金百利克拉克 (KMB) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow fourth quarter and 2005 year-end results conference call.

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

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

[OPERATOR INSTRUCTIONS]

As a reminder this conference is being recorded, Tuesday, February 21, 2006.

[OPERATOR INSTRUCTIONS]

Your speakers for today are Jim Talevich, Chief Financial Officer and Don Earhart, Chief Executive Officer.

I would like to turn the conference over to Don Earhart.

Please go ahead, sir.

Thank you, Pamela.

Good morning, everyone, and thank you for joining us for I-Flow's fourth quarter and 2005 year-end results conference call.

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

We achieved several significant milestones in 2005.

One was on the top line, as I-Flow reported that total revenue for the year reached a record $100,644,000, exceeding the $100 million milestone for the first time in our history.

These results were driven by a 54% increase in Regional Anesthesia sales to a record $49,850,000, and a 47% increase in Oncology Infusion Services revenue, to a record $28,525,000.

As you know, we forecasted total revenue growth for 2005 to exceed 40%, and we did just that.

For the fourth quarter of 2005, revenue increased 27%, to a record $26,925,000 on the strength of a 33% increase in Regional Anesthesia sales to $13,855,000, and a 31% increase in Oncology Infusion Services revenue to $7,081,000.

These gains occurred despite estimated revenue losses during the quarter of approximately $600,000 in the Regional Anesthesia market segment, due to Hurricanes Katrina and Rita, which primarily affected business in Texas, Louisiana, and Mississippi, and approximately $1,900,000 due to shortages of 5-flourouracil, better known of as 5-FU, a commonly used chemotherapy drug which affected our InfuSystem business nationally in the fourth quarter.

Also noteworthy is that SG&A expenses, net of stock-based compensation expense, rose by approximately one-half the rate of total revenue growth for 2005, compared to 2004.

This improvement reflects the planned deceleration of expense growth associated with the hiring and training of our Regional Anesthesia direct sales force, combined with improved sales productivity.

The net loss for the fourth quarter of 2005 was $5,263,000, or $0.23 per share, which included stock-based compensation expense of $6,074,000 and income taxes of $293,000.

This compares with the reported net loss of $12,336,000, or $0.56 per share, for the fourth quarter of 2004, which included stock-based compensation expense of $1,516,000 and income taxes of $6,717,000.

The increase in stock-based compensation for the fourth quarter of 2005 compared to the same period in the prior year is primarily due to the upward repricing and acceleration of The Company's out-of-the-money stock options that occurred in November 2005.

The decrease in income taxes for the fourth quarter of 2005 compared to the same period in 2004 is due to an increase in the valuation allowance for deferred tax assets during the fourth quarter of 2004, which effectively reduced The Company's deferred tax assets to zero.

Excluding both stock-based compensation and income tax, net income for the fourth quarter of 2005 would have been $1,104,000, and the net loss for the fourth quarter of 2004 would have been $4,103,000, representing an improvement of $5,207,000 when you compare quarter four 2005 with quarter four 2004.

The full-year comparable number are for 2005 versus 2004 is even more impressive, at $11,197,000.

This brings me to another milestone.

Before stock-based compensation expense, I-Flow earned $811,000 in the fourth quarter.

As reported earlier, we've earned $302,000 in the third quarter and $299,000 in the second quarter, giving us a total for the year of $158,000 profit before stock-based compensation expense.

Not only did we achieve our goal of being profitable before stock-based compensation by quarter four 2005, but we were able to overcome the loss in quarter one, and be profitable for the full year.

Even more important, our cash burn rate has steadily decreased.

In the fourth quarter of this year, excluding the $3,425,000 we spent on the stock buyback, the total cash and investments decreased by less than $1 million.

And of course, without the impact of the hurricanes and the 5-FU shortage, our performance in all of these areas would have been even better.

Our performance for 2005 demonstrates that our efforts to strike the right balance of improved bottom line performance with continued rapid revenue growth is delivering the results we anticipated.

As I've explained before, our rate of growth, particularly in our Regional Anesthesia business, is proportional to the amount of selling and marketing dollars we are willing to spend.

In other words, growth in our Regional Anesthesia business is a choice variable for us.

We can spend more money on sales and marketing and grow our Regional Anesthesia business even faster, postponing the day we become profitable, or we can drive for profitability now.

Our results for 2005 reflect what I believe is the right decision.

Drive for profitability, while continuing to grow the Regional Anesthesia business at a rapid rate.

Given our performance in 2005, we are confident that we can continue to deliver strong growth this year.

