金百利克拉克 (KMB) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow Corp.'s fourth-quarter year end results conference call.

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

Afterwards we will contact question-and-answer session.

At that time if you have a question please press the 1 followed by the 4 on your telephone.

As a reminder this conference is being recorded today, February 24th, 2004.

I would now like to turn the conference over to Mr. Donald Earhart, Chief Executive Officer of I-Flow Corp.

Please go ahead, sir.

Thank you, Charmaine.

Good morning and thank you for joining us for I-Flow's fourth-quarter and fiscal 2003 results conference call.

I am with Chief Financial Officer Jim Talevich and after our prepared remarks we will be glad to take your questions.

This was another strong quarter and full year for I-Flow.

Record revenues for the eighth consecutive quarter capped two years of substantial growth and market share gains for our postsurgical pain relief products that deliver a local anesthetic directly to a surgical site.

Adoption of the ON-Q Post-Operative Pain Relief System continues, as a growing number of surgeons are using it to treat pain after a variety of surgical procedures.

I'll have more to say about the quarter and the full year after Jim reviews the financial information in detail.

Jim.

Thanks, Don.

Before we continue 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 risks and uncertainties is in this morning's press release and I-Flow Corp.'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.

Revenue for the fourth-quarter ended December 31, 2003, rose 46 percent to a record $13,703,000 from $9,395,000 for the fourth-quarter of fiscal 2002.

The largest component of the increase was in the regional anesthesia market which increased by 125 percent to $5,226,000 from $2,327,000 for last year's fourth-quarter.

Net income for this year's fourth-quarter which includes net income from discontinued operations of $68,000 from Spinal Specialties Inc. and a $2.3 million gain on the sale of Spinal Specialties to Integra Life Sciences was $804,000 or 4 cents per diluted share.

This compares to net income of $90,000 or 1 cent per diluted share for last year's fourth-quarter which included net income of $8,000 from Spinal Specialties.

The net loss from continuing operations for this year's fourth-quarter were $1,547,000 or 9 cents per diluted share versus net income from the continuing operations of $82,000 or 1 cent per diluted share for the same period last year.

The loss from continuing operations for this year's fourth-quarter and this year included a write-down of $672,000 for (indiscernible) and inventory related to the declining electronic IV pump business.

The write-down resulted in additional cost of sales of $582,000 and additional research and development expenses of $90,000.

For the twelve-month period ended December 31, 2003, revenue from continuing operations rose 36 percent to a record $47,043,000 from $34,663,000 in fiscal 2002.

Net income for 2003 -- which includes net income from discontinued operations of $328,000 from Spinal Specialties and a gain of $2,283,000 on the sale of Spinal Specialties -- was $457,000 or 3 cents per diluted share.

This compares to a net loss of $3,035,000 or 19 cents per diluted share for fiscal 2002 which included net income of $24,000 from Spinal Specialties and a loss of $3,474,000 from the cumulative effect of a change in accounting principle for goodwill.

The net loss from continuing operations for fiscal 2003 was $2,154,000 or 13 cents per diluted share versus net income from continuing operations of $415,000 or 3 cents per diluted share for fiscal 2002.

Don.

Thanks, Jim.

Today's results confirm that our strategy to aggressively grow ON-Q revenues by investing in sales and marketing at the expense of short-term earnings is working and that our strategic focus to redefine the standard of care for full surgical pain relief is the right one.

Our record topline growth for the fourth-quarter and for the previous two years suggests that we are on the right path to becoming a leading provider of postsurgical pain relief technology using a local anesthetic.

Clearly I-Flow has come a long way since January 2002 when we regained the marketing rights to ON-Q from Johnson & Johnson Tethacon (ph) Endosurgery subsidiary and began the challenging transition from an OEM supplier to a direct selling and marketing organization.

On the last call, I mentioned that our sizable revenue gains and improving gross margins were attributable to I-Flow's independence as a direct distribution organization and a change in the compensation -- composition of our total business.

This change in focus and the direct distribution of ON-Q has continued to improve the Company's results as reflected in the 2003 numbers.

In fiscal 2003, regional anesthesia increased from 25 percent of total revenues in 2002 to 34 percent in 2003.

Oncology Infusion Services decreased from 29 percent in 2000 to 28 percent in 2003.

IV Infusion Therapy decreased from 46 percent in 2002 to 38 percent in 2003.

We anticipate this trend will continue in 2004 as ON-Q becomes an even larger percentage of our total revenue as we focus on that business.

During the quarter and throughout the year, we moved forward rapidly in building a sales and marketing infrastructure to expand I-Flow's position in the underpenetrated $2 billion plus U.S. market for postsurgical treatment using a disposable pump to deliver a local anesthetic to a surgical site.

Currently our national sales team consists of 110 territory managers and associated report staff.

That is up from 56 at the end of the third quarter and 100 at the end of 2003.

And since there is a direct correlation between sales growth and the number of reps in the field, we will not hesitate to add more salespeople where needed in order to increase awareness and continue to build market share.

With penetration of the U.S. market estimated to be less than one percent, we believe an expanding sales force, aggressive marketing activities and a growing portfolio of clinical studies will allow us to capture more of the estimated 15 million plus surgeries performed annually that are now being treated for pain with narcotics that are ideal candidates for the ON-Q.

Remember, one market share point is equal to more than $25 million of additional ON-Q revenue.

We know that clinical data is an essential component for our growth.

To date, we have completed and presented 29 studies and are enrolled in an additional 31 trial that will be completed in the future.

