金百利克拉克 (KMB) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow Corporations second quarter results conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards we will conduct a question and answer session.

At that time if you have a question, please press the one followed by the four on your telephone.

As a reminder this conference is being recorded Tuesday July 29, 2003.

I would now like to turn the conference over to Mr. Don Earhart, Chairman, President and Chief Executive Officer of I-Flow.

Please go ahead, sir.

Thank you operator, and thank you all for joining us this morning on the first of I-Flow's regular quarterly earnings conference calls.

We are very pleased with our second quarter results.

This makes six consecutive quarters of record top line growth for I-Flow.

In just a year and a half we have transformed the company from an OEM operation to an aggressive direct marketing organization that is structured to distribute our growing family of ON-Q Pain Relief Products.

Today's results confirm that our strategic road map has us moving in the right direction.

After Jim Talevich, our Chief Financial Officer reviews the financial results, I will have some additional comments on the quarter, and where I-Flow is going.

Jim?

Thanks, Don.

First a housekeeping item.

Please note that this conference call will include forward-looking statements.

These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.

These statements are not guarantees of future performance, and actual results may differ materially.

A more detailed discussion of these risk and uncertainties is contained in this morning's press release and in I-Flow's various filings with the SEC.

The statements made during this call are made only as of the date of the call, and we undertake no obligation to update these statements.

Net revenues for the second quarter ended June 30, 2003 increased 32% to a record $12,563,000, from $9,505,000 in the prior year quarter ended June 30, 2002.

By market segment, Regional Anesthesia revenues increased by 58% to $5,019,000.

Oncology Infusion Services revenues increase by 27%, to $3.3m, and IV Infusion Therapy revenues increased by 13%, to $4,230,000.

Gross profit increased by 35% overall to $7,740,000 for the quarter ended June 30, 2003, from $5,713,000 for the quarter ended June 30, 2002.

This gross profit increase was due to the increase in revenues, and a change in sales mix towards a greater proportion of high margin ON-Q products.

Selling General and Administrative expenses increased to $7,176,000 for the second quarter of 2003, from $4,975,000 in the prior year quarter.

This was primarily due to increased selling and marketing expenses to support the ON-Q sales expansion effort, which included the addition of more than 30 sales representatives.

R&D expenses decreased slightly to $520,000 for the second quarter of 2003, from $565,000 in the prior year quarter due to decreased consulting expenses associated with specific projects.

Net income decreased to $22,000 or zero cents per diluted share, for the quarter ended June 30, 2003, from $106,000 or one cent per diluted share for the quarter ended June 30, 2002.

For the six months ended June 30, 2003, revenues increased 31% to a record $23,727,000, from $18,055,000 for the six months ended June 30, 2002.

By market segment, Regional Anesthesia revenues increased by 63% to $9,063,000.

Oncology Infusion Services revenues increased by 25% to $6,344,000, and IV Infusion Therapy revenues increase by 12% to $8,320,000.

Gross profit increased by $3,948,000 or 37% overall, to $14,755,000 for the six months ended June 30, 2003, from $10,807,000 for the six months ended June 30, 2002.

Selling, general and administrative expenses increased to $13,668,000 for the first half of 2003, versus $9,316,000 for the comparable period in the prior year.

R&D expense decreased by 6% to $1,022,000 for the first half of 2003, from $1,091,000 in the prior year quarter.

Net income for the six months ended June 30, 2003 was $37,000, zero cents per diluted share, versus a net loss of $3,232,000 or 20 cents per diluted share for the six months ended June 30, 2002.

The loss in the prior year period included the effect of a change in accounting principle for goodwill.

Net income before the effect of the change in accounting principle for last year's first half was 242,000, or 2 cents per diluted share.

Moving to the balance sheet.

Total assets increased on year-to-date basis by $3.1m, to $36.5m as of June 30, 2003, from $33.4m as of December 31, 2002.

The year-to-date increase included a $1.2m increase in accounts receivable, which is related to the revenue increase, and a $0.8m increase in inventory.

Total liabilities increased to $7.7m as of June 30, 2003, from $5.9m as of December 31, 2002.

The increase in liabilities include a $1.0m drawn on a revolving line of credit, plus $0.8m drawn on equipment lines of credit related to the expansion of InfuSystems rental fleet of chemotherapy pumps.

