金百利克拉克 (KMB) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow second quarter results conference call.

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

Afterwards, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS].

As a reminder, today's conference call is being recorded, Thursday, July 27, 2006.

It's now my pleasure to turn the conference over to Mr. Donald Earhart, President and Chief Executive Officer and Chairman for I-Flow Corporation.

Please go ahead, sir.

Thank you Elizabeth.

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

Following our prepared remarks, Chief Financial Officer, Jim Talevich and I will be glad to answer your questions.

In 2002, I-Flow regained the exclusive distribution rights to our ON-Q Pain Management System, and announced our decision to go for it on our own by devoting the Company to fully supporting the development and commercialization of our proprietary ON-Q Technology.

We invested heavily in clinical studies that proved the value of using ON-Q, hired and aggressively grew a direct sales force trained in surgical sales, developed numerous new products that expand the population of surgeries ON-Q can be used for, and finally, articulated a detailed strategic plan designed to take maximum advantage of what we saw as a major long-term growth opportunity.

I believe that the financial results we announced this morning validate our strategy and our hard work over the past few years and mark a fundamental turning point in I-Flow's history.

Net income for the second quarter ended June 30, 2006, was $433,000 or $0.02 per basic and diluted share, which included stock-based compensation expense of $1,733,000.

This compares to a net loss of $645,000, or $0.03 per basic and diluted share, for the second quarter of 2005, which included stock-based compensation expense of $948,000.

We are on record predicting I-Flow will be profitable in 2006 after stock-based compensation expense on growth in total revenue of about 25%.

We believe our second quarter performance shows that we are turning this expectation into reality, and we remain confident that we will achieve our projections for the year as a whole.

Total revenue increased 26% for the second quarter of 2006 versus the same period last year.

Even more impressive is that Regional Anesthesia revenue which includes the ON-Q PainBuster Post-Operative Pain Relief System, the ON-Q C-bloc Continuous Nerve Block System, the ON-Q Soaker catheter, the new ON-Q SilverSoaker catheter, and ON-Q third party billings increased 36% for this year's second quarter versus prior year to a record $17 million from $12.5 million last year.

Also noteworthy is that the growth rate in our Regional Anesthesia business accelerated in the second quarter rising to 36% from the 31% growth rate we reported for this year's first quarter versus the first quarter of 2005.

Of the 36% growth, 24% was attributable to increased sales force productivity while 12 percentage points was attributable to increased average selling prices.

The increase in average selling price was the planned result of a mix change to selling a larger percentage of premium priced pumps.

As we noted on the quarter 1 conference call, our strategy is to focus on big-incision surgeries that require tunneling, and larger pumps that provide more days of relief while giving significantly better outcomes.

With the average selling price increasing in both quarters 1 and quarter 2 of this year, our strategy appears to be working.

The recently introduced ON-Q SilverSoaker line of products, which offer enhanced antimicrobial properties as an added layer of protection against the risk of infection, the addition of ON-Q tunneling tools, which are expanding the market for ON-Q, especially in large-incision surgeries, and the ON-Q C-bloc Continuous Nerve Block product, especially in orthopedic surgeries, contributed significantly to quarter 2 growth.

In fact, ON-Q C-bloc had a breakout quarter with revenues increasing 168% in this year's second quarter, versus the prior year quarter, to a record $1.5 million from $600,000 last year.

Oncology Infusion Services revenue increased 26% to $8 million from $6.3 million for last year's second quarter.

I am pleased to confirm that market wide supplies of commonly used chemotherapy drug, fluorouracil or otherwise known as 5-FU, which had been in short supply through the end of March 2006, returned to normal as anticipated early in the second quarter.

However, our growth during the second quarter continued to be dampened by the shortage in that the pipeline of patients had declined as they turned to other medications during the shortage and so the pipeline had to be rebuilt over the past couple of months.

I believe that the impact of the 5-FU shortage is now behind us, based on the increasing popularity of electronic ambulatory infusion pumps to provide multiple-day infusions of chemotherapy drugs to patients at home.

We expect the performance of Oncology Infusion Services to continue to improve as we go forward.

