AngioDynamics Inc (ANGO) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AngioDynamics fourth-quarter 2010 financial results conference call. During today's presentation all parties will be placed in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, July 15th of 2010. And I would like to turn the conference over to Doug Sherk. Please go ahead, sir.

Thank you for joining us for the AngioDynamics conference call to review the results of the fiscal fourth quarter and full year, which ended on May 31, 2010. The news release announcing the fourth quarter earnings crossed the Wire this afternoon after the Market closed and is available on the AngioDynamics website. The call is broadcast live on the web at www.angiodynamics.com. 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 over the forward-looking statements regarding future events, including the statements about revenue and earnings for fiscal 2011. 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 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 Principals, better known as GAAP. An explanation or reconciliation of these non-GAAP measures has been provided in today's news release issued by AngioDynamics and is available on the website at www.angiodynamics.com. 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. In today's call the Company has reported non-GAAP EBITDA and EBITDA per share and has reviewed the measures as an internal analysis and review of operational performance.

Finally, during the question-and-answer period today we'd 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 in our fourth quarter conference call. With me today is Joe Gersuk, our CFO. There's a lot we like about our fourth-quarter financial performance. Top-line growth of 14%, operating income growth, excluding items of 17%, combined with a rock-solid cash flow provided a strong finish to fiscal 2010. With this performance we delivered on one of our key objectives for the year, which was profitable growth. The drivers for our solid fourth quarter were strong revenue growth paired with strong operating expense leverage. These rivals have proven to be more than sufficient to offset the impact of an ongoing competitive price environment, as well as unfavorable sales mix on our gross margin.

Our fourth-quarter revenue growth was broad-based, as all three businesses contributed. At 14% our organic growth rate is the strongest it has been in the last two years. Engines of growth in Q4 were our varicose vein products, micro-introducer kits, LCBs, and last but not least, our RF and NanoKnife ablation products. LCB sales benefited from a competitive product, (inaudible), being out of the market this quarter. We believe the LCB growth rate will slow down from the fourth quarter because this competitive product has returned to the market. However, we also believe that LCBs should generate positive growth during fiscal 2011. The partnership with Biocompatibles, the manufacturer of LCBs, continues to be mutually beneficial and we will be exploring ways to continue this beyond January 1, 2012. At the same time, our shareholders should know that we believe that there are a number of scenarios that will allow us to be able to achieve continued profitable growth into calendar year 2012 and beyond.

We're very pleased with the strong performance of the varicose vein business. In a healthy market environment, which we continue to [tag] at about 15% annual growth rate, we continue to gain market share. The combination of our NeverTouch laser fiber platform, which was launched a little over one year ago, and our strong sales force, supported by a revamp and broad practice development program, is driving solid sales growth. We believe that through ongoing innovation, international expansion and increasing US penetration our VenaCure EVLT franchise will continue to be an engine of growth.

We also managed to stabilize our Access revenue in the fourth quarter, this despite the competitive pricing environment. Our results were aided by the launch of both the Centros split-tip dialysis catheter and the Triple-Lumen Smart PICC. Our strategic goal is to obtain a number two position in key segments of the Access market and we plan to use innovation, corporate accounts and international expansion to drive revenue growth and create economy of scale. We believe the Access business will contribute to growth in fiscal 2011.

Innovation is a key factor in driving future revenue growth. During fiscal 2010 we launched 11 new products, in addition to smaller products, as well as international releases. These launches included important products, like NeverTouch and DELTA lasers, new RF ablation electrodes, the NanoKnife commercial release with software version and hardware version 2.07, micro-introducer kits, Nephrostomy Drainage Catheter, and in the last quarter a specific NeverTouch kit for the international market, the Triple-Lumen Smart PICC and Centros split-tip dialysis catheter. Already in fiscal 2011 we have launched three new products. These include two new ports, the Smart Port CT Mini and low-profile models, and these ports further expand our family of successful Smart Ports with our patented Vortex Port technology positioning us for growth in this segment. We also launched a unique 16-gauge non-coring high-flow needle for use with implantable ports.

For the full fiscal 2011 we expect to continue a healthy flow of new products coming out of our R&D organization. We expect to launch approximately 10 new products into the marketplace. The plan includes important new products to strengthen our NeverTouch platform, a number of new products in our Smart PICC dialysis and Smart Port franchises, as well as an upgrade to our NanoKnife platform and a new RF ablation product. We're also making good progress on longer-term R&D programs that will lead to new products that we anticipate to launch in fiscal 2012, supporting long-term and accelerating growth for our Company.

Our most significant innovation program, obviously, is the NanoKnife IRE system. We are pleased with the success of the commercial program we launched in second quarter of the fiscal year, which resulted in our first $1 million NanoKnife sales quarter. Our customers are actively using the system to successfully treat patients. In addition to the revenue stream being generated, the system's use is building the body of clinical evidence that we believe will drive the long-term adoption of the technology. For the months of April, May and June a total of 76 additional soft-tissue ablation procedures have been performed using the NanoKnife system for a cumulative total of 230 procedures in 14 centers around the world. This represents an increase of nearly 50% over Q3, both in revenue, as well as the number of procedures.

