AngioDynamics Inc (ANGO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the AngioDynamics 3Q 2010 financial results conference call.

(Operator Instructions).

I would now like to turn the conference over to Doug Sherk. Please go ahead, sir.

Thank you for joining us today for the AngioDynamics conference call to review the results of the fiscal third quarter of 2010 which ended on February 28, 2010. The news release announcing the third 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 in 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 the AngioDynamics' website. A replay of the call will also be archived on the AngioDynamics' website.

Before we get started during the course of this conference call the Company will make projections or forward-looking statements regarding future events, including 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 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 at the Company's website.

In today's call the Company's reported non-GAAP, EBITDA and EBITDA per share, and has reviewed these measures as an internal analysis and review of operational performance. AngioDynamics uses non-GAAP measures to establish operational goals, and believes that non-GAAP measures may assist investors in analyzing the 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. 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.

Thank you, Doug. And good afternoon, everyone. Thank you for joining us for our third quarter conference call. With me today, is Joe Gersuk, our CFO. Overall, we are pleased with the progress during the third fiscal quarter. Our Oncology/Surgery business continued to show solid growth, and our Peripheral Vascular business growth accelerated. We have a second consecutive strong quarter of NanoKnife IRE system sales, and enjoy increased clinical utilization. We're also pleased today to report that we've extended our exclusive LC Bead US distribution agreement with Biocompatibles through the end of next calendar year. We continue to carefully manage our operating expenses, generated excellent operating cash flow, and achieved $0.13 per share in earnings, and we are reiterating our guidance for the full fiscal year.

At the same time, our Access business unit continues to face a combination of difficult circumstances, which is is holding back it's performance. We are aggressively implementing strategies to address these drags on our growth and gross margin. And as a result we believe we will see sequential growth margin improvement in the fourth quarter, and I'll review this in more detail in a few moments. From a top line perspective, the quarter ended up 6% as compared to the year ago period. Factoring in the one less selling day than same quarter prior year, our organic growth rate was close to our year-to-date organic growth rate. Leading our growth was a 19% increase in Oncology/Surgery product sales. RF ablation, LC Bead and NanoKnife all were strong contributors during the quarter. We're pleased with the extension of the LC Bead distribution agreement with Biocompatibles, and this partnership has been very successful for both parties, and our strategic goal is to insure continuity of the leadership role in this therapy area beyond calendar 2011.

NanoKnife generated over $700,000 in sales during the third quarter. Growing clinician interest in NanoKnife is reflected in the sales of five systems in the third quarter, bringing the number of active commercial NanoKnife sites to 11. And since our last call in early January, an additional 50 patients have been treated using the NanoKnife IRE system, bringing the overall total to 154 patients. Most importantly, the feedback on clinical performance we received, continues to inspire confidence in the future potential of this exciting technology. Our clinical development efforts for NanoKnife are progressing as well.

The protocol for an international multi-center pilot study on NanoKnife in the treatment of Hepatocellular carcinoma, also called HCC, or primary liver cancer, has been approved, and patient recruitment has begun. This study is being conducted under the supervision of Dr. Riccardo Lencioni of the University of Pisa School of Medicine, and Dr. Jordi Bruix of the Barcelona Clinic Liver Cancer Group of the University of Barcelona. The purpose of the trial is to study the safety and efficacy of IRE in the treatment of early stage liver cancer. The study will enroll 25 patients and up to seven leading centers in four European countries. And follow-up will be every three months during two years with the primary end point being CT or MRI imaging at 30 days. This is a very important milestone in our IRE development program, and we look forward to keeping you updated on progress.

