, it just became obvious that we were banging our head against the wall for very little progress. So, the addended agreement really clears up all the confusion in the marketplace. There is only one way to get Sotradecol, and that is through AngioDynamics. So we're planning to very aggressively educate the marketplace as to how to get it from us, where to get it from us and also if you educate them about the perils and risks associated with trying to use illegal substitutes.

Okay, final question and I'll go back into the queue here for a while. Can you talk a little bit about the assumptions for new products that are already sort of dialed into your revenue guidance number for the year? How much of that 101 million is dependent on the launch of anything currently undisclosed and unlaunched?

Well, the only thing that I believe is in the budget, the 101 budget, that we're planning to introduce in fiscal '07 is the Profiler, which is currently in test market. But the amount that is in the budget is really a nominal number. It's very conservative. So the vast majority of the 101 is with products that are already currently released, and as we discussed, the Sotradecol incremental $3 million upside.

Okay, and in addition to Profiler, how many products should we expect this year? How many new products? Will it be one, consistent with your two-product target?

Yes, that's certainly our goal. We did introduce the Morpheus insertion kit, which we expect a lot out of, really, in the, I think, third week of May, the last fiscal year, so with one week left in the year. So we're going to expect quite a bit out of that this fiscal year, it being a product that should see the same kind of success that our standard Morpheus CT PICC has seen. But our stated goal of two new products a year is still very accurate, and we would look to introduce at least two new products this year.

Very good. Thank you.

Thank you.

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

Okay, thanks. Hi, Eamonn.

Hey, Bob, how are you?

I'm good, thanks. A couple questions. First, the $0.04 these one-time charges, as well as the FASB expenses, could you give us a breakdown of where this appears on the income statement? Break it down between gross profit, SG&A and R&D if you can.

Well, the $0.04 is completely contained in administrative expenses in the fourth quarter -- I'm sorry, that's right. That's correct. And FAS-123R is looking to this fiscal year in '07.

The current fiscal year, and we'll [give you] the guidance, I guess. I don't have the breakdown right now for you between -- it's spread throughout.

It has an impact of 40 basis points in gross margin.

Right, so I guess adjusted for that, you'd be suggesting that the gross margin in '07 would be up 120 basis points?

80 basis points.

So, the 80 basis points already makes that adjustment.

That's right, yes.

Going to Profiler, maybe you can put that into some context for us. I mean, it's been in test market, it seems to me, a pretty long time. And could you hone down what later in this fiscal year means? Does that mean first half, second half?

I would think it would mean no earlier than the second half of the fiscal year.

No earlier than the second half.

That's right, which starts in December. And the -- it has been in test market approximately six months, maybe five months. And the purpose of our test markets are to make sure we get it right, and to avail ourselves of a lot of customer feedback, which we're doing. And we're very optimistic about the product, as we were before, but there are some changes to the product that, although they're not what I would perceive to be tremendously significant, we may have to file an additional short-term or special 510k to cover all the changes.

And that will slow us down a little bit, and that's baked into it's coming out in the second half of the year. It might be a little earlier, but I'm not counting Murphy's law in any of those calculations.

And just to remind us, that received FDA -- I thought that received FDA approval in mid '05?

It did receive a 510k, but the test market results have convinced us to make some additions, add some features to the product, and make some changes that require a supplemental 510k application, which is a pretty quick turnaround by the FDA.

Now, also, on Sotradecol, I want to make sure I understand what you mean by an incremental $3 million opportunity. Does that mean an incremental $3 million of sales for you guys, which would equal an incremental market opportunity of $3 million, since you are the market?

That's right. Incremental $3 million in sales, and the -- we are the market. That's right. Our competition in the Sotradecol market is primarily illegally imported or locally compound sodium tetradecyl.

And, per application, just to update us on what you receive revenue per patient for Sotradecol?

It's between $30 and $40, depending on the concentration.

So just multiplying the number of patients, which you gave us that data, 10 to 30 to 40, obviously you've got a market size that, whatever, is 40 to 50 million. And I had thought that the indication that initially Bioniche kept to themselves represented half the market.

That's absolutely right.

But the numbers don't work out, though, do they? I mean, if the total market's 50 million, and the new indication that you just agreed to them is half of that at 25, why isn't your incremental opportunity 25 instead of three?

