AngioDynamics Inc (ANGO) 2015 Q3 法說會逐字稿

Please stand by. We are about to begin. Good day and welcome to the AngioDynamics Q3 fiscal 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bob Jones, Investor Relations. Please go ahead, sir.

Thank you, Melissa. Welcome, everyone, and thank you for joining us for AngioDynamics conference call this afternoon to review the financial results for the fiscal 2015 third quarter, which ended on February 28, 2015. The news release that crossed the wire this afternoon is available on the Company's website at www.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 of forward-looking statements regarding future events, including statements about revenue and earnings for the fiscal 2015 fourth quarter and full year ending May 31, 2015. 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 the 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.

And, with that, I would like to turn the call over to Joseph DeVivo, Chief Executive Officer.

Thank you, Bob, and thank you all for joining our third-quarter fiscal year 2015 conference call.

We have made a lot of progress this year to date, growing revenue approximately 3% on a constant currency basis and adjusted EPS of 15% year over year. The third quarter was a mixed bag for the Company as factors both outside and within our control combined to produce a challenging period. After seven straight quarters, year-over-year sales improvement and strong earnings growth, procedural and economic headwinds and a voluntary product withdrawal, all combined to dampen our performance this quarter.

That said, we believe this is temporary. NanoKnife procedural acceleration, BioFlo adoption with Celerity No Chest X-Ray, the launch of our second-generation AngioVac which just occurred this week, and the signing of a licensing and development agreement for a truly disruptive embolic technology today have our enthusiasm for growth higher now than ever, all the while improving our profitability.

This quarter, our financial performance was at the lower end of our guidance as sales were flat with last year's third quarter on a constant currency basis and excluding the supply agreement winddown. Adjusting for currency effects, sales came in at $87.6 million and $0.14 of adjusted EPS. I was pleased we maintained our adjusted profitability and positive cash momentum in the face of lower than expected revenue, which is indicative of the management team's ability to build resilience into the business.

Our currency headwind included the rapid decline of the euro and the Canadian dollar where their quick erosion impacted our top end about a full percentage point.

We were also impacted by the extreme weather in the winter in the US probably more due to the concentration of our business not only in the US, but in the central and eastern part of the country where our customers lost valuable procedure days to closures and delays.

Additionally, based upon feedback from our customers who track insurance inquiries versus procedures, the US increase in family deductibles is having an impact on the seasonality of elective procedures like venous ablation.

We will be interested to see what our peer companies report as we work to better understand this phenomenon and whether it is truly indicative of seasonality impact versus the overall access to care for patients.

We ourselves certainly saw a very slow January and then a February compounded by the weather.

So let me move through each of the businesses in detail, and then Mark will follow with all of the other financial updates for the quarter.

Our peripheral vascular business declined 2% year over year in the quarter. The fluid management business was stable, only showing slight negative growth due to currency effects.

EVLT revenues were down 7%, which were weighed heavily by the factors I just mentioned. Being not only a seasonal procedure but a highly elective one, EVLT remains an area of concern going forward as revenues early in the fourth quarter are also soft, which leads us to believe the deductible issue may be more impactful even than the weather. We are confident procedures will improve given the millions of patients in need of venous ablation, but also believe a recovery may occur more in the earlier fiscal 2016 than in the fourth quarter.

AngioVac revenues were $2.3 million in the quarter, up 4% year over year, procedures were up 19% year over year from 111 to 132, but down sequentially from the prior quarter, which is a phenomenon we experienced also last year.

We are having a strong start with AngioVac in the fourth quarter procedurally and I believe will be up sequentially and year over year in procedures. So I am not that worried about AngioVac.

Although this quarter was down sequentially, our second-generation device, which is focused on time savings and ease of use for the physician, had been delayed, which resulted in customers holding off on procedures or delaying their program start in anticipation. While the third-quarter impact of this delay is disappointing, there is a definite continued positive interest in AngioVac device.

This interest is extremely evident when you attend the physician congresses such as [ICEIT], AVF, and SIR where AngioVac was featured in over 32 presentations, discussing numerous successful cases and educating as well as introducing the AngioVac device to thousands of physician attendees. This growing awareness at these congresses is extremely evident compared to the same time these meetings last year, and it is very exciting for this adoption, and the presentation phase of any of adoption of new technology is critical to its success.

The original AngioVac device is truly a novel technology which helped many patients. But, as with all new technologies that continue to evolve when in the hands of its users, second-generation AngioVac is a full redesign of the system, aiming to make it far easier to do the procedures. The system is easier to use in its entirety: easier to set up, saving precious time; easier navigation, giving the ability to navigate through tortuous vessels and free up difficult material.

