AngioDynamics Inc (ANGO) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the AngioDynamics fiscal second quarter 2010 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today, Tuesday, January 5, of 2010, and I would now like to turn the conference over to Doug Sherk. Please go ahead, sir.

Thank you for joining us this afternoon for the AngioDynamics conference call to review the results for the fiscal second quarter of 2010, which ended on November 30, 2009. The news release announcing the second quarter earnings crossed the wire this afternoon after the market closed, and is available on the AngioDynamics website.

We've arranged for a recording of this call, which may be accessed by phone. The replay will become available at approximately 6:30 pm eastern time this evening, and will remain available for seven days. The operator will provide the dial-in information at the conclusion of today's call. In addition, the call is being broadcast live on the web at http//investors.angiodynamics.com. A replay of the call will also be available at this webcast.

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 revenue and earnings for fiscal 2010. 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, today's presentation includes certain financial measures used to better understand our business, that have not been prepared in accordance with the Generally Accepted Accounting Principles, better known as GAAP. An explanation and reconciliation of these non-GAAP measures has been provided in today's news release issued by the Company, and is available on the Company's website.

AngioDynamics uses non-GAAP measures to establish operational goals, and believes that non-GAAP measures may assist investors in analyzing underlying trends of 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 today's call, the Company has reported non-GAAP EBITDA, and EBITDA per share, and has reviewed these measures as an internal analysis and review of operational performance. Finally, during the question and answer period today, we would like to request each caller to limit themselves to two questions, and encourage callers to requeue to ask additional questions. We appreciate everyone's cooperation with this procedure.

And now I'd like to turn the call over to Jan Keltjens, President and Chief Executive Officer of AngioDynamics.

Thanks, Doug, and good afternoon, everyone. Thank you for joining us for our second quarter conference call, and with me here today is Joe Gersuk, our CFO.

We followed up our good start to the fiscal year with a solid second quarter. Net sales grew 10% from prior year, and for the first half of the fiscal year, net sales were up 12%. Our second quarter was driven by strong growth from our Oncology/Surgery business, and good control of our operating expenses. These factors offset a decline in gross margin.

What is especially encouraging is that our growth was broad based, with the majority of our product lines contributing. And we believe our growth appears to be more rapid than the overall market we operate in.

Our results can be directly attributed to the diverse strength of our Company and its business model, which relies heavily on disposable products used in non-elective procedures.

All of our Oncology/Surgery product lines grew during the quarter, yielding a strong 28% overall growth. LC Bead and the Habib Radio Frequency knife continued to show particularly rapid growth, with increased sales also coming from RF Ablation.

We were very pleased with the growth in net sales of the NanoKnife IRE system. NanoKnife generated $700,000 in revenue in the fiscal second quarter. To date, physicians have treated a total of 104 patients in nine centers around the world, utilizing the NanoKnife IRE system. This represents an additional 18 patients since the last call in early October. Procedures now have been performed in seven different organs, specifically prostate, liver, lung, kidney, lymph nodes, bone, as well as pancreas.

And we are particularly pleased to see that the NanoKnife has been used for the first time to treat a tumor in the pancreas. This patient was treated now more than three weeks ago, and was discharged shortly after the procedure. The patient continues to show no complications.

We continue to make progress on our clinical development efforts with IRE. Due to hospital IRE scheduling conflicts, we're now anticipating enrolling the first patient in the international HCC study in the next few weeks.

In addition, we have met with the FDA regarding their questions on our focal prostate IDE, and in parallel the FDA has assembled a focal prostate panel meeting in early December, during which regulatory and clinical strategies for the industry were discussed. We continue to work towards addressing the FDA's questions, as well as the outlines of a possible pivotal trial for this indication.

Finally, we have also submitted an IDE for the pancreatic cancer study, and look forward to discussing this IDE with the FDA, so that this study can begin enrolling patients.

The first paper reviewing the clinical results following the NanoKnife use has been submitted for peer review publication. The second one is in preparation, and we look forward to publication of both papers over the next few months, and I should mention that we do intend to announce these, as well as other relevant future peer review publications, as they are released.

