AngioDynamics Inc (ANGO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AngioDynamics third quarter fiscal 2007 earnings conference call. My name is Katina, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Doug Sherk, please proceed.

Thank you, operator, and good afternoon, everyone. This is Doug Sherk with the EVC Group, Investor Relations Partner to AngioDynamics. Thank you for joining us this afternoon for the AngioDynamics conference call to review the financial results for the third quarter of 2007, which ended on March 3, 2007. The news release announcing the third quarter results crossed the wire this afternoon shortly after the market closed. If you haven't received a copy of the release and would like one, please call our office in New York at 646-201-5445, and we'll get one to you immediately.

Additionally we've arranged for a taped replay of this call, which may be accessed by phone. Replay will become available about one hour after the conclusion of today's call and remaining available for seven days. The dial-in number to access the replay is 888-286-8010, or for international callers 617-801-6888. Both numbers will need a pass code of 50281930. That's 50281930. This call is being broadcast live and an archived replay will also be available. To access the live Webcast, go to AngioDynamics Website at www.angiodynamics.com.

Before we get started, during the course of this conference call the company will make projections of the forward-looking statements regarding future events, including statements about the outlook for revenues, gross margins, and earnings per share for the fourth quarter of fiscal 2007, and preliminary gross margin and net income outlook for financial 2008. The company's projections and forward-looking statements are based on many risks and uncertainties that could cause actual results to differ materially from expectations. These factors may include, but are not limited to: the integration of the RITA Medical business, future actions by the FDA, or other regulatory agencies, results of pending or future clinical trials, market acceptance, foreign currency exchange rate fluctuations, the affects on pricing from group purchasing organizations, competition, litigation, overall economic conditions, and general market conditions. A detailed discussion of the risks and uncertainties can be found in the company's SEC filings, specifically the company's annual report on Form 10K for the year ended June 3, 2006.

In addition, during today's discussion, management will comment on both actual results and certain nonGAAP results. Reconciliations between GAAP results and these nonGAAP results are provided in today's earnings release, which may be accessed on the company's website at www.angiodynamics.com. Now I would like to turn the all over to Eamonn Hobbs, President and Chief Executive Officer of AngioDynamics.

Thanks, Doug, and good afternoon, everyone. Thank you for joining us this afternoon to review the progress we are making at AngioDynamics. With me is Bob Mitchell, our Chief Operating Officer, and Joe Gerardi, our Chief Financial Officer. Since we last talked with you in early January, our entire organization has been hard at work on an extensive number of initiatives, including: first we obtained shareholder approval and then closed the acquisition of RITA Medical on January 29. Once the acquisition was closed, we began aggressively implementing the plan to integrate RITA's operations into ours. As part of this plan, we completed the transitioning of the RITA and AngioDynamics product line management into two new groups, interventional and oncology.

With this structure in place, we moved quickly to train the AngioDynamics sales team on the special access catheter product lines, now under their stewardship, and completed this training just as the quarter drew to a close. We expanded our vascular access port portfolio with the launch of the Smart Port CT at the Society for Interventional Radiology show in Seattle. We continued to build our efforts to educate physicians on the effects of using nonFDA approved products in their clinical practice, an occurrences that is impacting Sotradecol sales.

We also prepared for the Diomed patent litigation trial, which began on March 12th. Closing arguments were made yesterday, and the jury deliberation has begun. We spent a great deal of management's time preparing for this trial and we -- we believe we presented a very strong case for the jury to rule favorably for AngioDynamics. We also continued the execution of our development plan for our IRE technology, as well as other new interventional and oncology product development.

And finally today, we are delighted to announce further expansion of our senior management team. Effective April 16th, D. Joseph Gersuk, has accepted our offer to join AngioDynamics as Senior Vice President and Chief Financial Officer. Mr. Gersuk's career has spanned 25 years in the field of finance. He has served as CFO of three technology companies, including publicly traded MapInfo Corporation, based in nearby Troy, New York. His experience also includes a broad financial and operating background in domestic and international businesses. Joe Gerardi, who has served as our CFO since 2004 and has been a full participant in our plan to expand the senior leadership here at AngioDynamics is thankfully going to remain with us as Vice President Special Projects. Joe Gerardi is going to lead the efforts to fully integrate the RITA operations into the AngioDynamics organization, as well as work with us on other special projects in the corporate development area, while Joe Gersuk will oversee all aspects of financial strategy and management of the company. As you can tell, it has been a very, very busy time around here.

When we last spoke to you, we indicated our intentions to update you on our financial outlook once we closed the RITA acquisition. After the close we found it difficult to pin down some specific accounting metrics with our advisers. One prime example was the amortization schedule for the RITA assets. It took us until this past week to get all these details resolved. At the same time as we closed the transaction, we made a decision to report on our revenues by the two major product groups, interventional and oncology. Bob Mitchell who joined us last fall as our Chief Operating Officer, led us to this decision. Having been in the industry for 20 years, Bob rightfully pointed out that the level of detail we've historically provided across seven product lines has become far too consuming when you add the RITA products to our portfolio mix. These two factors led us to conclude that it was worth waiting until today to provide you with some detail on our operating model going forward. I'll -- I hope you'll accept our apologies for the delay.

