ICU Medical Inc (ICUI) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2006 ICU Medical Inc. earnings conference call. My name is Shamika and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's conference, Dr. Lopez. Please proceed.

Good afternoon. Thank you for joining us for our review of ICU Medical's results for the second quarter and six months ending June 30, 2006. I'm Dr. Lopez, Chairman and President of ICU Medical, and with me today is Frank O'Brien, our CFO. On today's call, I will provide an overview of our operating results and Frank will provide detailed financial information for the second quarter. I will wrap up our prepared remarks with an update on our 2006 target and a discussion of current business trends before we go to the q-and-a. As always, we will limit the length of the call to about 45 minutes.

Before we begin, in the event that we touch on forward-looking statements during this call, please be aware that they are based on the best information probably available to management and assumptions that management believes are reasonable, though such statements are not intended to the representation for future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to our filings with the SEC for more detailed information on the risks that have a direct bearing on our operating results, performance and financial condition.

What that said, I will begin. We are very pleased with the continued strong financial results we achieved during this quarter as our sales growth and profitability exceeded our earlier expectations. Second quarter revenue increased 26% to $51.4 million and net income increased over 32% to 6.3 million, or $0.40 per diluted share as compared to 4.8 million, or $0.31 per diluted share in the second quarter of '05. We achieved growth in all of our channels of distribution during the quarter, including approximately 66% growth in our international channel. Also during the quarter, our existing core CLAVE and custom CLAVE and critical care product lines all performed very well and our revenue for our custom systems increased by 26%.

A number of years ago, we identified the custom market as a long-term growth opportunity for our Company. We believe that we have significant additional growth opportunities, both with additional customers and additional customizable therapy products. The potential market is big, and so far, no one is effectively competing with us. We ended the quarter with over $100 million in cash and equivalents and no debt, even as we continue to increased our investments in plants and expansion, R&D, sales and marketing and planned increases in our inventory levels.

In manufacturing, I'm pleased to report that we have completed approximately 50% of the transfer to Mexico of most of the manual assembly from Salt Lake City. This move is going as planned and we expect most of the move to be completed in the first half of 2007.

In addition, we have begun to move all molding and automated assembly from our San Clemente facility to the Salt Lake City facility and expect this move to be completed before the end of the summer. We believe moving our manual assembly lines to Mexico and consolidating our automated product from Salt Lake City will improve our manufacturing efficiencies and help improve our margins in the future. We will continue to use our strong product offering, secure manufacturing capabilities, market position, partners and balance sheet to enhance shareholder value by launching new products, improving manufacturing cost, pursuing acquisitions and expanding our market share. I believe we have the right people and resources in place to achieve these goals. Looking forward, we're well positioned to capitalize on our product leadership and stay focused on operational efficiency and management of our capital.

Before I get into more detail about our plans moving forward, I would like to turn the call back over to Frank to discuss our quarterly financial results in more detail. Frank?

Thank you, and good afternoon, everyone. Before I begin, let me remind you that all of the sales numbers we're covering as well as our condensed financial statements will as usual be available on our website before this call is over.

During the second quarter, we achieved top line growth in all distribution channels and an improvement in gross margins, resulting in very strong earnings growth. As Dr. Lopez mentioned, our revenue in the second quarter increased 26% to 51.4 million. Net income for the quarter totaled 6.3 million. This translates into $0.40 per diluted share for the second quarter of 2006 over a 32% increase compared to the $0.31 per share in the second quarter of 2005.

For the first six months of 2006, revenue improved to $100.2 million as compared to $67.8 million in the same period last year. Net income for the first six months increased 38% to $12.7 million, as compared to $9.2 million in the same period last year.

Now, let me provide you with the sales mix for the second quarter. We continue to diversify our revenue with the critical care product line and custom product lines. During the second quarter of 2006, our product revenue mix was as follows. CLAVE products excluding custom IV systems increased 20% to $18.4 million and were 35% of revenue in the second quarter of 2006 versus 37% during the second quarter of last year. When you add together CLAVE and CLAVE custom IV sets, combined sales were $25.5 million in the second quarter of 2006 compared to $20.7 million in the second quarter of 2005.