This research is being conducted at numerous leading U.S. universities and medical centers including the University of Southern California, Washington University in St. Louis, Jewish Hospital in Louisville, Yale University School of Medicine, John Hopkins, the University of Texas Southwestern Medical Center at Dallas, University of Texas M.D.

Anderson Cancer Center, Cleveland Clinic in Florida and Miami Children's Hospital.

These studies cover a broad range of surgical specialties including hernia, colorectal, c-section, hysterectomy, open heart, pediatric cardiac procedures and mastectomies, to name just a few.

Later in the presentation, I'll take a closer look at some of these studies.

However, in general, patients using ON-Q after surgery experienced a 1 to 3-day reduction in hospital stays, a 40 to 70 percent reduction in narcotic use, 8 to 30 percent reduction in treatment costs, increased satisfaction and substantial reduction in their pain scores.

More importantly most return to their normal lives faster.

Our growth model for the nation's 4500 hospitals anticipate that, as each facility becomes an established account, it may generate more than $500,000 annually in ON-Q sales.

Obviously, we don't expect to get in the door of every hospital nor do we need to in order to participate successfully in this lucrative fast-growing market.

But make no mistake.

We do plan to aggressively pursue this opportunity to our fullest capability.

As you can see, there's been quite a change at I-Flow from two years ago when just a few surgeons knew about ON-Q and only an handful of clinical trials were in process.

The momentum in regional anesthesia sales is growing as ON-Q continues to gain traction in the marketplace.

Although it's still early in the quarter, fiscal 2004 is shaping up to be an exciting year for I-Flow as well.

Now, before getting to your questions, let me quickly update you on the growth in each of our three businesses.

Regional anesthesia first.

Fourth-quarter regional anesthesia sales -- which primarily consist of ON-Q -- jumped 125 percent to $5,226,000 from $2,327,000 for the comparable period last year.

Annual sales climbed 88 percent to $16,112,000 from $8,582,000 in 2002.

During the quarter, ON-Q benefited from some great publicity when it was covered in the December issue of Readers Digest in the health-care feature story "Life Without Pain".

There are more than 11 million subscribers to the Readers Digest and last month we were highlighted in a terrific feature story entitled "Kicking the Morphine Habit: New Treatments for Pain" in the January 20 edition of The Wall Street Journal.

Media coverage in respected publications like Readers Digest and The Wall Street Journal is priceless.

They do wonders to increase the awareness of ON-Q to consumers, surgeons, and hospital administrators.

Needless to say we are thrilled with both of these articles and look forward to more positive press as the adoption of ON-Q grows.

In October 2003, we were included in an extensive Dow Jones News wire story covering the therapeutic and economic advantages of ON-Q.

In it, Dr. Stephen Zimber (ph) -- a gynecologist at the Cleveland clinic in Florida -- discussed a study at his hospital which found that ON-Q reduced hysterectomy patients' hospital stays to less than 24 hours from a previous three days.

Cost savings of about 30 percent.

Dr. Peter Geldner -- a plastic surgeon in Chicago who uses ON-Q -- was also reported in the article about the success he has had using it on his patients.

In addition, The Journal of Thoracic and Cardiovascular Surgery published the results of a study involving 35 patients who established the safety and efficacy of using ON-Q for patients that require medium sternotomy for open heart surgery.

This landmark study was led by Dr. Robert Dowling, professor of surgery at the University of Louisville School of Medicine and Jewish Hospital in Louisville, Kentucky.

He found that patients' intake of narcotics following surgery was reduced by an average of 41 percent and they experienced decreased pain levels.

The hospital stay for ON-Q patients were reduced by an average of three days from the previous eight days that were typically needed for recovery and patient charges were reduced by an average of 18 percent.

In fact, Dowling estimates that based on an average cost of $24,000 for coronary artery bypass surgery, a cost savings of 8 percent would result in savings of $1.4 billion in the United States alone.

Please note that these are Dowling's estimates and not I-Flow's.

However, since he is a recognized leader and a pioneer in the field of cardiovascular surgery, his numbers are probably realistic.

The results of Dowling's work were corroborated in a study of pain relief following coronary artery bypass graft surgery conducted by Dr. Paul White, professor of anesthesiology and pain management at the University of Southwestern Medical Center in Dallas.

White's study which was published in the Journal of American Society of Anesthesiologists observed that patients using ON-Q left the hospital 1.5 days earlier, reported significantly lower pain scores, and experienced a 63 percent reduction in the use of narcotics compared to those who received a placebo.

Another study of White's on the benefits of ON-Q for pain relief without foot surgery -- sorry, following major foot surgery was published in Anesthesia & Analgesia.

Those findings show that ON-Q patients had a 70 percent decrease in narcotic use, 67 percent reduction in pain after surgery, and 65 percent reduction in length of hospital stays.

And a study demonstrating the benefits of ON-Q following breast cancer surgery, which was conducted by Dr. Scott Schell was published in the Journal of Surgical Research.

It showed that the use of ON-Q following surgery for the removal of the axillary lymph nodes in patients with breast cancer resulted in statistically significant decreased pain and narcotic use by patients enabling a quicker return to their normal lives.

All of the 27 female patients were given prescriptions for oral narcotics -- today's present standard of care -- to alleviate their pain.

During the first fourteen days after their surgeries, the patients using the ON-Q required significantly less narcotics and experienced decreased sedation and nausea.

This research also showed that after 90 days there was evidence that when ON-Q was used there was a reduction in some of the chronic morbidities normally seen after breast cancer surgery.

In fact, their pain scores on a shoulder rehabilitation scoring scale showed significantly lower pain and disability scores.