It is, as far as market size opportunity. I think you've got the numbers correct. But our incremental -- what we're giving as guidance is an incremental $3 million in revenues, because although we are the market from a legal perspective, we are competing with legacy usage of illegally imported drugs and locally compounded drugs. What the wildcard is in our forecast for Sotradecol sales, and our ramp up to really getting the majority of that market, if not the entire market, into our camp, is our ability to displace those legacy drugs. And from the time we introduced Sotradecol to the present, we've been really very frustrated from a number of perspectives.

The biggest one, or one of the two big perspectives, was confusion in the marketplace where we would go in and convert business, only to have that order go to Bioniche, ultimately, through drug wholesalers or hospital pharmacies. And we've cleared that confusion up now, so that's a big step in the right direction, and that should start taking effect -- or already is starting to take effect this month. And the other big obstacle we faced, and we still face, is really getting the compounders to stop copying an FDA-approved drug, which it's illegal for them to do.

And two, to convince physicians that it's extremely risky for them to use a locally compounded drug based on the lack of controls that local compounders have. And this is a sterile injectable. It's not something that you can swallow, or do anything like that. It has to be really well made. And two, convince them that illegal importation is just way off the risk-benefit curve. And if you noticed in USA Today just two days ago, there was a large article on the perils of compounding and the impact on patients, including deaths and serious infections, that were due to a physician using locally compounded sterile injectables which weren't sterile.

And of course, the physician had no way of knowing that, and there were some instances of very serious cardiac infections and some deaths. And then the physician went back through records and found out that this had been happening for a while, and it was finally traced by back the CDC and the FDA to the compounder, who summarily went bankrupt and moved along. So, it's really a big problem. Our little piece of it is our Sotradecol opportunity. The good news is, although this is an extremely attractive market size from AngioDynamics' perspective at currently, as you calculate, about $50 million, it's a very, very tiny marketplace for compounders and the risk-benefit curve for them I think is going to favor them leaving it to us.

And just one final question and I'll get back in queue. An update on your -- I don't know what you would call it, squabble with [Virilitec].

Yes, not a whole lot has gone on recently on the litigation front. And the update is, on the 777 patents, as we disclosed, the judge has recused himself because of a potential conflict of interest, in that he was being treated by an expert witness of Diomed and he didn't know it. But once he realized it, he realized that that could pose a problem for himself. The new judge has been assigned, and is really just getting going. So what that ultimately works out to is, we don't anticipate the judge hearing arguments for summary judgment until January timeframe, maybe even later than that. And if summary judgment is not granted, the trial would not commence until, at the earliest, spring of calendar '07.

Okay, thank you.

Thank you.

And sir, our next question is from the line of Jason Mills.

Hi, thanks, Eamonn, thanks, Joe, for taking the call. Wanted to discuss the middle of the P&L for a little bit more. Specifically, if we go back to the last quarter's conference call and the press release, Eamonn, you guys at that point in time were [carrying into] that call about $6.7 million in guidance for net income and raised it, I guess, to 7.3 million, both of those, I guess, inclusive of the nonrecurring charges that you expected.

And so I was wondering, over the course of the last two to three or four months, what changed, because clearly there was something you saw that made you more optimistic relative to the quarter at that time. And then you ended up coming in, it looks like slightly above where you were originally, had you just left your guidance where it was. So that's my first question, just sort of the dynamics of the last four months, especially given that you were in front of a lot of investors on the road show.

Sure. Well, when we gave our year-end guidance during our Q3 conference call, which, of course, by default gives Q4 guidance, we did not factor in that we were going to fail in our acquisition attempt, because it was looking very, very, very good in that attempt. So, we did not include those expenses.

We didn't foresee at all the confidential legal issue with the former employee. That kind of popped up very unexpectedly. And really, the SOX 404 expense were higher than we thought they were going to be, and that's why we were where we were in our conference call at the end of Q3 and ended up where we are.

Just to go back a little bit, Eamonn, on that. It looks like in the press release you talked about 7.3 million, up from 6.7 million, as your guidance, and if you exclude some one-time expenses of about 400,000, which is within 100,000 of what you actually reported, if you exclude those, the guidance was 7.7 million.

So, are you saying then that you had baked into your fourth quarter guidance, and then therefore for the year, some not only -- not only the expenses as you laid out in the press release last quarter, but some benefit vis-à-vis the sales and maybe earnings from that acquisition in those numbers?

No, no. We didn't think we'd have the acquisition closed, necessarily, at a point where it would have been material for the quarter.

Okay, so, again, given the fact that it looks like you did have about 400,000 in that guidance already and you were a little bit above that, as you mentioned, about 100,000, is there anything else that contributed? Because it looks, again, like if you would have just left your guidance where it was, my guess is people would be relatively happy where you came in on the bottom line.