Custom products, which include CLAVE, non-CLAVE and critical care custom products, were 27% of total sales in the second quarter of 2006 and 19% for the second quarter of 2005. On a dollar basis, Custom product sales increased 26% to $14 million, compared to $11.1 million in the second quarter a year ago. As we have been highlighting for a number of quarters now, we believe there is tremendous growth opportunities in the custom market for many years to come. Critical care products, excluding Custom products, were 24% of revenues, or $12.3 million.

Now let's move to sales by distribution channels. As I mentioned earlier, we experienced sales increases in all of our channels. Sales to Hospira increased 25% to $38.2 million in the second quarter of 2006 compared to $30.9 million in the second quarter of 2005. Principal contributors here were CLAVE of $2 million and Critical Care products, excluding Custom products, up $3.8 million and Custom products up $1.3 million.

Domestic distributors generated $6.8 million in the second quarter of 2006, up 13% from last year. This increase was principally in Custom products. International sales for the quarter increased 66% to $5.3 million. We see international markets as a very promising growth area and continue to establish our position in Europe, Latin America, the Pacific Rim and South Africa. The sales increase was led by strong CLAVE and Custom IV system sales in Europe.

Moving to gross margins, you might keep in mind that we closed the Salt Lake City facility transaction purchase in May of 2005, and initially, that caused lower overall margins for the Company. For the second quarter of 2006, our gross margin on product sales were 44%, which compares to 42% in the first quarter of 2006 and 40% in the second quarter of 2005. We expect our overall gross margin to continue to improve throughout 2006 due to manufacturing efficiencies at our plants as we continue moving our San Clemente production to Salt Lake City and the manual processes to a lower-cost facility and Mexico and continue to make other manufacturing improvements. The relocation of manufacturing is probably 40% complete as of today and we expect the entire move to be finished by the first half of 2007. We expect the gross margin on existing products to increase quarterly by approximately 0.5 to 1 percentage point each quarter until they approach 50% in late 2007 or early 2008. We think we can go higher, perhaps into the mid-50%'s, in a few years if the new products that we're launching are successful.

Second quarter SG&A expenses were $12.2 million compared to $9.6 million in the same period last year. The increase was primarily due to expanding our sales force during the latter half of 2005. In addition, we awarded special bonuses in the second quarter of $1.6 million, of which $1.2 million was reported in SG&A expense. As a percentage of total revenue, SG&A expenses were 24% in the second quarter of 2006, compared to 23% in the same period last year. We believe we will begin to experience more leverage from our recent investments in SG&A as [a] percent of revenue should be between 22 and 24% in the coming quarters.

Research and development expenses totaled $2.3 million in the second quarter of 2006, or 5% of revenue, compared to $1.0 million in the same period last year. We expect continued investments in R&D during 2006 as we use our strong cash flows to develop innovative critical care or next-generation products.

During the second quarter, we continued to improve our balance sheet. As of June 30, 2006, we had $100.4 million in cash and investments and $140.4 million in working capital, and as usual, no debt. Accounts receivable at the end of the second quarter were relatively flat compared to the first quarter of 2006. DSOs, days sales outstanding, were 48 days at the end of June 2006 compared to 50 days at the end of the previous quarter.

Our inventory levels increased during the second quarter as planned to $18.5 million compared to $16.7 million in the previous quarter. This increase is primarily attributable to an increase in CLAVE products in preparation for the transfer of production to Salt Lake City. Our operating cash flow was $5.7 million for the second quarter, even after our increased inventory position.

Let me digress for a moment and touch on one matter that some of you have asked about. The company called Medegen sued us several days ago, alleging that our CLC and TEGO products infringe on one of their patents. We're still examining the allegations but so far believe we're not infringing and that there is no significant financial exposure.

Now I will turn the call over to Dr. Lopez to discuss ongoing business trends in more detail and the outlook for the rest of 2006.

