金百利克拉克 (KMB) 2005 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the I-Flow Third Quarter Results Conference Call.

During the presentation all participants will be in 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, Thursday October 27, 205.

I would now like to turn the conference over to Don Earhart, Chief Executive Officer.

Please go ahead sir.

Thank you, Bruce.

Good morning everyone and thank you for joining us for I-Flow’s third quarter and first nine months of 2005 results conference call.

Chief Financial Officer Jim Talevich and I will be happy to answer your questions following our prepared remarks.

This morning we reported a net loss for third quarter of 2005 of $488,000 or $0.02 per share.

This loss was substantially smaller than the net loss of $1,770,000 or $0.08 per share we reported for the third quarter of 2004.

It was also less than the net loss of $645,000 or $0.03 per share we reported for the second quarter of 2005.

And when you take into account that the net loss for this year's third quarter of $488,000 included stock-based compensation expense of $790,000, our performance looks even better.

As we did in the second quarter, in the third quarter we again exceeded the goal we announced earlier in the year of achieving profitability, excluding stock-based compensation expense by the fourth quarter of 2005.

Not only did we achieved the goal early, but we achieved it two quarters in a row.

Revenue for the third quarter of 2005 versus the third quarter of 2004 increased 43% to a record $26.8 million.

The third quarter revenue was also 11% ahead of the 24.2 million reported for the second quarter of 2005.

Within these totals, regional anesthesia sales rose 46% over last year's third quarter, while revenue in our Oncology Infusion services segment increased 66% and our IV infusion therapy business grew 15%.

For the first nine months of 2005, total revenue has increased 47%.

We estimate that business disruptions due to the hurricanes reduced sales during the third quarter by more than $500,000.

The hardest hit was the regional anesthesia business with loss revenues exceeding $420,000.

There are indirect revenue losses as well, which are not easy to quantify.

Disruptions in hospital surgery schedules all over Texas, Louisiana and Mississippi impacted our regional anesthesia business.

For example, hospital as far north as Dallas cancelled some elective surgeries to free up a lot of time in order to have ORs available for emergency patients from cities affected by the hurricanes.

On the expense side, our bottom line results for the third quarter included more than $200,000 of hurricane related asset write offs, and almost $600,000 of unplanned expenses in our Oncology Infusion Services business that Jim Talevich will detail for you in a moment.

I say all of that to say this, when you take in to account all of the negative events in the third quarter, I think you will agree with us that our performance against the guidance was particularly noteworthy.

Without the impact of the hurricanes, our revenue performance would have been even better and our loss would have been even smaller.

In fact we would have probably been profitable even after stock-based compensation expense.

We continue to be successful in balancing rapid revenue growth in our regional anesthesia business with an ever improving bottom line.

As I have explained before the rate of growth of our regional anesthesia business is proportional to the amount of selling and marketing dollars we are willing to spend.

This is a choice variable for us.

We can spend more money on sales and marketing, and grow our regional anesthesia business even faster and postponement day we become profitable, or we can drive the profitability now.

Based on feedback from investors like many of you listening today, we have made the decision to drive the profitability while continuing to grow the regional anesthesia business at a rapid rate.

Operating expenses remained under control in the third quarter increasing at roughly half the rate of total revenue growth when compared to the prior year quarter.

The heaviest expenses associated with the hiring and development of our regional anesthesia direct sales force and the funding of related investments required implement the current phase of our strategy plan are mostly now behind us.

Our performance validates the strategy we have pursued aggressively for a number of years in our regional anesthesia business.

We are focused on redefining recovery, by establishing proprietary ON-Q family of products as the new best practice for post-surgical pain relief, and also replacing narcotics as the standard of care.

The market for narcotics-free relief or post-surgical pain is still early in its development and very under-penetrated.

Therefore this market continues to be an enormous long-term growth opportunities for I-Flow.

Our direct sales force is increasingly experienced and productive.

We are assisting our sales team through the introduction of new products, the continued support of independent third party clinical studies which have repeatedly demonstrated the benefits of ON-Q in an expanding number of applications as well as with targeted co-marketing and advertising campaigns to increase consumer awareness of ON-Q in local markets, and finally programs to facilitate insurance reimbursement and reduce the reimbursement risks over our ON-Q products.

I will review in more detail some of the recent developments in each of these areas later in the call.

In addition to the rapid growth of our regional anesthesia business, I also want to mention how pleased we are by the continued strong performance of our Oncology Infusion services business.

Revenues are up 66% for the quarter, and 54% year-to-date.

We remain optimistic about the future of this business based on the increasing number of office-based oncologist now using electronic ambulatory infusion pumps to provide multiple-day infusions of chemotherapy drugs to patients at home.

In addition, more and more insurance companies are recognizing the cost effectiveness of this program, not to mention the improved quality of life for the patients.

Many of you may have read the RD, [while] in the Wall Street Journal on Tuesday of this week titled,” A new Approach to Chemotherapy”.

It talks about doctors who are experimenting with the new approach, giving very low doses of chemo drugs for extensive periods of time with no rest.

The approach represents a significant shift in thinking because the target is in the cancer tumor itself.

Rather the aim is to halt the underlying growth process, because the method spares patient the toxic side effects of high dose chemo such as vomiting and anemia.

It can be given continuously for a long-term perhaps during the cancer into a chronic, manageable condition.

It's a continuous delivery of chemotherapy drug expands as of pretty bit mortality, we believe there is no one better positioned than our Oncology Infusion Services company to take full advantage of the opportunity to provide the Oncologists with pumps for those drugs requiring intravenous delivery.

We are confirming our guidance from last quarter specifically, we expect total revenue to grow by more than 40% for 2005 as a whole and we expect that I-Flow will again be profitable in the fourth quarter excluding stock based compensation.

Let me now turn it over to Jim to review the financials.

Jim?

