金百利克拉克 (KMB) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by.

Welcome to the I-Flow First Quarter Results conference call.

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

Afterwards, we will conduct a question-and-answer session.

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

As a reminder, this conference is being recorded Tuesday, April 26, 2005.

And I would now like to turn the call over to Don Earhart, CEO.

Please proceed, sir.

Good morning everyone and thank you for joining us for I-Flow's First Quarter 2005 Results conference call.

After our prepared remarks, CFO Jim Talevich, and I look forward to answering your questions.

If there is one message I want you to take away from today's call, it is this: we are delivering the revenue growth we projected, and we are doing it while keeping our expenses under control as we thrive towards our goal of profitability this year.

Revenue for the first quarter actually grew faster than we had projected for the year, increasing 60% to $22,741,000, a new all-time high, from $14,169,000 for the first quarter of 2004.

And what is just as important, we achieved this impressive growth while actually reducing SG&A expenses compared to the fourth quarter of 2004 by more than $2 million.

Both our Regional Anesthesia and Oncology Infusion Services businesses turned in outstanding quarters and extended their momentum into 2005.

Regional Anesthesia sales increased 89% and revenue for the company's Oncology Infusion Services segment increased 52%.

Even sales of our IV Infusion Therapy products surprised us on the upside, increasing 31% with heavy shipments in the quarter to both domestic and international customers.

This strong growth was due to the timing of distributor orders, most of which was caused by increased demand.

During 2004, we racked up expenses to support the hiring and development of our direct sales force and to fund related investments required to implement our strategic plan for ON-Q.

This phase is now mostly behind us.

We expect SG&A to grow moderately for the remainder of 2005, most of which will be due to increased commissions as revenues in our Regional Anesthesia and Oncology businesses continue to grow.

We believe this rate of spending will support the top line growth we have forecasted to deliver and which we exceeded in the first quarter.

Therefore, we expect revenue to continue to grow more rapidly than expenses, providing the operating leverage needed to achieve profitability.

That is why we are comfortable reaffirming the guidance we provided you on our last conference call.

For 2005, we remain optimistic that we can grow our Regional Anesthesia revenue by approximately 80% and total revenue by approximately 40%.

We also remain optimistic that I-Flow will be profitable in the fourth quarter of 2005, excluding stock-based compensation expense.

We are particularly gratified that the investments we have made in our Regional Anesthesia business are continuing to pay dividends.

Increased awareness and subsequent adoption of our proprietary ON-Q family of products for narcotic-free relief of postsurgical pain continues to produce rapid top line growth.

Both clinically and in the everyday practice, ON-Q redefines recovery and gets patients back to normal faster following surgery.

Our ON-Q products can potentially benefit millions of surgical patients every year, yet the market for narcotic-free postsurgical pain relief is still in its infancy.

We estimate that the market opportunity in the US alone exceeds $2 billion and less than 3% of this market has been penetrated to date.

Our goal is to continue to establish our ON-Q brand as the new best practice in treating postsurgical pain and ultimately to replace narcotics as the standard of care for treating the pain caused by surgery.

With revenue projected to grow rapidly and the number of people in our sales force essentially unchanged since the end of last year, we expect the productivity of our sales force to increase.

This is a key assumption to our strategic growth plan.

Partly, the improvement we expect will reflect the move up the learning curve by our people and taking experience and credibility among their clients.

But we are also actively and aggressively supporting our sales team in other ways: First, by introducing new products that expand the use of ON-Q for new surgeries and increase the efficacy of ON-Q in all surgeries.

Second, by sponsoring independent third party clinical studies that repeatedly demonstrate the benefits of ON-Q in an expanding number of applications.

Third, by implementing targeted advertising campaigns in leading surgical journals like the one I described on our last conference call.

And, fourth, by pursuing programs to facilitate insurance payments and therefore reduce the reimbursement risk for our ON-Q products.

We are optimistic about the continued growth of our Oncology Infusion Services unit, InfuSystem.

This optimism is based on the increasing number of office-based oncologists now using electronic ambulatory infusion pumps to provide multiple-day infusion of chemotherapy drugs to patients at home.

This business continues to expand and because of this, we had to purchase $2.3 million worth of additional ambulatory pumps in the first quarter to support the continuing demand.

I will be back to summarize some additional highlights of the first quarter after Jim reviews the numbers.

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 contained in this morning's press release at I-Flow Corporations various filings with the SEC.

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

For the three months ended March 31, 2005, net revenue increased by 60% to a record $22,741,000 compared to net revenue of $14,169,000 for the first quarter of 2004.

Gross profit rose to 73% of revenue for the first quarter of 2005 compared to 67% for the same period of the prior year.

Operating expenses for the first quarter of 2005 increased by $6,930,000 compared to the prior-year quarter, primarily due to the ON-Q sales force expansion and increased marketing expenses, but decreased by $2,115,000 compared to the fourth quarter of 2004.

The reduction of expense from the fourth quarter was primarily due to reduced outside consulting and auditing costs associated with the implementation of section 404 of the Sarbanes-Oxley Act of 2002 and reduced compensation expense, including a reduction in equity-based compensation expense related to the achievement of year-end sales goals.

The net loss for this year's first quarter was $2,009,000 or $0.09 per share.