We continue to be very excited about the prospect of our NanoKnife IRE system. Based on their experience, our customers continue to be impressed by the strong safety record, and the anecdotal clinical outcomes are very encouraging. In addition, the commercial interest and clinical utilization of the system make us comfortable that we're moving in the right direction.

Turning to our Peripheral Vascular business, where net sales grew by 6% during the fiscal second quarter. Our EVLT disposable kit sales showed encouraging growth, and overall growth for this business unit was aided by a strong quarter for our Benephit renal infusion system, which we acquired from FlowMedica last year.

During the fiscal third quarter, we expect to begin patient enrollment for our PROVIDE multi-center, post-market study, where consistent with our committment to evidence-based medicine. We will be monitoring the use and outcomes of the Benephit system. Our goal is to register 2,100 patients over the next several years, and publish the results.

Our Vascular Access business showed growth of 4% during the fiscal second quarter, and the growth was led by our dialysis business. Based on some public comments from colleagues in the marketplace, we now believe unit growth in this segment has slowed down to mid-single digit rate, and (inaudible) sensitivity for port as well as PICCs has certainly increased. Assuming a mid-single digit growth rate, we believe we are gaining some unit market share in this segment, and with upcoming launches of Centros, a new PICC line and very important SmartPort line extensions, we believe we can continue to increase revenue and accelerate the growth across these product lines.

Part of our focus of driving strong global businesses is the expansion of our international business. In November, we named Steven McGill to fill the newly created position of Senior Vice President and General Manager, International. With his extensive executive level experience in Global Sales and Marketing, we expect to significantly strengthen our team and expand our business in international markets.

Turning now to the next area of focus of our organization. We continue to execute our strategy to bring innovation to our markets. To date in fiscal 2010, we have launched six new products, keeping us on track for 11 new product introductions in this fiscal year. Recent product launches include the new family of microaccess introducer kits, and we also released our Total Abscession drainage catheters, which combined with our biliary and general drainage catheters, now offers our customers a full range of choice from one single supplier.

Operational excellence is our third area of focus, and our gross margin in Q2 came in at 59.1%. This was a step back from 61.3% in the same quarter last year, and the drop was created by an unfavorable mix, product erosion in SmartPorts and PICCs, as well as higher material costs for some of our products.

On a positive note, we're close to completing the manufacturing transfer of the Benephit system to Queensbury, New York, and we're making progress on process improvements, as well as cost reduction of vertical integration programs. And we continue to drive the launch of new products that combine better performance with lower cost.

The supply situation of the Morpheus PICCs has stabilized, and we currently do not have any back orders. And following the hire of new supply chain leadership, we have also started to make good progress in reducing our inventories, contributing to our very strong cash flow during the fiscal quarter.

The construction of our corporate office in Albany is making good progress, and we plan to occupy the building in early spring 2010.

As we look ahead, we expect that some of the pressures on our gross margin are going to remain present into fiscal 2011, as implementing the structural improvements required to improve the gross margin will take time to show results. Therefore, like we did in the fiscal second quarter, we will continue to focus on driving top line growth, combined with good management of operating expenses, in order to grow our operating income.

In summary, while there is sufficient work ahead of us, there's a lot we like in this quarter that we are reporting today. The combination of good top line results and careful expense management allowed us to deliver on our goal of generating profitable growth.

At the same time, we continue to make strategic investments designed to create future growth. The markets in which we operate are showing growing residual volumes from which we benefit through our suite of mostly disposable products for non-elective procedures. We have a lot of opportunities for growth through our businesses and geographic regions, and we're committed to capturing these through a focused approach around innovation and operational excellence.

The momentum generated in the first half of the fiscal year, and initiatives planned for the second half, have given us confidence to raise our guidance today for fiscal 2010. And I'll let Joe go through the specifics in a few moments.

Our financial position is strong, and we continue to generate solid positive cash flow. We're now focused on continuing to execute on our strategy for profitable growth and creating value for all stakeholders. I would like to once again thank the AngioDynamics team for their continued efforts and hard work in delivering these results. I would like also to thank our shareholders and our Board of Directors for their ongoing support and ongoing confidence.

Joe?

Thank you, Jan, and good afternoon, ladies and gentlemen. Today we are reporting second fiscal quarter sales growth of 10%, to $53.5 million. Our strong growth this quarter was again led by our Oncology/Surgery unit, which reported $13.6 million in sales, and achieved a record quarterly growth rate of 28%.

