Joseph DeVivo - Chief Executive Officer Mark Frost - Chief Financial Officer Bob Jones - Investor Relations.

Tom Gunderson - Piper Jaffray Charles Haff - Craig-Hallum Jason Bedford - Raymond James Jeff Chu - Canaccord Genuity.

Good day and welcome to the AngioDynamics’ Q3 Fiscal 2015 Conference Call. Today’s conference is being recorded. At this time, I’d 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 identifies 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’d 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’d 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 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 the economic headwinds and a voluntary product withdrawal, all combined to dampen our performance this quarter. That said, we believe this is temporary.

NanoKnife procedure 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 disrupted 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 supplier agreement wind down. 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 phase 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 U.S., probably more due to the concentration of our business not only in the U.S.

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 U.S. increase in family deductibles is having an impact on the seasonality of elected 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 leaves 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 early of 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 we’ll be up sequentially and year-over-year in procedures, so I’m 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 to this delay is disappointing, there is a definite continued positive interest in AngioVac Device.

This interest in extremely evident when you attend the physician congresses such ISET, 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 as compared to the same time these meetings last year. It’s very exciting for this adoption and the presentation phase of any adoption and 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 within the hands of its users. Second generation AngioVac is a full redesign of the system aiming to make it far easier to do the produces.

The system is easier to use in its entirety, easier to setup, 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.

Setup times actually were a fraction of the first device and the added functionally of the angled funnel and the working channel actually were used and were enhanced in each of those three cases.

Also, the design of the new device and in-sourcing it to our manufacturing facility resulted in reducing per unit cost by 15%, enhancing the second generation’s profitability. The last thing I'll 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 our 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 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 through contract penetration as we 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 have published continuing to reinforce the clinical value of irreversible electroporation. At the end of this month data from a NanoKnife presenter will be presented a key surgery meeting establishing long term survival data of over 100 late pancreatic patients.

We believe this will be most prolific and substantial data set on a 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’ve also initiated discussions with NICE in the UK. With success in Germany and Demark NanoKnife reimbursement continues to progress as clinical evidence continues to mount.

So now I’m pleased to announce that AngioDynamics has entered into an exclusive global license agreement with EmboMedics, a venture back 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 U.S. Over seven years our oncology division had built this market into a $35 million space in the U.S. alone and in one year that revenue and contribution went away.

Since then I’ve been looking to get back into the embolic space. It’s highly synergistic with our business and we have a proven track record. That said I’d 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 products.

Two, we much have worldwide rights so not only our U.S. 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’m pleased to say that this agreement achieves all of those objects and far more. Spherical and compressible the EmboMedics product has the same characteristics of the market leading embolics, yet it is designed to be bio gradable in the body after two weeks.

We believe resolvability 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 resolvability will be value add for patients and clinicians as it allows for recanalization of the vassal, 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 registration. 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 distributed 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 phase 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 process with the Oncology/Surgery business. So with that I’ll 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 this 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 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 reap dividend as evidenced by our international performance this year notwithstanding the FX impact. I’ll discuss it in more detail later, but the FX impact in a major reason for reducing both our revenue and earning guidance for fiscal year 2015.

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

Transition 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’ll be limited in my product performance comments. All of my revenue comparison comments will relate to the prior year fiscal quarter. Peripheral vascular decreased to 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 lay and 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 PICC being down 11%. However the Ports portfolio grew 4% and dialysis was up 6%. BioFlo technology products continued 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 U.S. capital and improved international NanoKnife utilization. Our installed base increased by 7 sites to 123 units in the field. With an 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 U.S. 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 continue 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 at 60 basis points.

We took 40 basis points of period cost to shut down our plants during the holiday to manage inventory and we had a higher warranty cost relating to capital of about 30 basis points. .

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 to 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 U.S. commissions and open territory benefits and cost control actions. G&A increased only $0.5 million reflecting a 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 saving initiated in quarter one and clinical project delays offset in part by Microwave second generation project spend.

Now 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 changes was our pivot on the automated power injector project where we were determined we would not be able to continue with the project in its present from 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 indefinitely live intangible as part of the Navilyst acquisition.

In addition, we incurred higher litigation costs at $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 the liability reduction of $10.5 million with most of the decrease pertaining to our Vortex liability and to a lesser extent Aquilus and clinical devices.

The Vortex and Aquilus reductions relate to the fixed 10 year time period to assess the liability where lower revenue outlooks in the last couple of years compare 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 of 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 to $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 and 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 build out cost of the Glens Fall 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 ’16.

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’ll 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 would leave us at 3% growth at the midpoint on a constant currency basis and excluding the supply agreement wind down. As a result of the revision to our revenue expectations, adjusted earnings per share EPS excluding amortization is anticipated 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 are 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 top line 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’ll turn the call back to Joe for his final comments..

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 which is significant for NanoKnife and great, great data for elecrtroperation.

We should end 2015 with 3% net growth and a 12% adjusted EPS growing with improving cash and margins and in general it’s 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..

