金百利克拉克 (KMB) 2006 Q1 法說會逐字稿

Welcome to the I-Flow first-quarter results conference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Thursday, April 27, 2006.

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

Good morning, everyone, and thank you for joining us for I-Flow's 2006 first-quarter results conference call.

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

We are pleased with the first-quarter results we reported this morning.

We made real progress in this quarter on both the top line and the bottom line, and we are on track to achieve our forecast for growth and profitability for 2006.

Regional Anesthesia sales increased 32% to a record $14,278,000, from $10,790,000 in the prior year quarter.

We are especially gratified by the initial acceptance of our new ON-Q SilverSoaker line of products, which offer enhanced anti-microbial properties to reduce the risk of infection, and our ON-Q tunneling tools, which because of even better outcomes are expanding the market for ON-Q, especially in large-incision surgeries.

These new products, along with the increased awareness our sales force has been generating, have allowed us to increase our customer base without adding significantly to the total number of salespeople.

The ON-Q active customer base now exceeds 1700 accounts, versus 1500 in the prior year quarter.

And of these, more than 1500 are hospitals, representing 25% growth in the number of active hospital accounts when compared to the first quarter of 2005.

We believe we are striking the right balance of rapid revenue growth and improving bottom-line performance in our Regional Anesthesia business.

Because the rate of growth of our Regional Anesthesia business tends to be proportional to the amount of selling and marketing dollars we spend, driving revenue in this business is a choice variable for us.

We could spend more money on sales and marketing and grow even faster, postponing the day the Company becomes profitable.

Or, we can drive for profitability now.

Our results for the first quarter once again demonstrate that we are pursuing the right path in our drive for profitability, while we continue to grow the RA business and the total business at a rapid rate.

Oncology Infusion Services revenue increased by 19% to $7,717,000, from $6,471,000 a year ago, despite the continued impact of the industry-wide shortage of fluorouracil, or 5-FU, a commonly used chemotherapy drug, that also affected our revenue in the fourth quarter of 2005.

We estimate that this shortage impacted first-quarter sales in excess of $1 million in lost revenue compared to what we would have done if there had been no shortage.

The good news here is that supplies of 5-FU began to return to normal late in the first quarter, and we anticipate no further impact going forward.

The future of the Oncology Infusion Services business appears to be bright for the following reasons.

Approximately 85% of our pump rentals today are used to treat colorectal cancer.

With an estimated 145,000 new colorectal cancer cases in the U.S. every year, and less than 20% of existing patients now being treated with continuous drug protocols, the growth opportunity in colorectal cancer is still very big.

In addition, treatments for colorectal cancer -- there are a number of approved drugs and drugs in the pipeline that can be used for continuous infusion protocols for the treatment of other diseases.

Approved drugs include those for cancers such as head and neck, breast, lung, leukemia and stomach.

As these drugs are launched, in combination with continuous infusion protocols, we expect to get our fair share of the revenue these new treatments will generate.

And finally, more and more insurance companies are recognizing the cost effectiveness of the Oncology Infusion Services program.

And because of this, the opportunity for oncologists and patients to be part of the program continues to increase.

Total revenue increased 21% to $27,618,000, also a new record, from $22,741,000 for the first quarter of 2005.

And our SG&A expenses increased by only 11%, or about half the rate of total revenue growth.

This operating leverage is a planned consequence of our strategy to increase the productivity of our existing direct sales force, and to continue to introduce premium priced products with higher margins that deliver even better outcomes.

And the strategy is working.

The average unit selling price of our ON-Q products increased 7% from the prior year quarter.

On the bottom line, net loss decreased by 76% to just $482,000, or $0.02 per share, including stock-based compensation expense of $811,000.

In comparison, for the first quarter of 2005, the net loss was $2,009,000, or $0.09 per share, including stock-based compensation expense of $751,000.