Total cash as of June 30, 2003 was $1.5m, which is approximately $300,000 less than the company's total bank debt of $1.8m.

Don?

Thanks, Jim.

This was a strong quarter for I-Flow, as increased usage of our proprietary ON-Q post operative pain relief products triggered the highest sales of any quarter in the Company's history.

Adoption of the ON-Q brand as an industry standard of care grew rapidly, as sales of these products increased 55% over last year's second quarter.

And like the first quarter of this year, all three of our businesses contributed to a strong sales performance.

We should note that the comparison of this year's results to last year's numbers is an apples to apples comparison, on a direct sales basis without Johnson and Johnson, Ethicon Endo-Surgery subsidiary, as I-Flow's distributor.

Our performance since January 2002, when I-Flow regained the distribution rights from the ON-Q from J&J, reflect our growing understanding of the post operative pain management market, and our ability to effectively penetrate it.

During the quarter we nearly doubled the size of our sales force, with over 60 representatives nationwide.

We now have the sales and marketing infrastructure to bring the clinical benefits of this cost effective technology to more of the 5,000 or so hospitals in the US.

Put another way, I-Flow now has the human resources in place to serve a small but significant number of the estimated 15m to 20m surgeries performed annually in the US that would benefit from the therapeutic and economic advantages of ON-Q.

As of today we have introduced the ON-Q brand to less than 500 of these hospitals in the US.

Considering that the ON-Q on average sells for more than $150 per unit, the market potential for ON-Q is substantial.

After you do the math, you will understand why ON-Q is our primary growth driver.

And you will know why we are aggressively pursuing this opportunity, and are totally committed to establishing I-Flow as a leading provider of post surgical pain relief technology, using regional anesthesia medications.

Now, let's take a closer look at some of our other businesses.

First of all we will talk about Regional Anesthesia.

Increased sales of ON-Q helped Regional Anesthesia revenues increase by 58%.

ON-Qs revenues by themselves increased by 55%.

Ongoing clinical studies continue to produce compelling data supporting the therapeutic and cost saving benefits of ON-Q.

During the quarter we announced the results of two studies demonstrating that ON-Q provided significant pain relief following open hernia repairs.

Washington University School of Medicine initiated a study of the incision healing rates with ON-Q for patients undergoing prostatectomy surgeries.

A retrospective study was published showing that infection rates were reduced by 73% with ON-Q, compared to typical infection rates when ON-Q is not used.

And in July we announced a study on the advantages of ON-Q after colorectal surgery.

It found that patients using ON-Q experienced reduced pain, required less narcotics, and even more important than all of that, returned to their normal lives faster.

These studies continue to validate the ON-Q technology and are critical to its adoption as the standard of care by doctors, hospitals and patients.

As of today 18 clinical studies have been completed and presented out of a total of 51 that are planned or are in process.

This growing body of supportive data is helping our sales representatives convert surgeons and hospitals to using ON-Q.

Sales are gaining momentum, and we are steadily strengthening our position to exploit this high growth, post surgical pain relief market.

Our Spinal Specialty subsidiary is also doing very well.

Sales of spinal interventional pain products, including fully customized pain management trays, pressure monitoring syringes and bone biopsy needle sets, grew by 43% over last year's quarter.

And there is increasing interest in the Osteo-Ject Bone Cement Delivery System, which is used to deliver bone cement into vertebral bodies in a procedure called vertebroplasty.

We believe that approximately 250,000 vertebral body compression factures are diagnosed annually in the US, many of which could benefit from Osteo-Ject.

Because of it's unique economic advantage, and design allowing for the precise delivery of bone cement under active radiation without requiring the interventional radiologists hands to be in the radiation field.

We anticipate the Osteo-Ject to become a significant growth opportunity as more interventional radiologists become familiar with its clinical and economic benefits.

Next let's talk about our Oncology Infusion Services.

Business at our InfuSystems subsidiary continued to ramp nicely in the second quarter, with a 27% increase in revenues.

Last quarter we announced a cold marketing program, with two major pharmaceutical companies, to provide physicians with pumps to administer amphasar (ph) and eloxapin (ph) to treat colorectal cancer.

This new program is obviously doing quite well.

And it's part of a paradigm change from bolus infusions to continuous infusions for the delivery of chemotherapy drugs.

We believe that InfuSystems has the potential to grow significantly as more physicians recognize the advantages of continuous infusion protocols over bolus injections when delivering chemotherapy drugs.