Sales growth was led by strong sales of LC Beads, as well as $700,000 in IRE NanoKnife sales. The IRE NanoKnife sales program initiated this quarter offers prospective commercial sites either a lower price generator for purchase outright, or a probe generator bundle commitment under which the generator is purchased over a two year period. A total of seven hospitals committed to the program in the second quarter, all of which are in the US.

Our goals with this new program are two-fold, to generate revenues and to develop a group of commercial sites that make a commitment to use NanoKnife in their clinical practice. And we are obviously very pleased with the initial market response to this program.

Peripheral Vascular business unit sales grew 6% in the quarter to $23.2 million, and as you know we provided laser ablation sales data for the first year following the acquisition of Diomed. However, this level of detail impacts our competitive position in the market.

In addition, as you are aware, our largest competitor in the vein ablation market was recently acquired and no longer provides sales information. Therefore, we have elected to discontinue providing specific laser ablation sales data with the issuance of our fiscal second quarter results.

We enjoyed a strong quarter with our new renal infusion system, posting $832,000 in sales of the Benephit TRT product. Access business unit sales grew 4% in the quarter to $16.7 million. In the very price-competitive markets for PICCs, ports and dialysis products, we achieved healthy growth in unit sales in the quarter. However, Average Selling Prices were lower this quarter compared with the second quarter a year ago. We experienced price declines in the low- to mid-single digit range in most Access products, as hospitals and other buyers of these products are aggressively seeking to lower their purchase costs.

Overall, the Company's organic growth rate in the second quarter was 9%, which matched our fiscal first quarter organic growth rate. We are pleased with this rate of organic growth considering the challenging pricing environment we are seeing in some of our markets. From a geographic perspective, 89% of second quarter sales were in the US, and 11% or $5.8 million came from international markets. International sales grew 5% from the prior year, and 4% on a constant currency basis.

Continuing down the income statement, gross profit totaled $31.6 million in the quarter, or 59.1% of sales, compared with 61.3% a year ago. The 2.2 point margin decline from a year ago reflects the decline in Average Selling Prices on Access products mentioned earlier, as well as product cost increases on several Access products. And sales mix in the Oncology/Surgery unit, where LC Bead represents an increased share of sales. In addition, we incurred certain costs this quarter associated with transferring production of the Benephit TRT product from Fremont, California to Queensbury, New York.

Operating expenses were $26.3 million in the second quarter, an increase of $1.5 million or 6% from the prior year. Efforts to mitigate the gross margin challenge with lower operating expenses were successful this quarter, as we reduced operating expenses by nearly $300,000 from the fiscal first quarter.

As a percent of sales, total operating expenses were 49.2% in the quarter, a two percentage point improvement from the 51.2% reported a year ago. Research and Development decreased to 8.9% of sales compared with 9.1%, while sales and marketing expenses declined to 28.1% of sales from 29.5% a year ago.

The total investment in the IRE program for the quarter was $2.7 million, compared with $2.6 million a year ago. On an after tax basis, the net impact of the IRE program amounted to $0.05 per share in the second quarter, compared with a $0.06 per share impact in the second quarter a year ago, as the growth in IRE sales more than offset the increase in IRE sales.

After other income and taxes are taken into account, the result is $3.1 million in net income, or $0.13 in earnings per share compared with $0.12 per share a year ago. The tax rate was 38% in the second quarter and 34% a year ago, with the lower tax rate in the prior year the result of the reenactment of the R&D tax credit.

Turning to the balance sheet and cash flow statement, we ended the quarter with cash and liquid investments of $74 million, compared with $68.2 million at the beginning of the year. We enjoyed an extremely strong cash flow quarter, generating over $11 million in cash flow from operations.

In addition to collecting the $1.7 million federal income tax refund that we mentioned last quarter, we also made good progress by reducing inventories by nearly $4.4 million in the quarter. We are well on our way toward achieving our goal of reducing the inventory balance by the end of the fiscal year to a level close to where we began the year.