Despite all the activities going on here at AngioDynamics, our team remained focus and delivered 35% revenue growth over the prior year quarter. We set a new quarterly revenue record for the company and our business was strong across most of our product line. We are on track to generate the approximately $9 million in cost savings that we set out to achieve when we first announced the RITA acquisition back in November, and prior to the acquisition costs, we delivered on our profitability targets. We came out of the fiscal third quarter extremely confident about our strategies and growth prospects. After Joe reviews some of the quarter's financial highlights, I'll spend a few minutes reviewing those strategies and prospects before opening up the call to your questions. Joe.

Thanks, Eamonn, and good afternoon, everyone. Given that our third quarter financials are quite involved due to the RITA transaction, I'm going to focus my comments this afternoon on what we believe are the highlights of our income statement and balance sheet. Our net sales for the fiscal third quarter were $26.7 million, which is a 35% increase over the prior year's quarter. Our sales included contributions from RITA product lines, from the period of January 29 through March 3.

As restated in the news release, upon the close of the transaction, we immediately transitioned the RITA product lines into -- and our seven AngioDynamics product lines into two major product groups. We believe that presenting the sales information in this manner going forward will enhance our sales and marketing efforts and enable the existing AngioDynamics sales force to focus on the interventional product lines while the existing RITA team focuses on the strength in the oncology market. Familiar with the company, understand the transition interventional product sales include the existing angiographic, thrombolytic, dialysis, IGBA, PTA, Venous, and drainage product lines that have also included RITA's Port product license, as well as the hemodialysis catheters, Venous catheters, needles and PICC products into our interventional group. The remainder RITA product lines, which include the RFA and embolization and surgical recession products now comprise the oncology product group.

Interventional sales for the third quarter totalled $24.5 million while the oncology product sales for the period of January 29 through March 3 totalled $2.2 million. To give you a little color on the performance of the individual product lines, our sales growth was led by strong gains of our -- of the IGVA group, PTA, drainage product lines, as well as the contributions from the acquired oncology product lines. In particular, we generated exceptional growth from the Morpheus CT PICC, the Mariner angiographic catheters, and the TOTAL ABSCESSION drainage products.

Our largest sales product lines in terms of absolute dollars were angiographic, dialysis, and IGVA. No product lines grew during the quarter were the exception of thrombolytic. As you noted in the news release, we experienced slower than anticipated sales growth from the Venous products, dialysis products, and the acquired RITA interventional products. We believe the biggest factor behind the slower growth was the delay in purchase-making decision created by the patent infringement trial involving our VenaCure product line. The six -- first six months of 2007, Venous products have risen by 54.4% and in the third quarter they were up only 3%. The trial began on March 12, closing arguments were made yesterday, and the jury deliberation has begun. We believe -- we presented a very strong case for the jury to rule favorably in AngioDynamics and we expect the VenaCure sales growth to resume in the fourth quarter.

Turning to gross profit, we continue to make solid progress in this area. Gross margins were 59.6% compared with 58.4% in the third quarter of fiscal 2006 and 58.5% in the second quarter of fiscal 2007. The margin improvement is being driven by strong sales of high-margin products and a one-month contribution for the RITA Medical product lines. Excluding amortization expense on the step up basis of inventory acquired in the RITA transaction, gross margin was 60.8%. The association with the RITA acquisition, we recorded an end process R&D expense of $12.1 million. Without the end process R&D expense, our R&D expenses during the quarter rose to $2.1 million or 8% of net sales versus $1.4 million or 7% of net sales during the same quarter of fiscal 2006.

Expense for stock-based compensation impacted operating expenses by $884,000 and the RITA product lines generated some operating losses during the fiscal third quarter. All totalled, the operating loss was $10.5 million. Excluding the end process R&D expense and stock-based compensation, our operating profit for the quarter was $3.5 million versus $3 million for the third quarter of 2006. Our income tax with provision for the third quarter of 2007 was $918,000 compared to $1.2 million in the period -- same period last year. The $12.1 million charge for end process R&D booked in connection with the RITA acquisition is a nontax deductible and greatly impacted the affect of the tax rate for the quarter. Without the impact of this charge, our effective tax rate was [34.5%] compared with 39.4% for the prior period. Due to the addition of R&D credits that are available to the company after the RITA acquisition.

The company generated adjusted income, a nonGAAP measurement, which excludes stock-based compensation, amortization of acquired intangibles and one-time acquisition costs, net inapplicable income taxes of $3.4 million or $0.18 per diluted share in the third quarter of fiscal 2007. In the year-ago period, income -- adjusted net income was $2 million or $0.15 per diluted share.

Now let's turn briefly to the balance sheet. For the closing of the RITA Medical acquisition, we had cash and marketable securities of approximately $67 million as of March 3, 2007. With the acquisition of RITA, our accounts receivable increased to $18.9 million, that's compared with $13.5 million as of the end of the third quarter of fiscal 2006. Inventories increased to $27.3 million from $16 million for the third quarter of fiscal 2006, primarily due to the impact of the RITA acquisition as well as our own business growth. Other impacts on the balance sheet for the RITA acquisition include an additional $42.9 million of intangible assets and a deferred income tax benefit of $15 million, resulting primarily from the available NOL carry forwards with a tax value of approximately $30 million, which we can use to offset quarterly tax payments for the foreseeable future. We also have $166.1 million of goodwill as of March 3, 2007, and shareholder's equity of $337.3 million. For the quarter ended March 3, 2007, our fully diluted share count was 19 million shares. I would now like to turn the call back to Eamonn, and certainly welcome any questions regarding our third quarter and year-to-date financials during the Q&A session. Eamonn.

