AngioDynamics Inc (ANGO) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the AngioDynamics third-quarter FY14 financial results conference call.

(Operator Instructions)

This conference is being recorded today, Wednesday, April 9, 2014. I would now like to turn the conference over to Bob Jones, Investor Relations. Please, go ahead, sir.

Thank you, Brittany. Welcome, everyone, and thank you for joining us for AngioDynamics conference call this afternoon to review the financial results of the FY14 third quarter, which ended on February 28, 2014. The news release is available on AngioDynamics website at AngioDynamics.com. A replay of this call will be archived on the Company's website.

Before we get started, during the course of this conference call, the Company will make projections and forward-looking statements regarding future events, including statements about revenue and earnings for the FY14 fourth quarter and full year ending May 31. 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 the actual results or events to differ materially from those described in forward-looking statements.

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 re-queue to ask additional questions. We appreciate everyone's cooperation with this procedure.

With that, I would now like to turn the call over to Joe DeVivo, chief executive officer.

Thank you, Bob. Welcome, ladies and gentlemen, to our third-quarter AngioDynamics conference call. I'm very pleased to report a very strong revenue performance for the entire AngioDynamics team this quarter.

Last quarter, two of our four businesses, PV and Oncology, grew while International was flat and VA made progress, Vascular Access, from the preceding quarter, but was still declining at 4% year over year. This quarter, each of our four reporting P&L businesses, Peripheral Vascular, Oncology, Vascular Access and International grew for an aggregate worldwide top line of 8%. It would be 9% net our OEM supplier agreement.

Each quarter, I keep telling you that I look forward to growing our Vascular Access business, as when it does, we should be at a real, middle-single digit grower. Well, that time has arrived.

We delivered 3% growth in Vascular Access business. A 7% improvement over last quarter, alone. I believe that growth, and better growth in the future, is now here to stay. I believe we have a long runway with our key growth drivers in NanoKnife, BioFlo, EVLT and AngioVac in both the development of new markets, as well as driving market share through increased penetration and competition.

While we still have businesses which will float with the overall economy, a greater proportion of our growth is in our control, and I believe shines a bright future for AngioDynamics. Each quarter, we enjoy the benefits of the investment that we've made to fuel growth.

I'd like to review several highlights this quarter to provide more detail and color on them for you. Starting off, with Vascular Access. BioFlo, in my view, is winning. Today, BioFlo is now over 40% of our worldwide PICCs, driving our Vascular Access business to the first quarter of growth in the last two years.

More data keeps coming out and we are excited for the upcoming INS meeting where another new set of data will again show meaningful reductions in deep vein thrombosis rates in upper extremity -- deep vein thrombosis as well as more detailed cost savings in the administration of Cathflo TPA, something nurses used to clear clots out of catheters. Some accounts are seeing up to a 75% reduction in the use of this agent, which is used to reduce those clots, and also, which makes hospitals more profitable when it's used last and that cost is avoided.

Our BioFlo ports are also beginning to show similar benefits in reduction of occlusion rates, as well as reduction of Cathflo TPA usage as it does in PICCs. We are now seeing a meaningful uptake in port revenues due to BioFlo and believe this is just the beginning.

We also have initiated our clinical market evaluations at seven sites in the US and Canada using DuraMax BioFlo dialysis catheters and look forward to seeing similar clinical success. Over the next six months, we expect BioFlo ports and dialysis catheters to deliver growth to the Vascular Access category.

BioFlo does translate into market success. We are winning new accounts, winning IVN awards and will make our best efforts in the new future to make headway into GPO arena, which is entirely new for AngioDynamics Vascular Access.

The market share leader enjoys a virtual monopoly of sole-sourced GPO agreements, given their considerable market clout and leverage used across multiple categories. We hope BioFlo PICCs ports and dialysis catheters will actually prove so valuable to our direct customers and patients that putting patients first will be our best shot to overcome these sole-source agreements. In the GPO arena, it will be a very interesting year for AngioDynamics.

Staying in Vascular Access, you are all aware we acquired Medcomp's rights to the Celerity tip-location platform following an unfavorable FDA decision on Medcomp's 510(k). Since that time, and under our teams leadership, we have completed all the necessary work and quickly filed an adjunctive 510(k) claim for the Celerity -- just about two weeks ago. If all goes well, we would expect the positive decision by the end of June.