Right, right.

And so you raised it for a certain reason. I'm wondering what specifically that was. I didn't cover the company at that time, so I'm sorry if this is something everyone else knows as to why you raised guidance at that time. And then what sort of were the dynamics in the quarter that impacted you a little bit, relative to that guidance of 7.3, which includes 400,000 in one-time expenses?

Yes, it was supposed to be $7.7 million, and then we came in -- factoring for the expenses, we came in at 7.8.

Backing out the expenses, you came in at 7.8 for the year?

Yes.

Okay, I can talk to you after the call. No problem. I can go back into that with you. In 2008, the top-line guidance is really strong relative to where we were expecting. Just specifically on the venous line, should we continue, Eamonn, to expense sequential increases in that line, vis-à-vis both the strong laser placements and sort of incrementally Sotradecol. Will that be, you think, your fastest-growing line in the year?

Well, it will be close to it, if it's not it. Right now, it's a real horserace for leadership in fastest-growing product line between the Morpheus line and the VenaCure line. If I had to take a wager, I would probably lean more towards the Morpheus CT, because of our addition of the bedside insertion kit. That really opens up a lot of opportunity for us that we couldn't tackle before, and that product's been really, really strong.

Having said that, VenaCure continues to be very strong. Adoption appears to be increasing and via the very solid laser sales, laser box sales, and continued very strong growth in the consumables. So, we're very optimistic about both of those potentially leading the pack. But, having said that, everything's growing in a very strong way.

And then you mentioned the image-guided vascular access line, specifically ports. You've been sequentially growing 300,000, 400,000 a quarter. It would seem to me with a product line that opens up a complete new segment of that end market that you would maybe accelerate that sequential growth. Could you comment on that, and then also sort of help us understand the vascular access market in total a little bit? In our estimation, I think we kind of looked at a $350 million market, of which it was kind of a third PICCs, a third ports and a third other. Is that approximately right? Are you essentially getting into a third of the market that you weren't participating in this time last year, with ports?

Well, we didn't introduce a port. What we introduced was the Morpheus CT PICC with --

Insertion kit rather, sorry. Right.

And I would say that the market's much more heavily weighted towards PICCs and ports than it is other. It used to be a third, a third and a third, and the central lines have really waned in popularity in the marketplace over the last five years. PICC lines have gotten much more feature laden, and much more popular with the clinicians. Ports have continued to grow in a very strong way. So, that's eating into that other third.

So, it's more like 40-40-20 now, and we certainly are very excited about the PICC side of the business. It is a phenomenally successful product for us that really has only been released to market for a relatively short time, and we're going to be expanding our PICC offering, for sure, to build on that success. Certainly we like all of the image-guided vascular access marketplace and are going to be definitely looking to expand into the other areas as well, including ports and central lines.

Just so I understand, the 40-40-20 is PICCs, ports and other?

And the other is central catheters.

Okay, so the insertion kits fit in the PICCs.

PICCs, they fit in with PICCs, yes.

So, you're still not in most of the market.

That's right.

So, ports, would that be an acquisition or would that be internal development?

I really couldn't say. We'd be interested in either. We're pretty opportunistic. We definitely do not have to invent it here to be very interested in it, but one way or the other, we'll definitely be moving into that business.

You'll be in there. And then just some housekeeping questions for Joe and I'll hope back in queue. First, and I'll just rattle them off here, it doesn't look like you're modeling much in the way of SG&A leverage in the fiscal year '07, Joe, kind of the same sort of as a percentage of sales. Obviously you're building out your sales force. Are you being conservative there? And then if we look beyond '07, should we sort of model it that way? I know you're not giving guidance until later [now], but I just kind of want to talk to the middle of the P&L. And then, where should we model the tax rate for the fiscal '07 and the share count?

Okay, as far as the SG&A goes, we're going to continue to expand our sales force, and we'll have to do marketing, obviously, to support the sales force, and SG&A is going to continue to expand, because although we did have one-time expenses with 404, there will be continuation and recurring expenses now that we're 404 compliant. So we'll have expenses continuing on there, so that's why you're really not seeing any leverage this year.

Just going to interject here. Are you modeling in your current guidance? Does it any other nonrecurring, one-off expenses that you're just not breaking out?

Yes, it does.

Could you quantify that?

Well, as Joe pointed out, we have -- the second year of SOX 404 compliance requires additional audits, as well, that don't continue, hopefully, into the future years. At least with other companies, they haven't.