As reported before, we have submitted our proposals to IDE trials focusing on prostate and pancreas tumors to the FDA, and we are continuing our discussions with them, and answering the questions we receive. In today's regulatory environment, it is hard to predict when this process will lead to an approved IDE study protocol, but we remain committed to pursuing IDE's in support of FDA approval for more specific labeling indications for NanoKnife. We're also very pleased with the recent release of a book titled "Irreversible Electroporation" published by Springer Berlin Heidelberg. The book is edited by Boris Rubinsky, a Professor of the Graduate School of the University of California, Berkeley. And the book's chapters include one by the book's editor, in combination with Dr. Gary Onik of the School of Medicine at the University of Central Florida titled, "Irreversible Electroporation: First Patient Experience Focal Therapy of Prostate Cancer." And another chapter by Dr. Kenneth Thomson of The Alfred hospital in Melbourne Australia titled, "Human Experience with Irreversible Electroporation".

This book lends credibility to, and extends awareness of IRE and it's benefit to the physician community that will be most interested in this technology. In summary, we remain excited about the outlook for NanoKnife. Physicians have been generally encouraged by the efficacy and safety findings at this early stage. And as a result, we continue to see strong interest from hospitals and physicians in acquiring a NanoKnife IRE system. While capital equipment sales may fluctuate from quarter to quarter, we anticipate a growing installed base, and increasing utilization which will lead in turn to growing revenues, resulting in NanoKnife becoming a core growth driver for our Company.

Moving to our Peripheral Vascular business, net sales increased an encouraging 8% in the third fiscal quarter. And growth was driven in particular by strong performance of VenaCure EVLT, Benephit Targeted Renal Therapy systems, and our new Micro-Introducer kits. We believe that our VenaCure EVLT laser ablation program is becoming increasingly competitive, and gained procedure share in the third quarter. The Benephit renal infusion system also achieved a solid quarter, and is meeting our initial expectations when we acquired the product line over one year ago. The Benephit PROVIDE registry has made substantial progress, and we now have enrolled 18 patients at six sites, with another 20 additional sites agreeing to participate, providing an independently managed clinical registry designed to gather data on the clinical use of the Benephit catheter for Targeted Renal Therapy. We hope to have at least 1000 patients enrolled during the next year.

The Access business revenue decreased 6% in the third fiscal quarter. We are battling the combined impact of a challenging market pricing environment and a delay in product launches. This combined with previously reported increased material costs since the beginning of this year for a certain Access product drove a decline in our gross margins. We expect to regain momentum in the Access business, primarily through the introduction of significant new products. We recently introduced newly designed Centros self-centering hemodialysis catheter with our proprietary Curved Tip Catheter Technology.

Curved Tip is designed to reduce clots and (inaudible) sheathing by preventing contact between the catheter tip and vascular wall. Initial physician feedback has been positive, and we are gradually increasing this rollout while we build our supply. Although delayed by a combination of in or external factors, other key new Access products are in the near term pipeline. And in the balance of this fiscal year, we expect the launch important new Smart Ports, as well as our Triple Lumen PICC, which will also be the first member of our new PICC family. Combined with the new Centros dialysis catheter, this positions us well for creating revenue growth from this business unit, as we exit fiscal 2010 into fiscal 2011.

Throughout our businesses and regardless of the current market and regulatory environment, innovation will remain a key growth driver in the medical device industry, and is one of our three focused areas. As we long (inaudible) in the prior years, thus far in fiscal 2010 we have launched now seven new products. And we continue to anticipate there will be an additional four new product introductions this quarter, for a total of 11 during fiscal 2010. Looking ahead, we continue to make progress on the development of key new product scheduled for release this year, sorry, for release in fiscal 2011. To enhance our gross margin, we remain laser focused on manufacturing efficiency, cost containment and innovation. As a result of a move last week into our new facility near Albany, New York, we have opened up space at a Queensbury facility. This facility will increasingly serve as our manufacturing, engineering, and distribution hub.

