金百利克拉克 (KMB) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the I-Flow Third Quarter Results Conference Call. (Operator Instructions.) As a reminder, this conference is being recorded Thursday, October 26, 2006.

It is now my pleasure to turn the conference over to Don Earhart, CEO of I-Flow Corporation.

Please go ahead, sir.

Thank you, Tommy.

Good morning, everyone.

Thank you for joining us for I-Flow's 2006 Third Quarter and First Nine Months Results Conference Call.

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

Naturally, I want to begin with the big news.

On September 29, we signed a Definitive Agreement to sell our InfuSystem subsidiary to HAPC, formerly, Healthcare Acquisition Partners, for $140 million in the form of cash and a secured note subject to certain purchase adjustments, based at the level of working capital at the time of closing.

As a result, InfuSystem's operating results have been re-classed as discontinued operations effective in the quarter ended September 30, 2006, and all prior periods presented.

The transaction is, of course, subject to standard conditions and approval by the shareholders of HAPC, and currently is expect to close by the end of 2006 or early 2007.

Why did we decide to sell InfuSystem?

After all, it's been a strong business for I-Flow since we acquired it back in 1998 for about $8 million.

And as we have said repeatedly, we see considerably potential for continued growth in InfuSystem, based on the increasing popularity of using the electronic ambulatory infusion pumps to provide multiple day infusions of chemotherapy drugs to patients at home.

Well, the reason is that we believe our growth opportunity within the large total addressable market in our regional anesthesia business, that is our ON-Q franchise, is even better.

In truth, it has been increasingly more difficult to focus and allocate resources effectively, when faced with fueling the growth for two such high-flying businesses..

So the critical point is that upon closing the proposed sale of InfuSystem will represent an exceptional value to our shareholders.

And it will also enable us to concentrate our efforts on the tremendous long-term growth opportunity we see in our propriety ON-Q franchise.

Our third quarter results really highlight what I am talking about.

For the three months ended September 30, 2006, regional anesthesia revenue increased 34% to $16,972,000 compared to $12,713,000 for the third quarter of 2005.

For the first nine months of 2006, regional anesthesia sales were up 34% to $48,296,000 from $35,995,000 for the same period last year.

This strong performance was driven by continued growth and sales of our proprietary family of ON-Q products for the relief of post surgical pain without narcotics.

Particularly encouraging were sales of our recently introduced ON-Q SilverSoaker line of products, which offer enhanced antimicrobial properties as an added layer of protection against the risk of infection .

Our ON-Q tunneling accessories, which are expanding the market for our proprietary ON-Q PainBuster by delivering even better outcomes, especially in large incision surgeries, and by our ON-Q C-bloc, which is proving especially effective in orthopedic surgery.

ON-Q C-bloc revenues have been especially strong this year.

They increased 168% in this year's third quarter to $1,739,000, from $607,000 in the prior year quarter.

For the nine months ended September 30, 2006, C-bloc revenues increased 168% to $4,287,000 from $1,598,000 in the prior year period.

In the future, we plan to focus even more of our resources on nurturing and growing this aspect of our business.

These results demonstrate the power of our strategy to redefine recovery and establish ON-Q as the treatment of choice for the relief of post-surgical pain.

The productivity of our sales force continues to be strong as they sell more of our unique and premium-priced products, which deliver even better outcomes for patients and hospitals alike.

The increasing effectiveness of our sales team is evidenced by the 34% increase in the regional anesthesia revenue for this quarter, as compared to the same period last year.

The 34% increase is made up of an 18% increase in units sold, plus a positive mix change toward bigger pumps and more accessories, resulting in a 16% gain in average revenue per pump.

Our initiative to sell better outcomes, and therefore, bigger pumps and more accessories like tunneling, is working.

As we've highlighted in the past, more than 55 third-party clinical studies have been presented and published, and more than 30 new ones are in process that demonstrate the benefits of ON-Q in improving patient outcomes in an ever-expanding range of surgical applications.

Our carefully targeted co-marketing and advertising programs are working to increase awareness and expand the market potential for our ON-Q products.

