AngioDynamics Inc (ANGO) 2009 Q1 法說會逐字稿

Welcome to the AngioDynamics first quarter 2009 conference call. (OPERATOR INSTRUCTIONS) . This conference is being recorded today, Thursday, October 2, 2008. I would now like to turn the conference over to Doug Sherk. Please go ahead,

Thank you, operator, and good afternoon, everyone. Thank you for joining us this afternoon for the AngioDynamics conference call to review the first quarter fiscal 2009 results for the period ended August 31, 2008. The news release announcing the first quarter earnings crossed the wire this afternoon shortly after the market closed and is available on the AngioDynamics website. We have arranged for a taped replay of this call which may be accessed by phone. The replay will become available approximately at 6:30 p.m. eastern time this evening and will remain available for seven days. The dial-in number to access the replay is 800-405-2236 or for international callers 303-590-3000. Both numbers will need the pass code of 11119718 followed by the pound sign. The call is being broadcast live and an archived replay will be available to access the webcast for the AngioDynamics website at www.angiodynamics.com.

Before we get started, during the course of this conference call the company will make projections or forward-looking statements regarding future events including the statements about the sales and the company's belief about revenues and earnings for fiscal 2009. 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. Management uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing the underlying trends in the company's business over time. 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.

In this news release the company and this conference call the company has reported non-GAAP EBITDA and EBITDA per share. Management uses these measures in its continue internal analysis and review of operational performance. Finally, during the question and answer 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'd like to 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. With me is Joe Gersuk, our Chief Financial Officer. We made a lot of progress during the first quarter and as a result are on track to achieve our original top and bottom line guidance for the full fiscal year. As we look at our top line guidance for the full year, our first quarter revenue relative to the full year is right in line with our historic first quarter contribution to the full year. Since we last talked to you in late July we've accomplished quite a bit. For instance, we continued to successfully execute our five-point program to build consistent revenue growth. We've established our three business units, oncology/surgery, access, and peripheral vascular to provide better focus. We advanced the integration of the Diomed assets into our existing VNUS ablation product lines and operations. We've expanded our sales force significantly and we've continued to develop our game-changing IRE technology and the NanoKnife product line. All in all, fiscal 2009 is off to a very good start.

We generated 18% overall net sales growth during the first quarter, which was our expectation. In a few moments I'm going to turn the call over to Joe so he can review the details with you, but I would like to focus on a few highlights. The oncology/surgery business unit had an excellent quarter with strong sales growth coming from our LCB product line. In addition, our venous ablation product line sales more than doubled over the year's first quarter performance. Of course, a large portion of this growth resulted from the mid-June acquisition of the Diomed assets.

During the quarter, we hired 35 former Diomed employees and immediately began implementing laser system and dispositionable product transition strategies. Our team is doing an excellent job at converting appropriate Diomed customers to never touch consumables, and we are now exclusively selling Diomed lasers under the AngioDynamics brand. We had two issues during the quarter which kept us from an even better top line performance. We continue to be quite optimistic about the revenue potential of the combined product lines. Customer demand for [EVLT] disposable products remained solid during the quarter. However, first quarter laser system sales were impacted by the market's uncertainty regarding Diomed during the months leading up to our acquisition. We believe we are gaining momentum in the marketplace and expect laser system sales to grow as the year progresses.

The second issue was with the Morpheus CT PICC product line within our access product unit. During the quarter we had a single component supply issue that limited our ability to ship. We addressed the problem and believe this product line will be back to double-digit growth by our fiscal third quarter. Now, to give you more detail on the first quarter financial performance, I would like to turn the call over to Joe.

Thank you, Eamonn, and good afternoon, ladies and gentlemen. From an operating perspective the fiscal first quarter was a dynamic and productive quarter for us. Three strategic business units were established at the beginning of the fiscal year and a total of 194 engineering, sales and marketing personnel have been assigned to the units. General managers for the peripheral vascular and access units have been in place and we are actively interviewing for a GM for the oncology/surgery unit. We have also made considerable progress in hiring additional sales reps in the peripheral vascular and access units as Eamonn mentioned. The other major project this quarter was the June 17 closing of the acquisition of Diomed's assets the US and the UK. Our total purchase cost was approximately $11 million. The transactions were structured such that we did not assume any liabilities associated with the predecessor corporations. We hired a total of 35 people with this acquisition, 21 of whom are in Cambridge, England where the Delta laser is manufactured and international sales office is maintained.