Yesterday our first three cases with the second-generation device were performed with great success. Set-up times actually were a fraction of the first device, and the added functionality of the angled funnel and the working channel actually were used and enhanced each of those three cases.

Also, the design of the new device and insourcing it to our manufacturing facility resulted in reducing per unit cost by 15%, enhancing the second generation's profitability.

The last thing I will mention about PV is we plan on making some important enhancements to our PV selling organization. The sales team has a very full bag, and in fiscal 2016 we will be adding enhanced focus to the sales force, allowing for greater attention and acceleration of our higher growth opportunities while improving service to our valuable core products. I look forward to providing more details on this initiative on next quarter's call.

Moving to vascular access, we saw continued growth in our ports and dialysis product lines, up 4% and 6%, respectively. However, we chose to withdraw our Morpheus PICC line from the market following a period of unacceptable complaint levels. Patients are our number one priority, and without a clear short-term remediation plan in place, we felt it was the most responsible thing to withdraw the product from the market.

Fortunately, we have a complete and robust PICC line, and its elimination in effect will streamline our offering, removing a product whose revenues have declined every quarter for the past two years, weighing on our overall PICC growth. Removing our Morpheus PICC line from the market this quarter pushed PICCs down 11%, resulting in an overall down quarter for VA at negative 3%.

Mark will later detail the financial impact of this decision more closely, but the action meant writing off more than $5 million in inventory and a revenue reduction of $1 million to $1.5 million in the fourth quarter. Our sales force has been working diligently to convert so many of our customers from Morpheus to our other lines, and we are pleased that these large customers are staying with AngioDynamics.

Moving forward, with Morpheus behind us, by the end of 2015, it is virtually all now BioFlo. Coupled with the launch of Celerity No Chest X-Ray and the first six systems that were just shipped at the end of last quarter when they released, the future is bright for the balance of the vascular access line, and it's full steam ahead in the market share growth and group contract penetration, as we have discussed earlier.

So now, let's move on to oncology, which had a very good quarter posting 9% growth on top of last year's strong third-quarter growth of 15%. Microwave grew 25%, and NanoKnife improved 12% overall.

For the third quarter in a row, NanoKnife disposable revenues exceeded 25%, marking a continued trend of steadily increasing procedure adoption. Every month a new paper or two are published, continuing to reinforce the clinical value of irreversible electroporation. At the end of this month, data from a NanoKnife presenter will be presented at a key surgery meeting, establishing long-term survival data of over 100 late-stage pancreatic patients. We believe this will be the most prolific and substantial data set on irreversible electroporation presented so far and can set the way forward for a new standard of care for these patients.

Also, the Company has begun discussions with CMS on the potential creation of a new ICD-10 code. Experts made presentations last month, and we hope for a positive decision on a new code as early as the end of the calendar year.

We have also initiated discussions with NICE in the UK. With success in Germany and Denmark, NanoKnife reimbursement continues to progress as clinical evidence continues to mount.

So now I am pleased to announce that AngioDynamics has entered into an exclusive global license agreement with EmboMedics, a venture-backed startup company with very unique intellectual property out of the University of Minnesota, which allows us to reenter the $150 million global embolization market.

As you may recall, I arrived at AngioDynamics during a time when the Company was losing a distribution agreement to market the LC Bead in the US. Over seven years, our oncology division had built this market into a $35 million space in the US alone, and in one year, that revenue and contribution went away.

Since then, I have been looking to get back into the embolic space. It is highly synergistic with our business, and we have a proven track record. That said, I set some strict conditions for reentry, which were, one, it must be a novel technology that is highly margin accretive and not just a me-too product; two, we must have worldwide rights so not only our US organization would have it back, but our global direct sales force, as well as all of our global distribution partners, all would benefit from the product; three, there must be a pathway to own the technology where it cannot be taken away after market success was again accomplished.

I am pleased to say that this agreement achieves all of those objectives and far more. Spherical and compressible, the EmboMedics product has the same characteristics of the market-leading embolics, yet it is designed to be biodegradable in the body after two weeks.

We believe resorbability will be the key differentiator from today's more mature markets as embolics typically are used virtually for a temporary effect, yet stay in the body unnecessarily forever. For many procedures, resorbability will be a value-add for patients and clinicians as it allows for recanalization of the vessel, providing for repeat procedures to occur through the previously embolized vessels.

EmboMedics expects to file a 510(k) application early in calendar 2016 and will concurrently be filing approvals in other markets following the successful acceptance of the original registrations.

Our entire team is thrilled to be reentering this market and believes we will have much value to bring to patients, clinics, clinicians, and investors. We are ecstatic to be working with such a fine company as EmboMedics.