As we have shared before, we have proposed two IDE trials to the FDA, focused on respectively the treatment of prostate and pancreatic tumors. We held the pre-IDE meeting with the FDA on the pancreatic study. Following this meeting we are working on conducting some additional preclinical work to answer the FDA's questions. We have also received questions from the FDA on the prostate study IDE we have submitted. And again, answering these questions requires additional preclinical work. Both trials will be completed with our -- will be complimented with our growing body of clinical data and based on these developments we expect IDE for the prostate study to be resubmitted and the IDE for the pancreas study to be submitted towards the end of the fiscal year.

While this delay is disappointing we do remain confident we will be able to eventually obtain a positive response from the FDA on these IDE proposals. And this confidence is based on the fact that we feel that the additional preclinical work will satisfy the FDA's questions and our confidence was further enhance by the rapidly-growing body of clinical outcome data following the use of NanoKnife. The number of pancreatic tumors that have been treated continues to grow and patients continue to do well. The first whole gland prostrate ablation was performed and, again, the procedure was completed successfully. Number of procedures continues to rise, the safety profile remains favorable and clinical outcomes are generally positive.

The HCC primary liver cancer trial in Europe is progressing well. The first patient has treated by Dr. Riccardo Lencioni of the University of Pisa and additional patients are scheduled for treatment over the next few weeks. A number of additional centers have obtained the required approvals and will be initiated after the European holiday. We expect the majority of the seven participating centers will be enrolling patients by this fall, and we anticipate completing enrollment in this study, including acute results, before the end of this fiscal year.

There are a number of significant additional clinical studies planned. We expect these to focus on pancreas, as well as liver tumors. These studies, as well as other studies and physician experiences, are expected to lead to peer review publications. As an example, there was a recent article titled "Irreversible Electro-- A New Challenge in Out-of-Operating Theater Anesthesia," which was published in the peer review journal of Anesthesia and Analgesia. As we said before, we fully expect that sales of NanoKnife will continue to grow independently of the IDE trials.

Other studies, publications and presentations at international conferences will raise awareness and help drive utilization. As a result of all this, we expect sales this fiscal year to be substantially above fiscal 2010 sales. We remain bullish about the potential market opportunity for IRE technology. Let's take pancreatic tumor treatment as an example. To treat patients with nonmetastatic, so between patients with nonmetastatic disease and (inaudible) treatment, we see a potential global market opportunity of several hundreds of millions of dollars. Opportunities in liver, prostate and lung could each exceed this potential market. In aggregate, NanoKnife provides a very large growth opportunity for many years to come.

Moving on to our focus on operational excellence. As mentioned, price erosion in certain segments of our business continues. This, along with a unfavorable mix impact due to strong sales of LCB's, resulted in a fourth-quarter gross margin below our guidance. We have, however, been able to successfully offset the margin decline through solid expense management. Important to note is that this OpEx management is sustainable and is and will not be at the expense of our strategically-important R&D investments. We believe through a slowing of price erosion driven by a steady stream of new products and a number of manufacturing initiatives our efforts to build gross margin should start yielding results during the second half of the year.

We recently also completed an organizational realignment. The goal was to create the right balance between strategic focus and operational leverage. As a result of this, we have combined the US Venous Intervention, Vascular and Access sales teams into one vascular sales force. Our US Oncology sales force remains dedicated and will see a modest expansion this year. With the new US Vascular team we have substantially improved coverage, as well as penetration in the US,and created a strong commercial team, which will be able to rapidly convert new products into revenue, as well as better leverage customer relationships. The product marketing and product development teams have been aligned with key disease states, such as Venous Intervention, Access and Oncology, and this creates multifunctional co-located teams with a single-minded strategic focus to drive us to a leadership position in those respective disease state areas. Our executive management team has also been further strengthened with the addition of Linda Wallace as our new Senior Vice President of business development and Shawn McCarthy now providing leadership to both the Oncology and Vascular businesses. Beyond that we hired strong and high-potential VPs for HR and the [Venous Intervention Disease A Team].

We provided our current outlook for fiscal 2011 in a press release this afternoon. We anticipate revenue growth in the range of 6% to 9%. The low end of this guidance is aligned with estimated growth rate of the markets we operate in. The high end assumes ongoing gain in market share. We are committed to delivering profitable growth, as reflected in our operating income growth range of 8% to 13%, which is higher than our revenue growth guidance. Looking ahead we remain confident about the outlook for AngioDynamics. We are increasingly vested in high-growth markets with leading products in Venous Intervention and Interventional Oncology markets. We are aggressively pursuing opportunities to accelerate growth through international expansion, an increasing-exciting R&D pipeline for 2011 and the years beyond, and a continuing successful commercialization of NanoKnife.