We will continue to manufacture lasers in Cambridge and will standardize on the Delta laser for the our VenaCure and the EVLT business. We are combining the Diomed international sales activity with the AngioDynamics international sales team in Europe, so we now have a total of 31 people in Europe in laser manufacturing and international sales activities. In the US, we hired 14 people from Diomed, a few of whom are in Andover, Massachusetts, in the customer support office and the balance is spread across the US in sales and clinical support roles. This group has been fully integrated into our peripheral vascular business unit. Our business plan for the fiscal year anticipated that the first quarter would be a transition period for the peripheral vascular sales force with the establishment of new territories, the recruitment of new reps, the absorption of the Diomed reps, and the training of all reps on the suite of laser ablation products. It also included plans to engineer the VenaCure product to work with the Delta laser.

Additionally, in our diligence process before acquiring Diomed, we noticed a very sharp decline in laser sales immediately following their March bankruptcy filing. Prospective customers were understandably reluctant to make capital commitments due to the uncertainty and, as a result, laser sales momentum was completely lost from that date. We were well aware of the situation. We reflected it in our purchase price and we expected that it would take some time to rebuild the new customer pipeline. However, we believe that customer confidence would be regained once AngioDynamics acquired and began managing the business.

In September, we began to see evidence of increased laser purchases as customer confidence is being restored. With that as context, today we are reporting first quarter net sales of 44.3 million, an increase of 18%. As shown in the table in the financial schedules in the release, peripheral vascular sales were 18.4 million, which is an increase of 31% over the first quarter a year ago. This, of course, includes the impact of the products acquired if Diomed. The integration of the Diomed EVLT products and AngioDynamics' VenaCure products has progressed to the point that an attempt to identify the incremental sales impact of the acquisition would not provide an accurate number. However, we note that total laser ablation sales were $6.1 million in the first quarter, a 121% increase from the 2.8 million in VenaCure sales a year ago.

It is important to keep in mind that the summer period is the seasonally slowest quarter for selling laser ablation products and that laser sales were very low in the quarter while we rebuild the customer pipeline following the acquisition and train our sales force to sell the new products. Access sales were 15.7 million, an increase of 6%. We continue to see a very competitive market for dialysis products. Also, as Eamonn mentioned, access sales suffered from supply issues associated with the Morpheus CT PICC product line which we expect to be corrected during the second quarter. Finally, oncology/surgery sales were 10.2 million, an increase of 18% over the prior year. Sales of our chemo embolization product, LCB, were very strong this quarter.

From a geographic perspective, 89% of sales were in the US and 11% or $5 million came from international markets. Continuing down the income statement, the gross profit margin improved to 61.9% from 60% one year ago. Sales mix and manufacturing efficiencies are the primary reasons for the margin improvement over the prior year.

Operating expenses were 23.6 million for the first quarter, an increase of 25% over the same prior year period. As a percent of sales, operating expenses were 53.3% in the quarter compared to 50.6% a year ago. As expected, R&D expenses increased substantially this quarter to 8.9% of sales versus 7.2% a year ago. This is primarily due to IRE development and commercialization activities. Sales and marketing activities increased due to the Diomed acquisition, the expansion of the peripheral vascular and access sales forces with the addition of 16 new sales reps, and IRE marketing activities. These operating expenses -- expense increases were outlined in our guidance for the fiscal year.

Operating income was 3.8 million in the quarter or 8.6% of sales compared to 3.5 million or 9.4% of sales in the prior year. You will also note in the release that we are reporting EBITDA, which was 6.7 million or $0.27 per share in the first quarter compared to 5.6 million or $0.23 per share a year ago. Considering all of the activities and challenges of the quarter, we are very pleased with 21% growth in EBITDA in the quarter on 18% growth in net sales. Below the operating profit line you will note that other income declined by nearly $540,000 from a year ago. This is primarily attributable to $440,000 less interest income as a result of lower cash balances and lower investment returns. Our short-term cash investments are very conservatively invested to minimize risk during these turbulent times. After income taxes are taken into account, the result is $2.2 million in net income, $0.09 in diluted earnings per share compared with $0.10 in earnings per share a year ago.

Turning to the balance sheet and cash flow statement, we ended the quarter with cash and liquid investments of nearly $60 million compared with $78.3 million at the fiscal year end. Significant cash outlays in the quarter included the acquisition of Diomed for approximately $11 million, the redemption of the RITA convertible note for $10 million the settlement of the VNUS litigation for $6.8 million. We generated $1.7 million in cash flow from operations in the quarter which would have been $8.5 million excluding the settlement payment to VNUS.