We also recently announced a pilot phase of an ambulatory surgery billing program for our new product, the ON-Q Elite, which is designed for outpatient surgery centers.

Our strategy is to supply the ON-Q Elite, which is often reimbursable by insurance companies, at no cost to the outpatient surgery center.

In return I-Flow will assume the risk for the insurance repayment.

So far this program looks promising as a strategy for I-Flow to penetrate the outpatient surgery market.

Plans call for a full ramp of the program later this fall.

With more than 120m lives under managed care contracts, InfuSystems' core business of oncology drug management is a clear leader in its market.

This core business, along with the two programs I've just mentioned, are the cornerstones of a powerful strategy that we believe will open the door to new growth opportunities for Regional Anesthesia as well as for Oncology Infusion Services.

Next we will talk about our IV Infusion Therapy business.

Worldwide sales for IV Infusion Therapy, which includes our intravenous Elastomeric pumps for IV delivery of drugs, mechanical infusion devices, and electronic infusion pumps and disposables, grew 13% to over $4.0m in this year's second quarter, from last year's same period.

This is I-Flow's legacy business, a cash cow if you will.

What we continue to find however, is that despite the maturity of this market, the fundamental simplicity and reliability of our products continues to attract new users.

With Homecare companies no longer able to charge for unlimited nursing visits, a simple reliable infusion device becomes the norm.

Simple yet elegant, we like to say.

In conclusion.

To summarize, this was a productive quarter for each of I-Flow's three business segments.

We believe that ON-Q post operative pain relief technology is the primary growth driver for I-Flow, and we were channeling most of our resources into building this business.

Today's results confirm that we are making good progress toward achieving this objective.

We are positioning I-Flow to meet the market demand for clinical superior cost effective ON-Q technology.

However, we've just scratched the surface of this under-penetrated market.

We believe the potential for this innovative technology is substantial, and we are focused on establishing I-Flow as a real leader in the post surgical pain relief market.

We still have a lot of work to do, however, but we are pleased with the way things are going so far.

I will now be glad to answer any questions.

Operator?

Thank you, sir.

Ladies and gentlemen, if you would like to register your question, please press the one followed by the four on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the one followed by the three.

If you're using a speakerphone, please lift your handset before entering your request.

One moment please for the first question.

Our first question is from the line of Howard Halpern.

Please go ahead.

Hi guys, congratulations.

I guess I wanted to talk about how quickly the 30 hirers I guess this year will be able to ramp up to get to full speed throughout the year.

How long is it really going to take them?

Well we started hiring at the end of April, the next wave of sales people.

Now it's interesting that over the last year and half we've got a PhD in what type of people to hire.

In the early days it took six to nine months for a representative to begin to show real progress.

Now with the new people we've been hiring, and with the new model of type of sales rep that we do hire, it takes about half that time.

So I think you should begin seeing some real contribution from the new people definitely by the fourth quarter, possibly by as early as September.

So are you somewhat confident then, with these new sales people coming on line, that you should be able to maintain this 30% revenue growth as sort of a base line for the near term at least?

Well we don't make any projections, but there's nothing today that would indicate that we would not be able to continue as we are.

Okay.

And the way you have the sales force structured, the 57%, 58% SG&A expense as a percentage of sales, is that going to remain relatively confident?

Or as some of the different segments that continue to you expand, that may decline a little bit?

Well I think if we were to keep the sales force confident, and the revenues continue to grow, you would see that percentage be reduced.

Okay.

And I guess one final question on gross margins.

I'm fairly safe in assuming that as the ON-Q continues to become a larger part, that the gross margin will be expanding slightly as time goes by.

I would consider that to be a pretty good expectation.

Okay.

And I guess just one last question about the Osteo-Ject.

How big an opportunity is that for you guys?

It's not in the some category as ON-Q, but it's still an opportunity.

Okay, thanks guys.

Thank you.

the next question is from the line of Jason Kroll of Roth Capital.

Please go ahead.

Hi, guys.

Hi, Jason.

Could you maybe help quantify a little bit or just talk a little bit about the surgeries that you're seeing the ON-Q most applicable to now?

And talk about where the growth is coming from now?

Is it the same section, thoracic surgery, bariatrics?

Maybe just highlight some of the key areas during the quarter where the growth came from.

Well the nice thing, Jason, is it's coming across all kinds of surgeries.

