AngioDynamics Inc (ANGO) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AngioDynamics third-quarter 2011 earnings 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, Tuesday, April 5, of 2011. And I would now like to turn the conference over to Mr. Doug Sherk of The EDC Group. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today for the AngioDynamics conference call to review the results of the fiscal third quarter, which ended on February 28, 2011.

The news release announcing the third-quarter earnings crossed the Wire this afternoon after the market closed and is available on the AngioDynamics website. The call is being 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 or 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 actual results or events to differ materially from those described in forward-looking statements.

In addition, today's presentation includes certain financial measures that views to better understand our business that have not been prepared in accordance with the generally accepted accounting principles, better known as GAAP. An explanation of reconciliation of these non-GAAP measures has been provided in today's news release issued by the Company and is available on the website at www.AngioDynamics.com.

AngioDynamics uses non-GAAP measures to establish operational goals and beliefs that non-GAAP measures may assist investors in analyzing underlying trends of the Company's 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.

On today's call, the Company will discuss non-GAAP EBITDA and non EBITDA per share -- excuse me, non-GAAP EBITDA per share and has used these measures in internal analysis and review of operational performance.

Finally, during the question-and-answer period today, we would like to request each caller to limit themselves to two questions and encourage callers to requeue to ask additional questions. We appreciate everyone's cooperation with this procedure.

And now I would 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 on our third-quarter conference call. With me today is, as usual, Joe Gersuk, our Chief Financial Officer.

This afternoon I will start with an overview of our fiscal 2011 third-quarter results and then provide an update on our Oncology/Surgery and Vascular businesses, as well as the progress in our NanoKnife and [autostrategic] programs.

Joe will then review financial highlights for the quarter and we will open the call subsequently for your questions.

This afternoon after the market closed, we reported net sales for the third quarter, up 5% and net income up 14% compared to a year ago. Our sales in the third quarter were driven by continued momentum in our Oncology/Surgery business and NanoKnife forces strong growth with sales of $1.9 million, almost 25% growth over the fiscal second quarter and more than doubling from last year.

Also, LC Bead has continued to show solid growth. And the third pillar of our success for Oncology/Surgery is our international business. The international Oncology/Surgery business is becoming an increasingly large portion of our worldwide business, and all three product lines -- RF ablation, Habib resection device and NanoKnife -- contributed to growth during the third quarter.

I know there's a keen interest from our shareholders in the possible expansion of our LC Bead distribution agreements with Biocompatibles, now owned by BTG. We do anticipate a resolution about our ongoing distribution relationship in the next few months.

As we have discussed in the past, we are concurrently developing and implementing strategies that are designed to provide ongoing annual top- and bottom-line growth regardless of the contribution from LC Beads.

In the Vascular business, we continue to operate in the challenging US market environment. Sluggish procedure growth, fierce competition, and significant price erosion are the key factors contributing to the operating environment. We expect this difficult operating environment to persist for the next couple of quarters. Adding new, innovative products will be the key to regaining consistent growth.

We generated good volume increases in our Vascular business, which comprises our combined venous access and peripheral vascular franchises. However, this volume growth was largely offset by price erosion.

We did make further progress towards completing our sales force transition to a combined US vascular force during the quarter. Full training has been completed and we believe the effects of this transition are largely behind us.

Going forward, they will continue to strengthen the customer relationships necessary to achieve and sustain a high level of productivity.

Within the Vascular business, we did see some encouraging growth stories. Our VenaCure EVLT franchise continues to grow mid-single digits, with strong US growth offsetting the impact of health care reform in particular in the United Kingdom. Our Micro-Introducer Kits continue to grow at a healthy pace and in our venous Access franchise, both our PICC and [fourth] product family had a particularly strong quarter with solid double-digit growth.

Discontinuation of certain diagnostic catheters did impact corporate growth by almost 1% in the quarter. This negative impact will be visible in Q4 before starting to decline as of Q1 fiscal 2012. This particular catheter was discontinued at the beginning of this fiscal year.

Our corporate account theme was able to enjoy some successes in the third quarter by winning contracts with both HPG and Premier. These provide us with great growth opportunities for many of our core products. And our international business continues to show significant above average growth. Year-to-date growth is solid double digits with the Asia-Pacific Oncology business being the big engine as well as a great opportunity.

In the quarter, we further strengthened our international operation by acquiring the distribution rights back from a Dutch distributor.

We are at this point in time revising our full year financial guidance and this is driven by the current difficult market environment which is reflected in the pricing and procedural volume pressures. The Q4 over prior year comparison will be negatively impacted by the strong sales of LC Bead in the fourth fiscal quarter of 2010 due to the unavailability of a competing product plus the impact of the now discontinued diagnostic catheter line earlier this fiscal year.

Now let's turn to NanoKnife and let's further address the warning letter.

