AngioDynamics Inc (ANGO) 2008 Q2 法說會逐字稿

Welcome to the AngioDynamics conference call to review the second fiscal quarter financial results. My name is Joshua, and I will be your conference coordinator 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 conference over to the host for today's presentation, Mr. Doug Shirk of the EBC Group. Sir, please proceed.

Thank you, operator and good afternoon, everyone. This is Doug Shirk with the EBC Group and thank you for joining us for the AngioDynamics conference call to review the financial results for the second quarter of fiscal 2008, which ended on November 30, 2007. The news release announcing the second 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'll get one to you immediately. Additionally, we've arranged for a taped replay of this call which may be accessed by phone. A telephone replay of the call will become available from 7:30 p.m. Eastern time this evening, and will remain available for seven days. The dial number to access the replay is 800-405-2236 from the United States or for international callers, 303-590-3000. Both numbers will need a pass code of 11104157, followed by the pound sign. This call is being broadcast live and an archived replay will be also available. To access the Webcast go to AngioDynamics website at www.AngioDynamics.com.

Before we get started, during the course of this conference call, this company will make projections of their forward-looking statements regarding future events, including statements about the sales and the company's beliefs about its sales and earnings for fiscal 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, litigation damages, and others including the cash benefit from the use of acquired net operating losses and assumed taxes on net income, where applicable. Management believes these measures provide investors with useful information comparing the company's performance over different periods, particularly when comparing this period to periods in which the company did incur any expenses related 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 website.

Finally, during the question and answer period today, we request each caller to limit themselves to two questions and then encourage a requeue to ask additional questions. In advance we appreciate everyone's cooperation with this procedure. Now I would like to turn the call over to Eamonn Hobbs, President and Chief Executive Officer of AngioDynamics.

Thanks, Doug. And a happy new year to everyone. Thank you for joining us today to review another great quarter in AngioDynamics. With me is Bob Mitchell, our Chief Operating Officer, and Joe Gersuk, our Chief Financial Officer. After my opening remarks, Joe will review the financial highlights of the second fiscal quarter, and our reaffirmed outlook for the fiscal year. Then we will take your questions.

We generated net sales of $41.5 million for the second quarter of fiscal 2008, which is 70% higher than the $24.4 million reported for the second quarter of fiscal 2007. We executed our plan and delivered results right in line with our expectations for the quarter. Our overall sales performance was accomplished by growing the RITA product line sales by 18% to $15.3 million, and the AngioDynamics product line sales by 7% to $26.2 million. Last year, during the fiscal second quarter, we grew AngioDynamics' product sales by 30%, so we faced a very tough comparison this year. We are optimistic that our AngioDynamics product sales will return to our normal growth rate of at least 15% during the current fiscal third quarter as compared to a year-ago period.

Perhaps the highlight from the quarter from a sales perspective was the growth of our vascular access port sales. This product line grew an impressive 20% on a year-over-year basis. This progress was especially gratifying, because one of the key attributes of the acquisition of RITA, was the benefits we thought we thought could be gained by having our sales team manage the RITA port sales. You may recall that last quarter, the growth of this particular business was flat on a pro forma basis, when compared to the exceptional sales performance of the first quarter of fiscal 2007. However, the benefits we thought this product line would gain from the focus and relationships of our AngioDynamics sales force are now being generated, and we believe we are well positioned to have positive year-over-year sales gains for the ports business for the last half of the current fiscal year.

The RITA product sales performance was also favorably impacted by continued growth in our electrode business, combined with strong demand for the [LC Bates] products for tumor embolization and our Habib resection devices. The overall RITA product line sales growth of 18% came one quarter after two of our domestic distributors sold through the last of their remaining inventory and those territories were absorbed by our direct sales force. From a sales perspective, the RITA product line continues to perform very well, thanks to solid execution from the sales organization.