Thanks, Don, before we continue please note that this conference call will include forward-looking statements, these statements are based on current expectations, estimates or 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 and I-Flow Corporation's various flings 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 September 30, 2005, net revenue increased 43% to a record $26,795,000 compared to net revenue of $18,688,000 for the third quarter of 2004.

Gross profit rose to 72% of revenue for the third quarter of 2005 compared to 71% for the same period of the prior year.

Operating expenses for the third quarter of 2005 increased by 21% or roughly half the rate of revenue growth compared to the third quarter of 2004 primarily reflecting the ON-Q sales force expansion during the second half of 2004 and increased marketing expenses.

The net loss for this year's third quarter was $488,000, or $0.02 per share.

This compares favorably to a net loss for the third quarter of 2004 of $1,770,000, or $0.08 per share.

This year's third quarter included a $220,000 expense representing the estimated loss on infusion pumps missing or destroyed due to hurricane Katrina and a $571,000 expense related to a dispute with the State of Michigan concerning the Company's potential liability for use taxes on purchases of infusion pumps.

At September 30, 2005, I-Flow reported net working capital of approximately $53.4 million, including cash and equivalents and short-term investments of $31.5 million, no long-term debt and shareholders' equity of $73.6 million.

The decrease in cash and equivalents and short-term investments compared to December 31, 2004, included the purchase of $5.9 million of electronic infusion pumps by the Company's InfuSystem subsidiary to support its rapidly growing rental business in the Oncology Infusion Services market.

Don?

Thanks, Jim.

During the quarter, we launched three unique product packages that are designed to make ON-Q more accessible for larger incision surgeries.

The kits include tools for tunneling the ON-Q Soaker Catheter.

Tunneling is an established surgical technique that we have recently introduced with the placement of the ON-Q Soaker Catheter.

Tunneling techniques enable surgeons to quickly place the catheter into deep tissues adjacent to large nerve roots for more effective pain control and to ensure the precisely targeted delivery of the local anesthetic.

Tunneling, as opposed to placing the catheter in the wound, helps mitigate any concern the surgeon may have about a foreign body in the surgical site.

Tunneling techniques to place the ON-Q Soaker Catheter can be used in heart, chest, weight loss, plastic, spine, foot and surgeries unique to women, as well as in other procedures.

We are making key educational tools available and we are providing individualized training for surgeons seeking to use the new tunneling techniques, with an emphasis on tunneling, as well as on our proprietary 10-inch ON-Q Soaker Catheter, these new kits contain all of the components necessary for surgeons to provide their patients with the best possible post-surgical pain relief following large-incision procedures.

Given the growing interest in tunneling for larger incisions we are very optimistic about the market potential of these new products.

In fact, we are now receiving requests for shorter tunneling devices to be used for smaller incisions.

This is especially significant since we are the only company today; we know well that is providing the surgeon with the tools necessary to be successful when using this technique.

On the reimbursement front, we signed several new contracts with many care companies to provide reimbursement for the use ON-Q were appropriate in ambulatory surgery centers nationwide.

Based on the number of total lives covered by these new contracts, which include a contract with leading preferred provider organization MultiPlan, ON-Q will be available to 12.5 million more patients who may undergo outpatient surgery.

Total ON-Q-covered lives in the United States now number over 30 million.

We estimate that surgeries performed in ambulatory surgery centers represent almost 50% of ON-Q's market opportunity in the United States.

These new contracts show that insurance carriers and PPO networks are recognizing the positive value ON-Q delivers for their members; this is underscored by the momentum we've seen with respect to new contracts and the increasing number of covered lives in just the last few months, making the ASC business the fastest growing segment of our ON-Q franchise.

On another front Dr. Timothy Kremchek, medical director and chief orthopedic surgeon for the Cincinnati Reds, is transforming total knee replacement, once relegated to the hospital setting, by performing the procedure on an outpatient basis.

By that I mean less than 24 hour stay.

By including the ON-Q PainBuster in his protocol to treat post-surgical pain, it is now possible for Dr. Kremchek to treat healthy patients needing a total knee replacement without subjecting them to extended hospital stays.

ON-Q is labeled as significantly better than narcotics for post-surgical pain relief.

ON-Q, patients undergoing total knee replacement can remain comfortable after surgery, enter rehabilitation quicker and get back to their normal lives faster.

This outcome is ideal for the type of patients Dr. Kremchek treats, young, healthy and active, who cannot afford to delay their rehabilitation or prolong their recovery.

Orthopedic outpatient procedures are estimated to represent less than one-third of total revenues to facilities and physicians yet they account for almost one half of their profits.

By using ON-Q in an ambulatory setting, surgeons can take advantage of our Third Party billing program to cover the cost of the device.

Moving total knee replacement out of the hospital is consistent with an overall shift of surgical procedures to ambulatory environments whenever possible.

With more than 250,000 total knee replacement surgeries performed each year in the United States, the cost of these surgeries to the healthcare system could be substantially decreased using ON-Q while patient satisfaction would increase.

We continue to support programs to spread the word on the benefits of ON-Q. for example, we provided a grant to the not for profit national women's health resource centre and we are working with Dr. Susan Downey of the University of Southern California Keck School of Medicine in Los Angeles to launch an educational campaign to prepare women for surgery and ultimately help them redefine their recovery.

Designed to convey the message that recovery begins before surgery even takes place.

The campaign enhances patient's relationships with their physicians by providing women with the right resources to ensure a safe, comfortable and speedy recovery.

We recently developed and tested a new program designed to demonstrate to hospital administrators the cost justification for using ON-Q in their facility.

This new approach to selling which I-Flow has dubbed the econo-clinical selling uses the facilities existing cost accounting system to compare the actual cost to treat a patient with ON-Q versus a patient without ON-Q.

The comparison is based on the hospitals own patient outcome, and uses financial and clinical metrics that the hospital itself defines as significant.