Our accounts receivable remain in good shape. DSOs were 50 days sales outstanding in the first quarter which is similar to recent quarters. Our customers are primarily hospitals and we have not seen any significant collection problems as a result of the credit crisis. Our balance sheet and liquidity positions remain extremely strong and we expect to continue to generate significant free cash flow. Finally, as indicated in the release, today we are reaffirming our guidance for the fiscal year for net sales, operating income, EPS and EBITDA. That is, net sales in the range of $205 to $210 million, GAAP operating income in the range of $21 to $22 million, GAAP EPS of approximately $0.55, and EBITDA in the range of $33 to $35 million. I'll now turn the call back to Eamonn.

Thanks, Joe. I'd like to update everyone on our plan to build consistent revenue growth and then review the substantial progress with IRE. First, I believe that by reiterating our outlook for fiscal 2009, which follows a very strong finish to fiscal 2008, we're continuing to improve our ability to forecast the trends of the business. Another component of improving our ability to forecast was to expand the sales team to more comprehensively serve our customers. This action led to the establishment of our three business units.

Since we last talked with you in July, we've done a very good job of expanding the sales team. We filled a total of 18 expansion positions so far and expect to completely fill the remaining six positions by the end of Q2. This represents approximately a 40% increase in size of our peripheral vascular and access sales forces. We've also continued to build corporate account business during the quarter. We landed a contract with one of the largest GPOs, our second, and also added three regional agreements. We've also done a lot of background work required to implement an active product life cycle management program and are also continuing to explore tuck-in acquisition opportunities.

Turning to NanoKnife, we've made strong progress since we last talked with you in July. Substantial clinical and preclinical programs are planned at various prestigious institutions throughout the world. Investigator sponsored clinical studies for the treatment of liver, pancreatic, kidney and lung lesions are expected to begin. During the quarter we made progress in the development of preclinical programs for uterine fibroid ablation, pancreatic, lung, brain, liver, kidney and endovascular therapies. To date, 17 prostate cancer patients have been treated with the NanoKnife and 12 have had two-week postoperative biopsies. 11 of those biopsy results are back and 11 of the 11 patients have totally negative results in the treatment zone. One patient had negative biopsies in the NanoKnife treatment zone but had a microscopic positive biopsy in an area that was not included in the original NanoKnife treatment zone.

A second prostate cancer study with the Italian Ministry of Health Approval has begun with Professor [Maurizio Brausi] at the Carpi General Hospital near Bolognia, Italy. Professor Brausi is the Chairman of Department of Urology at the Carpi General Hospital, a professor of uro oncology at the University of Taurino and Piemonte Orientale, a board member of the European Society of Uro oncology, a member of the strategic planning office of the European Association of Urology, and the author of over 300 peer review articles and co-author of six texts on uro oncology. Professor Brausi is an independent investigator in that he has no financial ties to Oncobionic and has no financial ties to an AngioDynamics.

His focal prostate study will consist of 10 low risk of recurrence patients with organ confined prostate cancer. Biopsies and pre NanoKnife treatment preparations were conducted on patients starting in September and we expect NanoKnife treatments to begin on these patients to begin no later than December. The study's primary objective is to assess the procedural short-term safety in this patient population with a secondary objective with assessing the short-term effectiveness of the procedure in treating localized prostate cancer. These patients will be biopsied at two weeks post IRE, and their PSA levels will be monitored. We expect initial results of this study to be available in January.

Another key component of the IRE development program is the placement of NanoKnife IRE systems with key thought leaders throughout the US and Europe. While we originally planned on a placement of 20 NanoKnife systems, we have increased that number to 25 based on the strong level of interest we have received from more than 70 top institutions worldwide. To date, we have commitments to deploy NanoKnife IRE systems from five of the ten top cancer treatment institutions in the United States as well as three prestigious international institutions. All total, 12 NanoKnife units have been installed and another 13 have either been shipped or are scheduled for shipment. Using the results from our preclinical studies, we intend to file IDEs with the FDA in order to pursue additional and more specific tissue indications. While we already have a general soft tissue indication from the agency, we believe that more tissue-specific FDA approved indications will be very helpful from a marketing perspective. These will be obtained over the next few years by means of company sponsored IDE clinical trials and will also help serve to justify appropriate reimbursement levels.

In addition, we continue to pursue Australian, Canadian and European regulatory approvals and expect to receive them shortly. We are very pleased with the progress of the NanoKnife program, especially by the response we're getting from some of the world's leading cancer treatment institutions. From these initial placements, we expect to begin to build a strong database of very broad applications for soft tissue resection.

