金百利克拉克 (KMB) 2004 Q1 法說會逐字稿

Please stand by for I-Flow Corporation Conference call. Ladies and gentlemen, thank you for standing by. Welcome to the I-Flow corporation first quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterward, 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 remind he shaller, this conference is being recorded, April 27, 2004. I would like to turn the conference over to Mr. Don Earhart, Chairman and CEO. Please go ahead, sir.

Thank you, Melissa. Good morning, everyone. Welcome to I-Flow's first quarter 2004 conference call. I am especially glad to welcome our new shareholders who came on board with the completion of our public offering on April 19. Chief Financial Officer, Jim Talevich and I look forward to answering your questions after our prepared remarks. I am pleased to report that fiscal 2004 is off to a strong start, as we posted record revenues for the ninth consecutive quarter. Just as important, we made further progress in the implementation of our strategic plan with key investments in the development of our operating platform. We increased our sales and marketing capabilities, expanded our regional anesthesia business and broadened our portfolio of low-cost drug delivery systems and services.

This quarter's record top line performance reflects the growing acceptance of our proprietary ON-Q branded products and our commitment to make them the standard of care for treating post surgical pain. Sales of our flagship ON-Q brand continued to grain traction in the first quarter, as more physicians and patients learned about the therapeutic and economic advantages of this non-narcotic treatment. Although our regional anesthesia business has grown substantially over the past five quarters, we have just scratched the surface of the under penetrated U.S. market of 15 million potential surgeries annually that may benefit from this non-narcotic pain relieve technology. We believe that we have all the tools necessary to achieve our growth objectives. We have the sales, marking and manufacturing competency to support I-Flow's penetration into that largely untapped market. Clinical studies conducted at leading hospitals and institutions have demonstrated ON-Q's therapeutic and economic advantages over narcotics today's standard of care. We have an experienced and cohesive management team to guide I-Flow through this growth period and with our recent successful underwriting, we have the financial resources we need to implement our growth plan.

In the past we have made investments in our organizational and marketing infrastructure to support future growth and market penetration. We expect to continue these investments in 2004 as we hire additional hospital-based sales people and begin hiring a new dedicated sales force to focus on ambulatory surgery centers, another significant growth opportunity. We believe these additional investments are necessary and prudent to increase the awareness of adoption of ON-Q and to capture more of the $2.5 billion estimated market opportunity to replace narcotics as the standard of care for treating pain after surgery. After Jim reviews the financials, I will have some additional comments. Then we will be glad to answer your questions. Jim?

Thanks, Don. Before we continue, please note that this conference is 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 uncertainty certainties is contained in this morning's press release and I-Flow Corporation's 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 first quarter ended March 31, 2004 rose 40% to a record $14,169,000 from $10,135,000 for the first quarter of fiscal 2003. The largest component of the increase was in the regional anesthesia market which increased by 90% to $5,721,000 from $3,015,000 for last year's first quarter.

Gross profit increased by 42% overall, including the favorable effect of an increase in gross profit as a percentage of revenues by 1 percentage point to 67% of revenues. Net income for in year's first quarter was a loss of $1,500,000 or 8 cents per diluted share. This compares to net income of $17,000 or zero cents per diluted share for last year's first quarter, which included net income of $61,000 from discontinued operations related to spinal specialties. Selling, general and administrative expenses increased by $5,038,000 for quarter ended March 31, 2004 to $11,300,000, compared to $6,262,000 in the prior year first quarter, due to increase selling and marketing expenses related to the company's ON-Q product line. Moving to the balance sheet, total cash decreased by$2,424,000 to $12,761,000 as of March 31, 2004, compared to $15,185,000 as of December 31, 2003. These cash amounts do not include the net proceeds to the company of approximately $43 million from the company's sale of 2,990,000 shares of stock in a public offering which closed on April 19, 2004.

Property plant and equipment increased by $947,000 to $7,691,000 as of March 31, 2004 compared to $6,744,000 as of December 31, 2003, primarily due to purchases of additional electronic infusion pumps by the company's Infu System subsidiary to support its increasing rental business. Total assets decreased on a year to date basis by $1,867,000 to $50, 029,000 as of March 31, 2004, from $51,896,000 as of December 31, 2003. Current liabilities decreased by $1,387,000 to $5,736,000 as of March 31, 2004, from $7,123,000 as of December 31, 2003. The company had no long-term debt outstanding as of March 31, 2004, having repaid all bank debt during the previous fiscal year ended December 31, 2003. Don.