Thanks, Joe. I would like to provide you with a little more detail on the three product lines that experienced slower-than-expected sales growth during the third quarter, as well as provide you with some insight on our strategies to build the momentum for these lines. I'm very confident that we've got answers to the issues and that we'll see improvements in all three areas during the fourth quarter.

The biggest issue was the impact of the patent infringement trial involving our VenaCure product line. As Joe mentioned, closing arguments in this trial were made yesterday and jury deliberation has begun. We believe we presented a very strong case for the jury to rule favorably for AngioDynamics and regardless of the outcome, expect VenaCure's strong sales growth to resume in the fourth quarter. Our second product line performing less than our expectations is Sotradecol, a sodium tetradecol sulfate infection drug used to treat varicose veins. We continue to see the market opportunity for this drug to be in excess of $70 million and we have the only FDA-approved product. However, sales continue to ramp up, but are lower than we originally expected due to the residual activities surrounding compounding pharmacy or sodium Sotradecol sulfate. We've begun expanding our efforts to educate physicians on the affects of using nonFDA approved product in their clinical practice including the illegality and increased liability they incur by using a nonFDA approved product and find that once aware, the physicians get it.

At the same time, we are finalizing our plans to begin a consumer education campaign and are expanding our efforts on the lobbying front. For instance, we are encouraging support for Senator Kennedy's proposed bill to rein in compounders who are selling unapproved bulk product into the pharmaceutical chain are encouraged by the FDA's recent seizure orders for polidocanol drugs. In addition, we are -- we were included in an article on this topic in the most recent issue of the Congressional Quarterly. We believe over time as we begin gaining traction with our education efforts, that we will see a corresponding increase in the ramp up of Sotradecol sales. We've also found the selling cycle of our Morpheus desk size insertion kit is proving to be longer than anticipated. In response, we're introducing an improved product this month, so that our Morpheus product will be the only PICC bedside insertion kit that offers a standard straight outer diameter and rehearsed taper catheter shaft design options. The flexibility this provides is a big advantage to clinicians and should enable to us build sales momentum with this line.

Finally, we saw some softness from the RITA product line since the acquisition, but feel that the completion of the transition to two distinct product groups and the accompanying sales management transition has gone well. We've got about three weeks under our belt since the transition occurred, and I believe we are seeing positive trends. All in all, we've accomplished a lot during the quarter and continue to do so. The RITA acquisition continues to be integrated in a very smooth fashion, which I would largely attribute to the shared culture of the two organizations. Joe Gerardi's prime focus going forward will be to make sure the integration is successfully completed within the next 12 months and we are highly confident that he'll make that happen.

I would like to add that the vast majority of our product lines are doing very well in the marketplace and we believe we continue to build market share. Given Joe's earlier comments on the various product lines, I won't belabor the point, but I do believe it is important to remember that we've built both product line mass and sales force mass in the market through the RITA acquisition. By next year, we aim to have just about 100 representatives in the United States market every business day, building awareness and sales of our broad product line. As I speak to you today, the U.S. sales force stands at 88 and we've been very successful at maintaining the RITA sales talents that now focusing on bringing our oncology product line group to the market.

As we look ahead to the fiscal fourth quarter, we are beginning to benefit from our organization's focus on the two product groups, oncology and interventional. As a result, revenues for the period ending June 3, 2007, are currently expected to be approximately $40 million to $43 million. The interventional product group is expected to generate revenue of approximately $32 million to $34 million, while revenue from oncology product groups should be approximately $8 million to $9 million. Our gross margins for the fiscal fourth quarter will be impacted by the accounting principals requiring RITA inventory to be recorded at the fair value of the inventory at the date of the closing of the acquisition. This revaluation or step up in value of the assets assigned at fair value to the inventory versus the historical cost of the inventory. Due to this revaluation of RITA's inventory relative to the historical cost spaces, we expect to incur a one-time inventory step up in the value charge during the fiscal fourth quarter that will reduce gross profit for the fiscal -- fiscal fourth quarter by approximately $900,000. As a result, gross margin as a percent of sales for the fiscal fourth quarter is expected to be approximately 58.7% versus nearly 61% without the charge.

The company has also recently received the preliminary evaluation analysis of the RITA Medical acquisition, as -- as determined by the company's independent evaluation firm. As a result of this analysis, amortizable intangible assets have increased by $1.4 million from the original estimate of $41.5 million, and the analysis determined that the intangible assets have a five-year shorter useful life than was originally estimated by the independent evaluation firm in November 2006. The analysis will result in higher-than-anticipated amortization expense of approximately $0.01 per share per quarter beginning in the first quarter of fiscal 2007. As a result, earnings per share and adjusted income per share for the fourth quarter is anticipated to be approximately $0.13 and $0.25 per share on a fully diluted share count of 24.6 million shares.

