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AngioDynamics, Inc. (NASDAQ:ANGO)
Q4 2018 Angio Dynamics, Inc. Earnings Conference call
Jul. 11, 2018, 12:00 pm ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the AngioDynamics Fourth Quarter and Fiscal Year 2018 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. The news release detailing the Fourth Quarter and Fiscal Year 2018 results crossed the wire earlier this morning and is available on the company's website.

This conference call is also being broadcast live over the Internet at the Investors section of the company's website at www.angiodynamics.com. The webcast replay of the call will be available at the same site approximately one hour after the end of today's call. Before we begin, I would like to caution listeners that during the course of this conference call, the company will make projections or forward-looking statements regarding future events including statements about expected revenue, adjusted earnings, and free cash flow for fiscal year 2019.

Management encourages you to review the company's past and future filings with the SEC including, without limitation the company's Form 10Q and 10K, which identifies specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements. A slide package offering insight into the company's financial results is also available on the Investors' section of the company's website under presentations.

This presentation and should be read in conjunction with the press release discussing the company's operating results and financial performance during this morning's conference call. I'd now like to turn the call over to Jim Clemmer, AngioDynamics President and Chief Executive Officer. Mr. Clemmer.

Jim Clemmer -- President and Chief Executive Officer

Good morning everyone. Thank you for joining us today for AngioDynamics Fourth Quarter and fiscal year 2018 earnings call. With me on the call is Michael Greiner, our Executive Vice President and Chief Financial Officer. Today, I will provide a brief overview of the operating highlights for the quarter. Michael will then provide a detailed analysis of our financial and our fiscal 2019 natural guidance. After that, we'll open the call to your questions.

We are generally pleased with both our quarterly and our full-year results, as we further solidify our operational foundation, while also focusing on portfolio optimization. As we enter fiscal year 2019, we will experience operating leverage from the foundation that we have built over the past two years. We believe that developing a stronger portfolio on top of that foundation will create significant runway to achieve sustainable long-term growth.

Our net sales for the fourth quarter of fiscal 2018 increased 1.6% year-over-year to $88.3 million. During the quarter, we continued to experience solid growth in our Fluid Management, Angiographic Catheter, and our AngioVac product lines. Additionally, our oncology Ablation products, Solero and NanoKnife also experienced growth. This growth was partially offset by continued headwinds in our venous insufficiency business and our PICC product lines. While our revenue growth was moderate in the fourth quarter, we are very pleased with the year-over-year gross margin expansion, and solid profitability combined with strong free cash flow generation.

Focusing on the performance of each of our businesses, our peripheral vascular business was down 2.4% year over year. As the previously mentioned growth in Fluid Management Angiographic Catheters, in AngioVac product lines, was more than offset by declines in our venous insufficiency business. AngioVac procedural volumes remained strong and were up 14% year over year in the fourth quarter. We continue to make targeted R&D investments in our thrombus management portfolio, while also identifying external growth opportunities as we seek to build out a franchise around our AngioVac offering.

The venous insufficiency business continued to underperform, primarily due to our largest customer discontinuing their exclusive use of our EVLT products. We continue to examine various options to return this business to positive growth. For example, we just received 510(k) clearance for an expanded indication for our 400-micron laser vein ablation chip, for the treatment of incompetent perforator veins. This clearance was supported by the positive results of our clinical trial that we completed earlier this calendar year. We believe that this perforator vein indication demonstrates the comprehensive value that our EVLT product line can offer to the venous insufficiency market.

Our oncology/surgery business grew 37.5% year over year, as strong growth from our Solero Ablation System and a robust increase in sales of NanoKnife were partially offset by lower sales of our RFA products. In the fourth quarter of the prior year, we withdrew Acculis from the market in favor of our newly approved Solero products, and as a result, we recorded a $2.6 million reserve for returns of Acculis firms. Normalizing for this reserve, our oncology/surgery business grew 6% in the fourth quarter.

Vascular access revenue declined to 2.5% during the fourth quarter, as growth in ports and dialysis products was more than offset by declines in PICCs. During the quarter, we saw customers continue to gravitate to our BioFlo products, again providing evidence of the value that this one-of-a-kind of technology is delivering. As we have discussed in recent quarters, one of our top strategic priorities has been portfolio optimization both internally and through value-creating M&A. Our portfolio optimization will focus on the continuum of care within oncology, as well as disruptive impatient focused technologies, that are differentiated and surely changing how healthcare is delivered.

We will continue to seek out acquisitions focused on products and technologies that fulfill unmet needs in large addressable markets and generally have high margin profiles. NanoKnife and AngioVac are two examples within our current portfolio, and we're enthusiastic about continuing to build platforms and franchises around these exciting technologies.

In an effort to support how we think about our business platforms, we have renamed our peripheral vascular business to vascular interventions and therapies, and we've remained our oncology/surgery business to simply oncology. This renaming is effective as of June 1, and we will begin reporting using these new business names in the first quarter of FY 2019. The product families included in these business units will remain the same. However, we realigned our sales teams to reflect our focus on portfolio optimization.

Within both of these business units, and we continue to shape our international approach around specific products in defined regions that are well positioned to win. With that, I'd like to turn the call over to Michael Greiner, our Executive Vice President and Chief Financial Officer.