In general, we received a warning letter from the FDA in connection with certain aspects of our marketing of the NanoKnife System. In the warning letter, the FDA states that certain statements we made, including those on our Company website, promote the use of the NanoKnife System beyond this currently cleared indication.

The warning letter does not restrict or prohibit the sale or marketing of our products. The warning letter does not require us to recall any products. We take this matter seriously and are committed to complying with all equitable laws, rules and regulations in connection with the marketing and sales of any of our products.

While we believe we have been fully responsible to the matters raised by the FDA in the warning letter, there can be no assurance that the FDA will be satisfied with our response.

Meanwhile, NanoKnife continues to gain momentum in both the US and abroad. During the third quarter, six new hospitals became clinically active with the NanoKnife System and this brings the total number of active users to 29 worldwide.

In total, these institutions treated an incremental 126 patients since January 1, 2011, bringing the total number of patients treated with NanoKnife to 538.

The cornerstone of our NanoKnife program is a commitment to evidence-based medicine. In clinical outcome data will be the foundation for regulatory approvals, more specific label indications, reimbursement, and general market adaption. In the international HEC -- Hepatocellular Carcinoma primary liver cancer multi-sample study, we did see good progress with an additional six patients that had been treated in the last 90 days.

This brings the total now to 11 patients, which is close to the halfway point of this study. Six [centrals] in four countries are currently enrolling. We do expect perspective single central studies focusing on pancreas and kidney tumors to start a European [study] in the near future.

In line with earlier statements, we have submitted our responses to the questions from the FDA on a NanoKnife IDE submission for a prostate study and are currently awaiting their reply. We continue to be on track to submit the pancreas IDE in this fiscal quarter.

As scientists and commissions around the world continue to study and evaluate the safety and efficacy of the NanoKnife System, those results are being reported in significant publications and at important scientific meetings. The clinical feedback continues to be strong and there is a broad and deep interest from the clinician side to participate in the program.

Our goal for the Company is to grow significantly faster than the market and to grow in a profitable way. We remain more focused than ever on executing our program to create sustainable long-term growth. Being focused on Oncology/Surgery, Peripheral Arterial Disease and venous intervention creates solid growth opportunities in a large market regardless of the macroeconomic market trends.

The key to generating growth is delivering innovation to our customers and looking at the areas where we are enjoying growth, there is a strong correlation with us having to launch meaningful new products in the last 12 months or so. Our R&D investments currently are the highest in history, both in terms of absolute dollars as well as a percentage of sales. And in the third quarter, we launched four new products.

Yesterday we announced the US launch of the next-generation DuraMax Step Dip Chronic Dialysis Catheter and the new DuraMaxVP kit. Additionally, we launched the Safe Sheath Valve Peel-Away Introducer to support a fourth franchise, the Smart PICC Bedside Insertion Kit and we did obtain CE Mark for the NanoKnife 2.2.0, which comprises a significant hardware and software upgrade.

With this, year to date, we have launched 10 new products from our internal R&D organization, meeting our stated goal for this fiscal year. Our R&D and engineering teams continue to work on new products that will be launched later this fiscal year as well as in fiscal 2012 and 2013.

Gross margin in Q3 came in below our expectations. We believe we have a number of programs in place that will improve gross margin over the longer term.

Two significant vertical integration programs were implemented at the end of Q3. These are the launch of our Smart PICC bedside insertion kit and the new DuraMax Dialysis Catheter. Both products present gross margin improvement opportunities.

Also, mix is expected to become favorable over time, going forward with products like NanoKnife now being among our fastest growing product lines.

Our strong cash flow and resulting balance sheet allows us to look at acquisitions as a core element of our growth strategy, and we remain focused on strategic fit and potential to drive our top line. In addition, as we've previously stated, we want any deal to be accretive in a reasonably short time frame which we define as four to six quarters.

In closing, we remain confident in the long-term potential for AngioDynamics. Our strategic objective remains unchanged, which is to deliver profitable growth at a rate that is significantly faster than the broader market. We are executing our long-term growth strategy and profitability strategies and we continue to make necessary investments in R&D and our innovation pipeline to drive long-term sustainable growth.

Our commitment to strategic acquisitions remains a top priority and our financial strength gives us the flexibility to make disciplined investments to pursue additional growth opportunities.

I would like to thank once again our global AngioDynamics team for their continued hard work and for the dedication and commitment to building our future. And I would also like to thank our shareholders and the Board of Directors for their ongoing support and confidence.

At this point, Joe will take you through a more detailed look at our quarterly results. Joe?

Thank you, Jan. And good afternoon, ladies and gentlemen. Despite the continuing challenges of the operating environment, our third quarter was highlighted by a resumption of sales growth, major progress in our NanoKnife program, good operating expense management, excellent cash flow, and growth in net income and earnings per share.