These results are very important since they identify the potential of ON-Q to reduce the chronic pain that often follows the acute pain after surgery.

On our last call, we discussed the sale of our Spinal Specialties subsidiary to Integra Life Sciences holdings.

In November we consummated the transaction for approximately $6 million in cash.

While we were very pleased with the success of Spinal's chronic pain business, it did not support our strategic focus of being a leader in treating acute pain after surgery with local anesthetics.

On December 31st 2003, in order to further strengthen I-Flow's profile on the competitive landscape, we regained the exclusive rights to the orthopedic market and to the PainBuster from a licensing partner.

In January we renamed the PainBuster to the ON-Q PainBuster so that former PainBuster users will easily find the product at I-Flow.

We're also utilizing the resources and expertise of our in use systems subsidiary to drive sales in the Ambulatory Surgery Centers.

In January 2004, we initiated a third party billing program for ON-Q enabling ASCs to provide patients with this emerging standard in post surgical pain relief and I-Flow with reimbursement for the cost of the device.

Piloted in 2003 the program facilitates the adoption of ON-Q by physicians and minimizes paperwork for participating Ambulatory Surgery Centers.

ON-Q systems which has built relationship and secured contracts with insurance companies for more than 18 years will process the claims submitted by the centers and directly bill patient's insurance company.

Our objective is to make the use of ON-Q similar for the Ambulatory Surgery Centers and surgeons.

In addition to the ON-Q third party billing program I-Flow also introduced a program to educate surgeons on how to submit for payment for the procedure to insert the ON-Q catheter following surgery.

And now let's talk about Oncology Infusion Services.

Sales of our InfuSystem's top management subsidiary rose 27 percent in the fourth-quarter to $3,403,000 from $2,683,000 for last year's fourth-quarter.

Sales for 2003 were $13,022,000 -- a 27 percent increase over the $10,293,000 for 2002.

InfuSystem's core infusion pump management business also grew nicely in 2003.

The co-marketing opportunities that we established last year with two major pharmaceutical companies to provide positions with pumps to administer the new drugs Camptosar and Eloxatin to treat colorectal cancer are on plan.

Acceptance of these two drugs is growing rapidly and we believe that there will be new applications for these drugs that will have an impact on the clinical use of ambulatory infusion pump protocols for chemotherapy.

We are quite pleased with this program's progress.

InfuSystem currently has more than 120 million lives under managed care contracts and an estimated 65 percent of the oncology pump management market.

This core business continues to provide a solid foundation to develop and support new innovative pump services programs to capitalize on market opportunities and to achieve further growth.

Now let's talk about our IV Infusion Therapy business.

Worldwide sales of IV Infusion Therapy -- which include the Company's intravenous elastomeric pumps, mechanical infusion devices and electronic infusion pumps in disposables -- increased 16 percent to $5,074,000 for the fourth quarter ended December 31st, 2003, from $4,385,000 for the same period last year.

Sales for this year's twelve-month period increased 13 percent to $17,909,000 from $15,788,000 for fiscal 2002.

The Company's loss from continuing operations for this year's fourth-quarter and this year included a write-down of $672,000 for tooling, patents, and inventory related to the declining electronic IV pump business.

Revenues from sales of these products into the IV Infusion Therapy market were approximately $530,000 during 2003.

As part of our strategy to focus on ON-Q, we felt it was time to exit this business.

This was a breakthrough year for I-Flow, underpinned by the dramatic growth of ON-Q.

In each quarter we met or exceeded our goals while continuing our leadership in this rapidly growing market for post surgical pain relief using a local anesthetic.

We're totally committed to our sales and marketing efforts to hospitals, our Third Party Billing Program for outpatient surgery centers, and our comprehensive clinical research program where studies on the efficacy of the ON-Q technology are being conducted at some of the leading medical institutions in the country.

We expect 2004 to be another investment year.

With cash equivalents of $15 million and no debt, we will continue to invest heavily in growing our ON-Q business.

We believe that 2003's results confirm that this is the right thing to do.

With our regional anesthesia engine hitting on all cylinders, we expect further market penetration of ON-Q in 2004, as more doctors and patients learn about the therapeutic and economic advantages of this remarkable way to treat pain after surgery.

The past two years have been an exciting period for I-Flow and our progress reflects our long-term confidence in the market opportunity for ON-Q.

We are energized by our accomplishments and we are working diligently to achieve further growth.

Charmaine, we are ready now for questions.

+++ q-and-a.

[Operator Instructions]

Alex Arrow with Lazard.

Thanks.

Congratulations, Don.

I think getting our hands around the real meaning behind the revenue performance includes understanding the impact of these new sales reps that you've hired.

Part of the speculation about how this quarter was going to come out was centered around whether the newer sales reps you had hired were higher caliber than the initial sales reps you had hired because the Company's stature was increasing and therefore they might be able to come up to speed faster and, therefore, start to pay for themselves faster than the earlier sales reps.

Can you comment on whether you saw that effect happening during the quarter and whether the additional most recent 30 sales reps that you've hired to bring yourself up to 110 are even going to come up even faster than the previous one -- is there an acceleration in that effect?

Yes, there is, Alex.

What we're seeing is that there's a couple of things happening.

Because awareness is growing it's easier for a new rep to come on board and be able to get traction.

In addition to that the representatives that we hire already bring with them a significant rolodex of surgeons which they have relationships with.

So what we're really seeing is in the early days last year -- I'm really talking about 2002 -- it would take anywhere from 6 to 9 months for a representative to come up to a point where they could break even.

We are now seeing that reduced to somewhere between 4 and 6 months.