Excluding stock-based compensation, net income for the first quarter of 2006 would have been $329,000, even with the 5-FU shortage, compared to a net loss for the first quarter of 2005 of $1,258,000.

So, we feel very good about our results in what is historically a weak quarter of the year for our Company, and believe that we are very much on track to deliver another record performance for the year as a whole.

This is why I am comfortable reiterating the guidance we announced last quarter.

We continue to expect I-Flow to be profitable in 2006, after stock-based compensation expense, on growth in total revenue of about 25%.

We continue to make good progress toward establishing our proprietary ON-Q family of products as the new best practice for post-surgical pain relief and replacing narcotics as the standard of care.

By redefining recovery, we are creating a substantial long-term growth opportunity for I-Flow in a large and untapped market.

Our sales team is becoming increasingly more skilled and productive.

We continue to assist their efforts with new products, support of independent third-party clinical studies, targeted co-marketing and advertising campaigns to increase consumer awareness of ON-Q in local markets, and programs to facilitate insurance reimbursement, and therefore reduce the reimbursement risk for our ON-Q products.

I will have additional comments after Jim reviews 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.

Revenue for the three months ended March 31, 2006 increased by $4,877,000, or 21%, to a record $27,618,000, from $22,741,000 for the first quarter of 2005.

Gross profit increased by $3,647,000 to $20,286,000, or 73% of sales.

Total operating expenses increased by $1,976,000, or 11%, and about half the rate of revenue growth for this year's first quarter compared to the first quarter of 2005.

The net loss for the first quarter of 2006 decreased to $482,000, or $0.02 per share, which included stock-based compensation expense of $811,000.

This compares to a net loss of $2,009,000, or $0.09 per share, for the first quarter of 2005, which included stock-based compensation expense of $751,000.

Excluding stock-based compensation, net income for the first quarter of 2006 would have been a profit of $329,000, and the net loss in the prior year quarter would have been $1,258,000.

At March 31, 2006, I-Flow reported net working capital of approximately $51.1 million, including cash and equivalents and short-term investments of $23.5 million, no long-term debt, and shareholders equity of $71.1 million.

Don?

Thanks, Jim.

Published clinical studies continue to build the case for ON-Q.

We have recently announced the results of a key ON-Q colorectal study conducted at the Cleveland Clinic Florida that was published in the prestigious Journal of the American College of Surgeons.

Patients in the study who received an ON-Q delivering a local anesthetic reported effective pain relief and used significantly less narcotics, experienced an earlier return of bowel functions and ambulated sooner, on average, than patients in the control group.

These research results are potentially significant due to the growing physician interest and patient demand for better surgical pain relief.

According to the ON-Q study principal investigator and co-author, Steven D. Wexner, M.D., the cascade of physiological damage triggered by postoperative pain can interfere with the patient's well-being, comfort and recovery, and recovery also can be slowed by the unwanted side effects of narcotics, such as nausea and vomiting.

It was especially notable that a medical record review 30 days after the surgeries revealed only a 2.9% infection rate in these patients, compared to the expected 7.3% rate published by the Centers of Disease Control on surgical wound site infection for patients undergoing colorectal procedures.

These results are consistent with the improved outcomes seen in the more than 50 previously published and presented ON-Q studies, and go a step further in demonstrating how ON-Q may result in an even lower infection rate than expected for this type of surgery.

We also reported on an interesting case of ON-Q use in gastric bypass surgery.

Anthony Davis, the two-time All-American USC Trojan football star, who became an ON-Q patient, chose nationally renowned surgeon Dr. Alan Wittgrove, Medical Director of the Wittgrove Bariatric Center at Scripps Memorial Hospital, to perform his gastric bypass surgery and agreed for the procedure to be broadcast live and archived on the Lite and Hope Website.

Davis' goal is to spread the word to others suffering from morbid obesity and its related problems, including diabetes and sleep apnea.

He said, and I quote -- "I want people who are suffering like I was to know there is hope, and that surgery doesn't have to hurt if you get ON-Q."

