AngioDynamics Inc (ANGO) 2007 Q4 法說會逐字稿

Welcome to the second quarter AngioDynamics earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr. Doug Sherk of the EVC Group. Sir, please proceed.

Thank you, operator, and good afternoon everyone. This is Doug Sherk with the EVC Group. Thank you for joining us this afternoon for the AngioDynamics conference call to review the financial results for the fourth quarter of 2007 which ended on June 2, 2007.

The news release announcing the fourth-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 at 415-896-6820 and we will get one to you immediately.

Additionally, we've arranged for a taped replay of this call which may be accessed by phone. The replay will become available at 6:30 PM Eastern standard time and remain 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 the passcode of 16976535.

This call is being broadcast live and an archived replay will also be available. To access the web cast, go to AngioDynamics' web site at www.AngioDynamics.com.

Before we get started, during the course of this conference call, the Company will make projections or other forward-looking statements regarding future events, including statements about the sales and the Company's beliefs about its revenues and net earnings for 2008. We encourage you to review the Company's past and future filings with the SEC, including without limitation the Company's Forms 10-Q and 10-K which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

In addition, management will be reviewing various non-GAAP measures during today's call. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP. During today's call, the Company will discuss non-GAAP measures adjusted income and adjusted EPS. Adjusted income and adjusted EPS exclude certain expenses relating to the acquisition of RITA Medical, stock-based compensation expense, litigation damages and others, including the cash benefit from the use of acquired net operating losses and assumed taxes on net income using a 39% tax rate where applicable. Management believes these measures provide investors with useful information in comparing the Company's performance over different periods, particularly when comparing this period to periods in which the Company did incur any expenses relating to these activities or items. A reconciliation of all GAAP measures used during today's call was provided in the news release distributed this afternoon and is available on the Company's web site.

With that out of the way, let's turn the call over to Eamonn Hobbs, President and Chief Executive Officer of AngioDynamics.

Thanks, Doug, and good afternoon everyone. Thank you for joining us today to review our strong fourth quarter financial performance. With me is Bob Mitchell, our Chief Operating Officer; and Joe Gersuk, our Chief Financial Officer. After I make a few opening remarks, Joe will review the financial highlights of the quarter as well as our fiscal 2008 outlook. Then we will take your questions.

As we mentioned in our pre-release back on June 6, our team did a good job of executing our strategy and business plan during the fourth quarter. We executed on the sales front and generated net sales of $40.9 million despite the setback from the jury verdict regarding VenaCure. We executed our plan integrate RITA Medical into our company and remain on track to realize the $9 million in cost savings during fiscal 2008 envisioned when we announced the acquisition some nine months ago. We executed our plan to achieve profit growth and generated earnings of $0.29 per fully diluted share prior to onetime charges, and we laid the groundwork for what we believe will be healthy top and bottom line growth for fiscal 2008.

Of course, the biggest development during the quarter was the unexpected jury verdict in the patent infringement trial regarding our VenaCure kits with a bare tip fiber used in laser vein ablation. The jury's verdict was handed down shortly after we last talked with you. Given that we believe the evidence leads to no infringement on the Diomed patents by our original VenaCure kits, we've appealed the verdict and the penalty associated with it. Our appeal is currently expected to be heard in late June of 2008.

After the jury's verdict, we accelerated our plans to bring to market a clearly non-infringing replacement product that we believe is superior to anything offered in this market segment. NeverTouch was launched during the fourth quarter and shipments began on the last day of the quarter, June 2. NeverTouch is in full production today and our customers are giving us excellent feedback on the new product's features. The NeverTouch utilizes a unique noncontact method that completely eliminates even incidental contact by the emitting phase of the fiber with the vessel wall. This incidental contact was the jury's major issue with VenaCure.

Doctors are particularly appreciative of NeverTouch's ability to eliminate incidental contact with the vessel wall because early clinical evidence suggests it minimizes patient discomfort and bruising. We believe that the vast majority of our VenaCure customer base has stayed by our side during this difficult period and we are deeply appreciative of their support. For example, despite all the pressure on our original VenaCure product line caused by the legal activities and market noise created by Diomed, VenaCure kit sales to our installed base increased 10% year-over-year before we stopped shipments in April. With the NeverTouch solution, we have brought to market a better product that clearly doesn't infringe Diomed's patent and we have resumed our active participation in the laser vein ablation market.

As you know, the judge issued an injunction against us selling the VenaCure kits and lasers sold for use with the VenaCure kits earlier this month. We had stopped doing so in April and have fully complied with that injunction while we appeal the jury's original verdict. Meanwhile, Diomed has filed for contempt on the injunction for the simple reason that we continue to sell lasers. Please bear in mind that any laser now sold by AngioDynamics is a laser sold to be used only with the NeverTouch kit, which again, does not infringe. Diomed's filing goes before the same judge who issued the injunction and the timing of any ruling is uncertain.

While we're on legal matters, let the term briefly to the pending litigation with VNUS. As you may know, VNUS has sued us for patent infringement and a trial date has been set for October. Meanwhile, our R&D team has developed some innovative approaches that should allow us to remain competitive in the market should we not be successful in the jury trial. At this point, I need to limit our comments on VNUS to those that I just offered and we will keep you updated on any developments.