We've also initiated a human-factor study to yield a specific claim and are accruing candidates now. We should have that study completed in April and filed by the end of May. A successful result will give that claim to us in the end of August. We believe it was the right decision to acquire the rights to gain control of the technology today. It cost us a bit, and we will need to build an inventory before we receive FDA clearance, but it will prove worth it as we will hit the ground running at clearance.

Also, once we complete the trial for Celerity 1.0, we should immediately launch trial for the next-generation Celerity 2.0 system. This is all another piece of good news, which will help us grow this category through the balance of the calendar year.

Moving to Oncology, we are making great clinical progress in both of our US, as well as our European, safety studies for use of NanoKnife in the prostate. Last month we accrued our first patient in the US IDE prostate safety study and will soon complete enrollment for the European prostate safety study.

I'm excited our US IDE is under way and also very excited to view the European data as it's designed as an ablatent resect study, so we will have a cash of histology data to view. This should prove a valuable foundation in understanding how well IRE works in the prostate, giving scientists valuable data. Soon thereafter, a 200 patient pivotal study will begin in Europe.

Building on clinical evidence for pancreas, we are very pleased that data out of the University of Miami and lead investigator Dr. Rog, affectionately call Dr. Rog, was accepted as an abstract at the American Society of Clinical Oncology, or ASCO, the world's largest oncology meeting. Thousands of abstracts get reviewed and only a few accepted so this is a great honor.

The abstract entitled Percutaneous Irreversible Electroporation (IRE) in Management of Pancreatic Cancer, reviews the clinical experience of pancreas patients who received IRE at the University of Miami. This data will be fully searchable on ASCO's website as of May 14.

For the rest of the Oncology business, the category grew 16% overall. We continue a positive momentum with microwaves, of course NanoKnife and RF sales.

In Peripheral Vascular, it's not bad when are largest business is now growing 11% worldwide. We had a 20% growth quarter with EVLT and the whole category performed. Our AngioVac revenue for the quarter was $2.2 million, and below our expectations for the quarter. We had a very interesting quarter, as it was the first time sales to new accounts leveled off while procedure volume dramatically increased.

During the quarter, we made efforts to focus on same-store sales and drive utilization. Now, that payed off for us in a big way as we grew procedures by 80% quarter over quarter. It actually was so impactful that in the final weeks of the quarter weekly procedures performed were more than double the first few weeks of the quarter. That clinical ramp is continuing into the fourth quarter, where we've already booked $1 million in AngioVac revenue in March alone.

The third-quarter AngioVac revenue, will have us come in under our $10 million target by about $1 million, but is still a great result, given we only just received our thrombus claim, albeit nine months late, and we are just now booking European revenues, also nine months late, getting our CE clearance.

Frankly, I'm thrilled with the performance of AngioVac on the ground, with our team, and remain terribly excited to the continued revenue and margin expansion it will give the Company. Today, we are in over 230 accounts with AngioVac. 12% of the cardiac accounts in the US.

We still have a long runway in growing our account penetration. So, remember, AngioVac is also in the same bag of the same sales people who are growing EVLT 20%, driving fluid management, growing angiographic catheters, and overall, top-line PV growth in the US of 13% last quarter. This team has a day job while they are blazing a new trail with AngioVac, and they're doing a hell of a job.

Our International team is still in transition, as John Soto has dug in and made some changes. I'm pleased they returned to positive revenue growth of 7% in the third quarter. We have greater expectations than that, out of the International markets, and it will take us several quarters to allow for our changes to take hold. Like in the US, we will fix this and get excellent growth in the future.

Moving to our litigation with Biolitec, as you are aware, we are continuing to pursue our indemnification and damage claims against Biolitec's foreign parent and CEO, personally. We have now, not only successfully won our Massachusetts case, we were awarded treble damages equal to $74.9 million. Our Company has been in the right and we will continue to aggressively pursue all available paths and remedies to recoup this damage that they have done to our Company. We will update you when we hit our next milestone.

Next, I would like to highlight two major accomplishments this quarter regarding our operational excellence program. First, at the end of January, we successfully flipped the switch on our new Oracle Instants. Today, the Company and all of its global locations are operating on a singular platform, and we are in the early stage of now getting this system to deliver value.