This compares to a net loss for the first quarter of 2004 of $1,500,000 or $0.08 per share.

The prior year quarter included a tax benefit of $856,000, equivalent to $0.05 per share, whereas no comparable tax benefit was recorded in the first quarter of 2005 due to the company's accounting for deferred income taxes.

Without the tax benefit of $856,000, the loss in the prior year quarter would have been $0.13.

Moving to the balance sheet, total cash and investments decreased by [INAUDIBLE] to $38,998,000 as of March 31, 2005, compared to $44,108,000 as of December 31, 2004.

The decrease included $2,346,000 of additional electronic infusion pumps purchased by the company's InfuSystems subsidiary to support its rapidly growing rental business.

As of March 31, 2005, I-Flow reported net working capital of approximately $56 million including cash and equivalents and short-term investments of $39 million, no long-term debt, and shareholder's equity of $72 million.

There were a number of noteworthy developments during the quarter that I want to highlight for you.

On the insurance reimbursement front, Blue Cross/Blue Shield of Texas officially issued a revised policy covering the use of ON-Q for postsurgical pain relief stating that, and I quote, "the infusion of anesthesia using an elastomeric infusion pump may be considered medically necessary as a technique to relieve postoperative pain following surgical procedures that would typically require oral or parenteral administration of narcotics for pain control."

Our ON-Q Pain Buster, ON-Q Soaker Catheter, and ON-Q Postop Pain Relief are all trade names that are specifically listed under the policy.

This medical policy change also applies to ON-Q under Blue Cross/Blue Shield of Illinois and Blue Cross/Blue Shield of New Mexico policies and is primarily applicable in ambulatory surgery centers.

These medical policy changes are relatively small, yet significant steps forward in our ongoing campaign to facilitate insurance reimbursement and to reduce the payment risk for our ON-Q products.

Also during the quarter, we announced the release of a long-term study on the use of ON-Q Pain Buster following breast cancer surgery.

This study, which was presented at a major surgical meeting and included two-year follow up data on study originally published in the Journal of Surgical Research in October of 2003, shows the benefits of ON-Q not only in reducing acute pain after surgery, but also in helping patients have less pain with daily activities over time.

The study initially showed that the use of ON-Q Pain Buster following surgery for removal of auxillary lymph nodes in 27 patients with breast cancer resulted in decreased pain [INAUDIBLE] in narcotics use immediately following the operation.

In addition to that data on acute pain, lead investigator Dr. Scott Shell, Associate Professor Department of Surgery at the University of Medicine and Dentistry of New Jersey, has been tracking these patients for more than two years and has found that the patients who received whole surgical pain relief with ON-Q Pain Buster continued to have significantly better scores when tested for shoulder function and pain with daily activities.

This positive research shows that ON-Q not only improves patients' experience immediately following the surgery, but also improves their outlook on the future.

Removal of the lymph nodes from under a woman’s arm is an invasive procedure that can affect her mobility throughout the course of her life.

According to Dr. Shell, it was clear that patients treated with ON-Q simply felt better and had improved flexibility versus patients who did not receive ON-Q for their post-surgical pain.

It is encouraging to see the strong data supporting the use of ON-Q with patients undergoing breast cancer surgery, particularly where long-term outcomes are concerned.

Dr. Shell’s study records strong, chronic pain and lifestyle benefits with ON-Q.

With these results, I-Flow reaffirms its commitment to clinically studying all the ways that On-Q can redefine recovery for patients.

Not just in the hours and days following surgery, but over the ensuing months, and even years.

There’s more.

The positive outcome shown in Dr. Shell’s research was mirrored by results that Dr. Patricia Levat-Ohm discovered in her study of 60 cesarean-section patients.

Those who received post-surgical pain relief with ON-Q pain buster showed a significant reduction in pain following surgery, while requiring less narcotics.

This study also examined the long-term benefits of ON-Q following a cesarean-section, finding that up to 6 months after surgery, ON-Q patients experienced no residual pain, whereas more than 1 in 5 of the patients in the control group did have residual pain.

So in addition to the many studies we’ve reported to you that show the benefits of ON-Q compared to narcotics for post-surgical pain relief, we are now beginning to see study results that demonstrate long-term benefits from the use of ON-Q as well.

These long-term studies really enhance the power of our message platform, redefining recovery, and we expect these results to help us increase awareness and drive adoption of our ON-Q products going forward.

To that end, in February we began running 2-page ads featuring the “ON-Q Redefining Recovery” message, along with our new labeling claims, in Cardiovascular, Cardiothoracic and Bariatrics Professional Journals.

The ads complement the selling material that we provided our sales force at the national sales meeting January.

In combination, these tactics begin to give us a louder voice so that more surgeons can learn about ON-Q more rapidly.

While it’s still too soon for us to measure the program’s effectiveness objectively, the feedback we have received so far has been very positive.

Before we address your questions I want to reiterate my opening remarks: We delivered a strong revenue growth in all 3 of our businesses and made substantial progress toward achieving profitability in the fourth quarter of this year.

Revenue in total grew 60% versus the 40% projected for the year, and while doing so, we maintained tight control over expenses.

Earning per share losses, when looked at on a comparable basis with a year ago, were reduced from 13 cents in quarter one in 2004 [INAUDIBLE] to 9 cents in quarter 1 2005, a 4 cent improvement.