Turning to a more pleasant subject, the integration of our RITA Medical acquisition into AngioDynamics is on schedule and going very well. As we discussed with you in March, the sales organization has been integrated into two product groups -- interventional and oncology. I think an excellent example of how well the integration is going is the rebound in sales the team has been able to generate in the RITA Port product line business which had been on a declining revenue trend. We arrested that trend in the fourth quarter. The difficult transition of accounting and systems is largely completed and we expect by the end of September to complete all integration activities.

As I said in the beginning of today's call, we're highly confident that we will realize the $9 million in cost savings during fiscal 2008 originally expected when we announced the transaction last fall.

I'm going to let Joe provide a lot of detail on product line sales performance during his comments. However, I would like to spend a moment on Sotradecol. For those of you with us during our call in March, we commented about the less than expected performance of this product line during the fiscal fourth quarter. Sotradecol is the only FDA approved sodium tetradecol sulfate injectable drug used to treat spider veins. As we previously explained, sales growth had been tempered due to the residual activities surrounding compounding pharmacies for sodium tetradecol sulfate which utilized industrial chemicals that are not FDA approved. We continue to educate physicians on the negative effects of using a non-FDA approved product in their clinical practice, including the illegality and increased liability.

In addition, there have been a number of malpractice cases in which physicians using an unapproved version have incurred substantial economic losses. While we have not seen much momentum on this issue in Washington since March, Sotradecol sales did move up nicely in the fourth quarter. We remain wary of quarterly swings in this product, but we are encouraged by our fourth quarter performance.

Finally, I would like to note the recent expansion of our senior management team. John Soto, who joined us with the RITA transaction, has been promoted to Vice President, Global Sales and will lead our global sales organization. Bill Appling, who has done an excellent job leading our R&D effort, is being promoted to Senior Vice President this week. And last but certainly not least, Joe Gersuk joined us in April as our Senior Vice President and Chief Financial Officer. Now, I would like to turn the call over to Joe to review the financial highlights.

Thank you, Eamonn, and good afternoon ladies and gentlemen. Following our June 6 release of preliminary net sales for the fourth quarter, today we are reporting final financial results for the fourth quarter and fiscal year.

Fourth quarter net sales were $40.9 million, or 73% above the prior year. We view this as an excellent result, considering that early in the quarter we experienced an adverse legal outcome and a patent infringement matter affecting our fast-growing Venous product group and that it was our first full quarter of operations with RITA Medical. AngioDynamics' products amounted to $26.3 million in the fourth quarter sales. This represents 11% growth over the prior year. In viewing this growth rate, it's important to note that this year's fourth fiscal quarter had five fewer shipping days than the prior fourth fiscal quarter. Adjusting for this difference, year-over-year growth was 20% if viewed on an average daily sales basis.

RITA products totaled $14.6 million in fourth quarter sales. This is a 14% growth rate on a pro forma basis.

From a product group perspective, Interventional Products sales grew 36% to $32.1 million. The Interventional Products group includes our image-guided vascular access products, angiographic, venous, dialysis, thrombolytic, PTA and drainage products. The image-guided vascular access product line now includes the ports and related products that came with the RITA acquisition and the RITA products contributed $5.6 million to fourth quarter sales.

Image-guided vascular access products constitute the largest product category within the group and enjoyed 41% sales growth excluding the RITA products as the Morpheus PICC and bedside insertion kits sold well this quarter. Excluding the RITA products, interventional product sales grew 12% in the quarter and 20% on an average daily sales basis.

Recently introduced products drove stronger sales in the PTA and drainage categories with a new balloon catheter named PROFILER and the total ABSCESSION product both selling well. We also had strong sales of Sotradecol this quarter as Eamonn mentioned earlier.

In the Venous segment, the adverse legal outcome in March significantly impacted fourth quarter sales of our VenaCure system. VenaCure system sales declined by nearly $500,000 in the quarter compared to the prior year as we were out of the market for six weeks of the fourth quarter. Our non-infringing replacement product, NeverTouch, began shipping at the end of the quarter and is in full production today. For perspective, VenaCure system sales constituted 9% of total sales in the fourth quarter this year compared to 18% a year ago.

The Oncology Products Group includes the RF ablation, surgical resection and chemoembolization products, and they contributed $8.8 million in fourth quarter sales. This represents a 34% growth rate on a pro forma basis.

Overall, then, we consider the $40.9 million sales performance to be a healthy result under the circumstances. It is a clear indication of the strength and breadth of our product offerings as well as our ability to rapidly respond to changing circumstances.

Continuing down the income statement, the gross profit margin was 58.9%, which includes $894,000 in amortization of the step-up in RITA inventory acquired. With this, the step-up in inventory value has now been fully amortized. Excluding this onetime acquisition-related cost, the gross profit margin was 61.1%, which reflects the higher gross margins that are characteristic of the RITA products.