In the third quarter, we completed the manufacturing transfer of the Benephit line to Queensbury, and closed the manufacturing facility in Fremont, California, leading to a net cost savings going forward. We are focusing on a number of vertical -- specific vertical integration, consolidation, and process improvement programs. And through these efforts, we are optimistic that we will be able to lower the cost of manufactured products and rebuild gross margins. We believe the radar focus on operational excellence, in combination with planned new product launches, volume increases due to growing sales in combination with significantly reduced inventories, our gross margin will start to improve. And we continue to expect a gross margin for fiscal 2010 of 59% to 60% of sales. And in the fourth quarter, we expect to see initial results of some of these actions, as showing a gross margin higher than our Q3 number.

In addition, operating expense control remains an important focus for the Company. We successfully managed our expenses closely to offset some of the pressures on gross margin, and to preserve our operating profitability, as well as strong operating cash flow generation. We will continue to do this while protecting our strategic investments in R&D and clinical research to insure future growth and profitability. New product launches continued momentum in Oncology and Peripheral Vascular, operational improvements and strong expense management are expected to drive results for the remainder of fiscal 2010. And our full-year fiscal guidance remains unchanged.

To summarize, we are extremely optimistic about the outlook for AngioDynamics. Today, we have nearly half of our businesses in two flagship franchises, in interventional oncology and varicose veins. These have number one and number two positions in their space, are gaining market share, and operating in global high growth markets. The balance of the business is focused on large growing opportunities in Vascular Access and Peripheral Vascular disease. Our strategy is focused on fueling growth in interventional oncology and varicose veins, and launch substantial growth drivers in Peripheral Vascular and Access through the introduction of new products. We know what we need to do, focus on global growth opportunities, focus on significant product innovation including NanoKnife, and focus on improving operational excellence using expense leverage, while making strategic investments in future growth.

Our financial position is strong. We generated more than $11 million in cash from operations, and we enter the third fiscal quarter with almost $86 million in cash and investments. So a lot of opportunity ahead, and we are moving forward to capitalize on it to generate enhanced profitability and shareholder value. Before I turn the call over to Joe, for a more detailed review of fiscal third quarter results, I would like to once again thank the increasingly strong AngioDynamics team for their continued hard work and dedication in delivering these results. And also would like to thank our shareholders and Board of Directors for their ongoing support and confidence. Joe?

Thank you, Jan, and good afternoon, ladies and gentlemen. Today we are reporting third fiscal quarter sales of $52.2 million, which is 6% growth over last year's third quarter, and 7% growth on a daily sales basis, as there was one fewer sales day in this year's third quarter than a year ago. Our growth this quarter was again led by our Oncology/Surgery unit, which grew 19% to $13.7 million. Both was lead by strong sales of LC Bead and RF ablation products, in addition to $724,000 in NanoKnife sales. This was our second consecutive quarter of solid NanoKnife sales, and brings year-to-date IRE sales to $1.5 million. Five hospitals acquired a system in the third quarter, and we continue to be pleased with the commercial response to the technology.

Peripheral Vascular business unit sales grew 8% in the quarter to $22.4 million. This was an increase from 6% growth in the second quarter, and was despite some pricing pressure on disposable procedure kits this quarter. However, we saw very strong unit volume growth in procedure kits, to offset the price erosion and deliver strong sales growth. We also enjoyed another strong quarter with our new renal infusion system, boasting $754,000 in sales as a Benephit TRT product. As Jan noted, we have a very challenging quarter in Access business with third quarter sales declining 6% to $16.1 million.

We continue to see very price competitive market for PICCs, ports, and dialysis products, and experienced 6% lower average selling prices across the business unit this quarter, in comparison to price levels a year ago, as hospitals and other buyers of these products are aggressively seeking to lower their purchase costs. While we are not expecting the pricing environment to improve any time soon, top line performance should improve in the fourth quarter with the availability of the Centros dialysis catheter, and from the shipments of the Triple Lumen PICC, and two new port products. This is outlook assumes FDA clearance in the near future.