As in any new implementation, we are still in the implementation phase. We have some service delays. We've built some inventory and a little bit of a back order, but every day is getting better. We believe we should be operating quite well by the end of the quarter and begin to see synergies delivered in early 2015.

We also completed the first step of our New York operations consolidation by moving our Glens Falls distribution facility to our Queensbury distribution center of excellence. Today, we are now operating out of one global distribution center. That has now created the space for building a new clean room in Glens Falls. Once successfully completed, we will begin to move production lines to Glens Falls over the next year.

Each of these activities, coupled with the growing, higher-margin products, will deliver stronger profitability for the Company in the upcoming fiscal year. Also, our Queensbury facility, which is still under an FDA warning letter, had a very successful re-inspection by FDA recently, which resulted in no repeat 483 observations.

It serves as an incredible example of the tenacity of our entire team to remediate the issues and deliver on the commitments that we made to FDA, and of course, our investors. We are hopeful this inspection will lead to our ability to begin again registering products from this facility internationally, which has impaired some of the international growth and also the listing of the overall warning letter. We will keep you informed with this as accomplished as it will be a great sign of improved international sales growth by the end of the calendar year.

Regarding our overall financial performance, maintaining our focus on revenue growth creates the momentum to accelerate our earnings and cash generation. Today, we are temporarily behind on delivering that operating leverage. As Mark will show you in a moment, we are dead on our operating expenses and making progress on our operations efficiency initiatives, but had some negative mix in the quarter regionally and product wise that should run through the balance of the year.

Operationally, this negative mix masks some of the great strides our operations teams has a made in improving our efficiency I just chronicled. I firmly believe this negative mix is temporary and will resolve itself, especially with the positive momentum on the top line that we are experiencing.

So, with that, I will turn it over to Mark.

Thank you, Joe. Good afternoon, ladies and gentlemen. As Joe indicated, we continue to deliver improved revenue growth driven by a focused sales effort and the increased market acceptance of our new products AngioVac, BioFlo and microwave. As you also saw, our earnings leverage is taking a little longer to catch up and we did have some ERP implementation impact on the cash front, which I will explain later in the call. I will start with our quarter results and then move to guidance for both the fourth quarter and the full fiscal year.

Total revenue was up 8% from the prior fiscal year, but excluding the impact of the plan wind down of our supply agreement, we were 9% higher than the prior fiscal year. In the quarter, we did benefit from an extra sales day, which we estimate contributed about 2% of the growth. The sales quarterly trend line is demonstrating progressive improvement from negative 1% in quarter four 2013, to 1% growth in quarter one, 3% growth last quarter and 7% in the third quarter without the extra sales day.

Turning to product performance, our Peripheral Vascular business grew 11% to $47.4 million, reflecting continued 20% growth in EVLT and a larger contribution from AngioVac. AngioVac did slow its growth trajectory to $2.2 million, but for understandable reasons, as Joe articulated. EVLT strong results were driven once again by exceptional US performance in the conversion of a competitive customer.

Our Vascular Access business delivered a strong turnaround improving by 7% sequentially from the prior quarter and 3% growth compared to the prior fiscal year's third quarter. All three products PICCs, ports, and dialysis grew with PICCs and ports at 5%. BioFlo technology, as Joe commented, was a key driver behind both PICCs and ports improvement.

Now, in the Oncology/Surgery business, growth rebounded to a double-digit level of 15% over last fiscal year's third quarter. NanoKnife sales increased 35%, primarily because of International. Overall thermal ablation, fueled by strong US microwave results, grew 17%.

From a geography perspective, US revenue increased 10%, while the international markets modestly improved to 7% growth. The US growth was very encouraging and demonstrates both the success of our growth drivers, and the fact that we have overcome our sales integration issues from 2013.

With new leadership and a strategic growth plan in place, we are encouraged by performance outside the US. However, our international business is a work in progress. We are more likely to see consistent sustain performance when we move into FY15.

Now, continuing down the quarter's income statement, adjusted gross profit, excluding the inventory step up and QCA, QCTA costs, totaled $45.7 million or 51.8%, which is 110 basis point improvement over our second quarter, and an 80 basis point increase over the same quarter in the prior year. Our gross margin return was slightly lower than expected, primarily because of the product mix, as AngioVac and Oncology were lower and supply agreement shipments were greater than anticipated. We expect this negative in mix impact will continue into our fourth quarter as well as the impact of incurring higher rebate admin fees, which I discussed last quarter.