Thanks, Frank. Based on our top line outlook for the remainder of 2006 and continued improvements in our margins, we are raising our revenue and earnings projections. We now expect to achieve sales of $195 million. In addition, we are raising our diluted earnings per share target to 165. We feel we have good visibility for the rest of the year, so we are giving [you] targets as a single accurate number, rather than a range. None of these numbers include the effects of any potential acquisitions, new products or net gains from the sale of assets in San Clemente related to moving manufacturing to Salt Lake City, but do include projection costs associated with the moves in manufacturing facilities. We expect third quarter revenue to be down slightly from the second quarter, reflecting normal seasonality and the fourth up slightly from the third with EPS generally trending the same as revenues. But the next two quarters are targeted to improve as compared to the same quarters in 2005. Further, gross margins may drop slightly in the third quarter because of a one-time moving cost, and then return to the increases Frank described earlier.

Now to recap a few numbers for the second quarter. Revenue increased 26% to 51.4 million, earnings increased over 32%, free cash flow of 10.4 million for the first six months of this year versus 4.8 million for last year; operating income 17%, up from 14% for the same pad last year; DSOs, 48 days versus 50 days as of March 31, 2006; finished good turns, 31 times, off from 38 times less quarter, reflecting the build and buffer inventory; cash from investments, 100.4 million, up from 86.7 million at 12/31/05.

We are very encouraged by our second quarter results and expect to continue to deliver strong revenue and earnings performance throughout 2006. Based on our improving efficiencies and continued demand for our Custom IV systems and Critical Care product lines and the strength of our international markets, we're raising our earnings and revenue targets from those provided at our last conference call in April.

One of the reasons we're particularly pleased with the operating performance is, even as we build for the future with larger investments in sales and marketing and research and development, our bottom-line results continue to improve even during our sales force ramp-up and doubling of R&D spending. We're launching several new products, although sales on them are still very small. TEGO, which is a new connector which we're selling as an infection control device for use dialysis catheters, is gaining traction and a very strong response. Production tooling is on order. The Orbit 90 is a diabetic infusion set which has many features for patient comfort and ease-of-use. Initial reaction is very favorable. We're shipping product and tooling up for large-scale production. The [integral wide side check valve] has been used in our manufacturing product since late last year. This avoids the need for a separate check valve on IV sets. Automation is being ordered and we plan to sell this in the OEM market.

A line of chemo products for cancer care is being received very well, so well that we are considering adding more salespeople to meet market demand. We have several novel devices which will enhance the success of this line. One is a closed male lure which eliminates the drip at the tip of the lure on a syringe or IV line when they are disconnected. Another is a drug vial access device that eliminates any chance of drugs escaping into the air when a vial is accessed. Both of them are important to contain toxic chemotherapy drugs and keep them out of contact with the health care workers.

And we're working on a novel blood monitoring device, which if successful, will revolutionize critical care therapy. More on that later when we verify that it works.

With everything about new products, CLAVE, which by now is an older product, still in our view is the best IV connector on the market. Infection control is a big issue in health care today. Because of the CLAVE's patented design feature that CLAVE has significantly lowered rates of catheter-related infections than other connectors on the market. As witness to this, Johns Hopkins recently had an adverse experience with another company's connector and upon replacing it with a CLAVE had a significant drop in catheter-related infections. We have gained some business because of this publicity. ICU was the first with a swabbable connector and the CLAVE is still the best and we believe some of the strength in CLAVE's sales in the quarter is from market recognition of CLAVE's superior infection control performance.

As I mentioned in my opening remarks, I believe we have significant opportunity for custom product growth and we believe due to our position in the market, our R&D and low-cost manufacturing we are the leaders in this field and will continue to unveil new products that will expand our overall market share domestically and internationally in areas such as oncology, angiography and critical care.

Now turning to our channels, as I mentioned earlier, we achieved growth in every one of our channels during the second quarter, including in our international channel, which grew 66% during the quarter from conversions to CLAVE and sales of custom sets. We expect continued growth in all channels with our most rapidly growing channel, international, leading the way with year-over-year growth in excess of 40%.