Dr. Wittgrove actually performed the world's first laparoscopic bypass surgery in 1993, and currently leads the team at the Wittgrove Bariatric Center, an American Society for Bariatric Surgery Center of Excellence.

Having successfully performed 5000 laparoscopic surgeries, Dr. Wittgrove understands the significance of patient ambulation to speed recovery and rehabilitation, and to prevent problems after surgery.

Dr. Wittgrove said, and I again quote -- "As with all my gastric bypass patients, we treated Anthony's post-surgical pain with ON-Q.

This helped to make it possible for him to sit up and walk around within hours of his procedure.

Since narcotics aggravate sleep apnea, ON-Q is especially useful for pain relief for patients such as Anthony who suffer from this condition."

End of quote.

Also during the quarter, I-Flow received the prestigious Frost & Sullivan 2006 Post-Surgical Pain Management Product Innovation of the Year Award in recognition of its ON-Q PainBuster.

This award is presented each year to the company that has demonstrated excellence in new products and technologies within its industry.

I was fortunate enough to be able to receive this reward on behalf of our employees and our shareholders in a very special ceremony in San Francisco last month.

There is a transcript of my interview on the Frost & Sullivan Website, should anyone be interested.

These developments moved us forward in our programs to solidify and strengthen our leadership position with our flagship ON-Q product family.

Together with the strong financial performance of all of our businesses, we believe that the stage is set for profitability in 2006.

Pamela, we are now ready to take questions.

(OPERATOR INSTRUCTIONS).

William Plovanic, First Albany.

First of all, any color on -- just some color on the makeup of the sales force as you exited the first quarter, (indiscernible) in terms of number of reps, hospital, ASC, inside reps, managers?

As we've said before it's all one big sales force now, but we had about 250 people in the sales organization in the field.

So, no change there?

That would be quota-carrying reps; that would be nurses, et cetera.

Feet on the street.

If we could get a feel for the ASC revenues as a percentage of the total RA in the quarter, just a ballpark on how that's progressing.

Just a moment.

Just under $1 million in the quarter.

Any update on cycle times, payment rates, insurers that have turned on over the last three months or so that you could provide to us?

We've had numerous small insurance companies begin to negotiate with us on contracts.

We are working on a couple of large insurance companies, but those will take a long time.

But the key is that we continue to get paid at basically the same rate that we've been talking about for a year, and that is our overall rate, based on gross billings, is about 35%.

That hasn't changed.

And the price you're getting paid has stayed about the same, at about $120?

Yes, at about $120 on the billing side.

But as I mentioned earlier in my call, we've actually seen a 6% -- I'm sorry -- 7% increase in what we actually get for our product on the average unit.

So a lot of people thought prices would drop; they're not dropping at I-Flow.

You had bought some stock back in the fourth quarter.

Had you made any purchases in the first quarter?

No, we have not.

Thoughts on that going forward?

Again, we don't speak to that, other than what's been published in our public documents.

That's a decision we make when the opportunity arises.

You have a pretty significant asset in terms of that distribution network that you've built.

Has there been any change in thought about leveraging another product through that channel, outside of the ON-Q product?

We're very opportunistic.

So, if the opportunity arises, you can expect us to utilize that asset.

But again, it has to be an opportunity where we can make a significant margin; otherwise it wouldn't make sense.

Dave Turkaly, WR Hambrecht.

I was just wondering, on the ON-Q side, obviously, the numbers are pretty close to where we were looking.

Is there any -- can you speak to any -- is there any seasonality in the first quarter?

I think our call last year you said something to the tune of some of the reps taking vacations.

Is that still the case?

Our first quarter is hit by a couple of things.

The first one is we have the national sales meeting the first or second week in January, and that takes people out of the field for at least a week, and usually about two weeks before they settle down.

And then they also take vacation in January, because we don't allow vacations, for the most part, in December.