An important measurement of continued growth is the demand for pumps by customers, and because of the recent pick up in demand, InfuSystem purchases of pumps in quarter 2 exceeded $680,000.

Our IV Infusion Therapy business reported modest growth for the second quarter with sales increasing 1% to about $5.4 million.

We continue to see our Regional Anesthesia business as our primary growth engine for the future.

Each quarter, more and more patients are experiencing first hand, the improvement in surgical outcomes made possible by our proprietary ON-Q family of products for the relief of post-surgical pain.

This growth is a tribute to the continued diligent execution of the growth strategy we have been pursuing for a long time now, a strategy to which we remain totally committed.

Growth in our Regional Anesthesia business is being driven by the steadily increasing productivity of our sales team and by the increased awareness of pain pumps in general.

We believe ON-Q awareness increased 13% in quarter 2, 2006 versus quarter 2, 2005.

We obtained this number by totaling the accounts that purchased at least one ON-Q unit in quarter 2, 2006 and the same for quarter 2, 2005.

Comparing these totals, we found that the number of accounts purchasing ON-Q grew by 13% year over year.

All ON-Q accounts were included in the comparison, including hospitals, ambulatory surgery centers and office space surgery locations, for example, plastic surgery.

If an account purchased at least one ON-Q unit or used ON-Q as part of our billing program either as a regular user, or as part of a trial or evaluation they were counted as being aware of ON-Q for the time period measured, and therefore included in the 13% growth.

With our Regional Anesthesia revenues growing at 36% and ON-Q awareness growing at 13%, one could argue that we are experiencing strong growth in our established accounts while still finding time to introduce ON-Q to new accounts.

Our sales efforts continue to be bolstered by the accumulation of third-party clinical studies, which have consistently shown the benefits of ON-Q in an expanding number of surgical applications.

By our carefully targeted co-marketing and advertising programs, by our focus on large-incision surgeries where ON-Q makes a bigger difference in patient outcomes and by our efforts to educate and obtain reimbursement agreements with insurance carriers.

I will have more to say about some recent successes on the insurance front later in the call.

We believe ON-Q is redefining recovery and setting a new best-practice benchmark for post-surgical pain relief in hospitals and ambulatory surgery centers throughout the country.

What is particularly exciting is that even with all that we have achieved, we believe we have barely scratched the surface of ON-Q's market potential.

As I have said many times before we are seeking a judicious balance between growth and profitability.

The keyword is balance.

Our revenue has been consistently growing faster than our operating expenses for some time, and we have now shown that we can reach profitability.

We believe it is now clear from our recent financial results that we have built substantial operating leverage into our company.

If we continue to grow we expect to have additional resources available to invest in our Regional Anesthesia business.

We are determined to make the most of this exceptional opportunity by continuing to invest to build market share wherever we see solid opportunities to do so, while not losing sight of our need to be profitable.

I'll be back after Jim reviews the financial results in detail.

Jim?

Thanks Don.

Before we continue please note that this conference call includes forward-looking statements.

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

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

A more detailed discussion of these risks and uncertainties is contained in this morning's press release at I-Flow 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 three months ended June 30, 2006, revenue increased 26% to a record of $30,401,000 from $24,183,000 for the second quarter of 2005.

The increase included the effect of a 36% increase in Regional Anesthesia revenues over the prior year quarter.

On a sequential basis Regional Anesthesia sales increased 19% versus the previous quarter.

Total operating expenses increased by $3,263,000 or 18% for the second quarter of 2006 versus the second quarter of 2005, substantially below the rate of revenue growth for the period.

Net income for the second quarter of 2006 was a profit of $433,000 or $0.02 per basic and diluted share, which included stock-based compensation expense of $1,733,000.

This compares to a net loss for the second quarter of 2005 of $645,000 or $0.03 per basic and diluted share, which included stock-based compensation expense of $948,000.

On a year-to-date basis, total revenue for the six months ended June 30, 2006, increased 24% to $58,019,000 from $46,924,000 for the six months ended June 30, 2005.

The net loss for the first half of 2006 was $49,000 compared to a loss of $2,654,000 for the first half of 2005.