Reported sales of $54.6 million grew 5% from a year ago and featured another solid growth quarter for our Oncology/Surgery business, as well as improved performance in our Vascular division. Vascular product sales were essentially flat compared to the prior year which is a significant improvement from the 4% and 6% year-over-year declines that we reported in the first and second quarters.

The disruption associated with the sales force transition was much less of a factor this quarter than it was in the first half of the year, which is consistent with the expectation we set in our last earnings call. However, the broader slowdown in hospital admissions and procedure volumes that have been widely reported persisted again this quarter. And as a result, we saw softness in sales across most vascular product categories.

A bright spot was the strength of our vein ablation business in the US where we saw strong double-digit unit sales growth in disposable ventilator. This was somewhat offset however by weakness in the international vein ablation market due to budget-driven reimbursement changes in the UK.

We also saw more intense pricing pressure in the vascular business in the third quarter as ASPs declined 6% year over year in the Vascular division as a whole. This compares to the 4% year over year ASP declines that we saw in the first and second quarters. The price erosion in the third quarter was fairly broad-based across most of the vascular product categories and reflects the competitive intensity of the marketplace.

Turning to the Oncology/Surgery business, we achieved 19% sales growth in the quarter led by strong sales of LC Bead's and NanoKnife products. NanoKnife sales of $1.9 million marked our fourth consecutive quarter with more than $1 million in sales of this exciting new technology as seven additional sites entered the commercial program in the quarter. This included a site in the UK while the others are in the US.

ASPs were firm in the Oncology/Surgery business in the quarter, rising by 3%. This partially offset the impact of price erosion in the Vascular division. However the net price decline to the Company in the aggregate was 4% which, in turn, affected our gross margin in the quarter.

From a geographic perspective, 88% of third-quarter sales were in the US and 12% or $6.3 million came from international markets. International sales grew 8% from the prior year on a reported basis and 9% on a constant currency basis.

Consistent with our international growth strategy, in early February, we entered into an agreement with our distributor in The Netherlands who ended their distribution agreement to purchase the relevant business asset and to secure their assistance in transferring customer relationships to AngioDynamics. As a result, we have established a direct sales operations in the business office in The Netherlands.

With this transaction, we are now well positioned to sell more of our products in this small but attractive market in Europe. And it marks the fourth country in Europe where we sell directly to hospitals.

Continuing down the income statement, gross profit totaled $31.7 million or 58% of sales in the quarter. This is the same gross margin we reported a year ago and it is also 1.1 percentage points lower than reported in the second quarter and is not the sequential margin improvement that we expected. This is attributable to the pricing pressure in the Vascular division mentioned earlier, which offset the positive impact of the material and manufacturing cost production programs that continue to reduce our product cost.

Operating expenses totaled $26.5 million in the quarter, which is modestly higher than the $26.1 million reported in the second quarter as we continue to control SG&A costs to minimize the impact of lower sales growth and pressure on gross margin. The increase in operating expenses from a year ago was primarily due to a 24% increase in R&D spending to support vascular and oncology product development and regulatory activities.

Operating expenses for the NanoKnife program amounted to $2.7 million in the quarter. The net effect of the program was a loss of $0.04 per share in the quarter compared with a $0.05 loss per share a year ago as NanoKnife revenues are rising faster than the associated cost of the program.

Operating income was $5.2 million in the quarter and the operating margin was 9.6%. EBITDA was $8.4 million or $0.33 per share in the quarter. The income tax provision was recorded at a 25% rate compared with a 38% rate a year ago with this quarter's low rate primarily attributable to renewal of the R&D tax credit, which expired in December 2009, as well as manufacturing tax credit. This lower than normal tax rate added $0.02 to earnings per share in the quarter.

Turning to the other financial statements, cash generation continues to be excellent as operating cash flow was $10.3 million in the quarter and $22 million year to date. As a result, we ended the quarter with cash and liquid investments of more than $120 million. This is an increase of nearly $10 million in the quarter and more than $20 million since the beginning of the fiscal year.

As challenging as the operating environment may be, it is worth noting that our business model continues to generate substantial amounts of free cash flow.

Our revised guidance for the fiscal year is as follows -- net sales in the range of $217 million to $220 million. This is a 1% to 2% increase over fiscal 2010 with a revision due to the expectation of continued pricing pressure on our Vascular business and generally soft procedure volumes. Gross margin in the range of 58% to 59%, GAAP operating income in the range of $20 million to $21 million, a $500,000 reduction at the low end due to the lower sales expectations.

EBITDA in the range of $32 million to $33,000,000, a $1 million reduction from previous guidance and GAAP EPS of $0.48 to $0.50, an increase of $0.01 at the low end, mainly reflecting our lower tax rate. As the impact of the NanoKnife program has been $0.12 per share through the third quarter, we would expect a full-year impact to be in the range of $0.16 to $0.18 per share, of which $0.04 is the non-cash intangible amortization costs. This reflects the strong sales performance and lower spending on clinical activities for the program.

