AngioDynamics (NASDAQ: ANGO) reported quarterly earnings on Thursday morning. In the third fiscal 2018 quarter (ended February 2018), the company had revenue of $83.9 million, slightly below expectations. On the plus side, gross margin improved 3 percentage points, and earnings (adjusted for unusual items) was $0.25 per share, above expectations.

The company’s quarterly revenue was down 2% compared to a year ago. The negative comparison is attributable to competitive pressure in its venous and catheter product lines and ending a product line in Japan. Its key growth products, the NanoKnife and Solero Microwave Tissue Ablation System, both grew in the mid-teens. Sales for its BioFlo product line also grew.

A Need to Reevaluate

Overall, 8 out of AngioDynamics’ 11 product categories experienced higher year-over-year sales. The CEO James Clemmer acknowledged that the other 3 categories are the biggest inhibitor to stronger overall revenue growth and needs to be addressed.

Clemmer did not provide many specific details beyond saying the company will more rigorously evaluate its products and more discriminately concentrate investments in the products with stronger performance.

In regards to the margin expansion, AngioDynamics believes that the roughly 54% gross margin is sustainable through the fiscal fourth quarter and into fiscal 2019 because it has closed down some inefficient manufacturing plants and the remaining ones will be more productive. The company believes the plant consolidation permanently reduced overhead by $4 million to $5 million per year.

A Surprising Delay

Clemmer also noted that in regards to its efforts to obtain FDA approval to use NanoKnife to treat stage-3 pancreatic cancer, the company will go through the longer Premarket Approval (PMA) pathway with the FDA rather than apply for a 510(k) clearance.

To obtain 510(k) clearance, a company has to demonstrate that a device is “substantially equivalent” to a device already approved by the FDA. This was the expected pathway.

On the other hand, a PMA submission needs to prove to the FDA that a new or modified device is safe and effective. A key difference is that in the latter, human use data from a formal clinical study is required.

In other words, AngioDynamics will need to run a clinical study to show that the NanoKnife is safe and effective in treating stage-3 pancreatic cancer. The FDA granted the NanoKnife an Expedited Access Pathway designation for pancreatic cancer in January, but apparently it’s not satisfied with currently available data. It wants the company to provide more clinically-derived evidence before it will give its official blessing.

This will be the first time ever that AngioDynamics will use the PMA pathway for approval. The company believes it should be able to initiate the trial sometime in the second half of this year.

This announcement is a surprise, and likely explains the drop in the share price on Thursday. After a steep dive early in the morning, ANGO recovered and ended the day up 2%.

Long-Term Benefits to a PMA

While it will cost money to run a trial and approval will take longer, going through the more rigorous PMA route could bring more benefits in the long run. For example, having stronger clinical data should convince more physicians of the medical benefit of NanoKnife and the company may have an easier time getting approvals from payers.

Getting FDA approval is one thing, getting private and government payers to approval the product for reimbursements is a separate matter. The more data support the company has, the better its chances to get the insurers to pay.

The company still has some work to do before it’s running at full throttle, but the pieces do appear to be slowly falling into place for faster growth.