Now on to international. Our reported growth in international markets was 3%, but 8% in constant currency. Of our international business, 70% is distributor revenue and 30% direct, posing different challenges and facing significant changes to the value of the euro and Canadian dollar. Our team has done a terrific job delivering sales growth in the face of this currency challenge and has also exhibited positive expense management. The team continues to drive strong and now consistent year-over-year performance, powered by progress with the oncology/surgery business.

So with that, I will turn it over to Mark, who will review the financial performance of the quarter. Mark?

Thank you, Joe. As described in our news release and as Joe discussed in his comments, our financial results were impacted by some unexpected challenges in the third quarter. We were not alone as the FX headwind was a major issue for all global companies.

Our impact was larger than we expected, ironically, for a good reason, which was due to the increase of our direct international presence where 30% of our revenue is now derived from our direct markets versus 25% last year.

Our strategy, as we have discussed, is to increase our international contribution, and we are starting to reap dividends as evidenced by our international performance this year, notwithstanding the FX impact.

I will discuss in more detail later, but the FX impact is a major reason for reducing both our revenue and earnings guidance for fiscal year 2015.

Now a financial highlight for the quarter was a positive development relating to the financial metric we discussed last quarter, which was improving our cash flow. I am pleased to report that we returned to generating strong stronger operating free cash flow as we forecasted, driven primarily by improved inventory management.

Transitioning to the income statement, total revenue was down 2% from the prior fiscal year's third quarter and flat on a constant currency basis, as well as excluding the wind down of our supply agreement. There are no quarterly day differences this fiscal year, so all prior year comparisons are consistent on an average daily sales basis.

Since Joe has extensively covered our product performance, I will be limited in my product performance comments. All of my revenue comparison comments will relate to the prior year fiscal quarter.

Peripheral vascular decreased 2% to $46.2 million, reflecting softness in our EVLT business, which dropped 7%. AngioVac grew 4% higher and contributed $2.3 million as the pace of new account openings slowed due to the delay in launching the second generation product. Fluid management was flat on a constant currency basis, down 2% on a reported basis and actually 1% higher in the United States. Vascular access revenue was down 3% to $26.4 million. The major reason for lower vascular revenue was the Morpheus withdrawal, which led to PICCs being down 11%.

However, the ports portfolio grew 4%, and dialysis was up 6%. BioFlo technology products continue to demonstrate strong growth and now accounts for 31% of all vascular access products.

Oncology surgery again delivered strong results with 9% overall growth. The key catalyst for our performance was NanoKnife, with stronger US capital and improved international NanoKnife utilization. Our installed base increased by seven sites to 123 units in the field.

Within ablation, microwave continued to perform well with 25% growth. The microwave results were offset somewhat by expected RF erosion. As a result, we ended the quarter at 9% ablation growth, which again was a better result than the previous quarters.

From a geography perspective, US revenue decreased 2%, while the international markets grew 8% on a constant currency basis and 3% on a reported basis.

Now, moving down the income statement, adjusted gross profit when backing out the inventory reserve related to the Morpheus withdrawal, totaled $42.8 million or 49.5% of sales. This was a reduction of 140 basis points versus last year's third quarter.

We continued to deliver a strong contribution of 80 basis points from our operational excellence initiatives, but this was masked by a number of issues. The major factors were an inventory provision of 80 basis points, the FX impact that we discussed of 60 basis points, we took 40 basis points of period costs to shut down our plants during the holiday to manage inventory, and we had higher warranty costs relating to capital of about 30 basis points.

Now a couple of these issues were nonroutine events, so we do not expect them to continue, but we do expect continued FX impact. The inventory impact relates primarily to E&O increases, as well as expiry issues where some of our product only had one year sterilization. We are in process of moving all of our products to three year sterilization to minimize this issue in the future.

Now, speaking to the Morpheus withdrawal impact, our plan is to repurpose a portion of the Morpheus inventory, but we are uncertain of our ability to execute this plan. So we are required to fully reserve all inventory on hand, which is about $5 million.

In addition, we recorded a sales return reserve of $200,000, incurred a fixed asset charge and have taken steps to protect the sales force during the second half, which adds an additional $0.9 million of operating expenses for these items.

Now turning to expenses, operating expenses totaled $48 million. Sales and marketing expenses were reduced by $1.3 million because of lower US commissions and open territory benefit and cost control actions. G&A increased only $500,000, reflecting the rebalance of our bonus plan, which partially offset ERP and stock-based compensation increases we had seen in previous quarters. We do believe G&A will turn to being up about $1 million above the prior year run rate in the fourth quarter.