So, January is their vacation month.

So you have two things hit us there.

January is usually a very difficult month for us in terms of revenue; and number two, we have a tremendous amount of expense that's in the P&L for that national sales meeting.

If we had not paid for that national sales meeting, we would have been very profitable this quarter, even after stock-based compensation.

But that's a onetime; yet it's very important to us, because we use that meeting to train and retrain all of our sales reps not only on existing procedures, but new procedures like the tunneling, which is going very well for us.

Since you mentioned the sales meeting, is there any chance you could break out the sales and marketing from the G&A?

What does that mean in costs to you in dollars, if there is an estimate out there?

Just a moment.

About three-quarters of a million.

Remember now, you're training about -- you're bringing 250 people out of the field and you're also training people in Lake Forest, so you've got about 300 people at that meeting.

And they're there for about four days, and you're paying for their travel.

So if you divide that out, you'll find out it's not very expensive per head.

Do you have the breakout in front of you of sales and marketing versus G&A in the quarter?

Jim, do you want to provide that?

Sure.

G&A was $5.412 million.

Sales and marketing was [14 790].

I guess as we look at last year, kind of the sequential increase on the ON-Q side from fourth quarter of '04 to 1Q '05, it's kind of a -- you did a little better this year, but then you really step it up in the second quarter.

Do you think -- to get to your 25% topline growth for the year, are you expecting kind of a similar performance going forward in that ON-Q department specifically?

Looking at history, the second quarter has always been a good one for us.

And there's no reason today to believe that it will not continue to be a very strong quarter for us.

I think we would have -- we probably would have done even better against Street estimates if your report had included stock-based compensation, wouldn't we?

You're going to blame that on me now?

I'm kidding.

(multiple speakers) No, no, I'm not blaming anything on you, but you're the one report that's outside that doesn't include stock-based compensation.

And I believe you had a $0.04 profit.

I think if you back out the stock-based comp, I get to your similar number that you report in your release of a penny.

But I'm trying to show it as things that are actually paid expenses rather than non-cash kind of -- even though I realize that that's going to recur.

I think we would have made consensus if we'd have had that in your report.

But anyway, thank you very much.

Adrian Dawes, Hartwell.

Can you talk a little bit about how you measure productivity of the sales force, what trends you've seen sequentially Q1 versus Q4?

I'll start with that.

Wow.

Number one, I would measure it by whether or not they make the quota.

Number two, part of that productivity is the fact they are selling premium-priced products, which has helped tremendously.

And number three, look at the number of accounts we've added since a year ago.

Those are all very good productivity measurements.

What else can I tell you?

How should we think about all those new accounts being added?

What's the average size now of contracts?

What implication does that have for the next two or three quarters?

It just opens up more accounts where we can sell the product.

Again, nothing has changed in terms of our very strong focus on going deep and wide in existing accounts.

But because awareness is starting to pick up, we're getting requests to go into accounts that we have to get started on, even though that may not have been our original plan.

But I'm very careful about making sure they stay focused so that we can hit our numbers.

I don't want them going off and spending a lot of time in new accounts that take a certain period of time to get going.

But we are getting new accounts through the awareness of this product and through requests for us to come in and in-service.

So, there's a lot of good stuff happening.

What proportion of ON-Q sales were the silver coated catheters?

Since we're converting everybody possible to the new product, we would hope that as we go forward, we will probably have 80 to 90% of all of our customers using the silver catheter as opposed to the non silver.

In terms of the sales force hitting quota Q1 versus prior quarters, how would you characterize that?

We actually had 40% make quota in the first quarter, which is kind of high for us.

As you know, Adrian, we like to be right in between 25 and 35%, but we did have 40% make quota.

With the improved supply of anesthetic, you mentioned a $1 million drag.

How did you calculate that?

You're talking about 5-FU.

The $1 million is a very conservative estimate based on the running rate before the shortage.