Michael Greiner -- Executive Vice President and Chief Financial Officer 

Thanks, Jim and good morning everyone. Before I begin, I'd like to remind everyone that we have posted a presentation on our investor relations website summarizing the key items associated with our fourth quarter and fiscal year results as well as the list of key objectives supporting our 2019 outlook including our financial guidance. This information is intended to complement these prepared remarks.

As Jim mentioned, our net sales for the fourth quarter fiscal 2018 totaled $88.3 million, which represents a 1.6% year-over-year increase. For the 12 months ended May 31, 2018, net sales were $344.3 million, a decrease of 1.5% compared to the same period a year ago. Foreign exchange had a positive impact on both our fourth quarter and full year revenue of roughly 50 basis points. We've not historically called out any foreign exchange impact on our revenue because it has generally been de minimis. However, due to the benefit provided in our fourth quarter and fiscal year, we believe it was appropriate to identify in this instance. Going forward, we will discuss foreign exchange in certain quarters when the impact could be significant.

Our gross margin for the fourth quarter of fiscal 2018 expanded 500 basis points to 53.7% from 48.7% a year ago. This improvement was largely attributable to the prior-year Acculis recall that was announced in the fourth quarter of 2017 and had a negative impact on last year's cost of goods sold. Additionally, gross margins were positively impacted by the ongoing operational improvements, the recently completed facility consolidation, and the expiration of a royalty arrangement in the second quarter of fiscal 2018.

Excluding the impact of the Acculis recall, gross margin for the fourth quarter still expanded 100 basis points. The 12 months ended May 31, 2018, and gross margin ended at 51.4%. While we did not achieve our full-year gross margin target of 52%, we were very satisfied overall with our execution on closing two manufacturing facilities and improving net productivity throughout the year. As a result, we anticipate our fiscal year 2019 gross margin to be in the range of 54% to 56%. It is worth noting that this gross margin expectation for fiscal 2019 does not include any potential impacts related to our portfolio optimization objectives.

Our Research and Development (R&D) expenses during the fourth quarter of fiscal 2018 were $6.5 million compared to $6.7 million a year ago. The 12 months ended May 31, 2018, our R&D expenses were $25.5 million or 7.4% of total sales, compared to $25.3 million or 7.2% of total sales a year ago.

Although R&D was up modestly in absolute dollars, our spending in fiscal 2018 was more intensely focused and key investments that are supported by high ROI outcomes as a result of the more disciplined R&D processes that we've implemented in the past quarters. We will continue to focus on these key areas of organic investment, and likely to see an uptick in R&D spend as a percentage of sales in the upcoming year, approaching approximately 8%.

Now, moving to Selling General and Administrative expenses (SG&A). SG&A expense for fourth quarter fiscal 2018 was essentially flat at $28.8 million compared to last year. The 12 months ended May 31, 2018, our SG&A expense decreased to $108.5 million compared to $110.2 million a year ago and was 31.5% of total sales in both years. Our adjusted net income for the fourth quarter of fiscal 2018 was $7.7 million or $0.20 per share, compared to adjusted net income of $6.8 million or $0.19 per share in the fourth quarter of last year.

For the 12 months ended May 31, 2018, our adjusted net income was $27.6 million or $0.74 per share, compared to adjusted net income of $27 million or $0.73 per share the year ago. The presentation posted on our investor relations website include the slide that details two of our specific income statement captions that impact our U.S. GAAP net income results versus our adjusted net income results that I just discussed.

We specifically identify these items in our income statement under the captions, "Chang in fair value of contingent consideration" and "Acquisition, restructuring, and other items net". We utilize consistently applied non-GAAP Measures in the establishment of operational goals, and we hope that the non-GAAP Measures except all external stakeholders in analyzing our underlying and continuing business trends over time.

Adjusted EBITDAS in the fourth quarter of fiscal 2018, excluding the items shown in the reconciliation table in our presentation was 15.6 million compared to $14.3 million in the fourth quarter of fiscal 2017. It's been 12 months, and in May 31st, 2018, our adjusted EBITDAS was $57 million compared to $58.7 million for the same period a year ago. Now, moving to the cash flow and balance sheet, in the fourth quarter fiscal 2018, we generated $23.8 million in operating cash flow and $23 million in free cash flow primarily due to our solid core earnings and our lesser focused on working capital management.

With that, we ended May with $74.1 million cash in cash equivalents and $92.5 million in debt excluding the impact of deferred financing cost. As Jim mentioned earlier we are pleased with our consistent free cash flow generation, which bolsters our strong balance sheet and provides us with the capital we will need to pursue targeted investments in R&D and strategic M&A opportunities.

Now, onto our financial guidance for fiscal 2019, we expect our fiscal year 2019 net sales to be in the range of $344 to $349 million, and as I mentioned earlier, gross margin in the range of 54% to 56%. We plan to generate between $38 to $43 million in free cash flow. However, this does not account for approximately $12.5 million cash payment to the Department of Justice related to previously disclosed legal matters. As you know, we expected this payment to occur in the fourth quarter, but now we anticipate that it will occur during our first quarter.

Our adjusted earnings per share will grow double-digit percentage for range of $0.82 to $0.86.This is supported by the full-year revenue guidance and our new gross margin run rate partially offset by an increase in R&D spend as I noted earlier as well as increased accruals for variable incentive compensation throughout the year, which will likely drive SG&A slightly higher as a percentage of revenue.