Total operating expenses were $20 million in the quarter and include substantial non-cash charges as detailed in the release. You will also notice in the attachments to the release that we have reported litigation damages and amortization of purchased intangibles on separate lines of the income statement. These costs were previously included in the G&A line. The only exceptional expense this quarter was in legal fees, which totaled $1.2 million.

Operating income rose to $4 million in the quarter, a 30% increase from a year ago. The operating margin was 9.9%. Excluding non-cash items, operating income rises to $7.6 million, representing a healthy 18.7% margin on sales. After interest income and income taxes are taken into account, the result is $2.9 million in net income, or $0.12 in earnings per share. As noted in the release, non-GAAP adjusted income was $6.9 million in the quarter, or $0.29 per share. This is a clear indication of the strong cash generating capability of our business model as we integrate the RITA organization into AngioDynamics.

Another indication of the cash generating ability is the $5.3 million in cash flow from operations reported on the cash flow statement.

The balance sheet is strong as we closed the year with $71.5 million in cash, $107 million in working capital and $17 million in long-term debt. Accounts receivable represent 46 days sales outstanding, the best level in memory.

Finally, you will note the expanded guidance for the next fiscal year that is included in today's release. Our sales expectation of $170 million to $175 million represents 51% to 56% sales growth over the $112 million reported today. On a pro forma basis, this represents approximately 15% to 19% organic sales growth. We expect healthy growth across all product categories with the exception of the Venous segment where we are understandably cautious.

The loading of sales during the year reflects the historical seasonality of our business. The first quarter is typically our lowest sales quarter of the year and the fourth quarter is typically our strongest. This year should be no different. The operating income guidance indicates about a 12% operating margin on a GAAP basis, which improves to nearly 19% if non-cash charges for amortization of purchased intangibles and stock-based compensation are excluded. We incur some operating expenses in the first half of the year to support growth initiatives that are realized in the second half. Consequently, the first quarter operating margin is expected to be the lowest of the year.

Finally, the non-GAAP adjusted income figure of $30 million is comprised of net income plus $12 million for amortization of purchased intangibles and stock-based compensation and the cash tax savings from the use of the NOLs from RITA, of which we expect to use $7 million in fiscal 2008.

I will now turn the call back over to Eamonn.

Thanks, Joe. Before we take your questions, let me spend just a moment on why we believe that we will be a growth company in fiscal 2008 and beyond.

First, we believe that our core products are going to continue to achieve double-digit revenue growth. We have successfully achieved this goal for several years and our plans are to extend that track record in fiscal 2008.

Second, we have a long history with successful new product launches. In the last couple of weeks of fiscal 2007, we launched SmartPort CT and PROFILER. We expect to launch UniBlate, which RITA had under development at the CIRSE meeting in Athens in September. We also have other new products in the development pipeline that we expect to introduce during the fiscal year. We believe that our new products will increase our overall growth rate beyond that achieved by the core product lines.

Finally, longer-term, there is the potential of IRE. This next generation of radiofrequency ablation uses ultra-low radiofrequency pulses to open the nanopores in the cell membranes which leads to the cell's eventual death with no nerve damage and preservation of critical noncellular structures. Through the use of ultra-low radiofrequency, no appreciable heat is generated inside the body. We're working with clinical thought leaders to develop the technology. Currently, we have collected a tremendous amount of animal clinical data and expect to complete initial human clinical trials in malignant prostate before the end of the calendar year.

And now, operator, we would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Phil Nalbone, RBC.

We'll Eamonn, it certainly has been an eventful year. I wanted to start with the top-line expectations for fiscal '08. Your new guidance comes in a little bit below the kind of numbers that you were talking about in late March prior to the Diomed verdict. I'm wondering how much of that variance is due to lower expectations for the VenaCure line. And, can you give us some sense for what you would currently anticipate VenaCure doing in fiscal '08, assuming you get through the VNUS litigation successfully?

Well, indeed our revised -- our updated guidance is slightly lower and does take into account a considerable amount (technical difficulty) in the fiscal year, especially in the first two quarters. And we anticipate that VenaCure in -- makes up about 7% of our guidance in fiscal '08, and that is down from 9% in Q4.

Okay. You alluded to some sort of R&D-based work around the VNUS patent. Is that a laser-based product, or are you relying on irreversible electroporation as your opportunity to remain in the leg vein market if things go against you in the VNUS trial?

Well, I do like how you think, and certainly irreversible electroporation has some great potential in that area. But our next generation product that we expect will deal with the VNUS patent situation is a laser-based product.

Okay. And, can you give us a sense for when we're going to get a critical mass of clinical data on IRE, and whether -- at what point we're going to know whether this is a go/no-go proposition for Angio?

Well, as we stated, we anticipate completing our first human use clinical trial in malignant prostate by the end of the calendar year, and that's a pilot trial that really is -- has been designed to show specifically the benefits of IRE in malignant tissue in that it's nerve-sparing and critical structure sparing. We anticipate rolling the product out during fiscal '09, and doing that in pretty standard fashion in conjunction with clinical thought leaders on a multitude of fronts. So we expect the market is going to work hand in glove with us on -- with the clinical luminaries taking a leadership role in really defining where the best applications for the introduction of IRE are.