Moving to the balance sheet, total cash in investments increased on a quarter-to-date basis by approximately $1 million to $24.4 million as of June 30, 2006, compared to $23.5 million as of March 31, 2006, primarily, due to the improving profit picture.

At June 30, 2006, I-Flow reported net working capital of approximately $53.9 million, no long-term debt, and shareholders' equity of $73.5 million.

Don.

Thanks, Jim.

Earlier this week, we announced an important development regarding insurance coverage for ON-Q.

We signed three new contracts.

First with a health plan affiliated with the world-renowned hospital system and medical school.

Second, with Three Rivers Provider Network.

And third, with USA Managed Care Organizations, all of which to reimburse the cost of ON-Q for outpatient surgeries in ambulatory surgery centers.

These contracts cover approximately six million people, which raises by almost 20% the total number of ON-Q covered lives.

We now estimate the total number of ON-Q covered lives to be over 40 million.

Every increase in the number of ON-Q covered lives makes it more likely that people who are undergoing outpatient surgery may get ON-Q to control their post-surgical pain and get back to normal, faster after their procedure.

We are pleased to see that more healthcare plans are specifically naming ON-Q as their premier choice for post-surgical pain relief and are partnering with us to offer the greatest value, and best possible recovery after surgery for their members.

We also announced an agreement with the leading group purchasing organization Broadlane, to make the ON-Q PainBuster Post-Op Pain Relief System available to their customers, and ON-Q will be the only post-surgical non-narcotic pain pump on contract.

This agreement with Broadlane makes ON-Q more readily available to a large number of healthcare facilities across the United States.

Broadlane serves more than 915 acute care hospitals, 2,600 sub acute care facilities and 18,000 physician practices including America's leading Integrated Health Plan.

We have now contracted for ON-Q with six of the major group purchasing organizations.

These agreements are extremely important for us, because they open the door for our direct sales team to do what they do best, sell, sell, and sell.

While it is still up to our sales people to get the purchase order, this is a lot easier to do when ON-Q is on contract.

These new agreements increase our opportunity to build our business and to maintain our selling momentum while we increase ON-Q's share of the U.S. market to treat acute pain.

Updating our clinical efforts, we received IRB approval this week to start a human clinical study in patients undergoing colorectal surgery the goal being to prove that when an ON-Q pump used with an ON-Q SilverSoaker is used to bathe a surgical wound with a local anesthetic, patients will experience fewer infections.

Our preliminary work in both humans and animals has shown that lower infection rates are to be expected.

If the study is initiated, this will be the first I-Flow study with humans that is powered to prove or disprove the potential benefits of using ON-Q to reduce the occurrence of an infection.

Elizabeth, we are now ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS].

Our first question comes from the line of William Plovanic, from First Albany Capital; please go ahead.

Great, thank you, good morning.

Hi, Bill.

Hi, Don.

Couple of questions.

First, I think you mentioned that with the profitability now coming back, as long as that continues, you're going to potentially reinvest in the sales force.

I was wondering where you ended the quarter and what type of plans you have for '06 and '07 at this point?

We ended the quarter with basically the same number of sales people we've had for the last year and a half.

Okay.

So we're still running right around 250 in our total sales organization.

Again, about 200 of those are quota-carrying, the rest are clinical support.

We have not released any information as it relates to 2007 or 2008 Bill, but right now, we intend to keep that fairly level this year.

Okay, so if there were any [adds] you wouldn't, you're going to relook at that -- revisit that once you put your '07 plan together is what you're saying.

Yes, and again, since the sales force has been flat for the last year and a half, all these increases pretty much are organic as well as mix change advantages on the selling price.

Right, and then the ASP in the contribution to the quarter was solid, and you mentioned that new product and mix really helped you out, can you give us a feeling for what the SilverSoaker penetration rate at this point is, and as well as the tunneling device?

Yeah, I would guess that the SilverSoaker today is probably about 10 to 15% of our total sales, and again, that's increasing every day as hospitals get it approved to bring it in, because it has to be approved to purchasing, it's a different code number.

And then, what was the second question?

Tunneling, what percentage of your procedures has tunneling penetrated in for you?

Again, I don't know the exact answer to that, but since a large percentage of our surgeries are thoracic and heart related, that's where tunneling is used, I would guess 20 to 25% that's a rough guess, but that's where we target.