We originally focus, when we go into the hospitals, we focus on some of the more expensive or what we call the big surgeries.

The reason being is the price of the pump becomes less relevant to the total cost of the surgery, and it makes it easier for us to get the doctor to try it.

Secondly, we tend to get outstanding results in these larger incisions, because of the Soaker Catheter technology which is unique to I-Flow.

So the answer to your question in the best way I think to answer it is, we are beginning to expand into all types of surgeries.

But when we first go in we do a lot of colorectal surgeries, we do a lot of C-Sections, we do a lot of bariatrics, we do a lot of heart related surgeries.

And as you well know we do quite a few plastic.

In fact I had a comment the other day from someone mentioning the fact that they're not beginning to see our logo on plastic surgeons ads in some of the magazines.

So like the old Intel-Inside, we now have ON-Q is available.

So I hope that answers your question.

It does.

What have you done in terms of the number of surgeons that have adopted the products?

Or even less specifically, is the greatest number of surgeons in a particular specialty?

No we have not looked at it that way.

That's an interesting way to do that.

When you're in less than 500 hospitals, and you can anywhere from one surgeon to maybe ten surgeons using it, we're in such an early stage of penetration that we really haven't focused on that yet.

But I believe that is something we will focus on as we get more and more traction.

Okay.

You mentioned the retrospective study on infection rate.

Any plans to do maybe a prospective study specifically looking at that number?

That would be very difficult to do.

We are looking at wound healing, however, as we announced in a previous press release.

And of course we believe that if we could prove there are some benefits using Regional Anesthesia to increase of I should say decrease the healing process, then that would also be huge.

But right now we have nothing on the table to do that type of study, since we do have lots of data looking at previous studies showing reductions in those type of things, in infections.

what should we be looking for in the next few months or so, the next quarters, in terms of publication of key studies that you believe will be relevant?

Well I don't want to comment on that Jason, because I don't want to give away the information until those studies are ready to be published.

Until they're ready to be a poster or published, I don't want to mention those.

Is it in particular areas, the focus?

Well really across the board.

We've got lots of different things going, including orthopedics now.

Which is something we had not concentrated on earlier.

Okay.

I'm sorry, one more question.

In terms of the sales reps, you mentioned there are 60 dedicated to ON-Q. what's the breakup of those in the in-house for ON-Q versus the InfuSystem business?

InfuSystem is on top of the 60.

Oh on top, okay, it's an addition.

60 are the sales reps dedicated to hospitals.

Okay.

And do you know the InfuSystem number?

Well when we talk about sales force in total, if you include InfuSystem and the inside people, we're very close to 80.

Okay.

Excellent.

Thank you very much.

Thank you.

the next question is from the line of Bill Plovanic from First Albany.

Please go ahead.

Morning, gentlemen.

Hi, Bill.

Fantastic quarter.

Thank you.

I'd like to expand on Jason's questions in regard to the sales force.

I was wondering if you could just give us a benchmark.

What was the On-Q distribution channel like at the beginning of this year?

You've given us the number now that you have 60. what's the timing and size to your next class, and what's the goal by year end?

At the beginning of the year, Bill, we had about 30 people selling the product.

And how long had they been selling it at the beginning of the year?

Some of those were brought in the fourth quarter of last year.

In fact the bulk of them were.

So you have people that have been on board anywhere from one month to maybe three or four months, made up over half of that 30. so they were relatively new.

So the first half of the year, really up until the end of April, we were functioning with about 30 people.

The towards the end of April we began hiring the next wave.

And again they haven't really shown any traction yet as a whole.

So we expect to see that traction very soon.

Does that answer your question, Bill?

Yes.

And when's the timing of the next class, and size, and what type of size on the sale force can we expect for year end?

I think right now we don't have any plans to do anything before the end of the year.

However, once this settles down -- when I settle down, you know when you've got 60 fairly high energy sales people out there, you've got a lot of work just keeping it in control.

And a lot of them are new, they are learning, so we want things to settle down a little bit before we bring another wave in.

Now I'm not saying we're going to bring another wave in, but I'm not saying we're not.

So I think you should assume that things will probably stay the way they are in terms of people through the end of the year.

Okay, and then all 60 of those are external sales people, or does that include internal as well?

That's external.

And how many people again do you have minding the accounts internally?

We have people on the phone calling for orders and supporting those people in the field.

We have about seven.