Our accounts receivable remain in very good shape. DSOs were 43 days sales outstanding in the second quarter, a seven day improvement from one year ago. In November, we paid the final $5 million installment due to Oncobionic on the purchase of the IRE intellectual property.

A few other items before we turn the call over to questions. First, we filed an 8-K yesterday concerning renewed change in control agreements with certain senior executives of the Company. There was no change from the previous change of control agreements except for the elimination of a provision providing for the gross up of excise tax under certain circumstances. With the renewed agreement, the Company has no obligation to pay excise taxes on behalf of any executive.

Second, we are pleased to report that we will be presenting at the upcoming JP Morgan healthcare conference in San Francisco on January the 14.

And finally, as Jan mentioned in his remarks, we are increasing our guidance for fiscal 2010 for net sales, operating income, EBITDA and EPS, while reducing gross margin guidance. Our expectations for net sales is increased to $214 million to $217 million. Our operating income is increased to $19 million to $21 million. For EBITDA, is increased to $31 million to $33 million. And for EPS, is increased to $0.46 to $0.48 per share. Expectation for gross margin is reduced by two percentage points, to 59% to 60%.

With that, I'll now turn the call over to the operator to begin the Q & A session.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). As a reminder, please ask two questions then requeue for additional questions.

And our first question comes from the line of Seth Damergy with Deutsche Bank. Please go ahead.

Yes, hi, thanks for taking my question. Can you hear me?

Yes.

Thank you. First, I just wanted to touch on the margin a little bit and see if you can kind of hash out the pricing pressure that you talked about, I guess it seems like it's isolated to the port and PICC business. Is that so, and maybe, is it across the board or are you just seeing it in specifically large institutions?

Well, I think what we are seeing is not unique in the industry. I think we're picking up similar comments from our colleagues in the marketplace. I think in our case, I think the dimension I would add to that, so I think the pressure is indeed confined to the access business, I would say, so dialysis ports and PICCs. Not every single product in that area has the same pressures, but I think it would go into too much detail to tell you when, in all detail, what is happening to individual products.

I think the other thing that's happening here is, we are growing revenue and certainly also units in all three product lines, and I think what we are growing is also very much in the corporate accounts area, where the average selling price of the incremental business is below our historical average. And that pushes down the average selling price of all our product lines.

So part of it is also math. It is not necessarily that existing customers go down in price as such, unless of course they come off contract and we have to renegotiate a new contract.

So part of it we think is also a result of our growth, and part of it is some of the premium prices off some of the newer product lines are coming down a little bit. Nothing alarming. I don't think we're losing more than anybody else, but certainly part of the reason why we had to report a drop in gross margins.

Thank you for that. And then with your new product launches, you've talked about a number of them, and I'm sure over the coming months there's a significant amount of new products that come along. Will that help your margin in the future I guess tick up a bit, or I guess NanoKnife or I'm sorry not the -- I guess will that help your margins?

A product like NanoKnife and Benephit, by the way, that kind of highly innovative products are significantly above the average margin. When Joe and I also mentioned mix in terms of headwind as for instance a product like LC Bead, which continues to grow very, very healthy but has below average margins.

But I think you also heard us saying, that we are very much focused in running the business on operating income. Whereas a product like LC Bead has below average margin, the overall profitability of the product line is actually very good. So in the mix, it kind of works out.

Okay, that's great. Thank you.

You're welcome.

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

Hi. Can you hear me?

Yes, you're good Brooks.

Great, thanks for taking the question. Joe, understand why you don't want to break out EVLT sales any more, but are you comfortable with the statement that you're still growing kind of at or above market where you were last quarter?

We probably grew a bit less than the market last quarter, and had a very strong quarter last year in the second quarter, and so we think it's more an issue of a difficult comparison to the prior year. But as we noted, we did have quite strong sales of the kits, disposable kits in the second quarter.

Great. And I like what you're doing on the website and some of the marketing pieces there.

And then Jan, on the international opportunity, can you frame that a bit better? Do you see specific product opportunities, maybe more on the peripheral side, versus the access side, and should we look for your international revenues to grow at a pace higher than the US?

Well, that's certainly the aspiration, not saying it's going to happen tomorrow morning, but it's certainly the aspiration. I don't want to set up Steven McGill for failure either. He's building his team.