As it has been more than a year of the acquisition of the Benephit product from FloMedica, we characterize all of the Company's 6% sales growth rate in the quarter as organic. On a year-to-date basis, reported sales growth has been 10%, and organic sales growth has been 8%. From a geographic perspective, 89% of third quarter sales were in the US, and 11% or $5.8 million came from international markets. International sales grew 8% from the prior year, and 5% on a constant currency basis. Continuing down the income statement, gross profit totaled $30.3 million in the quarter or 58% of sales, compared with 61.1% a year ago, and 59.1% in the preceding quarter. The 3.1 point margin decline from a year ago, reflects the decline in average selling prices on Access products, and some Peripheral Vascular products as mentioned earlier, as well as product cost increases on certain Access products. Jan reviewed some of our key strategies to improve our margin, and we expect to see modest sequential improvement in the fourth quarter.

Operating expenses were $24.7 million in the third quarter, and declined from the prior year, excluding the cost of the CEO transition recorded in the third quarter a year ago. Third quarter expenses were also $1.6 million below the second quarter level, as we continue to mitigate the gross margin challenge with lower operating expenses. As a percentage of sales, total operating expenses were 47.3% in the quarter, the lowest level as a percentage of sales in two years. The total investment in the IRE program for the quarter was $2.6 million in operating expenses, which includes R&D, sales and marketing, and amortization of intangibles, compared with $2.9 million a year ago. Including the sales revenue and operating costs, the net loss impact to the IRE program amounted to $0.05 per share in the third quarter, compared with a $0.07 per share impact in the third quarter a year ago. After other income and taxes are taken into account, the result is $3.3 million in net income, or $0.13 in diluted earnings per share, compared with $0.08 per share a year ago, or $0.15 per share excluding the cost of the CEO transition. Tax rate was 38% in the third quarter, and 30% a year ago. The lower prior year rate was a 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 $85.8 million, compared with $68.2 million at the beginning of the year. We enjoyed an extremely strong cash flow quarter, as the cash and investment balance increased by $11.8 million. And we generated $11.4 million in cash flow from operations in the quarter. A significant contributor to the very strong cash performance was $5.9 million reduction in inventory that we achieved this quarter. Year-to-date we've generated $23.8 million in cash flow from operations, and $23.7 million in EBITDA, which equates to nearly $1.00 per share. This is a clear indication of the cash flow potential of our business model, in a difficult competitive environment, and while we invest substantially in our IRE technology. And finally as indicated in the release, our guidance for fiscal 2010 is unchanged from what we provided at the end of the second quarter. One thing to keep in mind, is that there are five more business days in our fiscal fourth quarter, than there were in the third quarter we are reporting today. With that I'll now turn the call over to the operator to begin the Q&A session. Jeremy?

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Jason Mills with Canaccord Adams. Please go ahead.

Hi, good afternoon. This is Jamar Ismail for Jason. My first question was going to be on the reduction in operating expenses, but I think you answered that. We were thinking whether or not you were going to cut NanoKnife spending, but looking at the $0.05 that's pretty much compatible with last quarter. Can you give me more detail like what projects are being reduced in terms of SG&A and R&D?

Yes, Jamar, this is Jan here. Good question. In our comments, we actually said we are leveraging operating expenses without cutting any strategic programs, so we're not cutting R & D programs. We're not holding back on investing in IRE. We are very much holding back on the more discretionary programs, holding headcount as flat as we can, etc., etc. So it's the normal operational measures, and the normal leverage that you can do without affecting any growth, or any future potential for the Company.

Okay, and my second question is on the VNUS business. Can you just give us some color in terms of what do you think the VNUS market, what growth rate do you think that's going at, and where do you think your market share is?

Yes, we have, I mean it's gotten a lot more difficult since VNUS has taken up the public grid at least, and the results of VNUS under the wings of Covidien are not being disclosed anymore. So for the same reason, we stopped doing it. It's a little bit of reading the tea leaves, but we actually believe the market continues to be very strong. We have no reason to believe that the market growth in the mid teens is not valid anymore. We've not seen a noticeable slowdown in growth from that point of view. We continue to be very excited about the potential as a long term potential of this market, and increasingly excited about our performance in that segment. So it's been a very strong franchise for us.