And carryover is actually carryover from this year's audit into this fiscal year, a first-year audit.

Right, so we have pretty significant expenses associated with 404 in this year that are in the administration line. And I would just add to Joe's comments about our SG&A that our game plan, or corporate philosophy, has been to peg our SG&A at 35 to 36% of revenues --

Right.

By pegging our sales at approximately 19% and our marketing at 8% and then our admin at 8 to 9%. And this year, if you factor out FAS-123, we're right at 36%. So when we hit 70 sales reps, which we're going to do by the end of fiscal 2008, we will then have the option to see some pretty significant leverage on the sales expense line. Now, having said that, I would anticipate that instead of taking advantage of that leverage and putting it to the bottom line, we would probably look to reinvest it in ancillary market sales endeavors.

Okay, I think this is a key point. So if you don't mind, I'm going to -- the Sarbanes-Oxley. I think the way we've been modeling it, for good or for bad, us as analysts, is we weren't maybe as tied into the Sarbanes-Oxley expenses that you would incur, and more so looking at your business as it has been running the last couple of years, and then assuming the build of the sales force and so on, but Sarbanes-Oxley can be a black box, as it ends up turning out.

So, just sort of the elephant in the room here, your guidance for fiscal '07 is lower than where the Street is. I'm wondering how much of that is Sarbanes-Oxley that we just frankly missed, and relative to your comments, Eamonn about you kind of modeling your business and marketing of this much in sales and so on --. Could you just spend a little time there, because I think that really may clear up some confusion and maybe some issue with respect to as people look at the guidance initially, and then sort of understand the components of it?

Sure. Joe, do you want to --?

Sure, I think for this year -- this year especially, like I said, you're going to have carryover from fiscal 2006 into 2007, and then you'll have continuation, or just recurring Sarbanes-Oxley expenses. And this year, we're looking probably at about $750,000 of expenses that's not historically been in our expenses, except for during 2006. That will be in 2007. And then, continuing on after that, you'll probably look at it between 500,000 and 600,000 going forward.

So, there's about a quarter of a million delta there that is kind of nonrecurring?

Right. Yes, exactly.

Got it. Okay, that's helpful. And then the question about tax rate and shares outstanding, and then I'll get out of your way.

Okay, the tax rate will be at 38%. And the diluted shares for the full year will be about 60,260,000.

Okay, thanks, guys. I appreciate it.

Thank you, Jason.

And, sir, our next question is from the line of Matthew Scalo with Canaccord Adams.

Hi, guys. Good quarter, here. I just had a couple quick questions. Can you quantify the gross margin impact of the additional laser boxes sold in the quarter? I think it was about 20 boxes ahead of our expectation.

Yes, it would be, I think, about 50 basis points.

Okay, 50 basis points. And I don't know if this is a fair question, but can you quantify, how much did Bioniche benefit from your marketing efforts in which the hospital would then sell the Sotradecol through pharmacy, what have you, in the quarter? Or were negotiations already ongoing in the quarter in which it kind of disrupted Bioniche's revenue stream as well?

We anticipate that we're going to benefit pretty significantly from the modified agreement in that Bioniche was benefiting in a very material way from our efforts, because our business was going through them. So the question we have is, how much of that is really pipeline, and when will those orders switch over to us to replenish the pipeline. But we looked at Bioniche's running rate, which was quite substantial, and wah-lah, there was our business.

So we're looking forward to that switching over to us. It's a question of how quickly that's going to get to us, and I think that's going to be -- the benefits of that are going to be in Q2 of this year, since Q1 is just a few weeks left, and we just signed the agreement.

Okay, okay, fair enough. Thank you. Did Uni*Fuse -- it was above expectations as well, 50%-plus growth, did that benefit from alfimeprase in their phase III trials? Can you quantify that? Is that going forward? Should we model something like 50% going forward here?

Yes, I think that's a reasonable expectation. The catheter that was chosen to be the sole catheter used in the alfimeprase trial, which are in phase III trial now, those appear to be going extremely well, and we wish them all the best with that. And that, I think, will allow Uni*Fuse business to grow year-over-year at about that same rate.

Okay, and just last question here, as far as the bedside insertion kit, can you quantify gross margin of the kit, versus just the Morpheus CT PICC by itself?

Since it's a brand new product, the gross margins are a little lower than the product we've been selling for approximately a year.

For the longer term?

Longer term, they should be very, very close, if not the same.

Okay, thank you very much, guys. I think, will allow Uni*Fuse business to grow year over year at about that same rate.