As we enter 2008, we are rapidly approaching the one year anniversary of the closing of the acquisition of RITA Medical Systems and during the second fiscal quarter, we completed the integration of RITA operations into AngioDynamics. While there are challenges and potential pitfalls associated with any acquisition, I am pleased to report that this one has fully met our expectations and can offer the following facts to support our case. We set out to fully integrate RITA into AngioDynamics while maintaining RITA's efficient and low cost manufacturing operation in Manchester, Georgia, and their very capable R&D center in Fremont, California. Product manufacturing and product development have continued smoothly. That said, we established a goal of $9 million in cost savings in fiscal 2008 from the elimination of overhead and duplicate costs. Halfway through fiscal 2008, I can report that we are well on our way to achieving that objective.

In addition, we believed there was considerable opportunity to strengthen our image-guided vascular access business with the addition of RITA's vascular port business. This was nearly half of RITA's revenue stream, but had been a secondary focus to their oncology products and the vascular port business was generating declining revenues of 4 to 6% prior to the acquisition. We have made several improvements to the design of the RITA ports, improved the manufacturing process, and most importantly, given the products to the AngioDynamics interventional sales force to sell. With a larger sales force and an opportunity to bundle it with other related products, we are seeing excellent sales performance in the ports business. Our second quarter was a clear indication of this success, and I believe you will see more of this trend continue in coming quarters.

On the oncology side of the RITA business, we have kept the strong development team in place and they continue to make strong progress. In addition, we now have a sales force dedicated entirely to the oncology family of products, which is perfectly positioned to launch new oncology products as they are introduced. This side of the business is today the fastest growing part of the company. Let me turn for a moment to the AngioDynamics product lines. As I mentioned earlier, we had a very tough comp during the fiscal second quarter. A year ago, AngioDynamics products generated an impressive 30% growth rate compared to 7% this quarter. That being said, we had exceptionally good quarters for Morpheus CT PICCs and bedside insertion kits, and the new Profiler balloon catheters. We believe we're in a very good position to grow AngioDynamics product line sales by at least 15% on a year-over-year basis during the third quarter of fiscal 2008.

I'd like to now update you on the VNUS litigation. As most of you are well aware, VNUS has sued AngioDynamics, Diomed, and Vascular Solutions for allegedly infringing their patents covering radiofrequency ablation technology used in the treatment of varicose veins. This suit relates to our VenaCure product that uses a laser-based system to treat varicose veins. Over the past six months, we prepared extensively for a trial that was scheduled to begin in mid-October. However, the judge has delayed the trial several times due to court matters unrelated to the litigation. Our view today is that the trial is not likely to begin before May of this year.

As part of the litigation process, in early October, the judge heard and ruled on a number of motions for summary judgment that were filed by the parties in the case. In one of the motions, the judge ruled that willful infringement is not a matter that is triable for AngioDynamics, there for eliminating the potential for any trebling of damages. This ruling significantly reduces our maximum potential exposure in the event of an adverse outcome in the litigation. Regardless of the outcome of the case, we believe that we have developed new, innovative products that will allow us to provide our customers with an uninterrupted supply of products for the treatment of varicose veins. 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.

Over the years, one of the distinguishing characteristics of our company has been our consistent ability to successfully develop and bring to market new technologies and products. In total, during the fiscal second quarter, approximately 50% of our sales were generated from new products introduced over the last five years. And over half of our growth was attributed to new products introduced during the last fiscal year. We believe we are well-poised to continue that trend. For example, on our last call, we mentioned that we launched the UniBlate electrode, a scalable single needle radiofrequency ablation electrode used to coagulate lesions during percutaneous, laparoscopic and interoperative surgical procedures. We've been pleased to see that the product has been well received during industry conferences and sales are being generated. Other new product lines recently introduced were recall SmartPort CT and the Profiler angioplasty catheters, both of which are doing very well.