And you're out from under the Diomed situation for all practical purposes. Why then is the VenaCure businesses still impaired?

Well, Diomed is still creating a lot of noise in the marketplace and uncertainty with the customer base. We think that is going to wane significantly as time goes on. We have started to see it abate. But we have taken a cautious view on the continued noise in the marketplace associated with Diomed's continued efforts, our ramp-up of NeverTouch, and also the anticipated noise around the upcoming VNUS litigation.

If your workaround for the laser market is successful, as you see it now Eamonn, what would be the likely timing of that rollout? Would it be contemporaneous with a jury verdict in say the November time frame, or is there likely to be a lag?

Certainly, our plans are to have our next generation workaround product available prior to any jury verdict.

I'm going to ask one last question and go back into the queue for Joe Gersuk. Can you give us a sense for what kind of litigation expense associated with VNUS is baked into the fiscal '08 earnings expectation, and can you kind of give us an update on the state of affairs with biolitic and whether they're going to be contributing anything to your defense fund, as it were?

With regard to biolitic, no, our assumption in our plan anyway is that they're not going to be contributing anything. So we have actually budgeted a certain amount based on our trial attorneys' expectations of what it will cost to see us through a trial in the fall.

Can you give us a sense for how much that is?

No, I wouldn't want to indicate the exact amount, but we think we have budgeted an ample amount and we know what the last trial cost, although we didn't bear the cost, but we're familiar with what it did cost.

Final thing -- your R&D assumption as a percentage of sales for fiscal '08?

We think it's going to be approximately 9%. We'll be spending a bit more than we have, which has historically been closer to 8% or so, and it will step up a bit in support of clinical trials activity.

Okay, thank you.

Suraj Kalia, Piper Jaffray.

Congratulations on the quarter. Eamonn, where should I start? In terms of the VNUS litigation, how should we visualize this litigation in terms of settling out of court given the precedent with the distraction caused? And I think that we all agree that in terms of as a percent of revenues, it is not that big a piece of the pie. But, given the precedent with the distraction caused by the Diomed litigation and the lumpiness in sales, can you help us understand the trade-offs of going into the VNUS litigation, redesigning products versus settling out of court?

Well, we've said all along that we're very open to a settlement with VNUS and would prefer one than litigation, and we should probably leave it at that. Of course, we would be remiss not to have contingency plans in place to be able to deal with the potential that we would be unable to reach a settlement with VNUS, and of course we have committed plans and expectations associated with those contingencies.

Okay. And Joe, in terms of the GMs or the guidance for FY '08, you are at -- the guidance is at 61% to 62%. Can you help us understand, one, the product mix shift versus ASPs -- what is the internal strategic plan and how should we visualize the 61% to 62%? And pardon me if I've missed this. In terms of the RITA GMs versus the base organic revenues, how do those GMs stack up for those two base units?

Historically, we've been able to improve our gross profit margins by a couple of percentage points a year, and we have done that through a combination of lowering material cost as well as manufacturing and engineering work to improve on the cost of labor associated with building our products. And thirdly, we have done it with a mix shift to try to maximize products that we control the intellectual property on and therefore don't pay royalties for. So we actually, if you eliminate the step-up in amortization in this fourth quarter, we were actually at 61.6 already going into the new year. So we are quite confident that we can meet the guidance that we have set out here using the same sorts of techniques that we have used in the past quite successfully.

And in terms of the RITA a business, can you qualitatively tell us where the GMs are trending vis-a-vis the base organic business?

Yes. Theirs have typically been in the mid 60s, 60% of range, and they have been maintaining. Our pricing there is firm and we don't see price pressure there. So that should continue, and then we can apply those same techniques that we've done on the core products to the RITA products as well.

I guess I need to rephrase my question. So do you see the expansion in GMs more contribution from the base business, or from the RITA business?

I think both can benefit from lower material costs and manufacturing efficiencies.

If I could chime in, the new products that we're introducing on the base business side, or the AngioDynamics side, are targeted at 70% gross margin eventually within a reasonable amount of time. So there is a mix shift on both sides of the business towards higher margins and both are driving gross margins forward.

And in times of NeverTouch, Eamonn, what percent of your current customer base would you quantify as being converted, and also in terms of being active users?

All of it. It's a really easy answer.

So pretty much all, as you all said last quarter, pretty much all on track?

Oh, yes.

Last question and I will hop back in the queue. Can you just give a qualitative picture on the PICCs, vis-a-vis competition from Bard and other players?

Bard continues to be a strong competitor and is certainly committed to the PICC space, as well as ports, and we are competing with them day in, day out. They are a very strong competitor that we have a lot of respect for and we continue to have a lot of success gaining share against.

Jayson Bedford, Raymond James.

A couple of quick ones. Just to finish up on NeverTouch. It is launch controlled in any way in terms of, have you held back with the contempt charge still outstanding?

No, we have not. We have made a complete conversion over to NeverTouch and have expedited the NeverTouch introduction into the marketplace. As soon as the jury verdict was handed down, we put NeverTouch on the front burner.