Thanks, Jim. Our record sales results for the quarter demonstrate that our plan to grow ON-Q sales is on track. First quarter ON-Q sales were up 90% over the same period in 2003 and more than 9% ahead of quarter four in 2003. This growth is the direct result of our investments in growing our hospital sales force and their productivity gains we are experiencing from the new sales people. Two years ago it took nine months or more for a new sales representative to begin to pay for themselves. At the end of 2003, this period was reduced to less than six months and at the end of the first quarter just completed, it was closer to five months. In addition, the growth in ON-Q sales reflects the marketing and public relations efforts, along with the continuing stream of clinical studies being presented and published which have increased awareness of ON-Q with surgeons, healthcare facilities and patients.

The role of patient education is important to emphasize. Patients increasingly are seeking alternative treatments that eliminate the negative side effects that may result from systemic narcotic use, including nausea, drousiness, constipation, shortness of breath and potential addiction. The increasing awareness of ON-Q as a better alturnative to narcotics has helped fuel the ON-Q growth and made the adoption process a little shorter. As I pointed out on previous calls, our revenue gains and improving gross margin are attributable to the steady change to the composition of our business. A break out of our quarter one business segment shows just how much our business has evolved. Regional anesthesia contributed 40% of our total revenues, up from 30% last year's first quarter. Oncology infusion services stayed the same while IV infusion therapy was down 30% from last year's first quarter.

In other words, we traded 10 share points of our lowest margin business for 10 share points of our highest margin business, resulting in a one additional gross margin point. We anticipate this trend will continue in 2004 as ON-Q becomes an even larger part of our total sales mix. Let's now take a quick look at each of our three business segments and how they performed in the first quarter of 2004. Sales for I-Flow's regional anesthesia business segment, which includes IQ pain buster post operative pain relief system, the ON-Q C--BLOCk continuous stir block system, and the ON-Q soaker catheter increased 90% to $5,721,000 versus $3,015,000 for the same period in 2003. At the end of the quarter, ON-Q was available to our 121 person sales organization in nearly 700 hospitals in the United States. We will continue to invest through through 2004 to increase the awareness and adoption of this product by the estimated 4500 acute care hospitals and more than 3,000 ambulatory surgery centers in the United States. During the quarter we launched I-Flow new ON-Q third quarter -- I'm sorry, ON-Q's third party billing program for ambulatory surgery centers and other out patients settings.

Soon to be supported by a new and separate sales force calling on ASC's, we expect this program to make on ON-Q increasingly available to patients who want to reduce their narcotics intake and risks and return to their normal lives faster following surgery. It is modeled after the existing and very successful oncology infusion services program and utilizes Infu System's billing expertise and provider relationships to facilitate the adoption of ON-Q by ASCs. I-Flow's Infu system subsidiary is processing the claims but the revenues will be captured in our regional anesthesia business segment. Separately, we will continue to educate surgeons on the use of procedure codes to apply for payment for the placement of the ON-Q soaker catheter during surgery. The placement of the catheter can be billed whether the surgery is performed in the hospital or in an ASC. Revenues for I-Flow Infu system subsidiary in the first quarter increased 41% to 4,263,000 compared to 3,030,000 for the prior year first quarter.

I am pleased to report that our co-marketing activities with major pharmaceutical companies to provide physicians with pumps to administer new drug protocols like those for Capital SAR and Eloxitin to treat colorectal cancer are having a favorable impact on the clinical use of ambulatory infusion pumps. More protocols requiring ambulatory infusion pumps to administer existing as well as new drugs, are expected in the near future. We expect this to fuel continuing growth of our Infu systems revenues. We'll ride sales of IV infusion therapy which included the intravenous elastomeric pumps, mechanical infusion devices and disposables and recently discontinued electronic infusion pumps were $4,185,000 for the first quarter ended March 31, 2004 versu 4,090,000 for the same period last year. In summary, we delivered a strong quarter and our growth strategy is clearly working.

We are not finished yet, since our goal is to establish ON-Q at the standard of care for the treatment of post surgical pain in a market that exceeds $2.5 billion in revenue. With less than 2% of the opportunity addressed so far, we still have a lot of work to do. We must further increase the awareness and drive the adoption of ON-Q products and services with surgeons, healthcare facilities and consumers alike. To accomplish this, we will use the proceeds from our recent offering to implement the following five-point plan: First, we will further expand our sales capabilities in the United States for selling the ON-Q to acute care hospitals. We intend to grow our dedicated, 121-person hospital sales force and increase our marketing efforts to broaden our penetration in the U.S. Today ON-Q is available in nearly 700 hospitals which means that we are making good progress, but have barely put a dent in the opportunity. In addition, we intend to build brand awarness and increase the use of our products through public relations, internet marketing and targeted advertising to surgeons, healthcare facilities and patients.