We're doing tunneling almost exclusively in all of our heart surgeries and all of our thoracic surgeries.

Okay, and then in the SilverSoaker, you said 10 to 15% of sales, what's the penetration rate in your -- is it 10 to 15% of every pump sale has a SilverSoaker attached to it?

Yeah, again, you have to go through the process of the hospitals approving it, and it's a different code number, so it has to come in that way, but no, that's going very nicely.

It is, and then where would you expect it -- would you expect a 100% penetration on that product?

No, because there are still some organizations that don't feel the need for Silver, but I would expect our penetration would be somewhere between 60 and 75%.

Okay.

And again, in ortho, since it's counter-indicated for some surgeries in ortho, it will never penetrate there totally.

And then, I'll ask one more question, then jump back in to queue, and that is, just in terms of the taxes for the quarter Jim, that was a bit surprising.

Are you going to have to accrue a tax going forward, and roughly what percentage should we kind of build in to our models, and then the same question for '07, would we kind of get to a 40% tax rate in '07?

You'll -- the only taxes you'll see for the rest of 2006, I'm confident, are just your state taxes and on InfuSystem essentially, and also some taxes we pay in Mexico.

So there's no federal income tax provision throughout 2006, and then a decision will be made with our auditors, at the end of 2006, as to what to do for 2007.

Okay, great, thank you very much.

Our next question comes from the line of [Alan] Arrow, from Lazard Capital Markets; please go ahead.

Thanks, hi Don, hi Jim.

Hi, Alex.

I think, I'd start with the guidance, you said 25% revenue growth for the year, and that was what you said previously and I think what you're sticking to now, and yet, you did do better than that this quarter.

So would it be drawing too much of a -- would it be looking into that too much to say that you're now guiding us to a little bit less for the second half, or are you seeing at least 25%?

Now, that's a tough question, Alex.

We want to stick with our guidance for the year.

Again, the unknown today is still our InfuSystems organization.

You know, 26% growth in InfuSystems is very good, but it's not nearly as good as what we had last year.

So until we get totally out of the 5-FU situation and get back on-stream, I wouldn't want to raise that guidance today.

But I think we can continue to show very strong growth in RA; we can continue to show very strong growth in the overall business.

And again, when you look at InfuSystems, 26% growth isn't all that bad.

Okay.

So the answer is no, we are not raising your guidance yet.

Okay?

Okay.

Let me ask you about the issue of stickiness.

The ability of an account to continue to order ON-Q, after the salesperson is no longer standing there reminding the surgeon to do it.

Can you give us any metrics on whether the stickiness is going up or down or whether -- I think previously you said that the presence of the tunneler made it more sticky because it was harder to forget.

And since you are now telling that it's 20 to 25% maybe that's -- is that the amount that -- of stickiness you're seeing?

Well, what can you tell us on whether you have to keep salespeople in the accounts in order to keep the level of usage up?

Well, the best way to handle that is probably to take a look at the growth that our sales force has generated organically.

The first quarter they had 25% organic growth, which means number of units sold pretty much, and they had 24% in the second quarter.

There is no way they could get that kind of growth if they were sitting in on every surgery.

The answer to your question is that stickiness is becoming less and less of an issue, especially with products like C-bloc, which I mentioned earlier is just -- well, I like to use the word, "exploding", because that's basically what it is.

There is no stickiness issue with C-bloc.

Once we get an account using it they use it everyday whether we are there or not.

The second thing that's helping stickiness is when we introduce tunneling into cardiac and thoracic, we don't have to be there anymore.

The outcomes are so fantastic the surgeon doesn't forget to use it.

We're even finding stickiness to be less of an issue in other types of surgery.

People are beginning to understand the benefits.

They are beginning to use the product without our having to be present and so it's becoming less and less of an issue.

And again, we couldn't get the organic growth that we're looking at from a fixed sales force if we were sitting in on every surgery.

We are sitting in on less and less.

Okay.

But in the other 75 to 80% of ON-Q usage, where there is no tunneler being used, do -- how much of a need is there for the salesperson to remain in those cases?

It's less and less.