And then just on pricing and gross margin of this product relative to VenaCure, is there any difference?

Yes. There are some startup costs associated with any new product, and NeverTouch is no different. We anticipate that the gross margins of NeverTouch will continue to improve throughout the fiscal year and potentially even surpass the gross margin potential of VenaCure.

And on the ASSP side?

ASPs are holding.

And then you seem to talk more favorably about Sotradecol. What do you think caused the bump in the fourth quarter? Anything that you did different internally?

No, I think it's just a timing issue. We're finally seeing the fruits of our labor to -- in our educational programs to convince physicians that it's a much better idea to use an FDA approved drug day in, day out when there is just a nominal cost differential, and the only other option is an industrial chemical that has been associated with numerous patient reactions and malpractice suits.

Eamonn, are you seeing any more use from interventional radiologists than you have in the past?

No. I would say the interventional radiologists continue to be a major player in this space. They were early adopters and they continue to be strong players. We are seeing more expansion in -- outside of interventional radiology and vascular surgery. The two strongest specialties in this space, we see expansion in the areas of OB-GYN, plastic surgery and dermatology.

And then just jumping over to RITA, with the SmartPort launch, is that cannibalizing your existing port business, or is that opening the doors to new customers?

It's not cannibalizing our existing port business per se because the ASPs of the CT-capable SmartPort are significantly higher, and it is opening doors to business that we don't have.

Finally I guess for Joe, what's the tax rate that you've assumed for fiscal '08?

It should be about that same 39% that you've seen recently here.

Just to clarify, the $30 million in non-GAAP income, that also includes interest income?

Correct.

Gotcha. Thanks, guys.

Greg Brash, Sidoti & Company.

I had a question regarding the bundling of the PICCs and ports. How has that helped you in the quarter? Does it help open up a larger portion of the market that you weren't able to compete in before?

The impact in the quarter was minimal because the efforts to leverage bundling really just began in Q4. But we anticipate that that's going to create a lot of potential upside in fiscal '08, because for the first time, we have a broad enough product line in vascular access with PICCs, ports and dialysis catheters which are often bundled together to go after a bigger slice of the business at very satisfactory gross margins.

You mentioned in the last quarter that the best PICCs were performing worse than expected. I know you were addressing that issue. Has that been corrected? I guess part of it was due to a longer selling cycle. Any changes there?

We saw an uptick in Q4 on the bedside insertion kits and are very happy with the performance of the products.

And in the last quarter, you also mentioned some pricing pressure for dialysis catheters from Medcomp and Aspire. Any changes there?

No changes. There is still pricing pressure from those two competitors. We are answering that with a continued features and benefits sale, and really no change. That's going to continue to be there and where we try and stratify our businesses is at the top end of the market that's really not driven by price and we have been able to continue to grow our share.

One of the things I missed, you mentioned the launch of the UniBlate. When was that expected to launch?

That's expected to be launched at the European Interventional Radiology Society meeting in Athens, Greece in September, and be rolled out nationally shortly thereafter.

Can you give us any indication of what sort of growth in your fiscal '08 guidance you're expecting from the oncology products?

We anticipate that oncology products are going to continue to grow at rates like they did in Q4, for instance, approximately a 34% pro forma growth rate year-over-year. They're going to continue to be some of our fastest-growing products. Those are the -- really led by the Habib Surgical Resection devices and the LC Bead chemoembolization product line, which are really outstanding, fast growers in our product portfolio.

Can you just refresh my memory about what the UniBlate product is?

The UniBlate product is really a -- completes our line on radiofrequency ablation electrodes by -- for the first time allowing us to have a nail-like electrode with no tines that's really ideally suited for much smaller lesions than our electrodes that are -- incorporate expanding tines. What makes the UniBlate so attractive to clinicians is you can actually calibrate the ablation size to the zone you want to ablate with the same UniBlate probe. So it's actually -- will make a sizable ablation, which is unique in the marketplace.

And you're still going to go after the [cilious] liver market with UniBlate?

We're definitely going to go after small lesions in the liver, but it also allows us to expand into other areas such as bone where it can be difficult to put the tines out into the bone and lung, and kidney, for that matter.

Okay, thank you for taking my questions.

Larry [Haimovitch], [HMTC].

A couple of questions. You've talked a little bit about Sotradecol. I know that there was some legislation proposed by Senator Kennedy several months ago. Can you give us an update as to where that is, and are you at all optimistic that we may actually see something that would help Sotradecol in terms of really coming down on the nonapproved labs?

Yes. Kennedy and -- actually in a bipartisan bill, Kennedy has proposed legislation that would rein in the compounding pharmacies that have crossed the line from doing classic compounding into doing unregulated pharmaceutical manufacturing at large scale. And we had anticipated that Senator Kennedy would try and attach that to the FDA reauthorization bills that were put forward in the spring and are currently on the floor being debated, but he chose not to do that. And we now expect that that legislation is going to be put forward in the fall, possibly as a stand-alone or potentially attached to some other health legislation.