As we look to the future, we have several programs under way. For example, in November, we announced the first 10 year study which highlighted the three year and five year survival rates of 234 patients who had undergone radio frequency ablation of colorectal hepatic metastasis, published in the October 2007 issue of the Annals of Surgery. The significant 5-year survival rate in patients with non-resectable disease is a major selling point for RFA, and also paves the way for potential use of focal ablation in other disease states. Another trial that was very recently completed is the RAPTURE trial. RAPTURE involves a study of the impact of RFA technology to treat lung malignancies. This trial involved 106 patients from Europe, Australia and the United States, and we expect the results to be published during the first half of 2008. I think it is important to note that given all the attention received due to the FDA's December 11th public health notification regarding the deaths associated with the use of radio frequency ablation for lung tumors, No AngioDynamics, RITA, radio frequency ablation probes were used in these studies, and during the RAPTURE trial, there were no deaths reported. Based on these results, we are now in an excellent position to evaluate the potential for pursuing a specific indication and favorable reimbursement for a lung RFA.

On the intellectual property front, during the second quarter of fiscal 2008, we announced that the U.S. Patent Office issued a patent to us covering an endovascular laser treatment device with a spacer which further prevents contact with the vessel wall. This patent, along with other pending patent applications covering VNUS disease treatments, demonstrates our continued commitment to maintaining our innovative leadership in this market segment.

With regards to our Irreversible Electroporation -- or IRE -- development program with Oncobionic, it continues to progress. We are very excited about IRE, which uses needles and image guidance similar to existing thermal ablation technologies. The most interesting thing about IRE is that instead of cooking or freezing the targeted tissues, IRE disrupts the cell membrane, which in turn destroys the targeted cells. This quarter, working along side with Oncobionic, the developer of IRE, we added important new parameters and stricter investigator independence requirements to our human trials. Investigator independence is very important to our study, and to the validation of the technology. Our malignant prostate cancer pilot study is now expected to get under way in the early part of calendar 2008. It is designed to access the safety and efficacy of using IRE to ablate localized prostate cancer. As we have stated, the successful completion of this study will trigger the completion of the acquisition of Oncobionic. This will be completed with a $20 million payment.

We continue to aim to provide IRE systems to leaders in the field of focal tumor ablations in the U.S. and Europe. We expect to begin placing units in Q4 fiscal 2008 with a total of 20 units placed by the end of the first quarter of fiscal 2009. The thought leaders will begin using our systems to treat patients and develop clinical data to demonstrate the technology's therapeutic effectiveness.

We believe that IRE is a very broad based platform technology. We anticipate researching a broad range of applications including both malignant and benign tumor therapy, cardiovascular disease therapies, electrophysiology disorder therapies and other procedures. We will prioritize our plans based on the feedback we receive from these 20 leading physicians who are pioneering the clinical use of the IRE system. We expect that malignant prostate will be the initial area of specific interest that will lead to definitive clinical trials.

With that, I would like to turn the call over to Joe.

Thank you, Eamonn, and good afternoon, ladies and gentlemen. We continued our strong operating performance in the second fiscal quarter and achieved our financial objectives. Operating cash flow was particularly strong this quarter and exceeded our expectations. Our first half operating performance indicates we are well positioned to achieve the financial goals we set at the beginning of the year. Second quarter net sales increased by $17.1 million, or 70% to $41.5 million. $15.3 million of the increase was attributable to the sale of products acquired from RITA Medical Systems and the balance was in AngioDynamics products. From a product group perspective, the interventional products group grew by 32% to $32.1 million, and constituted 77% of our total sales. RITA's port product line is now included in the interventional products group, as are all of the products sold by AngioDynamics prior to the RITA Medical acquisition.

The oncology products group produced sales of $9.4 million in the quarter and constituted 23% of total company sales. International sales were $3.9 million, or 9% of total sales. Sales of RITA Medical products were strong across the board, from the recently introduced SmartPort CT, which drove a 20% pro forma increase in port sales in the quarter, to the entire line of oncology products which grew 26% over the prior year on a pro forma basis. We continue to see strong market demand for the entire line of oncology products with market leading devices and an excellent sales force selling them. The pro forma rate of growth of all RITA medical products in the second quarter was 18%, which reflects the discontinuation of a few low margin products following the acquisition.