Finally, assisting your modeling, please note that we expect their sales for the first quarter of fiscal 2019 to be lower compared to the same period a year ago. In the first quarter of fiscal 2018, we recognized 1.6 million related to the reversal of the Acculis reserve due to product exchanges for our Solero product offering. Additionally, we are still annualizing the reduction in VCA volumes and our venous insufficiency businesses, which will result in at least a $2 million headwind in the first quarter of fiscal 2019.

These two headwinds will be somewhat offset by growth in other areas of our business in the first quarter. With that, I'd like to turn the call back to Jim.

Jim Clemmer -- President and Chief Executive Officer 

Thanks, Michael. Before we open the call to your questions, I would like to update you on the progress of our NanoKnife program. As we previously announced, the FDA has granted the expedited access pathway designation to our NanoKnife system, and they proposed indication for use for the treatment of stage three pancreatic cancer. We firmly believe that our proprietary reversible electroporation technology provides unique platform, upon which we can build a winning, differentiated oncology business.

We are currently focused on driving our strategy to obtain FDA claims, payment reimbursement, and market adoption for pancreatic cancer; But are also planning on the next phases of a platform approach that will address treatments of other cancers including liver, prostate, lung, and brain. In June, we submitted our data development plan providing the details of our trial design to the FDA.

As previously discussed, we are committed to executing our data development strategy by conducting a comprehensive clinical trial with three main goals: first, to provide meaningful clinical data to our customers; second, to lead a specific regulatory indication for the treatment Stage III pancreatic cancer; and finally, to facilitate reimbursement to the hospitals and treating physicians. To achieve these goals, we develop a next-generation registry. The trial is designed as a controlled all-comers observational registry.

Each site that has a NanoKnife in the United States and certain O-U.S. sites are eligible targets to enroll in this study, and all procedures done with the NanoKnife can be captured within the registry. Control sites will also be matched to allow for a robust propensity score matching the NanoKnife subjects. We anticipate enrolling approximately 200 patients in each arm, with an interim analysis planned to verify sample size assumptions. What makes the design next-generation is that we have engaged a third-party CRO to tap directly into each enrolling site's electronic medical records, pulling data directly from the source, ensuring data integrity, and avoiding selection bias.

Our proposed design will facilitate robust, and continuous enrollment, and data collection, and we will avoid many of the most costly elements associated with running trials. Finally, let me speak to our progress on the reimbursement front. As you are all aware, there are three pillars to medical device reimbursement: coding, payments, and coverage. All three must be in place for hospital and physician to receive reimbursement for the care they deliver. We have exciting news to announce in respect to coding.

In May, CMS released the new proposed ICD-10 codes that will become effective in October with new IRE-specific codes for pancreatic and liver procedures, in both cases, for open laparoscopic or percutaneous interventions. These new codes will make tracking information on the use of NanoKnife in our proposed trial even more efficient. Over the next several months, we expect CMS to publish the DRGs that these new codes will map to, clarifying the payment for these procedures.

With respect to coverage, we are engaged in discussions with CMS' Coverage and Analysis Group and expect to seek coverage of procedures done under our IDE to cover IDE Category B devices, along with coverage for the routine cost of clinical trials. We are encouraged by the conversations we've had with this group, and we'll give you an update on further developments. We are making great progress with our NanoKnife program and we are targeting our second fiscal quarter of 2019 to begin enrolling patients, subject to the FDA's approval of our IDE.

And we look forward to providing updates to you as we progress. As we reflect on fiscal year 2018, we continue to work hard and execute against our operational goals, and we're very pleased with the gross margin expansion and a strong free cash flow that we're able to achieve. Our balance sheet is stronger than it was a year ago, with an overall net debt-to-EBITDA leverage ratio of less than one-half term.

While overall sales growth has been below our expectations, we saw a consistent growth over the past three quarters within some of our key product categories including our Oncology Ablation product portfolio, AngioVac, and as well within our largest product category, Fluid Management. We appreciate your attention this morning. As you've seen, we've spent a lot of time and effort building a strong operating foundation upon which to drive results.

I want to also reiterate that a pillar of our strong foundation is our commitment to quality and compliance. As a medical device company, we make products that are inserted into patients' bodies to provide care. We understand that profound responsibility and adhere to the highest standards of quality and compliance in everything that we do.

Going forward into fiscal 2019, we continue to believe that we have the right strategy and resources in place to successfully pursue internal and external growth opportunities, and we remain focused on reshaping our product portfolio, driving innovation and positioning AngioDynamics as a leader in the markets that we serve. Thanks for your time today. We look forward to speaking to you again soon, and now, I'll turn the call back to the operator for your questions.

Questions and Answers:

Operator

Thank you. At this time, we'll have I think a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and the confirmation tone indicates your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For assistance using speaker equipment, it may be necessary pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question today comes from the line of Matthew Mishan with KeyBanc. Please proceed with your questions.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Thanks. Good morning, Jim and Michael.

Jim Clemmer -- President and Chief Executive Officer

Good morning, Matt.

Michael Greiner -- Executive Vice President and Chief Financial Officer 

Good morning, Matt.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Hey, I just want to follow up first on the NanoKnife progress you guys have made. Could you give a little more clarity on what it means for you guys to have a new ICD code that's IRE specific?