You can go back and take a look at that in previous quarters, and you'll see the $1 million is a small conservative number.

It could have been much higher.

The first quarter is usually a very good quarter for infuse systems, or our Oncology Infusion Services business.

And it wasn't until the middle of March that it officially came off the shortage list, as per the FDA's announcement.

So you are now producing as much as you need to meet demand in the market?

Yes.

We've been told by the suppliers, and we have also been told by the sales force, that people are going on the drug as I speak.

We're pretty excited about that.

And as you know, there's a lot of new stuff coming that will require 5-FU, we think, as a chaser, just like the colorectal drugs.

So, with that in mind, that would suggest improving growth rates for the rest of the year.

Can you sort of give us some granularity, how we get to 25% revenue growth for this year?

No, I can't do that.

But that would be very easy for you to do.

That we can do.

If we were to prioritize (technical difficulty) by divisions, we should have ON-Q having the highest growth rate of something north of 30%.

(multiple speakers) but now, ON-Q may not necessarily be the highest growth rate.

I didn't say that.

It may be; it may not.

But the oncology business, once it gets back on track, if you remember last year, was doing 40-something% growth, and that's a much smaller base than the ON-Q base.

So, I think it will be nip and tuck this year.

That kind of rationale, 30-kind-of-% number, is a useful one to think about?

Those are all reasonable numbers.

As we look out in terms of marketing expense, are there any planned increases in sales force?

Are there any planned changes in compensation for the sales force as we go through the year?

No.

The compensation plan is set, and of course they can make more money if they hit quota.

And since we had a slightly higher number make quota in the first quarter, we paid a little bit more in commissions than we had originally planned.

But that's all good news.

That just means they did better on the revenue side.

And with our kind of margins, we would love to have them all hit quota.

Last two questions.

The Minnesota study -- how far along in that are we now, when will we see results, and where are you anticipating it to be reviewed, peer reviewed?

We are in that process at the point where we really can't talk, which means that we're well into it.

We can't say a whole lot.

And again, we still have not decided how we will release the news once the news is available, because we've got doctors involved who may or may not want to publish.

Final question.

Stock-based compensation -- how should we model it for the rest of the year?

I believe we've said in the past that the total for the year will be about $6 million.

So, I would assume -- and Jim, you can correct me if I'm wrong -- that you probably want to spread it evenly, what's left, over the next three quarters.

(multiple speakers) we could always diminish the stock option expense as we go forward, and narrow the gap between the two numbers.

Is that a question, or is that advice?

Whichever way you wish to review it.

Next question.

Mark Mullikin, Piper Jaffray.

Jim, can you just tell me what the capital expenditure was in the quarter?

Sure, Mark. $850,000.

Don, I want to clarify and make sure I'm doing the math correctly here.

The press release indicates 25% increase in active hospital accounts year-over-year, a 7% [ASP] increase.

That sounds like, then, average hospital volumes were flat year-over-year.

Or is my math off?

No, I don't think that's true at all.

The new accounts typically are small in comparison to the existing accounts which we've gone deep and wide in.

So, the productivity is coming from our existing accounts, as well as, to a lesser extent, from the new accounts.

If I just look a year ago, based on those numbers that you provide, if you have the 7% ASP increase, that implies a 25% volume increase, and your number of accounts was up 25%.

Therefore, the volume in each account on average would be flat year-over-year.

Wait a second.

Mark, where do you get that math at?

Most of our sales are still coming from a base of between 1000 and 1200 hospitals.

We do have some new hospitals that did order in the first quarter, which took us to 1500.

So, a year ago we had 1200 hospitals, approximately, that bought in the first quarter of 2005 -- and by the way, that's the way we measure it.

Did they buy in the first quarter of 2005 and did they buy in the first quarter of 2006?

We probably have more active accounts than that if we were to say if they bought in the last six months.

But to be conservative, we said if they bought in the last three months.