Second, we intend to leverage our billing and reimbursement expertise at Infu system to increase the use of our ON-Q products by hiring a dedicated sales force to call on ASCs and to sell the new third-party billing program. We expect this sales force to exceed 20 representatives by year end. Over the past 18 years, Infu system has provided oncology infusion customers with direct billing assistance for services related to ambulatory electronic infusion pumps. Our 50-person staff bills for and collects payments from a wide range of insurers, including Medicare, Medicaid and commercial managed care organizations. We believe that we have an opportunity to use Infu system's business relationships to offer ambulatory surgicenters a third-party billing program for our ON-Q products, similar to the one that is used by Infu system for its oncology infusion services. This program facilitates the adoption of ON-Q by physicians and minimizes paperwork for participating ambulatory surgicenters. We are excited about this opportunity, since more than half of the U.S. surgeries performed a day are in the outpatient setting.

Third, we are using our knowledge of the reimbursement system to educate surgeons and their staffs about using procedure codes to receive payment for the placement of our soaker catheter following surgery. We have established a hotline to answer physician's questions when they bill for the procedure and we'll make relevant case studies available to interested physicians. Although this program has been available for only a short period of time, we are pleased with it's -- we are pleased with its performance so far. Fourth, we will continue to educate surgeons and patients about the benefits of ON-Q through medical advertising and promotions, presentations at major medical conferences and publications in prominent medical journals. These efforts will be supported by additional clinical studies that we believe will demonstrate the many benefits of ON-Q. Currently, 30 post marketing clinical studies have been completed and presented and more than 37 additional clinical studies are yet to be completed and presented.

And fifth, we intend to increase our investments in public relations efforts and marketing initiatives to accelerate the awareness and adoption of ON-Q by physicians, healthcare facilities and consumers. We believe we have a significant opportunity to quickly capture a significant portion of the $2.5 billion market in the U.S. alone and we want to leave no stone unturned. Today I-Flow is on the leading edge of the post surgical pain relief market with ON-Q and all of our resources are being used to gain market acceptance of ON-Q as rapidly as possible. We expect the increase in awareness and adoption of the ON-Q to continue as more physicians and patients learn about its therapeutic and economic advantages versus narcotics for treating surgical pain. We are encourage bid our progress and optimistic about the opportunity to make I-Flow a leading provider of post operative pain-relief technology. Melissa, we are ready to take questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will here a three-tone prompt to acknowledge your request. If your question has been answered and would you like to withdraw your registration, press the one followed by the four. If you are using a speaker phone, please lift your handset before entering your request. One moment please for the first question.

Our first question comes from the line of Bill Plovanic from First Albany Capital. Please proceed with your question.

Can you hear me?

Hello, Bill.

Yes. Can you hear me in

Yeah, you're breaking up a little bit.

Is this a little better?

That's better, that's better.

Good morning.

Good morning.

Good quarter.

Thank you.

A couple of questions, if I may. Let's start out with the ambulatory surgery center business. Number one, how many reps did you actually have on the street for that business in the first quarter?

I believe Bill, we have two right now. And we are in the process of interviewing with the goal to have 10 on the street by the end of May and an additional 10 hopefully by the end of June.

And then what -- with your typical reps in the hospital, I guess the breakeven point you stated before is about $20,000 a month. What is that breakeven point for the ASC reps?

Since we'll be paying less for these reps, and they will not be necessarily surgical experts, we will probably have a breakeven point which is about two-thirds that of the hospital sales force, maybe a little bit less.

I'm doing the math in my head. So you're saying about $12,000 a month?

Yeah it might be a little bit less. We haven't hired enough people yet, Bill, to really have a good number.

Okay, and then if I could ask this question, Jim, what -- just to give us a comparison as we try to figure out, you know, what made it a negative impact of the loss of the DJL contract was and help show us what the strength of the actual hospital on to sales were, what was that comparison of the ASC revenues in the first quarter '04 versus the first quarter '03?

Repeat the last part of that question, Bill, you're breaking up pretty bad.

What I'm trying to find out about is what the is ASC revenues in the first quarter '04 versus the first quarter '03.

The a -- you mean the ambulatory surgery centers?

Yes.

Oh, it -- it's very small.

So as in -- typically that'd run about 500,000 a quarter, somewhere plus or minus and you're saying that was a very small number?

Yeah, in fact it's less than that in the first quarter.

Is it not -- what I'm trying to figure out, Don, is, you know, the number you posted -- basically I'm trying to figure out what was the growth in the core hospital business. So I'm trying to do a year over year, apple to apple comparison. You know, is it 100,000 in the first quarter last year versus a half million last year?