Beyond this, our strong balance sheet allows us to create additional growth opportunities. We are making good progress on executing our strategic plan and realizing our vision of building a fast-growing and profitable leader in our space. We have a profitable business model. We generate significant cash and we have a strong balance sheet. We are exiting fiscal 2010 stronger than we ended it, with higher growth, a stronger organization, a stronger financial position, as well as a clear strategic vision. We are well positioned for continued growth and enhanced profitability in fiscal 2011.

Before I turn the call over to Joe for a more detailed review of the fiscal fourth-quarter and full-year financial results I'd like to thank, once again, our global AngioDynamics team for their hard work in delivery these strong results and the dedication and commitment in building our future. I'd also like to thank our shareholders and our Board of Directors for their ongoing support and confidence. Joe?

Thank you, Jan, and good afternoon, ladies and gentlemen. We ended fiscal 2010 with a very solid quarter, recording fourth quarter sales of $60.3 million, which is 14% growth on last-year's fourth quarter. The 14% growth rate was entirely organic and is the highest rate of organic sales growth for AngioDynamics in eight quarters. We note, however, that there was one additional business day this year, which means the growth rate on a daily sales basis was still an impressive 12% for the quarter. For the fiscal year sales grew 11% to $216 million. Organic sales growth was 10%, which is a substantial improvement on the 6% organic rate reported in fiscal 2009. We achieved two important milestones this quarter. The first was crossing the $60 million threshold in quarterly sales and second was exceeding $1 million in quarterly sales of IRE products for the first time.

Our growth this quarter was again led by our Oncology surgery unit, which grew 35% to $16.8 million. We saw strong sales of LCB's and RF ablation products, in addition to $1 million in NanoKnife system sales. This was our third consecutive quarter of solid NanoKnife system sales and brings IRE sales for the fiscal year of $2.5 million. Four hospitals acquired systems in the fourth quarter and we continue to be pleased with both the commercial and the clinical response to the technology. The list of working hospitals that are actively using NanoKnife today on a commercial basis is available on our website.

As Jan mentioned, the withdrawal of the (inaudible) from the US market resulted in increased demand for LCB. Using a more-normal growth rate for LCB that we saw in the first half of the fiscal year prior to withdrawal of (inaudible) we consider a normalized or adjusted fourth-quarter growth rate for our Oncology surgery unit would be 27%. Our Peripheral Vascular unit also enjoyed a strong quarter, with 13% growth in sales to $25.5 million. This was the highest organic growth rate achieved by the Peripheral Vascular unit in eight quarters and was led by very strong sales of disposable procedure kits in our EVLT business. While we continue to see pricing pressure in the procedure kit market we were more than able to offset it with very strong unit volume growth. The balance of the growth in PV sales was primarily in introducer sets and the Benephit Renal Infusion System. The return to growth in our Access business in the fourth quarter, albeit modest sales, with sales increasing 1%, to $18 million.

We continue to see strong price -- strongly price-competitive markets for PICCs, ports and dialysis products and we experienced 6% lower average selling prices across the business unit this quarter in comparison to price levels a year ago. This offset 7% to 8% growth in unit volumes for our major Access products. Hospitals and other buyer of these products continue to aggressively seek to lower their purchase costs. While we are not expecting the pricing environment to improve any time soon, the recently-introduced Centros dialysis catheter and Triple-Lumen PICC and two new port products just granted FDA clearance should contribute to incremental growth in fiscal 2011.

From a geographic perspective, 90% of fourth-quarter sales were in the US and 10%, or $6.1 million, came from international markets. International sales grew 1% from the -- grew 8%, rather, from the prior year. Continuing down the income statement, gross profit totaled $35 million in the quarter, or 58% of sales, compared with 58% in the preceding quarter and 61.9% a year ago. The 3.9% margin decline from a year ago reflects the decline in average selling prices in Access and Peripheral Vascular products mentioned earlier, product cost increases on certain Access products and the effect of sales mix. The pricing pressure accounts for two-thirds of the year-over-year margin decline.

Operating expenses totaled $28.6 million in the fourth quarter, a 2% increase from the prior-year expense level. We achieved excellent operating expense leverage by reducing operating costs to 47.4% of sales in the quarter, more than a four percentage point improvement from the 51.5% a year ago, excluding last-year's one-time item. This is reflective of our effort to lower operating expenses to mitigate the reduction in gross margin and these efforts have focused on sales, marketing and administrative costs. They have not been achieved at the expense of new product development activities. For the full=year operating expenses totaled $106.1 million, or 49.1% of sales. The total operating cost investment in the IRE program for the quarter was $3.2 million and $11.1 million for the fiscal year. Including the sales revenue and operating costs, the net loss impact of the IRE program amounted to $0.06 per share in the fourth quarter and $0.23 per share in the year.