Okay, thanks a lot. I'll get back in queue.

Thank you.

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

Hi. Good afternoon. Thanks for taking the question. Just on the Access business, where are you seeing weakness? I think you've kind of said broadly but I'm just kind of curious, is it PICCs, ports or dialysis, meaning is one having a bigger impact than another?

Well, Jayson, good afternoon. It's a good question. And I'd love to say there's one significant culprit but it's really, it's across the board. If you want to get a little color within that, I'd say probably within the three, dialysis probably least worst or best, or whatever you want to call that. But I think there's significant room for improvement in all three areas. And again what's very exciting is of the four launches that we will start benefiting from, and that's on the near term horizon, there's one significant launch in each of those three segments. So Centros will help us shoring up the dialysis segment. A couple new ports will sure up the port segments, Smart Ports. And then of course ,the first, well the Triple Lumen PICC, the first PICC of the new generation will help that segment. So we think we can actually start bucking the trend in all three buckets.

Okay, and then when you talked about kind of a push out or timing of launches here, did you expect a greater contribution or launch of Centros earlier in this third quarter? Is that what kind of contributed? I know you guys don't guide quarterly, but obviously there was a little bit of weakness relative to where the street was. And I'm just trying to figure out if that was because of Centros, or was it due more to some of the PICCs and ports that got pushed out?

Yes, it's a bit of a combination, Jayson. I think pricing actually continued even a little stronger than we anticipated a quarter ago. We did anticipate that the tough pricing environment was going to stay around, but if anything it got a little worse I'd say. But the other one is, I'd say all three of the above. I think we would have anticipated Centros to kick in a few weeks earlier. Regulatory approval has been delayed across the industry a little bit, against what we were historically used to. And it's a little bit here, a little bit there, and that took the shine off the Access business in the quarter. Well, shine is kind of an understatement I guess, but that give us headwind, strong headwind there.

Okay, that's fair. I'll jump back in queue, thank you.

Thank you, Jayson.

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

Hi. Can you hear me?

Absolutely Brooks, yes, we can. Welcome.

Great. Thanks for taking the questions. On the new product launches, Jan, you said there was some risk on FDA. Can you give us of the four products that are pending launch, kind of where those are in the process, and what risk there might be there?

Well, FDA approval is a binary process at the end of the day, so it happens, or it doesn't happen. I think most of the risk is behind us to be very honest. There's one product where we still need approval. But again, Q4 is not contingent. If it happens even on schedule, it would be done late in the quarter. It would not really help us drive Q4. So I think all that is accounted for in the maintained guidance from that point of view.

So just to clarify, three of the four products are already approved and you're just waiting for it's probably a 510(k) approval on the fourth?

Well, Centros is approved. obviously it's a new market. We actually just received PICC approval. But we're not quite ready for a launch, so we're waiting for the port approval. And nothing is normal in this day and age, but one would expect it's fairly straightforward.

Sure, and then if I could get on IREs, I guess a couple of questions there. Joe, can you break out what's disposable versus capital in that 724 number? And then can you also give us how many of those are commercial versus clinical cases?

Well, the majority of the revenue, more than half of it, was probe sales this quarter, unlike last quarter where more of it was generators. But we don't break down the specifics of the revenue mix there. And all five of these hospitals we sold in the quarter are commercial sites.

And if I can add to that actually, so all 50 procedures done in the quarter are commercial sites. Right now, today, we have no active clinical programs that are sponsored by the Company. So every single bit of activity in the field is pure commercial activity.

Great, and maybe I can sneak one more in. Can you give us any light on how the hospitals are getting reimbursed for these procedures?

Yes, the hospitals are billing under the traditional RF ablation codes, is what they're using and getting reimbursed, and they are pretty healthy reimbursement rates.

Okay, great. Thank you. I'll jump back in line.

Thank you.