The only number we give out, Bill, is the 90%. Can you assume almost all of the 90% growth was on the hospital side.

Okay.

We're just -- well we're getting started in the ASCs and the other thing, remember, there is a lag time between collections and the actual billing, so we're very conservative on what we're booking on that until we catch one that lag time.

Okay. If I can move on to the oncology business. The -- what do you attribute the growth -- I think you said that the co-marketing agreements was [inaudible] is that also included in there? Do you have a co-marketing agreement with that company?

No, we have an official co-marketing agreement with one pharmaceutical, an unofficial one with a second. However, what's happening is is the oncologyists are now learning about our program and no matter what drug comes down the pike, we're getting phone calls now for the use of our devices because it's the easiest way for an oncologist to get involved in using these drugs. If you remember, the way the program works, is the pumps are placed in the doctor's office at no charge and we collect our money by billing the insurance company of the patient. So it's a great way to get pumps and not have any up front outlay.

Okay. So this -- basically it's the history of using your product is there and the new -- new drugs that are coming out in the oncology market are driving the increased usage?

Yeah, it's amazing, Bill. We've had to buy pumps. We've had to buy a ton of pumps lately in order to keep one this demand. We no way we ever forecasted the 41% growth in the first quarter.

Right. What exactly does a co-marketing agreement mean? Can you define that?

Yeah, what it means is that the pharmaceutical representatives, when they go into an oncologist's office to sell the new drug, it's in their best interest if they sell that drug to an oncologist practicing out of an office as opposed to putting it on some contract with a large hospital organization where the price is cut significantly. So it's in their best interest to get doctors to use the drug out of their offices, so they literally pass out literature on Infusystem and that's how they learn about it. That's how the oncologists learn about us. Now, what's interesting, Bill, is one of the things that's happening since an oncologist now has to put a pump in in order to do a Eloxotin or one of the other drugs, Capisar, since he is going to put the pumps in anyway, he might as well use it for other drugs which he's been avoiding and giving those patients to a home care company or the hospital to get their protocols. Since he's got to put the pumps in anyway, he might as well put more in and start doing some of the old protocols which he's been avoiding. So we're getting a lot of that business. Now, that's something we hadn't counted on.

Right. And then last question, if I may, the IV infusion business was a little slower. I think you mentioned that you discontinued some pumps this year versus last year. What was the impact on the revenue line from that? Did you lose a couple hundred thousand or 100,000 in the quarter this year versus having the hundred thousand last year? What is the true apples to apples there?

Yeah, I believe that total business last year was about a half a million dollars. So it's very little.

And was there any revenue from that in the first quarter this year?

Yeah, we did have some revenue, it was very small, but we have people who just will not give up the pump who bought some disposables because they're not prepared to give the pumps up yet, so they bought, you know, six months or nine months worth of disposables. But even then, Bill, it was a relatively small number.

Okay, and actually, one last question, if I may, the [inaudible] business, what -- you gave us a number of 121 reps today. Can you give us a little more hard numbers for where you expect to be at the end of the second quarter and through the end of the year?

Now remember, the 121person sales organization includes about 70 quota carrying represents.

Right.

The rest are support people. So the 121 are not 121 territories. It's more like 70 territories.

Right.

So we plan to hire another 70 representatives between now and the end of the year. We already talked about 20 of those will probably be on the ambulatory surgery center side. So that would leave 50 or so that we will begin hiring also to expand our hospital based sales force.

And those are quota carrying?

Those are quota caring. So by the end of the year, we expect to be somewhere around 100, 120, 120 hospital reps that would be quota carrying. And then on the ambulatory surgery center side it'll 20, maybe a little bit more, all quota carrying.

Okay. Great. Thanks alot. I'll let some more people ask some questions.

Thank you, Bill.

Our next question comes from the line of Spencer Nan of S.G. Cohen. Please proceed with your question.

Thanks very much for taking my questions. I have a couple of questions. One is the -- the -- if you have any thoughts on the outlook for the year. For the top line.

We don't forecast those kind of things. So we're not prepared to give a number like that.

Okay. The second question I have is the -- you mentioned that there were about 700 hospitals where the ON-Q system is in effect or is being used. I was curious whether you have any thoughts on sort of how with the additional sales force that you are envisioning this year how that number may grow, what kind of, sort of percentage of hospitals in the United States you're thinking about reaching out over the last -- over the next -- next few months.