As mentioned in the release, we attribute the modest 7% organic growth rate in the sale of AngioDynamics products primarily to a difficult comparison to the year ago quarter, when the company reported 30% sales growth. Another way to look at it is that the sale of core AngioDynamics products has grown 40% from the second quarter two years ago. Comparisons aside, however, we are continuing to see considerable price competition in the dialysis market today which we believe is constraining revenue growth for all competitors in this market. As a company, we remain very committed to the dialysis market. Over the years, we have introduced a variety of highly differentiated products in all markets we serve, so as to compete on features and performance, and not on price.

This will also be our strategy in the dialysis market as we plan to continue to innovate and introduce new products in coming months that we hope will set new standards in patient care. Continuing down the income statement, the gross profit margin improved 61.3% from 60% in the first quarter. And 58.5% a year ago. The improvement from one year ago reflects the higher gross margin on the acquired RITA Medical products, and the improvement from the first quarter reflects a favorable sales mix. We continue to believe that our margin goal for the year of 61 to 62% is achievable as we are at 60.7% at the halfway point.

Total operating expenses were $20.7 million in the quarter, and are detailed in the release, include $2.8 million in non cash charges for stock based compensation and amortization of purchase intangibles. Excluding the amortization of purchase intangibles, operating expenses were 45.8% of sales in the quarter and a similar percent of sales a year ago. The successful integration of RITA Medical has enabled us to reduce G&A costs from 12% of sales last year to 9.8% of sales in the current quarter. This 2.2 percentage point operating efficiency has enabled us to significantly increase R&D spending from 6.7% to 8.9% of sales in support of new product development activities, without increasing total operating expenses as a percentage of sales. This increase in R&D spending is consistent with our previous guidance that we would spend 8 to 9% of sales on R&D this year. Legal fees were high again this quarter, totaling $1.3 million, with nearly half of that cost related to patent litigation matters with Diomed and VNUS and the balance related to the customary level of IP and normal corporate legal work.

Operating income rose by 59% in the quarter to $4.8 million. Excluding the amortization of purchased intangibles and stock-based compensation, operating income improved to $7.8 million or 18.7% of sales for the quarter. The comparable prior year margin is 15.9%. This 2.8 percentage point improvement is again indicative of the success of our ongoing integration efforts. Below the operating profit line you will note that our other income declined by nearly $900,000 from a year ago. This decline reflects interest expense on the convertible debt assumed in the RITA Medical acquisition, interest expense on the litigation award, and a $215,000 decline in the value of an interest rate hedge that does not qualify for hedge accounting under the accounting rules. Nonetheless, the hedge is effective from an economic standpoint. After income taxes are taken into account, the result is $3.1 million in net income or $0.13 in diluted earnings per share.

As noted in the release, non-GAAP adjusted income was $7.3 million in the quarter, or $0.30 per share, demonstrating a strong cash generating capability of our business model as we integrate RITA into AngioDynamics. The balance sheet remains very strong as we ended the quarter with nearly $80 million of cash and marketable securities, $95 million in working capital and just $7 million in long-term debt. Accounts receivable represent 48 days sales outstanding. Cash flow was exceptionally strong in the second quarter, as shown in the cash flow statement in the release. In the quarter, we generated more than $9 million in cash flow from operations, bringing the year-to-date total to $10.2 million, or more than double the cash flow from operations in the first half of the prior year.

Finally, you will note in the release that we are reiterating our guidance for the fiscal queer. The guidance is unchanged from what we provided earlier in the year and I'll briefly repeat it for the benefit of those who didn't join that call. We continue to expect sales for the year in the range of 170 to $175 million. Gross profit margin in the 61 to 62% range, GAAP operating income of 20 to $22 million, GAAP EPS of $0.56 to $0.60. And non-GAAP adjusted income of at least $30 million. Adjusted income is defined as net income plus stock based compensation, amortization of purchased intangibles and cash tax savings arising from the use of RITA's net operating losses.