What we are especially interested in is that there be an informed consent provision whereby clinicians are required to get informed consent from patients that they understand they're not getting an FDA approved drug when they're not getting one, because otherwise they would never know they're being injected with an industrial chemical, which seems like a fair warning that every patient should have. So, we're keeping our fingers crossed that that legislation will gain some traction in the Congress and get passed. Our guidance does not reflect that legislation passing. We have a very conservative contribution from Sotradecol in our guidance in fiscal '08 because we certainly didn't want to hang our hat on the government.

Eamonn, isn't that market something like a $150 million or a $200 million market, number one? And number two, if that legislation passes, I would assume that that could push a lot of business your way over a period of time as people realize they are running into danger with some potentially bad lawsuits.

Well, the current market is approximately a $70 million market, and it's driven by about 1.7 million patients who have multiple treatments, average of about three treatments. And that all comes out to between $65 million and $75 million U.S. market. That is a conservative number because we believe that the number of patients who are -- have the disease and are not seeking treatment is about three times larger than those that have historically sought treatment. So as venous disease becomes more understood by the population, the patient population, we expect that the market could be much bigger than $70 million. If all patients that had the disease were treated, it would be $210 million.

But, if you do get that legislation, most importantly, that could really push some business your way, is really what I'm getting at?

Yes, I would agree that if the legislation passes and brings the issue into the light of day in the patient's mind, I cannot imagine that a patient would choose to have an industrial chemical injected into them when they could have an FDA approved drug injected into them in order to save $8.00. It wouldn't make a whole lot of sense. So I think that legislation could really drive the market our way.

And where does Sotradecol fit in, in terms of margin? Is it one of your higher margin products?

No. Currently, it's a 50% gross margin product. We distribute that product in an exclusive arrangement with Bioniche Pharma.

That's right, it's a distributed product.

And we had originally intended, if things had gone more to plan, to renegotiate our margin with Bioniche and get it up to at least corporate average, if not a little better. But that would have required an additional investment and we have tabled that until we see the dust settle on this marketplace.

And then one other question and I will jump back in queue, and that is, we have touched a little bit on the drug-eluting beads, and I recall when drug-eluting beads were part of RITA. That was a very, very attractive business. It had started well and was really, really rocking. Can you speak a little bit more about it? Because I know that, in my mind at least, that was a business that had tremendous promise.

Yes, the LC Bead product is an embolic bead that is injected directly into the tumor site, and before injection, it is loaded with a chemotherapeutic agent, typically Doxorubicin, to treat primary liver cancer, or Irinotican is now being used to treat colorectal MEPPs to the liver. And what makes the product so compelling is that the LC Beads will slowly elute a very, very high concentration of the chemotherapeutic agent directly into the tumor, which is much more tolerated by the patients than a large systemic volume being injected into the patient's cardiovascular system that goes round and round and causes tremendous toxic effects. So clinicians are very impressed with the performance of the product and are -- we have seen a sales ramp that is commensurate with that very, very, very positive reception.

Christopher Warren, Suntrust Robinson Humphrey.

Eamonn, I noticed in your prepared remarks, you talked about stopping the decline on the -- or the stand-alone RITA port business. Did that part of the business grow year-over-year, or did you just stop deceleration?

We believe that that business is up slightly. We, on a sequential, quarterly sequential basis, we are definitely up in a year-over-year basis. There is some question on apples-to-apples on shipping days, but you could easily say we took it from decline to flat with the prior year. It might be slightly up in single-digit growth, but the trend is clearly on track to get it up to our goal of corporate average growth rates.

Excellent. Well done on that front. Just another question. With a new head of sales coming onboard, are there any strategic changes in direction that you intend to carry out, and will there be any different tactical plans to implement the sales strategy going forward?

John Soto is, we're very happy to have him in the lead role in our sales efforts, and both the Interventional Product Group and the Oncology Product Groups report into him directly. One of the first things on John's plate are to get the two groups working together seamlessly to leverage their respective relationships in the marketplace and we've already seen the fruits of that labor start to materialize. The Interventional Products sales force has really outstanding relationships with interventional radiologists. And for example, that plays very, very well in their ability to facilitate the oncology product sales force's access to the interventional radiologists who are interested in using LC Beads, for instance, which are the specialists that typically do the embolizations. So getting the two sales groups to work very closely together is priority one.

Priority two for John is two maximally leverage our direct sales presence in the international markets. We are direct in the UK, France and Germany and looking to expand that presence. We got that through the RITA acquisition and John's charter now is to get those direct channels up and running with the AngioDynamics products, and he is well on his way of making that happen with his team.

Outside of that, it's blocking in tackling, more of what has worked so well in the past, and keep feeding it.

Actually just a follow-up to that second point there. How much traction on getting the AngioDynamics products internationally do you include in the guidance numbers you issued for fiscal '08?

Well, it's in there in a very, very modest way. We consider that to be an upside, and from an overall perspective we looked at fiscal '08 with a conservative view that we wanted to forecast current trends and have some potential upside, and expanding our success in the international markets is definitely an upside.