Now I'd like to spend a few moments on the relocation of the automated manufacturing from San Clemente to Salt Lake City and the manual processes from Salt Lake City to our facility in Ensenada, Mexico, as we believe that this will truly position the Company for long-term growth. As we mentioned on our first quarter call, both moves were preceded by construction. The initial expansion in Mexico and the construction in Salt Lake City are both complete and we have moved approximately 50% of Salt Lake City manual assembly, except for the highly skilled parts that stay in Salt Lake City, to Mexico, with completion in the first half of '07. The significant redesign of the production floor in Salt Lake City and construction improvement is complete and was right on schedule. We continue to move equipment out of San Clemente and the move from San Clemente to Salt Lake City will be complete by the end of the summer. These moves have been carefully and intensively planned to avoid any order fulfillment or quality issues.

In order to minimize disruption to our sales and customer service, we're doing both moves in careful and measured steps. As Frank mentioned, our inventory is up because we have made a conscious effort to build up inventory levels during the move. We have done extensive training, however, keep in mind that we do expect the move to have a small, small temporary effect on operating margins in '06 until we realize the full benefits in '07 and beyond.

In summary, the last time I felt this excited about the future was the night before we launched the CLAVE connector. Looking forward, I like what I see. Now I would like to turn the call over to questions if I may.

(Operator Instructions). Daniel Owczarski.

Hi, Dr. Lopez, hi Frank, congratulations on the quarter. I was wondering if you could talk a little bit about where you are with building your sales force -- how much did you do in the quarter, are you where you want to be, or what do you have left to do?

We have enough sales men for what we want to do, but, Dan, we have recognized an opportunity -- we think there's a huge opportunity in oncology. So we're actually contemplating with our excess earnings to invest it in more sales people, specifically for oncology. We're launching -- waiting for the FDA approval on Genie, we already have FDA approval on the closed male lure, we're actually taking orders and it's going so well that we're actually contemplating adding more people. But it shouldn't have any impact on the numbers we've given you.

Okay, and as far as (multiple speakers).

(indiscernible) want to go as many salesmen as we think we need, which in the neighborhood, for our oncology, we're thinking of around 15 more people.

I was going to say -- as far as a timetable for those oncology products, it sounds like it's within a couple of quarters.

No, we are actually selling now. We're taking orders and (indiscernible). We've got some -- I haven't verified, but we actually have some fairly large orders. And my philosophy is, when you're winning, pour it on. And we're waiting for the FDA to approve Genie, and that should occur, actually expected to occur last week. They still have some time left. But once Genie goes through, we think that's going to add more fuel to the fire. So I think the best answer is, about 15 more sales men. We have around 70 now.

And then for the oncology products that you're selling right now, who are the customers that are most attracted to these new products, and how are you positioning or who are you aggressively going after to market it?

The market right now doesn't exist. There's really nobody in the oncology market. We see as a customizable market where you can walk in and use our connectors which are closed now. When you disconnect the -- after you have given the drug, normally when you disconnect an IV, it drips out the oncology drug. With our sets, when you disconnect them, they close off. When you -- with the Genie product, which I say we're waiting for a on a 510k on, that product there, you can access vials and such. So it's really, we're customizing the market and it's a fragmented market but a fairly large market. And so we are targeting companies that -- the hospitals, the clinics, there's some fairly large organizations that sell -- that take care of oncology patients, such as US Oncology and such. We're targeting those accounts.

And then switching to Hospira and the critical care business, now that you're a year into it, have they committed any additional resources to expand that product line or added more sales capabilities themselves? And now that you are a year into it, have they met or exceeded their commitment to that area in your eyes?

I'll let Frank tell you, but the answer's yes.

Yes, they've actually exceeded that commitment somewhat on the sales side. It's going well.

We're very happy the way critical care is going. We are way, way -- we're three-quarters ahead of our plan.

When you say on the sales side, you mean sales resources, or sales revenue?

Both.

And then, Frank, you briefly mentioned that newest litigation, Medegen. Have you guys been in court with them before? Is there any history there?