Additionally, we expect a tax rate of 35% in the fourth quarter and 33% for the fiscal year and cash tax savings of $3.1 million from the use of NOL.

Finally, we plan to report Q4 financial results on Thursday, July 14, after the market closes. And now, we are ready for questions.

(Operator Instructions). Brooks West with Craig-Hallum Capital.

Thanks for taking the question. I wanted to just dig into the vascular commentary a little bit. And I'm a little confused.

Jan, you said in your prepared remarks that you had good volume growth within your business, but then you are contrasting that with sluggish procedure growth and price. And I'm wondering if you've got positive comments on PICC and [ports], seem to be positive comments on the laser ablation.

Can you give a little bit more detail on just what you are seeing coming into Q4 that is making you cautious? I mean, is it more price, is it more competitive launches? Or do you feel like you are losing some share and you need to get some new products out.

I know it's a broad question, but just a little bit more detail there would be helpful.

Yes and, Brooks, it is difficult to summarize it, I can see that. So I think the big overarching issue is price. I mean, I think price erosion as Joe was indicating has stepped up by two points in the investment division compared to previous quarter and that is a meaningful number on the overarching revenue number.

The R&D from some broad focus, fixed ports have been singled out like introducer kits, VenaCure franchise, and we have consistently been able to grow it out over the last couple of quarters actually and, certainly looking at volume, we'd like to believe that we are at least holding share in the US, maybe even inching forward a little bit.

But we've got some headwind with some of the other product lines. I did single out diagnostic catheters although that is heavily distorted by this one product line that we discontinued, which starts having a significant impact in Q3 and also in Q4. Frankly, benefit is not generating the distraction that we hoped for when we entered into the whole franchise of PTA products, having a tough time.

So that offsets it to a certain point, but again the price erosion is the big overarching comment. And in my comments, if you go through them, I said the single biggest driver for getting out of that is, frankly, innovation. Because by having more unique products, products that perform strongly, can stand up against competition, make it a little easier to manage price.

I think the days of gaining price are far away in this sector, not just for us but, I think, for many companies. But by upgrading technology, being able to upsell, have products that distinguish themselves from competition, products management becomes a little easier.

Okay and I guess two more, if you will indulge me. Joe, will gross margin --? You kept your gross margin guidance for the year consistent. Will gross margins be above 58% in Q4?

And then I just had a question on the cash. I mean, you've had a lot of cash on the balance sheet for some time now. Are you not seeing deals out there? Are things still too pricey? I'm just a bit surprised you, pulled the trigger on something.

Well, with regard to gross margins we would certainly expect them to be no less than what we just reported in Q3 at 58% and [Nexus XR] are helping us as well as the reduction program, so shouldn't be any lower than that and certainly possibly better than the 58 even that we just reported.

With respect to the M&A activity, certainly you know we continue to look at numerous opportunities and haven't found exactly what meets the strategic criteria yet and is available at the right price. But the program remains active and we continue to look at opportunities and there's certainly no shortage of them.

Jayson Bedford with Raymond James.

Good afternoon and thanks for taking the questions. Just a couple of quickies. The Access business was strong. I think it's the first time it is grown in a while.

Can you just -- and maybe you mentioned it, but what were the drivers there if you just think of the three buckets -- PICC, ports and dialysis catheters?

I think the danger of doing this now almost for two years is some of the [ports are] -- I'm going to use are being recycled, but we are a little cautious, but yes we had a very strong quarter in PICC and a very strong quarter in ports. But ongoing struggle in dialysis and that certainly took the overall number down.

I made in my prepared remarks a comment about a correlation between those areas where we do see success on the top line and innovation. I think in the PICC line, we have been launching two products. Frankly, three products within the last 12 months, a triple lumen, Smart PICC, a dual lumen, [5 French], Smart PICC, and then more recently a bedside kit, which is frankly a big volume product. So we had meaningful innovation and these are all the new Smart PICC family.

So those are meaningful pieces of innovation that really help us show off the business. I think even the fourth French as it may be even stronger, I think Smart Port technology with the Vortex technology has a great reputation in the marketplace. We have been launching a mini portal low profile port, really rounding out our titanium power injectable Smart Ports and they have just been performing well.

The second thing that also plays in favor of the business like a port line or maybe also a PICC line is corporate accounts. We have certainly over the last couple of quarters made some steady progress in that it has become an increasing part of our revenue stream in Vascular. Maybe also contributing a little bit to the price pressure to be honest, but we get volume in return for that.

But getting more -- becoming more effective and more successful in corporate accounts tends to help some of the core products and the Access products more so than some, for instance, oncology products. Is that helpful?

That is. It's a fair answer.

And then as the second question here, just on the fourth-quarter operating dynamics, in the EPS, it looks a little lower than I would've thought, especially given gross margin, you expect to be up sequentially. It seems like you've left yourselves a little cushion. Is there somewhere specific where you are ramping spending?