By analyzing data from up to four different surgical procedures we have been able to demonstrate significant cost savings to specific hospitals when ON-Q is purchased and used routinely.

As you know, during the second quarter we engaged Tulane University Health Scientist Center to conduct an animal study to evaluate the anti-microbial benefits of ON-Q.

The study protocol has been initiated when flooding associated with Hurricane Katrina covered uninhabitable the facility where the animals were housed, effectively terminating the study.

We are in the process of securing an alternate site for this study, and we will have an announcement soon.

Last week I attended the American college of surgeons meeting in San Francisco where I was amazed and pleased by the high level of awareness and interest in our ON-Q family of products among this key target audience.

We have made significant progress since January 2002, and we still have a long way to go.

We are excited however about our ability to continue delivering strong results in the future.

All in all, despite the negative effects of Katrina and Rita it was another strong quarter for I-Flow.

We met or exceeded our aggressive financial performance objectives, and made considerable progress in expanding the growth opportunities for our flagship ON-Q business.

In fact we are extremely pleased with the performance all three of our businesses, each of which is a market leader and a strong performer in it's own right.

Bruce we are now ready to take questions.

Thank you sir.[Operator Instructions]

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

Great.

Thank you.

Please proceed with your question.

Oh, good.

Good morning.

Good morning.

Just had a couple of questions, you know you mentioned there was some disruption in the regional anesthesia business in the quarter as of the weather.

Do you think those will come in the fourth quarter in a sense you think we will see that strike up in the fourth quarter as you recover some of those cases?

Yeah let me ask Jim Talevich to answer that question for you Raj.

Jim?

Hi Raj.

As we said, we think the impact on the third quarter is over 500,000 and that we don’t know for sure, but we’re estimating approximately 900,000 in Q4.

As the impact?

Yes.

So we won't see a recovery maybe until the first part of next year at this point?

Well you know there’s Wilma, there’s certainly I mean I don’t think it’s a huge damage to our business but there are some lingering effects.

Okay.

Obviously you are sort of curious on the timing of when that business to make it back on track.

And may that missed as well but I’m not sure what you gave guidance for the full year.

I know in the past you have mentioned you know the top line growing greater than 40% and I’ve given some specifics around there, but did you mention your outlook on the call this time?

I’m sorry Raj, what was the second part of your question?

The guidance on the top line got, what was the second part?

I was just curious I know you mentioned in the past I just didn’t whether you had brought it up on this call, so

Well our guidance for the year continuous to be 40% or better for the top line and we expect to be profitable in the fourth quarter before stock base compensation again, which we did I the second and the third quarter.

Let me add a little bit to Jim’s comments about the hurricanes.

We know in [New Orleans] it is coming back in the fourth quarter.

Now if you guys know something different than we do you should tell me about that but we know those hospitals are not back up.

Oh true I understand that but

Yeah we expect that to come back up to sometime next year and we are evaluating as I speak the effect of the Hurricane Wilma in Florida.

My sales reps in Florida don’t have water, they don’t have electricity and we know that the hospitals are running on generators so they’re still doing emergency surgeries but we don’t know if we are going to lose any business from Wilma and we won't know the effect of that until this quarter is over.

Okay, if I could just ask you a little bit more on the guidance, you know, in the quarter, we saw the Oncology business really step up, if we are still looking at greater than 40% for the years for the same guidance you gave in the past.

The complexion change a little bit, you know, is regional ask can [you] maybe a little less in Oncology, a little bit more, maybe you could give us a little bit of flavor on that?

Well we don’t give a guidance on each of the individual businesses. [Inaudible] say this, we don’t see any weakness in the Oncology business now, whether it can grow 66% again, we won't comment on that.

Don’t forget we mentioned in the second quarter conference call that we had some carry over on the Oncology side because we had a complete computer system implementation in that second quarter, do you remember that?

I do and I think you mentioned in this release as well.

Yeah, so we mentioned it again, so some of that was carry over but again a good portion of that growth and as I mentioned in the Wall Street Journals, the article that you guys ought to read, the one on Tuesday if any of that comes to pass, we believe we are by far that way the best positioned company in the United States to take advantage of that.

Okay, then its one last one, on the Regional Anesthesia side.

Can you provide a breakup between in-hospital and the ASC side of the business?

Jim, do you have that?

Just one moment, Raj.

Sure, for the quarter it was little over 900,000 for the ASC fees.

Okay, interesting because I guess if the number is a little bit obviously covered by the weather effects but looks like then in hospital is actually down a little bit sequentially but I guest again it tends a lot of effects of the weather.

Any other questions Raj?

No.

That's fair enough.

Thank you.

Bruce next question.

Our next question comes from the line of David Turkaly from WR Hambrecht.

Please proceed with your question.

Thanks.

Just going back to the Oncology the strength there, can you remind us, kind of what the key metrics are, I know you mentioned that you purchased a number of pumps.

Could you update us, I mean what are the new sales people there as well exactly what contributed to that strong kind of sequential number that you posted?

Well again we go back to Dave what we have talked about in the past.

Number one, is the new drugs that came out of Pfizer and Sanofi about three years ago the initially were used for Phase IV cancer patients, they are now available for Phase II which means you picked up a significant number that's all transpired over the last two years.

Number two, since the pumps are already being used for the drugs the new drugs; our oncology just are beginning to use them for the old drugs as well.

So they were avoiding the program or avoiding the use of ambulatory pumps in order to play with the new drugs they had to bring demand so as long as they are in they might as well go ahead and use them for the old drugs as opposed to given those patients at the hospital or the homecare company.

So we picked up that.

And then number three, if you read the article in the Wall street Journal it actually talks about doctors today or in more beginning to experiment with longer term infusions in order to do that, they are going to have to send patients home with the ambulatory pumps and guess who is already there with ambulatory pumps.