So, the bulk of our sales is coming from our base hospitals of 1000 to 1200.

But what's nice here is without a program to go after new accounts, we are getting new accounts.

And some day they will be our big generators.

So, how many accounts did you add in the quarter?

We don't have that number.

I'm just telling you what we did versus a year ago.

We've added about 300.

You've added about 300 accounts from a year ago.

Fair enough.

By the way, that's without a program to do that.

Okay.

And then you assigned quotas to some of the associates.

What are your expectations for sales force productivity out of the associates as opposed to a more experienced sales rep?

Do you expect them to ultimately hit the same productivity level as the more experienced reps, or are you assigning them lower quotas?

Number one, we're assigning lower quotas.

But on a percentage basis, we're actually expecting them to grow it faster, because they will have smaller bases.

And we know that there is the opportunity to grow a small base to what we call a medium base is much easier than to grow a medium base, say, around $50,000 a month, to $100,000 a month.

Most of our sales associates got quotas of $300,000 for the year, but they still have to get to $20,000 a month by the sixth month, which is the same program we have for any rep.

So it's the same for the associates?

Well, the quota for the year is lower, much lower than on the average, the rest.

But they still have to get to $20,000 by the sixth month.

They are measured exactly the same way.

By the way, that program is working quite well, as you can see from our numbers.

So, you're pretty happy with how the associates are getting traction?

Yes.

Some of them will never get traction, because this just isn't the right thing for them.

But a high percentage are actually having a pretty good time.

They're making more money than they've ever seen.

And is there any difference in the number of sales days this year in this quarter relative to first quarter of '05?

I don't have any idea of the answer to that question.

Maybe one or two.

One or two additional?

It wouldn't be any different than that.

The other thing I want to mention, too, is the morale in the sales force is extremely high.

They're having a good time.

(OPERATOR INSTRUCTIONS).

Ryan Rauch, Jefferies.

Just a handful of quick questions.

Jim, what was the negative impact on the gross margin due to the 5-FU shortage in the quarter, just roughly?

The gross -- the dollar gross profit impact would be roughly 70%.

So, if you lost roughly $1 million in revenue, you probably lost $700,000 in gross profit.

Is that the way to look at it?

Yes.

Low 70s.

Sequentially, how do we look at oncology services?

We model $8 million -- clearly, you're not going to get all of what you lost the last two quarters back.

But we're hearing April is off to an outstanding month, just to an outstanding start.

What kind of levels should we look for, eight to nine?

Is there going to be a significant uptick in oncology services this quarter because you no longer have the 5-FU issue?

Let me handle that question for you.

First of all, if a patient -- if we didn't have drug available in the past, than the patient was probably treated with oral, so therefore we don't have a chance to pick up old patients.

But because there are so many new patients coming into this market every year -- as I mentioned earlier, 145,000 -- we expect this thing to get back on track in the second, third and fourth quarter, just like it was last year.

You saw what happened last year just before we hit the shortage, so we expect it to be back on track and growing starting immediately.

On the IV therapy business, it was in line, but probably not quite as strong as we would have thought with all of Baxter's issues.

What are you seeing there out of B. Braun?

Do you still think that's just a single-digit grower, or how should we look at that going forward?

That's a single-digit business.

And by the way, on the Baxter, we got that hit last year.

That's not a hit you get every year.

So, we picked that up last year.

And unless they stumble again, we [can't] look forward to another pickup from Baxter this year.

But that's always been a business we've talked about being in the low single digits.

What happened last year was unusual.

And finally, Jim, I forgot -- stock-based comp was a little bit beneath our estimates in the quarter.

You said again it should be $6 million for the year?

Yes, roughly.

Alex Arrow, Lazard.

This is [Andrea Selman] actually, for Alex.

What I wanted to ask about is, I talked to some physicians who said they heard some patient anxiety about the ON-Q.