Daniela, we are now ready to take questions.

[OPERATOR INSTRUCATIONS].

One moment please for the first question.

Our first question comes from the line of Dave Turkaly from WR Hambrecht.

Please proceed.

I was wondering first if you could break out the sales and marketing versus the GNA spent in the quarter?

Yes, just one second Dave, I’ll have Jim do that for you.

Selling expense was $11,000,406, and marketing was $2,000,156 for the quarter.

Great.

Now I think you said the sales force stayed pretty constant, is that around 148 members, or is that the exact number at the end of this quarter?

Yes, let’s just say it’s between 145 and 150.

In terms of your plan for the rest of the year, no change to that or is that the number you’d like to exit ’05 at?

Yes, our plan today is to stay right around that number.

If we look at, obviously, the first quarter was strong across all your divisions, but if you look at what happened last year, the second quarter was strong acceleration.

In terms of our models going forward I appreciate the guidance that you gave for the full year in the top line, but should we expect, let’s point out Oncology mid-sequentially, up again?

Or if we look at the improvement that you had last year in the second quarter, do you think that across your divisions you could repeat what you did last year?

Dave, we don’t give quarterly guidance.

Again I come back to my guidance for the year, 80% growth in RA and 40% growth overall.

However, I will say this.

Historically our first quarter has been the weakest quarter, and there’s good reasons for that, because January is when we have our national sales meeting so we pull the sales force out of the field for almost a week, plus the fact that we don’t allow vacations typically in December, so we have a lot of sales people who take their vacations in early January.

It’s also the month when we give out quotas.

So January is typically our least productive of all of our months.

So with that it mind you then can guess what will happen in the second quarter.

Fair enough.

One last one.

Can you possibly break out the US versus the International sales in the quarter?

International was $3 million, $2,989,000.

Our next question comes from the line of Bill Plovanic, First Albany Capital.

Please proceed.

It’s actually Brian for Bill.

A couple of questions.

Could you give us a monthly breakout of the RA revenues, January, February, March, April thus far?

No, we don’t do that, Brian.

Well, I’m just trying to look at the RA numbers.

They were a little bit weaker than we expected.

I’m trying to find out if the reps had been pushing stock at the end of the year just to get their bonus.

I’m sorry Brian, we don’t give that kind of guidance on a monthly basis.

Hey Don, it’s Bill.

A question for you is, if you look at the, you said typically January is weaker due to the sales meeting and vacation, was that the case this year number 1, and number 2, if it was how much lower is January than February or March?

Not giving away the numbers, but are you seeing the trend that sales are accelerating and that sales people added in the back half of ’04 are contributing to the top line more and more as we work through the quarter?

Again, Bill, we don’t give monthly guidance, but what I have said and I’ll say it again, is that January is typically our weakest month of the year between the fact that there is some extra sales pulled into December to make quota, plus the national sales meeting, and plus that’s a time when many of our sales reps take vacation; it is definitely our weakest month.

February picks up, however February is a short month and March is extremely strong.

And that was the case again this year?

Yes, it’s that way every year.

It’s been that way every year since we’ve had a sales force.

Our next question comes from the line of Raj Denhoy of Piper Jaffray.

Please proceed.

If you could maybe comment about sales force turnover in the quarter.

Did you see any of the reps you hired recently or I guess now that there are probably some of them reaching the six month mark, get released either on their own or involuntarily in the quarter?

Raj, we have a continuing program at I-Flow where you have to make certain numbers by a certain timeframe or we ask you to move on and do something different.

That happened in the first quarter just like it will happen in the second quarter, the third quarter, the fourth quarter.

So the answer to your question is that we will always have some turnover and most of that turnover is because we want it.

Right, but you’re not willing to comment on the scale of it or if it was higher or lower than….

No, we don’t give individual numbers on a quarterly basis on what the turnover is.

I would like to follow-up a little bit on Bill’s question previously.

We look into the sequential growth, the [regional IC] of your business quarter of a quarter.

This quarter was just 3.5% and the last quarter and the first quarter was close to 10%.

Was there anything in particular in the quarter that maybe that sequential growth was a bit slower than you might have been expecting, or is that, are you okay with where it is now and the acceleration you’re seeing?

Well Raj, I’m not going to apologize for the growth we had in the first quarter.

But I would say it was very significant and way over anything we predicted.

But I’ll reiterate again for the third time that January is our weakest quarter of the year typically, and the first quarter is typically our weakest quarter.

So when you take into account the fact that we had some January sales that end up in December because of quota achievement, we have vacations, we have the national sales meeting, we have the realignment of territories because we have all these new sales people going into the year for the first time, and new quotas -- so a lot of things happen in the first quarter.

But I would say the growth was outstanding.

That’s fair enough.

Maybe I could just ask you about the ambulatory surgery side for that regional anesthesia business.

How is that progressing?

I know your probably won’t break it out, but is that continuing to meet your expectations?

It’s actually exceeding our expectations, Raj.

That is picking up extremely fast.

And again it’s a great program and we continue to get paid at that level we’ve talked about before, which is about 35% of our gross billings.

And as we knock off additional insurance companies and add contracts, that’s going to improve.