Jim Clemmer -- President and Chief Executive Officer

So, Matt, good morning. We're joined here by Stephen Trowbridge as well, and I would like to ask Stephen to answer that question for you in more detail.

Stephen Trowbridge -- Senior Vice President and General Counsel

Thanks, Matt, I appreciate the question. It means a lot, and it doesn't mean that there's still more to go. So as Jim mentioned on his call, there's three pillars for reimbursement. You need to have coding, coverage, and then payment. The step to get the code is the first step, but it's also a very important step.

So, whereas in the past when physicians we're doing IRE procedures, there was some confusion, and there wasn't a real good clarity around how they should code for the procedures that they were doing, which also meant that down the road, it was harder to collect the data, and then go back and assess a lot of the work that was being done unless they were doing it under some of the IIPs that we talked about in the past that led to complications.

So, now that we have a code, every physician who does a procedure will now have a very clear pathway to code that procedure to keep information around the procedures that they're doing. What's great about the current code that we have is that it is specific to IRE. So, no other ablation modalities, so it differentiates IRE and any procedure that they're doing. It also differentiates whether they're doing the procedure in the pancreas or the liver, and then even further, percutaneous, laparoscopic, or open procedures.

So this will provide great clarity going forward in terms of data collection, but it provides great clarity now to our physicians when they're doing these procedures. Those codes will eventually map into a CRG, which will probably be published by CMS sometime between now and when those codes become effective in October. That would set the payment fees. Now, you still need the coverage, which is what Jim talked about where we are engaged actively in conversations with CMS about providing that coverage piece specifically pursuant to our IDE around pancreatic cancer.

But the codes also give us the platform to then have additional discussions down the road for coverage for some of those other procedures in the liver as well. So, it's a great first step. It can provide a lot of clarity to our current position. It's going to provide us great efficiency in terms of collecting data as we move forward, and it provides us an opportunity to have the second-step conversations around coverage.

Some we've already had and I'm really moving down the road on with respect to our pancreas IDE. Others that will come as we get into more specific indications from putting it out.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Steve, is this more of a collaborative event between CMS and the FDA and Angio that helps enable you to do a better clinical trial, or was this done in separate conversations?

Stephen Trowbridge -- Senior Vice President and General Counsel 

Look, it absolutely does what you suggested which provides us an opportunity to run a more efficient better clinical trial once we're approved by the FDA. Each of these divisions are separate divisions within the government. I think there's probably some communication that goes on, it's not as much as industry would like some of the time. But these are very different paths that you have to go forward, you have to touch these bases before you can get to the final outcome. So, there's some element of communication but this is a lot of work is being done by the broader Angio team to bring all these elements together.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Great and then can you walk us through the process by which you decided what is core and what's non-core as part of the portfolio optimization process, and what's changed since the Analyst Day last year?

Jim Clemmer -- President and Chief Executive Officer

So, about the Analyst Day kind of set for I'll share with you after my one year in the role, kind of what I saw are 11 product categories member under our three GBU's. We really have 11 product categories. In the past, I think maybe one of the areas that Angio could have done better was really differentiating between those categories. Which really all 11 more or less equal, as far as resourcing, time, and energy and that won't work in a company our size. So, at the Investor Day, we identified four of the 11 that we thought we'd get continuous investment at higher rates than the others.

Now Matt, really a year after that as we learned more, looked at more things and even from the Investor Day to remember them, Bob Simpson has just joined our company right before that. He was our largest GBU, and since then too Brent Boucher has joined us that runs our Oncology GBU. We've got new eyes and ears on this business, they have new people in their teams. So, we've crystallized what we're doing there. The work that Chad and the VA team have done have been very clear and specific. The growth in our BioFlo portfolio within the VA business has been strong. So, really the three different GBU is getting better market knowledge. We've eliminated a layer of I think as you know internationally and globally. So, we could pull our decision-makers closer to the extra markets as well. So, we're just a little tighter on, Matt, how we make decisions.

Michael Greiner -- Executive Vice President and Chief Financial Officer

Matt, I'll just add the one product category that we have in our investor group in on Investor Day insufficiency joined category that has not executed the way we adopt. We're still investing behind that. We still believe we have the best laser in the market in that space but as you know when the reimbursement headwinds with the RF competition we got a tough year this year. So, as he mentioned we just had an up tight and pay approved or the main perforation and we're looking at other opportunities to get that particular product family back to growth.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Okay and then last question and then I'll jump out. What's your ability to carve out or divest pieces of the portfolio without significant disruption or dis-synergies?

Jim Clemmer -- President and Chief Executive Officer

You know Matt. Any company- if a company were to make a decision to carve out a business or divest something, is always disruption. You know my background I was at a company that did a lot of M and A, internal and external. Here at AngioDynamics, if we decide to make a portfolio move, that will carve something out as you mentioned or divest something, the good news is the operational aspects of our company is much higher than it was two years ago.

We got plans in place and if we're going to do that, how we would execute. We've also got the right people in place now, who have done that before. So, anytime you do something whether you're carving something out or bringing something in, there is always disruption. But here at Angio we prepared for that, we're ready for it. We think we execute well on either aspect of M and A.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

All right. Thank you Jim, Michael, and Steve.