But obviously the international market is huge, and I think what we would consider in the US as our flagship products, we want to turn into global growth franchises. So obviously oncology, we see tremendous opportunities outside US, particularly in Asia-Pacific but also in Western Europe. We're certainly underdeveloped in those markets compared to our market position in the US.

I think, frankly, the Access business has a lot of opportunities, just slightly different rules of the game over there than here in the US, and the EVLT business is one of our stronger franchises also international, continues to show good growth. We think we can drive that further, and on the heels of that some of the other peripheral products, but I'd say for all intents and purposes, interventional oncology, the vein intervention business and the Access business are probably going to be the horses we're going to ride initially international.

Great. Thank you.

You're welcome, Brooks.

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

Good afternoon, guys, and Happy New Year to you. Just a couple of quick questions. First, on the cost side, you did leverage the operating line nicely, at least sequentially, and I'm wondering, is it a timing issue or is this kind of a level of OpEx that we should expect going forward?

Well, it's not necessarily the level we should expect going forward, if you suggest that it would be flat. So it will certainly rise as sales rise through the balance of the year. But we felt that gross margin issue for a while and have made some adjustments on the cost side of the business.

Our headcount in the Company has not changed significantly from the beginning of the year when you account for some temporary people that we've had previously, so the full-time headcount has not changed at all over the six month period of time. And we've reduced certain marketing expenditures, and controlled G&A costs as well. So have had a strong program to control the costs for a number of months, and we continue to have the brakes on on all non-essential spending on the operating side for the foreseeable future, until things improve on the gross margin side.

Okay. Thanks. And just as a follow-up, on NanoKnife, the $700,000 in the quarter, is this kind of a bolus with respect to the new program or is this a level that you would expect going forward, the $700,000.

I think we said -- and Jayson, by the way, thanks for reminding us. It is Happy New Year to everybody on the call. I should have opened up with that.

I think I said a quarter ago or so that revenues will go up and down a little bit. It was a little hard to predict for us because there's a capital component in there, there's sometimes complex, formalized for revenue recognition. And that's why in addition to our revenue number we're also disclosing the number of centers that are using the system, the number of new sites that have been opened up, which was seven in the last quarter. And the number of patients that have been treated.

We think the $700,000 level is something -- we wouldn't be surprised if we see something like that again or a little more. But also could be a little less, it's sometimes a little hard to predict on when that exactly falls. But the underlying trend is there, and we think it's not a fluke that we had a very pleasant quarter on the revenue side in NanoKnife.

Maybe also to add to this, Jayson, that these centers, not all of them are operational yet. And some of them have to yet be trained and start doing procedures. I think that will drive momentum also forward.

Thank you.

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

Go afternoon, Jan and Joe.

Hi, Greg.

On the Access side, you mentioned some pricing pressure and so did your competitor. Your competitor also mentioned they may be losing market share, specifically on the port side. Is that where you're seeing the gains, more in the ports then the PICCs?

Well, to a point it's reading the tea leaves, and the beliefs on whose market estimates you believe, but if we add up all the market estimates and divide them by the number of contributors, we actually may be gaining share. I think we're certainly gaining share in dialysis, and we may well be gaining share both in ports and PICCs in the quarter. So the underlying trend is not bad but some of the glamour, some of the shine of course is taken off by the price erosion. But the unit growths are good, and again, assuming those market estimates, we may be gaining share. I would certainly believe that.

Are some of those market share gains and some of the price erosion, you being more willing to go down to a lower price or are you holding price the best you can, and it's just the markets dictating that?

Well, it's and, and, in this whole thing. We're in the ballgame, so we're playing ball but we're certainly not a price aggressor. I want to be very clear on that. I don't think we are. It's hard to say. But that's not where we're coming from. We're trying to sell value.

As somebody in the call mentioned earlier, the new website that went up on EVLT, I think is a great example of what kind of support we provide to our customers to just enhance the value of doing business with AngioDynamics. And we're trying to do the same thing in other parts of our business. Whether that's a training program for physicians and nurses, and all that.

But at the end of the day, we're in the game. We have a very strong strategic drive to increase our share and increase the volumes, because we believe it's a key driver for keeping the business healthy and allowing us to drive gross margins up. So yes, we will engage in the battle and we are competitive if we need to be but we're not a price aggressor.