For those of you who are new to AngioDynamics, let me briefly review how nano knife works. We have come to realize that NanoKnife is not just another thermal ablation modality like [RSA], microwave, or cryoablation. These ablation modalities destroy all the cells and critical structures in the targeted tissue and this destroyed material remains in place for years. The body struggles to remove the material which is largely denatured proteins by slowly and painstakingly attacking it from the outside because all the normal pathways to remove damaged tissue are destroyed. NanoKnife is quite different in what it accomplishes. With NanoKnife, only the membranes of cells in the targeted tissue are affected, sparing critical structures such as nerves, blood vessels and the lymphatic system. This allows for the targeted cells to be removed by the body via normal mechanisms and pathways such as blood vessels and lymphatic system.

Unlike thermal ablation modalities like RSA, microwave, and cryo, the targeted tissue does not remain in place for more than a few days. The body actually resects the cells one by one and carts them away via normal processes. In a regenerating organ like the liver, the body will actually replace the treated cells. In animal models we actually saw no scar in treated liver tissue two weeks post NanoKnife treatment. As we previously mentioned, we are devoting significant resources in fiscal 2009 to drive the generation of NanoKnife surgical resection clinical data in a broad range of soft tissue areas such as prostate, liver, pancreas, lung, kidney, brain and others. Since NanoKnife will be compared to standard surgical resection, we do not anticipate these studies will require a long follow-up periods.

As we look ahead, our next milestones with NanoKnife will be to work with our initial installations to develop the clinical data I've just referred to and begin sales of the NanoKnife. Hopefully that first system sale won't be too far off as we have written two quotations for NanoKnife purchases. We'll be keeping you up-to-date on NanoKnife developments as they occur and we'll also be holding an education symposium featuring very prominent clinicians reporting on their experience with the NanoKnife. The symposium is currently scheduled for January 22 and we will be forwarding additional details on this event as we get closer to the date. Now, operator, we're ready for questions.

(OPERATOR INSTRUCTIONS).

Thank you, operator. Good afternoon, everyone. Thank you for joining us this afternoon for the AngioDynamics conference call to review the first quarter fiscal results for the period ended August 31 --

Operator?

We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) . Our first question comes from the line of Phil Nalbone from RBC. Please go

Hi, guys. Good afternoon. Since I was just about to be told by Doug Sherk for a second time to ask only two questions, let me just say they're going to be two very complex, detailed questions, get your pens ready here, so question.

We just want to keep you on your toes, Phil.

Absolutely. Well, I'm flat on my back at the moment but that's okay. Number one, in complex fashion, Eamonn you cited two factors that might have hindered sales performance in the quarter, the Diomed capital equipment and the Morpheus CT PICC. Give us a little more detail on what happened with each and how much you think that might have cost you in the quarter. And as a part of that, do you see any threats to ongoing purchases of the laser capital equipment, given the economic environment and the tightening of the credit and lease financing markets? That's question number one.

Okay. Well, sorry to hear you're not feeling well, Phil. And hopefully you'll be back on your feet shortly.

I'm just referring to the market environment, Eamonn. I'll be fine, thanks.

All right. All right. Well, as far as lasers go, we, as Joe pointed out, we inherited really a bit of a mess in that the customer base was very concerned about the long-term viability of Diomed as an entity and laser sales had dried up significantly in the Diomed business prior to the acquisition. So it took us a large part of the Q to start to see that turn around where we could restore customer confidence in the Diomed laser, which is an excellent, excellent product. And we've replaced all our outsourced lasers with Diomed sales, Diomed laser sales.

I don't anticipate that there's going to be a tremendous amount of impact from the overall market conditions because the majority of lasers that we sell are purchased outside of a leasing arrangement. We do still offer leasing arrangements and there is available credit to physicians but, for the most part, it's such a small number that they'll typically finance them on something like Master Card or Visa. Switching over to Morpheus, we had a problem that had to do with supply. It represented probably a million dollar shortfall for the quarter, maybe a little more than that. We believe we've sorted that out in Q2 and it's really a transient issue that we expect to be passed in Q2. So the net of all that was a -- let's say -- it's hard to estimate, but let's say a half million or so, so the total for the lasers and Morpheus was about $1.5 million, roughly.

Okay.

Maybe a little more.

Great. Second question, could you just give us an update on [Centros] in terms of progress with the manufacturing transition, when you expect to relaunch it and, in general terms, how much is baked in to your guidance for the full year from Centros?

Well, Centros update is it's looking more like Q4 than Q3 right now. Our total expectation for Centros on the year was $1.7 million. We're reiterating our guidance and still think that we have ample performance from the time available with Centros and other products to make up for any small shortfalls. We didn't put a whole lot in for Centros because of the potential for delays, it being a new product. So --

Thank you. Our next question comes from the line of Christopher Warren from Caris and Company. Please go ahead.