R&D declined by $200,000 from restructuring savings initiated in quarter one and clinical project delays, offset in part by microwave's second-generation project spend.

On a GAAP basis, we incurred significant one-time charges in the quarter of $18.8 million, offset in part by reductions in our contingent liabilities of $10 million. The major driver for the charges was our pivot on the automated power injector project, where we determined we would not be able to continue with the project in its present form because of FDA feedback. This led to writing down our investment of $8.2 million and also taking a charge of $6.4 million to reduce the value of the name and trademark, which was recorded as an indefinite lived intangible as part of the Navilyst acquisition.

In addition, we incurred higher litigation costs of $1.7 million, as well as the previously mentioned operating expense of $0.9 million for the Morpheus withdrawal.

Turning to the contingent liability assessment, we recorded a liability reduction of $10.5 million with most of the decrease pertaining to our Vortex liability and, to a lesser extent, for Acculis in clinical devices. The Vortex and Acculis reductions relate to the fixed 10-year time period to assess the liability where lower revenue outlooks in the last couple of years compared to prior estimates led to the change. We believe both products have excellent growth potential, and we continue to believe they will be strong contributors to our growth going forward.

The GAAP bottom line result as a result was a $0.12 loss per share versus $0.13 income per share in 2014. Excluding the $0.02 FX impact, adjusted EPS was $0.14 per share versus $0.14 in 2014.

EBITDA was negative $1.4 million or negative $0.04 a share versus $13.8 million or $0.39 a share in the prior year. Adjusted EBITDA was $13.5 million or $0.37 a share versus $13.9 million or $0.39 a share. Adding back FX impact would have brought adjusted EBITDA at $14 million.

Moving to the cash and the balance sheet, as we communicated last quarter, we expected cash generation to improve and it did. We generated $12.2 million of operating cash and approximately $9 million of free cash. The primary factor was a $7.7 million reduction of working capital, driven by enhanced inventory management.

During the quarter, we repaid $6.3 million of debt and $800,000 related to settling an infringement dispute pertaining to AngioVac-related patents.

In addition, we acquired $3.5 million of fixed assets, bringing the total investment year-to-date to $11 million. Half of the year-to-date investment reflects the completion of the buildout costs of the Glens Falls facility for the manufacturing consolidation.

We ended the quarter with $21.4 million in cash and investments and $148.9 million of debt outstanding. We have delivered on improved cash flow and expect this to continue into the fourth quarter and fiscal year 2016. We continue to anticipate generating a low $30 million operating cash flow and free cash flow in the high teens, low $20 million range for the fiscal year.

So now I will turn to the discussion of our guidance for fiscal 2015 and the fourth quarter. For fiscal year 2015, as a result of the FX headwinds and the short-term impact of our Morpheus decision, we are lowering our revenue range from $362 million to $368 million to $356 million to $360 million. This reflects 1% lower growth from FX and 1% for the Morpheus impact, which we believe is the right long-term decision for the Company. This will leave us at 3% growth at the midpoint on a constant currency basis and excluding the supply agreement winddown.

As a result of the revision to our revenue expectations, adjusted earnings-per-share EPS, excluding amortization, is anticipated to be between $0.57 and $0.60 per share versus the previous range of $0.66 to $0.72. At the guidance midpoint on a constant currency basis, this would be a 12% increase over the prior year.

Turning to fiscal year fourth-quarter guidance, we were guiding to a revenue range of $90 million to $94 million, 2% growth at the top end on a constant currency basis and excluding the supply agreement impact. The range reflects potential further FX volatility and expected year-end capital timing.

Given our topline expectations, adjusted EPS is expected to be in the range of $0.13 to $0.16 because of the revenue reduction and FX impact.

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

Thank you, Mark. So the quarter clearly had mixed results. There were clearly individual items that could have been better and also a challenging environment, but the opportunities for this business have never been brighter. Each of our growth drivers are strong and, while the road might be bumpy, the future is very bright.

We have an exciting new AngioVac product. We have continuation of BioFlo with No Chest X-Ray, we have significant data with our new NanoKnife data coming out with significant for NanoKnife, and great, great data for electroporation.

We should end 2015 with 3% net growth and a 12% adjusted EPS growing with improving cash and margins. And, in general, it is not bad in this environment. We believe 2016 will be even better.

So thank you very much and, operator, please open the call for questions.

(Operator Instructions) Thom Gunderson, Piper Jaffray.

I will focus my two questions on product-specific things. Joe, can you give us a little bit more detail on Morpheus and what you did there? The press release uses the word recall. You, in your prepared remarks, did not. It doesn't sound like it is an FDA recall.