Jim Clemmer -- President and Chief Executive Officer 

Thanks, Matt.

Michael Greiner -- Executive Vice President and Chief Financial Officer 

Thanks, Matt.

Operator

Our next question comes from the line of Jayson Bedford with Raymond James. Please proceed with your question.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Hi. Good morning and thanks for taking the question. So, I guess maybe just a follow on the last line of questioning. When should we realistically expect to hear something on the optimization of the portfolio?

Jim Clemmer -- President and Chief Executive Officer

So, Jayson, this is Jim. Good morning. Jayson, we've talked about it now for a couple of quarters that we're in that phase. As you know, the first call, four to six quarters of my tenure here at Angio was more shoring up the business as we talked about getting gross margins right in the operational aspects. The last six months or so, we've shifted a little bit, because we know the markets better than we did before.

So, we're really in that phase, Jayson, where we're doing deep analysis, run potential opportunities to either bring into our portfolio or maybe to shift out. So, it is hard to gauge exact timing, but we're actively engaged in the process, utilizing the discipline, I think, we've shown to you over time. Maybe soon, we'll have some announcements, but we're actively engaged in that process.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Can you just walk us through the renaming of the two segments there? More specifically, how does that improve the business?

Jim Clemmer -- President and Chief Executive Officer

Renaming the segment does not improve the business, Jayson. Renaming helps describe the focus of the business change. AngioDynamics has been tied for a while to our legacy and our history, which is strong. We've served the interventional radiologists at a very high level in all three of our business GBUs, and will continue to serve the IR doctors.

But over time, I'll give you a couple examples. Do you see the double-digit growth? We've had a procedure volume in AngioVac. It's been tremendous. What that's done, we know what that unique tool can do when it's in a physician's hand. So, what Bob and his team have done this year, we've also carved out our sales force a bit differently allowing people to focus on just representing that product to our surgeon partners.

So, Bob and his team thought they'd also kind of rename the business to focus on where they're going within our peripheral vascular franchise. So, it has four segments. But the future business has been better defined by what they've named it. On the oncology surgery side, the same thing. Branson and his team are focused on developing an oncology business.

Today, we are the leader in Ablation technology. But we want to be a full oncology provider. We've always had a small surgical tool in our bag, but it's not what we're focused on. Tomorrow, we want to know the medical oncologists, the radiation oncologists in much deeper levels than we do today. So, we want to let people know we are an oncology company, and we're focused on it. Other than that, Jayson, our strategy and our execution will drive results off the names.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Okay. Maybe for Michael, a couple of financial questions. One, it appeared that the tax rate was pretty high in the fourth quarter. I guess the question is, why and what's the assumed tax rate in fiscal '19?

Michael Greiner -- Executive Vice President and Chief Financial Officer

Effective tax rate in fiscal '19 will approach around 50%. But remember again, given our NLO situation, we only had about $2 million off of that of the $6 million tax expense that is cash-based. The other $4 million relates to a variety of deferred taxed items that we're working through. Then when you look at the full year for fiscal '18, we had a significant tax benefit related to the revaluation of the deferred taxes due to the fractured format out of Jan 1, 2018.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

But I guess what I'm getting at is, the $0.82 to $0.86, what's the tax rate tied to that adjusted EPS model?

Michael Greiner -- Executive Vice President and Chief Financial Officer

Sorry about that. I meant that for Jayson. So, 23%. So, that's the 21% plus 2% for state and local. So, full year, 23% next year versus we had the blended rate this year given our fiscal year versus the Jan 1 effective date for the tax format.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Just to be clear, the $0.20 in adjusted EPS you reported for the fourth quarter here, what was the tax rate type on that?

Michael Greiner -- Executive Vice President and Chief Financial Officer 

That was 30.62%, which was the blended rate for the full year.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Okay. Then when we look at fiscal '19, gross margin is 64 to 56 and I realized it's a little step-up in R&D, but it seems like there's a big step-up in apex. So, where are you spending all of these additional dollars that weigh on margins?

Michael Greiner -- Executive Vice President and Chief Financial Officer 

So, the surgery rights. So, we're going to have some additional gross margin dropped the bottom line offset. Some partially offset by increased R&D. Then, as I mentioned in the prepared remarks, we'll have, at least the beginning part of the year, an accrual for variable compensation for commissions and bonus tracking at 100% going into the year. Knowledge and a headwind versus where we ended up this year with the lower revenue outcomes that we have.

We didn't pay out for commissions and for bonuses in FY 18, because we didn't achieve the intended results, but obviously as we accrue going into the year for FY 19, we are assuming we'll achieve the results that we laid out today. Selected the big portion of that headwind is there.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Is there any way to quantify that?

Michael Greiner -- Executive Vice President and Chief Financial Officer

It's been 150 basis points in total. As a percent of revenue across SG and A, selling and marketing, and general administrative.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Then, last question and I'll let someone else jump in queue. When do you anniversary the customer loss in the year long sufficiency business?

Michael Greiner -- Executive Vice President and Chief Financial Officer

So, toward the back half of the second quarter, so October to November timeframe, was when we saw some acceleration and that as we get into the third quarter, we'll start to see some leveling off of that. But it's not going to happen to fully anniversary until fourth quarter.