I will now turn the call back to the operator to start the Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). One moment, please, for our first question. Our first question comes from the line of Phil Nalbone with RBC Capital Markets. Please go ahead.

Hi. Thank you very much. Good afternoon, guys. Eamonn, you lost me a lilt bit in your recitation about the IRE time lines, particularly the timing of placement of some of the generator units. Can you go back through that and specifically when do we expect revenue generation from those box placements?

Hi, Phil, happy new year. The IRE time line is -- we're going to start placing boxes in Q4 of this fiscal year, which is spring, and our intent is to place 20 units, which we will have completed by well before the end of Q1, which is the summertime, this calendar year.

Okay. And does that equate to the recognition of any revenues in that time frame?

The revenues from IRE are going to be modest until we analyze the data we get from the 20 leading centers and that revenue will be associated with the consumables that those clinical leadership centers consume as they do clinical cases with the IRE boxes.

Our next question is from the line of Jayson Bedford with Raymond James. Please go ahead.

Hi, good afternoon. Just a quick question for you. In terms of the 20% port growth, just wondering, what drove that? Meaning, if you take out the contribution from SmartPort, did you see true base port business growth?

Well, SmartPort was the -- definitely the shining star in the port sales and it's hard to carve out smart port and then look at the base business. The majority of the smart port business was new port sales but we did convert some existing customers to smart port.

Our next question comes from the line of Jason Mills with Canaccord Adams.

These questions are rolling through quickly here. Happy new year.

Happy new year, Jason.

I'm going to follow on Jayson's question, on the -- well, more generally on the image guided vascular access business, could you give us a sense for in total what the sales force, the AngioDynamics sales force did with the entire vascular access business in terms of pro forma year-over-year growth, and then help us understand or give us a little bit more color of what you're expecting in that specific franchise as we move into the back half of your fiscal year and in fiscal '09, given that now you have seemingly some momentum with a sales force selling the entire line, and couple that with at least my understanding you have not achieved any national accounts yet, which is over 50% of the opportunity there.

Well, the image guided vascular access products, which are primarily the Morpheus, the Morpheus bedside insertion kit and the port product lines, grew at approximately 20% overall. So we were pleased with all the products in those groups. And that was a solid reflection of the AngioDynamics sales force, our interventional products group sales force as we call them now, executing, as we expected they would, when we gave them the port product line, which not only is an excellent product line, but we've added new products and improvements, coupled with the great success we were having with CT and injectable PICCs with the Morpheus and bedside insertion kit.

So did the existing non port business, did that grow above or below the 20% level?

About the same.

Our next question is from the line of Suraj Kalia with Piper Jaffray, please go ahead.

Good morning. Eamonn, Joe, happy new year.

Happy new year.

Congratulations.

Thank you.

Eamonn, Joe, one quick question, in terms of the implied guidance for Q4 and the whole year, a follow-up on Jayson's question, the RITA business drove the angio port business and there was growth of 20%. Did any organic angio product lines see any softness in the quarter, and if you could tie that to what was the implied acceleration in Q4?

That's a difficult question to answer, from the perspective of we're comparing to an extraordinary Q2 the prior fiscal year, so with that in mind, and by extraordinary I mean that we had peak sales in Q2 in many of our product lines for that fiscal year, so the -- but the stand-outs as far as the softest side of the angio business was the dialysis segment and the venous segment. Both were working against, as I said, extremely difficult comps, and dialysis we're, as we said in our presentation, we're expecting to deal with that by innovating, as we've done in the past, and venous, we're very pleased, actually, with the way the venous business is going and think that venous is going to have -- be at or above average growth, company growth, in Q3 and thereafter.

With respect to the implied debt growth rate in the guidance, it would work out arithmetically at the low end of the guidance. We would have to grow 19% year-over-year pro forma in the second half of the year and at the high end, 25% in order to end in that 170 to $175 million in total for the full fiscal year.