Well, the way we -- the way we gain additional hospitals is by the hiring of new reps. When we hire a new sales person on the hospital side, they must bring with them a rolodex of surgeons because they're asked to reach what we call break even within six months or less, which means they've got to be generating by themselves something north of $20,000 per month. The only way they can do that is they've got to have surgeon friends who will begin using the product the first or second week they're on board. So when they come on board, we ask them to go after their top surgeons, get them using the product right away. Now, those surgeons then practice in specific hospitals. So that's when we actually gain or get entrance to a new hospital. So we go after the surgeon, who then works in a hospital. He becomes our advocate within that hospital to help us get through the committees. So it's hard for me to predict how many hospitals we're going to have by the end of the year. But let's say a typical rep can handle three to five hospitals. So if we were to hire another 50 or so, then I think you could probably figure out the minimum number of hospitals we would have on board by the end of the year, not counting however, many of our existing reps are reaching the point where they can begin taking on additional hospitals as well. Because now, their goal of course is to go into a hospital, get a few surgeons using it, get it established, start to the committees and then once they get the approvals then to go wide within that hospital, deep and wide, not necessary to go to a new hospital. So it's hard to measure the business based on the number of hospitals we have because we don't really encourage a rep to leave a hospital when he's got the opportunity of generating over a $1 million in revenue in a typical hospital. So we really want him to stay there, live in scrubs and make sure he gets every surgeon there using the product. That was a long answer to your question, but --

[inaudible] the detail, actually, that was very helpful. Sort of switching the gear a little bit. My second question is on rereimbursement with respect to the ambulatory care centers. With this -- with this new billing program that you are launching, I was curious what sort of -- what sort of yield you would expect, you know, based on your historical performance, whether your yield on these ambulatory care centers with respect to the ON-Q payments would be similar to the historical numbers or do you see something different, more effective, less effective, any thoughts on that?

Well, right now we're seeing yields of about the same as we were getting on the oncology side. However, the actual payments are different because it's a different type of device. So what we're seeing today is and -- is something north of 35% yield in terms of people paying us. Again, I don't want to give a number out but you can feel comfortable with something north of 35. And the payments range anywhere from as low as -- you know, $15 or so all the way up to $500. The most important thing to note is is that after about 2500 billings, we're getting an average payment of somewhere around $130, which is very, very good.

Great. Thank you. And then one follow-up question on that is, do you expect that 35% yield -- how do you expect that -- the number to behave over -- you know, going forward. What are some of the thoughts on improving that figure or is that going to be a -- are you at -- near the peak?

Well, I tell you this, as we expect that number to go up significantly for a couple of reasons. Number one, as we begin billing this product, we identify the insurance companies who are reluctant to pay or who are reluctant to pay as much as we think they should pay. That gives us the opportunity then to go visit those insurance companies an educate them on the product. That is exactly what we have done on the oncology infusion services side for 18 years. When we first started that program years ago, we had a very low yield on payments. But as the product begins to get billed and the insurance companies become aware of it and its benefits, that yield improves. So we expect this to improve significantly as we identify those who pay little or nothing and we go out and reach out to them and explain to them what it is and by the way, we have full-time people who do that. Then we expect those yields to improve substantially.

So, a quick question on that is, what's sort of the current yield on oncology infusion system customer base?

It's much closer to 50%.

Okay. And then one final question, if I could. Your SG&A growth over the next few quarters, I was curious when that -- when you expect that growth would subside and sort of enter into a plateau and you know with respect to the top line growth as well?

Well, I think you can assume that the G&A will slow down in growth, however, as we add additional sales people, we will still have to add some additional regions, which means we'll be hiring some regional managers as well. But I don't think you're going to see the huge jumps that we saw in the past as we expand the sales force. But we do have some G&A that we've got to spend in order to put some more regional managers in place. And on the ASC billing program, the third-party billing program, that new sales force will have to have a management team. So it'll slow down some but it's not going to go away.

Okay. Thanks.

Our next question comes from the line of Adena Dodi of B. Riley and Company. Please proceed with your question.

Good morning. Could you please give us a break down of SG&A expenses between selling and marketing and G and A?

Jim, you want to handle that?

Sure. Hi, Adena.

Hi.

One moment, please. Yeah, I think the -- let me see here. Selling and marketing in the first quarter was $7,683,000. G and A was $3,617,000.

Thanks. Now, at the end of the year, you had a -- about 110 people, your sales force consisted of 110 and you finish quarter this year with 121. What was the turn over?

The actual number at the end of last year, if you count the entire sales organization, not just quota carrying, was 99. And then we added the additional in the first quarter to get us up to a little over 121. Our turn overover's been relatively small. If we take a look at first quarter, for example, of those people who could not make the break even mark, and we asked to leave, we only had about two that were actually didn't make the number. In fact, -- in fact, it's probably -- it's three, I'm sorry, it's actually three. So we had three in the first quarter who left because they couldn't make the mark. We have very few people leave on their own. The opportunity is just too good. So our turn over is very low, except for that which we want to turn over.