We have not added any sales people so all of that business is coming to us without spending any money on sales people, however we have that increase the number of dealers and receivable clerks, about the small cost of the growth of this business.

Did that help you Dave.

Yeah it has been and that’s kind of what I was you know how you get to the main point which is kind of is that sustainable if you didn’t hire sales people and you own the pumps now I would imagine people could take away that -- that could be -- you know that Jim real quickly for mat be a couple of hours they charged the 500K in quarter and than the 200,000 loss where is the 500 coming out of is that -- and the 200 I think is in the inventory for cost of goods the 220 for the loss, but the litigation where is that in the numbers on the P&L?

You talk about the [Inaudible] question?

Yeah.

Yeah most of that been cost to sales.

So you are trying to say that I mean so that’s a one time event could be explained, we expect any thing else going forward is there kind of, is that taking care of now, what exactly was that?

Yeah I think you can say that that’s taking care of, basically the department of treasury in Michigan has essentially has changed their mind and issued a decision order determination, we recorded the full potential impact of that, but we do intend to appeal that decision to the Michigan tax tribunal.

Great and then one last if I could on the RA side any -- can you update us on the churns there in terms of sales force size or turnover or additions in the quarter?

Thanks.

Okay to help you there Dave there has been no additions and the sales force still stands at we count nurses and everybody about 250 plus or minus 5 people and that's the same as it was in the second quarter and very much the same as it was in the first quarter.

So all increases are coming through productivity improvements.

Thanks a lot.

Does that help you.

Yes, thanks.

Okay Bruce next question.

Our next question comes from the line of Alex Arrow from Lazard Capital Market.

Please proceed with your question.

Thank you.

Hi Don, hi Joel.

Hi Alex.

First on the InfuSystem just following up on the question of the sustainability.

I understand the new drugs from Pfizer and [Inaudible] and take home effects let me ask question if we were to take that 8.6 million number and then look at that as sustainable numbering and I understand you don’t give guidance individually by unit but would you feel uncomfortable with us out here analyzing the company flowing through that higher level of InfuSystem since it is such a difference from what we’re expecting or would you rather see that as a one time effect.

Well because of the carry over from the second quarter, some of that is a one time effect but we are growing that business today I believe year-to-date about 54% so I wouldn’t be too surprised if the growth in that business does not exceed in the fourth quarter our guidance for the total.

Now that's pretty big.

No that's actually very helpful.

Okay but I think it will grow at least as fast as the total business.

Yes this is an amazing business Alex we had not planned on anything like this, this year.

And again I would ask you to read that Wall Street Journal article because when I read it on Tuesday I got very excited.

Can you say whether the percentage of those cases that they are billing for that you collect on has changed, I know in the past it was about half the cases -- can you comment on the percent that you are collecting on?

It's the same it's steady as a rock.

The percentage that we use continues to be the same percentage we used now for two years very close to the same percentage we have used now for about 10 years.

Okay great.

On the inventory that was lost because of the hurricane, can you tell us, do you have regional inventory warehouses and one of them was wiped out or is it just a matter of logistic that you couldn’t get them down to those hospitals in time or is it just because the hospitals were shut down during the hurricane, is that which of those things or is it a combination of all three was the reason for the negative effect of the hurricane?

The inventory we were talking about our ambulatory infusion pumps that we loaned to Oncologists as part of our InfuSystem program.

So these are pumps that were sitting in individual Oncology offices, it has now been wiped out.

Electronic pumps?

Electronic pumps, yeah, these are the electronic pumps that are part of our InfuSystems inventory.

So they are located in the fixed asset portion of the balance sheet.

We actually lost about $220,000 worth of pumps that are floating somewhere in the Mississippi or the Gulf.

Roughly how many pumps did that represent, can you say?

Oh, let's see let me give you a quick calculations, Jim is going to run it for you quick.

115 maybe.

Yeah, 100 to 115.

Some of those are probably old anyway, had to be replaced, right?

Yeah, well -- we used pumps for 10 years and we write them off for five.

We get ten year life out of those pumps and that’s we lose them.

There was every now and then happens but no we get close to ten year life out of them.

Okay and so as far as just the number of days that hospitals are shut down, should we interpret that is a discreet sort of linear infact number of hospitals shut down or there is a logistical thing I mean just for modeling what might happen in the coming quarter in Florida?

Well I think you need to assume that in New Orleans we don’t expect any business out of New Orleans of any significance until sometime next year and that used to be one of our top regions.

In Florida we are very concerned because that has damaged everything south of Fort Waterdale in fact it's actually a little bit of north of Fort Waterdale.

So we are not sure yet what that means, we know the hospitals have got generators and so most of those are operating but you've got a lot of people now that can't get to the hospital, they can't get gasoline, they can't get water, they can't get ice.

So we don’t know the effect they had and therefore I can't really comment on whether there will be an effect and in so how big it would be.

But when we think about inventory for ON-Q everything is shipped out of Irvine it's not as if you lost any ON-Q inventory direct and also there is, it's just a matter of when the hospitals are operational let's see only affect?

Exactly right, yeah because the inventory what it shipped here it's taken off the assets.

Okay.

Taken out of the inventory.

I could ask you about the tumbler for a minute.

I know that's -- but a help of cardiovascular.

Do you have anything about the length of stay for that affect, is that I mean that’s one of your key selling point I think in cardiovascular.

Does that improve it by a day or something if you use the tunnel?

Yeah what's happening is, is that to choose to long incisions.

We are getting even better pain relief and doctors who are using it for long incisions are getting releases even earlier.

Do you have a study coming out for that one?

We will have studies, yes.

We will do studies on tunneling.

For that's another year or two years away before those which come out?

Yeah you could assume that.

Okay.

But the adoption rate is very high.

Doctors have used tunneling technique for years.

All we are doing is going in and teaching them how to use this with ON-Q.

It's not a tough sales.

Okay.

It's a very easy sale.