Okay, and just last question here, as far as the bedside insertion kit, can you quantify gross margin of the kit versus just the Morpheus CT PICC itself?

Since it's a brand new product, the gross margins are a little lower than the product we've been selling for approximately a year.

For the longer term?

Longer term, they should be very, very close, if not the same.

Okay, thank you very much, guys.

And, sir, we have a question from the line of Chris Warren with Janney Montgomery Scott.

Thank you guys, appreciate it. Just turning to Sotradecol, I believe in your press release you talked about a direct to consumer effort. Could you quantify how much you expect to spend on that in the next fiscal year, and also what patients you'd really be going after first with that?

Well, we are going to be doing some mail and Internet marketing to physicians, and some very nominal direct to consumer initiatives. The costs associated with those are really immaterial. The Internet affords you a lot of opportunity to do things in a pretty cost-effective way. Our primary marketing initiatives with Sotradecol will be the classic ones that we've done all along, and that will be relying on our direct sales force and heavy participation in trade shows to educate the physicians as to the availability and method and getting the FDA-approved drug.

Got you, thank you. A follow-up question on Sotradecol, in making calls around the New York City area, what I've found is a lot of these docs, particularly outside the hospital, just don't want to pay the extra money for Sotradecol, versus what they can get from a pharmacy, et cetera. How do you make a convincing argument to them to spend $30 or $40, as opposed to 10 or 15?

Well, that's the big, big question. And when Sotradecol was not FDA approved, up until 1999, Sotradecol was an FDA-approved drug that was sold by Wyeth and really it was the marketplace. It was what everybody used. So Wyeth, for manufacturing reasons and strategic reasons decided to discontinue the drug and the market was left with nothing. At that point, it was quite legal and proper for physicians to ask a local compounding pharmacy to create a Sotradecol sterile injection for them, because they really had no other choice. It was either don't treat the patient with a drug that works, or have a compounded drug made per patient, per prescription, which is all very legal and proper.

Once the -- and I should add to that, the other way they could go about doing it was to buy drugs overseas and have them imported, which is illegal. But it's only illegal if you get caught, I would say is probably something you heard from physicians you talked to. The change that's happened is once a drug is available and FDA approved, it is no longer legal for a compounder to copy an FDA-approved drug and sell it.

Obviously, FDA doesn't take too kindly to anybody skirting FDA stringent manufacturing regulations and inspections, to ensure the safety of the drug and the safety of the patient population. So, it makes a lot of sense that if there is an FDA-approved drug, you've got to use that one. So we're educating the physicians that they're engaging in something that's not in their best interest by saving $15 per patient, and we're also educating them that illegal importation is illegal importation, and they could lose their medical license if they get caught.

And if you look at the USA Today article that just came out, and there have been many, many articles over the years on the compounding issue, it's all well and good until you get caught. Until you have a patient that gets an infection, because the compounding pharmacy had a bad day, because they don't follow stringent FDA guidelines, and are making different batches of drugs all day, every day which is quite challenging, I would imagine. Once the physician gets caught, then all of a sudden their medical license is on the line, and their only defense is that they wanted to make $15 more per procedure?

They can't say they were trying to do what was best for their patient, because there's an FDA-approved drug. So, really, it's a common sense issue that we are trying to blanket the market with. It's going to take some time, and we're going at it from a number of perspectives, educating our customers about the risks, educating the compounders that there is an FDA-approved drug, and if they don't stop copying it, we're going to take action, and educating our customers that illegal importation really is a very, very bad decision on the risk-benefit curve.

Since most of these -- the vast majority of these procedures are not reimbursed, the use of Sotradecol is primarily for treating small spider veins, which are cosmetic and not typically reimbursed, the physician can simply pass along the extra $15 to the patient. What physicians seem to be concerned about is that if they're the only one doing that, then they're going to be less competitive in the marketplace, and the physician across the street, who's using the illegal, less-expensive drugs, are going to be more competitive. But when patients figure it out, and physicians figure it out, it will all come right.

Got you. What I've been hearing is that the problem might be principally with the compounders at the pharmacies. Is there any direct enforcement action that you can take? Or is it just one of education, and then hope that they see the light?

Well, we're exploring our options with direct actions. The compounding issue is a very complex one, in that compounders are, believe it or not, not regulated by the FDA. Although the FDA has jurisdiction over them, they delegate it to the state drug authorities, which, from our due diligence, the state drug regulatory authorities have very, very small resources that really are incapable of regulating any industry, let alone the compounding industry.