These factors are the primary reason that while we are raising our revenue guidance, we are lowering our adjusted EPS guidance. I will go into more depth when I discuss our guidance on this point.

Turning to expenses, operating expenses totaled $38.1 million including $3 million of acquisition integration restructuring items, of which $1.3 million is associated with the Navilyst acquisition and $1 million relates to our operational excellence program.

Included in our expenses was a non operational $5 million gain from reducing the AngioVac contingent liability. The liability is reported at fair value each quarter, based on expected AngioVac sales over the earn-out period, which is 10 years from the date of acquisition.

We continue to have significant comments in the future of AngioVac, however, any delays in our revenue expectations over that finite 10-year period will reduce the fair value valuation of the liability. However, incorporating contingency mechanisms was a key part of our M&A strategy to design risk protection for us, while also enabling upside opportunity for performance for our counterparts.

Sales and market expenses increased $2.2 million, primarily from the need to accrue for the over achievement in the US sales side, as well as our continuing investment in the AngioVac clinical specialist team and the cost of some new sales territories we added in the first half.

Another point, which I communicated last call, is we experienced significant sales attrition during the first half of FY13, which artificially reduced the run rate, particularly for quarters two and three. An important issue, though, in relation to our sales marketing costs, is the impact of our geographic revenue mix. Where we have over achieved on the US front, but under achieved on the International side verse our original operating plan.

The variable compensation component for International is limited but high on the US side. So, as a result, we did not gain any cost leverage for the International business, but have negative leverage for the US business. This is a secondary reason for reducing our adjusted EPS guidance.

Now, as announced in December, we've begun the next phase of integration on the operations side of our business. We achieved two key milestones, as Joe communicated, since that announcement. We went live on the ERP system in January and consolidated in our warehouse operations into one center of excellence in March.

Both activities were challenging, particularly the ERP implementation and have led to some operational volatility, as Joe indicated, especially in product shipment. However, we are systemically working out the issues and are making good progress. A positive outcome of the ERP implementation is the improvement in transparency this provides into our business, which we expect will add significant value as we are able to accelerate and improve decision making from the expanded information.

These actions have already led to some savings, but as I indicated in the last call, most of the $15 million to $18 million cost savings, or 400 to 500 basis points gross margin improvement, will take place over FY15 to FY17. We will have more color on the expected impact for 2015 on our next call in July.

Now, GAAP income per share results improved to $0.14 versus negative $0.03 in the FY13 third quarter. Pro forma adjusted EPS, excluding amortization, was $0.16 per share, even with the prior year's FY13 comparable quarter. The GAAP to non-GAAP reconciliation items are detailed in the earnings tables in the quarter's news release.

EBITDA more than doubled to $14 million or $0.39 a share, for $6.5 million or $0.18 a share in the prior year's third quarter. Adjusted EBITDA was $14.6 million or $0.41 a share versus $13.7 million or $0.39 a share. Again, a detailed reconciliation is provided in our news release.

Looking at cash, a consequence of the ERP implementation was a temporary build of working capital, specifically receivables. We experienced some learning curve issues and therefore our billing was delayed, which led to a $9 million increase in receivables. Our operating cash as a result declined $0.6 million. We expect to catch up our collections, for the most part, within the fourth quarter, and anticipate a return to strong cash generation.

Our cash balance was reduced to $9.2 million, reflecting the working capital build and a micro sue list $5 million earn-out payment. We ended the quarter with $138.9 million debt outstanding.

I will now turn to a discussion of our guidance for FY14. For FY14 we are raising our revenue guidance from $349 million to $353 million to $351 million to $355 million, which is 4% growth at the top end. Our upward revision is driven primarily by our stronger sales results in the US, reflecting the positive impact of our growth drivers.

On the earnings side, we are slightly reducing our full-year guidance from $0.63 to $0.67 and expect adjusted EPS, excluding amortization, to range from $0.60 to $0.63. There are three reasons for the reduction in our range.