For 2006, we expect I-Flow to be profitable from a GAAP standpoint, on total company revenue growth of approximately 25%.

Among the growth drivers underlying this positive outlook for 2006, we are particularly excited by our customers' positive response to our current launch of the ON-Q SilverSoaker antimicrobial catheter line of products.

These catheters offer an added layer of protection, via properties to further reduce the risk of infection.

I will have more to say about SilverSoaker later in the call.

We are also pleased with the increasing popularity of the ON-Q tunneling tools for large incision surgeries, and the new interest in shorter tunneling devices for use with small incisions.

We continue to support independent third party clinical studies, which have repeatedly demonstrated the benefits of ON-Q in an expanding number of applications.

In addition, we are using carefully targeted co-marketing and advertising campaigns to increase the consumers' awareness of ON-Q in specific local markets and we are executing programs to facilitate insurance reimbursement, and reduce reimbursement risk for our ON-Q products.

The new products and programs, along with the increased number of quota-carrying representatives in the field, give us confidence in our ability to deliver another strong performance in 2006.

The foundation for all that we have achieved over the past few years, is our unwaivering commitment to our effective execution of our proven growth strategy, day after day, and year-after-year.

In our Regional Anesthesia business, we are redefining recovery, by establishing our proprietary ON-Q family of products as the new best-practice for post-surgical pain relief, with the ultimate goal of replacing narcotics as the standard of care.

I will remind you again that the market for narcotic-free relief of post-surgical pain is still early in its development and very under-penetrated, so this market remains a substantial long-term growth opportunity for I-Flow.

Our Oncology Infusion Services business unit also reported outstanding results, despite a shortage of 5-flourouracil that we estimate reduced revenue by approximately $1,900,000 in the fourth quarter.

Because the market availability of 5-FU is not expected to return to normal before April, we anticipate that spot shortages will continue and have a comparable impact this quarter.

Almost 90% of InfuSystems billings are for the delivery of 5-FU in combination with one or more drugs.

Nevertheless, we remain optimistic about the future of this business, based on the increasing number of patients needing continuous chemotherapy to treat colorectal cancers, and the increasing number of office-based oncologists who now use electronic ambulatory infusion pumps to provide multiple-day infusions of chemotherapy drugs to patients while at home.

Because of the cost saving benefits to insurers, the patients are treated at home by their attending physician, more and more insurance companies are beginning to pay for the InfuSystem program.

Now, let me turn the call over to Jim to review the financial results in detail.

Jim?

Thanks, Don.

Before we continue, please note that this conference call will include forward-looking statements.

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

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

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and I-Flow corporation's 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 fourth quarter of 2005, net revenue increased 27% to a record $26,925,000, compared to net revenue of $21,121,000 for the fourth quarter of 2004.

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

Operating expenses for the fourth quarter of 2005 increased by 17%, compared to the fourth quarter of 2004, primarily due to the increase in stock-based compensation expense recognized in connection with the upward repricing and acceleration of The Company's out-of-the-money stock options.

The net loss for this year's fourth quarter was $5,263,000, or $0.23 per share, which included stock-based compensation expense of $6,074,000 and income taxes of $293,000.

This compares to a net loss for the fourth quarter of 2004 of $12,336,000, or $0.56 per share, which included stock-based compensation expense of $1,516,000 and income taxes of $6,717,000.

The net loss for the fourth quarter of 2005 included stock-based compensation expense recognized for the upward repricing and acceleration of The Company's out-of-the-money stock options.

The net loss for the fourth quarter of 2004 included incremental provision for income taxes, due to an increase in the valuation allowance for deferred tax assets of $8,808,000, effectively writing down The Company's deferred tax assets to zero.

The write-down was a noncash accounting entry consistent with the guidance in finance-- statement of financial accounting standards number 109, accounting for income taxes.

If The Company were to become consistently profitable in the future, the valuation allowance may be reversed, resulting in increased earnings in the period of reversal.

Excluding both stock-based compensation and income tax, net income for the fourth quarter of 2005 would have been $1,104,000, compared to a net loss for the fourth quarter of 2004 of $4,103,000.

At December 31, 2005, I-Flow reported networking capital of approximately $49.7 million, including cash and equivalents and short-term investments of $27.2 million, no debt, and shareholder's equity of $70 million.

For 2006, The Company expects to be profitable after stock-based compensation expense and income taxes on growth in total revenue of about 25%.

We estimate the stock-based compensation expense will be approximately $6 million and income taxes will be approximately $500,000.