Okay let me turn to profitability, can you say what quarter you would expect profitability even with the effects of stock-based compensation?

No we don’t give that kind of guidance, now remember now next year the rules change and the dollars that we will have to expand for stock based compensation will go up significantly.

So that will hurt us next year, again it is going to be interesting to see how people like yourself look at this, because we won't be the only company in the country, which s going to have to expense all their options.

Are you going to change your options of granting policy and all should we assume the same number of options with the grant to next year?

Again I can't speak to that but you can assume that that will be discussed in great detail at the December Board Meeting.

Okay.

And announce when your quarter perhaps?

I don’t know we had ever made that announcement because that would be a hard one to announce but again I can't speak to what we are doing in a way our policy going forward.

Okay almost end of my questions the turnover rate any update you can give us on that I know the sales force is kind of constant can you say what the turnover that has been?

Well we start giving turnover rates at the beginning of the year so we don’t speak to that but the sales force has been in terms of size has been basically the same.

Okay and can you say whether you've got and if so how many hospital sort of reached the $1 million production rate, or any other kind of metrics you can give for what your best hospitals today?

I won't give you a metric on that right now but what I will give you metric on is we had our first territory in $1 million last week.

So year-to-date sales into that territory did $1 million.

And there's a 150 there to vista?

Yeah I think on the seaside there is a vista 150 but on a hospital side there is about 125, so let's with a hospital territory.

Okay.

I’m pretty excited about that as we don’t believe that will be the only one this year but that’s the first one this year.

And ahead of $1 million annual run rate or is it actually what’s happening?

This person with her helpers are at phase year-to-date in $1 million last week.

Only 10 months into the year?

That’s exactly right.

Okay, great.

Okay, thank you.

Yeah that’s pretty exciting.

Thank you.

You are welcome, Thank you -- next question.

I didn’t mean take down to you.

Who is next question?

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

Please proceed with your question.

Hi guys good morning.

Hi Jason.

A question first as just clarification on a previous question that was asked on the hurricane effects.

Are you guys expecting or projecting the impact on Q4, Obviously only feared, in September in the third quarter to be?

Did James say $900,000?

James you want to answer the question.

Yeah, yeah, now we don’t know for sure but it remains to be seen as Don has saying what will happen in Florida but that is could be the effect, now we have achieved our guidance for that so whatever we turn in would have been higher otherwise had we not lost New Orleans and these other areas.

But it could be Orleans or an oncology a potential $900,000 impact?

Yes, not counting Wilma, but we have not changed our guidance, that’s the key thing Jason.

Okay.

We will find a way to overcome.

Okay.

And then in terms of you know, sales force productivity and in that issue, I understand the number of reps is pretty stable, but can you break down the impact that you are seeing from the more recently hired reps specifically in the back half of last year and I know we are expecting a six month type timeframe for those guys to become productive.

Are we seeing those more new hirers now having an impact on sales?

Well the answer to the question would be yes, but we won’t break that down for you.

Remember, with the kind of quarters that we hand out and the goals we give new people, if they are not supporting themselves in a fairly short period of time, then they are not with us.

So you can assume that anybody we hired last year is performing or they are not here.

Okay.

And then can you comment, you know, just broadly on quotas being or I know -- obviously that’s very nice to one particular person or region, you know, broke a million buck, but across the board, are you seeing everybody pretty much on track to head quotas in general, is that a fair question?

So, we -- remember now, our goal or the way we actually budget every year is we expect somewhere between 25 and 30% of our people to hit quota.

We are at the low end of that right now.

So about a quarter, your reps are [equal].

Exactly right.

That's what we expect.

And then finally, just on some clarification, I know it’s a tough questions, you don’t break out the specifically ON-Q versus Oncology or any of the specific businesses but when you are thinking about strategy [dawn] and growing the ON-Q line and I think you said a rapid growth rate.

Obviously it's been declining year-over-year type growth numbers over the past couple of quarters now.

But where do you flip the switch and start spending more on the sales and marketing line to have a more stable growth rate there.

Or when can be expect to see that rapid growth rate kind of the -- as long as you are also managing bottom line expectations.

Again Jason that would give -- we are not prepared to answer that question today.

That would be guidance we are not prepared to give.

Okay I am just trying to understand when do we start to see stable addition there on net line, and what defines rapid growth rate?

Again I can't comment on that today.

Okay, fair enough.

Thank you very much.

Alright thanks Jason.

Bruce, next question.

Our next question comes from the line of Sara Michelmore from SG Cowen.

Please proceed with your question.

Thank you good morning.

Hi Sara.

A lot of my questions have been answered, but I sort of asked a question on this ambulatory care opportunity Don and you mentioned it at 15% of the potential market opportunity obviously saw a very small piece of the overall revenue.

Can you just remind us how you are targeting that market today, and as you get an increasing, increasing amount of reimbursement coverage in that area.

How the focus of the sales force may or may not change?

Alright, Sara it's about 50% of the total surgeries in the United States are going out patient.

So it's about half of our opportunity, so we are targeting that with a sales force today that’s about 33 people.

That’s up about 80 from the beginning of the year and the beauty of that program is, it's no risk for the facility.

The only risk to the patient is that they have to pay the no-pay whatever that is, and that’s different by insurance company.

Now, today we are collecting about 35% of our gross billing, and as we get more and more contracts that percentage will increase.

So that’s the value of the contracts, because once we get a contract we know we are going to get paid.

And number two we then will improve that percentage and reduce the number of no-pays.

So we are going after that business pretty hard, and without the NQ system company or business doing the billing force we would not be successful.

But because of that asset we think we are being very successful.

So you know RA is up about 64% year-to-date, and we think that’s a pretty good rate, and we expect that they continue.

So I said the answer to my question one is that you are going to invest that sort of incrementally as you grow the business and get these contracts lined up?