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

Good morning, Jan, or, sorry, good afternoon, Jan and Joe. Thanks for taking my call.

Good afternoon.

Curious, you're reiterating your revenue guidance here. You need pretty strong sequential growth just to hit the bottom end there, that $214 million, looks like you need around 12% sequential growth. Is there anything, what's giving you confidence that you'll see that sequential growth here in the fourth quarter, other than the five extra selling days?

Well, first thing are the five extra selling days which is a very significant number. You're talking about 9% more selling days in the fourth quarter than in the third. But secondly, are the new products that we're talking about as well. Those should be contributing. And lastly, is the fourth quarter is seasonally very strong for us. It always has been. And it's our annual commissions plans and various other factors that always seem to bring us a strong fourth quarter.

Okay, and then just on the PICC and port side, so it looks like you'll be launching two new products this quarter. I know one of your competitors mentioned in their year-end, that they were seeing possibly some improved procedure volumes. Curious if you're seeing of that? Or is it at least holding steady, and most of the declines coming from pricing at that point, or do you think maybe you're losing a little bit of share? Just a little more color would be helpful.

Greg, I think both is true. I think we have to assume we're losing share. We also assume that at least procedure growth in the marketplace, and maybe even revenue growth. And the fact that with the 6% negative revenue development, 6% price erosion, it means that our volumes have been virtually flat. So we have to assume we're losing share. I think with due respect, I'm not sure we're -- we're certainly not the market leader. And I think there's other parties out there, and you've got your quotes from that as well, that are really the market leaders. And we would like to believe their arguments, again as happily we would be to come up with any excuses, but I think the market is not one of them. I think the market is holding up, procedures are good, volumes are good. And keep in mind the procedures for PICCs and dialysis and ports and all that kind of stuff, are to a large extent non-elective procedures. Procedure volume is driven by the prevalence of oncology, diabetes, and every single model we see we believe market continues to develop from a procedure point of view. So yes, we are losing share, and yes, we can do better, and yes, we will.

Okay, thank you.

Thank you. Our next question comes from the line of Robert Goldman with CL King. Please go ahead.

Okay, thank you, and good afternoon guys. I also have a couple questions on IRE. The first, and not to get too detailed here, but it's important I think in tracking some trends. I had thought and correct me where I'm wrong, that the revenue on probes for procedure was something on the order of $5,000, 2.5 probes per procedure at $2000 each. And if I multiply that by the number of procedures yet in the quarter, which you say was 54, I would get a revenue number considerably less than the 50% of the NanoKnife sales. Could you help me with my math on that?

No, your math is perfectly fine. It's all about what you put into the math. And there's two things. You're correct in that we have said that we have approximately $5,000 worth of disposables per procedure. However, we also said early on in the game, these numbers swing up and down a little bit. And we were frankly a little favorable to the average, but we don't want to give that guidance because these things may jerk up and down a little bit. Secondly, way we report procedures is pretty much from conference call to conference call. Where with the revenue we book, is very much in the fiscal quarter so you can't really tie those numbers out.

Of course, it's always a bit of a stocking effect up and down, and there is some honorable mentions in the revenue as well. So I think the most honest way to track the performance of IRE is really looking at the procedures. And it's almost like a data point in itself, and 50 procedures in the last 90 days is far and above anything we've seen in previous quarters, and is a marked step up. And we have every reason to believe that it's the beginning of a trend from that point of view, and we said the revenue, it will continue to jerk back and forth a little bit and again there's three elements in there, disposables, service agreements, as well as capital component of the equipment.

Okay, and if I could ask one more follow-up? If the generator sales were something on the order of $350,000 and you sold five. I guess that's about $70,000 each. And could you give us a sense of what the obligation is on the part of the customer in acquiring a generator at that price under the program? In other words, what does it obligate them to do on consumable utilization?