But it’s a great program because anytime you can walk into a surgery center and offer the product at no charge for a 3rd party billing, it’s a good program.

I think at one time you said that could be close to $3 million for the year, are you still tracking towards that, or is it accelerating beyond that at this point?

I don’t want to comment because it’s too early, but let’s just say we are right on track.

Fair enough.

Let me see if I can still get back in cue.

Our next question comes from the line of Adrian Doors at Hartwell.

Please proceed.

Congratulations on a great quarter.

If you look at the growth rates we’ve enjoyed in Oncology and Infusion Therapy in the first quarter, can you talk a little bit about, you mentioned some of them in the press release, but again, talk about the variables that help make it such a surprisingly strong quarter.

And comment perhaps on the sustainability of that and how you see those businesses evolving over the next year or so.

Well, last week I spent some time with our people in Detroit on the Oncology side so that I could understand better what’s driving this terrific growth and it comes down to the fact that Oncologists, in order to protect their income, their income has been affected by the reduction in reimbursement on the drugs, they are now moving towards doing infusions, which is a service.

Now if they incorporate the service into their practice they cannot only make up for most of the money that they made on the drug side in the past, but they can actually exceed it.

So it is a business which is driven by the fact that the reimbursement in drugs has gone away, or the ability to make a lot of money doing drugs has gone away for the Oncologist, and it’s been replaced by the ability to do services and make that money up and even then some more.

So we don’t expect this business to slow down very much whether or not it can maintain 52% growth is still a question mark, but we expect it to still be strong going forward.

And by the way, Adrian, it better be strong because I just bought $2.3 million of pumps for these guys.

How many pumps does that represent?

Well, I think the average pump is somewhere around $2,500 a piece, so you can do the math.

But we have well over 10,000 pumps now in inventory in that business.

How big a market do you think it can be?

You know, Adrian, we used to think it was a $20 million market.

Now I think it’s probably something north of $50 million.

Tremendous growth there.

Question for Jim.

Can you talk a little bit about the success you had in reduction of corporate expenses and how we should we think about the modest growth you eluded to over the rest of the year and talk about some sort of scale efficiencies that are coming through [inaudible] grows.

Well, I think the reductions you already know about, which is the fact that we did have some non-recurring costs in the fourth quarter relating to stocks implementation, and also we did take a hit for stock option acceleration of 950,000 in Q4, and both of those types of costs were significantly reduced in the first quarter.

And in addition to that, I think that there’s been a wide variety of expense reductions that occurred that off set the increases resulting from having the new sales force here for the entire quarter.

Field expenses, I think, were down somewhat.

And also in terms of sale competition, since you reset the quotas for the reps, the total expense, the total commission expense as a percent of sales dollars is naturally smaller than when you are starting off with these itty-bitty territories.

So as we think about the year, what sort of incremental growth does [inaudible] to that growth over time or is the--.

What would be the variables involved in seeing it go up?

Well, I would think that the increases would be very modest quarter to quarter.

You’ll have essentially the same staff, where I’m not aware of any significant head count adds at all.

It’s just a matter of letting those sales territories mature as we move on.

Adrian, let me jump in a little bit.

We’ll have increases in expenses directly related to commissions.

So, if we achieve our revenue goals both on the RA side, the regional anesthesia side, and the oncology side, we’re going to be paying happily for commissions.

So, that’s really where we see the growth and expenses on that side of the business.

Okay final question now and then I’ll hop back in the queue.

Of the new product launches that you talked about, how would you characterize the ASPs relative to the base product offering that you have today?

Well, the new products that have been launched in the first quarter actually have been better than our pumps, and not only are they better than, but they take us then to some new surgeries which expands the 15 million surgeries we talked about all the time.

So, we’re now heavily getting into spine surgeries, for example, which we did not play in before, because of the new products and the ability to have the same kind of results of better than we get for example in heart and bariatrics.

Our next question comes from the line of Jason Kroll of Roth Capital Partners.

Please proceed.

Question a little more detail on the sales force, Don.

What is the average quota right now of your quota carrying rep?

It’s something north of 400,000.

If you take our projected number for the year at 80% growth is somewhere around $58 to $60 million, divide by 150, and that gives you an average.

If you take the 25 ASC reps out of there, ambulatory surgery center reps, and divide that into the same number, that’s probably a better number to look at, because we double count, in other words, the sales reps on the hospital side and the sales reps on the ambulatory surgery center side, get paid on the dollars both.

So probably the best way to do it, Jason, would be to take the 130 or so, or 125 hospital reps and divide that into $58 to $60 million.

And what would the range be?

Is it fair to say the range of being there from, I don’t know, 200K to close to a million dollars?

No, the minimum quota is $380,000.

Okay.

Is that right?

Yes, $380,000.

Is that in the high end?

We have quotas of $900,000, just short of a million dollars.

Okay.

Curious, maybe you could tell, but for the high-end quota people in their respected regions, what is some of the surgeries that you’re seeing the most significant use of the ON-Q in?

We’re seeing a lot of continuous nerve blocks in one of the territories, which by the way, we sell continuous nerve block products at a much higher ASP than we do the wound site.

So, that’s driving some of the sales.

But a lot of it’s in bariatrics, cardiovascular, thoracic; it’s the big surgeries that drive that kind of business.