The first is the impact of negative product mix, where our Oncology and AngioVac product lines, our highest gross-margin products, will come in below our original operating plan, while sales from our supply agreement, which is our lowest margin product, are expected to be higher than our original plan. This will mix will lower our gross margin expectation to about 40 to 50 basis adjusted gross-margin improvement or 170 to 180 basis point GAAP gross-margin improvement as compared to FY13.

The second reason is a geographic cost mix issue where we expected to attain operating cost leverage as communicated on the last call, to cover the gross margin shortfall. We actually have seen negative cost leverage on the US sales side because of the higher variable commission cost component, as I explained earlier.

The third reason is the recently announced Medcomp agreement, which will create extra R&D and clinical costs, reducing our EPS by about $0.01.

One important point, though, is we are seeing, though, overall leverage as our adjusted operating returns have improved each quarter and now stand at 12.2%, up from 9.9% in the first quarter. While it is taking a little longer to accelerate the leverage from higher revenue, we do believe we will realize further operating leverage in the future.

For cash guidance, we are reducing our expectations for operating cash improvement because of the adjusted EPS revision, the ERP impact, as well as the Medcomp deal and inventory requirements associated with it and expect operating cash to improve by 15% to 20% verse the prior fiscal year. Free cash flow is accordingly expected to improve by about 30% to 40% above the prior fiscal year. On the adjusted EBITDA front, we revised our range because of EPS reduction to $54 million to $57 million.

Turning to fiscal-year fourth-quarter guidance, we are guiding to a revenue range of $91 million to $95 million, 6% at the top end of the range but an 8% on an average daily sales basis, as we are losing a day in our fiscal fourth quarter. Adjusted EPS, excluding amortization, is expected to improve from quarter three, and be in the range of $0.18 to $0.21.

With that, I will turn the call back to Joe for his final comments. Joe?

Thank you, Mark. I just realized I didn't write down your full last name and title. So, Mark Frost, our Chief Financial Officer. I apologize for that. It's so casual here, a pleasure to work with you.

Our plans to rebuild our top line are working. Our growth drivers continue to deliver. Our entire team continues to hit their marks. The plan we laid out for growth in each of our businesses is progressing, as we're focusing on execution on both the top and bottom lines.

I believe that we will exit this year at that 5% growth that we've been targeting, and I believe we should have every opportunity to not look back from there. As we drive our top line, we will leverage the bottom line and make AngioDynamics a wonderfully valuable company for investors. We very much appreciate your support going forward.

With that, operator, let's open it up for questions.

(Operator Instructions)

Charles Haff, Craig-Hallum.

I had a question for you about your revenue guidance, which appears to be going up a little bit, a little more than the beat that you had this quarter. I'm getting calls from investors with concerns about bad weather, some of the hospitals are saying they have mixed surgical volumes versus their prior expectations. I'm just wondering how much conservatism or how much you are concerned about some of these bad weather issues that happened in March and so fourth, in terms of your revenue guidance?

Yes. Weather in -- third quarter is December, January, February and weather was an issue. We don't see it as much of an issue in March, but it was most certainly an issue in January and February. There were times -- I think our sales teams have reported up that East Coast and Midwest, we lost anywhere between three and six days of elective procedures. We think we will catch it up in the fourth quarter. We don't believe weather will impact -- anything that has been done for March is a function of our current revenue guidance. I will tell you that, I believe, we would've had an even better third quarter if it wasn't for whether. So, I wouldn't be surprised if other companies, especially those reporting January, February, March, are going to be lamenting a really tough winter.

Joe, you mentioned you were winning some IDN contracts and expect some good GPO news in the future. Obviously, you probably don't want to mention names. Can you characterize what type of wins those would be? Would those be BioFlo wins? Or will those be your whole products set? How should we think about the magnitude and the potential impacts for those wins in the future?

Well, right now, the main crux of our focus is in the Vascular Access category. There our PICCs contracts, port contracts coming up. We've been sitting in the last couple of years talking about the fact that we are losing customers in Vascular Access tip location.

Tip location, of course, is an issue for growing some new business, but BioFlo is proving out, hospital after hospital who are doing their evaluations are seeing the same type of clinical benefit that the original hospitals have had. That is creating a stickiness. A, we are not losing our accounts anymore. B, we are converting accounts. We have a line of sight on a whole laundry list of them.