Interestingly, market feedback suggests that our missionary work to establish the ON-Q brand is resulting in an upswing in physician and health care professional awareness, especially in surgical specialties like heart, chest, and weight loss, where a surprisingly high ratio of the audience has at least heard of the therapy.

We are also benefiting from the introduction of new ON-Q product.

IN particular, our family of pumps and accessories designed for large incision surgeries.

These surgeries are where ON-Q has been shown to make the biggest different in improving patient outcome.

The bottom line is that the proposed sale of our InfuSystem subsidiary, will allow us to pursue this proven strategy even more aggressively in the future.

We are now developing our plans on how best to use the additional management time and financial resources that will come from the closing of the InfuSystem transaction.

While we have yet to reach any conclusions as to precisely what we will do in terms of expanding our sales force and our marketing programs, and so on, what is certain is that we expect to implement a variety of activities and programs designed to capture a bigger share of the market for post-surgical pain relief than we have today.

We believe we are now the clear leader in this market, but we think that the business is still in its infancy and that there is tremendous growth still to come.

We want to do everything we can to ensure that I-Flow captures as much as what we estimate to be a more than $2 billion U.S. market opportunity, and to do so as quickly as possible.

So while we will not ignore spending efficiencies and eventually delivering a profit, our near term focus will be to drive top line sales as hard and as fast as we can.

Now, I am going to turn the call over to Jim Talevich, our Chief Financial officer, 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 three months ended September 30, 2006, revenue from continued operations increased 31% to $23,813,000, from $18,154,000 for the third quarter of 2005.

The increase included the effect of a 34% increase in regional anesthesia revenues over the prior year quarter.

Total operating expenses increased $2,028,000, or 12%, for the third quarter of 2006 versus the third quarter of 2005, substantially below the rate of revenue growth for the period.

The income from continuing operations for the third quarter of 2006 was $16,835,000, or $0.69 per diluted share, which included stock-based compensation expense of $1,279,000 and an estimated income tax benefit of $17.9 million, due to a full release of the valuation allowance for deferred tax assets.

The Company is currently analyzing its tax position, and the amount of the gain is a preliminary estimate pending completion of final analysis.

This compares to a loss from continuing operations for the third quarter of 2005 of $2,100,000, or $0.09 per diluted share, which included stock-based compensation expense of $686,000.

The income tax benefit was consistent with the guidance in Statement of Financial Accounting Standards Number 109, accounting for income taxes, which addresses financial accounting for deferred tax assets.

The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance when it is more likely than not, based on available evidence, that projected future taxable income will be insufficient to recover the deferred tax assets.

The Company believes that due to the ending sale of InfuSystem, it is more likely than not that future taxable income will be sufficient to recover the deferred tax assets.

Income from discontinued operations net of tax for the third quarter of 2006 was $24,000, or $0.00 per diluted share.

This included expenses of $1,661,000 associated with the anticipated divestiture of the Company's InfuSystem subsidiary.

For the third quarter of 2005, income from discontinued operations was $1,612,000, or $0.07 per diluted share.

The net income for the three months ended September 30, 2006 was $16, 859,000, or $0.69 per diluted share.

This compares to a net loss for the three moths ended September 30, 2005 of $488,000, or $0.02 per diluted share.

At Sept 30, 2006, I-Flow reported net working capital of approximately $65.4 million, including cash and cash equivalents and short-term investments of $24.3 million, excluding $1.5 million in assets held for sale, no long-term debt, and shareholders equity of $100.5 million.

Don?

Believe it or not, the proposed sale of InfuSystem wasn't the only activity going on at I-Flow these last few months.

As I mentioned, support for clinical studies to demonstrate the effectiveness of our ON-Q products in relieving acute pain after surgery is a crucial element of our growth strategy.

Most recently, we announced the launch of an important human study to evaluate the antimicrobial benefits of the ON-Q PainBuster System in colorectal surgeries.

The study, which includes the ON-Q SilverSoaker antimicrobial catheter, will assess the rate of surgical site infections in colorectal patients who receive ON-Q therapy versus those who do not.