Our next question comes from the line of Jeffrey Cohen with Jesup & Lamont. Please go ahead.

Happy new year. Thanks for taking my call.

Happy new year.

Just had two quick questions. First, can you run through the sales force breakdown as currently configured. And I guess the second short question is do you have any comments regarding Sotradecol from the past quarter?

I'll take the Sotradecol aspect. Sotradecol had a very strong quarter. It is still one of our fastest growing products and we continue to gain traction based on our educational programs of educating physicians on the benefits of using the only FDA approved sodium tetradecyl sulfate which you have heard before. It was a very solid, solid quarter for Sotradecol and we expect that trend to continue throughout the rest of the fiscal year and beyond.

With regard to the sales force, the total sales organization at the end of the fiscal quarter is 119 strong. And then within that, the number of quota carrying sales reps in the U.S. and Europe totaled 96.

And what was the breakdown between RITA products and the interventional?

The numbers in the oncology products group numbered 27 and the interventional group in the U.S. numbered 61 and then 8 others in Europe.

Thank you.

Our next question comes from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Hi, guys.

Hey, Brooks.

I actually had a question on sales force size that was just answered. Can you comment, Joe, a little bit more on plans for growth of the sales force and where you're trending in terms of sales per rep and what some goals might be there?

Yeah, we'll add a few more this fiscal year, not too many, and at the moment we don't have any open spots, but I'm sure we'll be adding some later in the year. In terms of the productivity level, this quarter we were at about a $1.7 million per quota carrying rep level of sales on an annualized basis. So good productivity and it continues to step up nicely throughout the year.

Great. Thank you.

Our next question comes from the line of Christopher Warren with Friedman Billings Ramsey. Please go ahead.

Thank you for taking the question. Just wanted to ask about the contract revenue opportunity. Did you see much incremental revenue from the IDN network and where are you as far as hiring that sort of tactical team?

Chris, this is Bob. Basically we're just getting started to push forward our national accounts or group purchasing -- purchase opportunity. As we start right now, we've identified a Vice President of the organization and he's building the organization around him right now. We haven't recognized much by the way of revenues with the organization thus far.

Thank you so much. I appreciate it.

Our next question is from the line of Larry Haimovitch with HMTC. Please go ahead.

Happy new year, Eamonn.

Happy new year, Larry.

I'll see you next week. Couple of questions. One is can you give us a little more color on the performance of the oncology division, I'm thinking specifically of growth rates of Radio Frequency ablation, vis-a-vis the drug eluting beads. I'll come back to my second question when you answer that. When you answer that.

Well, the drug-eluting beads are really a star performer in the oncology segment and they're relatively new product so you expect to have a higher growth rate over the much more well established Radio Frequency ablation.

Okay. And any color on the growing 30, 40, would you give any color on the actual growth rate of the drug-eluting bead business.

We don't give specific product information for competitive reasons. But having said that, it's multiples above our corporate average growth rate.

Okay. And then on the Oncobionics, what are some of the triggers for -- you talked about a $20 million payment, which has previously been discussed. What are the key triggers that get you to a full milestone payment or milestone payments?

The $20 million is broken up into a $10 million followed by two $5 million payments that are time-based, so really, the closing of the acquisition happens after the milestone of successful demonstration in malignant prostate. The malignant prostate study that we're going to be conducting in Italy with the world-leading urologist who is completely independent of the development of IRE, is going to -- we anticipate trigger the closing of the acquisition of Oncobionic. We have paid $10 million then over the next 12 months pay another $10 million which is just simply time based. The closing would be complete, I would anticipate, this fiscal year.

Our next question comes from the line of Greg Brash with Sidoti & Company. Please go ahead.

Happy new year.

Hey, Greg.

I was curious, I know you don't like to break out individual sales, but you've done it in the past. Would you be willing to comment on the laser sales in the quarter?