So they kind of fall into a regulatory abyss, where they can do whatever they want, as long as they don't hurt anybody. But the facts are, that the compounding industry is hurting patients, and there are documented instances of patient death, and serious infections, and morbidity as well. So, there are initiatives in Washington to kind of rein this in, and there are also initiatives potentially that we can take to convince compounders that this is really not good business for them.

And, just to follow up, do you have a rough back of the envelope conversion estimate on the compounding pharmacies nationwide for Sotradecol?

No. We have a list of all the major compounders. There's about 80 of them in the United States.

But no estimate as to how many of those are using exclusively Sotradecol now.

No, we don't know.

Okay, thank you very much. Appreciate it.

Thank you.

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And, sir, we have another question from the line of Robert Goldman.

Thanks again. Just a couple more financial questions. Joe, you mentioned the Sarbanes-Oxley expense in '07 of 750,000. I might have missed it, but what was it in '06?

We didn't disclose that. That's why you missed it.

Could you do it? You're making the case here of an increase in the Sarbanes-Oxley expenses.

Yes, it's -- it will be right now probably almost the same in '06 as '07, but '07 is going to have carryover from '06, so all together Sarbanes-Oxley would be probably in '06 $1.2 million.

'06 is 1.2 million and '07 is 750,000? So, actually, your Sarbanes-Oxley expenses go down in '07?

They will, because the consulting to set up the initial Sarbanes-Oxley won't be there, because after we've set it up, the process is in place.

Okay, but that's not -- the other question I was trying to get at, if Sarbanes-Oxley might have been a cause for your earnings guidance less than consensus. That's certainly not the case, because it's the opposite, in fact. But you did mention these other one-time expenses, or at least that you've embedded other one-time expenses.

Those are pretax numbers, too.

Right, okay. What about these other one-time expenses that you've embedded into your guidance for '07? Can you at least quantify in total what those amount to?

Well, what we anticipate in '07 is that 750,000 for SOX compliance --

The 250, which is carryover from the prior year, which won't continue next year, plus the litigation issue carried over a fiscal year as well.

Right.

They're all anticipated, and total approximately 750.

Okay, and then finally, if you can just tell us the number of shares we should use in our model for next year, and some of the significant, if you would, expirations of lockout periods that we should be conscious of?

All right, the number for next fiscal year, total shares will be 60,620,000 and the lockout period for us is over on November 1st of this year.

The lockout period for the primary shareholders expires November 1st, and that's a carryover from the tax-free spin-off, which was conducted under a private letter ruling of the IRS. And in that agreement, the two founding families of EZ-EM, the Stern family and the Meyers family, had certain limitations which will expire on the 1st of November. That's going to unlock about 2.1 million shares that have been locked up, for the most part, over the last two years.

We don't anticipate that there's going to be a dash for those shares to come out, because the company is doing very well, but the restrictions that have been on them will be gone. On top of that, the implications of private letter ruling also limited our ability to be acquired, because of certain tax issues and agreements with our former parent company. So those all expire, as well, as of November 1st. And the possibility of us being acquired would go back to sort of normal circumstances. It would have been very difficult prior to November 1st for us to have been acquired.

And no other -- for instance, on the secondary offering, no other lockup periods of consequence?

The standard 90-day lockups on insiders with the secondary. I wouldn't say that that's very significant.

Okay, all right. Thank you.

Thank you.

And, sir, we have a question from the line of JD Padgett with The Boston Company.

Yes, hi, just wanted to clarify one thing I thought I heard you mention, was that net income, excluding all of the one-time charges, might have been 7.8 million for the year?

No, it was $7.3 million. I think it was actually 7.7 we were talking about, was with Jason Mills looking at the third quarter guidance.

So we would add to the 6.9 million, the roughly 500,000 in one-time expenses.

Correct.

And then the share count, I think you said 16.3 and then the second time around 16.6.

No, I did. I transposed it, and I was just going to clarify that as well, it's 16,260,000.

Okay, great. Thank you.

And with that, we have no further questions at this time. I'd like to turn the call back over to Eamonn for any closing remarks.

Okay. So, in closing, we continue to be leaders in our field, and to maintain our presence at important industry conferences. Our next major conference will be in Rome, Italy, from September 9th through the 14th at the CIRSE, which is the Cardiovascular and Interventional Society of Europe. We're very excited about the prospects facing AngioDynamics in fiscal 2007, and are duly proud of our accomplishments. We look forward to updating you during our next conference call in the fall. Until then, thanks for joining us today.

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