The income tax estimate consists primarily of state income taxes, because we do not currently recognize federal income tax expense.

Don?

Thanks, Jim.

We have made several significant announcements during the fourth quarter that I want to focus on.

First, I-Flow recently received clearance from the United States Food and Drug Administration to market our new ON-Q SilverSoaker, the first proprietary silver-coated antimicrobial catheter for post-surgical pain relief that has been added to the rapidly-growing ON-Q family of products.

The ON-Q SilverSoaker is a patented soaker catheter that is treated with a specially formulated antimicrobial silver agent called SilvaGard, licensed from AcroMed Incorporated of Portland, Oregon.

Silver is an established antimicrobial agent that is effective against a wide variety of microorganisms, including bacteria and fungi which can cause infections.

The ON-Q SilverSoaker may destroy and inhibit the growth of microorganisms that could otherwise grow on the surface of the catheter.

The unique antimicrobial coating will compliment ON-Q's novel soaker technology that effectively delivers medication evenly over a wide range of surgical incisions.

The SilverSoaker will be available in 1, 2 1/2, 5 and 10-inch catheters, which when used with ON-Q PainBuster, will help our continuing effort to redefine post surgical recovery so patients can get back to their normal lives faster.

To accelerate market share growth, we are constantly on the lookout for new methods and technologies to enhance our market-leading ON-Q PainBuster product line.

While reported infection rates with non-coated ON-Q Soaker Catheters are well below the national average, the antimicrobial properties of the ON-Q SilverSoaker provide an added layer of protection for patients undergoing surgical procedures where ON-Q PainBuster is used to relieve post-surgical pain.

Due to the increased scrutiny of post-surgical infections and their costs to the health care system, surgeons, their teams, and hospitals have been very receptive to our new silver-coated catheter.

Second, our ON-Q Post-Operative Pain Relief System was featured in five presentations at the recent American Society of Anesthesiologists, the ASA meeting, in Atlanta.

This meeting has served as a forum for landmark studies on the use of ON-Q since the year 2002.

All five studies highlighted the safety and efficacy of the use of surgical site post-operative pain relief technology, with data spanning a variety of surgical categories.

For instance, a study conducted at Maimonides Hospital in the Bronx evaluated the efficacy of ON-Q for post-surgical pain relief and reduction of morphine use following gynecologic surgery.

In addition, the risk of infection at the surgical site was also evaluated.

In testing ON-Q after the therapy was finished, it was concluded that none of the catheters were contaminated by microbes and there were no infections in any of the 90 patients.

A study at St. Joseph's Healthcare, University of Western Ontario, utilized two ON-Q per patient for the relief of post-surgical pain following total knee replacement.

The patients who received ON-Q were able to recover more quickly and with minimal support from the hospital staff, thereby reducing the need for nursing resources.

The therapy also significantly reduced narcotic use to treat pain after surgery.

Further, there were no infections noted with the use of ON-Q.

Two studies in neurological procedures, radical prostatectomy and varicocele, were conducted at Scott Department of Urology at Baylor College of Medicine.

In the prostatectomy study, ON-Q reduced the need for narcotics by 65%.

In the varicocele study, patients receiving ON-Q had a significant improvement in pain relief and increased activity levels five days after the ON-Q was removed.

This finding suggests that improved local pain relief has lasting effects well beyond when the therapy is finished.

We also reported on and ongoing study at the Congenital Heart Institute of Miami Children's Hospital in pediatric patients undergoing open-heart procedures with ON-Q.

Study results to date showed that patients receiving ON-Q used 50% less narcotics during the immediate post-surgical period.

The expansion of the ON-Q clinical study library has been and continues to be a major initiative for The Company.

We now have more than 50 completed studies in our arsenal, and our continued support of clinical research enables I-Flow and researchers to demonstrate the need for ON-Q in more surgeries and patient populations.

We hope that the study findings presented in Atlanta will encourage more physicians to adopt ON-Q as this therapy moves toward replacing narcotics as the standard of care for treating the pain following surgery.

Third, I-Flow signed several additional contracts with managed care companies to provide reimbursement for the use of ON-Q where appropriate in ambulatory surgery centers nationwide.

Based on the number of lives covered by the new and previously existing contracts, total ON-Q-covered-lives in the United States are approximately 35 million.

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

The increasing awareness among insurance carriers and PPO networks of the value that ON-Q delivers for their members is making the ambulatory surgery center business the fastest growing segment of our ON-Q franchise.

To summarize, we are pleased by I-Flow's performance for 2005, highlighted by the attainment of our profitability objectives, much sooner than anticipated, while delivering record revenues in excess of $100 million.