Well, we really stopped giving detailed product performance based on competitive issues. We were giving our competition really a tremendous amount of competitive advantage by telling them exactly how we did and hence why we're doing what we're doing. But lasers had a very strong quarter. They were up against an extremely strong comp and that's about the only unusual thing about Q2. We were pleased with how the laser box sales and laser consumables performed during Q2 and expect that that trend's going to continue. NeverTouch, our product that we introduced in Q,1 is still performing really well, getting solid, positive feedback from the clinicians who are using it and we're pleased all around with our venous sales performance.

Is it fair to assume there was sequential growth?

There was indeed.

(OPERATOR INSTRUCTIONS). Our next question is a follow-up question from the line of Jayson Bedford. Please go ahead.

Hi, thanks, guys. I'll just make it quick. First, Eamonn, you alluded when talking about the size of the oncology sales force to potential new product introductions in the oncology segment. Outside of the IRE technology, is there anything else we should look forward to. And then just so I get it in, to Joe, in terms of the interest income, it sounds like that that hedge had an impact. I'm just wondering, does that hedge reverse in the third quarter and then from -- just from an interest income, should we look at it as growing? I'm a little unclear as to what's happening with that, that line item on the P&L.

As far as new products that outside of IRE for the oncology sales force, we have a very full pipeline of new products that are associated with the Radio Frequency ablation area, both for in terms of additional electrodes and the box, adding features to the boxes for future generation machines. In addition, we are very actively involved in the development of surgical -- electrosurgical devices, along the lines of the very successful Habib electrocautery systems and there are other things in the pipeline as well that we're really not ready to talk about yet. But be that as it may, we are very committed to the oncology space and adding new products to the -- in the bag of the existing oncology sales force, and also working on programs to expand the markets of the existing products and things we're looking at that are very potentially significant are lung RFA, getting a specific indication for that and a favorable reimbursement would allow us to dramatically increase the market for our existing RFA products.

Our next question is a follow-up question from the line of Greg Brash. Please go ahead.

I was just curious if you've been gaining any traction selling some of the angio products overseas. I know you have a sales force over there.

Yeah, I think we're definitely leveraging the sales force as we continue to expand our global operations and that's reflected in our sales numbers. So definitely.

You know, we've got a ways to go, that I think -- it's still early with regard to integrating our -- getting full value out of our direct sales force with regard to the angio products. We are direct in the U.K., Germany and France, and we have plans in various stages in those three countries of execution of leveraging that direct sales force to push the European sales of the AngioDynamics products forward.

Other thing I would comment on that is the actual pro forma growth rate on the OUS business was actually about twice the rate of growth of the domestic business. We are in fact seeing very strong growth there, even before we get up to full speed in terms of ramping up our sales and marketing activities in Europe.

If I could also answer the question with regard to the hedge that Jason brought up, we recognized $215,000 worth of expense in other expense below the operating profit line, which is the mark-to-market adjustment of that hedge to flow that through the balance sheet and that stems from the very significant drop in interest rates that occurred in our second quarter as part of the turmoil in the credit markets and in the past few quarters, it had actually been a very small amount of either a gain or an expense and this quarter just happened to be a very significant expense by virtue of the sharp drop in interest rates. And so we wouldn't expect that to repeat, just because it's unlikely that there could be a further precipitous decline in interest rates in the coming quarters. If you'll accept our view of the -- of interest rate forecasting.

Our next question is a follow-up question from the line of Phil Nalbone. Please go ahead.

Thank you. Eamonn, I'm interested in your thought on this. What do you think it's going to take operationally for AngioDynamics to get back to a position where it can routinely exceed expectations? You had a couple of sort of sloppy quarters around the time of the RITA acquisition. You've now had two very strong on-target quarters. But what needs to happen for us to see kind of shades of the old AngioDynamics, which was known for beating expectations on a pretty consistent basis?