We actually hired 44 reps in the fourth-quarter.

So prior to that, we had 56 so those 56 are actually more productive than what we had in 2002 by far.

The 110 figure you quoted now -- how many of those are direct reps vs. rep managers?

About 70 of those are quota carrying territory managers.

The rest are support groups which include sales associates and nursing as well as a group that we call our inside sales force that works here in Lake Forest.

Can you comment on if there's been any significant turnover during the year plus that you've had this (MULTIPLE SPEAKERS) ... ?

Other than those reps which we've asked to leave I think we've only had one resignation.

OK and can you say how many, roughly, you asked to leave?

Oh, half-dozen at the most.

Thank you and if I could also ask about the Ambulatory Surgery Center effort.

I understand, conceptually, what the goal of that program is.

Can you say how big the program has become and if you can say anything about how much revenue in the quarter the Ambulatory Surgery Centers contributed?

Well, the revenue in the quarter was almost nothing.

And the reason for that is, Alex, is that we do not book that revenue until we receive payment.

So until we have some history we are not going to book the revenue on a percentage basis.

So it's still a small program.

Again, it was piloted last year with only about 8 representatives in the country actually selling the program and then we brought it into our main sales force in January at the national sales meeting.

So we are beginning to see a lot of activity.

We're seeing a lot of paper.

That was okay -- close to 90 days to get paid on that paper so we're not going to see anything until, really, the second quarter.

Okay and you also made a comment just on today's call that you're providing instructions to surgeons to receive payment themselves.

In other words on how they can apply for payment.

I think that sounds like a change from the original Ambulatory Surgery Center program in which you would use a consignment model provide them with pumps and then if the pumps were gone when your rep came back to check on them then you'd bill for it yourselves.

Are the surgeons now billing themselves billing -- applying for payment themselves?

Yes they are.

We have provided them with an instruction booklet which actually has the forms and the CPT codes, the procedure codes, which they can now bill for the placement of the catheter.

So it's not a product code -- it's a procedure code.

They've existed for years and what you do is use a standard code with modifiers for the type of surgery.

What we found last year when we piloted the program is that surgeons can actually get paid a significant number of times if they go ahead and apply.

So we put it into a nice, easy format -- almost a cookbook style -- for the surgeons and we've also provided an 800 number where they can call, their billing clerks can call to get additional information should they have any questions in filling out the forms.

Early results are showing that about half the submissions are getting paid right now and only time will tell how that turns out in the future.

Okay, but isn't that a change from your other plan of doing the billing for the Ambulatory Surgery Centers or are you giving them a choice?

Yes, those are two totally separate programs.

The Ambulatory Surgery Center billing program is a program where we take the risk of collecting on the product.

The surgery program for the surgeons or the CPT code program for the surgeons is something we do not bill.

The surgeon has to bill himself because he books it or submits as part of the procedure associated with the surgery.

Okay, so the CBG code program is part of the program hospital-based community that you're targeting.

Yes but remember that same program works in an outpatient surgery center.

Can you say what the code is or what the code ... ?

No, we do have a complete package which we would be glad to send you.

Finally, one more and I'll jump back in queue -- the surgeries which you're getting most of your revenue from in general.

Can you say whether these are general surgery, OB-GYN, thoracic, plastic, can you give us any sense of that?

Bariatrics, heart surgeries, c-sections, hysterectomies, hospital-based type surgeries.

Is there any change in the fourth quarter versus what you've seen previously in that mix?

No, not really.

It's the big surgeries who've had the most luck because that's where our sales force goes.

With the introduction, however, of the Ambulatory Surgery Center Billing Program we will begin moving into orthopedics, hernias and those types of surgeries that are now done at an outpatient setting.

Bill Provanik (ph) with First Albany Capital.

Couple of questions.

First, as I look at the gross margins they were actually down sequentially or a little below what we are looking for.

That was a little surprising concerning that the RA business has a higher margin than everything else.

I was wondering if we could get a little color on that?

Yes what we did is is because we're exiting the electronic business, we had to write down the assets.

And that's about $582,000 that you see in the cost of sales.

If you take that out you'll see our margins are just short of 65 percent.

So that was in the gross margin 582,000.

Yes, I knew you were going to ask that question, Bill, and I fought like crazy to keep it out of there but that's where we had to book it.

OK and I think wasn't the charge a little more in total -- (indiscernible) rest of it is in G&A.

Well, the rest of it went into R&D.

About $90,000, I believe, went into R&D.

So that went into the expense line.

Okay good and looking at the sales and marketing, that chart, that expense was definitely higher.

Is that all attributable just the cost of hiring and training the reps or is there something else in there onetime charges that we should be aware of?

One of the interesting things, bill, is we had such a great fourth-quarter.

We ended up paying a lot of commissions.

We got a lot of reps.

We had about a third of the reps, by the way, actually make quota.

So they got into the bigger dollars so commissions were a significant part of that and of course the hiring of 44 reps was also a significant portion of that.

We also had some restricted shares that vested.

If you remember when I explained the program the sales reps get restricted shares which vest when they hit quota.

Now that's a non-cash expense, but that's also booked in there.

So we paid the price of having a phenomenal quarter.

I'll take the price of success any day.

Thank you.

Of the 110 reps you did give us a breakdown that I believe 70 are quota carrying on the (indiscernible).

Of the remaining 40 how many of them are inside sales reps and how many of them are. you know, just basically working under a quota carrying rep?

Well what we've got is we got about 10 inside sales reps.

When we reach our number -- which is about 118 is where we want to be in the next 30 days -- we will have 75 quota carrying territories.