All of our businesses contributed to this impressive performance.

We also moved forward in our programs to solidify and strengthen our leadership position with our flagship ON-Q product family.

This progress sets the stage for I-Flow to become profitable after stock-based compensation for the full year 2006 while still delivering strong revenue growth.

Pamela, we are now ready to take questions.

Thanks.

[OPERATOR INSTRUCTIONS]

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

Please go ahead.

Great, thanks.

I know you quantified in the quarter the impact of the weather at 600K.

In terms of the guidance going forward, do you think that -- does that bounce back quickly, as we're looking at the model for '06 in the first quarter, do you think you recaptured that?

Thanks.

Well, that portion which is Louisiana, and even parts of Mississippi, is not going to come back quickly.

But again, so the first half of 2006, we're being compared when there was no hurricane, but in the second half of the year, of course, it will be apples vs. apples.

But as the revenues continue to grow, that number becomes a very small factor.

Great.

And then I noted, your guidance is, profitability for 2006, as you look at it, those were mildly, do you think incrementally, if you look at this fourth quarter without your stock comp expense, what should we expect that to be incrementally sequentially up, moving forward?

This is your bottom line profitability?

Again, we don't give guidance on that side.

So I can't really speak to that.

Okay.

And then on the sales force side, I know you mentioned spending was down.

If you could break out what you spent on sales versus G&A, and give us an update on where you stand in terms of total hires, that's great.

Okay.

Just hold on one second, while Jim is getting the information for you on the break down, what we're doing in the way of hiring, the goal is to remain at about 250 people in the organization in total for the year, so that is the same as last year, no increases.

However, we have increased the number of quota-carrying territories by moving people that were in a nonquota-carrying mode into a quota carrying mode, so we will have approximately 200 territories in the United States this year, all quota-carrying.

So the remaining 50 people will be service people, that will be nurses, inside sales, and other clinical people.

Jim, are you ready with the other numbers?

Sure.

Dave, the G&A number for Q4 is 9,603,000.

The sale and marketing number is 14,214,000.

Great.

Thanks.

Thank you, Dave.

Our next question comes from the line of Mark Mullikin from Piper Jaffray.

Please go ahead.

Hi, thanks for taking my questions.

I wanted to start off with more cash flow oriented questions.

What is your expectation for capital expenditure in 2006?

We will continue to fund the InfuSystems business, because if it continues to grow like it has in the past, it will need more pumps, so I would-- off the top of my head, I would say say it is going to be no greater than last year, if even that number.

Okay.

We don't foresee anything beyond what we spent last year.

And what was the capex in the fourth quarter?

Just one moment.

Yes, I honestly don't have that number, Mark.

Okay.

I can get it to you.

Okay, that would be great.

Thanks.

And then the $1.9 million impact of the drug recall, can you just tell us how you came to that number?

How did you quantify the impact?

Well, we know from history what our billing would have been had we not had a shortage of 5-FU.

By the way, that was a recall by the manufacturers.

I believe it was glass, the chips of glass that was found in the vials, and so there was a recall that totally surprised us.

All of a sudden, there wasn't any.

And they're now just getting back onstream.

We're beginning to see drug in the field now but we don't expect it to be back on a normal basis, until April.

So do you sell the drug as well?

Or-- or not?

No, we rely totally on manufacturers to have the drug available.

We do not stockpile or sell drug.

As of today, we don't have the license to do so.

And I think several manufacturers produce that drug.

Do you know what percentage of the market that company in particular manufactures?

Well, it is a generic drug, so it is manufactured by quite a few people.

But the ones that have the recall just killed the market.

Okay.

Our small offices couldn't get drug.

Okay.

And then --

By the way, that's improving, Mark.

Okay, but the first quarter is probably -- it is going to continue to occur in the first quarter and then improve going forward from there?

Yes, we hope that the shortage will be over with by the end of March.

And then just quickly on the cost of goods sold, you can tell us what the breakout was between the rental and sales line there?

Just one moment.

Yes, rental cost of sales was $1,994,000.

Okay.

And then you can squeeze the rest into the manufacturing business.

Okay.

Great.

Thank you very much.

Thanks, Mark.

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

Great, thank you.

Good morning.

Good morning, Bill.

Just to jump back on the 5-FU questions.

First of all, when did that recall start?

What month was that?

We began to note shortages at the beginning of the fourth quarter.

So it was in October?

Yes.

Okay.

And you said you don't know what percentage of the market that the player had, that had the recall?

No, we do not.