Exactly, and today what we have done is again we added eight people in that business this year but at the same time we are also utilizing nurses and what we call sales associates on the hospital side to also supports that business by making sure they drop by the surgery centers and pick up the paper and make sure that all the billing information is there to help out the ambulatory surgery center rep.

So we are finding ways to increase the productivity of the wrap without adding people.

Thanks, that’s helpful. on the tunneling products Don, you know was the lack of tunneling ever a push back for adoption of the ON-Q and then I’m wondering if now that you have the tunneling fleet of products available will that change the types of procedures that the ON-Q use for the is there a particular procedure you think that you maintain increase and how was the availability of these tunneling products.

Thanks.

Yeah, the tunneling products are actually designed initially they were designed for long incisions or large incisions which being means were to do lot of card and cardiothoracic, bariatric or anything with a long incisions.

So that's what they were targeted at and actually the idea came to us from a surgeon.

So usually doing is all tunneling and we happen to observe he was getting fantastic results because of course he’s taken out all the nerve endings that be aside.

So he was getting even better results then he would if he dropped the catheter in to the surgical site.

So we learnt from him, and then we immediately of course took that forward and developed specific products to do that.

So the answer to your question is this.

As we do more and more tunneling, we will concentrate and focus on the long incision surgeries, where tunneling gives better results.

Not only does that increase the dollars for sale that we get but it put another big barrier between us and the orthopedic companies, who would never chase this opportunity.

They wouldn’t spend any time with heart surgeon.

So it separates us even further from the competition.

Now that we’re getting requests to look at small incisions we’re doing tunneling in the foot, we’re doing tunneling in the ankle, we are doing tunneling in a lot of small incisions where it's actually better to put the catheter right on the nerve endings as opposed in the surgical site.

So that’s another huge opportunity for us and again, that continues to separate us from the guys who are just selling pumps on price.

And remember we get more money for a tunneling kit then we do for just a standard pump.

Does that help you with the answer?

Yes, absolutely.

Okay, thanks.

Bruce, next question?

Our next question comes from the line of Adrian Dawes from Hartwell.

Please proceed with your question.

Hi, Don good morning.

Hi, Adrian.

Couple of questions, clarifications please.

Can you talk a little bit about the use tax whether that’s an ongoing incremental expense that we are running through the Detroit operations and it's so what kind of magnitude it represents so whether it's just a one off catch up?

just one moment.

Okay, Adrian, that will be I am little [bit] the amount of we rode off is over several years of accumulation because we have been arguing with the State of Michigan of whether or not we have to pay that tax.

So it's been going to a legal process for several years.

So that’s the accumulation, if we work to loose, and have to do that every year, it would be a small percentage of that.

Its 6% increase in the cost of the pumps is where it amounts to.

So you will see a very small effect going forward if we have to continue to pay that tax.

Just clarify to say it's 6% on all pump sales through out the United States or simply those --

it's like a sales tax.

When you buy a pump, it wants you to pay a sales tax on it which is 6%.

So it will be a one time dealer every time we buy a pump.

It's a small number but the big number that we took and reserve for is an accumulation of many years.

Okay, Thanks for that clarification.

Looking a little to your guidance for the year.

Can you talk a little bit about whether we should expect to see growth in all of the businesses in the fourth quarter versus the third quarter?

Well you know every time I get asked that question I talk about the fact, yes, on the Regional anesthesia, yes on oncology and then I make excuses for IV.

There is no reason to believe we will see anything but growth in all three of our businesses in the fourth quarter, even the IV business.

Okay.

So the growth rate and the guidance you have given, the 40% number we should think of that for the fourth quarter or is that an annual number?

That's an annual number on the guidance side and I can't speak too whether they will do that well or better in the fourth quarter.

Okay, switching gives a little bit to the growth overall the regional anesthesia business.

Huge market opportunity, great opportunity ahead of you, little competition.

Can you talk conceptually about how we scale the business in 2006 and what is required to do that and --

It's a little bit early of us to give that of guidance, so why don’t we save that for the fourth quarter conference call?

I am not prepared to give you that kind of guidance today Adrian.

Okay, if we look at margin trends are there -- or is there any evidence of margin improvement or erosion occurring in the underlying regional anesthesia business?

No not in the regional anesthesia business because again we are moving people to tunneling which had significantly better margins then selling an orthopedic surgeon in an out patient service center.

The difference in the cost of the two devices is several hundred dollars.

Okay so that would imply rising margins overtime?

Yeah that actually implies rising average selling price, which would also improve margins.

Okay and last question and I will get back in queue, of the 250 sales related personnel how many were quoted carrying sales people?

About 150, maybe with the additional AMC people its probably closer to 160, that’s a separate organization with different types of quarters.

Great thanks very much.

You are welcome.

Bruce next question.

Our next question comes from the line of Ryan Ralph (phonetic) from Jefferies.

Please proceed with your questions.

Hi Don, hi Jim.

Hi Ryan.

Can you just walk through your relationships with [Inaudible] as it relates to the C Block product focused on anesthesiologist in Europe is, how is that going, could that be a source of upside and help us better understand that?

That’s in the very early stages, even though it's been going on for almost two years.

It just take their companies a while to get going but the answer to your question is they have launched, they are selling now and yes that’s an upside to our C Block business.

Okay perfect and then secondly Jim on just a profitability, it look like I mean if you back at all the numbers you had a $0.05 profit excluding.

Is there anything in the fourth quarter I mean besides the $900,000 revenue impact that we should expect from a cost acceleration side.

I mean because it seemed like you were highly profitable in the third quarter if you didn’t have those two one time items not even including the Hurricane revenue impact.

So there is something going on in the fourth quarter we should be aware or you just being conservative saying exclude in stock based comp.

I think we’re just being conservative, Ryan.

But you don’t expect anything on the operating expense side to look much different than this quarter expect for commission is that fair?

(A - James Talevich): I don’t know if anything particular either direction Ryan.