Yes. As we've talked about before there are two programs here that we're running. One would be an out right purchase of a generator, and in which case there is no absolute obligation to purchase any probes if they choose to pay the price for the generator they can. They are only obligated to buy a service agreement with that, which will get them training and service over a year, and that cost, the service cost would be amortized over the year. The other program would be one where the generator is bundled with the probes. And there is a committment to buy a certain number of probes over a two year period of time. And, but if it's just a generator purchase out right, it's only -- there is no further obligation. And all of that revenue is recognized at the time of the shipment of the product.

And to add to that, Rob, if there's an out right purchase of the capital equipment, it's always at a price level where it's profitable to us. And I think we said before, even at the lowest price levels we have seen, that we will be perfectly happy we continue to sell them at that level.

Yes, and the last point would be to chime in further, would be to say that our prices are above $70,000 a generator. That math is not exactly right. We have not sold any below the listed price that we're selling them for under this new program.

And can I ask one follow-up? Or should I get back in queue?

Sure.

Absolutely.

Could you give us a sense then so we get an idea how the customers are buying the generators? Of those five, how many were bought out right, not tied to any consumables contracts?

Those five were out right generator purchases.

Okay, thank you very much.

Maybe to clarify that, possibly one exception. I'd say also maybe to add-on to that in general, our preference is flat out right purchase, never a big fan of these long term purchasing commitments. At the end of the day, physicians need liberty to choose patients for which they want to use this system. Obviously it's also their choice where they want to use it. We have this generic indication, soft tissue ablation indication. And then within that context, we're working with physicians, and so this is a genuine pull from the market. From a strategic point of view, and I want to clarify this once again, as a Company we're laser-focused on getting these IDE trials started, and get more specific indications. And we're quite excited about the anecdotal results we see, and if anything we get more confident about the potential of this. But there is a method to the madness, and that's working through those IDE trials, to get the specific label indications. And then progressively, we start developing the market. This is pull.

And, Bob, let me correct one point. Two of the sales for generator were out right generator sales in the quarter, two of the five.

Okay, just two of the five. Thank you. Okay, thank you very much.

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

Good afternoon. Jan, on the Biocompatibles deal, can you discuss it? I realize there's probably some sensitivity to discussing a lot about it. But can you talk about were the terms of the deal, the gross margin split, and so on pretty much similar to previous years? Or was there any noticeable change in that agreement?

Well, Larry, by the way, good afternoon. Great question, and I can talk as long as you want on this but I'm not going to say a lot. The only thing I'll say is from a margin point of view, no real difference from that point of view. But as always, well not as always, we made a couple tweaks in the agreement. Again, want to focus on I think on the Biocompatible side, you would hear some of the stories. This has been a very very successful relationship. There's been a great performance to the benefit of both companies. I think both companies have recognized this all along. And as relationships mature, and projects become more substantial, so do agreements evolve. And that's what we went through, and has been in a very very cooperative spirit. We're quite pleased with the extension, and I'm sure you will, again, hear the same thing on the other side of the table.

Were you hopeful, Jan, of extending it even longer, and perhaps they were willing to do that? Or were you just shooting to have a one year extension and be happy with that?

We're very happy with this extension. I think this gives us what we need. And we look at this as a long term relationship from that point of view, and we're excited about the space, and committed to the space.

But you are vulnerable in the event they decide to go direct and I'm knowing you, I'm sure you must have some alternatives in your mind in case that's the way it goes. A year from now you'll be probably in the same position of trying to negotiate to extend it again.

If you want to avoid the vulnerability at all cost, I'd strongly recommend you get out of the medical device industry. So could a factory burn down, and there's a couple things, and yes, without being -- let's put it this way, we're in the business of managing risk. This is a factor. But I think also sometimes it would help to focus on the positive. This has been a great relationship. It's the strongest product out there in the marketplace, leading in terms of clinical evidence. And I'm not sure we gave that detail here, but this is now a what, five years or so relationship between the two companies. First starting with Retia, and then when we acquired Retia, we became the owner of that agreement. This is like a forth amendment. So it's not unusual to go to these kind of amendments for different kinds of reasons. So, we I think both parties keep their eye on a long term goal here, and that's what I'd like to focus on as well.