So it's a pretty nice strategy, because you've got the representatives in the hospital, and again to be successful they must be in surgery.

If they're not interested in participating in surgeries they're not a good fit for I-Flow.

So while they are in surgery they have a counterpart back here in Lake forest California, calling their accounts and making sure they have inventory, and making sure that they get the orders when it's time.

That way the representative in the field can concentrate on introducing it to more doctors, and being in surgery.

Okay.

And then you said your RA business was up 58% with ON-Q up 55% and Spinal Specialty up 33%.

What was the other driver to get the RA and the whole path for the ON-Q and Spinal Specialty?

What put it over the edge in the path to growth rate?

[BJ Orthopedics].

We actually had sales to BJ Orthopedics that took place also in the second quarter, which was a very pleasant surprise.

So they are making good progress on the orthopedic side, and of course we supply that product.

And that was also a very nice surprise?

and is that a sell-through or is that a stocking?

That's a stocking.

They buy from us on an OEM basis under the [PainBuster] name, and they then provide that to their distribution network as the PainBuster product.

Okay.

And can you give us just a feel for the size of that order in the quarter, and how different it is from normal patterns?

I can't give you the dollar amount on that order.

But let's say that we are beginning to see an increase in ordering from DonJoy that we have not budgeted, or that we had not expected.

It's a very pleasant surprise, Bill, because it says that we're gaining share - or we believe we're gaining share - on the orthopedic side through our distribution contract with DonJoy.

As we concentrate on all surgeries other than orthopedics, DonJoy continues to concentrate on orthopedics, so we're picking up share we had not planned on.

Great.

Thanks a lot, and again, good quarter, gentlemen.

Thanks, Bill.

the next question is from the line of Bill Miller with Hartwell.

Please go ahead.

Don, that's really wonderful news from this quarter.

To get back on this tale of the sales force.

If you had approximately 30 people doing $5m plus or minus in your quarter, could you qualify for us whether these people you felt were fully productive or whether they still had more room in there?

That's about $166,000 per sales person.

Do you think that the average salesman is going to start generating $300,000 or $400,00 as he goes along and gets more support inside the hospital, etc?

You know, Bill, you're probably one of the best at asking questions of anybody I've ever met.

That's an excellent question.

The answer to the question is, no.

The people who have been on board even a year, a year and a half, still have lots of growth potential available to them.

As you well know we could never afford a sales force that could only generate about $150,000, even $250,000 a year in revenue.

We would expect these territories some day to be well north of $0.75m and probably north of $1.0m each as they get traction.

You don't have to have very many hospitals to call on before you're into the $0.5m to $1.0m.

You could probably do that with two or three hospitals who have converted.

Don, as you've seen this conversion to go from $500,000 to $1m, what has been the key element that has got those salesmen?

And is that, whatever talent it is, duplicable across the board?

I know you have some sales people that are doing $500,000 plus.

Can you transfer that knowledge, that skill level to your whole sales force?

Well, Bill, we've been doing it as we’ve been taking the model that works; the sales rep who has been successful, and we've trying to duplicate that.

We actually have a couple of sales people today that will leave the year tracking at probably over $1.0m for their territories.

So the answer to your question is, the answer is yes, we know now what the secret is.

We know that the secret is to be in surgery.

We know the secret is to find any hospital, convert it and then go deep and wide within that hospital.

You don't gain any sales by being in your automobile.

You gain sales by living in that hospital and converting more and more surgeons until it becomes the standard of care.

And then you move on to the next hospital.

That's why we've only penetrated less that 500 of the potential 5,000 out there, of hospitals.

That means there's about 4,500 hospitals, Bill, that have never seen us.

If you were to ask a surgeon today if he's ever heard of the ON-Q, probably eight or nine out of ten would say they'd never heard of it.

And that's because we just haven't got their yet.

Thanks for that.

But the other continuing theme would be, can you hire now more readily, can you get better sales people now?

Are the coming to you?

How are you seeing the sales recruiting coming, and are you going to have to have more turnover of your existing sales force?

Well the turnover has been nil since September of last year.

It's just almost non-existent.

We're having no problem at all getting top notch reps from some of the top surgical companies in the United States.

They actually call us now, Bill.

They know about the compensation package, they know enough about it by talking to their fellow reps who've come over.

And with the company doing as well as it is, and the product beginning to get traction, we're not having any problem hiring representatives who used to sell it for another company.