As of today, we have enrolled more than 70 patients at six sites with the goal of adding at least 50 more sites.

This major multicenter trial is expected to include more than 1,000 patients and take approximately one year to complete.

We are moving ahead with this human study based on findings from a recently completed animal study, and on a meta analysis of past ON-Q clinical study results that highlights reduced rates of surgical infections versus expected incidences.

A total of 48 studies encompassing 3,011 patients were included in the meta analysis.

The data, which was recently presented at the International Conference on Surgical Infections in Stockholm, showed a significant benefit for continuous wound catheters, such as ON-Q, in lowering the risk of surgical site infection.

Both quantitative and qualitative systematic review identified the benefit and the data was confirmed in a subanalysis by therapeutic area or specialty.

According to the Center for Disease Control's National Nosocomial Infections Surveillance System, over 8% of colorectal surgery patients, and an average of 2% of all surgery patients, may develop surgical site infections often increasing the length of stay in the hospital by an average of seven or more days, and costing the health care system hundreds of millions of dollars each year.

I-Flow's colorectal study is just the latest and highest profile clinical to investigate the benefits of ON-Q in a therapeutic area that would expand the addressable market.

We are not only looking into ON-Q--into how ON-Q may reduce the risk of infection, but we are also exploring combination therapies.

For example, a local anesthetic mixed with an antibiotic to treat pain and reduce the chance of an infection, or a combination of a local anesthetic and an anti-inflammatory to only treat the acute pain caused by the surgery, but to minimize the chance of chronic pain in the future.

We now have at least five studies in process to evaluate the benefits of adding Toradol, an anti-inflammatory drug, to the local anesthetic.

The idea originated from a recently published C-Section study conducted in Belgium where patients who got ON-Q had significantly less chronic pain post-op.

Rest assured, we will continue to fund studies in a wide variety of surgical procedures and applications, including pediatrics, to measure the benefits of reduced infections, chronic pain, and faster healing, the goal being to find more reasons to use ON-Q to treat pain and to identify new markets where ON-Q can provide superior outcomes when compared to current therapies.

This is an exciting time for I-Flow, as we research ON-Q's potential benefits in reducing chronic pain and the incidence of surgical site infection.

ON-Q is already redefining recovery for an ever growing number of post-surgical patients across the country by providing superior pain relief, so that they get back to normal faster.

Proof that we can reduce chronic pain and possibly surgical site infections are important steps in identifying significant new market opportunities for an already successful technology.

We expect our ON-Q business to continue its rapid growth in the fourth quarter.

On the other hand, we expect growth in our IV Infusion Therapy segment, which was unusually strong, both in our domestic and international markets this quarter, to return to its more modest pace beginning in the fourth quarter.

On balance, then, even with the proposed divesture of InfuSystem, we continue to expect growth in total revenue from continuing operations of about 25% for 2006 in total.

Tommy, we are now ready to take questions.

With pleasure. (Operator Instructions.) And our first question comes from the line of Raj Denhoy from Piper Jaffray.

Please go ahead with your question.

Hi.

Good morning, guys.

Good morning.

A couple of questions, if I could.

The 34% growth you guys put up for regional anesthesia in the quarter.

If I'm reading through the release right and some of your comments, I think that included--you said about a 12% increase in selling price.

Is that correct?

I think we said 16, didn't we?

No--16 in the quarter.

16 is based on a mix change to more expensive pumps, not a price increase.

Okay.

I guess what I'm trying to--I'm just trying to sort of get at the underlying sort of unit growth rate here.

I think also included in this quarter was--in the third quarter of last year, you mentioned that there was a bit of a hit from the hurricane.

So I'm not sure if there was a bit of a catch up here.

So, I don't know if you maybe have--just have some comments about sort of what the underlying unit growth rate is at this point.

Well, I believe that we said that our unit growth looks like about an 18% increase, and about 16% of the growth totaling the 34% was due to mix changes, which is sales towards more expensive and bigger pumps to get better outcomes.

Okay.

I guess then, the follow-on to that would be that mix shift.

Where do you think we are in that cycle here?

And do you expect that to play out for another several quarters, or are there other products that are coming down the pipe that should keep that going?