As we begin fiscal 2008 in June, several positive trends should take hold. During the fiscal fourth quarter, we will begin selling the Smart Port CT, which virtually doubles the market opportunity in this segment with an extremely value-added product. We think the Smart Port CT expands the total domestic market opportunity AngioDynamics is addressing in ports by approximately $100 million. We will also be introducing the exciting new addition to our PTA product line with a full market release of Profiler. The domestic market for Profiler is approximately $90 million.

These new additions, plus the expanded sales potential created by our transition sales organization, and the end of the market uncertainty created by the patent litigation positions us for full-year revenue growth of approximately 55% to 60% over fiscal 2007. After the fiscal fourth quarter of 2007, there will be no more amortization expense charged to cost of goods sold, and our goal is to move overall gross margins to approximately 61% to 62%. We believe at that -- at this point in time we'll generate cash of approximately $30 million, net income in the $15 million to $17 million range, and have a share count of approximately $25.2 million. It is important to note that we are still working on the overall plan for fiscal 2008, which as you know won't start for another two months, and we'll plan to provide you with more granularity on FY '08 in our fourth quarter fiscal year-end conference call. However, results like this would illustrate the potential of AngioDynamics to generate increasing levels of shareholder returns as we move into the future. So with those opening remarks, operator, we're ready for questions.

Thank you for that presentation. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Phil Nalbone representing RBC. Please proceed.

Good afternoon. Eamonn, I wonder if we can start with fiscal '08 guidance. The expectation is for 55% to 60% topline growth. Can you talk about what that contemplates in terms of the outcome of the Diomed patent case? What are you assuming happens with the VenaCure line in that year?

Hi, Phil. As we've said all along, the outcome of the Diomed patent case is really not -- we don't see that being very material to fiscal '08 for a number of reasons. First off, our overall gross margin subsequent to this case being completed should actually go up because our cost of goods will go down significantly because part of that today incorporates indemnification insurance that is paying all the bills in the -- in the trial and paid all our legal costs, part of that concerning this case. So the net-net is even if we have to pay a royalty going forward, we should still end up on the positive side.

On top of that, we -- the market doesn't stand still and we anticipate that there are going to be innovations in the market to move the bar higher and new products entering this field that will positively impact fiscal year '08, so we're feeling very comfortable that fiscal '08 is going to be a very, very positive year for our Venous products and that our Venous products will continue to be some of our fastest-growing products in the mix.

Okay. Could -- can you walk us back through some of the analysis you provided regarding a net income expectation? I believe you gave some numbers that I didn't hear.

For the fiscal year '08?

Yes.

We're looking at net income of $15 million to $17 million. I should stress, though, that because of the accounting treatment of the acquisition, you should also take a look at our adjusted income numbers, because there is some pretty significant difference in some of the nonGAAP numbers with regard to the bottom line. As we mentioned in our disclosure, we're planning to generate in excess of $30 million in cash and part of that difference from the GAAP net earnings of $17 million are $17.1 -- excuse me, $7.1 million in tax credits from a net loss carry forward that we acquired in the RITA acquisition, and also the -- of course the amortization and depreciation expenses are much more significant now, which factor into that as well. Okay. Maybe you can talk a little bit about the breakdown of revenue in the interventional bucket that you're expecting for the fiscal fourth quarter, Eamonn. Can you -- can you give us some sense of what you're expecting the RITA Port Access product to do?

Well, with regard to the -- the new product just recently introduced? The Smart Port? Well, really that whole line of Port Access products, inclusive of the CT capable.

Well, the answer to that really centers around, when we bought RITA, the RITA business was divided into two halves, one growing quite well and that's what we're now calling the oncology products group, and the other half being what RITA terms specialty access catheters, which were primarily the ports. And RITA has a -- and Angio now has a number two business in ports. That business, unfortunately, was not growing. In fact, it was actually declining at single-digit rate. So in Q4 we anticipate we're going to be able to turn -- stem the tide there and turn that -- that decline in sales into at least flat to positive. As we've said before in fiscal '08, we are very bullish that we can get the growth in the port business up to our company average growth based on the focus of putting our entire interventional sales force on those products.

Okay. Thank you.

Your next question will come from the line of Suraj Kalia representing Piper Jaffrey. Please proceed.

Yes. Good afternoon, gentleman. Eamonn, if I look at the organic growth, just per my calculations, if I look in Q1, it was roughly about 26% year over year, Q2 is about 30%, and Q3 was 6%. And this is organic, if I'm just looking at five -- at removing five weeks of RITA Medical, again, an approximation. I do understand it might be a little here and there. The question I have is, this patent dispute with Diomed has not been -- has been going on for some time. What changed in this quarter for the sudden drop in overall -- or in revenue growth? What was the thing that was different relative to Q1 and Q2?