Okay thanks a lot.

Have a good morning.

Thank you.

Bruce next question.

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

Please proceed with your question.

Great thank you good morning.

Hi Bill.

Just a couple of questions.

First of all on the hospital sales force I think you mentioned you have about 33 reps in the ambulatory surgery center how many are you carrying in the hospital side these days?

125.

Okay so that’s relatively unchanged.

On the oncology infusion business in the quarter you keep referring to the back log that was caught up for in the third quarter, can you quantify that for us?

I believe we’ve said that they were somewhere in the neighborhood of a $0.5 million.

I think we said that at the last conference call.

And is that pretty much what row through the third quarter you believe?

Yeah that’s what rolled through in July.

Okay.

And can you your ASPs average selling price on the palms pretty on queue pump has that been stabilized up down, what would you say the trend’s been over the last couple of quarters?

The interesting thing that Bill is it's flat as a pancake and again we get pushed to compete with our two days pumps, our low end pumps, the orthopedic pumps and again we try whenever possible to move people to the billing program but if we get pushed that’s what we have to discount and we offset that of course with our programs to move everybody into the bigger surgeries and to do tunneling.

Again, tunneling is going to be a very important part of our business in the future and remember we just launched that program last month.

But it's going very, very well.

We talked to a heart surgeon who does tunneling today and used to place catheters into the sternum before he will swerve up and down, he gets significantly better results plus he mitigates any concerns he would have had if he had dropped that catheter on the sternum.

He doesn’t have a foreign body in the surgical side.

Even though he wasn’t getting infections before, he still gets concerned about that.

So now he can go deep on each side of the sternum with 2/10 inch catheter by tunneling and drop it right on the nerve ending.

Did that make any sense?

Yes, it does and then on the Oncology infusion, there is no more backlogs everything has been cleared up, correct?

Yeah, there is no backlog that we know of.

They got everything billed this quarter.

And just housekeeping items sales and marketing in expense in the quarter versus G&A expense, Jim?

Yup, Jim will give you that.

He has to put his glasses on so --.

Selling and marketing for the quarter was 13,370.

G&A was 5,738.

Okay and two last questions then I will jump off as you -- the hospital that hit the million dollars, have they exceeded their goal for the year?

I am sorry it's not the hospital that hit the million dollars.

It was the rep oh my goddess yeah.

The individual of courses is top rep this year at least so far and she is doing very, very well against quarter.

Okay and then last question this year you focused on profitability Don, you've done a great job with that.

You are coming to a cross roads as you reached the end of the year and look into '06 and beyond you said it before that you can dial up or down growth as you wish.

It's just much you invest.

The question is how much did you plan on investing and how much did you want to dial up for down growth?

Bill that's a hard question for me to answer today.

But I think it's probably a question you might want to ask me at the end of the fourth quarter.

It will be in a better position as those discussions will take place in December at the Board Meeting as to exactly how we budget for 2006.

We could increase the growth in RA today if we increase the spending, there is no question.

All we have to do is add people.

There are a lot of areas of the country where we have no representation; and as doctors become more and more familiar with the product the opportunity to put people in those territories increases everyday.

So, coverage is our biggest issue today but where in it's still a big issue that like I mentioned in my conference call script at the surgery show is becoming lesser then issue everyday as people to get to learn about the product.

But you still have to go into the hospital, you still have to give the surgeon to try it, it's still somewhat of a grind and that means more people.

But we are getting pretty good productivity from our existing territories as you can see from the sales growth.

So that’s a long answer to your question.

Great, thank you very much.

Alright thanks Bill, Bruce next question.

Our next question comes from the line of Kevin McNamara (phonetic) with Barrington Partners.

Please proceed with your question.

Hi quick question on the 500,000 of foregone sales due to the hurricane, how do you estimate that and could you give us an estimate of what you did last quarter and did you basically take those revenues and make the estimate or based on the prior quarter or last year's quarter?

What we did there Kevin was as we took a look at the sales in those territories, which were affected.

Okay.

Those sales territories that were affected and we took the difference between the revenues we actually got after the hurricane versus the revenues we were getting in the last 6 months from those same territories; it was a very, very easy calculation.

To give you some idea I believe it 6 people counting territory managers, sales associates and nurses who for 60 days had no place to go.

And we've actually taken and relocated some of those people into territories outside of Louisiana, we are actually giving them a living allowing so they can go get an apartment so we can still use then because they are trained and we don’t want to loose them but they are not selling anything in New Orleans.

As an example we has of course we got hit with Houston when the hospital all cleared out and everybody left Houston we had no business that was an easy one for us to determine because we know exactly what the medical center in Houston does in the way of business well that draft light offs.

So, those estimates are based on at least 6 months of history compared to what we actually got after the hurricane hit.

Excellent, thank you, two other quick questions, since you are amortizing the costs to the electronic infusion pumps over a 5 year period and they have a 10 year life is that correct?

That’s correct.

Most of them had 10 year life unless they get lost they are good for 10 years.

Okay and one other quick question just on and you probably can't answer this but in terms of seeing cash flow positive do you have any idea of when that happens?

Again I don’t give that guidance but I think you could take a look at what has happened in the last quarter and we are not that far away.

Okay, great, thank you very much.

Okay, we will close.

Thanks again I appreciate it.

You are welcome, Bruce next question.

Our next question comes from the line of Matt Buten with Sapphire Capital.

Please proceed with you question.

I have a question on margins and then I have a follow-up, if you could help us normalize what the gross margin was for the quarter, given some of the one time percents?

I believe it was close to 73% and back in the things that we talked about I think we are close to 73%.

And that would be inclusive of the sales tax or the Michigan situation and the hurricane impact or just --

That’s pretty close I don’t think I had it back in that.

So, it might be a here better but 73, 74 would be very close. 74, it's actually 74, Jim said, when you add that back in.