Operating income for the fourth quarter was $6.4 million, or 10.6% of sales. This was a 17% increase on a prior-year result if we adjust last-year's operating income for the $702,000 of nonrecurring costs. EBITDA $9.6 million, or $0.38 per share in the quarter, compared the $7.8 million, or $0.32 a year ago. For the fiscal year we reported $20.9 million in operating income compared with $16.1 million in the prior year, while EBITDA was $33.3 million, or $1.34 per share compared with $27.9 million, or $1.14 per share in the prior fiscal year. After other income and taxes are taken into account the result is $3.7 million in net income, or $0.15 in diluted earnings per share, compared with $0.12 per share a year ago. The nonrecurring cost reduced the prior-year fourth-quarter earnings by $0.02 per share. For the fiscal year, net income was $0.50 per share in 2010, compared with prior-year earnings of $0.41 per share, or $0.51 per share excluding items. Tax rate was 36% in the quarter and 35% a year ago. While we recorded a tax provision in the income statement, we paid minimal federal income taxes in fiscal 2010, and saved $7.6 million in tax payments through the use of NOLs available as a result of the acquisition of RITA Medical. This was a substantial contributor to our strong cash flow from operations for the year.

Turning to the balance sheet and cosh flow statement, we ended the quarter with cash and liquid investments of $100.1 million compared with $68.2 million at the beginning of the year. We enjoyed an extremely strong cash flow quarter, as cash investments increased by $14.3 million and we generated $16.1 million in cash flow from operations in the fourth quarter. For the fiscal year we generated a record $40 million in cash flow from operations. A significant contributor to the very strong cash flow performance was an $8.3 million reduction in inventories that we achieved this year. On a per share basis we generated $1.60 per share in cash flow from operations and $1.40 per share in free cash flow after accounting for $5 million in capital expenditures. These metrics are a clear indication of the strength of our business model to generate cash flow in a difficult competitive environment while we invest substantially in our IRE technology

Finally, as indicated in the release we providing guidance for fiscal 2011. We expect 69% organic growth in net sales, which is a range of $230 million to $235 million; gross margin in the range of 58% to 59%; GAAP operating income to increase 8% to 13% to a range of $22.5 million to $23.5 million; EBITDA to increase by 5.8% to a range of $35 million to $36 million; and GAAP EPS of $0.53 to $0.56, inclusive of a $0.23 per share impact from the IRE program, of which $0.04 is a noncash intangible amortization cost. Additionally, we expect a tax rate of 37.5% and to achieve cash tax savings of $3 million next fiscal year from the use of RITA NOLs.

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

Thank you, sir. And our first question comes from the line of Jayson Bedford with Raymond James, please go ahead.

Good afternoon, guys, and thanks for taking the question. Just to start off on the Access business, can you just maybe talk about some of the traction, I guess, on Centros Triple Lumen PICC. I guess we would have thought you would have seen a little more impact in the quarter, I'm wondering was it a full launch in the quarter, or was it partial, or just maybe talk about the trend generally with those new introductions?

Yes, Jayson, good afternoon. Good question. As you know, we typically don't break out revenue on even product families let alone product lines. The second thing I want to add is that we always said, certainly for the PICC line in particular, that the (inaudible) halo affect, or the absolute revenue for that individual SKU is one number, but it also makes the entire PICC family more competitive. Now Centros was released, but released (inaudible) early in the quarter, initially on a limited basis (inaudible) to see what the user feedback was and then we'll release it more fully. Smart PICC, I think, was frankly at the very end of the quarter. (inaudible) handful of weeks, if that, so I think the impact of that has been very, very marginal, as such.

Okay. And when you look at the Access business, was there a specific subsegment, whether it be PICC, ports or dialysis, that did better than another?

I believe the -- I'm opening up the page here while I speak. Actually the PICC family was the best in that mix of three, so they were above that average of 1%.

Okay, and then lastly for me and I'll jump back in queue, in terms of the guidance you just did near 10% organic growth in 2010, the guidance is 6% to 9%. Just wondering what's the source of your caution there? And then secondly, is there a way you can break out the expected growth or contribution from each of the segments for 2011? Thanks.

The basic methodology, like as we did last year, Jayson, was essentially quite close to the industry growth rate and we essentially bracketed it, so we've taken the same methodology this year. But we don't offer any guidance with respect to the individual segments as to how those might break down.

Okay. And maybe if you'd just comment on -- again, the guidance implies a deceleration in organic growth and I'm just wondering is there a specific area of caution or is that just conservatism?