Well, the difference was the proximity of the trial. Our competition was out beating the drum that we were going to -- they were very confident they were going to get an injunction and -- and carve this market up solely by themselves, and basically put fear in our customer base that AngioDynamics and Vascular Solutions and others in the marketplace were not going to be around and they should not embark on any new purchases of laser systems with us. So customers -- some customers took a wait-and-see attitude that they could easily table their purchase until the trial was over and see what the landscape looked like. So we -- we interviewed a number of customers and got that same response where they said, look, I believe you guys, but your competition is whispering in my ear, or yelling in my ear that I should be very concerned as to your viability in this product line for the long term, so how about I just wait until after the trial and then we'll move ahead.

So we expect Q4 to be very, very strong in our Venous products because of that, because we've got a pent-up demand, if you will. We saw -- going backwards, we saw Q1 was a little slow in our Venous products, which is typical. Q2 was really an outstanding quarter for our venous products, and then Q3 definitely saw it slow the closer we got to the trial date, i.e., in our Q3 of December, January and February. December was our best month. January started to slow, and February was very slow. So, I would anticipate that it's going to pick up very shortly because all the questions in the mind of the customers will be gone.

So -- so Eamonn, can you shed some color in terms of what was the contribution from VenaCure sales? My understanding -- or as as a percent of overall organic revenues ex-RITA probably in the 15% range. One is my assumption fair? And two, what will you say if you can shed some color on what the contribution was in Q3 relative to Q1 and Q2?

Well, we're -- if you look at historical numbers as of Q2 and factor in the RITA acquisition, the VenaCure product line would be slightly less than 8% of overall revenues, and what we're looking to do going forward is to provide data on our two product groups, oncology and interventional without giving our -- tipping our competition off to a lot of detailed information on each individual product line. We will be providing qualitative analysis on each product line -- each major product line to shed color on how they're doing. So the VenaCure performance in Q3 was very much disappointing from our perspective and we anticipate -- and we know exactly why that happened and we're very bullish that we're going to be able to correct that in Q4, as soon as this trial is finished, which should be eminently.

So your guidance for FY '08, Eamonn, what -- and maybe you've already answered this, but what is your internal strategic expectation on VenaCure as being part of the overall growth engine?

We believe that VenaCure is going to be one of our fastest-growing products in fiscal year '08 and the reason for that is the market is only 15%, 15% penetrated so far. So there's tremendous upside for all players in this space. And we feel that given that, we're very, very well positioned with our product to be able to take advantage of -- of that fast growth in this area and see that going on for many years to come.

So is it fair to say that you'll have factored it into FY '08 guidance? Sorry for belaboring this point, I just need to make sure I understand it right?

Oh, absolutely. We -- regardless of the outcome of the Diomed trial, we have contingency plans to be selling a VenaCure product that definitely is included in our FY '08 guidance.

Okay. In terms of -- what were the -- Joe, what would the legal expenses in the quarter related to the litigation?

Very minimal. They were indemnified from the trial by our laser back supplier, Biolitec. There were minimal expenses associated with the -- with our -- out of pocket.

Out of pocket expenses were minimal. The distraction was considerable. Yes.

Okay. In terms of the sales force, your SG&A on an absolute basis has increased. Obviously you'll have a higher sales head count with the Rita acquisition. Eamonn, can you help us understand -- my understanding was the RITA acquisition was -- sales force was going to be pushing to the oncobiotic product. Can you help us understand how the sales force is positioned right now and how should we look upon it moving forward, especially for FY '08 as a percent of sales?

Well, as a percent of sales, ex-FAS 123(R), we've been in the 35% to 36% range. And over the course of the fiscal '08 period, our goal is to get the sales expenses back in line with that ratio. It's going to start out this year a little higher and then come down over the course of the year. There are a number of factors to consider. One is that we have also via the acquisition now have a very active and fertile international sales organization of 11 people that is extremely productive and we are planning to continue to invest in and expand as opportunities present themselves. The domestic sales efforts are divided up into two groups, the interventional group and the oncology group.

The oncology group is virtually identical to the sales organization that we acquired in the RITA acquisition. It's comprised of approximately 30 people between territory and clinical specialists. These numbers do not include managers on the domestic side. They are totally focused on half of the historical RITA business, the half that is made up of radiofrequency ablation, surgical resection devices for oncology and chemo-embolization products. That segment of the RITA business was growing very, very well, and we anticipated that the added focus that we now provide to that sales team is going to help drive those sales at an even higher rate.

The remaining products, the interventional products are comprised of the AngioDynamics products combined with the specialty access catheters that we acquired in the RITA transaction, and we have a sales force of 58 territories and clinical specialists, so our total sales territory force today is approximately 88. We intend to continue to grow that as we can afford to do along with staying inside that test G&A goal and we hope to be at 100 sales reps or close to it by the end of the fiscal '08 period.

Perfect. Gentleman, thank you for taking my questions.

Thank you.

Next we'll have Jayson Bedford representing Raymond James. Please proceed.

Hi. Good afternoon. Can you hear me, gentleman?

We can hear you fine, Jayson, how you doing?

Okay. Doing well, thanks. Just a couple quick questions. Of the $24.5 million in interventional revenue in the third quarter, what -- what were port revenue in that quarter?