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Okay. Thank you.

Operator

This question comes from line of Jason Mills with Canaccord Genuity. Please present your questions.

Jason Mills -- Managing Director -- Canaccord Genuity Inc.

Hi guys, thanks for taking the question. Can you hear me? Okay?

Jim Clemmer -- President and Chief Executive Officer 

Good morning?

Jason Mills -- Managing Director -- Canaccord Genuity Inc.

Good morning Jim. So, two questions, one on portfolio management the other one on NanoKnife. Starting with portfolio management, Jim. Trying to give us guidance on the cadence and how things play out in a very difficult there's only so much you can say about where you're going to do from a divestiture standpoint and acquisitions. But as you think about the next couple of years, are you looking to add more than subtract, or add before subtracting, or is there any strategy you have in place if you look at what you're looking at. As you can talk about what you're looking at now from both standpoints? Can you give us any stands for what looks like, that may have reached the bottom of the funnel first?

Jim Clemmer -- President and Chief Executive Officer

Jason, fair question. As you know you identified it's really hard to time these things exactly. We're looking to add things around a couple of our businesses that we see where we have deep platforms. We talked about a couple of those this morning with NanoKnife, AngioVac, and some other things we have. So, we're going to add around those, and so, those maybe smaller in scope out of the gate but adding a few small things to an already established space will then make some sense in those areas.

In those specialized areas there is not a lot of large things there. So, we're not trying to time one over the other than may be neutral activities occurring simultaneously. We think we can execute it that as I mentioned earlier, we planned for this. So, we're ready to execute now in our portfolio objectives. I can't tell you today what may happen first obviously if something does will talk to you about it, given the rationale as to why but similarly given both ways. Through effective portfolio management is usually a combination of in and out. Both of those we expect to practice during this fiscal year.

Jason Mills -- Managing Director -- Canaccord Genuity Inc.

Fair enough. Just to follow up on that Jim. Maybe if you give us a sense for, you mentioned smaller assets in some of those growing areas being part of those athletes aren't big. Are we talking about assets that are generating revenue today, or will there be clinical trial, time periods and costs associated with the assets that you mentioned, and then, maybe more for a 20,000 foot level as you're looking at valuations, those valuations you may have buy and valuations you may get for your businesses. Med-tech, at least in my 20-year career, has never traded at multiples this high, so it's a good time to be in Med-tech.

So, perhaps you could comment about what you're seeing within the marketplace, both from a acquisition and divestiture standpoint, in terms of what folks are willing to pay, and maybe what they're wanting them to get paid.

Jim Clemmer -- President and Chief Executive Officer

So, there's series questions, let me try to jump on kind of your theme here. So, a couple of things here in two years ago, as you know, our company was valued, if you look at just the revenue valuation. Our company's valuation was about one times our revenue, and today we're a little over two times our revenue. Okay, fine, we're so underneath the average as you just identified in the Med-tech valuation, so we find the curve. So, you make the assumption that if we were to divest an asset, probably priced about two times revenue, and as you just mentioned earlier, some of the valuations today are very high, extraordinary .

So, the discipline that Michael has financially, we have a really good set of strategic objectives that are three GBUs and deliver, about where they want to be. We've also had a max that bandwidth financial sense that will work for us. So, we're probably paying, Jayson, to your point, a little higher bringing the asset in the house, to make it value of something that may exit our home, but we're going to try to find fair value of what we buy. We also believe that when we add that, the product, it will drive our whole company's valuation higher, it we'll be in areas that have higher-growth and higher-margin.

And back to your question you asked earlier about, do we look at things that are probably not revenue-generating initially? It's not our initial targets. We'd like to find something that has revenue streams initially, that may benefit from our commercial execution capability or the alignment of that technology, the current technology within the AngioDynamics family. We have on campus here, you already Jayson, a couple of things that are call quote-unquote science projects, and some of that we talked to you about today with NanoKnife, which is a proven effective ablation technology, but the work had not been done at Angio to the level that we expect as far as the regulatory and clinical pathways open it up.

So, we're doing our own Quantico science projects internally, around NanoKnife, around the Angiographic expansion, and some other tools we have inside, will talk about later. So, really looking externally, the things that are clear US-focused are things that today already had the regulatory pathway clear, and may already generate some level of revenue that we believe we can accelerate the curve by adding to our family.

Jason Mills -- Managing Director -- Canaccord Genuity Inc.

That's helpful. Thanks for the color on that, Jim. To the last, sort of, line of question for me on NanoKnife, could you take us back a little bit to the near 20,000-foot level, and as you're running through these clinical trials, which we've all been waiting with bated breath, I think, for years to see progress in, so kudos to you on that front and reimbursement sounds like it's moving in the right direction, but as you're thinking about the patients you're studying in this trial, and the patients that you're clinicians are seeing or expect to see once you've hopefully post good results.

What's your low hanging fruit target vessel market? What's the patient's flow through the clinicians offices today? A patient that would be prime candidates for NanoKnife treatment. What does that market look like, and with good data, what kind of adoption rates would you expect? I guess the other part of that question would be, how many centers, if we have good data here eventually, how many centers will have NanoKnife and really truly be developing that therapy continue on within their hospitals?