Well, whether you call it conservatism or caution I think in certain segments -- I think in the overall Access market, apart from our own performance, I think we seen the market slowing down a little bit, although still volume growth is outweigh -- in the marketplace, at least, is outweighing price erosion, so maybe there's a little bit of guarding in there, hard to say, but we want to set it up well and we thought this was the right number. Again, as I said in my remarks, the 6% we think estimates that we hold in share, the 9% would be that we continue to gain share. I think we took down market growth by one point and the mix from 7% to 6% for this year and that's how we came up with this math. I understand the flavor -- I understand the background of your question, but we believe it's the right kind of guidance and sets us up right (inaudible), as well.

Fair enough, thank you.

Thank you. Our next question comes from the line of Jason Mills with Canaccord, please go ahead.

Hi, guys, this is Jamar Ismail in for Jason. Congratulations on your quarter.

Thank you.

Thank you.

My first question is on oncology, can you give us little bit more color on how you guys are gaining share, a little bit about the competitive landscape and the sustainability of your guys' share gain in oncology.

Yes, the oncology market, [Jamar], is probably the hardest one to frame in terms of market size and market growth because there's, frankly, a lot of market creation going on and conversion from very, very different areas, like [bronchotherapy], et cetera, so in the RF side I think we're coming off a good quarter. Hard to say whether we gained share or holding share, market's hard to triangulate, but we did well and we think it's sustainable. LCBs, in a way you may argue that that was a share gain but at the expense of (inaudible) was pulled off the market in that quarter. We think that's going to drop back a little bit, but still year over year we will continue to show growth in that area, meaning that some of those customers have converted away from (inaudible) to LCB. We believe we can retain and keep and like the benefits of a product like LCB so much that they will stick with us throughout the year.

Beyond that, also, in market growth the HCC problem is going up and there's a broadening use of the product. But we are gaining share, but we certainly see in Q4, beginning Q1 [we're probably clipping in terms of what we think close to a market separation but, again, ongoing growth.] NanoKnife, I'd say, is entirely market creation and $1 million on the oncology business is a substantial number. $2.5 million for the year, Joe, is what, about 4% or 5% of the growth number coming from NanoKnife in the quarter, probably more than that, and that is, I would say, virtually entirely creation. Those were patients that went to other types of procedures, some of the maybe RF, but I think the majority coming, frankly, from either surgical resection or even counter indicated for that. And what else do we have? I think those are the highlights I guess.

Yes, the only thing I'd just chime in on that, Jamar, to say that in the US market certainly we have a undisputed number one position in RF ablation, so we've got the strength of market leadership. And secondly I'd just say that we have a very strong Oncology sales force that's been intact for a long time and it is really excellent as establishing the physician relationships and selling the product. So a very strong sales force is also part of our success there, oncology.

Okay, just one follow up. Outside of IRE do you see differences in the growth rate in US and o-US for Oncology.

Yes, I think you were following up on Joe's comments. We've got a very strong position in RF in the US, but frankly, a good chunk of our RF growth is coming from international markets where we are arguable, I would say, (inaudible) number three behind [Convidian] and (inaudible) Scientific , but that's what we see about average growth and it goes up and down over the quarters a little bit. NanoKnife has been heavily slated towards the US thus far. Q4 a significant success for us, our first ever international commercial sales and we like to believe that there's a little bit more to come. I think the (inaudible) has frankly been performing out of the US quite well, better than in the US. And LCBs, of course, is a domestic US product so we're not carrying that product outside the borders of the US. Does that give you a bit more color, Jamar?

Yes it does, thanks. I'll get back in queue.

Grat.

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

Hi, guys, can you hear me?

Very well, Brooks.

Great. Congratulations on a good quarter.

Thank you.

I wanted to ask a follow-up question on guidance mirroring an earlier question on revenue but testing gross margins. Joe, just wanted to understands the thought process there and also how we might see gross margins ramp throughout the year, kind of taking into consideration product launches, LCB contribution and also the sales force reorganization?

Essentially we've got a number of programs going on intending to target material costs, which are a large element of the cost of goods, and we think those will begin to bare fruit heavily in the second half of the year, so the improvement should all take place in the second half of the fiscal year in terms of getting towards that 59% range that we're talking about.

So it's primarily coming from the manufacturing side versus the revenue-driving side on the mix side?

Yes, it's going to be more on manufacturing activities, some vertical integration programs that we have going on, a number of things, but then mix should also help somewhat. IRE, as well, is -- will be an increasing element of our sales and that has an attractive gross margin in it, as well. So it really is a combination of all of those factors, but in the aggregate the improvement is expected to be back loaded into the second half of the year.

Okay, and a couple of other quick ones. Our quick math you got about a $1 million benefit from the LCB competitor being off the market in Q4, is that in the range?

We calculate a little bit less than that.

A little less than that, okay, s it's still good performance in Q4 despite that competitor being off. And then, Jan, lastly on o-US sales only 10% in Q4, you've hired new management, what's the opportunity or the plan you see for o-US in the following year -- or in this coming year, I guess the current year?