Well, I don't think so. It is a bit of a funky comparison. And of course, when we give guidance it is typically a full-year guidance rather than specific for the quarter. We do realize changing it at the end of Q3 as an implied guidance for Q4, the only thing I think is the R&D expenses have gone up in this quarter and we're actually committed to fund our future. And that probably stays relatively high.

We had a little bit of one-time windfall in certain areas that we wouldn't have liked the tax benefit, I guess. Joe.

Yes and there is a fairly wide range I think is what your question implies there, that there -- a $3 million range in just for a quarter's performance. So it is a range and certainly we want to make sure that we get in the range.

But I think the only specific area of spending that we would see necessarily is in R&D which is ramping up some as we just saw it did in Q3. And then apart from that, the sales expenses typically you know will rise with the higher sales expectation that is implied in this forecast, relative to Q3, that is.

Jason Mills of Canaccord.

This is [Jim Arias in] for Jason. My first question is on R&D. We talked about how it is increasing. Can you give us a little bit more color on what type of products you have in the pipeline? Is it in new product areas or just product line extension or improvements?

Well, it's all of the above. We launched, I believe, 11 new products last fiscal year. This year three quarters in, we were up to 10 new products. You know, we could make a few more this year.

So there is actually a steady stream of new products running out at about one a month. And it's really across the board.

We had new line extensions, if you like, in our Never Touch platform, our laser fiber for varicose vein ablation. I already highlighted two or three launches in our Smart PICC family, two launches in our Smart Port family. We just had a major addition to our dialysis product lineup. We did launch a new micro introducer kit and I'm rattling these off from the top of my head here.

Couple of support products, like this Valve Introducer Sheath. We had an non core in needle in the year. In Oncology, while the 2.2.0 upgrade is only international right now we are trying to obtain CE -- sorry (technical difficulty) approval in the US as well. But that of course is from an R&D point of view was a significant effort.

So it's fairly broad-based [tomorrow] and I think that is going to look like that going forward. In the hopper are more ports, more dialysis products, further innovation on varicose vein on the VenaCure franchise and, frankly, a few other ones as well.

Okay.

New props about -- and a number of new props, ablation props in oncology, are in the hop -- in the near-term hopper as well. So I think this is looking increasingly good.

All right. And for my second question just on the sales force. Where are you in terms of trying to -- think that they will be driving efficiency gains. I know you mentioned in your remarks that the training is over.

Yes. So two things there.

I think the -- I mean first of all just to kind of [recall] a little bit. [Training] is never over. You know, we launch new products on an on going basis and we train people all the time and there is always room for improvement. I think the comment we're saying -- we're making is that the transitional impact of combining two sales forces is largely behind us.

I think we had -- you know, I think from a leveraging point of view, from a sales and marketing point of view, I don't think -- and I am looking at Joe while I speak here -- I don't think you should expect much there in the near future.

I think we want to continue to invest in our sales force and it is really about topline growth. And with that, the sales and marketing expenses go up a little bit.

So I don't think it's as much a -- it is a bit of a productivity issue, but with that the commissions will go up and some of the variable expenses will go up as well. So I wouldn't want to guide towards too much leverage on the sales and marketing line in the next couple of quarters. We frankly made some pretty remarkable strides there in the last 18 months or so. Is that answering your question?

Thomas Kouchoukos with Stifel Nicolaus.

Thanks for taking my questions. Just wanted to, I think you mentioned on the FDA ID studies that you are expecting pancreas by the end of Q -- your fiscal Q4. Is there an update on prostate? I mean, should we not expect that by year-end at this point?

Yes. Maybe I slipped it in there a little bit too much, but we did submit all the required paperwork for the prostate IDE. A couple of weeks ago. So that and that IDE was an older IDE, FDA came back with questions top of my head over a year ago. We did some work to answer those questions that we submitted that package a few weeks ago.

And so we met that goal of submitting that in this fiscal year. And now we're sitting in the hands of the FDA. We'll hopefully get a reply from them at least the next, hopefully, couple of weeks or so, but you never know.

(multiple speakers) pancreas IDE which is a brand spanking new IDE which should go in or will go when before the end of this fiscal year, in the next six, seven, eight weeks, [thereabouts].

Okay and you know based on the different indications, is there one that you would expect to get cleared sooner than the other? Or is it anybody's guess, at this point?

I limit my gambling to Vegas and even I don't do it there actually. So I don't want to roll the dice. It's hard to say.

Obviously, we believe that both are strong submissions and we would love to get into real prospective clinical trials, well-regulated and, you know, gain the learning from that. And hopefully with good outcome which we expect, of course, get a benefit in terms of getting spend the label indications and reimbursement, etc., etc.. So we gave it our best shot and we look forward to a discussion with the FDA and hopefully it's going to be okay in one fell swoop and if not, we will come back with some more questions. We will deal with that.