Jim Clemmer -- President and Chief Executive Officer 

That's a lot of question but I understand where you are going. Jason, what we want to do this morning will share with you are at right now, we hope to have other news in the very near future we will share with you a more defined path ways. But let me take a quick swing into the genesis of your question. I'll speak out a little bit of detail color. What we've done in the last year and a half here is really developed a clear pathway of what we believe in, is the right way to get the regulatory and clinical pathway done.

Do you have access to our customers physician partners, to use data like in the proper way that we can train them properly and they can treat people properly. We have a good idea of how many people are diagnosed with stage three pancreatic cancer on an annual basis, talk about the U.S. for now. Today very few of those people are able to receive coverage from our product. Over time we need to open these pathways up.

When we do, just getting the pathway in the reimbursement coding isn't our only challenge, we also have to make sure that the Medical Oncologists and people that drive care within the medical centers, are aware of the clinical efficacy of their demise. So, we have a lot of work to do but we're very encouraged by the fact we've done a lot of work to past 12 to 18 months in the background, anticipating positive results in this trial, Steve.

Stephen Trowbridge -- Senior Vice President and General Counsel 

Yes, so, your question, you invited us to kind of go up to the 20,000-foot level and then you're asking a little specifically about what we think the markets are for some of the low-hanging fruit for the patients coming through. I want to build on that because I think that's the right way to look at it. Want to hearken back to what Jim said earlier in his prepared remarks, where he talked about irreversible electroporation and our Nanoknife technology as a platform, and then us trying to move that platform or jump off that platform to go to a variety of different cancers including liver, lung, prostate, and brain, and we see that the promise that our technology has is great in all of those areas.

But we do think that the pancreatic cancer patient is the first place to go after and that's something that we talked about when we discussed achieving our breakthrough designation, in that there is a huge unmet need and pancreatic cancer now. Over 55,000 patients are diagnosed every year in the United States in that stage three area. They're very limited options. That's why we're going after that first, but we really do see NanoKnife as a broad platform that has promised to patients throughout the spectrum of cancer care.

This is the first step, but we anticipate going after all those. So, this pancreatic cancer patient population is the low-hanging fruit from our perspective because of the unmet need there are a lot of other options. But it's probably not the biggest market that we're going to go after as we started to build out on the promise of the technology.

Jason Mills -- Managing Director -- Canaccord Genuity Inc.

Thank you guys. That's helpful.

Jim Clemmer -- President and Chief Executive Officer 

Thanks, Jason.

Operator

Your next question is from the line of Matthew with Craig-Hallum. Please present your questions.

Matthew -- Craig-Hallum

Good morning gentlemen and thank you for taking the questions.

Jim Clemmer -- President and Chief Executive Officer

Good morning.

Matthew -- Craig-Hallum

Just a follow-up on the NanoKnife line of questioning a little bit. How should we be thinking and I realize it's not a short term situation but how should we be thinking about those other disease states? Are those markets that you will be going after simultaneously deliver the long brain? Or would they be- would you knock one each one off separately in succession?

Jim Clemmer -- President and Chief Executive Officer 

So, it's a good question. We identified a few of those other disease stage today on the call. Because we're aware of the efficacy we've seen published results as what nano has done the physicians have used our products. What we're going to do I think it's so important for our company. Credibility wise no.1 execution-wise no.2, to get our pancreatic cancer program done. They might be in the market for a number of years and hadn't had the regulatory and clinical pathway that we desire.

So, we think it is very important around as Steve just mentioned, the largest unmet need in the patients who can benefit the most, are those folks who are diagnosed with stage three pancreatic cancer. So we are committed to try to get that program done as efficiently as possible to get those patients acceptance treatment device that we have. When we do that, then we'll give you a clear view as to what our staging will be the next disease states. Yeah, we have the benefit here at Angio, out of people like Steve and good people in laboratory and clinical work group.

We also have a blend of people who have run this business for many years have very good deep knowledge and good ties to the KOLs, externally and new people coming to run this business. We have a lot of good history, and a lot of good forward looking view. So, we will share that soon, but right now to Austin, largest hurdle for us is clearing our NanoKnife pancreatic pathway.

Matthew -- Craig-Hallum

Sounds good. All right and then maybe one question a little bit different here though. During the prepared remarks you had mentioned that you had recently completed the realignment of the sales teams and a couple of the groups. Maybe if you could provide a little bit more color on what the new targets are, and whether or not you anticipate any near term or short-term disruption because of that realignment.

Jim Clemmer -- President and Chief Executive Officer 

It's a good question. So, there's really not a whole lot of disruption is really positively. Look at our Peripheral Vascular business that we just remake. So, Bob and his leadership team on the commercial side taking a look at how our businesses has performed. You look at our Fluid Management business. That has been up over 5% this year, with a really strong competitor, but we just out executed them. One of the gifts we have there is not only talented people that manage the business and sell those products, but we're also the gift of focused.

We have a defined sales group that is responsible for those products in the U.S. They've outperformed the marketplace. So, we're taking some of that gift now and aligned it to another category that is very important to us our AngioVac or our promise category, now has a defined sales team. A while a couple of things to happen the folks than on the venous side are now aligned and defined as well.

We had a tough year, last year on venous. Now the new team can not worry about one corporate customer that we lost. They can do what they do best. Generate relationships and trust with smaller individual customers that understand the efficacy of our laser. So, we really just broken down our sales team to be closer to the customer, closer to the action where decisions are made, and to make sure we clinically represented technology that we have in a better manner. We have really good people, now there are aligned in a better manner.