It's not like it used to be, Alex, pain pumps are becoming accepted.

Okay.

If that weren't true we wouldn't be on six GPO contracts.

Yeah, okay.

Okay, now -- and then if you could just turn to speaking of salespeople, I know you've kept the headcount constant and then about a couple of quarters ago you promoted a bunch of people that didn't have quotas to where they now have quotas.

So now that you've done that, at some point it seems like you're going to have to split territories again and hire more people.

Can you tell us anything about the timing on that?

We have no plans to do that this year.

However, we will look at that very close for 2007.

So if we were to model an increase in the headcount in January '07, would that be unreasonable?

No, I don't think that's unreasonable.

Okay.

And if we were to say maybe 50 new people, would that be in the ballpark?

I'm not sure we would add that many, but again, we'll look at it very hard, Alex, and we'll put people where there is an opportunity.

Maybe 10% more, something like that; maybe a little bit more.

Yes.

Okay.

And helping you with your stickiness question, I just thought about this.

We could never have gotten growth of 19% from quarter to quarter if we were sitting in on every surgery.

Yeah, okay.

Yeah, there's just no way.

Are you seeing any new competitive entrants in the market that are anything material or is it the same cast of characters and --

It's basically the same cast of characters we talk about on every conference call.

There are rumors others are coming, which gives us market credibility, but we kind of look forward to that, Alex.

The more people that come, the greater the awareness will go up, and you know, all ships rise with the tide.

We expect to get our fair share if more come, and there's no question, we are without question the leader and with the wide range of products that we have, including tunneling and silver-coated and C-bloc, let them come.

We will get more than our fair share.

Okay, thank you, Don.

But it's basically the same group today.

Okay, thanks for taking my questions.

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

Please go ahead.

Hi, Adrian [multiple speakers]

Congratulations on a good quarter, fine thanks.

A couple of questions for you.

Can you talk a little bit about progress you're making in some of the major markets that have been more challenging for you.

I'm thinking of metro New York, Boston, East Coast areas.

Well, thanks to your help and to Bill Miller's help; we've been able to get the C-bloc into Columbia, which has been a two-year effort.

So we're pretty positive about that.

We're making very good progress in the New York and Boston area.

In fact, the three contracts that we announced for insurance coverage, all come from the Northeast.

Another good statistic is our New York region, for the first time in the history of I-Flow, is making quarter for the year.

So we're starting to get some good traction in the Northeast.

I guess that's the bottom line.

Good.

Can you talk a little bit about the implication of that for reimbursement levels, the proportion of billings that are now getting reimbursed?

How much improvement have you seen Q2 versus Q1 or a year ago, if you can provide some color there?

Again, I don't speak to the actual statistics, but I can share this with you.

It makes the number we're using and have been using for two years that much more solid.

We're not ready to raise the number we recognized, but we are feeling very comfortable with the money that would be -- the number that we booked today as revenue, based on billing.

So that has not changed at all.

They get stronger everyday, as we get insurance companies to come on board.

As you look at the mix of sales between surgery centers and inpatient, what's the mix change that's gone on in the last couple of quarters, are we seeing continued momentum on the surgery center side?

Yeah, we do.

But again, our emphasis is not on surgery centers per se, our emphasis is on Regional Anesthesia.

We can generate a lot more revenue a lot quicker if we sell into a hospital, especially, our tunneling devices, and if we sell C-bloc to an anesthesiologist.

The ambulatory surgery center portion of our business is another tool in our tool-kit.

It's a very important tool and is growing very nicely.

But again, remember now, each surgery generates a fraction of revenue, compared to doing a heart surgery with tunneling that might get us $400 to $450.

So it's all part of the tool-kit.

With rising ASPs, one would presume that that has a positive impact on gross margin.

Is that a fair way to think of it?

Well, the absolute dollars in margin goes up significantly, and in most cases, it helps with the percentage as well.

It helps stabilize the percentage.

So -- just so I understand, a higher priced product would have a modestly higher gross margin associated with it?

No, it may have the same gross margin as that lower priced product, but the absolute dollars could be three times as much.

Okay.

I mean, that's what we care about.

I can't pay any bills with percentages, Adrian, but I can pay bills with dollars.