So I was wondering, with the co-marketing to increase consumer awareness, how -- what type of consumer awareness are you trying to get out there about the product?

The consumer awareness we're doing today is mainly joint marketing with a surgeon or a surgical center.

We're not doing anything separate from that to go after consumers.

Do you have a plan to do that at all?

Not in the immediate future, but we always are looking at that and when the timing would be right.

We don't think it's the right time to do it now.

Direct to consumer marketing is very, very expensive, and we don't believe we have enough surgeons yet to justify the expense.

If a patient goes in to see a surgeon who doesn't use our product or has never heard of it, then they'll be talked out of it.

So, we still have to get some more users and awareness at a higher level, we believe, before you start doing things like television and direct to consumer marketing.

I also heard some comments that the product worked unpredictably.

Unpredictably?

Okay.

Well, I don't know what that means.

You mean it worked better than predicted?

No, it's erratic.

They said that they couldn't rely on the results, so they weren't using the product anymore.

And I'm curious how you get people to try it again if they have tried it once and they didn't like it, or if you work on this -- if you continue to work on that customer.

What typically happens if we have an outcome that's not satisfactory, or is believed that it didn't work, we send -- the rep goes back in.

And the first thing we look at is the concentration of the drug to make sure they have the right concentration; and then number two, the key to this thing is where you place the catheter.

So, we'll help the surgeon and make sure he places the catheter correctly.

Because if you're not where the pain is going to be with the catheter, then you're not going to get any drug in there, and you're not going to take care of the pain.

The third thing is we all have different pain thresholds.

So, what is pain to you, Andrea, may not be pain to me.

So again, I don't know how to answer that question, other than to be able to tell you, based on our growth, we're doing extremely well.

And you might want to ask Alex about how well the product works, since he had a very good friend who used it.

[John Long], First American.

I was just wondering if you had any updated thoughts about the ON-Q label.

You go through all the peer-reviewed information that suggest better outcomes, lower infection rates; what can you do to strengthen the label to get this product to be more appealing in the eyes of surgeons and payors?

Based on what we've seen in our past clinical studies, we believe -- and again, I emphasize we believe -- we may have an opportunity here with a claim in the future that it reduces the chance of an infection.

So, we are doing the animal study, which was mentioned earlier.

And that's well in progress.

We are getting ready, we hope, to start a colorectal study.

We have an IRB under review right now.

Once that is approved, our plan is to start a colorectal study with humans to see if we can show a significant difference in infection rates.

And then, if those work in our favor, then you can rest assured we will go back to the FDA with the data and hope to be able to show and get a label claim that we do have a positive effect on reducing infections.

So, our next big target is the infections.

Would you seek to pursue other outcome claims in terms of motility, time to recover, things of that nature?

We tried -- we tried to get a length-of-stay claim from the FDA from the same studies we used to get the better-than-narcotics claim.

But they said we don't ever give those kind of labeling claims.

We don't give cost savings, which that really is, a length-of-stay savings; so we just don't do that.

Even though our studies were overwhelming, they said we just don't do that.

So, we tried.

Any thoughts on the size needed for a human study?

Yes.

We are looking at something less than 1000 patients.

And again, it will all depend on how many infections we actually see or don't see in the two groups.

Lastly, could you update us on the patent status of the SilverSoaker catheter?

Is this something that you can protect over time?

We think so, because we have filed.

We have a patent on the Soaker.

Nobody else in the world has put a silver coating on a product like ours that goes into a surgical site to treat pain.

So, we have actually got a very general patent filed for any catheter of any kind that is coated with silver and used to treat pain.

So, we'll see.

But we are first.

Mr. Earhart, there are no further questions at this time.

I will turn the call back to you.

Thank you.

We want to thank all of you for being with us today, and we are very positive on what is happening in the future.

So, based on our progress reported this morning, I can truly say that we believe that the best is yet to come for I-Flow.

As always, we thank you for your continuing support.

Thank you.

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