Yes, there are times now where -- AngioDynamics, historically, has not been in, for Vascular Access, the GPO conversation. Today, buttressed by not only having BioFlo and seeing the benefits, and it being a proprietary technology that no one else has, but coupled with the fact that the acquisition of Navilyst is paying off in spades, which not only delivered us BioFlo but also a very complete product line offering.

When we, now, go into GPO conversations and IDN conversations, we are not trying to carve out this product or that product because we don't have it. We can convert out any competitor lock, stock and barrel, and that makes us formidable, now. We don't guide to -- in our guidance, it doesn't represent expected wins. In our guidance, it's purely what's in hand and what we think we can accomplish with what we have.

Some of these arrangements, could be very meaningful, but I also want to be cautious because the incumbent competitor is incredibly powerful. They use a lot of their market clout, especially even in other businesses, to make sure that small companies don't, at times, can compete head-to-head. We will see how that all plays out.

I will tell you, this is our time. Right now, we are -- there is no reason why we can't make an impact. We've brought on and promoted some of our best sales executives into the corporate accounts part of our business. I am terribly pleased with each one of their efforts, as they are representing our Company very well. It's an upside.

As I look at a growth driver, from a product standpoint, there's a growth driver from our corporate strategy of coming up with a complete product line and bringing in great technology. So, the ability to satisfy competitively, this category, which has virtually been a monopoly for a competitor, I think is now fair game.

Okay, great. Then, one more question and I will jump back in queue. I have other questions, but I will re-queue for those. In terms of NanoKnife, congratulations on the IDE. One, we haven't heard about NanoKnife in a big way for a while from your Company.

One of the concerns that I hear from investors is, how much money are you willing to put into this product, at this juncture, given the fact that you put a lot in already? How should we think about the work that you are doing from a capital allocations standpoint over the next couple of years? It might be helpful to just put that in context? Thank you.

Thank you very much, Charles, for the question. I think I mentioned in the past, that we have -- historically, in the past, there was a substantial investment, almost and over investment in NanoKnife to the detriment of other businesses. Within our operating businesses, we've now created a balance between the revenue opportunity and the expenses associated to it.

We are growing our business as a very well hedged portfolio. We are not betting the farm in any one area, whether it be AngioVac, BioFlo or NanoKnife, but we are continuing to invest in NanoKnife's clinicals, proportionately.

Of course, if there is a time when we feel we can create significant value in doing a massive US pivotal trial, that may tip the scales and we may have to talk about that. But, we would have to believe that was incredibly meaningful, in order to do it. I don't see that in our near-term plans. I think the ability to clinically validate the technology can be done within our means at the moment.

Okay, great. Thanks a lot. Nice quarter.

Thank you.

Tom Gunderson, Piper Jaffray.

On BioFlo, that is going well on PICCs and ports. You got the FDA approval for the dialysis catheter.

How should we think of adoption of BioFlo within the new category of dialysis catheters? Is that something that people are waiting for? Is it going to take a couple of quarters to get people familiar with it? Give me a little color on how you think the product rolls out?

Thanks, Tom, for the question. Just like in PICCs and ports, there is a long dwell time for the catheter. I think it's going to take us three to four months of clinical time for the investigators to start to see the reduction or elimination of thrombus formation and then see the benefits. I don't see that it's something that would fly off the shelves day one. We are very committed to getting that evidence, because boy, when you have it, it does allow you to sell.

One of the good things in this area, is there is no tip location that holds us. We have a great product already. Typically, those who see the complications are the ones who are placing the product. With PICCs, you have to walk in the hospital and convince them they have a problem because a lot of the people who put it in aren't the ones who are dealing with the patients who are [servicing] thrombus.

So, you have got to go through this study and then build its awareness. Then, you go, what? We are spending that much money in cath flow? What? We have these complications? Then, after a year of hard work, it is now starting to catch on and hospital after hospital are seeing the benefits.

On the dialysis side, I think it's going to happen quicker. We are going to have to wait a few months to get the clinical data.

Once that data happens, I think the adoption might happen quicker than PICCs because we don't have to convince a radiologist that -- or a nephrologist, for that matter, that a dialysis patient has of thrombus issue. They all have thrombus issues. If we are successful, clinically, I think we will see a quicker adoption in the dialysis segment than in PICCs.

Got it. Thanks. That's exactly what I wanted.