Just some thoughts around that would help--be helpful.

Yes.

We have an initiative with the sales organization to move people up to bigger and better pumps that give longer periods of therapy and also give us better outcomes.

It protects us in several ways.

Number one, surgeons see better outcomes.

Number two, we get the benefit of the additional price and the revenue.

And number three, it makes it that much more difficult for the competition to take that surgery away from us because they just can't compete in that area.

So will it continue?

Absolutely.

We have more and even better products coming to expand the line and to give us the opportunity to do even better outcomes and to do more days of drug delivery than we are today.

So, yes, we are trying to roll out even more products along that line.

So you think maybe something--18% unit growth, and then probably 15 or 16 points of mixed benefit for the next couple of quarters is reasonable?

No, we didn't say that.

Because we've had higher unit growth in the past.

This is the summer quarter, which is the toughest quarter for us, so we thought 34% was pretty good, even though 18% of that's units, we also got the benefit of the mix change.

Okay.

Maybe I should ask a couple other ones as well.

There was a paper published in the Journal of Arthroscopy not too long ago, which I think you probably are aware of, which called into question the use of this therapy in orthopedic surgeries, particularly when it had to do with cartilage.

And I'm curious if you've seen much of an impact of that in your business on the orthopedic side.

No, we've seen little or no impact.

What we have seen is we've seen some surgeons - some orthopedic surgeons - moving to C-bloc, which instead of putting the catheter directly into a surgical site for a knee or a shoulder, they're now doing blocks which eliminates that issue entirely, assuming that it is true.

Because there's a lot of discussion about whether or not that is even caused by Marcaine or Litocaine or anything else.

So, that's not been proven.

But we do know we're seeing a tremendous expansion in our C-bloc business.

And one of the reasons may be because it's just a little bit safer in the eyes of the surgeon.

Okay.

So it actually is--I mean, conversely turning out to be a bit of a benefit as people are trading up to higher priced--?

--As they move to C-bloc, it's a huge benefit for us.

And we are without questions we believe to be the leader in C-bloc.

Okay.

And then, just lastly, I'll just ask one kind of larger picture question.

I mean, here we are, now you guys have +$140 million, or will have shortly, million dollars in the bank.

What are your plans at this point?

I mean, do you think you're going to be adding salespeople here, increased advertising spending?

And you know what that kind of dovetails with is, what are the real expectations for profitability now over the next year?

I mean, can we expect you guys to do something before maybe a year's time?

And when I say something, I mean, put down some positive earnings.

Or is it really going to be just spending for some time in order to drive the top line growth?

Well, I believe we hinted at it.

In fact, I think we actually said it in the conference call.

And that is that we will drive top line as we go forward.

But at the same time, we'll be sensitive to how we spend the money so we don't spend it foolishly.

But right now the focus for 2007, once we close on the deal, will be to drive top line.

Sure, I mean, I appreciate your commentary.

I'm just trying to frame it as we'll put it down in the model.

I mean, do you think you'll actually show a profit then in 2007, or do you expect a loss for the full year on an earnings basis?

Again, I don't project those kinds of things.

But I think you can assume that our emphasis will be on driving revenue.

Okay.

So--.

--Which means we will probably add sales people and we'll increase our marketing efforts to do that.

But I guess at this point you're not willing to sort of frame what those look like?

No, we're not prepared to do that.

We don't have the money in the bank yet.

When we get the money in the bank, we'll be in a position to talk a little bit more about it.

But we are framing those plans back here in Lake Forest.

Okay.

That's fair enough.

We look forward to seeing what you guys do.

Thank you.

Thank you very much.

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

Please go ahead, sir.

Great.

Thank you.

Good morning.

Hi, Bill.

A couple of questions here.

First of all, could you just expand a bit on your commentary on more and better products coming to expand the product line?

Give us a taste of what that might look like?

Yes, Bill.

We've already developed and we soon launch another line of tunnelers, the first line of tunnelers were for longer incisions.

We're getting a lot of requests to do tunneling for smaller incisions as well.