Can you quantify how many left on their own? I'm just trying to find out what the actual additional was to the sales force in the first quarter.

I can only remember two in the last year who have left on their own. Now there's more than that have been asked to leave, ocunting last year, but not -- not on their own. One of those who left on their own has already come back and begged us for a job.

Now, what were the top surgeries do you know the quarter that used the ON-Q? I know bariatrics attribution was during the fourth quarter, OBGYN. Did that profile change at all?

No, our top surgeries because those are the ones we target, are open heart and bariatrics. And the reason we target those is because those positions -- those surgeons get whatever they want. It's easier to go into a bariatric surgeon or a heart surgeon and have them use the product because number one, it makes a huge difference in their patients getting well faster. So it's a big benefit. It also is a big benefit to the hospital because it reduces the length of stay. It reduces significantly the amount of narcotics and because these surgeons generate a lot of revenue for the hospital, they can have anything they want. So we don't run into the flack that we would run into if we were to try to go and get it into the hospital through the general surgeon who may be doing hernias. We'll get to him later after we've convinced the hospital of the benefits of the product.

Maybe the next question is for Jim. A few house keeping items in terms of accounts receivable, inventories and accounts payable. Do have you those numbers available?

Sure. Accounts receivable was 11 million 953 and net inventories was 6 million 381 and what was your other question, Adena?

Accounts payable.

Accounts payable. 2 million 455.

Thank you.

Thank you.

Our next question comes from the line of Adrien Das of Heartwell. Please proceed with your question.

Congratulations on a great quarter.

Thanks, Adrien.

I wonder if you could give us a sense for -- on the ASC side of the business what kind of growth rate and what kind of sales targets for a fully burdened sales person would be on that side and how it contrasts and differs from the hospital side of the business.

Adrien, You know, I don't do forecasts but let me help you out as best I can. The responsibility of the representative on the ambulatory surgery center side will be quite a bit different than what the hospital reps have. The ASC reps will be responsible for going into a surgery center and introducing them to the billing program. Many of the surgicenters already have a doctor who works in the hospital and also works in the surgery center who has become familiar with the ON-Q and those type of products, so it's not so much they have to teach somebody how to use it as it is to teach them how to prepare the documents for the billing. So those individuals will be compensated based on the number of billings that they turn in, as pposed to the amount of revenue they generate. Since we don't know day how many of those billings will actually be paid until after they're submitted, it's hard for us to compensate the rep on only those which get paid or on revenue. So we'll actually pay them on the amount of paper they pick up. It's identical to the way we pay the oncology reps. So we're still learning right now as to how many they're going to be able to handle, how many ASCs they'll be willing -- they'll be able to handle and how many billings they'll be able to pick up. So it's still too early for me to give you a number this in that area since we only have two reps on board and they've been on board less than a week.

If we look at the hospital side of the business, what -- and you were to segment them, how many hospitals do you have doing more than half a million dollars in sales, approximately?

We don't have any.

Okay.

Yeah, in fact, if you take a look at -- at the end of last year, let's assume we had 600 hospitals at the end of last year or so, divide that into our revenue for last year and can you see we're just barely touching the surface. Remember now, we're concentrating on the big stuff, open heart, bariatrics, some of the oncology surgeries, mastectomies, the big stuff. Therefore, we haven't even gotten deep into the hospitals where is we need to be and that means a represent has got lots of opportunity without leaving the facilities they're in. So you can see if a hospital can generate over a million dollars in revenue, we're just barely scratching the surface of the 700 we have.

Great, thanks.

Hello.

Hello. I'm sorry, I'm -- I believe I thought he was finished so may have disconnected him. I'm recue him back up. But we could proceed to the next question if you wish.

Okay.

Okay. Our next question comes from the line of John Brady of Wachovia Securities. Please proceed with your question.

How are you doing guys?

Fine, John.

Currently how are you planning on getting the word out? You mentioned that you're going to be going directly to the consumer, if you will. In what ways are you planning going direct?