Well, we're -- we're hesitant to give out detailed product information on the ports because of competitive issues. That's what we're trying to get away from. And although ports made up the vast majority of the RITA revenues that were incorporated in the interventional numbers and if you looked at historical numbers from RITA, you'd -- it was approximately 50% of the revenues. So if you see what the oncology revenues are about $2.2 million, it's going to be somewhere near there just by deductive reasoning. But what we're trying to do, Jayson, is stop giving the competition detailed -- detailed sales by product information because they're gaining more from that than we are.

Okay. If I look at -- I'm just trying to figure out what's change over the last few months. If I look at your guidance -- your topline guidance for fiscal '08, I'm assuming that 55% to 60% growth is off a consolidated '07 revenue number, which if I take the mid point of the fourth quarter looks to be about $112 million, $113 million, which puts you at about $170 -- $174 million, $175 million in fiscal '08. Is that the way I should interrupt your guidance?

Yes, fiscal year end guidance basically comes out to approximately $114 million, and that's a consolidated number of a piece of RITA in Q3 and all of RITA in Q4 and in a -- in applying that growth factor that you mentioned, that'll get you up to where our guidance is.

Okay. And so with that number, let's call it mid-to-high $170 million, what is -- what's changed over the last few months? Is the base business a little slower, is the port business going to take a little longer to ramp? I'm guess I'm just trying to figure out what's going on there.

Well, it really came down to the short fall in Q3, which was associated primarily with the Venous products. VenaCure definitely had a slow Q3 that we think is a transient function of the trial. Sotradecol is ramping nicely, but not as nice as we anticipated it would. It is definitely one of our fastest-growing products and had an excellent Q3 relative to prior quarters, but it's not -- it's not getting to us where we thought we'd be as fast as we thought. We've got a lot of initiatives going on to correct that and we're pleased with the progress we're making on those initiatives. And the last short fall is the bedside insertion kit for Morpheus. We're introducing improved product there and we are gaining traction in that area, so a little slower -- a lot slower take up than we anticipated. So we think Q4 we get right back on track, but we can't make up in Q4 for the short fall -- transient short fall in Q3. And then we get back on track with '08 growth over the '07 finish and we're feeling very good about it -- about the business right now.

Okay. Just last couple of questions here. The guidance for the fourth quarter EPS number, that $0.13 is a GAAP number?

That's a GAAP number.

And then what's the -- what are the adjustments that lead to the $0.12 delta between the GAAP number and the $0.25 number?

Well, there are a number of adjustments. There's a -- the FAS 123 expenses, the inventory write-up of approximately $900,000, the amortization expenses for the acquisition, and the tax NOL impact, because we're not going to be paying those taxes in that quarter. We get full benefit for the quarter.

Okay. And your assumed tax rate in the fourth quarter is roughly 38% on a reported basis?

That's right, 38% in the GAAP number. And for '08 we're looking at approximately 39%. 38% to 39%.

Okay. And then just on '08, do you have just a raw absolute number of what you'll charge to amortization in '08?

Probably about $7 million.

Okay. And there -- are there -- besides stock options, are there any other noncash items in that '08 number?

No, not really.

Okay. And then, I guess for you, Joe. In terms of integration time lines, can you maybe walk us through what's left in terms of integrating RITA?

Sure. We're right on course for our integration plan. We made the initial cutting that we needed to do and we're integrating their IT system with ours. We should be going live with the customer service piece of the SAP module, and really we're working on from now until the end of probably the first quarter is getting the rest of the facility up on SAP with all of the accounting system, as well as the inventory management system. And as we roll that on and get that going, we'll find future synergies from there.

Joe, I would say that we're very pleased with the integration as it stands right now. We're on track to meet or exceed the $9 million in cost synergies that we anticipated. The morale and attitude of both of the companies is excellent. I think cultures are melding very, very well, and we really feel very, very comfortable with the way that entire integration is going.

Okay. Thank you.

The next question will come from the line of [Gregg Brash] representing Sidoti & Company. Please proceed.

Hey, Eamonn. Hey, Joe. Thanks for taking my call.

Hi, Greg. Taking time off your conference.

I am, I am. So as far as -- I know you don't want to break out revenues for each product, are you also unwilling to break them out for the product segments as you had in the past?

Yes.

Yes, yes. We're trying to get away from that. And we had seven major product segments and now we have 11, if we kept with that philosophy. So we're scaling back to two, and we'll be providing metrics on two product groups from now on: the oncology and the interventional product groups.

Okay. And looking forward to fiscal '08, just for me to try to come up with an EPS number right here, you said gross margins, 61% to 62%, SG&A, 36% to 38%, but then you mentioned net income around $15 million to $17 million, is that then also including the $7 million in amortization?

Yes.

Okay. Do you know what --

But as far as the SG&A metrics, we didn't give that metrics right now. We'll be a little bit on the higher side -- we'll be the 38% to 39%.

Okay.

Probably more like 39%, because that's something we're going to finish this year, 39%, and we'll continue that.

Okay. Do you know what your stock option expense range that may be in '08?

About $5 million.

Okay. $5 million, before or after tax?

Before.

Before, okay. Lastly, I was wondering if you could just talk a little bit more about the changes to the Morpheus bedside insertion? What went wrong there, and what is this change going to help fix?