So when we're trying to take the second quarter and extrapolate it out, and say well, $5.0m with 30 sales force, not all up to speed yet.

Still most of them becoming more productive as you go along, you can make quite a bullish case out of the next 30 that are coming on board.

Given the increased productivity of the original 30 plus the next 30.

You can really be getting quite a quarterly run rate here.

That's the math, is there something wrong with the thinking?

No. the only thing I want you to be sure you understand is, that they didn't come on board -- the first 10 didn't come on board until the end of April, and then they came on board through May and June.

So remember, even if I cut the old period in half that it used to take for a rep to be productive, you're probably talking about early fourth quarter before they start being productive.

However, the existing 30 people continue to become more productive as the months go by.

That's terrific.

Just one other small topic.

As you look out for the rest of the year, do you expect your gross margins to get better, to be the same or to decrease from here?

Well if we are successful with the ON-Q strategy, they will get better.

It all hinges on Regional Anesthesia continuing to grow at a faster rate than the company in total.

Because the margins in that business are greater than the company in total.

Right.

So in other words what we're saying is that the fastest growing area of your business has the highest margins, and you're putting the most effort into it?

That is exactly what we are trying to say, Bill.

Thank you very much, Don, wonderful quarter.

And of course we expect more all the time.

I know, Bill, and thank you very much for the question, that was excellent.

The next question is from the line of [Bennett Napman] for [Shaco] Capital.

Please go ahead.

I'm sort of asking the sales question in a different way.

As more data comes out proving the effectiveness of ON-Q, when the sort of word of mouth gets out there, what are you seeing in your sales cycles?

Are we going to be pull through demand that's decreasing the length of the sales cycle, and maybe helping reps get to productivity faster?

There are a couple of things here that work in our favor.

Number one, we're hiring reps who are better skilled at representing the product and getting surgeons on board.

That's been a positive.

The public relations work that we've done has also helped make consumers aware of the product, and we're actually getting some feedback now that consumers are asking for it when they get ready to go for surgery.

That's a positive.

The clinical studies makes it much easier to sell the product to a hospital and to a surgeon if we can show them that we have clinical studies proving its value.

And also proving the economic benefits, not to mention the fact that we can reduce the amount of narcotics.

It's amazing there's been some recent studies and some reports done about drugs that cause errors, or drugs that are responsible for errors in hospitals.

The number two drug is narcotics.

Well there are a couple of ways that you could fix that.

You could go ahead and put controls in place so that the pharmacy and the nurses and the doctors all use it correctly.

Or there's even a better way just to eliminate the need.

ON-Q significantly reduces the need for narcotics in a hospital, that's the best way to eliminate the number two drug that's responsible for errors.

Now after all that I hope I don't know if I answered your question or not?

Well I guess what I'm trying to get at, and I don't know how you can really define it or measure it.

But is there some point at which you pivot from having a somewhat missionary aspect to the same, to having it be sort of pull through demand?

Either because the doctors are more familiar with it and are asking for it, or as you were alluding to, patients begin to ask for it.

That sort of accelerates your sales cycle and makes it easier for you to penetrate the incremental hospital or the incremental doctor.

Well I think that will happen once it's recognized as the standard of care.

Now I think you can tell from the results that have been announced for the first quarter, even starting in the fourth quarter of last year, that we're beginning to make some progress in that area.

So your guess is as good as mine as to when we finally hit that point on the curve where it accelerates by its own momentum.

But again, our number one competitor for the ON-Q is narcotics.

That is the standard of care today.

What we are trying to do is to change that through Regional Anesthesia as the standard of care to treat pain after surgery.

Thank you very much.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press the one followed by the four on your telephone.

I'm showing no further questions at this time -- I'm sorry we do have a question from the line of [Eleanor Pasquidi] with Wedbush Morgan Securities.

Please go ahead.

Hi, thanks a lot.

I was just wondering also, is there a way of, with regard to the sales force, doing trade show presentations?

Showing like a cost comparison of perhaps the average financial impact and the benefits to cost savings by using the technology versus using the narcotics, and the impact of that?

Is there something like that in place, or going to be a study developed to being able to show to hospitals and to further market the goal of making the product the standard of care in the future?

That's an excellent question.

We announced a study that actually took place almost two years ago.

It was done by the Cleveland Clinic in Florida, and Dr. Zimburg is the surgeon who did total abdominal hysterectomies.