Thanks for taking the question. I wanted to drill down on the sales force additions. Could you just once gentle us how many you added in this quarter and how many more you can going to add and how those additions relate to the folks you hired from Diomed.

Hi, Chris. We had 56 territories in our -- what was called interventional products group which is now divided into peripheral vascular and access units. We've expanded that to 80 territories, of which we have 74 filled right now and we expect to have the remaining six filled certainly by the end of Q2 if not by the end of October. So we've made tremendous progress in being able to fully staff our sales force and expect to see the fruits of that as the year unfolds.

And just a follow-up, as my second question, talking in granular detail about how you get new revenue out of the reps you're adding, what's essential here? Are the new reps calling on new hospitals? Are they calling on departments that they didn't previously call on by the former reps? Or is this just beating the same folks in the departments or meeting them more frequently to convince them to use angio products?

Well, I think the best way to look at it is that as we add territories we add the ability for the sales reps to improve both quantity and the quality of their sales calls. In addition, as we provide an added focus with the SBU structure, they are really enjoying the ability to have a smaller bag of products that they can work on with their customers and they aren't pulled in as many directions as they were being pulled with the much broader bag. So for instance, in the IPG combined sales force, an average territory really was challenged to balance their efforts to sell the endo VNUS laser therapy products as well as the access products. It really was a very, very broad product line that took them in too many different directions, albeit in the same department, primarily, but different sort of nuances associated with the products. By focusing them on peripheral vascular and the access products, we really are getting tremendous feedback from the salespeople that they are much more confident, much more effective, from the customer's perspective, in adding value on every sales call because they have a smaller bag in which to focus.

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

Hi, guys. It's pretty good summer.

Yes.

Hey, I want to take advantage of Phil's multi-part question here and my first one is on the Diomed acquisition and, Joe, I have in my notes that you were going to have about two months of Diomed contribution in the quarter and I'm wondering if you might break out what the contribution from Diomed was in the quarter?

Yes, we really can't do that, Brooks. It's been fully integrated into the peripheral vascular business and we make no attempt to isolate the impact of it. We're selling all of the laser ablation products and the salespeople are selling the full bag of peripheral vascular products, so it's just virtually impossible to segregate the incremental impact of Diomed in the quarter. The one thing I would say is we talked last quarter about spending several cents per share of one time costs associated with the transition, if you will, rebranding and things like that and we spent less of that than we thought we would. It was probably something less than a penny a share impact from all of that in the quarter and we probably will only spend about a penny in the second quarter to do that work. So less overall for those one-time items but it really is impossible to carve out the incremental financial impact from that.

Am I correct, though, just to follow-up on that, am I correct on the two months of contribution?

Yes, since mid June. Little more than two months.

Are you seeing -- given that that's basically an elective procedure, are you seeing procedure volumes holding there?

Maybe I'll take a stab at that. The summer months are historically a very, very slow period for laser vein ablation procedures because patients that are seeking the procedure usually get it done in the spring so that they can have the benefits all summer long. We see procedures pick up very significantly in our Q2, which is the fall and then winter is very strong and then they peak again in the spring that patients can have their legs in great shape for the summer again. It's very, very hard to extrapolate anything from Q1 but, having said that, as Joe presented earlier we had very, very strong consumable sales in the laser vein therapy area during Q1.

Thank you. Our next question comes from the line of Jayson Bedford from Raymond James. Please go ahead.

Hi, guys. Good afternoon.

Hey, Jayson, how are you?

Doing well, thanks. Just one question for Eamonn, one for Joe. I guess Eamonn, just on the 12 NanoKnife installations, logistically, what's required? And then is it just a little longer lead time than expected?

The logistics of an installation are we have to reach an agreement with the institution with an understanding that we still own the equipment and we're putting it there to basically allow them to pursue whatever program we've agreed to. If they're going to pursue a physician sponsored study, we need to understand in general terms what they're going to use the equipment for. It outlines the consumable usage and the cost of consumables based on usage. And also it involves an inservice of the facilities biomedical engineering teams who are going to be responsible for the equipment and an inservice of the clinicians as well as to how to use the equipment. So the summer months are really a tremendously difficult time to push installations because of all the vacations we had to deal with, both with our customers and the hospital staff and, of course, our own team. We've seen things pick up dramatically in the fall, so we're making great progress as everybody's come back to work and we're very encouraged by their tremendously positive response we've got from all the prestigious institutions.