And we sell bigger pumps then for those surgeries, which generate more revenue and much higher margins.

Okay, and then you mentioned the new products, Don.

What specifically are the new products and what types of surgeries do they help you penetrate beyond the 15 million that were originally thought about here?

Well, one of the new products that we introduced in the first quarter were tunneling devices.

Which is kind of hard to explain that over the telephone, but it’s a device that allows you to place the catheter outside of the surgical area right on the nerve bundle.

So you get a double benefit.

Number one you block the nerves before they get to where you cut, and number two you’re not putting a foreign object in the surgical site per say, so therefore any chance of an infection pretty much goes away.

Is that in cardiothoracic surgery do you think?

Yes.

Any chest surgeries.

And by the way, also in spine.

So we’re getting tremendous results with tunneling devices.

And of course of those devices we sell the tunneller and we also sell the special sleeves that are required in order to provide an entry way for the catheter.

Then we also have launched a device that allows you to change the flow rate on the pump, which puts us in direct competition with electronic devices only without the electronics.

So you literally now can change the rate of fluids delivered without electronics.

And we have more products coming in the second half of the year.

Okay, and finally just on reimbursement.

Any update or what can we expect, I guess on the private payer side, on Medicare, any update post the ruling back, I think it was November of last year?

And then can we continue to expect a snowball like effect on the private side following the Blue Cross/ Blue Shield announcement?

No, the Blue Cross/Blue Shield announcement is very, very important.

It helps us get in to see other Blues, but it’s not an automatic.

We still have to do the work.

But because we have five people now working full time; we hired a person going after reimbursement, you will continue to see private contracts continue to get signed.

On the Medicare side, we have a hearing in Baltimore, the CMS next month to talk further about possibly national coverage.

That’s the update.

And obviously there’s nothing to do with national coverage based on your expectation at this point?

No.

Remember now nation coverage with Medicare or coverage with Medicare doesn’t necessarily help us that much on the ambulatory surgery side in terms of Medicare patients, because we don’t see that many.

But what it does do is that it helps gets private insurance onboard faster.

Remember all the numbers we’re generating today are without Medicare.

So we’re not doing that bad not having Medicare reimbursement.

We could do even better if we had it.

And now our next question comes from the line of Ryan Rauch of Jefferies and Company.

Please proceed.

Good morning, congratulations on a good quarter.

Just three quick questions.

First, Jim, what did the distributor build on the IV therapy side add in absolute revenues to the quarter?

And I’m sorry if you gave this in your opening remarks.

Distributor numbers?

It’s pretty much all distributors.

No, no, you—

Everything we do on the IV side is distributor.

You indicated that there were some build on the internation side for some products were brought in where brought in at the end of the quarter, I think it what was said on the press release.

I’m just trying to figure out what was the absolute revenue impact of that.

Ryan, again, I don’t understand your question.

All IV sales, everything reported in that segment, almost everything goes to the distributor, or I should say a family of distributors.

Okay, well then I’ll just ask you that off-line.

And then anything new out of the competitors, anything new since Zimmer’s launch in February?

I don’t believe we’ve seen Zimmer in the marketplace yet.

So, they have a very quiet launch because they’re nonexistent, as least from the fact that from our sales force, we have not run into a Zimmer rep yet selling a pump.

So they must be avoiding all of our customers.

Okay and then are you still roughly in-- From a hospital increase, did you see, I mean, what is the number of hospital currently using the ON-Q.

It’s still right around 1000, maybe a little bit less.

Okay and then finally, there’s been a lot of chatter as of late that there are a couple of customers in Southern California on the hospital side that recently stopped using the ON-Q.

Is that accurate information, I mean, can you give us any more soft of information with respect to any customer losses in the quarter?

Ryan, we don’t give that kind of information, but have customers come on-line and come off-line a regular basis.

As they reach a certain level of purchases, many times we go in then and have to present to committees, and during that period of time there may be a slow down.

There’s almost never a stop.

And then as soon as we present to committees typically we get it all back and we go forward.

But because if you take the number of hospitals, say a thousand, and divide that into the total revenue, you can see that losing one customer on the average is not a big deal.

No, I got you.

If we lose customers for any length of time, we get them back.

Okay great.

And then, Jim, I think in the fourth quarter you spent $500,000 on some marketing campaigns or getting ready for that.

We it roughly in the same area or the same ballpark, $.5 million in the first quarter, or what was your specific marketing stand in 1Q?

The program continued, Ryan, but it was the actual placement of ads we paid for, which was significantly less than 500,000.

Our next question comes from the line Alex Arrow from Lazard.

Please proceed.

Thanks, hi guys.

I would like to go back to the quota system for a moment.

The quota system that you described previously we remember as pretty aggressive and double the previous year’s production in each territory and that becomes the expectation for the following year and any territories for which that becomes physical impossible have that kind of a growth year to year, then you split the territory and have more than one salesperson take it on.

But since now you have leveled off your sales force hiring, can you explain a little bit about how that works given that there are probably some territories that have grown to such as extent that you would otherwise be dividing them in two, but you can’t divide them in two this year because you’re not hiring more salespeople?

What goes on in that case?

What happens is as you start to reach a certain level, you pick up what we call a sales associate.