And like I said, 10 inside, the rest will be sales associates, who work within the larger territories with our territory managers.

So you could think of them, though, I mean they're basically working under the quota carrying and they're generating revenues.

Yes what they typically do, Bill, is they work in those hospitals where we will maintain the business and grow, once the hospital has excepted the product.

That allows that our territory manager to hunt or to move on to the next hospital.

Okay, good.

And then I was wondering, Jim, will we be able to get quarterly numbers for the RA business for '04 and if possible '03 just so we can build our models a little cleaner?

Is that possible?

Sure. '03 actual for regional anesthesia I think the numbers are already published.

But of course, they included Spinal Specialties so if you throw out the Spinal Specialties and International (indiscernible) plasty the 2003 RA numbers by quarter are 3015, 3839, 4032 and 5226.

And then we have the fourth-quarter RA number, obviously, at Spinal Specialties.

Can we get the quarters on that too?

You have that in front of you?

I don't understand the question.

You just gave us the '03 numbers.

Do you have those same numbers '02?

Yes.

It's -- Q1 is 1.7;

Q2 is 2.4l;

Q3 was 2.2;

Q4 was 2.3.

Great and then, lastly, I know you haven't given any revenue or earnings guidance in the past.

I was wondering if you are going to be changing that at all?

Well, we aren't going to change it today, Bill, but as we get the people on board and we start to settle down that's something we can do in the future.

Thanks a lot and great quarter, guys.

Jason Kroll with Roth Capital Partners.

Don, just for clarification that 5.2 RA number -- is that note final there?

Correct -- that's correct.

Could you maybe give us a little bit how much indiscernible was on that round number?

In Q4, was 450.

About 450.

Okay.

So you're really growing ex DJL, north of 100 percent direct ON-Q sales?

Yes if you take a look at second-quarter, growth from first quarter of the ON-Q business for last year that was about 15 percent.

And then growth in the third quarter was 15 percent, again, but remember third quarter is where all the surgeons go on vacation.

But in the fourth-quarter, we grew about 30 percent.

So you can see the growth is very strong.

On the sales and marketing front, you said you had 56 at the end of Q3 sales reps; 100 at the end of Q4 so 44 hired in Q4.

Now you said that at the end of Q1 you want to have 118 -- total of 110 now.

So about 18 hires in Q1.

I'm just trying to get -- a lot of hiring in Q4 seems like that pace is slowed down somewhat in Q1.

I guess as the Q1 I guess is -- 18 as hire a good rate to go forward with per quarter throughout '04?

We haven't forecasted anything beyond first-quarter, Jason.

You know whenever you talk about going from zero sales people to 110 in two years there's a lot of infrastructure that has to be built as well.

We spent a lot of time and are spending a lot of time not only hiring salespeople but we've got a lot of infrastructure that has to be put in place to service these people back here in Lake Forest.

So that's all been part of the effort.

So my salespeople have asked me kindly to slow down for just a month or two until we get everybody settled in.

We went from four regions to eight, and from 56 representatives to 100 in one quarter.

So that's all in the process now of settling down hopefully.

But clearly in Q2 and Q3 as you settle down, you could see that ramp accelerating again?

Yes.

On the billing business, can you give us you said there was, you guys have obviously launched that program and can you give us some color just reflect on how successful the pilot program was and what your expectations for actually collecting on I guess the papers that are out there?

The pilot program in 2003 showed that we can literally do the billing for the product, take the risk that we will get paid, and what we actually received per billing -- that includes no pays, that includes high pays, that includes low pays -- but when you take the average we collected per billing, it's almost the exact same number as what we get on the average for the product when we sell it.

So it turned out that launching that program in 2004 was a no-brainer.

What was (indiscernible) no pays vs. pays?

No, I don't have that number off the top of my head.

There were very few no pays at the end of the day, Jason, because of the expertise in Detroit they don't accept no pays.

They'll go back and appeal and we will appeal up to three times before we give up.

Now that is something a doctor will not do if he's billing; that is something a surgery center typically will not do if they're billing.

But since we are a billing company, we do that all the time.

So when you get down to the end of the day, the actual no pays was very very small.

Okay.

Very good on just on the -- again, on the Ambulatory Surgery Centers growth we are really starting to get into some orthopedic type procedures.

Don, what are your expectations for seeing the ON-Q in Ortho -- orthopedic type procedure in '04?

I don't give any numbers out at this time because it's too early but we expect to have a pretty good time in the outpatient surgery centers.

We are going in with the program which takes all the risk away from the surgery center in terms of who has to pay for it.

So if you can provide this product for your patients at no charge to the patient and no charge to the surgery center we think it's going to be rather exciting.

So we expect to take more than our fair share of the orthopedic surgeries going forward as well as hernias and foot surgeries that are also done in the outpatient surgery center.

Thank you very much.

Nice quarter.

Howard Halpern with Taglich Brothers.

I guess little bit of a follow-up on the margins.

Excluding the onetime charge in the mid 64 close to 65 percent, do you expect with the rate of growth in regional anesthesia to be able to maintain that 64 percent throughout 2004?

No, we don't, Howard.

We expect it to grow.

The regional anesthesia business has much higher margins than the overall 65.

So as that continues to grow as a larger percentage of the total revenues, we expect that number to continue to climb.

Okay.

And how many hospitals have you actually penetrated and, of those, have you gotten to of a journey of where you want to be in those hospitals?

We don't actually give that number out.

But what I can tell you is this, if you take a look at the number of hospitals that ordered at least once last year, it would be less than 1,000.

Now of those that are ordering on an ongoing basis, it's even less than that.