Especially foot surgeries, ankle surgeries, wrist surgeries, those kind of things.

We are also going to be launching a triple, which now you can drive three catheters at the same time.

In fact, we actually have a small market where we've placed those, but we will expand that across the entire country probably before the end of the year.

But believe it or not people are asking to be able to drive three catheters.

So that triple is already developed, it's already in the small market and we will expand that.

We also have on the drawing board and will launch before the end of the year, a 600 ML device.

The largest we have today is a 400, but we will launch a 600, which by the way can be overfilled to 750 MLs, which now allows you to do a five-day continuous nerve block, which is pretty exciting because nobody's been able to do that without using electronic pumps.

So those are the kind of things we're doing and that's just some of the things we're looking at.

: Great.

Thank you for that.

And then, in terms of the penetration of the tunneling and the SilverSoaker catheter, both separately into your exiting customer base, could you give us a little color on that?

Yes, we believe our SilverSoaker now--I think the last time we talked was somewhere between 10 and 15% penetrated.

It is now over 20%.

And again, that continues to grow.

It doesn't happen overnight because a lot of hospitals have got to take a look at adding Silver, and that has to go back through approval processes in some cases.

However, with the emphasis on hospitals to reduce their infection rates, we believe that's going to accelerate adoption of things like Silver catheters.

That's what my sales people are telling me anyway.

We're getting a lot of interest now on the fact that we've got Silver.

So I think that will make a big difference.

Any--what did I forget on your question, Bill?

Tunneling--penetration in tunneling.

Tunneling continues to grow very nicely.

We get outstanding outcomes when you use tunneling.

And because of the outstanding outcomes, the surgeons continue to use it over and over again.

Again, what drives this business we believe is, number one is outcomes.

The surgeon's got to have good outcomes or he's not going to use the product.

And then, second, the hospital's got to see a cost benefit.

And so, improving outcomes, we get adoption much faster and the stickiness issue doesn't exist when you do tunneling.

And then, on the penetration of the SilverSoaker, you're over 20% today.

Where do you expect that to go?

We expect that--our goal is to get it to 75.

Okay.

So there's a lot of runway in terms of mix then, especially with the new products coming out.

Yes, and I believe, Bill, as there's more emphasis no reducing infections in the hospital, we're going to see an even faster take-up.

Okay.

And then, just an update on the sales force.

Turnover in the last quarter?

Well, again, turnover has not been any bigger than what we'd expect--any greater than normal.

It hasn't been very much at all.

The sales force is basically the same size as it was in the second quarter, which is the same size it was in the first.

So we're still seeing total sales organization management, clinical, as well as territory reps, of somewhere between 250 and 255.

And then, how many reps hit quota this quarter?

We had about 63 reps hit quota this quarter.

Out of?

Out of quota-carrying reps of about 194.

So, that's about a third.

Yes.

So a little less than last quarter.

But it seems like you're starting to see seasonality for the first time in your business.

Yes, we saw it in second--we saw it in the third quarter.

And it seemed to be an unusually light quarter for surgeries.

We got a lot of comments back from the field that the ORs were empty.

However, we still managed to grow 34%.

Right.

And then, the--you talked about spending upon the sale of the InfuSystems business.

Can you give us two things - one, timelines or milestones we can look for that we're reaching the closing of this?

And then, secondly, you talk about growing the sales force in '07.

Is this something in the magnitude--assuming the completion of the sale--is this a magnitude of 10 to 20%, or is this another large scale expansion?

No.

I think you can assume it will be somewhere between 10 and 20%.

I don't think we're going to have to grow it anymore than that.

And you're going to see a lot more emphasis on C-bloc and you're going to see emphasis on other programs that are going to help the sales rep get traction even faster.

But I wouldn't put a sign anymore than say if we hired 50 more sales people, 40 more sales people, somewhere in that neighborhood, would be a pretty good guess, Bill.

And then, just milestones on the InfuSystems.

And I'll jump.

And I have more questions, but I'll jump back

Yes.

The InfuSystem thing - right now, we are waiting for HAPC to file their proxy with the SEC.

And then it's anybody's guess as to how long the SEC will have the proxy before that's approved.