So, when you reach, I believe it is when you reach about $40,000 a month, you are eligible for what we call a helper or a sales associate.

That sales associate then helps you maintain your base business so that you can continue to hunt and get new business.

There’s another level above that when you can actually receive a second sales associate.

So for example, these territories that have quotas north of $700,000 typically have two sales associates.

Have you and will you tell us the number of sales associates so we can see how that impacts the total sales expense and production.

No, the only thing we’ll tell is that we’re up to about 240 total people in the sales force, 150 of those or approximately 150 are quota [inaudible] reps, the rest would be a combination of nurses, sales associates, and our inside sales people.

Okay, about the hospitals, I understand you have approximately 1,000 hospitals or a little less.

Can you tell us of your top performing hospital what production is up to or maybe the top five or the top 20, just give us a sense of how much the best hospitals are doing.

We don’t give that information but I can tell you this, we have hospitals today that are tracking over $.5 million.

Roughly how many would you say are tracking over $.5 million.

Again we don’t give those numbers Alex and we actually have a hospital or two that might do a million dollars with us this year.

You made the comment earlier about the difference between December and January, you do not allow vacations in December.

I am wondering if you can tell us the reason for that policy given that I would imagine, a lot of physicians take their vacations in December so wouldn’t it make sense maybe the second half of December may be the least productive time, why would you have a policy where you don’t allow vacations then?

We just have a policy that at the end of the quarter — In fact that is true about any quarter.

The last two weeks of any quarter you can’t take vacation and in December that is true just as well.

Okay, same thing for all four quarters.

Yes.

Our next question comes from [inaudible] of [inaudible], please proceed.

Very good quarter, just have a couple of questions.

To go back to infusion systems, the purchase by distributors, you said that some of that was for demand and then some of it was stocking.

Do you all look at it in terms of months of inventory that they are carrying and how does that level compare to what they have been carrying after the purchase.

Well I think the important thing to know here is that most of our distributors do not have quotas to buy to.

Right, I am just curious in terms of, if you looked at their demand and months of inventory that they are holding now, how that compares to what they typically hold.

Like in terms of drug sales, you know you will look that they have usually a month and a half worth of inventory, and that fluctuates.

I am just curious where that is right now.

Well to answer your question, if you let me finish, is not an issue because they don’t have quotas to buy to and those who do have quotas are buying way over quota.

Nobody was forced to buy anything they didn’t need in the first quarter so therefore it is not an issue.

Okay, well was all the purchase related to specific demand?

Yes, we didn’t force anything on anybody.

No I was just curious whether they were buying ahead of a price increase or something like that.

A small portion, a very small portion, of our distributors bought ahead of a price increase but that was a fraction of the total number.

Okay that is very good.

I was just curious because you happen to note in your press release.

Just thought I would ask the question.

Also, on SG&A I think you mentioned it but I didn’t hear for sure, Sarbanes-Oxley, how much was that expense?

In the first quarter?

Fourth quarter.

Fourth quarter?

Yes.

I think we actually published that our audit fees including Sarbanes was about $800,000.

That was in the proxy.

Okay I wrote down $950,000 for some reason from earlier in the call so I wrote that down wrong.

And how much were year end bonuses in fourth quarter?

You are talking about the restricted share number?

Well just the yearend bonuses for sales for meeting quota.

We don’t give that number but we did give you the number for the cost of the restricted shares, which [inaudible], which if you don’t hit quota, you don’t get the restricted shares.

Jim do you want to reiterate that number?

Yes the [inaudible] was $950,000 I think that is the number you remember.

Okay, and so that is about 1.7, so it is roughly, excluding yearend quotas and yearend audit, then you are roughly at, it looks like $18.5 million in the fourth quarter if you excluded those in terms of SG&A.

You are thinking like the non-recurring fees?

Right, excluding non-recurring for, like in terms of the first three quarters, where it would be.

Well there was some spending on those two items in first quarter as well.

Okay.

So, it is roughly $700,000 savings on restricted stock and call it $700,000 again on stocks and the rest being operational improvement if you will.

Okay, and Selling and Marketing you said was $11.4 million, is that right?

The selling was $11.4 million, marketing was $2 million.

Okay, and G&A was how much?

$4.6 million.

What I am trying to get to is the SG&A from fourth quarter to first quarter.

It seems like just the 18.5-18.1, which I know isn’t statistically the right way to look at it next to those items but was trying to get a better feel for the impact of —.

I guess I would have expected it to drop off a little bit more since you had the large number of reps hired in the fourth quarter but you didn’t pursuant to comments earlier in the first quarter.

I would image that there are a lot of signing bonuses and training costs that go towards those reps in the fourth quarter but not in the first but it doesn’t seem like it dropped off as much as I would have thought.

Yes but wait a second now because in the first quarter we had them for a full three months plus we paid commission —

Okay, that helps, that helps, okay.

In the fourth quarter we might have had them for 30 days but you still pay those bonuses.

Right, no that helps, that helps.

In DSOs since I didn’t see the balance sheet where were DSOs for the quarter?

It is probably about 45 days on the four side the non [inaudible] and then it is higher than that in NP systems just because of the nature of the business.

They are a billing business.

Our next question comes from the line of Michael Davidoff from Sidoti please proceed.

I will be quick on my questions.