Matthew -- Craig-Hallum

Understood great. Thank you very much.

Operator

Thank you. As a reminder, to ask a question you may press star one. The next question is a follow-up from the line of Matthew Mishan with KeyBanc. Proceed with your question.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Hey thanks for taking the follow-up. I just wanted to talk a little bit about the competitive landscape around IRE. Are there other players who are trying to enter this area, and how confident are you in the ability of protect like the patent portfolio?

Stephen Trowbridge -- Senior Vice President and General Counsel 

Sure Matt, I'll jump in on that. Yes, there are other people that are getting into this area more broadly. I do think that we haven't seen a lot of the meeting into the specific electroporation around the parameters that we have proven out with NanoKnife, but we do know that there are other people that are looking at the delivery of energy as a way to treat cancer patients. We're continuing to build out our patent portfolio. We do feel very strongly that we had created in the fence around our technology, and all of the history in patients that we treated throughout the year that Jim talked about NanoKnife being on the market.

So, we feel pretty confident in our IP position as well as the position that our technology currently has. We're currently we're always looking to get into this game and make sure that we continue to stay on the leading edge of the development of this particular type of therapy. So, yes people are looking at it, but we feel very strong about our current position, if we're going to continue to foster that position.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Okay, and then in the EVLT business, in addition to the headwinds from a customer contract loss, we're also seeing Medtronic moving, our competitor moving with VenaSeal with some good reimbursement for that product. What's the headwind in the additional headwind you may see from a competitive entry like that entering the market?

Jim Clemmer -- President and Chief Executive Officer -- AngioDynamics

You know Matt, I think we see more of an issue around the RF product from Medtronic than the VenaSeal. I think they're working hard probably in there and I can't speak for them to maybe balance their portfolio a bit. But what really we need not seen is much.

Maybe adoption or marketplace disruption of VenaSeal, I think that's their issues to get that aligned in their portfolio. But, the RF reimbursement has been the bigger hurdle we've seen. Now, we think we can face it well. We know the efficacy of our laser, it works really well. Positions globally understand the value of what it does to help cure patients. So, now, part of the realignment we've done, is allow our Sales Reps to communicate that message in a more clear fashion. Medtronic will always be a tough competitor. But we think we're better aligned now than we were in the past.

Michael Greiner -- Executive Vice President and Chief Financial Officer 

Matt, I would just add that broadly non-thermal not messing categories including player been a cleaner, we've not seen inherent disruption there, that doesn't mean that might not come later on. Next generation forms but exactly right RD impact has been far more significant.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Last question on AngioVac. It's seems that the growth has been much more sustainable at these levels over like the last three or four quarters. What do you see has been the drivers of it? Previously, it's been more fits and starts there.

Jim Clemmer -- President and Chief Executive Officer

Well, look at it internally. First of all, we have a really good marketing team, that understands our product. Second, a good R&D team that's working with that marketing team, adding value to the product. Third, the product is really good. It doesn't nothing else can do in that space. Then finally, we're looking at these cases shift are watching clinicians who have done cases shift what they're treating. We're seeing more cases being done in the right heart, by our physicians who treated things differently.

So, watching the shifting in care, I think they're now seeing positive results in that area. So, we're very very careful in to how we support that, and we're now looking at expanded regulatory, and clinical pathways that we're interested in, that we'll speak to you about in the very near future, to help open up the way we can get AngioVac to market. So, Matt maybe hopefully you'll see, maybe you'll look back at AngioDynamics and use the AngioVac example of what we're trying to do here. Where we have something that we know is really differentiated.

The technology is terrific. But we have not always had is maybe a really strong business plan around that technology. That accomplishes not just the go-to-market plan, but our clinical and regulatory pathway plan. So, now we've built those, and we've got really good clinical and regulatory people to buy good marketing people, and great effective sales people to carry the message to the street. So, taking AngioVac or you just identified as consistent success, and hopefully you'll see that from us in a few more categories going forward.

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Thank you.

Operator

Thank you. At this time, I will turn the floor back to our CEO, Jim Clemmer for closing remark.

Jim Clemmer -- President and Chief Executive Officer

Suppose thank you for joining us this morning. Again, at AngioDynamics, we're work-in-progress. We're proud of a lot of results we could report this morning. We also have identified areas that we can improve upon. Areas that we know we can do to increase value to our three most important stakeholders: our customers who represent our patients, our employees, and our shareholders. Each of those three stakeholders deserve the highest major dynamics we will deliver. Thank you for being a part of our story. We look forward to sharing our growth in the future.

Operator

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 55 minutes

Call participants:

Jim Clemmer -- President and Chief Executive Officer -- AngioDynamics

Michael Greiner -- Executive Vice President and Chief Financial Officer -- AngioDynamics

Matthew Mishan -- Vice President and Equity Research Analyst -- KeyBanc

Stephen Trowbridge -- Senior Vice President and General Counsel -- AngioDynamics

Jayson Bedford -- Sr. Vice President, Equity Research -- Raymond James

Jason Mills -- Managing Director -- Canaccord Genuity Inc.

Matthew -- Craig-Hallum

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