Well, the improvement really centers around the addition of a reverse taper product to the bedside insertion kit, which the clinicians were -- have been telling us since we introduced the Morpheus would be an excellent addition, broadening the product line would differentiate our product even further from that of Bards, and -- one of our major competitors, and help to push that business forward. But there are a lot of moving parts with the bedside insertion kit. So to walk through those, the -- the sale point is a complex one, including the physician, the nursing staff and administration. So everyone gets their fingers in that pie. In addition, being able to bundle the bedside insertion kit with our current sales of Morpheus CT PICC, and the broad product line, and market share position of the port business now, is a great advantage.

So having said all of that, what we anticipate is going to happen is we're going to continue to come at the market from our strong point, and that is the clinician -- or the physician, rather, the interventional radiologist, the doctor, and leverage our business into the bedside insertion marketplace from that perspective, because many of the bedside PICCs are placed by PICC teams that actually report into the interventional radiology department. Bard comes at this market from the other side of leveraging their strength with the general nursing community, and they leverage that along with their broad product line to get the bedside insertion business as well. So you can see how we're both coming at this market from our relative strengths. We're still very optimistic that we're going to succeed in this space, but the selling cycle, because there are so many fingers in the pie, is quite long.

The good news is once we convert accounts, the numbers are quite substantial and it has the potential of a halo affect from a bundling perspective with other imagine-guided vascular access products. So what went wrong really is we underestimated the time necessary to get into the market and during that time we learned from the successes that we did have and took that knowledge and leveraged it into an improved product offer, which now provides one of the -- if not one of the, it is the broadest product line in the business and we feel very confident we can compete effectively for market leadership.

Okay, great. And one last question for Joe. Could you break out the sales and marketing and G&A for the quarter?

Let me see here.

Sales -- sales are approximately 21%. And marketing is typically about 8%. And it was in this quarter also.

Yes. Because you've got all the one-time charges in there too, right now, so -- yes.

Outside of one-time hits.

Okay, okay. That's very helpful. Thank you.

Your final question will come from the line of Tom Kouchoukos representing A.G. Edwards. Please proceed.

Hi, guys. Thanks for taking my question.

Hi, Tom.

A couple quick ones, most have been answered. I know you won't give line items, can you talk to what RITA as a -- as its own entity would have put up in the fourth quarter would you guys not acquired them?

Well, they -- they -- our first quarter or theirs?

I'm sorry, in -- sorry, this past quarter.

In the Q3?

Yes.

It -- We didn't look at it that way.

You did $2.2 million for the five weeks you had, right.

That was just the RF business.

The oncology business.

The oncology business.

Okay. What was the whole business for the quarter -- if they would have had a whole quarter's worth, what would it have been? What was their contribution if you would have had a whole quarter?

Well, it -- we'd be talking about unaudited numbers, first off, because -- and we really don't have them, so we can -- we can estimate roughly what January was. We didn't close on the business until the end of January so it was sort of a lost month. Approximately $13 million.

Okay. So looking at growth rates, was there your typical transition issues that might have slowed things down a little bit? Did you have any rep turnover with them at all?

There definitely were the typical transition issues were the throttle -- the foot came off the throttle there for a while, because January was a -- had a -- had a number of factors. One, January was the first month following a fiscal year finish for the RITA sales force. They were on a calendar year, so the -- notoriously the first month after the finish of a year is not -- is not one you want to extrapolate from. Two, it was a time of uncertainty for the RITA sales force as to what the organization was going to look like. The turn over in the sales force has actually been lower than average during the transition process. We normally budget for industry average turnover between 15% and 20%, and we've actually seen turnover that's significantly lower than that during the period. So we're very pleased by that. We certainly are looking forward to that hopefully continuing. And we really didn't spend a whole lot of time getting too flustered about the RITA performance in -- prior to us buying the company, because they posted their Q4 numbers and they were very solid and we were pleased with them.

Yes. Okay. And then looking at the core business, in -- with respect to guidance and all the questions about VenaCure have been asked. It sounds like you guys are pretty confident that that's going to come back. On the Sotradecol side, would you say that -- I think you had had a $5 million target out there for fiscal '07. Is that where some short fall will be that you won't get to that number?

Yes. No. We're definitely not on track for that number. We have continued to see sales ramp in Sotradecol, but we're definitely farther out to hit that $5 million to $6 million number. And we are pleased -- Sotradecol is one of the disappointments of the year, but on the other hand we are pleased with the fact that it is ramping up nicely, it's just not meeting our expectations on what we anticipated for a ramp. We're also pleased with all the programs going on to rein in -- the only competition we have is illegal bulk compounding of sodium tetradecol sulfate or polidocanol. The FDA has initiated seizure without inspection at all borders for polidocanol and the active ingredient to compound polidocanol, because it's never been approved in the U.S. and it's illegal to import. On the compounding side, the compounders have raised the attention of congress on a lot of issues outside of our small Sotradecol issue, so we anticipate that with bipartisan support, the Kennedy bill is going to be enacted within the next six months, maybe a lot sooner than that, and that going to dramatically impact our $70 million market. We still believe the market's at least $70 million, $70 million in the United States and growing, and we're really the only player positioned to service that marketplace with a -- an FDA-approved drug.