All we know is our doctors--

We can find that out from the IMS data.

All of a sudden our doctors couldn't get 5-FU.

Okay.

And then you talked about the reps where you're going to -- where did you end '05 in number of quota-carrying territories?

We ended in '05 about 155 quota-carrying territories, if you combine the ambulatory surgery center sales force with the hospital sales force.

Today --

And can you-- can you separate out what was hospital and what was ambulatory surgery center?

About 33 for ambulatory and the rest was hospital.

Okay, and then where, if you go to 200 at the end of '06, what would you expect the mix to be roughly?

We're at over 190 right now.

And the mix will be all hospital and ambulatory surgery centers combined.

We combined the two sales forces.

So if I'm a rep, I'm going to call on both the hospital and an ambulatory surgery center?

You may, or you may not.

You may be a specialist in which you will continue to call on hospital only.

Or you may be a rep who will do both.

If have you an expertise on the ambulatory surgery center side, you will continue to call on that, but you will also have one or two hospitals to call on.

That way, we are able to put the program across the entire United States.

Okay.

But in the -- when you pay a rep for the inventory surgery center market, you're paying them more for leads than revenues, or at least the number--

No, we're not.

that they're putting --

No we're not, Bill.

We're paying them for billings.

We're paying them for paper pickup.

Right, for-- that's what I meant, for billing, leads, the same thing.

No, isn't the same.

Billing means it has been used.

Okay.

And then the hospital market for the extra sales--

They're both in actual sales.

Has your conversion rates or the -- the number of billings that are getting paid in the ambulatory surgery market, has that been increasing, or flat, or how would you characterize that?

It is still very good.

Has it gone up or down?

We believe it is moving north.

Okay.

And then has pricing stayed the same, increased, decreased?

Yes, in fact I would say our average realized price has actually improved.

We got more people using tunneling and using our more expensive products than we do using the less expensive ones.

Okay.

It's a function of a higher ASP product, so you're getting more revenues per-- per procedure that way?

Well that-- Bill, that we haven't discounted.

We haven't had to drop our prices.

Right.

And now, with the coated catheter starting to ship in -- well, actually next week, we expect to maintain our positions.

Okay.

I'm going to ask one more question and then I will jump out.

Just in regards to the tunneling device, what you would characterize the contribution for that product in the fourth quarter?

Not a whole lot.

Because you had about 25% of the sales force at that time, who even knew what tunneling was about.

But in January of this year, 2006, we trained the entire sales force.

They went through two days of very intense training with doctors here in California at the sales meeting, in which they learned all about tunneling and how to do it.

So we expect tunneling to be a significant part of our revenues going forward.

Okay.

Fantastic.

Thanks, Don.

You're welcome.

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

Please go ahead.

Thanks.

If I could just start on the 5-FU as well.

If it's made by many manufacturers because it is generic and there was just one that had the recall because of the glass chips.

Why wouldn't the docs be able to get alternative supply from the other manufacturers during the quarter?

Well, the -- I just got the information here from one of the guys, Alex.

It was triggered by American Pharmaceuticals Partners.

That was the recall, that is the name of the company.

And they evidently are the biggest supplier in the United States, so I can't answer your question.

All I can tell you is, is that doctors couldn't get 5-FU, therefore they were not able to do the full fox and the other protocols that require 5-FU.

Okay, but you're also, in your guidance for '06, you're saying you're not assuming that the supply will improve necessarily any time soon, and yet if there is again, lots of other manufacturers, why wouldn't the other manufacturers be jumping all over this opportunity to supply 5-FU?

Because it takes a certain amount of time to gear up production, and you just can't do that overnight, is the only thing I can answer, Alex.

But we expect it this to be all cleared up by the end of March.

Okay.

All right.

If I could move on to the stock-based compensation expense, you give this number 6,074,000.

We're trying to figure out what portion of that is the one-time acceleration of the out-of-the-money option versus how much of it is the ongoing amortization that will be representative of your costs going forward.

Reason being we're trying to do apples-to-apples about what the bottom line would have been if you hadn't done the one-time acceleration, but you still have the FAS 123 expense.

Is it possible to separate out how much of that is the one-time effect?

Yes, I believe that was in my presentation, but let's do it again.

Sure, Alex.

The actual one-time hit, the unusual item was $5.3 million.

Okay.

I'm sorry for not recognizing that.

Okay, so-- are you-- well okay, then we can figure out whether you would have been profitable.

And what are we projecting for 2006?

For full-year basis in 2006, it will be about 6 million, Alex.

All right.