Okay. Thanks, Eamonn. Just quickly for Joe. Other expense was $250,000, roughly. You have net cash of $53 million. So I'm just wondering what was in that other expense line?

Well, you've got -- you had some interest expense in the quarter, we also had a loss on our interest rate swap that we have as a result of the movement of interest rates. It's a non-cash loss. It's an accounting entry just there because of the fact that the instrument we have doesn't qualify for true swap accounting. So that was about $127,000 worth of loss in the quarter. Then bank fees as well are down there below the operating profit line. And those were higher this quarter than they were a year ago. And little bit of foreign exchange loss as well, now with our UK subsidiary we've established AngioDynamics UK Limited and we had about $78,000 worth of foreign exchange losses as well in the first quarter. So a variety of things fairly small, all of which went in that direction. But the preponderance, the biggest item of all was the interest, less interest income and that was the 500 -- or about $440,000 of difference.

Thank you. Our next question comes from the line of [Greg Verash] from Sidoti & Company. Please go ahead.

Hi, thanks for taking my questions. On the gross margin side, little higher than I was expecting. I don't know if you had any -- if there was just a mix issue, is that something we can look to sustain going forward close to 62% or would we expect it to rise? I mean, were there any purchase R&D costs in there or anything of that nature?

Yes, nothing abnormal, Greg. It was higher than we expected as well, to tell you the truth. And it can move by a percentage point up or down, based on sales mix and even within our different business units on the specific products that we might be selling. Some are higher margins than others, and we said before that the oncology products have higher gross margins than the rest of the products in had the other business units, but it can can fluctuate significantly. We did have some good manufacturing efficiencies which contributed this quarter and while we're reluctant to raise our guidance, what we said was 60% to 61% gross margins. We're certainly off to a great start on gross margin but it won't necessarily stay at this high level next quarter. So everything came together, if you will, and gave us the strong result in the quarter.

Okay. And then just also curious on the sales rep hires, I mean you did add a lot in the quarter. I also that may -- higher expenses because of that. Were a lots -- where were those I guess hires spread out through the quarter? Beginning? Middle? End? Should we expect expenses to ramp up as we head into Q2 here?

Yes, I mean, they came throughout the first quarter and will continue to come in the second quarter. We think we'll have achieved that last six that Eamonn talked about by the end of Q2. We're hiring them as fast as we can. It's a good recruiting market, as you would expect out there. And I think the larger factor in that increase in sales and marketing expense, if you're looking at it as a percentage of the sales dollar, would be on the marketing side and we are making some investments there, particularly with regard to IRE and some other activities. So it will continue at that fairly high level during the balance of the year.

Thank you. Our next question comes from the line of Jason Mills from Canaccord Adams. Please go ahead.

Hi, this is [Chris Welniak] for Jason. I wanted to ask you a couple questions on Jason's behalf. If you look at the current run rate, it suggests that boast your sales and EPS will be below what you need over the balance of fiscal '09 to reach your guidance, so we're curious as to what specific drivers do you foresee to accelerate your business to reach that guidance notwithstanding a seasonally slow 1Q?

Sure. And I guess I would just take a little bit of exception there, Chris. If you were to look at our normal loading of sales over the course of the year, over, say, the last five years, you would see that we do typically about 21% of sales in the first quarter and then steps up to about 24%, then 25%, then 30% in the fourth quarter. And so in this Q1, we actually did about 21% of what is our full-year guidance if you were to take the midpoint of our guidance. So we think we're right on track with regard to the top line and then on the bottom line we typically make some investments early in the year and have less investments later in the year and the returns would come later as well. So we would think that the earnings level that we just reported is fully consistent with the earnings, the guidance for the full year.

Great. Thank you so much. I also wanted to get some -- and I may have missed this, but did you state when you plan to start your IDEs or for IRE and if so, or if not, do you have your trial design already worked out? How many patients? Primary end points?

Well, we're currently working on draft IDEs now for a number of specific tissue indications. We have not disclosed when those trials will start. I don't think we really will do that until we've worked out the details with the FDA on approved structure. But to review what our plan is with regard to IDEs is that we currently already enjoy an approved indication for general tissue resection, soft tissue resection, which is a general indication. So physicians can use the -- can purchase the system and use it freely for whatever they deem appropriate. We certainly will limit our marketing efforts to the general indication that we have approval for. But as we roll the system out, there is certainly a perceived benefit to being able to, in a marketing fashion, specifically discuss tissue types and the potential benefits of using the system on a specific tissue, like prostate, like liver, like lung. So we're looking to do these clinical studies in order to gain additional indications for marketing purposes.