Then, quick question on the lawsuit, or ongoing litigation of Biolitec. Is that -- $75 million would help the balance sheet considerably, even if it was taxed it would help the balance sheet considerably. We all know that the court systems move slowly. Is there any prediction that you've gotten from your lawyers or internally that on timing of when you might receive money?

Well, we still have several steps to go. We are certain that the defendant will appeal. That will take six to nine months.

We feel confident, as we've been successful at almost every turn because we are in the right, that we will win that appeal. Then, at that point in time, Tom, we are going to now then have to take action on the entity who is domiciled in Austria. Now, they have assets around the world that we may be able to go after, but I think it's a long process. I don't expect a check for $75 million any time soon.

We have a major -- if this is upheld -- a major set of leverage. We will continue until we get as much value as they have.

Got it. Thanks. Those are my two. Thank you, guys.

Jayson Bedford, Raymond James.

I apologize for the background noise here, but just a couple questions. Just following on Tom's question on dialysis. It seems like it's a little more of a price sensitive market. What's the pricing strategy on BioFlo for dialysis?

Well, it's a consistent strategy that we have across the board. Where the dialysis category does have another product that has similar benefits, but it's priced very, very high and has been niched for that purpose.

We continue to hold a 15%, 20% premium on BioFlo. We will do that in dialysis. Because thrombus is such an immediate, acute issue that drives dialysis costs, we don't think that the additional up charge we will require to cover our costs will be a problem.

What's going to happen for us, is over the next three to four months we are going to get our clinical evidence. If the clinical evidence shows a similar thrombus reduction and improvements in other areas, we think we are priced well to not only grow the business, but to make a very good argument to dialysis centers to convert to BioFlo lock, stock and barrel.

That's helpful. Growth in the EVLT business was strong. Have you seen any benefit from the in-hospital reimbursement shift at all?

I don't know that I have any -- we have anecdotal information. There are definitely accounts where, on the inpatient in hospitals, where we now have some lasers going in.

I can't say that that's the reason why we are growing as much. It's definitely a tailwind, which is great. I think it's something that will help us deliver growth in the future.

I can't tell you that, of the growth rate, I can attribute a portion to it, yet. I think if you spoke to my sales force, they definitely have a line of sight, and we have most certainly have seen several accounts convert since that January timeframe.

Okay. Last one, if I could sneak it in, on the cost side. I miss the gross margin comment. Is the assumption that gross margin is above 52% in the fourth quarter? Then, what's the increased cost in a dollar value related to the Medcomp deal? Thanks.

I will do my best to answer it. The guidance is in the fourth quarter, we will get to that. But as I said, for the overall year, adjusted gross margin would improve by about 50 basis points. That does put us into the 52% range. On Medcomp it's about $0.01, is what the extra R&D clinical costs have been baked into our guidance.

Okay. Sorry, Mark, the 50 basis points was a year-over-year number?

That's a year-over-year improvement. You can back in to what the fourth quarter is going to be, which is close to what you said.

Okay. Thank you.

(Operator Instructions)

Charles Haff, Craig-Hallum.

On sales and marketing, you guys came in a little bit higher than I was expecting. I think, Mark, you mentioned the US sales force doing a little better and that was the additional bonuses that were paid. Is there anything else that I should be thinking about when I model sales and marketing expenses?

No. It is primarily because of that reason. As I said, in my talk earlier, we are over achieving in the US, which then triggers we have to pay higher achievement to our US sales force. The problem is, when we miss on the International side, we have a very low rate of commissions, so it's almost fixed costs. We get no benefit when we miss on the International, so we're getting no leverage the other way.

The US achievement is a pure additional cost for us at this point in time. That's what we expect for the fourth quarter, as well. Now, this will go away as we reset our 2015 plan, but it's an issue of our operating plan in 2014, the way the revenue has played out.

Charles, we had expected, at the beginning of the year, a lot more from International and frankly, less from the US. We have -- when you do your US plans, you factor in how many people you think will get to over achievement and create an accrual for that. The truth is, we're going to have a lot of US sales people who are going to make a lot of money this year. You know what? They deserve it. I'm happy for them. If I've to take an accrual in the third and fourth quarters to help pay for the success that the team has delivered, so be it.