Certainly, thank you. [Operator Instructions] And our first question will come from Tom Gunderson with Piper Jaffray. .

Hi guys. .

Hi Tom. .

I’ll 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. Now obviously anytime 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 it to every put it back on the market. This is a product for the last couple of years.

Ever since we did the integration with Navilyst has seen quarter-over-quarter declines, part in which is due to a fact that it’s an intervention radiology product designed for interventional radiologists and has been seeing a natural erosion as you have seen PICCs go to beside and we’ve 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 termination that given the breadth of the portfolio and given the current complaints that was best to take this product off the market, and as we’ve 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. On 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 actually one 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’ve been giving ourselves some cushion with the Street, and the last time we had mentioned it I think it was February that we would be coming out with it. Our internal plans had it almost a year ago.

So it’s 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 on-boarding to an internal manufacturing process, and it did represent – and we didn’t think, especially on last quarter’s call, we thought we’d get the product out, but we definitely started to feel, 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 redesigned the AngioVac wholesale from stem to stern, and it’s 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 that it would come out earlier and unfortunately it weighed on us more than we expected. .

And just to be clear, the cases yesterday, you’re good to go commercially now.

It’s a success?.

Yes, now it’s released….

That’s it from me. Thanks guys..

Thanks Tom..

And next we’ll take a question from Charles Haff with Craig-Hallum..

Hi, thanks for taking my questions.

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

Depreciation and amortization was about $9 million..

Okay, thanks..

And then regarding EmboMedics, you know your LC Bead business you mentioned took about seven years to reach that peak of $35 million. How long or do you have what the differentiated technology here. Do you think it’s 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’s a different time. When we were at that point in time with seven years, we were in the U.S. the only product really in the market and had created a significant amount of penetration.

We think that we can recreate 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’s also many more entrants in the marketplace. So, we have some work to do.

We need to get it approved and 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’re seeing, but the market is far bigger than it was and we are also global.

So Charles when I came to Angio and I mentioned in my remarks, not only were we losing LC Beads but we didn’t have tip locations and the two areas that were virtually the bane of my existence and coming in the biggest priorities that 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 disrupted the novel technology and trust me, we’ve been very selective. We’ve seen embolics. I mean a lot of people have put embolics on the marketplace for the sake of having embolics.

Our view is the adventures 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 that it’s 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 re-queue for more questions. Thanks..

Thanks Charles..

And next we’ll go to Jason Bedford with Raymond James..

Good afternoon and thanks for taking the questions. .

Hey Jason..

Hey guys. Just wanted to ask about EVLT and the weakness there.

Are you confident that it’s not a competitive dynamic?.

Well, what we did was we went out to our customers where we saw the greatest drop off, where 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 perceived it were down. It was a competitive issue we’d say.

I mean, I don’t enjoy having this type of call and I haven’t enjoyed telling you this, but I think Jason you’ve seen – we’ve always been transparent and the queries that we’ve made to the marketplace came back, that they’ve seen less procedures. Now we’ve been competing against Covidien for, I don’t know, 10 years.

Did they all of a sudden get more savvy? Maybe. There’s 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’s what we’re responding to and the data that we have is what we’re reporting to you. If it is a competitive issue, I’d love to learn about it from our competitors, but it’s not something that we’ve 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 then tip location.

I’m just wondering if you can just comment on the launch or roll out of that product and if its having any kind of pull through impact in the business?.

So from a pure timing perspective we received our clearance in the first week February. It might have been the third or fourth if I can recall correctly and then once we received the approval, we get the labeling that’s been approved by them and then it usually takes a couple of 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’s 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’re going to see a lot of growth.

I expect 2016 to be a very strong growth year for our entire Vascular Access business..

Just on Morpheus, it 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. It’s actually about 1% of growth, $1 million in a quarter Jason..

We in the middle of February we did a stop shipment when we had seen earlier that there was increase in complaints that were sustainable. Our quality management system went into action and did a complete and thorough review of the complaints of manufacturing and supply chain.

That review completed basically by mid February and after we sat and looked at it and looked at the potential remediation’s 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 continue to complete that review, which ultimately turned in us doing a formal recall in 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. .

The tip would have been flat without this impact in the quarter Jason..

Okay. And the guidance for the fourth quarter, I think you said $1 million to $1.5 million. I’m assuming that that factors in some kind of leakage in the account base.

I’m guessing not all of your Morpheus users will migrate over to BioFlo, is that fair?.

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’s been – when you look at a lot of the BioFlo growth we’ve had and we’ve always been wondering well, you know what’s going on, well Morpheus has been waiting on that line.

So we think there’s 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’re just going to be able to absorb it.

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

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

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

Okay. And then I guess just lastly from me and then I’ll drop.

On EmboMedics, what needs to be done between now and the filing in January ’16?.

Well, the company needs to complete the work it needs to do in order to create the appropriate file; it’s just as simple as that.

From competitive reasons its all the necessary requirements that the company believes it needs for FDA to kind of finish the testing and validation and all different things that FDAs asked us and that’s what our initial target is..

Okay, thanks. I’ll get back in queue..