Okay. And then on the NanoKnife side, that was really the big surprise here in this quarter. Can you remind us what you did last quarter with NanoKnife, and what you think ultimately drove that improvement. You think a lot of that was the new program or is there just enough data out there that physicians are starting to get comfortable with the product?

We had $42,000 in sales last quarter, and we would really attribute all of the performance this quarter to this new program, and kudos to our guys in the business unit who thought it up and have driven it and sold it to Jan. And it's been a great response on the lower price generators, was one program, and in fact the majority of the revenue is generator sales.

And the alternative program is a commitment to a bundle of probes and the generator, by which the generator is essentially purchased over a two-year period of time. And as Jan mentioned, most of these sites have just started getting the generator installed, so we have some optimism that there should be a good stream of revenue coming out of these seven centers, going forward, as Jan mentioned.

If I can add to that, Joe, also, I think there's a correlation between how sophisticated our team is and the traction we have in the marketplace. I think it's fair to say that the vast majority of the revenue we report in the second fiscal quarter came from the US, where we clearly had the strongest organization.

I don't want to take anything away from our international people. We just don't have that clinical expertise, that engineering support yet. Steven McGill is aggressively building that team, and we think we can start showing revenue international hopefully in the not too distant future as well.

But apart from that commercial effort, that positioning and that training program, I think there's ongoing cases being done, and as I tried to comment in my remarks, the safety profile is just very strong. I think that word is getting out there. The anecdotal result, also the way we share them, sometimes at symposia and the way physicians share them amongst each other, get out there a little bit, and that word gets out there a little bit and starts getting some confidence in the marketplace and such.

Thank you, that's very helpful. Just one final one for me. You are reducing your gross margin due to some of the pressures you're seeing on price. But curious, are you still on track, pricing pressure aside, improving margins by moving some more of the production in-house? I know you were looking for some pretty decent improvement in the second half of this year. Is that still on track?

Yes, I was with you all the way until you said decent improvement in the back half of the year. I think we're on track, but I think it was signaled before, some of the measures we are taking, for instance, hinge on product launches and it just takes a little bit of time to get those products out there, ramp up the volumes and all that. But I'd say we have no major setbacks in those programs.

We do notice, and I think some of our colleagues have commented on that as well, if we change a product or move a location that requires a filing, it takes a little more time than it used to take. Things like a special 10-K in the past is of no practical value anymore nowadays, but no fundamental setbacks from that point of view, Greg.

Great, thanks, Jan.

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

Hi, this is Jamar Ismail for Jason. Good afternoon and congrats on a good quarter. My first question is on international expansion plans. Can you give a little bit more color on plans there, for example, like how many OUS direct reps you have now and have you thought about what's a good number going forward?

Well, our strength in the certain school, that's best summarized saying pay as you go. So Jamar, we have a -- the oncology business is direct in three countries, the UK, France and Germany, and between those three countries I want to say we have probably about 12 sales reps, something along those lines. I think you'll see that inching up, and then as revenues go up, as we develop our plans, we'll hire the people that go along with that.

But I think we said before, and I know we don't break out a separate international P&L, but we don't expect a significant investment overnight in that business. It's more going to be a gradual uptick of our infrastructure while revenue grows, while business grows as such.

Okay.

And a substantial part of our international revenue comes through our distributors, we have a wide international network of distributors, and we do see particular growth opportunities in the Asia-Pacific region where we're starting to get some real traction in China, as an example.

Piggybacking on that, Joe, that was a great comment. It also means, Jamar, it is not just about sales reps, it's also about providing support to distributors, providing training support, marketing support, program support, et cetera, et cetera, sometimes reimbursement support, market development support, allowing them to do a better job in the marketplace. All right?

Okay. Just one more, just thinking about, in terms of support has moved to the US NanoKnife team. Can you talk about the type of support that center needs to get up and running, how long does it take from the time they decide to get a console to they're up to being able to do cases? What's the size of the team that's running that now?

From the time we get a purchase order in hand and of course that triggers the program, it's typically about 30 to 45 days before the system is installed. We would send an engineer there to do the installation work, and then there would also be a clinical training period where we would either be training physicians on that machine or they would come to someplace else for training, and that would depend on the specific physicians. But I think generally speaking, within 90 days of an installation, we would expect procedures to begin.