And then, once the proxy is approved, then we have a shareholder vote.

That shouldn't take more than 30 days.

So the end of the year is pretty tight, but we think the first quarter is still a very good number in terms of the timeline.

Great.

Thanks.

I'll jump back into queue.

All right.

Thank you very much.

And our next question comes from the line of Mark Richiter from Jefferies and Company.

Please go ahead, sir.

Hey, guys.

How are you?

Hi, Mark.

Most of my questions have already been answered, but I have a few additional.

First, could you remind us what your gross margins are for the IV therapy as well as the RA businesses?

And then, how you--how we can look at sort of blended operating margins going forward as I think the oncology services was somewhere around a 30 to 35% operating margin business?

Well, number one, Mark, we don't give operating margins on the two separate businesses.

On the RA business, of course, that would be negative.

But if you want gross margins--.

--Correct.

Gross margins on the IV business are between 40 and 45 %, depending on mix for any given quarter.

And on the RA side, it's between 85 and 90%.

Okay, perfect.

Thanks, that's helpful.

And then, just on the repurchase program, any thoughts there based on the cash coming in from the divestiture?

Again, as I alluded to in my conference call, a stock buyback as well as sales force expansion, as well as marketing programs et cetera, all of those are being discussed and looked at, but no decision has been made on exactly what to do, and we really can't do anything until the money's in the bank.

Right, sure.

But clearly, this has been discussed.

And you are considering it, of course.

Well, we already have a buyback program in place.

The question is do we expand it?

Correct:

Yes.

And then--.

--But they're all being looked at, Mark.

Okay, perfect.

And then, what are your plans for the--your IV Therapy business?

I mean, clearly that performed well in the quarter.

I mean, is it fair to assume that that could be the next business on the block here?

No, I don't think so.

The IV business fits very nicely with our regional anesthesia business.

Again, you're talking about the same kind of delivery technology.

And, in fact, the RA business was actually borne or came out of the technology and the IV business.

So, they're both manufactured in the same plants.

They sell very nicely together.

It's a drug delivery system, both of them are.

So, no, I don't think you can assume that.

Okay And clearly, selling the oncology services business makes you clearly a much more likely pure play acquisition target.

Our contacts have been telling us that people are poking around.

I mean, any comments that you can make on that front?

Now, Mark, you know I can't talk about things like that.

When something important happens that we can talk about, you'll be the first to know.

How about that, Mark?

But it would make sense, right, with the divestiture of this oncology service?

I mean, it would make sense, right?

Well, now, Mark, you know I can't answer that either.

I'll get in trouble.

But let's just say that it makes us a little more of a pure play.

Okay?

You're a tough nut to crack, but thanks so much.

Okay, Mark.

Thanks a lot.

And our next question comes from the line of Mr. Adrian Duff of [Hartwell].

Please go ahead with your question.

Hi, Adrian.

Actually, it's Bill Miller.

Oh, Bill.

Okay.

Hi, Bill.

I can attest to the fact that it works wonderfully well on orthopedic procedures and the Columbia Presbyterian, at least, among other people who is trying to implement a wider program.

But that's not my question or comment.

I have two, Don.

Okay.

One, could you talk a little bit more specifically about the study--the infection study?

How soon do you think you may get any results that will be meaningful in terms of labeling FDA approval, et cetera?

And secondly, how that study could contribute to your growth?

But more importantly, what gating factors do you have on your growth for next year?

The 34% is pretty heavy growth.

Obviously, if you're going to concentrate on it, we'd expect faster growth from that.

But if there are any gating factors that we should know about, would you please give us that indication now and let's get going.

Let's not worry about [inaudible] relevant to the question.

Thanks.

Well, let's take the colorectal study first.

The goal being to get up to about 25 sites, which will allow us to get to that 1,000 patients much faster.

If we are successful in doing that, Bill, then I think we're looking at having our 1,000 patients sometime by the middle of next year.

And then it's just a matter of what do we do with the data.

After we've analyzed it, do we publish right away?

If we publish, it takes a while.