Yeah.

In terms of the P&L accounts, question for you, Jim, can you comment on what we should think about for stock-based compensation expense for Q3 and Q4?

Q2 clearly was a higher number than the first quarter.

So some clarity there might be helpful for all.

Well, Adrian, it will continue at the higher level and that's consistent with the guidance we gave earlier this year, which was approximately $6 million in stock-based compensation for the year.

Is there any thought that '07 would be materially different from that or we should just think about that on a sort of consistent go-forward basis?

Yeah, I don't know the answer to that Adrian, I don't know why it would be different.

Okay.

In terms of the Oncology, are we seeing rapid growth now in the post 5-FU environment, are we at the run rate you would expect we should have been at?

We announced 26% growth, which I think most companies would consider to be rapid growth.

For that business, however, we would hope that as we go forward that could climb more towards the 35 to 40% range.

But again, 26% is nothing to sneeze at.

Absolutely not, it's great.

So back to Alex's question [earlier], if Oncology is currently growing at 26 you expect it to improve to a higher number.

Regional Anesthesia is growing at 36%, a corporate target of 25 for the full year seems very conservative.

Yeah, we hope it is too.

Good, thank you so much.

I'll get back in queue.

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

Hello, Ryan.

Hi Don, how are you, good quarter?

Yeah, we're feeling great.

Yeah, I don't feel quite as good, but -- about myself, but real quick, just curious about what were the actual revenue in the ambulatory surgery centers, and sorry, I have quite a few earnings releases today, so, I didn't hear it.

Just under $900,000.

$900,000, okay --

$884,000 to be exact.

Okay.

And then again, on the Oncology services side, I guess, we thought you had a solid quarter, ON-Q was better than we thought.

Oncology services, and I know you spoke about it at the beginning, was it just because after 90 days you have to get the patients back in the billing process, which take a lot of time, and it's not as if you don't have them in the pipeline, it just didn't hit in this quarter.

Could you give us some more detail?

And if you did already, I apologize.

What we believe is happening is during the shortage, patients who had colorectal cancer were put on other therapies, which may or may not have needed liquid 5-FU.

Once they are started on those protocols, there is a reluctance by the doctor to switch them, once 5-FU became available.

So we basically lost most, if not all of those patients, who got put on some other protocol during the shortage.

Once the shortage went away, then it's a matter of signing up all of these new patients and getting the pipeline filled again.

We believe that's what's happening on the Oncology side, and that's the indication we get from doctors and from our sales force.

So it's -- once you lose a product like 5-FU it just takes a long time before you get back rolling again at the same level we did, for example, last year.

Got you, but you mean it's pretty safe to assume, and maybe Jim, this is a question for you, that -- do you think it will grow sequentially;

ON-Q revenue as well as Oncology services revenue?

I -- well, I didn't understand your question Ryan.

Yeah, I have marbles in my mouth.

Do you think that you will grow Oncology services revenue sequentially, and do you think you will grow ON-Q revenue sequentially in 3Q?

Third quarter is always an interesting quarter for us, Ryan.

In that typically, I believe, our third quarters are very similar to our second quarters in ON-Q.

Again, we experience vacations both by surgeons and by our sales force, and so therefore, I believe if we take a look at the past, those quarters are relatively flat.

So I don't really have enough information today to tell you whether it's going to grow or be closer to what we did in the second quarter on the ON-Q side.

On the Oncology side, we would hope that as we come out of the shortage that we will maintain and possibly grow that business beyond what we did in the second quarter.

Okay, and then two final questions.

Jim, why did your SG&A, and I apologize again, increased by a million sequentially.

And then, Don, your stock sort of, I mean, it's one of the cheapest stocks in the group, do you have any strategies to enhance shareholder value by, I don't know, may be divesting one of your three business units, or what are your thoughts there?

Ryan, there's no way I can respond to that question.

I have nothing to say.

You could Don, but I understand, so Jim.

Yeah, I mean the, I would say the largest reason there, Ryan, and again, it is growing slower than the revenues of course, but the largest reason would be sales commissions really.

You know, they had a great quarter.

Gotcha, have a wonderful day.