The reason it's less than 1,000 is we do not have enough territory managers to service most of those hospitals.

Our territory managers can handle only somewhere between three and five hospitals right now because of the effort it takes to get a product, to get the hospital converted and going.

But once they do that, that's when it gets exciting.

So you can see the opportunity is absolutely huge, 'cause there's over 3500 hospitals that have never seen us.

Okay.

Do you have a general estimate when you get into a hospital how long it will take you to go from touch everybody basically that you want to?

Do I have an estimate?

Yes, you know...?

In 2002, when we first started hiring people, it was taking 6 to 9 months to convert a hospital -- when I say convert, get through the committee and get a hunting license.

In other words the blessing that you can go ahead and sell the product in there.

It's taken three to four months less now to do that with our new reps -- with the reps we hired in the last year because of their relationship with surgeons in those hospitals.

Adina Dudy with B. Riley and Company.

Few housekeeping items left, I guess.

Can you give us a break down of SG&A between sales and marketing expense and G&A?

Yes now fourth-quarter, Jim, you want to give her that number?

Sure.

Fourth-quarter, the G&A was 3.2 million.

The sales and marketing was 6.7 million.

Do you have the same numbers for the year because I know Spinal affected the previous quarter (inaudible)?

In the -- for the 12 months ended December 31 for 2003 it was 20.4 sales and marketing, 10.3 G&A.

Thank you.

How about inventory and Accounts Receivable?

Just one moment.

We will get it for you.

Inventory was 6.8 million and receivables was 12.4.

As of 12/31.

Are you planning on restating previous year and this year for quarterly income statements to exclude the specialties business -- that Spinal Specialties business?

In our 10-K, which will be published shortly we will have a quarterly P&Ls in there for the year that will be restated.

Jim Stone with (indiscernible).

Good morning.

Nice quarter.

I had to hop off for a moment.

Did you provide any forward guidance?

No we didn't, Jim.

That takes care of that question.

Not necessarily satisfactory but it takes care of it.

The next is in trying to understand the effectivity of the sales force I'm wondering if there might be a type of a hooker in there from the standpoint of your hiring folks who have a lot of relationships so, naturally, they're first going to go to the hospitals that they have the relationships and then when they go to the next set of hospitals would that four to six months you're talking about slip into a longer time period, because they wouldn't have the relationships or do you think they will have learned enough that they can now get through the hurdles in the four to six months?

You know, Jim, I think you maybe read our sales plan.

Because you said exactly what we do.

We hire a sales rep with relationships in given hospitals with given surgeons, ask them to go there first and that's where they go to place the product, get some champions to help them -- that's the surgeons that they worked with previously -- and then go through the administrative process of getting it approved.

Now we've not had a whole lot of experience yet in going to a hospital that's brand new where we don't know any surgeons, because we're pretty busy in those where we do have relationships.

So I really can't answer your question 'cause I don't have that much experience.

The reps we have today are having a great time harvesting anywhere from the three to ten hospitals they have relationships with when they came on board.

What would be the plan for the new -- for hiring more reps than would it be to hire those with relationships and hospitals you're not in already?

Not necessarily.

What we would -- there's so many hospitals we're not in that we wouldn't probably would not have any problem with that, but our plan is, if the sales continue to accelerate and we continue to make good progress then somewhere in the future, probably sooner rather than later we'll look at hiring some more.

Can you comment on what sort of quotas you assigned to the quotas salesman?

The average quotas this year are just short of $.5 million.

Now that's for a rep that's been here a full year now.

If we hire new reps they won't pick up those kind of quotas.

Yes.

Understand.

Going back to a question or a statement that you made earlier -- I can't find it now -- but you said there's roughly 2 billion of markets that you are looking at.

Of the types of surgeries that you're in now, did you say what percentage of that 2 billion it is?

And then when you're talking about the Ambulatory Outpatient Surgery Centers you're looking at, what percentage of the 2 billion that would be?

The best way to answer that question since I don't know all the answers the best way to answer that question is that with our Ambulatory Surgery Center billing program we are now going after surgeries which we were not concentrating on in the past.

We think that about half of the surgeries that make up that $2 billion we talk about are done outpatient.

So that would give us half that 2 billion just in the surgery centers not to mention the fact that we have a significant amount of revenue now coming from the hospital surgeries.

In fact, that's where most of our revenue is today.

So I would say that we are attacking most of that 2 billion right now.

And we've only penetrated about 1 percent of that so we've got lots yet to go after.

Any thoughts of going outside the U.S. yet or is that way too early?

No, we're starting that effort.

But it's on a small-scale.

Again, we have limited resources so our resources are focused on the U.S.

However, we have started discussions with local distributors in different countries in Europe.

And we expect to start selling some products this year.

In fact, my international guy has already received his first orders from a couple of those countries.

Got you.

In terms of your strategy of billing up revenue and doing market penetration, could you give us some sort of feel then on when you might expect break even?

Are we talking is that an '05 or is it an '06 phenomena?

What's your thinking of how you're going to control those expenses?

Well it's interesting to note that we still had $15 million in cash.

Even though we hired a significant number of salespeople, paid some significant commissions and had a resounding fourth-quarter.

We're still sitting on plenty of cash with no debt.

So the answer to your question is we're not targeting breakeven in 2004, because there's still 99 percent of this $2 billion market that we can capture.

So I really don't have anything further than projections through 2004 which is an investment year as I explained earlier.

That I understand and in full agreement with.

I'm just trying to understand what your thinking is going forward.