But, I mean, if we do a poster board, for example, we could probably do that fairly quickly.

So you've got to be thinking in terms of second quarter of next year probably on that study before we hear anything.

But again, I think when I first talked about the study, we thought we'd get five to 10 sites.

It looks like we've got so much interest, that we're going to have 25 sites, which is going to allow us to move much faster.

But again, you're still talking about 1,000 patients and sometime middle of next year.

On that second question, what are the gating factors?

Again, I don't want to talk too much to that right now, Bill, other than to tell you that we are looking at expanding the sales force, we are looking at more marketing programs, probably more of a local effort where we do more marketing programs that help us in a specific area, as opposed to national.

And we are looking at expanding our effort in areas like C-bloc, heart, thoracic, the surgeries that we get great traction, and we have still a lot of opportunity.

What did I forget, Bill?

Well, I guess the what-if game as follows, Don.

Supposing you get the study and it comes back as you hope it will, and as we all expect it kill, where it's showing a significant or even a slight 20% or whatever reduction in the infection rate.

At that point, how can you exploit that opportunity?

How quickly will you be able to exploit that opportunity?

Will it take you into completely new fields?

Will it expand the market from 2 billion to 10 billion?

I mean, give us some range of expectations, should that be a study which comes to the same conclusion we think it will, which is that it significantly or it slightly reduces the infection.

What are the implications of that on surgeries, on post-op, et cetera?

And secondly, how will you be able to exploit it?

Will you have to put new salesmen on, will you have to go into other kinds of adventures, or will it just--business just kind of come to you?

If we can show a significant difference in infection rates by utilizing our product, delivering a local anesthetic, or possibly even a cocktail - a local anesthetic and an antibiotic - we will have what I think would be a super home run.

The size of the market would be significantly bigger than what we have today.

We do have the sales organization in place to take advantage of it.

The--we would probably have to add more clinical people initially, just to do in-services, but selling it would not be a problem.

The hospitals I believe would adopt it as a prophylactic against infections because the savings is absolutely astronomical, plus the fact I don't think any patient in the country would want to go in for surgery anymore with a chance of an infection and not have this product, if it's proven to reduce significantly that chance.

So Bill, all I can tell you is that we'll probably put a large office--a large building up with nothing but phones and people in it, so we can just answer the calls and send out nurses.

Well, that sounds terrific, Don, but if we're--.

--That would [inaudible]--.

--Seasonally slow third quarter, and we think we're going to go for growth, which I heartily applaud, that would imply that next year your expectations for growth are at least higher than 34%.

Is that a safe assumption, even without the study coming to the fore?

Now, Bill, I don't want to address that at this time.

Let's wait until we get all of our plans in place and we have the money in the bank.

Fair enough.

Look forward to that.

Okay.

Thank you, Bill.

Thank you.

Thank you very much.

And our next question comes from the line of Mr. Jim Molloy of Oppenheimer.

Please go ahead, sir.

Hi.

Thanks for taking my question.

Hi, Jim.

How are you?

Have you guys touched on how many procedures were done in the quarter?

And another--the RA has shown a great growth in the quarter, but it was the first time I think it declined sequentially quarter-to-quarter.

A little more color perhaps on what happened there?

Well, I think it's what was said earlier is that we finally hit seasonality.

But I did say on the last conference call that you should expect third quarter to look very much like second quarter.

And I think we're within a couple hundred thousand dollars of being just like second quarter.

So, Jim, it shouldn't be a surprise.

But we did have seasonality in the third quarter.

There were fewer surgeries than we saw in other quarters.

Any color on the number of procedures that were performed in the quarter?

Well I think you could take the revenue and divide by somewhere around $195 and you can get the number of procedures probably.

It would give you a good estimate.

Because we are selling a lot of accessories now, too.

Even I should be able to do that math.

Yes, I know you could, Jim.

Now, how does the split go between sales and marketing and G&A?

Certainly, SG&A lower than we had thought it might be.

And I think it--how did that break out?

Jim, you want to take that question?

Jim, you're looking for a breakout of our operating expenses between G&A versus selling and marketing?

Yes, sir.

Yes.