Is that -- any change in your policy for awarding options to any employee, maybe your sales force in particular?

Has the fact that have you to expense these now changed your option awarding policy at all?

Yes, it has.

It has made a significant difference.

Have you significantly reduced the number of options?

Yes, overall, the options are being reduced, and given to only a select number of people, and we are looking more at doing more restricted shares as opposed to options which reduces dilution again.

But again, I can't tell you exactly what we're going to do.

That decision hasn't been made yet.

Is any part of the changing compensation scheme for the sales team needing more cash compensation?

Because if you're cutting back on the option expense and you want to give the same amount of total incentive, perhaps you would be increasing the cash payout in some way, in the commission --?

On the sales force side, we have always awarded them based on performance-restricted shares.

You have to hit certain goals to vest restricted shares.

That hasn't changed.

Where we will make significant changes in the way we award options and/or restricted shares, is for all other areas of The Company, which in the past got those kind of things and now may or may not get any, and if they do get them, they will probably get fewer.

So for those employees, then, the non-sales employees, would there be an increase in salary expense for the rest-- if you're taking away the option, are you giving them back cash or something else?

Not necessarily.

All right.

And then on ON-Q, in particular, well, 33% year-over-year growth is very high growth rate, it is still not quite as much as we were expecting and I'm wondering if you can give us a comment about whether there was a maturation of some -- you've-- just the Florida hurricane effect doesn't seem like it would have reduced it from the 40+% to 33%.

Is there anything that was inhibiting ON-Q other than the hurricane that may be is maturing, or decelerating a little bit?

No, the -- we're very positive and feel very good about this year.

We're very optimistic.

The key thing people have to remember is, is that in 2004, the second half of 2004, we hired over 100 people, counting clinical and sales reps, so in that second half of 2004, those people were in the field and those numbers are what we were being compared against in the second half of 2005, where in 2005, we went into the year with 250 people total, and we left the year 250 people total.

So all of the growth has come organic. 2005 growth was all organic.

We didn't add any people or add a bunch of new territories.

Now, in 2006, it will again be all organic.

We moved approximately 40 people from a nonquota-carrying mode to quota-carrying, but they were still in the sales force in 2005 as support teams for the quota-carrying reps.

We expect to get some more productivity out of them now that they have quotas, but again the number of headcount stays the same.

How are those new quota-carrying reps that used to be sales assistants doing so far since January, can you say?

Well, we actually tested the experiment in the second half of 2005 with one out of 12 regions.

And we got very, very good results.

Going in -- I'm sorry?

Can you say which region that was?

Yes, the mid-Atlantic region.

So that would be, what, Atlanta, the Carolinas, Virginia, DC, that area there, Alex.

And it went very, very well.

So we then rolled it out at the national sales meeting in January of this year, in which we got over 40 people signed up to carry quotas, and most of them are having a pretty good time.

In an effort to quantify what you mean by very, very well, if a new -- if a sales assistant becomes a new quota carrying rep, what is a very, very well result for one of those new people to do in terms of monthly production?

Can you say anything like that?

Well, we expect them to be at $20,000 a month by the sixth month.

If we gave them zero business going in.

If we -- but the -- if we gave them $10,000 in business going in, we would expect them to be up to 30 by mid-year and then it would accelerate after that.

Again, that is our benchmark, when I give you a territory, Alex, I expect you to have $20,000 of new business per month by the sixth month.

So 20,000 per month by the sixth month.

By the sixth month, of new business, on top of whatever I gave you.

So the experiment that was done in Atlanta and Virginia and so forth, those reps hit the 20,000 per month during that experiment?

Is that fair to say?

Yes, they sure did.

And by the way, they were the region of the year.

Okay, and when you say 20,000 per month, you don't mean like 20,000 each month adding up to 120,000 by month six?

You mean getting --

Well, let's say in January, I gave you a territory of $10,000 a month.

I expect you to at $30,000 a month by the sixth month.

Okay, okay.

Got it.

And to grow it from there.

Okay.

And then the last question, in your '06 guidance of revenue of 25% growth, can you give us what you think the ON-Q revenue growth in '06 might be?

We haven't given that guidance, so at this time, we're not prepared to do that.

All right.

Okay.

Thank you, Don.

You're welcome.

Our next question comes from the line of Ryan Rauch from Jeffries, please go ahead.

Hi, good morning.

Just a---

Hi, Ryan.

Hi, Don, hi Jim, just a couple of quick follow-ups.

Are you-- your IV therapy sales accelerated nicely in the quarter.