Well, right now our plans are related to having a customer on board and then working with that customer to get the word out to their area that they now are using the ON-Q and the benefits of it. For example, on the ambulatory surgery center side, as part of the program, if you sign up with us, not only do you get a third party billing program but you also can participate in a co-op advertising program and we haven't finished all of the ink on that yet but the way it will work is that if you put our product in and you sign up for the third party billing, depending on number of units you use, we will give you credits towards advertising in your local area that you have the ON-Q and that you now can offer surgery with the pain being taken care of without narcotics. Now, we hate to say pain free, however, we do know that a lot of -- a lot of our plastic surgeons have used a similar program. And they do advertise in the yellow pages and in a local newspapers that they're doing pain-free cosmetic surgery with the ON-Q. So we'll be doing something like that. We've even had a hospital come to us. We've actually had more than one but we have one hospital right now we're talking to who wants to do local advertising that they're doing heart surgery in which the narcotics are significantly reduced and the pain is taken care of with ON-Q. So it's not for a lack of people who want to team up with us, but those are the kind of programs we're working on. We're not planning on -- at least at this time -- on doing a super bowl ad. Because that just wouldn't make any sense. So we're talking about very targeted consumer oriented programs in which we would partner with the facility that's using the product.

All right. My last question then goes back to DJO, they are currently using another similar product I guess at this stage after you guys, you know, dissolved your arrangement. Are you picking up any of that old business, is it starting to flow back or are they staying with the new DJO product?

Well, it's interesting. Number one is the product is not like ours. It's significantly different and we believe that it's not nearly as good. But the answer to your question is yes, we are beginning to pick up some of their old customers.

Okay. Now, has that had any impact on the -- the revenue for the figures this is quarter or is that something that you're looking at down the road more so?

It's had a little bit of impact but remember now, -- and have I to be careful how I say this. But we never felt that Donjoy was doing anything near the opportunity they could have done with our products, so therefore, their business last year, we believe was pretty small. So that -- so when you talk about significant, we didn't believe their business was all that significant last year and we are capturing some of that business now. And we're happy to have it by the way.

And my last question I guess would be, are there opportunities where you would be using perhaps joint ventures along the ways that you did with Donjoy and also how does the product -- is it cleared for international sales at this point?

The answer to your question is only on the international side would we consider joint ventures and yes, the product is cleared for international. In fact, last quarter, fourth quarter, fourth quarter of last year and first quarter of this year, we began putting distributors on board in Europe. In fact, in January we had our first training meeting which I believe we had five countries represented by five different distributors in Europe who learned all about the product and who are buying it right now and taking it to their customers. So on the international side, the most efficient way for us to go after that market at this time is to use partners or distributors and that's exactly what we're doing. And by the way to get back to your earlier question on DJ Orthopedics, one of the things I forgot to mention is we expect to capture even more of that business with our ambulatory surgery center third party billing program. Because we're not going into the surgery centers to sell. We're going in with a consignment program so it will be interesting to see how they can compete against that. They and others because that's their market being an orthopedic company.

Thank you.

Our next question comes from the line of Vivian Waul of Kauffman Fund. Please proceed with your question.

Hi, Don.

Hi, Vivian.

Very nice growth.

Thank you.

I'm just curious, since you touched on international, would you share with us what the component was from overseas?

Yeah, it was still small since the distributors came on board really in the first quarter and had small orders. Jim is doing a calculation quick so I can give you some feel for that. But it's not big yet.

Okay. And then separate from that, you answered my question on the advertising. But I'm wondering in the -- if you add reps on the ASC side and they are in the same communities as your main line hospital reps, how do you get them to work together?

Well, you know, they -- the way you do that is you give a SPIF to the hospital rep to help introduce the new billing rep to their surgeons. And that's exactly what we're doing. So what we're doing right now, Vivian is we're giving a SPIF to the hospital rep so that they can go ahead and introduce the billing rep to all their surgeons and help them get into the surgery centers. So both people are getting something to work together.

Okay. And then on the ASC rep side, are the reps trying to get patient credit card information in the event that the billing is turned down by their insurance carrier?

No, we will not bill the patient.

Okay.

That's the beauty of the program because the patient will not hear from us. If -- if we don't collect. By the way, that's a big concern of an ambulatory surgery center.

Right.

They don't want their patients to get hassled if they -- if we don't get paid by the insurance company, so we will not do that.

Okay. Great. Thank you.

You're welcome.

Ladies and gentlemen, as a reminder to register for a question, press the one followed by the four. We now have a follow-up question from Adrien Das from Heartwell. Please proceed with your question.

Actually Bill Miller.

Oh, hi, Bill.

You didn't think you were going to get away from hearing from me did you?

I was sitting here saying, where is Bill.

I'm going give you a lot of soft pitches so that can you handle them with ease. I'm interested in the number of 50 for your sales force that you say you're going to add for the hospital sales force. Are you still seeing the same quality -- I think you said you were -- is there some magic to the number 50? I mean, if you see more salesman that you think are qualified, can you see 70 or can't you process that many or is there a dilution because you're putting 20 on the on the ASC side or could you hire 75 if that pool of talent were available and are you now seeing a better pool because of the new studies that you had come out rhapsodizing about your product or how do you -- can you give us some color and -- of the quality that we're seeing and why the number couldn't be a hundred or 70 or wherever it's going to go?