At what point do you say, "Well, we're going to stop hiring and we're going to concentrate on the profits, getting the profitability or no, we liked it as this type of program, we're going to raise some more money?"

Would you share with us some of the thinking along those lines?

Again, Jim, I don't want to project those kinds of thoughts.

And I'll just leave it at this.

That we continue to invest in 2004 and as long as we're seeing this kind of acceleration in revenues, that investing will continue beyond 2004.

How long that is?

I don't know the answer and I'm not prepared to answer it today.

Okay.

Keep up the great work.

Adrian Doss (ph) with Hartwell (ph).

Congratulations on a wonderful quarter.

Couple of questions on the sales growth.

Firstly what proportion of sales guides now have assistants in the various hospitals and have now sort of migrated away from that first missionary sale and are now onto their second and third hospitals?

About 30 to 40 of the TMs (ph) now have associates.

Great.

In terms of the number of news sales reps added, does 44 in the fourth-quarter represent a significant challenge for you going forward in terms of finding the number of people once you reaccelerate the sales force growth?

Well it is interesting, Adrian.

You know back in 2002 we had a very difficult time finding qualified representatives.

We couldn't get the level of people that we really wanted.

As the ON-Q though has accelerated and become better known in the marketplace, we get lots of resumes today from some of the best companies in the country in terms of surgical reps.

So we did not have a big problem hiring those 44 in the fourth-quarter.

And they come with outstanding resumes.

So we are expecting a lot out of those people this year.

Now going forward, again, we get resumes every day from representatives.

From some of the top companies in the country.

That includes people like U.S. Surgical; it includes people like Johnson & Johnson Ethicon.

And these are unsolicited resumes that we're getting in many cases.

So if we decide to continue the hiring process, we believe we will be able to accomplish them.

This is a very exciting product and the salespeople love to sell it.

As of year end, Don, how many of the sales force had been on for more than a year now?

About 25.

Great.

If we look at the gross margins you sort of indicated that margins are rising.

Is there any reason why we shouldn't continue to see gross margins rising this year and next, just given the faster growth rates that we're seeing from regional anesthesia?

Well, if we're executing correctly, and our focus is intact, there's no question that revenues will rise as the ON-Q product line becomes a larger percentage of the total revenues.

It's the highest margin product we have.

Great.

Bill Miller here (MULTIPLE SPEAKERS) I sent my proxy, Mr. Doss, but I realized he was talking in a strange accent.

I noticed your thinking you have slowed down by only having 18 new salesmen in the first quarter.

That does imply sort of an annual rate of 72 for the year.

I assume that it's -- your systems are put in place and don't have too many complaints in the field that 72 would be the least we could expect here and that it would be more in keeping with 100 or more new salespeople for this year, given the fact that you're not constrained by not having enough resumes, the number of new studies have come out and will come out etc.

Can you give us a goal for your salespeople?

Or salesforce numbers by the end of the year?

Now you're asking me to project again, Bill.

No I'm just asking you to say whether we should just annualize the 18 it looks as though you're going to have for the new hires for the first quarter or whether since you're already indicated you are going to slow down your hiring pace, whether that was the least we can expect?

I'm a little lost, Bill, as to exactly what your question is.

How many sales (indiscernible) by the end of the year?

Okay, okay, I'm sorry -- it was, we get to the 118 we will take a look at where we are and then we will decide whether or not we start hiring again probably third quarter.

And again if we hire again we would probably hire in batches of 25 like we've done in the past.

The fourth-quarter was very unusual in that we have to -- we had to increase the number of regions as well as hiring salespeople so that was a very unusual quarter.

Does that answers your question, Bill?

I'm sure it doesn't.

Well not exactly.

But maybe we should go off line on the whole thing because it seems to me in calls past you've said the easiest quarter to hire is the first quarter because everybody will have gotten paid their bonuses from their prior associations.

You know, we thought that was true but there were a lot of people who came on board in the fourth-quarter, didn't worry about their bonuses.

Exactly so the fact that you're hiring 18 in the first quarter and then going to take a break for some period of time, with all of these people knocking on your door I would think it would be very hard to resist hiring as many as possible and the second part of this, obviously, is why won't you have your systems in place already and, therefore, not be [indiscernible] from hiring as many good people as you can find as fast as you possibly can.

You know, Bill, I think you've been talking to my vice president of sales.

Orlando and I never talk.

No, no he's marketing but Chris Welch who has already come to me and said, look, we've got some opportunistic hires that I want to add on top of the 118.

We're getting resumes from some very, very good people with some outstanding companies.

These are territories we hadn't planned to fill right now but because of the level of individual and the opportunity to bring them on board today, we're probably going to violate the 118 in the first quarter.

So the answer to your question is that you're absolutely right.

When the right person comes along from the right company with the right contacts and the right surgeons, we will hire them.

Thanks.

That really reassures me.

The other part of my question is that if you try to hire somebody with 5 to 10 hospitals in satchel when they arrive, are you trying to hire people that will take you into new hospitals where they may have those 5 or 10?

In other words, not say he comes from J&J but he's going to be able to call on St. Mary's in the Fields and get us into that hospital and get us into other hospitals?

Can you slice it that way now?

It's not quite that easy.

If we hire a new representative who has outstanding relationships in one of the hospitals that we're already getting orders from but the orders are not anywhere near where they could be, then it's not unusual for us to take that hospital away from the existing rep and give it to the new.

Because, again, the opportunity in a hospital, I've talked in my presentation here that we expect at least I $.5 million from each hospital once we get them converted.

But many hospitals can generate an excess of $1 million in revenue.

So we will take and do whatever we need to do in putting the right person in the right place.