And if we think about so the follow-up is, if the sales are sequentially up, hypothetically, what would be the hypothetical impact on margins?

You mean, going forward?

Yeah.

We would like to think that, that margins will continue to improve going forward as our RA business continues to grow at a very rapid rate, our Oncology business which has margins now north of 70% you know continuing to grow, and our weakest business in terms of margins, if they were flat our margins would probably be even better.

But because there is about a 45% margin business, it's actually dragging our margins down but I'll still take the 15% growth.

And just to clarify on the margins, if you -- are you adding back the full amount of the Michigan tax and the full amount of that 220 or whatever it was impact from relocations and pump losses and whatever.

Jim.

Yeah.

Well, we had roughly 0.5 million of sales that came from that [USAC] adjustment that we did, that we generalized.

Right.

And so you would add back the cost of sales to our gross profit, that’s how you would do that.

Okay.

And the lost margin on the lost sales.

Well, yeah.

I mean included that.

Yeah.

So again, you are between 73 and 74% a margin that’s about as close as we get that.

Okay, because it look like 74.5 when I did that number.

Well that would be great.

Now it would have been even better Matt if we had not had the 15% growth in IV sales.

But like I said earlier I will take the growth.

Right, thank you.

You are welcome.

Bruce next question.

Our next question comes from the line of Bill Miller (phonetic) of Hartwell.

Please proceed with your question.

How are you feeling Bill?

I am feeling fine Don, thanks very much.

Had a very successful operation thanks to the I-Flow product and it went very smoothly and everybody at the hospital is very intrigued with your product.

Well thank you.

That gladly sales people were very constructive.

Getting to my main question is on the ambulatory surgery centers, they are fastest growing.

And do you have any way of predicting when do you think we should and where we get to on this question of reimbursement.

I know you got more questions coming because of the contracts you signed etcetera but it's been at this level for a long time, and I would have thought by this time we would have a kick in to a higher collection rate.

Is there any way of predicting that or have you not been collecting the rate you hope you were or since it's a big area.

Second question is have you got in to any new areas, any new territories or had any breakthroughs on that store with hospitals or whatever.

Well first of all let's take the Medicare reimbursement part of the question first and as we have been have saying in each of the conference calls, we have agreed to let CMS have until the end of the year before we push any harder hoping that they will come back with a solution to the problem, the problem being to give us reimbursement on our existing coat.

So we will know the answer hopefully by the end of the year, and the answer comes back positive that would be very nice, if it comes back negative it will not be a significant hit to our business, because less 10% of those Medicare patients get their surgeries on an ambulatory surgery center.

So it won't affect business significantly, but it would be nice if we did reimbursement because it would make the private insurance companies give us reimbursement that much faster.

We are making good progress with privates because it doesn’t take long if you can get in front of people to show them the benefits, and once they see benefits they usually agree that this is worth reimbursing, so that’s why we have been successful on that side.

We see a lot of upside in that business, and yes we are expanding the sales organization which we have been already, and we will do in the future as the opportunity arises.

We are out trying to get national contracts with some of the big guys, and as soon as one those comes to fruition we will announce like a health [salad] for somebody that.

But we consider that to be a very important part of our business.

Did that answer your question?

Yeah.

And the other – if you have gotten in to any new territories and made a significant debt in any geographical business or any [Inaudible] hospitals that can really help you a lot?

The answer for that question is yes, we have made some significant progress, we now have the hospital sales associates.

We have an experiment going on in one of or regions being where the sales associates actually go in and get the billing paper so that our ambulatory surgery rep does not have to double back and do that.

That allows the ambulatory surgery rep to hunt and bring in new accounts while we support him with our sales associates who normally work with hospital rep in surgery that when they have a few minutes they run over to the surgery centers to pick up the paper.

So we’re doing a lot of things to increase the productivity but the answer to your question is yes, we’re making good headway.

That’s a significant barrier to anybody else taking the business away.

No I understand that.

It's just a new kit pay from more than 30% of the business.

Don’t forget we build pretty high.

If all of us were to build up, so you get 35% of a good number, you can get a good number back.

Yeah and I know its good business but I’m just feeling, so much happy there for we’ve had so the 60% or 65% reimbursement because the same.

Bill the net number I collect is actually as good as or better than when I sell the product because it's a competitive sell as it two day product against the orthopedic companies who are our competition.

By the way I have gone as low as $80.

And we are getting somewhere in the neighborhood of a $120 today for the billing.

Well.

And the other question is, have you got any tests or studies, are they in process and when do you expect those matriculate.

Well we are now four of them this week at the anesthesia show for a brand new one.

A five – I am sorry, correcting me, it was five brand new ones, and we got a lot more coming Bill.

And I like I said in the conference call you’ll get a big announcement shortly about when the animal study will start again.

Yeah.

So that – if starts again what do we have, 60-90 days before its complete?

The goal is to have all the animals done by the end of the year, as was the original goal, when we had the thing going in New Orleans but we have found another site who could handle more animals at the same time and do some more surgeries and therefore do them faster so we think we can get all the animals done by the end of the year which means we are still on schedule then for having resolved some time in the first quarter then the question is when do we release the results and how do we release them and that we haven't decided yet.

Okay, great.

[Inaudible] back on target.

Absolutely, very good, John, thanks a lot.

Alright, thanks Bill.

Bruce, Next question?

Thank you very much sir.

I am showing no further questions at this time.

I will now turn the call back to you.

Please continue with the presentation or closing remarks.

Thanks Bruce.

We want to thank each and every one of you today for joining us for today's conference call.

Our performance so far this year shows that we are simultaneously succeeding both in our ambitious effort to redefine recovery following surgery and in our drive towards profitability.

We look forward to reporting further progress to you on our fourth quarter and 2005 results conference call in a few months.

Thank you for your continuing support.

Bruce, we are finished.

Thank you sir.

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

Have a good day.