Yes, the quarter was a little softer international, nothing systemic. The overall number was -- currency didn't play major role in case that question comes up, that actually was virtually a wash. The growth is coming by-and-large right now from RF, but in general, though, I think the plans going forward are strong, And again, we don't give guidance by region and all that, but we would expect the international division to grow above our average growth rate for the fiscal year and certainly our hope would be, though, grow substantially faster. So we are looking forward to those results coming through and being able to report (inaudible).

Great. Okay, I'll jump back in queue, thanks, guys.

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

Okay. Thanks and good afternoon, guys. A couple of questions on NanoKnife. First, if you could just help me through some of the vocabulary. On the (inaudible) trial that is characterized as a pilot study. Could you just help me understand what a pilot study is, and what additional clinical data, if any, the FDA would be requiring to render a judgment on the use of NanoKnife without indication.

That's a good question. The main pilot study for the international ATC study is somewhat arbitrary because the study is not designed to drive any indication, nor in the US, nor in Europe where we frankly don't need it because we have a very broad indication that works well. You don't have the regulatory shackles in international market, or at least in the European market, we have here. The reason we call it pilot -- and we could have called it many things, but the reason we called it pilot is because the pool of 25 patients that will be enrolled in this trial is somewhat on the smaller side. We wanted to do a first high-quality study, a top-notch protocol using all the right parameters for end points, et cetera, with some real big names, some movers and shakers, frankly, on the global field of liver ablation. Involved in a trial, create a base line and we do anticipate that following this trial we will set up more elaborate efforts that could lead to indications in the US, but that has not been a decided upon strategy.

Okay. And relative to the IDEs -- you mentioned prostate and pancreatic cancer -- is there anything that you could share with us as far as what the issues are with the FDA, what generally their questions are or concerns that resulted in a bit of time delay here?

Yes, the -- I can't go in to details for obvious reasons, but the way to frame it -- because I couldn't imagine that the bystander would think -- by now we have substantial body of clinical data, what can animal trials and preclinical data add to that, but there's a couple of safety points that you cannot really test in humans and don't want to test in humans. You really go beyond the normal use of the device and make sure that even in extreme situations there's no collateral damage, et cetera, et cetera, and that kind of stuff you can typically only do in a preclinical setting. So it's questions of that kind of a nature that we were trying to address here. It's fairly straightforward animal trials followed up by histology and pathology and then get a (inaudible). But we did an environment between contract negotiations, setting up the animals, doing the work, doing the follow up, doing histology and pathology, it chews up time. And it's a little disappointing but, again, very important to note here, as well, that we do not make revenue growth contingent on getting those IDE trials started or let alone finished any time soon. It's decoupled at this point in time.

One more question, if I could, although it's not on NanoKnife but it's on acquisitions. I think, Jan, you mentioned on the last quarterly call that you did have some interest to the exploring acquisitions and there's actually been a number of medical device acquisitions since that time. Given what we're seeing in the marketplace as far as the valuation of medical device acquisitions, things like ED3 and [Microse] and even (inaudible) made one or two, is your appetite increased or decreased over the last few months?

Well, I've never been accused of not having a healthy appetite. The -- I think what we said last time is that we've purposely held back on acquisitions, we've been accumulating cash, we did not plan on buying back shares or paying dividends, we didn't like the interest we got on banks so we think we can actually invest it in the business. We are somewhat picky. We are looking for synergy, we're looking for strategy, we're looking for leverage, we're looking for a bottom-line contributions, we're looking for growth. I've said in smaller circles that stuff that's cheap is cheap for a reason. I think the prices that recently have been paid for the companies you mentioned are not necessarily all that much higher than some of the other transactions that were done in, let's say, the two years before that. Good stuff that is worthwhile always expects a solid price. And the final thing I'd say is, yes, we filled the VP of business development function with Linda Wallace, we're in a strong position. Very important, also, to mention -- I kind of slipped it in there in my remarks-- we have a much more (inaudible) strategy than we had 12 months and yet I would imagine we get more and more active in the whole space.

Great. Okay, thank you, Jan.

You're welcome.

Thank you. Our next question come from the line of Tom Kouchoukos with Stifel Nicolaus, please go ahead.

Good afternoon, guys, thanks for taking my questions.

Hey, Tom.

I guess on the gross margin side -- I know you talked a lot about this already -- but just looking back to the beginning part of last year one of the things you talked about was bringing, 30% of products manufactured outside the Company at that point and one of the goals, like with DuraMax, and then bringing the Benephit product manufacturing in house in Queensbury was that we'd see this push upward with gross margin. I realize that your prices are a factor there but I'm wondering if you take price out of the equation how much progress are you making with the initiative to bring more product in house? And then as you have your new PICC and ports and Access products is that going to help bolster that as we go through the next year?