Our next question comes from the line of [Matt Dillman], from Roth Capital; please go ahead.

Good morning, guys.

Hi, Matt.

Hey, Don.

I don't know if you covered this, I jumped on late as well, but on the ASPs, I know you mentioned they're up Q1 over Q2, I believe.

Did you quantify how much that impact was in the quarter, for the Regional Anesthesia business?

Yeah, what we did for the Regional Anesthesia business, earlier, we mentioned the fact that we had 36% growth.

Of that 36% growth, about 12% was pricing, it's actually a mix change.

So our average selling prices are beginning to approach $200.

Okay, very good, that helps.

And then on the Oncology business, I know it was talked about a little but can you help us out in terms of the timing on how you're sensing that pipeline, you know, throughout the quarter, either month by month, or you know, where you are, here at the start of Q3?

Well, we had 26% growth in the second quarter, and we think we can continue to grow that business, and possibly even better as the pipeline fills up and patients start coming in and getting the protocols that require pumps.

Again, I don't know the answer to that question, but that's what we're looking forward to.

Okay, I understand.

Okay, and then following on the announcements earlier this week, you know, more lives covered, it is kind of an ongoing addition of lives over the past couple of years, in fact.

How do you see that affecting the overall payment rate on the reimbursement side, or is there anyway to kind of quantify these types of announcements as we go forward?

Yeah, when you take a look at signing insurance contracts, there's a couple of very important benefits.

Number one, when an insurance company agrees to pay for the product, it significantly increases its credibility.

Number two, if I'm an ambulatory surgery center, I have two choices.

I can either use I-Flow's third party billing program, or I can bill it myself and keep the difference.

If an insurance company has agreed to begin to pay for the product, then there is a high probability that me as a surgery center is going to do their own billing.

So as we get more and more contracts, it makes it easier then for a surgery center to do their own billing if they so desire to do that, which then gets them to use the product even more.

And third, it means that I'm going to get paid more often.

So any of my third party billing, I know for a fact now, that the insurance companies that I have contract with are number one, going to pay me; number two, they're going to pay me within a reasonable period of time, and therefore my no-pays go down.

So there's a lot of benefits every time we sign one of these contracts.

Right, okay, and then on the competitive front, I know you talked about, you know, broadly competitive introductions in the market, but more specifically, you know, we've been hearing about a product, that was 510(k) approved, I believe, back in March.

Have you seen that one specifically out there or hearing any noise surrounding that product?

We haven't seen any new products at all, and again, like I said earlier, is that we welcome more people into this market if they want to come, because what they're going to do Matt, is they're going to increase the awareness.

I don't believe there's any question that we have the best products, we have without question the widest range of products, and anybody coming in significant, that could increase awareness, is going to help us.

Again, all ships rise with the tide --

I understand.

-- so we'd expect to benefit.

Okay, thanks a lot guys, I appreciate it.

All right.

Thank you, ladies and gentlemen. [OPERATOR INSTRUCTIONS].

Our next question comes from the line of Jim Molloy from Oppenheimer; please go ahead.

Hello, Jim

Hi, thanks -- hi, how are you?

Fine.

Thanks for taking my call.

Congratulations on making profitability, the first time.

I had a quick question for Jim, and then a couple for Don.

Jim, could you break down on the COGS, how it breaks down between product sales and rentals and on the G&A between selling and marketing and general and admin?

I don't have the cost of sales breakdown with me Jim.

If you want to call me later, we can talk about that.

And you also were looking for G&A versus sales and marketing?

That is correct.

Yeah, G&A number was $5,696,000, sales and marketing was $15,645,000.

Okay, then Don, I know that the ASCs -- the new agreements that were signed are very important for penetrating the ASCs, could you talk about how the mix between hospitals and the ASCs were in the quarter, how that may change with the -- with this new plan in place and what kind of reimbursement you'd expect to get.

Well, if we take a look at the total revenues in the second quarter, of that $884,000 was ASC.

So -- that -- that's the billing stock, that's the billing portion of ASC.

By the way some ASCs purchase product and I don't know that separation, but I do know what we billed was about $884,000.

So you could figure out the percentage there.

I don't see that changing drastically as we go forward, because both sides of the business are going to grow.