One final question. Three of four quarters ago when biolitic's indemnification of your litigation expenses came up, you had mentioned if they don't pay for the ongoing legal expenses, we can go find a less-expensive manufacturer of our consoles. Given that it seems that biolitic has reached the end of the road as far as what they're willing to pay for, should we expect that you would switch to a lower cost console manufacturer at this point?

I would like to take the fifth on that one. Yes, you can expect that we are always looking to lower our cost of goods and we work with all our vendors, including biolitic, to facilitate that. I would add to that though that we are not just interested in finding a lower cost laser, we're always interested in adding features and benefits that can drive the market forward and hopefully drive gross margins forward as well.

There are a number of those vendors out there, right?

There are, indeed.

Thank you very much for taking the question.

Jason Mills, Canaccord Adams.

We're having some electrical problems here in San Francisco, so hopefully nothing big. Sorry if I've missed some of the stuff. First, Eamonn, I just wanted to get your feedback on the PICC business, and [the image guys' ASCO access] business. You talked about previously potentially launching a reverse taper version of your bedside insertion kit, and that product is important to you as it should allow nurses and technicians to put the PICC in as opposed to having to go into under fluoroscopy in the radiology suite. And the reverse taper, I think you had talked about giving you a broader product line than even Bard in that area. Could you talk about that business in light of what is coming down the pipe in the new product front?

We did introduce the reverse taper bedside insertion kit, and we had a very strong quarter in bedside insertion kits and PICCs in general in Q4. So we are pleased with that product and -- or those products and that product category and its performance during the quarter and expect it to continue to be a big contributor in fiscal '08. As we discussed our issues with bedside insertion kits really centered around much longer selling cycles than anticipated, but we are gaining the traction that we are seeking and are still bullish that we're going to be a major player in image guided vascular access overall.

We are very pleased with the performance of the reverse taper bedside insertion kit, so we offer both flavors, if you will; a reverse taper and a straight taper, and that does give us the -- at least the broadest product line out there, if not clear leadership in broad product line.

The addition of ports and the ability to bundle all that together is also a big opportunity and upside for us that we've never been able to enjoy before, in that we can now compete for much more of the business on a much broader base than we ever have had a chance. So that is going to be a major part of our strategy in fiscal '08 and is a potential large upside for us.

Just following up on that, you've mentioned in a few areas the potential for upside, and clearly in the companies we follow, we like to hear that, as well as you hear it all the time in the NFL draft, but that's a different discussion. But I'm just wondering if you could -- in the past, I think you guys have done such a good job of growing your business and beating expectations. And we saw in March you be very bullish on the Diomed litigation, and then before that the RITA transaction. And it seems like with the RITA transaction, you just got kind of snuck-up on with respect to intangibles amortization that really you couldn't have foreseen. But I'm wondering if I could ask you to take a step back now, looking out into fiscal '08 and not only give us maybe an additional few areas where you have modeled the business where there could be upside, but also areas of the business that may be -- I know you're not going to use the word downside, but where you have to be cautious with your current guidance relative to your previous guidance. And understanding, just adding onto that question, you have obviously lowered your revenue guidance, but I think it's important to note that the consensus expectations I think were lower than the bottom end of your previous guidance before. So perhaps the second part of that question is part of the motivation to lower guidance, the fact that consensus is already there anyway, might as well give yourself a little bit room for upside since we're using that term so much.

Let me start out with the potential downsides, and we have been very conservative in our guidance with the contribution from the VenaCure and NeverTouch product lines because we anticipate continued noise around that, both associated with the legacy of the Diomed litigation and the upcoming VNUS litigation. We do believe that we have forecasted that conservatively enough to handle any and all contingencies, and hopefully that proves to be true.

On the upside, we've been very conservative with our new products that we've introduce. Both the PROFILER and the SmartPort CT are very conservatively estimated in the fiscal year, which we think is appropriate, especially in light of the fact that where we missed in fiscal '07 was on the two new products -- Sotradecol and bedside insertion kits. Now that we have a solid year of sales data to forecast Sotradecol and bedside insertion kits, we have forecasted them very conservatively. So we anticipate that all of those have a potential upside.

Last but not least, our oncology products are forecasted conservatively because it is still a relatively new business for us, although RITA was in existence a long time. Two of the major contributors to the RITA growth were new products in the Habib product lines and the LC Bead. So, all in all, the conservatism comes down on the side of VenaCure and Sotradecol and bedside insertion kits, and the new products being forecasted at a very, very conservative rate, which should hopefully keep us on track throughout the fiscal year.

That's very helpful. And then, it also seems to be very important, you mentioned that the cadence of your revenue throughout the year, if you will, is 45% in the first half, 55% in the second half. Obviously, investors are very sensitive to earnings throughout the year as well. So perhaps, Joe, you could help us out with the cadence of earnings throughout fiscal '08 in light of your expectations for spending in the gross margin. Specifically in the latter, should we expect that to be flat lined throughout the year? Do you see a quarter in which gross margins may be either sort of on the low end or the high end, or just sort of a cadence so that we can develop our quarterly model such that surprises are minimized here?