Again, if I could add to that, it's more of a logistical issue than a training complexity issue. The actual manipulation of the NanoKnife electrodes is fairly easy trainable for the physicians we are addressing here, because ultrasound or CT guided needle placement, and they're typically used to that through using our RF products or something along those lines. So these are very much existing customers using similar technologies and similar support devices, as they already have been doing. So the clinical training curve is fairly limited.

Okay, guys, thanks a lot.

You're welcome.

Thank you. Our next question comes from the line of Tom Kouchoukos with Stifel Nicolaus. Please go ahead.

Hi, thanks for taking my question, guys.

No problem, Tom.

Follow-up one on the IRE question, in terms of kind of the trend and what we should see going forward. I know previously you guys had placed several boxes out in the field, just wanted to get a sense, are the revenues that you recognized this period, are those kind of conversions from the placements you had that decided to go ahead and buy the system from you or at least get into a commercial capacity with you.

In a case or two they are, but most of them are not. They're brand-new sites, if you will, long-standing customers, but new sites to IRE.

Okay. So would there be -- do you have a sense of, is there a backlog of any sort or is it too early to put a number on that?

A backlog of what? Prospective customers who are interested?

That and also the ones that you've already placed units with. Will they come around to a commercial capacity at some point, or do you just keep those placements out there and generate disposable revenue.

On the latter case, if the site doesn't have an interest in going forward, and makes some sort of a commitment to us, we will take the machines back, and it's through those discussions that a couple of them have actually converted to these commercial sites, and --. But we do also have a backlog of other prospective of potential customers that we hope to start to close in the third quarter, as well as some backlog of -- through the commitments that have been made to these two-year purchases as well, so there's a certain amount of revenue that we can anticipate from those sites also.

We think at some point down the road, all these historic customers, if you want to qualify them like that, will either be on trials, on the clinical research trials, or will become commercial customers. That is the strategic direction.

Okay. That's helpful. Thank you.

And then Jan, on Benephit, you guys have had a couple quarters of pretty nice sequential upticks, it still seems like there's a lot of need for that type of product out in the field. At what point, or what do you think you need to kind of crack the market open with this device?

I'm sorry, Tom. I missed the opening of your question there. The Benephit?

The Benephit catheter, kind of what it takes to get the market -- I mean, it seems like your growth is nice off of a small base but what really breaks the market open for you.

It is a definitive of pivotal clinical trial. It's a significant trial. This is 2010. We commented on this before. I think this is a great example from that point of view.

You're asking physicians to use an additional device, lengthen the procedure, make it a little bit more expensive, and the first question is why would I do that. And that question can essentially at the end of the day only be answered by a definitive trial.

Now rather than going into a big randomized pivotal trial giving the answer for eternity, we said let's do a solid study, single arm study, the PROVIDE registry, that is having a lot of traction, gets a lot of people enthusiastic to work with us and work with the device. That will start a baseline, that will get a good story out.

But eventually, if you want to tap into the full potential of this device, potential market of this device, you probably have to do more than that. But that's going to be several years out, to be honest.

Okay. Thanks a lot, guys.

Thank you, Tom.

You're welcome, Tom.

Thank you. (Operator Instructions). And our next question comes from the line of Larry Haimovitch with HMTC. Please go ahead.

Good afternoon, Jan, good afternoon, Joe.

Hi, Larry.

Two questions. One may be a bit of a sore subject with you, Joe. It's been probably many, many months now without a head of the oncology division. To my knowledge you have not appointed anyone. I wonder if you might just update us on where that stands.

Joe is throwing that question back to me. I'm not sure why you were asking it to Joe.

Oh, I was asking to you, Jan, actually.

That's okay, in some regions of the world, I go by Joe, too. Larry, I commented on this before. We're looking for a very specific skill set to lead the oncology business. And it is a specific profile, specific experience we're looking for, and we have a long slate of candidates we're interviewing while we speak.