Robert Goldman with CL King.

Thank you. Good evening. A couple of additional things on the NanoKnife and then a financial question. With NanoKnife, the seven new commercial accounts, could you just break those down as to how many were US and how many were outside the US?

Yes, one was in the UK and all the others were in the US.

Thank you. And then also on NanoKnife, could you tell us what the R&D spend was in the third quarter and year to date?

We don't quantify it exactly, but we've said in the past that we spend roughly 40% of our R&D on NanoKnife. And it hasn't changed significantly over the course of the year.

And that would include the clinical expense in support of NanoKnife.

Correct.

But in Oncology, of course, is also work going on in RF (inaudible) and some other work to support those product lines, Habib knife. So we ever break out the actual hot R&D dollars for NanoKnife, only the total program expenses.

Okay and then the final financial question, I can't remember if you guys give a free cash flow guidance for the year. If I missed it, could you tell me what that guidance was or could you add that to your guidance?

Yes. We do EBITDA, but we don't actually do cash flow from operations or free cash flow, for that matter. The cash flow from operations tends to certainly be in the vicinity of the EBITDA and the capital expenditures tend to be fairly modest. You know, they run in the $5 million or so a year range would be the normal level of capital expenditures in the business.

Charles Colson with Sidoti & Company.

I just want to -- quick item here. I want to thank you guys again for breaking out those segments, the Access and the [peripheral] Vascular, that's helpful. Switching gears here, question for Jan.

Seems to be a theme among several of your competitors that increased innovations to deliver better clinically backed up products is pretty necessary in the environment. So a two-part question. Does this potentially means you have to increase R&D maybe north of sales about 10% and what you have to do to outpace the competition in this area since they are somewhat doing the same thing?

Well, it's a great question. The -- I mean, first of all to start at the beginning of your question, I wouldn't guide the group to spending structurally more than 10% of revenue on R&D. You know, it could be the odd quarter that we kind of breakthrough that a bit and then that we would draw back but I think that is kind of the right level. And certainly what occurred in gross margins, I don't think we could support much more anyhow.

And I think when I say and I really obviously mean this, that innovation is the key to the future and your -- I mean it really means that what I would call portfolio management, portfolio strategy is an important element. And you know even an organization that we're relatively small, but not that small, but we can't be all things to all people. Even large corporations can't be all things to all people.

It is really about picking your battle and you have seen as one example, we are really committed -- I mean, more spaces like that, absolutely committed to the varicose vein business and that is why we have a healthy pipeline and a steady stream of new launches. And it makes a difference and I do believe that the growth we have been enjoying there over the last -- oh, coming up to two years now, year and a half, two years, it is not a coincidence. It is a result of that commitment and it's frankly an organization-wide commitment.

It is not only R&D. It is frankly also the marketing team that has done a tremendous job in creating market development programs. It is a sales team across the world that has done a great job in bringing this to customers or working with customers and putting this to good use. And then of course, all the support's actually around it, coming altogether.

So I am a big believer in, as a corporation, pick your areas of opportunity. Oncology is one for us, ports, we are doing great, and again, the [Anglo study] starting to [level in 3Q] is that they ignore other ones that don't want to do that.

It's really about less, fewer projects and really committing to them and driving it hard. Because yes I think all of my colleagues would say innovation is very important. But I also believe all my colleagues would say the cost of innovation, the costs of bringing in new product to the market have gone up over the last couple of years both in terms of dollars and in terms of resources, as well as in time. Regulatory environment, the burden of proof on the clinical side, (inaudible) side has increased over time. There is nothing wrong with that. We just as committed to that and again be very, very smart about picking the R&D projects that we take on.

Okay. Thank you. That's very helpful. Just then again one more quick question. On the vein sales, you said disposables is what's really driving those. Can you touch upon that? And then just one question similar to that. What do the console sales account for, the total vein sales if you can give a rough number of that?

Yes, I will leave the second part of the question to Joe, but the overarching comment I want to make at the beginning of your comment is we look at is very much as a razor, razor blade business. And we are a disposable product company and the laser is enabling technology. We own the technology. We develop our own lasers. We make our own lasers, we think we have got an advantage from that point of view and we have seen a shift -- and I think some of our colleagues have been saying similar things over the last couple of quarters -- where the transaction on the laser equipment moves away from the hard cold cash transaction to a leased or amortized kind of a structure.

Joe, I am not sure to what extent we have details available here in numbers. But --.

Yes, we don't particularly break them down, but I mean the -- in terms of the capital component, I think if you are asking what the portion of the total vein sales represents, it is only about 10%. But 90% of the vein ablation revenues would be the sales of the disposable products. 10% would be the capital component.