It sounds like it was a product on the way to obsolescence, that you decided to cease a little early, partly because it was on its way to obsolescence and partly because you were getting increased complaints. Is that a fair assessment?

Yes, it is.

Okay.

Now, obviously, any time you take a product off the market, the technical action is to issue a recall. But this is a withdrawal because we don't intend to ever put it back on the market.

This is a product for the last couple years -- ever since we did the integration with Navilyst -- has seen quarter-over-quarter declines, part in which is due to the fact it is an interventional radiology product designed for interventional radiologists and has been seeing a natural erosion as you have seen PICCs go to bedside, and we have done the best we could to convert over to BioFlo. But it also has been a product that has had -- has been at the higher end of the complaint spectrum internally.

And recently, there was a set of complaints and remediation work that was done. And it was a determination that, given the breadth of the portfolio and given the current complaints, that it was best to take this product off the market. And, as we have always had a focus on being a BioFlo-specific company, ultimately, down the road, we thought BioFlo -- or we thought Morpheus was ultimately going to go away.

So given the fact that we had this interim quality and complaint challenge and given the length of time to remediate, we chose to take the product off the market and make a disciplined effort towards BioFlo.

Got it. Thanks. And then the other product specific question was on AngioVac or AngioVac II, and you said it was delayed. In previous comments, you said that you had hoped to begin commercialization in March. I think you said you started yesterday. So is that the extent of the delay, that it was (multiple speakers) month?

No. The product had originally been -- I mean, for our own internal estimates, it was November and then it was December and then it was January. We have been giving ourselves some cushion with the Street, and the last time we had mentioned, I think it was February, that we would be coming out with it.

So it is something that -- our internal plans had it almost a year ago. So it is something that took us a long time to get to market. It was a complete redesign of every component in the system and also an onboarding to an internal manufacturing process.

And it did represent -- we didn't think, especially on last quarter's call, we thought we would get the product out, but we definitely started to feel some -- let's say, some barriers towards getting to higher utilization levels. The procedures took a very long time, and it was cumbersome, and doctors were getting very selective to really the end stage types of cases that they were doing. And while we have some users who overcome it, in general to build the business, you need to make a simpler device.

So we have redesigned AngioVac wholesale from stem to stern, and it is a beautiful device. And we did just do our first three cases yesterday, but if you speak to the sales force or even customers, there was an expectation it would come out earlier and, unfortunately, it weighed on us more than we expected.

And, just to be clear, the cases yesterday, you are good to go commercially now. (multiple speakers)

Yes. No. It is released.

Got it.

It is released.

Charles Haff, Craig-Hallum.

First, Mark, what was the D&A for the quarter?

Depreciation and amortization was about $9 million.

Okay. Thanks. And then, regarding EmboMedics, your LC Bead business, you mentioned, took about seven years to get -- reach that peak of $35 million. How long -- or do you have with the differentiated technology here, do you think it is going to be a shorter time? Do you think that your opportunity here will probably be larger than what you had with LC Beads? Maybe you could just give us some color on how we should think about the ramp there for EmboMedics? Thank you.

Thanks, Charles. Well, when we look at it, it is a different time. When we were at that point in time with seven years, we were the only -- in the US the only product really in the market and had created a significant amount of penetration. We think that we can re-create that, and we also think that this agreement gives us the ability to have all of our excellent global partners and also our global direct sales channels access.

So today, the marketplace is much larger than it was before, but it is also many more entrants in the marketplace. So we have some work to do. We need to get it approved. We need to do some clinical work that validates the assumptions and the assumptions that we are making. But I would say the opportunity is probably bigger than it was before, and I think the opportunity is also global for our Company.

So how quickly we get there is a function of how quickly we achieve regulatory success in each of the key markets and also successfully complete some of the clinical validation of what we are seeing. But the market is far bigger than it was, and we are also global.

So, you know, Charles, when I came to Angio and I mentioned in my remarks, not only where we losing LC Beads, but we didn't have tip location. And the two areas that were virtually the bane of my existence in coming and the biggest priorities to fundamentally improve this business was to get a tip location device approved with No Chest X-Ray. Get access to one, first of all, and then get it approved. And then, second of all, to get to our oncology business, this incredibly disruptive and novel technology.

And, trust me, we have been very selective. We have seen embolics, and a lot of people have put embolics on the marketplace for the sake of having embolics. Our view is the inventors of this technology are right on. Our view is the thought leaders who are supporting this are very visionary. And our view is, we are not going to get into this market to simply compete and say we have a line extension. We are coming into this market to take some share and grow.