Are you seeing a pickup from the recall of the 60-60 pump and if so, do you think that will continue into '06?

Well, we're actually forecasting, I should say budgeting, mid to high single-digit growth for the IV business.

Again, it surprised us in 2005, it surprised us in 2004.

Hopefully it will surprise us again in 2006.

The answer to your question, though, as it relates to the 60-60, we are taking business from electronic pumps in general.

Any electronic pumps that used to be sent home to deliver antibiotics or pain medication or chemo, we are getting more and more of that business every day, as people begin to realize that it is more cost effective to use disposable pumps than it is to set up electronics.

So whether it be Baxter's recall, or anybody else's pump, we are gaining share, we believe, and that's based on our distributors telling us so, with our disposable pump business.

So yes, it has been a positive.

Okay.

And then on the oncology services, is it fair to say besides this 5-FU issue that -- trends are strong, as you've ever seen them, and then if you care, what would you quantify that market opportunity as?

It used to be a couple of years ago, I think you thought it was maybe 15 or 20 million, and that continues to grow.

Would you care to guess what you believe that market opportunity is for oncology services?

Yes, we're doing some forecasting on that business, just to see what we think the opportunity is, and we now believe that market could be as much as a half a billion dollars.

I'm talking about within five to six years.

The colorectal cancer protocols continue to expand.

They're expanding beyond anything we thought two years ago, and that market could be huge going forward.

Gotcha.

And then finally, we've still yet to hear anything out of Zimmer, if your sales people have seen that product, their ON-Q-like product in the market yet?

And thanks a lot.

No, we rarely see Zimmer.

In fact, it has been relatively quiet on the competitive side recently.

Ever since we announced the new catheter and actually shipped samples to some of our big customers in the fourth quarter, things have gotten rather quiet.

Which we kind of like.

So now, we haven't seen any activity from Zimmer.

Okay.

Thanks a lot,.

You're welcome.

[OPERATOR INSTRUCTIONS]

Our next question is a follow-up from the line of Bill Plovanic from First Albany Capital.

Please go ahead.

Hello, Bill.

Hey, great, thank you.

The stock comp expense, the one-time piece of that, how much was that, Jim? 5 point what?

5.3, Bill.

5.3 even?

No.

I'd say 5.3 is pretty close.

Okay.

And then-- but the total charge was 6.074, so it was only about 800,000 for the whole quarter?

Yes, now, bear in mind, those in the fourth quarter of 2004 are very different rules.

The total mechanics of calculation is entirely different in 2005 and in 2006.

Okay.

And what was the normwise, what was it running you first through third quarter? 1Q, 2Q, 3Q for '05, just on an ongoing basis, if we went back and looked at that?

The full year number, Bill, for stock-based compensation is 8.6 million.

And that includes the one-time?

Yes.

So then you're saying it is 3.3 for the whole year?

That's the one-time.

Yes.

Okay, and then it's one-- the one-- the 6 million for '06, that is going to be about a million, half a quarter, not a lot of variability for that per quarter?

I wouldn't necessarily be straight lined, Bill.

Okay.

It will be lighter in the first quarter, Bill.

Lighter in the first quarter.

Okay.

And then just two last questions.

The ASPs, in the ambulatory surgery center market, I know they're going up, Don, due to the using bigger product, adding on the SilverSoaker, the catheter, but if you look at the individual products, are those-- let's say you're using the three-day pump, has that pricing, as you get reimbursed for it off of the billing, actual payments you're getting from the insurance companies, is that going up or down for the certain sizes?

Yes, let me help you out, Bill.

On the billing side, the ambulatory surgery center side, we bill at the same price no matter what is used.

But 90+% of everything used on that side is our two-day device.

So we don't do tunneling on that side and bill the same number, or anything like that.

We basically sell two-day pumps that are placed into a surgical site, that's what we have on the consignment program.

Those reimbursements from insurance companies on the average including no pays, high pays, and low pays, are solid as a rock and actually inching upward.

Okay.

That's what I was looking for.

That's what I mean by that.

Okay.

Fantastic.

And then just an update, you were conducting the pig study.

I think that moved up to Minneapolis.

Yes.

Or Wisconsin.

Just an update on that, if we could.

Well, it is in the process of pigs being cut and infected, and we're not at a point where we can talk about it right now, we have to keep very quiet or we will damage our ability to publish.

So that is really all I can tell you, is that it is still going.

And when you would think completion of that study would be and potential presentation of the data?

Well, again, we're trying to decide whether we do a poster, or whether we wait for an actually-- actually a published article.