Yes. There is some history going back about four years. A similar suit was brought by one of their predecessors organizations and it was dropped.

Okay. And my last question, now that you've built that cash position back up, as far as priorities, acquisitions, strategic investments, share buyback -- any, all of the above, or how should we think of it priority wise?

Acquisitions I think would be the top priority.

I would drop the word strategic because I don't believe in strategic acquisitions, but acquisitions -- accretive acquisitions would be a better definition, certainly that. If we can acquire business in the custom fields, custom set business, we would certainly be interested in that. We are actually actively pursuing that. As far as cash buybacks, that's certainly -- we think the stock has got a lot of potential ahead of it, so you can probably be -- keep an eye out for stock buybacks, which is something we do from time to time and have authority from the Board. So that's probably going to occur in the future. What else?

That's it.

To be honest with you, Dan, the amount of cash, the free cash flow that we accumulate, you cannot be very difficult to bring that down because the cash flow's pretty strong. And the more -- as we move into oncology with these new products and such, I expect it to just continue to go up.

Okay, thank you.

Bruce Cranna.

I guess some housekeeping first if I could, Frank. In terms of tax rate guidance for the year, where should we be?

37%. We're looking at 37% now, Bruce.

So kind of snapping back a bit?

Yes.

You mentioned the dollar amount I think that hit SG&A on the sales bonus piece. What was that?

$0.06 per share.

The dollar is 1.6 gross, [worth] [1.2] million (indiscernible) hit the SG&A line.

About $0.06 gross per share.

Do you guys always pay bonuses in 2Q, or is that something unusual?

It's unusual because the acquisition, and as you see the earnings are so strong from the acquisitions that the Board decided to reward only the people that were involved with the transition -- moving the product, moving the machines, transferring the lines down to Mexico. So it only involved people who were directly involved in the successful acquisition and merger of Salt Lake City. So you're correct -- we normally don't do it in the second period, but as you know, the earnings were fairly strong.

And Doc, is there any way, when you look at the critical care business from Hospira, any way to kind of assess it I guess if you and sort of core growth rates when you look at where you are this year versus a year ago? Do think it's sort of a single-digit growth business, or do you have any better sense to kind of directionally which way that's going?

No, I don't. I don't have a specific number I can give you, Bruce, I don't. Although, I would say something. It's my understanding from looking at and talking to the sales people that a lot of the growth we're getting now is coming from competitors in addition to Hospira. Hospira is doing well, but coming from competitors, that Johns Hopkins article made a huge impact on the market in terms of converting hospitals. So we're converting hospitals from competitors that normally we would not have taken.

And just so I'm clear, when I look at the OUS line -- sorry -- outside the U.S., or the non-U.S. sales line, the 66% up, is that your distribution alone?

As compared to what, Bruce?

HSP?

There is some HSP in there.

Can you give us a sense as to who's really pushing that rock?

When you say pushing the rock, Bruce --.

You mean, the breakdown between Hospira and our independent distributors?

(indiscernible) yes, I mean, it would be up 60%. I'm just trying to figure out -- is it really that HSP is starting to push a little harder OUS, or is it your own independent distribution?

That's a piece of it, but the majority of the growth is our non-HSP distribution.

So that's you guys really doing that?

It's really, the custom set business in Italy, is doing very strong, going very strong, and the CLAVE is very strong.

And then, Doc, you mentioned TEGO a couple of times. Can you just remind us, do you have any plans to partner that product? Am I right in assuming it's all independently distributed currently?

Remember, there's no reimbursement for that product, no reimbursement. It comes right out of the bottom of their bottom line, which is unusual. But right now, we have four people selling the product and that's it, but they're converging -- they've converted approximately 50 accounts by now and we just got word for another 15 accounts in one of the states is going to be converting also. So, remember, the numbers are still small, but I started with CLAVE with very small numbers also. You have to start somewhere.

Did you say 5-0, 50?

50 accounts, yes.

So is that really just 50 clinics, or when you say (multiple speakers)?