So I know you would like a model that gives you a slope, and it is hard to give that to you, Charles. But it would be very hard for me to suppress my enthusiasm for what we just did.

Okay. Thanks, Joe. I'll requeue for more questions; thanks.

Jayson Bedford, Raymond James.

Just wanted to ask about EVLT and the weakness there. Are you confident that it is not a competitive dynamic?

Well, what we did was we went out to our customers where we saw the greatest drop off. We surveyed all of our customers, first of all, and we looked at where the year-over-year drop-offs were. And the greatest areas were in large customers who -- procedures were down.

If it was a competitive issue, we would say it. I mean I don't enjoy having this type of call, and I don't enjoy telling you this. But I think, Jayson, you have seen we have always been transparent, and the queries that we have made to the marketplace came back that they have seen less procedures.

Now, we have been competing against Covidien for, I don't know, 10 years. Did they all of a sudden get more savvy? Maybe.

There is a bunch of biologics out there, but they are not reimbursed. And no one has told us that those procedures have grown to the extent that have met where our customers saw less demand. Our customers told us that they saw less patients, and that is what we are responding to, and the data that we have is what we are reporting to you.

If it is a competitive issue, I would love to learn about it from our competitors. But it is not something that we have seen in conversations from our sales force or our surveys from our customers.

Okay. On the PICC side of things, I don't think you mentioned Celerity and tip location and I'm just wondering if you could just comment on the launch or rollout of that product and if it is having any kind of pull-through impact on the business?

So, from a pure timing perspective, we received our clearance in the first week of February. It might have been the third or fourth, if I can recall it correctly. And then once we received the approval, we get the labeling that has been approved by them, and then it usually takes a couple weeks after that approval to release the product to market.

We released the product literally within days to the end of the quarter, and we shipped our first six systems right away. And we anticipate this quarter to ship at least 20 systems to get through our pipeline and to accelerate from there.

There is a nice pent-up demand for BioFlo and Celerity. We have a lot of contract wins that have been waiting for this. We have distracted our sales force over the last few weeks by pulling Morpheus off the market, and that has kind of hindered them a bit and will probably hinder them a little bit this quarter. But, in the near term, the pipeline is rich, and we are going to see a lot of growth. I expect 2016 to be a very strong growth year for our entire vascular access business.

And just on Morpheus, did -- and I may have missed this and I apologize if I did. Did it impact the third quarter on a revenue basis?

Yes. It impacted us about $1 million.

We lost about a percent of growth -- $1 million in the quarter, Jayson.

Yes. We, in the middle of February, we did a stop shipment when we -- we had seen earlier that there was increasing complaints that were sustainable. Our quality management system went into action and did a complete and thorough review of the complaints of manufacturing supply chain. That review completed, basically, by mid-February, and after we sat and looked at it and looked at the potential remediations, we realized that this was going to take a lot longer, and we needed to make sure that we did the right thing for patients.

And so we put a stop shipment on the product as we continued to complete that review, which ultimately turned in us doing a formal recall on the marketplace, I think, in the first week of March. So yes, it made a pretty significant impact right at the end of the quarter.

Tip would have been flat without this impact in the quarter, Jayson.

And the guidance for the fourth quarter, I think you said $1 million to $1.5 million. I am assuming that that factors in some kind of leakage in the account base. I am guessing not all of your Morpheus users will migrate over to BioFlo. Is that fair?

Yes. Let me give you a little more perspective on Morpheus. In 2013, we did $16 million, in 2014, we did $12 million, and we were probably on an $8 million or $9 million run rate with Morpheus throughout 2015, and it was falling pretty quickly.

And then in reviewing that, it has been, when you look at a lot of the BioFlo growth we have had, and we have always been wondering, well, what is going on, well, Morpheus has been weighing on that line.

And so we think there is a lot of customers who are staying with us, but of course whenever you go through this change, you have to plan for the worst and hope for the best. And we didn't want to get ahead of ourselves in communicating that, oh, we are just going to be able to absorb it.

I think our field feels very confident because of the strength of BioFlo that we are going to move most of those customers over. But those are always opportunity for competitors to step in and change. And the last thing we want to do is create an expectation that is unrealistic.

So there is a part of us -- let me be quite honest, Jayson -- that has a sigh of relief, to say, finally, okay, Morpheus is flushed out of the system. And now it is -- we are really going to focus on BioFlo and Celerity and that thing that has been causing us -- that has been weighing on our growth rate and has been causing a lot of sales time is now behind us.

So it is not -- you never want to withdraw a product from a market. We had thought that the product would have atrophied and that we would naturally move it, but it is what it is.

Okay. And then, I guess just lastly for me and then I will drop, on EmboMedics, what needs to get done between now and the filing in January 2016?