Yes, that's a good question, Tom. I'll make two comments and, Joe, I'm not sure you want to chime in here. But the two comments I'll make is, as I've said a couple of times before, moving a significant product in house -- and it depends a little bit whether the product, of course, is owned by the supplier it gets a little harder because then you have to redesign the product versus we have contract manufacturing going on and we more it in house it's a little easier -- but in the medical device world in 2010 things take a little bit of time. We started executing on this kind of strategy about a year ago, I guess, and benefit, as an example, of that is a few, I would say, relatively small examples but I think the bigger initiatives wouldn't come on stream until deeper into fiscal 2011 and they would contribute to what Joe was signaling, a bit of -- starting an upward trend in gross margins deeper in the year.

The margin -- the contribution of externally produced products as a portion of total revenue is coming down a little bit. Some of the reasons for that is that our high-growth products are actually internally manufactured products. NeverTouch, so our laser fiber business is growing, growing very very healthy. Within that our NanoTouch product line, which we manufacture internally, gets a bigger share of that volume. And in those product lines -- we can't share the details with you as you will appreciate -- we do see healthy steps forward in gross margin, so volume really helps and it's a part of our strategy and we want to load up the factories, we want to create more volume and we're committed to that strategy. So, again, major -- more major and more substantial initiatives of moving (inaudible) product in house will happen over the next couple of months and quarters. On top of that, maintaining volume growth will do very well for us.

Okay, thanks. And then, Joe, a couple of financial questions here, looking at the next year. Just in terms of the R&D line and your expenses there I would assume if you're pushing the IDE studies approvals towards the back half of the year, should we assume that R&D would come down until you start enrolling patients in ernest, or is there -- or will you focus those dollars towards internal projects as an offset?

Yes, it won't come down, it'll rise over the course of the year and be -- still be heavier, though, in the second half of the year than in the first, but it'll rise in absolute dollar terms throughout the year. In fiscal 2010 we spent 8.9% of sales on R&D and our expectation for next year is to spend slightly more than 9%.

Okay. And then last one, Joe, on the tax rate, came in a little bit below what we were looking for this quarter, was there anything going on there? And I think you said 37.5% for next year, is that correct?

Yes. No, it's just that the final analysis of the taxes brought it down a little bit in the fourth quarter but nothing really special. And as we said, 37.5% next year.

Okay, great. Thanks a lot, guys.

Thank you, Tom.

Thank you. Our next question comes from the line of Larry Haimovitch with (inaudible), please go ahead.

Good afternoon. Two questions, Jan. One, tremendous progress and congratulations on all the cash flow you've generated. You are facing what appears to be the loss of a key product at the end of next year. Is it possible that that cash in some way could be used to solve that problem, either with some sort of deal with Biocompatibles or some other manufacturer that would have -- fill the hole that the loss might occur with Biocompatible.

And what's the second question, Larry?

Oh, I'm saying -- you have lots of cash, you've got the potential loss of the Biocompatibles-- oh, second question, you want me to give you that now?

Yes, I was just wondering whether or not it's related or not.

No, it's not. It's just completely a different question --

Okay, fair enough.

-- so let's (inaudible).

No, we'll do this one first, Larry, and thanks for that question, profusely, I think. The -- I said what I said in my remarks. We've got a very healthy business, it's a win-win scenario. This relationship has been, and continues to work well for both parties and the first and foremost our energy is focused on just continuing a very successfully mutually beneficial relationship. Secondly, I've said very strongly that we believe that regardless of the outcome we can manage the Company through that period and that we continue to show profitable growth growing in to 2012 in either scenario. As you also will appreciate I cannot and will not elaborate on the potential of [any] of the scenarios. As such some of them may acquire -- may require use of cash funds, some of them can be done differently. And you know what, it also may be more than one solution and maybe at the end of the day two, three things coming together that create a seemless transition into a new reality from that point of view. So not Dave (inaudible) nor Joe nor I nor the team here is (inaudible) to be naive and sit on their hands, so we're trying to deal with all eventualities, project a vision of the future and deal with that. But again, the energy right now is focused on just continuing with what's been a great run.

Okay, great. And second question -- I guess really just preface my question by saying that I am a major believer in IRE -- but I look at what you're spending now, which is $11 million I think you expended in the (inaudible) that just ended, I don't know whether you projected a number -- I joined the call a tad late, I don't know if you projected a specific number for IRE. Your sales are growing but are very modest, do you have unlimited stake, Jan, that this is going to ultimately pay off? Because with the slowness of FDA it appears that you may be facing many more quarters when this continues to be a significant drag on the Company. I just want to understands your real commitment to this business and is it warranted because it's just so difficult to get FDA approval to even begin clinical trials?