It would be nice if we had the confidence to actually bake that it at the beginning of the year, but we just didn't expect them to deliver as much as they have done so quickly. Now, normally, with the lower revenue in International, if we had a variable comp plan, that team would've made a lot less and we would've been able to offset the wins and the gains for this level of revenue. It's just the way it is.

When we look at, as Mark mentioned, we look at our operating income, our operating income adjusted is improving. Our operations excellence programs are in place. Our ability to -- our overall gross margin, if you net out this mix issue, actually is doing what we want it to do. It masks some of the great work our operations team is doing. It's just an artifact of the year.

So, we are very pleased with top-line growth. We know top-line growth gives us ability to adjust our plans and the ability to create leverage. Where focused and intent on continuing to drive that top-line growth, continuing to build our markets, continuing to grow market share, winning agreements.

We are also incredibly committed to building out our International group. We are very pleased with some of the work that John's already done, Soto, with the International team, and believe that it's not going to be too long where those guys get back to the type of revenue performance they had before, but also in a very sustainable, profitable manner.

I think it is what it is. I think if we came in at very low revenue growth, put another penny in earnings, I wouldn't be as excited about that as I'm excited about what the team has delivered and what we can do for our future, which is completely consistent with how we communicated to the investment community and how we communicate internally and externally.

So, I wish that artifact wasn't there and we could've predicted the mix differently. But, you know what? Our team is doing great. I appreciate all the work they are doing. It's just -- momentum is hard to create, guys.

When you got it, you really start hitting the gas pedal and you've got a lot of good things fall into place. We are starting to get that.

Okay, great. My last question is regarding the Queensbury facility. You mentioned an inspection recently with no 483s. Congratulations for that.

You hope the warning letter to be cleared soon. What kind of impacts could that have to your business? I'm not quite clear on that, because, I know, in terms of the operating excellence plan, you moved some stuff around. What type of impacts would the lifting of the warning letter have?

Well, the most material impact lifting the warning letter would have is on our International revenue. Products that are made out of that facility we can't re-register until we lift that warning letter in international markets.

In our Latin America EVLT business, for example, we don't even have our 1470 laser registered in all of Latin America. It's a large EVLT market, but because of this warning letter, we have an old system down there that really hasn't made that much traction.

I can go line by line of all the stuff that come out of the plant. There's issues where we are registering products in China that it's affecting us. There's issues in Southeast Asia where we are registering products that we can't get these registrations. So, it's actually a core contributor to the International performance, but not the entire contributor.

We think we are very close to lifting those restrictions. We think that will, then, allow us, over a six- to nine-month period to go through the re-registration process. I think this time next year, on a one-to-one basis, the International business is going to start seeing some really nice growth based upon, simply, registering and selling products we currently have in those markets.

Let me just build on Joe's answer, Charles, there's actually a potential interim step that we are pursuing, where you can file for what's called a CFG, certificate of foreign goods, which allows you to register earlier, before you even get the warning letter lifted. So, we are doing both plays. We may be able to get some of the economic benefit even earlier, before waiting to get the warning letter lifted. We are pursuing both avenues at the same time.

How long does that certificate of foreign goods usually take to process?

It's usually pretty immediate. We've applied for it and it's about 30-day wait.

30-day wait.

We should know in a few weeks whether that clears. If it doesn't, we will be getting it to clear the new future because there is no basis for it to not. We will just have to sit with FDA and understand why.

Then, just one other clarifying comment. The were a couple 483s out of the Queensbury facility, but they were not related to any of the prior issues and there's stuff that we will resolve. If we had a repeat 483 for the issues that we were remediating, then that would be a serious issue. So, when I say no 483s, I meant no repeat 483s.

I got you. Yes, that make sense. Okay. Great. Thanks for taking my additional questions.

I'm showing no additional questions in the queue. At this time, I would like to turn the conference back to Mr. DeVivo for any closing remarks.

All right, everyone. Thank you so much for your interest in our Company and watching our progress. For the employees of AngioDynamics, we are very proud of the work that they've done operationally, sales and marketing, globally. This is a journey and while everything doesn't move in concert, always in the same direction, everything is getting better and the team is delivering. I appreciate your attention and thank you.

Thank you. Ladies and gentlemen, this concludes the AngioDynamics third quarter FY14 financial results conference call. We thank you for your participation. You may now disconnect.