Okay, I'm going to ask one more quick question, and I'll get off and get back in queue. And that is congratulations on all of the cash you've generated. That's fantastic. Has the Board considered the possibility of a share buyback? Is that in the realm of possibility? Or is that cash most likely to be used for product acquisitions or Company acquisitions?

We considered that for a split second, but we're not going to go in that direction. We think that share buyback, dividend payments, we think we've got better use, better sources for this kind of cash to really fuel the business going forward. And that's what we're focused on. Obviously, it's fair to assume that we are developing a potential license acquisition pipeline. We used the last 12 months to really get a better understanding of the business, where we are, where we need to be, keep our nose to the grindstone and get innovation going again. We kind of had the multi-year drop in the launching product, we think we'll hit that 11 products this year. And we think we have a couple in the hopper for next year. Organic growth rate is picked up and for the year, it's about 8% assuming, and obviously we assume we will make our guidance. It will certainly hang in at that kind of a level. And we think we did good work on shoring up the foundation of this Company, built the management strength, built a team strength also to really go after acquisitions, and do them well. And I think that's what we're focused on as a management team, with full support of the Board.

Great, Jan. Thanks very much. Happy Holidays. Happy Easter.

Same to you, Larry. Happy Easter.

Thank you.

(Operator Instructions).

We do have a follow-up question from the line of Greg Brash with Sidoti & Company. Please go ahead.

Please go ahead thanks for taking my follow-up. Just curious. Some of the discretionary spending you're holding back on, could you quantify how much you're holding back, and should we expect those costs to come back some time in fiscal 2011?

Well, I'm not sure there's a lot of value in terms of where we're holding back. But I would say by and large, Greg, holding back on discretionary spending, one thing maybe at a very high level, one little tidbit, our headcount today is probably a hair below where it was at the beginning of the year, despite 10% revenue growth. So that has been a significant element I'd say, and that's across many many areas. The second thing I'll say is the way we're holding back expenses is not moving expenses from one quarter to the next. I think these expenses have gone away, and we don't expect a catch up effect, neither in R&D nor in sales and marketing, nor G&A from that point of view. So I think it was a real clean, and frankly kudos to the management team here, and people in the organization, a clean real proactive management of expenses in areas where it does not affect our future from that point of view. Okay, that was very helpful, Jan. Just one more for me. This Centros, when exactly did that launch in the third quarter, and did it have any impact on sales?

It was just the last week of the quarter that it launched and it was a negligible impact on third quarter sales revenues.

Okay, good. Thanks, Joe.

We presented it the first time at the SIR Meeting in Tampa, which I believe was two weeks ago.

Just to climb in on Jan's last comment with regard to the expenditures. And actually, we look at the non-direct labor headcount in the Company as one of the metrics that we follow. And it's actually been flat now for four consecutive quarters, as we've found some areas to trim, as well as not hired replacement people. So we're operating at a substantially lower level of headcount than we would have, had the gross margins been higher or the sales been higher. And then secondly, with regard to the marketing programs, we've cut back on a number of marketing programs. And you go to virtually any trade show today and you'll see a lot fewer people exhibiting. And it's just, I think a big trend in the industry where there's a lot less expenditure going on in marketing programs. So we don't think that any of these are things that will hurt us in the longer run.

Thank you. And management, I show there are no further questions at this time.

Okay, well thank you, Jeremy, and thank you all on the call for your interest in AngioDynamics. We'll continue to provide updates on our progress, and I look forward to talking to you again during our fourth quarter fiscal 2009 conference call somewhere in July. Thank you very much, and have a great evening and balance of the week.

Ladies and gentlemen, this concludes the AngioDynamics 3Q 2010 financial results conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325. For international participants, dial 1-303-590-3030 and enter the access code 4263674, followed by the pound key. ACT would like to thank you for your participation. You may now disconnect.