In parallel with all that, we believe that there will be a tremendous amount of data generated under the general approval because there is no such thing as soft tissue. It all boils down to some specific tissue and the use of the system under its current you approval is going to certainly constitute an opportunity for clinicians to generate a whole lot of data on their experience with the system. So it's going to be a parallel program of current marketing under the current indication and expanding our indications as opportunities present themselves. Timing-wise, I would hope that we can initiate IDE clinical trials before the end of the fiscal year.

Our next question comes from the line of Shekhar Basu from Basu Capital. Please go ahead.

Thank you for taking my call. I had a question on the NanoKnife opportunity in prostate cancer. I'm wondering how you you are able to detect the cells that are cancerous or need to be ablated when the diagnostic methods and the biopsies available are themselves inaccurate in detecting cancer versus normal cells?

Well, the way the NanoKnife works is it does not discriminate between cancerous cells and healthy cells. It will treat the cell membranes of all the cells in the treatment zone with the exception of nerve cells which are insulated and protected from the pulse energy, electrical pulse energy of the NanoKnife system. So the treatment zone is -- everything in the treatment zone, with the exception of the nerves and the critical structures that are made up of primarily of collagen, elastin, matrix are going to be treated. So all the cellular material in the treatment zone will be affected. The biopsy methods or the diagnostic methods vary by tissue type. In the liver, there are many different diagnostic methods to identify the treatment zone that are imaging oriented in other areas such as prostate, for instance, imaging has not proven to be specific enough and biopsies are required, matrix biopsies are required in order to identify what part of the prostate needs to be treated, if not all of the prostate.

Thank you. And you had done a study previously and it shows the biopsy data as a result of this procedure. You were going to follow with some PSA data and I'm wondering when the PSA data will be available and when you might be initiating and completing the multi-physician study.

Well, the PSA data is rolling in. So far we've had very excellent PSA results. They've been in large treatment zones where the vast majority, if not all of the prostate, was treated with NanoKnife. The PSAs were undetectable and commensurate with what you would expect from a radical prostatectomy. And unlike other treatments of the prostate, there did not appear to be a big spike in PSA post-treatment, which was very interesting. But we haven't completed PSAs on all the patients yet. I would hope that we would be able to present that data as it's given to us before the end of the calendar year, hopefully, but that study is actually a physician-sponsored study so we're limited by the data as it's presented by the physician. With regard to a multi-center trial, our next step in prostate is the Italian trial that's being conducted by Dr. Maurizio Brausi and subsequent to that, we'll be looking to most likely scenario is immediately subsequent to that, we would be looking to pursue an IDE multi-center trial in the prostate. So timing on that would probably be in the best case in the first half of calendar 2009 as far as beginning.

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

Good afternoon, Eamonn, good afternoon, Doug. Hi, Joe.

Hi, Larry. How are you?

Been a long week. Question for Joe. You mentioned it looked like a true operating cash flow was about $8.5 million in the quarter, just wanted to verify that and ask you if that's -- multiplying by four for the four quarters is kind of a reasonable guess about the cash flow for the year?

Yes, that figure was -- is if you exclude the impact of the cash we paid to VNUS as that one-time settlement.

Yes, sort of a normalized cash flow, normal operations would be $8.5 million.

Yes.

Okay. Joe or Eamonn, when you look at NanoKnife, what approximately is the investment in NanoKnife this year? Have you got any kind of number for us on what that might be?

Well, it depends on how you look at it. The R&D investment in NanoKnife this year is approximately $10 million. But if you consider all the efforts we're putting into NanoKnife in sales and marketing and business development activities, it's far higher than that. So we're clearly NanoKnife constitutes a massive investment for AngioDynamics this fiscal year.

R&D, sales, marketing. Everything. Largely across the board. Certainly the amortization of intangibles as well. We're amortizing the purchase cost of those patents as well.

You have a follow-up question from the line of Brooks West from Craig-Hallum Capital. Please go ahead.

Hey, guys. On the access business, Eamonn, it looks like if you add back the million dollar shortfall with the Morpheus PICC you get to 12% growth rate in access which would be kind of the low range of the revenue growth guidance you gave us last quarter. I'm just wondering what else is going on in that business on the port side of the business, and do you feel that you can still get to maybe the higher end of the guidance range for that product category?