Yes. The gross margin should be fairly constant in that range throughout the year, perhaps with the exception of the first quarter when we are still ramping up the production of the NeverTouch product. But apart from that, it would be pretty smooth throughout the year at the gross margin line. As we said in the comments, we do incur some operating expenses early in the year, although [their] operating expenses do rise during the course of the year. All of the quarters we would expect to be profitable, but the lowest level of profitability would be in the first quarter and rising to the best in the fourth quarter, which is always our strongest sales quarter of the year.

And would you like to provide any first quarter earnings guidance at all?

No, none beyond the rather considerable amount that we've already provided.

I'm sorry, maybe I missed that. Have you provided --?

Not specifics, but we aren't going to offer a single point or even range guidance for the specific first quarter.

One last one and I will get back in queue. You are still guiding, Eamonn, to some strong cash flow targets, greater than $30 million. Your GAAP EPS target, however, did come down a little bit, not much, versus previous guidance. It suggests to us that maybe there's a non-cash expense that you expect to be a bit higher than previous. Could you give us more color there. Am I reading that correctly?

No, I think the slight change in the earnings expectation would simply relate to the slight change on the sales line. But the non-cash components I think are consistent with what we've previously indicated before in terms of about $6 million for the stock-based compensation and about $6 million or so of the RITA amortization of intangible costs. And likewise, the $7 million that we have indicated for the use of the RITA NOLs has also I think been consistent as in our previous calls.

Okay. So just to follow up, that would imply that your previous guidance relative to your previous GAAP income, net income guidance, would imply that your cash flow guidance before gave you a lot of room for -- perhaps it was even a couple of million higher than $30 million, and now you're just kind of coming down a little bit; that's still above that $30 million. Does that make any sense?

It does, but I think at the end of the day, we think $30 million of this adjusted cash income is really quite a substantial amount out of the business.

Pretty good. Thanks, guys.

Phil Nalbone, RBC.

Eamonn, just back to the Diomed overhang. Can you give us a clear sense for the assertion that you have indulged in contempt of court in continuing to sell the consoles? What's their legal argument, what's your defense? Were there any modifications made to the consoles, or are you simply selling the same old console for a different procedure kit?

Yes, we are selling the same consoles with the addition of a label that says that these consoles are solely for use with the NeverTouch kits. We have changed all our instructions for use to coincide with solely the NeverTouch kits. The wording of the injunction was such that it -- at least, it could be construed that it covered the lasers that we were selling, but we think that the judge will agree that the lasers don't infringe the Diomed patent and the Diomed method that's covered in their patent when they are used with the NeverTouch kits. And since that's the only product that we sell now, it seems illogical to say that the lasers are infringing or could infringe their patents since the VenaCure bare fibers that were judged to infringe no longer are sold. So we're confident in the logic of the argument. We expect that the judge will clarify his language to make it clear, and of course we have no idea when he'll do that. If the judge decides that we can't sell that exact laser, we have contingency plans to be able to address that, if such a situation arose.

Great, Eamonn. One last thing, I just can't resist. While we were talking, Boston Scientific announced plans to possibly sell a little business that you've heard of called NAMIC. So here's your big chance, Eamonn, you could own a big facility down in Glens Falls.

Well, we'll give that a lot of consideration.

A couple of trips a year to Ireland.

That's a business I know very well. I used to head up marketing for NAMIC.

Exactly. We know you always wanted to run the whole thing, Eamonn, here's your chance.

It would be very ironic.

Jeff Jonas, GAMCO Investors.

I just had one last question that had not been answered. We talked a lot about $30 million cash flow, and what are the uses for that cash? I guess the simple math says that's almost $90 million in net cash at the end of the year. Are you ready to do an acquisition again?

We expect to close the Oncobionics acquisition during the fiscal year and that will use up $15 million in cash with a remaining $5 million to be paid six months after the closing date. So if we assume we're going to close in the spring, we would have $15 million this year and another $5 million in the following fiscal year. We expect to need between $4 million and $5 million for a capital expansion to expand our manufacturing facilities. We've just completed a warehouse expansion and the prior warehouse will be converted into manufacturing space, which will virtually double our manufacturing floor capacity at the Queensberry facility. And last but not least, we are still looking for tuck-in product acquisitions that we can put in the bag of our sales force that are accretive to gross margins and growth rate and earnings. So, we have plenty of opportunities to invest the cash.

Okay, great. Thank you.

Ladies and gentlemen, that concludes our Q&A session. I would like to turn the call back over to our speakers for any closing remarks.

Well, that wraps up the AngioDynamics conference call for Q4 and fiscal year 2007. I would like to thank you all for your attention and I want to look forward to a very successful fiscal 2008. We're all very excited here at AngioDynamics about what we have coming out of the new product pipeline and look forward to 2008 being an exceptional year.

So, thank you all. Have a great evening, and I look forward to speaking to you again at our next conference call.

Thank you very much, sir. And ladies and gentlemen, just as a reminder, the replay information for your call today, the two phone numbers that you may dial, one is toll-free. It is 888-286-8010, the other is 617-801-6888. The access code you need to use to acquire the replay via the phone is 16976535. (OPERATOR INSTRUCTIONS).

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