What we saw in the third quarter was good, strong, double-digit growth in the US market in disposable sales. However, much of that was offset by the effective price erosion and then we saw some weakness in our international vein business as a result of the reimbursement issues, in the UK in particular. But at the end of the day, we continue to see the vein ablation as a strong market for us, an attractive one where we believe we have a very strong market position and can ultimately increase market share.

Larry Haimovitch with HMTC.

Good afternoon. On the NanoKnife, couple of field checks I've made suggest that there's some very, very good results with nonresectable pancreatic cancers. And I know pancreatic cancer is a great opportunity. I'm just wondering if it makes sense for you to pursue a -- your mandatory device exception you know limiting props, limiting the commercial potential, but perhaps speeding your way to the market by going to the FDA and looking at that as a possibility.

I wonder if you've looked at that as a strategy and how you think about that.

Well, we looked at that as a strategy. We don't think it works at the executive summary, if you like.

Going into this discussion gets a little complicated. But first of all HD is a viable pathway. I am familiar with it from my prior lives and stroke and all that. The -- there's a couple of limitations, a number of procedures that I think even in pancreas would be exceeded or easily exceeded.

The second thing is I am actually not aware of -- and that might be my limitation, but we are not aware of a device getting [AZE] approval when it already has a generic [passing K] approval. I mean obviously we can only promote this device but in its indicating use which is surgical ablation of soft tissue, it has no specific indication for treating specific disease beyond that. That is part of a strategical towards the future to try and obtain that.

And again -- but at the same time, you know. I think as you are reporting apparently physicians are using it in certain cases for that kind of a procedure. So I don't think an AZE would be feasible in this scenario, Larry.

Yes, I don't know if there is or isn't any history of going for an HD, but obviously it would be great if you could promote it directly rather than just as for soft tissue. I don't know whether it would speed the commercial acceptance, but -- .

But -- listen, Larry. The device is what it is today. As I said, generic label as I said, again, we are absolutely disciplined in promoting it within those boundaries and commercializing it within those boundaries. And I want to set that apart from our strategic intent and you see it also international. You know, we are really trying to get that in different countries into perspective trials that are much more research, clinical research from that point of view. And that will lead us over the path going forward.

So I want to clearly separate between what we're doing commercially today as opposed to what is best from technology. Could potentially do some in the future but which is not reality today and which is not a commercial foundation, certainly not in the US.

(Operator Instructions). Brooks West with Craig-Hallum Capital.

Just a couple of quick ones. Jan, any update on the Star Registry that Rob Martin is running? And then, since the warning letter have you seen an impact in either control unit sales or utilization as maybe some people back off from the technology? Any impact there?

Well the Star Registry, again, is an independent registry run by Rob Martin. I don't think it is published, but I do know from conversations with them that apparently more and more samples are getting [IOV] approval and more patients are being enrolled in that study and at some point, I assume there is going to be some publications coming out of that.

Impact on the warning letter, hard to imagine. I mean this letter, of course, gets the attention of our customers. Obviously we have an intense training program following this kind of episode internally as well. You know the only thing I can say is look at the results in Q3, which we believe we can hold our head out there.

But, you know as I said, earlier on forward-looking statements, I tried to stay away from those, but there will be lasting impact here or not -- hard to say.

Thanks for that. And then just one on the LC Bead. You didn't call out the growth rate there this quarter. Have you seen any kind of an impact in that growth rate as your customers realize that Biocompatibles has been acquired and maybe you are going to lose that product line? Has that slowed down at all?

No. I mean this [other spike] was driving a pick-up or slow down like I reiterated a year ago, well, today a year ago, a competitive product was taken off the market. And that is why I think you'll start seeing reported growth coming down because we had a big spike being started in Q4 last year. Frankly, it lasted well into this year.

So I think because of that effect, that kind of effect, you will see it coming down. But I think whoever happens to be the legal entity owning a certain product, I don't think in itself drives sales up or down.

Business as usual.

(technical difficulty), it really isn't.

John Granahan with Granahan Investments.

Thank you. Does your statement about being selective in terms of picking competitive battles or R&D support for product line, does that suggest future pruning of the product line to any significant degree?

No. I wouldn't jump to that conclusion, John. The fact that we strategically focus on something doesn't mean we don't value the rest. At the end of the day, certainly, is you want to build a sizable franchise and you want to sustain this kind of a free cash flow, I think you need it all. These products, whether you want to [further] them or score products or base products or whatever you want to call them, that don't necessarily get an entire strategic focus, in that the share of R&D dollars still constitute a very important part of our Corporation in terms of absorption of costs, in terms of filling out the back, in terms of being able to pull through, in terms of being able to have larger contracts with buying organizations, so they can still construe a very, very important and integral part of the franchise.

So our focus is on growth, on profitable growth. For that, we need to increase gross margins, we need to increase top line, of course. I think the basic infrastructure works well. We are not looking right now at lobbing off significant product lines or revenue streams.

Okay. Thank you.