If you just divide the $2 billion dollar market that you think is out there by the 4500 eligible hospitals, Don, it comes out to be more than $.5 million.

It sure does.

So I guess the 500,000 or the million is really a low ball estimate, isn't it?

Don't forget now, a significant portion of that is going to come from the billing program.

Not going to come from just the hospitals.

Now, again, we don't know how many surgery centers there actually are, Bill.

We've looked at market data from three different sources and it ranges anywhere from about 8,000 facilities all the way up to 15,000 facilities when you count the plastic surgeons.

So you know, you can't do the math you just did because you haven't taken anything into account for the outpatient surgery centers.

If you did would that expand the $2 billion opportunity?

It night.

But we think 2 billion is enough of a target right now.

Why have you gotten modest and conservative?

Well ... next question, Bill.

Alex Arrow.

Don you described the renaming of ON-Q 2 to ON-Q to PainBuster first not just because of the great name but also because you're hoping to channel some of those previous DJ orthopedic customers so they could easily find the product.

Now that that's been going on for almost two months can you tell us how well has that been going?

Are you getting DJ customers coming over to you in a notable way?

Yes, we are, Alex.

Can you be any more quantitative about that?

I would rather not be any more quantitative than that but the answer to your question is yes for two reasons.

No. 1 -- many of those customers have grown to like very much the elastomeric technology and are not prepared to switch to the new device.

And no. 2, that during this process of switchover, we've made a concerted effort especially in the outpatient surgery centers to convert many of these users to the billing program.

So between the two we think it's going to be quite exciting this year.

Would that imply that orthopedics is becoming a material part of your revenue base?

Previously I think you only participated mostly through DJL, is that correct?

That is correct but as we roll out the billing program orthopedics is a significant portion of the surgeries that are done in those centers.

So we would expect to get our fair share of those with the billing program.

Okay.

Okay on the write-offs that you're taking for the electronics business I -- you told us exactly the impact for this quarter.

Are you in a process of exiting the electronic business altogether and can you give us a sense of how that's going to look in future quarters, or are you going to write down more of it?

No.

We've taken the write-down.

It's gone.

Are you entirely out of the electronic business what was it Infuse and VeriSign?

The VeriSign and the [indiscernible], what we've done is we told our customers that all orders have to be placed by the end of this quarter.

I'm sorry -- by March what?

March 1st.

By March 1st we have to have all orders.

We would then fill those orders and then we're finished.

So after March 1st there's no more electronic pumps?

Are you going to support the existing pumps in the field or are you totally out of it?

We're totally out of it.

We've informed all our customers that we're not going to support.

We're finished.

Okay and there will be no more charges other than the one you just announced in today's release.

That's correct.

Okay, thanks and then finally, appreciate it, you mentioned on an earlier question the RA numbers minus Spinal Solutions.

Can you also give that on for '01?

Just one moment.

You want that by quarter, Alex?

Full year (MULTIPLE SPEAKERS)

No.

Annual's fine.

Annual's fine for '01.

It was 5 1/2.

5.5.

Yes.

[indiscernible] Capital.

Just wondered if you can give us maybe some qualitative data on maybe at monthly unit consumption or some sort of metric like that on the hospitals that have been using you or that you've been through the approval process for several months what type of ramp have you seen, in general?

I know you don't want to get too specific but maybe something we can sort of try and get our arms around?

The only thing I am prepared to give you is the growth from quarter to quarter which I mentioned earlier.

Second-quarter growth last year was 15 percent on the ON-Q product line from quarter to quarter, first-quarter second.

Second to third was 15 percent with third-quarter being of course the quarter where people go on vacation.

And then, fourth-quarter vs. third-quarter went up 30 percent.

Those are the only numbers I am prepared to give out.

Can you just qualitatively say, is that driven more by a penetration of new hospitals or unit growth within existing facilities?

It's really driven by both and probably most of it is driven by additional penetration in existing users because we haven't come anywhere near the saturation point with our existing customer base.

The absolute I am just trying to get at is sort of the rate of adoption once you get into one of these facilities?

Once you get in and start getting some surgeons to use it we are 99 percent of the time very successful and converting more and more surgeons everyday.

Bill Provanik with First Albany Capital.

My two follow-ups are No. 1, what percentage of DJ's business was in the hospital and No. 2, Jim, what was the level of that non cash expense for stock for the sales reps because, obviously, that's not recurring in the first-quarter again.

Well let me answer your first question.

We do not have -- we do not have actual numbers for DJ's success in the hospital, Bill.

Since their product was sold to orthopedics distributors, however, we believe that most if not all of those sales were into the outpatient surgery centers.

That's what I thought -- I just wanted to clarify that.

We did not see PainBuster in the hospital.

And then the second question.

Yeah, I don't have that number at my fingertips.

It's several hundred thousand dollars, I would say.

Was it up to half a million or 2-300 do you think?

Talking about the quarter or the year?

Just the quarter.

Yeah, I don't have that number.

It would be under half a million.

It would be 2 or 300,000 perhaps.

For the quarter.

Yes.

And then, usually, it's the fourth-quarter when that all hits because that's when all the -- all your reps are most likely to hit quota is at the back end of the year.

Correct.

Yes because the restricted shares are tied to an annual quota.

So it would hit in fourth-quarter.

[Operator Instructions].

Sir, there are no further questions at this time.

I will now turn the call back to you.

Thank you, Charmaine.

Thank you for your interest in I-Flow.

We look forward to reporting on our first-quarter fiscal 2004 results and hope that you'll be able to join us for our next update.

Thank you very much.

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

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