Yes, I think we can over time. The distraction caused by the supply issue was very significant and really caused a lot of heartburn for our sales force who had to deal with the situation by juggling product and customers and the like, which certainly cut into their ability to drive the revenues and other products as well. So sort of one thing led to another and the burning issue of the day had to be dealt with as the top priority. So we expect that Q2 will be certainly by the end of Q2 we'll be out of the woods on that issue completely, and Q3 will hopefully not have any issues and we can start to see that business increase its revenue growth rate percentage pretty significantly.

And then on the port -- how is the port business going?

Ports were very strong in Q1.

Okay.

Yes, the port business is everything we hoped it would be and more. We're very, very excited about our port business and expect a lot of good things this year out of it.

Great. Thank you.

We have a follow-up question from the line of Jayson Bedford from Raymond James. Please go ahead.

Hi, guys. Just one quick one. In terms of NanoKnife, is the procedure being reimbursed in these trials and then I guess just at what level?

Yes, it's an excellent question and because of the units that we placed out there are in a myriad of different institutions being used for a myriad of different applications under the soft tissue indication, the answer is it depends on the facts and circumstances. But the clinicians believe that a NanoKnife is going to be reimbursed for the majority of the procedures that they're going to do unless they're in a structured trial where the costs of the procedure are being underwritten in some other way. So in the normal course of doing procedures, they do expect that the reimbursement will be there. There are a number of ways they can slice that. We're certainly helping them with that and until there's definitive codes, which won't be for years to come, there will be different avenues of attack by the clinicians in structuring how they get -- how they bill for reimbursement.

Will it go under an RF or a cryo code?

Sometimes. I'm not sure about cryo. Certainly there's been some discussion of billing for an ablation, an RF ablation, but there's also been discussions of surgical resection, using surgical resection codes.

Our next question comes from the line of [Ronald Goodson] from [Goodson of Malibu]. Please go ahead.

Hi. Two questions. The prostate procedure that they're using, this is not requiring an operating room environment with support staff and so forth, is it? Or is this an outpatient procedure?

Well, the procedure is currently been conducted under general anesthesia and that has been done in an ambulatory surgery center scenario, O.R. The procedures have all been conducted -- I believe all of the cases were conducted as an outpatient procedure. None of the patients, if memory serves, had any reason to be kept overnight. So I would think that for at least the immediate future, the NanoKnife procedures are going to be conducted under general anesthesia and we would hope to evolve over time to the ability to be able to conduct this over -- under conscious sedation or even less, depending on the application.

Thank you. Next question, with the credit crisis, are you considering any programs to assist customers with a long-term payback to the company instead of them having to achieve financing of their own? You said they were putting things on credit cards and stuff, but if you roll out the NanoKnife and stuff, they're not going to throw a $400,000 machine on a credit card.

Yes, no, we didn't say they were using credit cards, although we do take credit cards and we do have a leasing program that historically has not been used very much but now with the Diomed acquisition we are beginning to use it more and we have reaffirmed the relationship there and have been told that the company very much wants to continue with us and that their leasing company is not in any imminent danger. But the hospitals who are our largest customers today continue to give us purchase orders and pay within normal credit terms so we aren't seeing any pressures from them to do anything different from what we did in the past.

I would add to that that we are considering programs that are based on spreading out the capital purchase over a longer period of time for a NanoKnife in order to stimulate sales. But, as we mentioned in the call, we have -- so far we've written two very detailed quotes for NanoKnife systems, which are significant capital purchases and we haven't gotten any feedback that the current credit crunch is impeded the customer's ability to be able to execute the purchase.

(OPERATOR INSTRUCTIONS) . We have a follow-up question from the line of Jason Mills from Canaccord Adams. Please go

Hi, want to know if you guys could give us an idea of what percentage GPO comprised of sales in the quarter and what the -- give us the year-ago number if you can and also let us know if you can what you expect going forward.

Yes, the GPO segment of the business is virtually impossible to calculate at this stage, because we really have only recently received GPO contracts and they provide -- they are multi-source contracts so they provide us really with a hunting license at an established price and we have yet to go through a cycle where we can or we have calculated the fees associated with compliance with the GPO contract. I would expect that it won't be until Q3 of this year, this fiscal year, where we see any real material data available on the impact, positive impact of GPOs for our business.

At this time I show no further questions in the queue. I would like to turn the call back over to management for any closing remarks.

Well, we would like to thank you today for your attention and your participation in our call. We are very pleased with our Q1 results and look forward to speaking to you at the end of next quarter. All the best.

Ladies and gentlemen, this concludes the AngioDynamics first quarter 2009 conference call. If you would like to listen to a replay of today's conference please dial 303-590-3000 or 800-405-2236 with the access code of 11119718. Thank you for your participation. You may now disconnect.