Hospitals or clinics or -- exactly, and growing. Remember, what happened here, Bruce, is we applied for a reimbursement number from the Medicare. If we get that reimbursement number, I'm assured that there is virtually no account that will say no. Right now, just virtually we should own that market at that particular time, and we cannot apply until November of this year.

You're applying in November for a code?

Right, and we're working very hard on that presentation. But I'm assured by the sales force that the answer is going to be yes for every claim that [succeeds] it. So no competitors, empty market.

Okay. And then last question -- .

Remember, the market, the big market you have to put your eye on is this oncology market. Remember, this is just a natural extension of where we're going. We've built up to the custom set business, expect that number to continue to grow. But branching into oncology with our new closed connectors and such in custom format; that does two things. It's a big market, number one; and number two, it creates a big barrier to entry for competitors because every account is going to be different and nobody can make every step different. They can make a million all the same, they just can't make them different. So that's where you want to turn your eye towards. Yes, we'll make a ton of money on TEGO, but the big market to keep your eye on for growth in the future is oncology.

How much of your custom set business do you think is already being driven from the oncology?

We just started, we're just taking orders now.

I thought you were doing a fair amount in oncology already.

No, no, no.

We've got some in Italy, but it's still a relatively (multiple speakers).

Yes, my correction. I'm thinking U.S., you're thinking Europe, the answer is yes. But that's where we cut our teeth on the market. But we've just started in the U.S. and we have some fairly sizable orders coming forward, so we will report those next quarter.

And then my last question, I just want to push a little bit on Mexico. You may take some exception to this, but initially I think you would describe that transition as kind of 3Q this year and then sort of became early '07 and now it sounds like first half '07. So I guess if it's moving a bit to the right, I just (multiple speakers).

No, no, we have never been in -- our buildouts and execution has been exactly on schedule. So you must have the wrong notes or the wrong days, because remember, there's a bunch of parts that are moving here. We're moving manual assembly from Salt Lake City to Mexico; that's one part. Then we're moving -- we've done about 50% completion -- across the street, we're actually about -- the equipment machine moving over, about 85% of it is moved from San Clemente to Salt Lake City as of today because I walked the facility this morning. It's virtually empty in there; there's like four or five machines in there as far as molding machines go. But at Best, we had 40-something before. So that has moved over, but we're right on date, Bruce. We're actually -- construction was completed right on schedule, everything is moving right on cue. We'll be out of San Clemente by probably September

Oh, yes, by September for sure.

So if you have the wrong --.

Bruce, let me just help you a little bit on the date. The target date is April '07 to get the manual stuff all done, so that's in the first half.

Maybe I'll go back and reread.

We'll be ahead of that schedule, we'll be way ahead of that.

Thank you.

Robert Goldman.

Thank you. I apologize if I misheard this, I'm on a cell phone and it might have been a bit muffled. But I think you mentioned that you're in the process of introducing seven new products. And I certainly know about TEGO as well as the oncology systems, but what are the other five that I have sort of missed?

I think your cell phone scrambled something on you. It's several.

Several? Okay, I'm sorry. Were there others in addition to TEGO and oncology systems?

I went ahead and mentioned one which normally we wouldn't do, but we're within three weeks of testing. We'll be testing a new product for critical care that if -- and a big if -- if it works, it will be extremely disruptive to critical care units and critical care medicine, be it a fantastic high-margin product, but that's if it works. And we'll know within three weeks. I sort of mentioned it this time so I can talk about it next time because we assume it may work. We're going to do bench testing and prototype testing and be complete with the monitor and the device by -- within three weeks.

Also on the new product front, I gather that the Company you have a majority interest in Connecticut has a product that was nearing a prototype stage with the possibility of actually seeing that product this month. Have any update on that product?

We really don't talk about that product because we really don't -- that's an investment we made which if it's again a disruptive technology. But it's really a year away from the marketplace. So at this point, we rally shouldn't be talking about it.

Okay. And switching gears a second, I believe also you're a few weeks into implementing your new computer systems broadly throughout the Company.