Larry Haimovitch with HMTC.

There were some earlier questions about acquisitions. And I don't want to beat this horse dead, but I feel like you could be more open with us in terms of the kinds of things you are looking at, the kinds of pipeline you have, what size of acquisitions.

And you know, we know you are looking at acquisitions. We know you brought someone on board to help you, but I am just wondering if you would be willing to give us a little more color so we could get a little more confidence that, in fact, some deals are going to get done?

Well, first of all, the Company's deals get done. It's -- you know, deals get done, you know. That's straightforward. We have a strong balance sheet. We committed a lot of cash. We did it somewhat on purpose. And part of that is, also, that we can master some of the larger deals.

If you want to in this day, in this environment, you want to buy products that have some revenue, ideally have some revenue, has tremendous growth potential, you have got to pay up. And I think we have an ability to do that.

As we said before, we are not looking for science projects. As an example, as much as we like NanoKnife strategically, we do not want a second NanoKnife-like program. I think that would kind of exceed our abilities a little bit.

So we are looking for things that we can sell to existing sales forces on these mega-sales distribution organizations stronger both in the US as well as international. We are looking for things that can increase gross margins, accelerate our compound topline growth rate. We wanted to be accretive in four to six quarters which is a big statement and a big commitment from that point of view, as well. And you know, within those constraints we are looking at things. And they can be bigger and they can be smaller.

Not that we are going to destroy the balance sheet of the Company here, but we are looking for robust solid deals. And I think they're out there -- well, I know they're out there. And you know, we are pursuing those opportunities.

Okay. Thank you.

And while we're at it, the areas where we're interested, I think we have reiterated those before. We have a big appetite to build a strong leading Oncology/Surgery franchise on a global basis. We are looking for an international footprint, very intrigued by venous intervention, thrombus management. And of course, peripheral arterial disease is virtually a boundaryless opportunity. So we have got a fairly broad-based interest there as well.

That's helpful. Thank you.

Charles Colson with Sidoti & Company.

Yes, just one quick question. On the Access segments, showing growth, but I was curious if there's any effect on the -- that you might see from the CMS reimbursement on the end-stage of renal disease? Any effect there at all or is that minimal?

I think that particular impact is minimal in our product lineup. I mean the dialysis business is not doing great but I don't think this is a key driver there.

Okay and just one more follow-up. On the distribution purchase in The Netherlands, is this something we should continue to expect as far as the broader strategies to boost international presence, again boosting up the sales force, the direct side?

I wouldn't probably take it that far. I think that The Netherlands was a bit of a unique situation and not because of my accent and my first name. But, frankly, our distributor in The Netherlands has done a tremendous job in building a very strong franchise force, in particular in varicose veins. And it was very attractive to start owning that directly for a number of technical and strategic regions.

I think that not too many that kind of opportunities are there and I think distributors going forward will always be an integral part of our distribution strategy. Not to be saddened that we couldn't take more products direct in certain products -- some more product lines direct in certain countries, but never say never. But I don't see too many opportunities of this kind of a magnitude out there right now.

(multiple speakers) (technical difficulty) in time though, we are likely to be directing more countries than four across the globe. We're just -- The Netherlands is our fourth that we are directing that. We will be directing others in time and certainly to buy a distributor's business is a good way to get a significant foothold in a new country that we want to go into. So could be more in time, though.

I see that directs though, is that -- what kind of timeline is that just you know a slow process? Or would that be something you are doing more quickly?

Well, when the opportunity is there will do it and it's like that acquisition strategy. You know we will do it when we've got things that meet the strategic objectives and fit the economic requirements and the accretion requirements as well. So easy to buy things, but you want to make sure you are buying the right things.

Thank you.

To put a bit of color around the. I think our Dutch distributor actually before we acquired them was probably the single largest distributor in the world. So it was a very sizable entity, there's not too many opportunities out there of that magnitude.

So -- but I think Joe's overarching comment is important, that we think having a direct interface with key opinion leaders and key positions is very important. And I think in some key markets, I think we will have some kind of a presence and that could also be a hybrid presence, which is more strategic rather than actually distribution.

Okay. Thanks again, guys.

I know it's a little incremental, but I think we said last quarter or the quarter before that we -- one strategical tactical move we made is we opened up an office in Hong Kong, and we have a person based there right now who is supporting distributors in the region just better in terms of training, in terms of working with customers and trials, etc., etc. And it just enhances the performance of the distributors and it is really a win-win scenario.

Thank you. At this time I am showing no further questions in my queue. I would like to turn the conference back over to management. Please continue.

Well, thank you, [Mikala], and thank you, everybody, here on the conference call. And thank you for participating today. We look forward to keeping you abreast of our progress and we will talk with you again, reporting our Q4 numbers which will be somewhere in July, early July this year in a couple of months. Thank you very much. Have a great evening.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation, and at this time you may now disconnect.