And our next question will come from Jason Mills from Canaccord Genuity..

Hi guys, this is actually Jeff Chu filing in for Jason.

I just have a couple of quick ones for me and first for Mark and I apologize if I missed this one, but did you provide the implants to ASP rate for the BioFlo?.

What? Say your question again Jeff..

I’m sorry. I guess the mix of your in-plant growth or 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’re close to 60% now of all our PICCs, that’s 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. And I was wondering if you’d comment on the competition you’re seeing on the coded products.

Is there anyone that you see in the near future coming out with the similar coated product?.

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

Sure. And as a quick one on AngioVac, with your second generation device here, what drives acceleration I guess 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’ve initiated – I think we mentioned it last quarter. We initiated a registry at UCLA. We’re funding a registry, an independent registry. So the collection of all the data and your experiences will be able to be aggregated at UCLA and so we’re very excited about that and 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’ve 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 these to 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 that’s why when we launched AngioVac we had a clinical specialist there for every single case, because we knew there was going to be laborious in a 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’ve made a huge leap now and it’s something that over the last six months has weighed on us and we realized that hey, we really do need to get this technology out, because it has impeded some of our utilization.

We’ll do a great heroic case, but to turn it into an everyday business and something that’s a solution on an everyday has been frankly a challenge.

The keys to future success are (a) launch in the technology; (b) continues 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 no 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’m very encouraged by March procedures. We’ve had a very consistent and strong set of March procedures; very encouraged by the first set of clinical cases.

I think this will be just a hick-up in a great evolution of a great technology..

Thanks for the color. I’ll get back in queue..

No problem Jeff..

[Operator Instructions] And we’ll now go back to Charles Haff with Craig-Hallum..

Hi, thanks for taking my follow-up. So on gross margin Mark you gave quite a bit of detail here, but I just wanted to make sure I got all this. Can you go over that one more time, your prepared remarks. I got the 60 basis points of 4X and the 60 basis points factory shut down, but there are 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 one of the things we did in managing inventory management as we shut down our plant 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’ve said previously that your hoping for 50 to 100 basis points this year as an aspirational goal.

I mean, where should that be now that you had to say it in the fourth quarter?.

Yes, it’s a good question. So we think we’re on track to generate 100 basis points of operational excellence benefit for the year.

Unfortunately that’s going to be eroded by probably about 50, 60 basis points of FX and then we’ll probably have some residual E&O, so we’ll probably be more in the range of 20, 40 basis points, a full year benefit on the gross margin line is our expectation right now Charles..

Okay. Well, it’s not bad all the things considered given the score. .

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

Okay.

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

No, the pricing is sticking. In order to get some larger contracts we’ve gotten more aggressive, but the delta between the inter product and BioFlo is there and it’s still an accretive to gross margin product and yes, we have been able to maintain price. .

And that’s true also to dialysis and ports..

Actually it’s even more true on ports and dialysis and that’s also an interesting metric that Mark puts out this quarter, because historically we’ve 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 if you look at our entire business, I mean we have ports and dialysis catheters now 30%, 31% and I think that’s going to get in a couple of years through to be 100%. The product works, it works everywhere. People see it when they use it and it’s the best product on the market..

Okay. And lastly you said 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’ve had a lot of activity, we have a great pipeline, but the bigger accounts we’re waiting for Celerity. Celerity released in the last week of the third quarter, we’re going to see activity in this quarter and so it’s very, very positive. From a Port standpoint, you’ve been seeing port growth rate.

So I guess this quarter we’re six, but prior quarter was 15 and 14 and those growth rates are entirely due to the GPO wins that we’ve had and we’re now starting to see some life in Dialysis which has been a category that was declining in revenue and in margin and now has 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’re growing we’re taking share and we’re taking price and that’s going to be a trend that’s going to continue all throughout this quarter and 2016. So we’re starting to deliver a set back 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 didn’t deliver perfect this quarter..

So on the GPO front, HealthTrust seems to have the greatest [inaudible] and maybe the greatest source of near term opportunity, so HealthTrust purchasing on BioFlo PICCs it sounds like was held back this quarter because they are waiting for Celerity.

Is that accurate?.

I think from valuations we’re 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’s 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 just to remind everybody, the thing with PICCs though is you always do an evaluation, so it’s 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 ’16 and that’s still our expectation Charles on what’s going to happen of all this GPO activity on the PICCs..

Okay, thanks for taking my questions..

Thanks Charles..

And that concludes our question-and-answer session today and I’d like to turn the conference back over to Mr. DeVivo for any closing remarks..

End of Q&A:.

So everyone, it’s 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 of years ago we had a rough third quarter, it seemed very similar, but we’re in a much better shape today.

While it’s 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’s there, the oncology business has never been in better shape with the prospects of NanoKnife potentially breaking out and AngioVac, while we’ve had a bit of just the third quarter pause, we’ll 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, it really strengthens our oncology portfolio that much more. So we’re 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 it would have been even a rougher quarter, but the teams resiliency and execution continued. 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..