First of all, let's talk about the quality. It's not easy to find quality reps, however, they are out there. And to give you some idea of the quality, I think I mentioned in my earlier comment abouts how the productivity is improved, but I took a look at first quarter and we had three for four representatives in the first quarter who actually reached break even and went on to hit quota who came on board in January. So as we see the productivity improve from nine months down to six months, down to about five months at the end of last year, and getting better every quarter, we are getting reps who I believe are better qualified, number one, and number two, remember, we've done a lot of work to increase the awareness of the products so they're not walking into territories where nobody knew anything about the product. They are getting some help there with awareness. Is 70 a magic number? No, it's our best estimate at this time. We have never turned down the opportunity to hire a top-notch rep if one is available. We will create a territory if necessary. We are going to go ahead and add three more regions as part of this process so we'll be in a good position to handle the additional 50 or so hospital reps and if we get an opportunity to hire a couple of real hot shots beyond that, we will do that. [inaudible]

Thank you. Is there anything in the ambulatory surgery world that is given an increased incentive for the surgeon to start using the -- your products in his surgeries rather than just saying, well, you do the same old thing?

Well, one of the nice things is, Bill, there's a couple of incentives we believe. Many surgeons own a piece of the surgicenters. In that case, if they can drive more patient notice there because they're doing surgeries where the pain is treated without narcotics, that's a benefit. We know the plastic surgeon have used that tact. The second thing is if you remember when you and I were talking about this on the road show, we have found a way for surgeons to apply for payment for the placement of the catheter.

So they'll get reimbursed?

Well, sometimes they do and sometimes they don't. But the fact that they can get reimbursed some of the time is actually helping surgeons to remember to use the product.

Right.

So if they can get paid once in a while, and hopefully more often than not, they'll use it in the surgery centers as well the fact that they can offer better care.

Finally, are there any hospital chains or other institutions with whom you can co-market because they represent 50 hospitals or a hundred hospitals or something like that?

Well, we have to be careful what we say here today but we are working on some of those opportunity as I speak and if you could be a little bit patient, you may hear something in the next 30 days.

Don, you know how patient I am.

Yes, you are, you're very patient and we appreciate that. All right. We've got other questions but why don't we ring off and talk to you another time.

Thank you.

Thank you:

We have a follow-up question from Bill Plovanic from First Albany Capital.

Great, thank you. Actually, if I could ask Jim for the answer on Vivian's question on the international component in the quarter.

Yeah, I mean, total revenues in international were 2.5 million.

In the quarter?

Yes.

2.5 million?

Yes.

Now, that's not ON-Q.

Right.

Okay. That's kind of what I think everybody was looking for is how much of that was ON-Q. So you're talking about stock in those international distributors.

Less than 200,000.

Okay. And then of the 700 hospitals you're in right now, what is that reorder rate?

I would say, Bill, the hospitals that we're in right now were reordering at least once a month.

Okay. So, you know, of the hospitals that you've gone N you have they've done one surgery you know, are 50% of those hospitals reordering, or 70, 80, of the hospitals that you've gone in, shown the product, gotten a doctor to use it, gotten it through committee, what does that look like?

Well, more than half are ordering on a regular basis and that number continues to grow every quarter. But it's right now just a little over half.

Okay.

I say regular. They're ordering at least once a month.

Okay.

Some are ordering once a quarter and that would be in that other group.

Pardon me?

Some are ordering only once a quarter and that would be in the other group.

Okay. And then last question, for the ASC reps, what do you model as the time to break even for one of those reps, are you going to start out on the long end at the 12 months and scale it back as you get more experienced?

No, no, no, no, we're expecting those reps to come up to speed very quickly. When you're selling a program which is a consignment program and it's basically no cost to the surgery center, and since they'll be introduced to surgery centers where we already have doctors using the product in the adjacent hospital, I expect them to come up to speed very quickly. Because they're going to have at least one surgeon working in that ambulatory surgery center who is already familiar with the ON-Q. So no, I would expect these people to pay for themselves in less than a quarter.

Okay. That's all I had. Thank you very much.

You're welcome.

Ladies and gentlemen, as a reminder, to register for a question, press the one followed by the four. Mr. Earhart, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, Melissa. Thank all of you for your interest in I-Flow. We look forward to reporting our second quarter fiscal 2004 results and hope that you will all be able to join us at that next update. Thank you very much. Melissa.

Ladies and gentlemen, that does conclude the conference call for dough today. We thank you for your participation and ask that you disconnect your line.