I believe it was 30 patients, and what he was able to show is that a surgery that used to take three days in the hospital, he started doing on an outpatient basis.

He used the ON-Q product and within 24 hours he sent the women home with the product.

They got their medication while they were at home as opposed to being in the hospital for anywhere from three to four days.

The results of that study showed a 30% reduction in costs, not to mention the fact that there was a significant reduction obviously in narcotic use.

We love to tell the story that a woman whose surgery was done on a Thursday was actually at the Mall on Saturday.

The Doctor, Dr. Zimburg actually ran into her at the Mall.

She was carrying in her pocket a [indiscernible] and getting her medication.

And he asked her, what in the world was she doing shopping after the surgery.

And she told him that she had been asked to be sure she self-limits, that she had no pain and she didn't want to miss that sale that day.

So I think the answer to your question is that we have numerous studies in place.

Some have already been published showing the economic benefits as well as the benefits of the reduction in narcotics.

So we're already doing the things that you asked.

Okay.

And these are presentations that are done to booths that are set up at colleges of different physicians and associations for medicine?

Yes.

This was actually presented as a poster at one of the big surgical meetings here in Los Angeles about a year and half ago.

It will also be published fairly soon.

I can't say when or where, because we're not allowed to do that, but it's already been accepted for publication.

And it will show up in one of the medical publications very soon.

Okay.

But that's one of many studies.

Remember we have 50 plus studies going on right now.

Right.

Also another question, what is the viability of having some options be available on I-Flow at any time soon?

Options?

Yes, options on the stock?

I'm sorry I don't -- you mean for outsiders?

For trading, yes.

We have no plans to start.

Yes, we have no plans to put options out for trading.

Okay.

Yes, I'm sorry, we don't do that.

Alright.

Any other questions?

Our next question is from the line of Bill Miller with Hartwell.

Please go ahead.

It's actually Adrian Dawes.

Congratulations on the quarter.

Hi, Adrian.

A quick question.

As we think about the level of sales and marketing expenses going forward, what level should we look at?

Obviously we expect to see some increase as we go through the year.

But when do you expect that to level out and we begin to see the benefit of higher gross margins filtering their way through the P&L?

Well Adrian, we're in a market that we believe is somewhere between $2.5b and $3.0b.

And today, with the competitors and us and everybody together have penetrated less than 1% of that potential market.

It's very difficult for me to sit here and say that I'm not going to continue to expand my efforts to gain share.

So I would not look for anything short term to reduce the amount of money we are spending to capture share.

And as I answered earlier, that some time after the first of the year we may begin adding additional resources to capture more of that market.

Thanks.

Okay.

Once again, ladies and gentlemen, if you do have a question, please press the one followed by the four.

The next question is from the lines of [Harry Oger] with Patience Partners.

Please go ahead.

Good quarter, gentlemen.

Hi, Harry, how are you doing?

Terrific.

You have mentioned your only competitor is Narcotics, are you seeing any other devices threatening to come in the market so you don't have to do this by yourself?

Oh I'm sorry Harry, I must have mis-spoke.

My number one competitor is narcotics.

Because it's the standard care.

However we do have other competitors.

When you've got gross margins like this product has, we expect more to come.

However, we would also consider that to be a positive.

Since we're trying to change the paradigms, since we're trying to change the standard of care, the more people that come into a market this big, the faster we should be able to convert to that standard of care.

All I-Flow wants is a fair share of that total market.

And it makes a huge difference to us.

So the answer to your question is we're not seeing anybody new yet, but I would not be surprised if we don't get additional competitors in the future.

Because I think we're beginning to prove that regional anesthesia can replace narcotics for a significant number of the 60m plus surgeries that are performed each year in the United States.

But you're not seeing anybody in their yet?

Nobody new beyond what we've seen in the past.

And nobody is putting the effort behind the product that we are with the direct sales force.

Right.

And the clinical studies and everything we’re doing, and the public relations work.

Right.

Thank you.

You're welcome.

I am showing no further questions at this time.

Please continue with your presentation or closing remarks.

Alright.

Well I want to thank each and every one of you for joining us today.

We look forward to discussing our progress on the next call.

And with that I thank each and everyone of you, and have a good day.

Ladies and gentlemen, that does conclude your conference call for today.

We thank you for your participation and ask that you please disconnect your lines.