Well, the Company needs to complete the work it needs to do in order to create the appropriate file. It's just is simple as that. From competitive reasons, I don't -- it is all the necessary requirements that the Company believes it needs for FDA. Got to finish the testing and validation and all different things that FDA has asked, and that is what our initial target is.

Okay. Thanks; I'll get back in queue.

Jason Mills, Canaccord Genuity.

This is actually Jeff Chu filling in for Jason. I just had a couple quick ones for me. First, for Mark -- and I apologize if I missed this one, but did you provide the implant to ASP rate for the PICC lines -- I'm sorry, for the BioFlo?

What? Say your question again, Jeff.

I'm sorry. The mix of your implant growth on volume growth, I'm sorry, to ASP growth for the BioFlo line.

No. I didn't provide penetration. I said for overall VA, that about 30% of our business is now BioFlo. We are close to 60% now of all our PICCs. That is something we have provided, so I don't know if that answers your question. So about 60% of our PICCs now are BioFlo-based.

Okay. Great. I was wondering if you could comment on the competition you are seeing on the coated products. Are they are -- is there any one that you see in the near future coming out with a similar coated product?

Well, there is currently one out there. Teleflex has Chlorag+ard. It has been a product that has been on the market for a while, and they are actively competing in the marketplace. But nothing else is in the market, currently. There has been rumblings another competitor may get in, and so you can ask them or listen to their conference calls.

Sure. And just a quick one on AngioVac. With your second-generation device here, what drives acceleration over the near to medium term here? Is it presenting at these physician conferences? Is it clinical trials? Are you thinking about launching any clinical trials in the near term?

Well, actually, yes. We have initiated -- I think we mentioned it last quarter. We initiated a registry at UCLA. We are funding a registry -- an independent registry. So the collection of all the data and the experiences will be able to be aggregated at UCLA. And so we are very excited about that.

And then, what we need is, we have incredible proof of concept. We have case after case after case of life-saving procedures of patients who had no other option, and we have been running proof of concept for a while, and we were moving very well. But the ability to get to the lower end of the market to the more less end-stage, you have to have easy use. You have to be able to turn the room over faster. You have to be able to do the cases and get in and get out. And it is why, when we launched AngioVac, we launched a -- we had a clinical specialist there for every single case because we knew that it was going to be laborious in the technology that we acquired.

But the next step of the evolution is for the user who is interested in the technology but doesn't want to invest the type of time that the first generation takes, we have made a huge leap now. And it is something that, over the last six months, has weighed on us and we have realized that, hey, we really do need to get this technology out because it has impeded some of our utilization. We will do a great heroic case, but to turn it into an everyday business and something that is a solution on an every day, has been, frankly, a challenge.

Now, the keys to future success are, A, launching the technology; B, continued physician education; C, practice building within the hospital and to create connections between referring physicians and the practicing physicians. And practice enhancement modules are recently launched, and we are working with the sales force on that. The new technology is launched, and we are now doing increased amount of education going forward.

So had this product been out a little earlier, we might not have seen this kind of a slowdown. But I am very encouraged by March procedures. We have had a very consistent and strong set of March procedures. Very encouraged by the first set of clinical cases and think this will be just a hiccup in a great evolution of a great technology.

Great. Thanks for the color. I will get back in queue.

(Operator Instructions). Charles Haff, Craig-Hallum.

So, on gross margin, Mark, you gave quite a bit of detail here, but I just wanted to make sure I got all this.

Sure.

Can you go over that one more time, your prepared remarks? I got the 60 basis points of ForEx and the 60 basis points of factory shut down, but there were some other factors I may have missed.

Sure. So we added up -- when you back out the Morpheus reserve, we would have been at 49.5%, which is 140 basis points below prior year. We did generate 80 basis points of operational excellence benefit, but that was offset by E&O of 80, FX of 60, and then, one of the things we did in managing inventory management is we shut down our plants during the holidays. And when you do that, you have to take a period cost. You can't put it into your variances. So we took a 40 basis point charge for that.

And then, we had some warranty service charges of about 30 basis points. So our hope is the E&O and the warranty should hopefully be much smaller. The FX will be a real issue going forward into fourth quarter.

Okay. And I think you have said previously that you are hoping for 50 to 100 basis points this year as an aspirational goal. I mean where should that be now that you had this hit in the third quarter?

Yes. It is a good question. So we think we are on track to generate 100 basis points of operational excellence benefit for the year. Unfortunately, that is going to be eroded by probably about 50, 60 basis points of FX hit, and then we will probably have some residual E&O. So we will probably be more in the range of 20, 40 basis points -- full year benefit on the gross margin line is our expectation right now, Charles.