My math doesn’t add up for SG&A expense Jim you said $11.4 million for Selling and Marketing and $4.6 million for G&A but on the press release it says about $18.2 million.

Am I missing something there?

Let me give you the components.

G&A for Q1 is $4.6 million, Selling and Marketing is $13.6 million.

Okay, I think you might have said $11.4 million.

No somebody asked me to subdivide Selling and Marketing into two pieces, Selling, which was $11.4 million versus Marketing, which was $2.1 million.

Okay, my fault there.

Can you just talk briefly about the gross margin, you had a nice improvement, and half bad of a higher sales numbers, is there anything in terms of product mix was then on cue, or anything else going on there that is driving that.

: Well I think the best way handle that Michael is that we continue to move people up into the more expensive devices on the RA side.

Our continuous nerve block product, for example, had a bigger share of the total revenues in the first quarter, and again those margins are substantially better than 90%.

Plus we had a very strong quarter from Infusystems, which didn’t pull the margins down so the mix was very, very good.

And the 73% gross margin we think is for real and could get better over the year.

Do you expect any price pressure when you start to see in Zimmers product or from Striker or any other competitors.

Well the products we see from the competitors will probably be products that will affect our lower priced items, again our two-day pumps, the pumps that are used for orthopedics.

But remember our concentration and our effort is on the big surgeries, the non orthopedic surgeries, which require the more expensive pumps.

So the answer to your question is no we do not expect to see much or any change in our ASPs because of Zimmer or Striker.

My last question is for Jim.

If you can just breakout the working cash-flow components, just receivables, inventory, and payables.

Sure, accounts receivable was $16.8 million, inventory was $9.7 million, they already have the cash piece.

The rest is just other assets and prepaids, and stuff.

And how about accounts payable.

Uh, lets see here, accounts payable was $5.4 million.

And we do have followup questions from Bill Plovanic, First Albany , please proceed.

Really quickly you mentioned in previous calls that you were looking to get the anti-infection labeling claim.

Can you give us an update on that?

Yes we are proceeding with our program there.

We have finished the retrospective data gathering.

We are in the process now of putting that into a document, which hopefully can be published and presented and of course those numbers look very good.

We already have the oxygen study done, which was done last year, which shows the benefits there.

And we are still waiting for the final approval from the FDA on the protocol for doing the pig study.

Now where we are at today is, if we cannot get the FDA to agree to give us a claim with a approved protocol, we will probably do the protocol anyway with the pigs and get that published, because we do believe if we can show a reduction in infection in animals that that will be a very powerful statement regardless of whether or not we get a label claim.

So the short answer to your question is that that is continuing.

Okay and I think Bill has one question.

How many reps that you hired in the third of the fourth quarter that are coming on now or kind of hitting that four/five month mark.

How many of those reps are at risk of getting the infamous warning letter from you guys.

Again, we don’t give those kind of numbers Bill but we have [inaudible] this year turnover somewhere in the neighborhood of 10%.

Okay that is good to now.

So 10% turnover and right now you are running, it sounds like somewhere around 3-4%, so somewhere around 5 people maybe, which is kind of expected for what you are going.

You know the interesting thing is Bill is I think I mentioned this to you when we were together in the west, is that most of the reps, more than half, will get that four-month letter, start performing.

It is amazing, they don’t leave the company, they fix the problem.

What I am trying to figure out is do a large number of people get those types of letters in the first quarter and maybe potentially we can see the turnaround that you are talking about in the second quarter.

That is really what I am going after here now.

No more than usual, no more than what we have experienced in the past Bill.

Okay then, last question is, you mentioned that the AST program is coming on pretty strong, wondering if we could get an idea for what those revenues were in the quarter and then how much of the RA revenues were from international in the quarter.

Hello.

Yes hold on Bill we are looking at number one we wont breakout international but we will give you the inventory surgery center numbers.

$600,000.

We booked $600,000 Bill.

Wow that is a great number, okay great.

Our next question comes from the line of Adrian [inaudible] please proceed.

A question in terms of the setting of the sales quota and your expectations for how that should fall through the year.

I think you took some previous calls about expecting sort of a slipping point in the third or the fourth quarter.

Could you just refresh my memory on that point and I have a followup.

Okay Adrian I don’t quite understand the question because your first question was something about quotas for the sales reps and the second part was something about a tipping point.

What is the question again?

The question is you have an annual quota range of between $380-900,000, is that linear through the year or there is a bigger emphasis placed on sales the latter part of the year versus the first half of the year?

The answer is yes because the brand new rep this year got a quota of around $380,000.

We don't expect him to hit that until fourth quarter.

That is, we don't expect him to hit the $380,000 until fourth quarter so we would be quarterizing that $380,000 in such a way that hopefully they can make quota every quarter with the biggest number or the ramp being at its highest level in the fourth quarter.

So, thinking about the [Novia] question in terms of the quarter-on-quarter growth for Regional Anesthesia being 3 ½ %, we've made the numbers that you have guided to for the full year and we're clearly going to see a significant ramp through the year with the biggest increment or increase being in the fourth quarter.

Is that a fair way of thinking about it?

Well, I think that's the way we think about it.

And again, if you take 80 new sales reps last year coming into this year for the first time, they're going to be performing on a full-year basis.