Well, mainly Salt Lake City Oracle. Oracle, and it went off perfectly, without a hitch, which is extremely unusual. We executed Oracle implementation. It was just so well planned that no hiccups, no nothing, just went off perfectly. And that's one of the reasons bonuses were received also. Part of it was the implementation of Oracle.

Let me ask, finally, we're still early, but I know the legal suit with [Alaris] Cardinal is scheduled for the jury trial earlier part of next year. Any update on there? Is this likely to reach a jury trial in February, or are discussions such that it might never reach that point?

Both, both.

Both, you said?

Both.

Anything can happen, Bob. We have a long way to go.

They're okay people, though.

Alright, good. Thank you.

(Operator Instructions). Greg Macosko.

Yes, nice quarter, Doc. Could you talk about the transition? You're saying you're 40% complete with the transition from Salt Lake City. In terms of the cost savings and the total gains there, is that about the same? Are we at the same point in terms of cost savings?

No, we're ahead of that, Greg, because a lot of the savings are coming from changes in manufacturing processes and headcount in Salt Lake City that are happening independent of the actual physical relocations.

So when you talk about the goal of 50% gross margins, just looking at gross margins here, is that -- what -- how far of that -- how much of that is kind of the consolidation and getting Salt Lake City all together, and how much more, and how much to get to that level is from new products or just other things there, would you say?

The 50% is based only on the products that we have today. It does not include any new products. And what's there Greg, and I don't have the numbers separately, but it's a combination of the benefits of the move, better overhead absorption and adjustments in manufacturing processes in (multiple speakers) Salt Lake. There's a big difference in labor rates between Salt Lake City and Mexico, and that's going to have an effect.

Keep in mind, I'll reinforce what Frank said and we've said it a number of times, and that's look for the margins on average to spread 50 to 100 basis points per quarter on average. I've also mentioned, it should drop slightly next quarter and then come back up again. But look on the average, until we get to 50%. We're pretty confident internally, but we won't project that outwardly. We're pretty confident we can get above 50% with new products, because with products like Genie and oncology, these will be high-margin products and should shift our margins towards more traditional margins, which you've known me to achieve for many years, Greg.

So if we looked at fourth quarter, given the down in the third quarter, could we be as high as 46%, somewhere between 45 and 6 then in the fourth quarter? Is that what you're saying?

I would not exclude that at all, Greg. Anything is possible.

Highly possible.

Okay, good, that's nice to hear. And with regard SG&A then, have we -- we have ramped up what we need now, and then most of it - and so the next -- if we grow more, that's from the 15 people in the oncology discussion we had?

I probably don't understand your question.

Basically that's the case, Greg.

So we've gotten SG&A pretty much in place with the new salesmen and with the consolidation and with Salt Lake City?

Pretty much. There's always some creep in the spending as we get bigger as well, but you know, you've identified the big piece.

And then your discussion of Orbit 90 with the diabetes tooling up for a large scale. When should we start to see that really ramp, because that's a fairly good-sized market?

We're basically -- with our (indiscernible) right now, my understanding we're sold off for the year. We have to wait for bigger tooling, bigger cavity tooling. But my understanding is that we can't take any more orders. We're sold out for the year. But it takes awhile to build higher-cavitation tooling, and once that's in place, then we'll ramp up for -- we'll be there for 2007.

So just order of magnitude in terms of 2007, what's the potential for that market, say, once you have everything?

We'll give you pretty accurate guidance on our next earnings conference call.

On that particular piece then?

Right, we'll probably, absolutely.

And then is the run rate on a quarterly basis for R&D about right now? I know you kept those people in Salt Lake City.

We're targeting, Greg, to be at about 5% of sales, and we're --.

You're almost there, you're a little below 5% at this point.

We're just over 4.5, so, yes. And, we could go higher than that. We're not going to miss any opportunities.

If this new product works out, this new critical care product, we'll be pouring in R&D dollars into it. It works, but it's a big if.

Yes, well, you make those ifs work, Doc. Okay, thanks very much.

I would now like to turn the call back over to Dr. Lopez. Please proceed.

Thank you very much. We appreciate you joining us. We'll see you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.