A published article could take a year and a half, a poster could take six months.

So we haven't decided yet exactly what we're going to do.

But we do not want to damage our ability or our flexibility to do whatever we need to do when the time comes.

Okay.

Thank you.

You're welcome.

Our next question comes from the line of Tommy McNamara from Behrenson Partners.

Please go ahead.

Hi, sorry to come back at you with with another question on this 5-FU.

The NCI, the National Cancer Institute, says this was a potential shortage, put out a release in September, and also said that this would be cleared up, if it did actually become a shortage, in January.

And APPS actually says that the -- there are pharmacy bulk packs available.

And again, that it is a potential shortage.

And also, that these infected vials can actually be filtered.

So I'm just wondering how you -- $2 million is actually 7% of your reported revenue, so I'm not quite sure I understand how you came up with that estimate.

I wanted to see if you could give me more color on that.

I'm not quite sure what were you trying to tell me with your preliminary.

Well, I just don't -- 2 million, the estimate that your revenues would be 2 million higher is a large number, and if the NCI, which is probably one of the largest users of 5-FU, says it is a potential shortage and not a shortage and APPS says there are other available supplies, how do you come up with that $2 million estimate?

Well, first of all, if you take a look at Infusion magazine for December 2005, you will see it spelled out very clearly in there that there is a shortage of 5-FU.

So whether they want to say there is a possible shortage in September or not, the fact of the matter is, there was a shortage and there still is a shortage of 5-FU.

So it affected our billings.

You want to say anything further on your calculations, Jim?

Well, it was really just an extrapolation.

But if you look at our actual reported sales for oncology by quarter, it was-- this year it was 6.5 million in Q1, and 6.3 in Q2, and 8.6 in the third quarter, and 7.1 in the fourth quarter.

And we did -- there was definitely an effect in -- on InfuSystem for the quarter.

Okay.

Great.

So you could pick whatever number you want, but it was definitely -- hurt our revenues in the fourth quarter.

Also, there are different types of 5-FU, I think there is an oral form and an injectable form, but there was definitely a shortage in the field.

And by the way, you cannot use the oral form, or if you do use the oral form, we don't get a pump.

If you use the oral form, and you're a doctor, you don't get the same results, either.

Okay.

Great.

Thanks, that's what I was looking for.

Our next question is a follow-up from the line of Mark Mullikin from Piper Jaffray.

Please go ahead.

Yes, just a couple of quick ones for Jim.

In an 8-K filed on November 15, you guys had initially estimated the impact of the accelerating options vesting and this program at 3.3 million.

I just want to understand better what makes up that difference, the 5.3 that you actually did versus the 3.3 estimate?

Why is the number so much higher?

If you look at the 8-K, you will see that it is broken into two pieces, but the total is about 5.3.

Okay, so the 3.3 is just one piece of it?

Yes, and it is all in the 8-K.

Okay.

And then relative to the 1.9 million on the oncology drug, obviously a lot of people are having issues with how big that number is, and based on some of the commentary you just gave, it sounds like what you did was you extrapolated your quarterly progression in '05 into the fourth quarter, and just took the delta between what you actually did and what that estimate would have been.

Is that a correct assessment of how you came up with the 1.9 million?

Well, that's close.

We did some other adjustments too, it wasn't quite that back-of-the-envelope.

However, just bear in mind, the fourth quarter reported oncology sales is 1.5 million below third quarter reported oncology sales.

So I don't think that 1.9 is that much of a stretch, considering the evidence just on its face.

Okay.

And then you've scaled back some of the capital expenditures, at least in the third quarter, you had scaled back some of the capex.

And we don't have the numbers for the fourth quarter yet, but is there a difference in the utilization of -- in the oncology business of pumps that are newly acquired versus ones that have been in your inventory for a while?

Is it easier to rent out a brand new pump?

No, because we don't give the doctor that choice, Mark.

Okay.

So they don't--

We give the doctor a choice on the brand, or the type of pump, but he doesn't get a choice on new or old.

Okay.

He doesn't care, as long as it is clean, and it works.

Okay.

All right.

Thank you.

Any more questions?

Pamela, are we finished?

Hello?

Pamela, are you there?

Operator?

Well, I hope you guys can all hear me.

We've lost our operator.

So I'm going to go ahead and close.

Thank you for joining us for today's conference call.

We expect 2006 to be another year of significant progress for I-Flow, as we drive toward ever-increasing profitability.

We look forward to updating you on our first quarter results conference call in just a few months.

Thank you for your continuing support.

That ends the conference call.

Thank you, everyone.