We expect them to grow their business every month and every quarter so that's more than half the number of sales people prior to hiring.

So yes, we should see a ramp this year as we go from quarter to quarter.

As we look at going into the second quarter from the first quarter, refresh my memory as to the seasonality impact.

Should we expect to see a steady ramp from the March run right to April, May, June, kind of that gradual increase the way you setup quotas and the demand patent for the market?

Well, in the past, our second quarter has always been relatively strong.

There's no reason to believe today that it won't be stronger than the first.

Our next question comes from Ed [inaudible] Please proceed.

I am a little confused on one thing.

You all sold some into the rental side.

You said you're providing those units.

How does that run through?

Is that capitalized on the balance sheet so that you accrue rental income from those?

The pumps are all capitalized and written off over 5 years.

Unidentified Speaker And then we, as a company, get the revenue off of that, correct?

Yes, oh yes.

We book the revenue by what we get paid by the insurance company.

And that comes just per use?

Yes.

And so, as that builds up that becomes kind of a recurring revenue generator?

Well, yes.

That's what the oncology business is all about.

It's all about third party billing and eighteen years of gathering contracts with insurance companies and building relationships with office-based oncologists.

But, because of some new protocols especially on the corrective cancer side in the last 3 years that business has started growing significantly greater than it did in the past.

How does that sales process go.

Does our sales guy go in there and say, "Hey.

We've got this great pump and so you can rent it from us and pay us "x" amount over the course of, I guess, a couple of years."

No.

What happens there, Ed, is that we compete directly with pump rental companies.

A pump rental company would do what you just described.

He would rent the pump to the oncologist to be used on his patients.

We do something different.

We go in and provide the pump at no charge, including the disposables, and we're such nice guys we even throw in the batteries to run these things, at no cost to the oncologists in return for the paperwork that we need to bill the insurance company.

The oncologist never pays us a dime.

We collect our money directly from the insurance company so it's a great program for the oncologist and that's why we are, without question, the national leader and the only national player with this kind of a program.

It sounds like a great program.

So, the oncologist says "yes," we get the paperwork from him, we bill the insurance company, and then we get paid for the pump.

Yes, we get paid for the use of the pump, which is like a rental.

We do have a final question from [Inaudible].

Please proceed.

Just to follow up on the previous caller's question on the pumps.

I was curious.

You said that you believe that the market is 50 million now.

Is that right?

Yes, probably something around that number or north of that.

Okay, and so just kind at an average price pointed at $2,500 a pump, then that's 20,000 pumps roughly.

No, no, no.

You can't, you can't do that.

Pumps have nothing to do with the size of the market.

Remember these things are used for maybe two weeks' protocols, maybe a month protocol and then they're sent back to Detroit, which is where our headquarters is for that business, cleaned, and then shipped out to another oncologist.

So, these things are always being moved back and forth between oncologists, and in many cases, our bigger users may have four or five on the shelf awaiting patients.

How would you suggest I break down the market then?

I really don't know how you would break down this market because you'd have to know the number of patients that are actually going to be treated with continuous infusions.

Okay.

And you said you have how many pumps in inventory or in the market?

I think you said 10,000:

No, that's our pumps.

Okay, so you have 10,000 out there.

Yes.

So, with this $2.3 million purchase then you're increasing your number of pumps out there by roughly 10%?

Yes.

Well, what's happened is that the demand [audio out] for our program is so high that in order to provide pumps when the oncologist needs them, which is right now when the patient shows up, we've had to continue to buy pumps.

We bought pumps last year, and we're buying pumps this year obviously.

Okay.

And then I'm sorry to circle back on the distributor thing, I just -- maybe it's a bad morning and I'm not smart enough to understand what's going on, but just trying to figure out in terms of distributor purchase.

I know that they're not contracted to purchase any amount and that they purchase on demand.

I'm just curious, how do you all track in terms of, or how do they track, inventory that they have in their reserves to resell, and if you look at what they have right now in terms of months of inventory based upon current demand, how does that number compare to where it's been over the past couple of quarters?

Well, I don't quite know how to answer the question to make you satisfied, but let me try it again.

We have no visibility on the distributor's inventory nor do we care because they're not forced to buy to minimums.

Therefore, they only buy when they need product.

And in fact, in the first quarter two of our very largest distributors moved orders from second quarter into first because they were out of product.

Right.

Okay, I am not trying to press you.

I'm just trying to understand what the deal is.

We do not have a sales force on that side.

Therefore, we receive orders here at corporate headquarters and we say "Thank You" and ship.

Absolutely.

That's the best thing for all of us.

Well, thanks again, and I may follow back up offline just to ask, but I appreciate the time and look forward to next quarter's call.

The good part is that we don't stuff distributors because they don't have to buy.

Any more questions?

We don't have any other questions at this time.

Needless to say, we are very pleased with our first quarter's financial performance and 2005 is shaping up to be another outstanding year for I-Flow.

Our growth strategy appears to be sound, proving itself in the marketplace everyday as increasing numbers of patients benefit from ON-Q.

We have built an operating platform that we believe can support our growth for the long-term, and we look forward to updating you on our progress in three months.

Thank you for your continued support.

The call is over.

Ladies and gentlemen, this does conclude the conference call for today.

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

Thank you and have a great day.