Okay. Then, I guess on the earnings front for '08, you talked about $15 million to $17 million on a GAAP basis, including amortization, including your stock option expense. On the EPS line, did you give that number of what that -- I guess we could figure it out pretty easily, I just don't have it in front of me. I guess what I'm looking for, what was your $0.05 accretion on a GAAP basis accretive to? What was your base number? Was it what the street had out there?

No. We have not given '08 guidance, so it was based on internal calculations, based on long-range forecasts. We are still very comfortable that the RITA acquisition is at least a $0.05 accretive deal on GAAP. On an apples-to-apples basis, as we said prior. And that includes the increased amortization expense that is additional to the initial estimates that we got in the -- from our outside consultant early in the game. They've revised that up slightly and shortened the useful lives, so we'll have some additional amortization, but even still, the transaction is very accretive on a GAAP basis, north of $0.05, and on a nonGAAP basis, it's wildly accretive, it's still in the 40% range -- the $0.40 range.

Just one last one. On the oncology side, it looks like from the most recent RITA quarters, that LCD has been one of the faster-growing products. And I would expect that's going to continue for the next several quarters. Can you give some context what part of the product line that makes up, and what kind of growth rates you expect there?

Well, it's a relatively small part of the product line. It was just introduced in May. It's going to -- I would agree that it's going to be one of our fastest-growing products and is going to increase in importance as a percentage of sales, but up until this date, it's still really in the embryonic stage.

Okay. As it ramps up, can you talk a little bit about what your margin is with that product?

We are really trying to keep away from giving competition that kind of data.

I'm trying to look at it from a perspective, since you are a distributor of it, should we assume it's a typical distribution-type arrangement?

Yes. Yes. What I would guide you towards would be our overall gross margins that -- where we've taken that into account. Because we really don't like to give the competition that kind of information to come back at us with.

Okay. Actually, I have one more. I'm sorry. The Profiler, did you guys launch that this quarter on a test basis, or is that really going to be an '08 event?

We launched the Profiler to a test market in -- early in the fiscal year.

I remember that, but I think you said Q3 you would have had it on the market.

That -- that's right. Q4 is when we are actually releasing it. Full-blown, no-holds bar release. So it's finally been pushed out of the nest.

Great. We'll see impact largely from that in '08, then.

Yes.

That's all. Thanks guys.

Thank you. We have time from one more question from the line of Ed Antoian representing Chartwell. Please proceed.

Hi, guys. A couple questions. I won't ask for numbers, but maybe you can tell us qualitatively how did the kit business do versus the box business do in the Venous business?

Well, qualitatively, the kit business was up in Q3, but at a lower rate than prior quarters. There was definitely some slowing and that we believe ties right back into not selling new boxes and -- because when we get an account up and running, there is a bullous of kits that typically go into the new --new account, so that has an impact. So the -- that and Q2 kit sales were extremely high, and we thought that that was because Q1 kit sales were kind of slow and there is a lot of seasonality in that varicose vein business. So we expect Q4 kit sales to be back on track with -- with historical norms of very, very hefty growth rates. And boxes as well, yes.

Eamonn, also, on Sotradecol, you had gotten the distributors out of the game and were able or at least supposedly be able to take some of the share back from that part of the market. Did that -- what, if anything, change there?

No, nothing changed. We are -- we are enjoying that as they run out of inventory at the hospital level. I believe all the distributors are out of the game now. They've gone through everything, so we are seeing a very, very healthy growth curve in Sotradecol. It's steady and very healthy, it's just about half the slope that we would have liked to have seen.

And on dialysis, not last quarter by the quarter before, your dialysis business was relatively weak, and then last quarter it rebounded quite strongly and you said qualitatively that was a weak business for you this quarter. Two quarters ago, it was -- at least some of the issues were customer-specific. Any other comment about the cause for this quarter?

Well, we're still flushing or rationalizing some customers, that should be out of there by the end of this fiscal year. But there is increased pricing pressure in the dialysis segment. There's no doubt about it. We're seeing a lot of competitive efforts to compete on price and we are being selective with our business because we're not looking to commoditize our current business or grow based on win on price. Although, it did was -- it did not meet -- qualitatively meet expectations this quarter. It still had a very healthy growth rate.

Okay. I was just kind of curious, that was the issue six months ago and last quarter you had just a great quarter in dialysis.

Yes.

So was there any kind of promo activity or --

No.

-- or sales force focus last quarter that pushed the number higher than it normally should be?

Quite frankly, we just whipped them. We were pretty surprised by the really weak Q1 in dialysis and we made it well known with our salespeople that they need to pay for attention to dialysis and they did and they did in Q2. Q3, they've come back and told us in no uncertain terms that they're paying plenty of attention to it, but competitive pricing pressure is -- is new and very aggressive.

Okay. Alrighty, that's all I have. Thank you.

Thank you, Ed.

There are no further questions at this time. I would now like to turn the call back over to Mr. Hobbs for closing remarks.

Well, thank you. So in summary, we're very pleased with the integration of RITA Medical Systems and look forward to leveraging our two focused sale groups in Q4 and beyond. We look forward to discussing Q4 and year-end results during our next call. Thank you all very much for dialing in today, and I'll look forward to speaking to you all soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.