So I don't have a look on how the mix could change going forward, but because when we sell a product into surgery for hearts, we sell it for about three or four times what we actually recognize if we do billing in a surgery center.

So the mix is probably going to stay fairly close the same.

Does that help you Jim?

Yes, it does.

I guess the final question.

The new GPO deal, is there any way that there's an inventory selling into that new deal or is there any opportunity for an inventory stocking in any of these quarters?

No, we don't do inventory stocking, that's not something we do, because we don't have hardly any distributors, and the distributors we do have are very, very small, you know, taking very small territories where there's very few [humans], so we don't have a distribution stocking issue.

However, the key thing about signing a GPO like Broadlane is Broadlane in the past has buying -- been buying pain pumps from competitors.

We will now target all of those accounts and we will go in there and we will tell them that we are now the exclusive product on contract and they need to switch.

That's where the big advantage is.

And so we're going to pick up sales of pain pumps just by switching our competitors.

And that's one of the big advantages to Broadlane, because they've been buying pain pumps, I believe since 2003, maybe even 2002 from other competitors.

So we think that's very, very important.

All right.

Thank you very much Don.

Okay.

Thank you.

Our next question is a follow-up question from William Plovanic with First Albany Capital, please go ahead.

Hi, actually it's Brian for Bill this time.

Hi Brian.

Hi, how's it going?

Fine.

Two more questions quickly in terms of the C-bloc, you said that was up year over year, was it up sequentially at all?

Yes, but I don't have that number in front of me; it's building every quarter.

Okay, and for Jim, what were the international sales in the quarter?

Hang on a second, Brian, $8.5 million.

Okay, that's it, thanks very much.

You have another --

Brian, I grabbed the wrong number there, 3.5.

Brian, did you get that.

He's off.

Yeah.

He's out there.

$3.5 million.

Yeah, numbers are too tiny.

[Say it -- it helps to count].

All right.

Our next question is another follow-up question from the line of Matt Dillman with Roth Capital, please go ahead.

Hi guys, just a real quick one for Jim.

Any share buybacks in the quarter?

No.

Okay, and any plans going forward, is that still outstanding?

We have no plans going, no particular plans going forward, it's management discretion.

Okay, thanks.

Our final question is a follow-up question from the line of Adrian Dawes with Hartwell.

Please go ahead.

I'm just following up from the last comment.

You -- just so for clarity's sake, you haven't purchased any stock in the quarter to date in July?

No.

Okay.

As you look out over the next six, twelve months, what do you think are the greatest challenges in terms of realizing the sales growth objectives that you have?

What are the greatest obstacles?

Yeah.

Challenges?

Yes.

I think it's keeping our sales force motivated.

Just keeping them motivated, keeping them focused.

You know, if you remember my discussion about awareness.

Making sure they stay in their existing accounts and grow them while at the same time they are being pulled in many directions to open up new surgeons, to go in and teach new surgeons how to use the products.

So it's just a matter of making sure they stay on track to deliver the numbers and not get pulled away into a lot of trials and stuff that they can't support.

So it's all about execution and it's execution by our sales team and them staying on track.

I don't know what else to say.

What proportion of the quota-carrying sales force hit quota in the second quarter, tying into Jim's comment about the higher commission levels?

We had an all-time record.

We had 44% of our sales reps make quota; never happened before.

It's a very good thing and that's why our revenue was significantly greater than most expected.

Great.

Again, congratulations.

We are getting terrific productivity out of our sales organization.

It's become very stable.

Great.

Thanks very much.

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

You may continue with your presentation or closing remarks.

Thanks, Elizabeth.

We believe our second quarter results indicate that we can expect profitability to grow with increasing revenues, giving us additional opportunities to invest in our Regional Anesthesia business.

We will continue to invest in all aspects of our Regional Anesthesia business to ensure that we capture as large a share as possible of the anesthesia business, of the dynamic market for our growing ON-Q family of pain management products, while at the same time we achieve the right balance of profitability and growth; a strategy we believe is the best way to deliver long-term value for our shareholders.

Again, we thank you for joining us today and for allowing us to give you some further insight on our performance this past quarter.

Thank you.

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

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