Yes, great question, Larry. As my -- first of all, black and white, you know I have a engineering background and so ask me if my belief's unlimited I have to say no. We are,in certain ways, as interested in making certain milestones as the investment community and as you are. We, of course, have the advantage of seeing a little bit more detail. I certainly personally also have the advantage of spending a lot of face time with customers that use this system, been in front of the FDA, worked with the big thought leaders, had dinner a few weeks ago with (inaudible), I'm going to be at the [AZIO] meeting next week, so spending a good chunk of my time there. Tell you what, I wish sometimes that I could share the enthusiasm of individual physicians that have used this, their belief in how big this is going to be in the future. Some of the patient testimonies are in the public domain because they're being disseminated by our customers.

I said before also, Larry, you and I in private conversations and one-on-one conversations that it takes a couple of things to build a great business. One is a big unmet clinical need. I think we all easily agree we have one in certain tumors; in pancreas, prostate, liver, vital organs. The second thing at stake is a viable solution for that and I absolutely believe NanoKnife is it. Now I also add there's a third dimension, which is an ability to execute, which is determined by capabilities of a company, a reimbursement situation, a regulatory environment, et cetera, et cetera. And yes, it's more difficult than it used to be and yes, therefore it takes more time, probably a little bit more money than people anticipated certainly a few years ago when we moved into (inaudible) and all that. But I do believe that we'll get through this and I do believe there's going to be a very worthwhile investment.

The final point I'll make is it a big [role]? Already in the interventional oncology space, the current technology out there, the bulk of the revenue opportunity sits outside the US and I do believe for NanoKnife it's not going to be different. And we were not as strong from an infrastructure point of view in Europe and certainly not in Asia-Pacific. We're building that fairly aggressively and I want to -- as a side comment say all of that is funded while we are leveraging SG&A expenses aggressively, so we're making the right steps from that point of view. I do believe that international traction we're going to get in interventional oncology in general, and NanoKnife in particular, in itself is -- certainly in Europe has less hurdles, has less burdens and, yes, I think there's going to be great opportunity. So in short I'm not saying it's (inaudible), but there's enough belief here right now to continue to spend this kind of money on this program. The one thing I'll say is a lot of -- a good chunk of the investments are (inaudible) investments, amortization of historic investments, it's not all cash, and I think the cash flow we get from on going sales is increasingly offsetting the cash drain we make through R&D investment, et cetera.

Jan, that's a great answer. Let me just ask one more quick question and I'll jump back in queue. What would you say was your most pleasant surprise in the last fiscal year, and what would you say you were most disappointed with in the past fiscal year?

Oh, man, do you want to lie on the couch before I answer that question?

Yes, that'll be good. I'm from California, we have a lot of couches, so if you want to come along --

Yes. Well, really this cold-hearted northwestern European here, so --

No. But I mean --

Listen, what I'm excited about is -- two things that I really -- I knew oncology was really something I was intrigued by when I looked at this opportunity and I'm very excited about the potential of interventional oncology. It's a complicated market, it's a fragmented market, but by -- and I understand we're here to make profits and deliver returns on investments and all that kind of stuff, but what a rewarding opportunity it is. I find it a privilege. And I find the varicose vein, the venous intervention market quite intriguing. Very different dynamics in many ways. In certain ways much more a consumer market, much more commercial market, for year. Tremendous opportunities, so that from a business point of view I think we've got a tremendous team. I've said a couple of times this has been the easiest leadership assimilation program I've gone through, great people, willing to do the right thing, c capable people. Disappointments, probably could escape now by not answering that question, but disappoints, I think the margin erosion in Access took the shine off what otherwise has been a very, very strong fiscal year I think. We're not one of could have, should have, but if Access would have hung in there -- if only the margins would have hung in there we could have added that to top-line growth and we could have added that to bottom line I think it would have made a solid year a great year.

Very good, thanks very much.

Thanks. Okay, anything else? You're on. Hello?

Looks like we lost the operator.

Is that you, Larry.

Yes, it's me, I guess we may have lost the operator. Well, you and I can have a private conversation then.

I'm not sure it's private, I wouldn't count on that. I wouldn't pull a Reagan one here but then --

No, no, yes. I suppose it may be a disappoint this year that it's been a little bit slower with the FDA as far as IRE. (inaudible) going to be this slow to get some of these approvals (inaudible).

Yes. Kayla? Larry, do you have to hit a button? No, I don't think so.

No, no, I wonder if anybody else is on?

Well they can't talk.

No, that's right. Never had this happen before. I've had other strange things happen on calls but this is a new one.

Let me put you on mute for one second then, Larry. I'm going to check by the web here. and I assume the rest can hear as well.

Pretty good.

(inaudible). No. Larry, and assume the rest can hear us as well, sounds like they lost the bridge but also our systems tell us there was nobody else in queue so we go out on a limb and we just assume that. So I want to thank everybody for their interest in AngioDynamics. We will, obviously, continue to provide updates on our progress and very much look forward to talking with all of you again on a first quarter fiscal 2011 conference call, which should take place in October. Thank you all very much and talk to you soon. Bye.