The second thing is, it's not like we have a burning platform here. You look at the operating results of the oncology business, you look at the traction we're starting to get on NanoKnife. On a day-to-day basis, operationally, this thing is managed pretty well by the interim General Manager, Rick Stark, whose daytime job is running sales and marketing, who does an outstanding job in just holding the team together, motivating the team on site. So it's not like we have a burning platform from that point of view, and we really want to make sure we get the right individual with the right skill set, right personality that adds something to the mix rather than messing it up from that point of view.

We did hire in the meantime, maybe important to mention as well, we did hire senior leadership when it comes to marketing product management, et cetera, so the training programs and some of the marketing programs you see coming out of those resources, those new people on the team as well. Again, not a burning platform, certainly doing our diligence in getting the right person, and hopefully we can make this happen in the not too distant future.

You're absolutely right, the performance of the division has been so good, maybe leave it alone and not hire anyone.

I was wondering whether you were going to flip to the other side there. Sounds like you did.

I'm teasing with you, of course. But, Jan, I wonder if you could give us a little more color on the division. It obviously had a terrific quarter, even if you take away the NanoKnife, which were all incremental. Where are you strong? Is it RF Ablation? Is it the bead business? It's clearly doing very, very well in the marketplace.

Yes, yes, and yes. All three product lines, now for the second quarter in a row, are growing. So Radio Frequency ablation is growing, LC bead obviously is growing, but also I want to give a little shout out to the Habib knife team who is really doing an outstanding job, arguably from a smaller footprint, although it's becoming quite significant as well.

Looking at the markets in those three areas, it means we are gaining share. And in the case of LC Beads, frankly creating a market, increasingly so because we've got no meaningful competition in that segment.

And one question on the LC Beads. I think you still are being supplied by a third party if I recall correctly. That goes back to the Biocompatibles deal, Joe, Jan. Is there any thought of doing anything internally and having your own product line as well so you can capture greater gross margin there?

As we said before, the LC Beads is a great product, despite it having a below average gross margin, because it's quite profitable to us. We're not carrying the burden of clinical development or R&D.

The second thing I would like to add to that is that this has been a tremendous successful relationship both for Biocompatibles as well as for ourselves, and we would like to believe that we could continue that relationship in the future.

Thanks, Jan, and congratulations on a very nice quarter.

Thank you, Larry.

Thank you. And we have a follow-up question from the line of Jayson Bedford with Raymond James. Please go ahead.

Thanks, just a quick one, Larry took my oncology question, but just on the gross margin line, what drives gross margin expansion? What reaccelerates it going forward? I'm guessing the pricing pressure's going to continue, so I'm just wondering what other variable do you have to drive margin expansion?

Yes. The completion of various programs that bring product in-house, and the first of which is the TRT move from Fremont to Queensbury, and that one is probably 90% complete. And there are others that we're doing right now as well, so that's a fair amount of it.

We also came into the year with higher than desired levels of inventories, and we've been working through those inventory levels. So we anticipate a better level of factory utilization in the second half of the year, and that too, we don't expect to run some of the adverse variances, manufacturing variances that we had in the first quarter, don't expect that to continue into the second.

And then I think the other factor of course is the mix, and the Beads has been the fastest growing product for a while. That may not necessarily be the case in the future, and certainly as IRE rises as a percentage and becomes a meaningful amount of our sales, the margins on that are extremely high. So we can envision a day when the mix factors would be positive rather than negative factors in the analysis.

Okay. And someone mentioned earlier in the call corporate accounts, GPOs. How much of your business stems from that channel now?

Don't have it available here and honestly, if we had it available, not sure we would break it out. But we do see a good chunk of growth certainly in the Access business, coming out of the corporate channels. So it's increasingly important for us and we like that segment. We just added a resource to that department as well.

Okay. Thank you.

Thank you. And at this time I would like to turn the conference back over to management for any closing comments.

Okay. Thank you, Mikala. And thank you all for your interest in AngioDynamics. We will continue to provide updates on our progress, and I'll look forward to talking with you again during our third quarter fiscal 2010 conference call in early April, which by the way may well be hosted from our new corporate office in Albany. Thank you all.

Thank you. Ladies and gentlemen, this does conclude the AngioDynamics fiscal second quarter 2010 conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000 with the access code of 419-1734, pound. We thank you for your participation, and at this time you may now disconnect.