Well, it's a fair question that I would say that we're well on our way to doing that. We are very pleased with Q2, but our overall growth is not back to, as you say, the old AngioDynamics. We think Q3 is going to, as Joe pointed out, if we hit our guidance for the last half of the fiscal year in Q3 and Q4. We'll be back to growth rates that are much more in line with the historical kind of growth rates that angio enjoyed and put forward. I think we're very close to being able to execute and hopefully exceed expectations routinely.

Great. Thanks. Good luck in the new year.

Thank you, you too.

Our next question is a follow-up question from the line of Brooks West. Please go ahead.

Eamonn, specifically on the lung RF ablation, nice to see you coming through that unscathed. You talked about going after a specific indication, which would be pretty nice. Any time line on when you might try to apply for that, and is that trial complete or nearing completion?

Well, that rapture trial that we mentioned is completed and is going to be published shortly and we really can't get into too much detail on that study due to our consideration for the authors of the study. But we are, as of today, considering the plans for going forward with a -- the pursuit of a specific lung indication and a favorable reimbursement. So it's premature to be giving -- putting a time line on that, but it's definitely on our short term radar screen, as far as being in a better position to give a time line on it.

Would that give you the only indication for RF in lung?

That would.

Thank you.

Our next question is a follow-up question from the line of Jason Mills. Please go ahead.

Thanks for taking the follow-up, guys. Couple quick questions here. Eamonn, we were keen to the progress here, the PROFILER balloon, you said sort of the general terms it was going well. That product, at least when you were -- before Bob came along and prevented us from hearing all the good stuff in each division -- Seems to have been doing -- sorry, Bob.

That's okay.

About $1 million, $1.5 million a quarter. I guess just generally speaking, what could PROFILER mean to PTA, catheter line, sort of two or three years out? Are we talking about something that could be a 5 or $6 million a quarter business, talk about the competitive landscape there that may or may not allow that.

Secondly, gross margins were really strong this quarter. My guess is, it was partly driven by new product launches in addition to obviously acquiring RITA. As we look forward, and I know you probably, Joe, aren't ready to give 2009 fiscal gross margin guidance, but my guess is also that you want to continue to expand that. Sort of in general terms what sort of year-over-year margin expansion can can we expect over the next couple of years on the gross margin line?

Bob talk about the PROFILER opportunity.

Why don't you go first with the gross margin.

Bob can redeem himself.

On the gross margin, this past quarter, not so much new product actually. Typically, with a new product we'll see a ramp-up as we work through the manufacturing process, if you will. So this quarter, it really was primarily just sales mix and in the first quarter of the year, the sales mix was less favorable and in this quarter it was more favorable. That really primarily accounts for the improved margin this quarter. If you look at our past, of course, we have historically improved gross margins by about two percentage points every year and we think at least the guidance we've offered is that we expect going forward to be able to improve them at least one percentage point a year from the current levels. But we continue to work on all the aspects to improve margins from material cost efficiencies to better manufacturing processes and most importantly to just the sales mix and to the extent we invent our own product and build and sell that, there's a much better margin on that that one that we might be selling that somebody else would have created in the first place.

Very good.

Bob?

Well, thanks, Jason. I really thought we were beyond this in our relationship.

We are. I just dig up old bones.

I appreciate that. But specific to the PROFILER, I can say in general that we're very impressed with the growth that we're experiencing and the market penetration that we're also experiencing along side that growth. It's an exciting product line and relative to your question, four and five years out, you bet. We plan to be a major contender in this space and the way we're going to do that is through continue with innovation, so within our R&D pipeline, we plan to continually innovate on the PROFILER line.

Should we expect an iteration this year? Next year.

Probably not this year. But we're close.

Okay. Thanks, guys.

Okay.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

I would like to thank you all today for your attention and we continue to look forward to a successful fiscal 2008. Have a great evening and I look forward to speaking to you again at our next conference call.

Ladies and gentlemen, this concludes the AngioDynamics conference call to review the second fiscal quarter financial results at and t would like . ACT would like to thank you for your participation. Have a pleasant day. You may now