Okay. Well, that's not bad, all things considered, given this quarter.

Yes. As I said in my comments, the FX impact, for ironic reasons, a little bigger, but everybody is getting hit by that and, unfortunately, it is almost like a 100% price impact because when you lose the revenue, it is a 100% margin hit on your bottom line. And we are not alone in that, but it is a big hit.

Okay. And then, just jumping around here, on the PICC -- the BioFlo PICC, are the price increases sticking, or has there been any change in the net pricing of that product over the last few quarters?

No. The pricing is sticking. I mean, in order to get some larger contracts, we have gotten more aggressive, but the delta between standard product and BioFlo is there, and it is still an accretive -- it is a gross margin product, and, yes, we have been able to maintain price.

And that is true also in dialysis and ports.

And actually, it is even more true on ports and dialysis. And that is an interesting -- also, it is an interesting metric that Mark puts out this quarter because, historically, we have been tracking BioFlo penetration, and I think especially with Morpheus now, you're going to see BioFlo penetration shoot up above the 60% rate for PICCs.

But, even more interestingly, you look at our entire business, and we have ports and dialysis catheters. It is now 30%, 31%, and I think that it is going to get, in a couple years, through to be 100%. The product works. It works everywhere. People see it when they use it, and it is the best product on the market.

Okay. And, lastly, you have had some IDN and GPO wins in the last six months. Were you starting to see the impacts of that this quarter? Can you maybe give us a little bit of color, if you have some?

From a PICC perspective, we have had a lot of activity. We have a great pipeline, but the bigger accounts were waiting for Celerity. Celerity released in the last week of the third quarter. We are going to see activity in this quarter. So it is very, very positive.

From a port standpoint, you have been seeing a port growth rate. So I guess this quarter was six, and the prior quarter was 15 and 14. And those growth rates are entirely due to the GPO wins that we have had. And we are now starting to see some life in dialysis, which has been a category that was declining in revenue and in margin. And now it is turned into -- dialysis is not a growth business in general. If you talk and listen to all the dialysis companies, especially for catheters, but we are growing. We are taking share, and we are taking price. And that is going to be a trend that is going to continue all throughout this quarter and 2016.

So we are sorry to deliver a setback with Morpheus, we made the right decision, and we made the right decision for the patients. We made the right decision for our quality system. But, obviously, everyone wants to see everything perfect, and we did not deliver perfect this quarter.

So on the GPO front, Health Trust seems to have the greatest teeth and maybe the greatest source of near-term opportunity. So Health Trust purchasing on BioFlo PICCs, it sounds like was held back this quarter because they are waiting for Celerity. Is that accurate?

I think some evaluations were most certainly held back, absolutely, and now, we are in process. Also, there is a pretty nice pipeline of Novation hospitals that we won that we got on contract for over the past summer, and there is a lot of activity there.

I think, if we didn't have this issue and we didn't have the distractions of this issue, we probably would have been more productive with PICCs, and we will be more productive in the future.

Yes. Just to build, though, on Joe's point, to remind everybody, the thing with PICCs, though, is you always do an evaluation. So it is usually 60 to 90 days. So, as we said on the last call, we are doing a ton of evaluations, but you won't see the real run rate to maybe the last month of the quarter, but more in fiscal year 2016. And that is still our expectation, Charles, on what is going to happen with all this GPO activity on the PICCs.

Okay. Thanks for taking my questions.

That concludes our question and answer session today. I would like to turn the conference back over to Mr. DeVivo for any closing remarks.

Everyone, it is not fun to go first in this earnings season announcing off of January and February numbers, especially when it was this slow. And, as a couple years ago, we had a rough third quarter. It seemed very similar. But we are in a much better shape today.

We have -- while it has been some concern on EVLT, we don't have concerns across the rest of the business. We are very excited about vascular access and the growth that is there. The oncology business has never been in better shape with the prospects of NanoKnife potentially breaking out. And AngioVac -- while we have had a bit of just a third-quarter pause, we will get that mojo back, especially with the new technology.

When we look at the future and we invest in the future, and we look at our growth, this Company has more opportunities and now adding such a high quality company as EmboMedics with incredible technology and putting it through our channel really strengthens our oncology portfolio that much more.

So we are continuing to work hard. The operations team continues to deliver. One of the -- if we didn't have such improvement on the spending and OpEx with the revenue fall, we would have been in even a rougher quarter, but the team's resiliency and execution continues.

So with that, I appreciate your time and look forward to communicating to you next quarter.

That does conclude our conference for today. Thank you for your participation.