The G&A number in the quarter was 3.9 million and year to date it's 9.8 million.

Okay.

And then, I guess, my last question, in the past, you've guided to about 80 million is profitability or breakeven for your business with the current sales force.

Any guidance on where the breakeven might be with your thoughts on expanding the sales base?

Jim, I would like to hold that question until we've finished with our plans and until we close on the InfuSystem deal.

Very good.

Well, thank you very much for taking the call.

All right.

Thanks, Jim.

Thank you very much.

And our next question comes from the line of Mr. Matt Dolan of Roth Capital.

Please go ahead, sir.

Good morning, Don.

Good morning, Jim.

Hi, Matt.

Just a couple of questions.

I'm on a little late, so hopefully it's not repetitive.

But can you give us what the ASC - ambulatory surgery center - contribution was in the quarter?

Yes, Matt.

It's becoming more and more difficult to do that.

But what I can give you is the billing number.

The third party billing number was about $700,000. but two things are happening on that side of our business.

Number one, more and more ASC's are buying the product and doing their own billing.

So we're getting a lot of direct sales on the PainBuster.

And then, number two, there is a big effort in taking those surgeries and using continuous nerve block to treat the pain.

So we're seeing this huge increase in our nerve block business, and that's because a lot of these orthopedic surgeries - knees and shoulders especially - are getting nerve blocks instead of getting PainBuster, where they would either buy or use the billing system.

We do very little billing on the C-bloc side.

And the reason is there is--there are codes in place, so that both the surgeon and the facility can do their own billing and make the money.

So it's kind of an interesting situation where there's more and more people moving towards C-bloc, which does not help us on the third-party billing, but it's a much better deal for us because instead of getting $120 per surgery, we can get something north of $350, and we get cash.

Okay.

And then, on that note, in terms of talking about the sales force--expanding the sales force into '07, is there any weighting towards the ASC or staying in the hospital, or should it stay pretty proportional?

Oh, I think it will stay pretty proportional.

Again, there'll be more emphasis on C-bloc, which will take away from the opportunity on billing if more and more orthopedic surgeons are moving towards continuous nerve blocks to treat the pain.

Sure, okay.

And that would be a huge benefit for us, by the way.

Right.

And then, in terms of C-bloc, could you give us what Q2 was, the contribution of revenue there?

Oh, we had that in the conference call last time.

Okay.

Just a second.

Let Jim see if he can find it.

1.5 million.

1.5 million.

Okay.

And then, one last one and I'll jump off.

Jim, on the gross margin, it came in sequentially down a little bit.

Any color there?

Is that any one-time events here now that we know we've got the normalized business being reported, or is this something that we could model off going forward?

Well, I think one of the significant factors this quarter was that we received a lot of very large orders on our IV infusion therapy products, which as you know, carry a lower gross profit margin.

That was the main thing going on there.

IV had an exceptional quarter in terms of sales volume, both U.S. and internationally.

Got it.

Okay, that helps.

Okay.

Thanks, guys.

Okay.

Thanks, Matt.

Thank you very much.

And our next question is a follow-up questions from the line of Mr. William Plovanic of the First Albany Capital.

Please go ahead.

Great, thanks.

These are a couple of housekeeping questions, Jim.

Could I peg you just a little closer.

You said G&A was 3.9 million.

Could you give us a more exact number just so our models can be up to date?

$3,928,000.

Great.

I really appreciate that.

And then, in terms of the overhead that's applied to the ON-Q business, or the ongoing business versus discontinued.

I mean, is there any portion of the G&A overhead that you, Don, and others in Lake Forest, that's carried on the InfuSystems at this time?

Or is it fully reflected in continuing operations?

It's all in continuing.

Okay.

So there's nothing--that's good.

Okay.

So this truly is a picture of what's going to go on going forward.

And then, can you give us an idea--I don't think you published it, but what was the D&A and the stock comp expense in the quarter, just so we can try to figure out an EBITDA number?

Because I--if I'm right, you were probably EBITDA positive, but I just wanted to get a handle on that.

Yes.

I don't think I've got that depreciation at my fingertips.

The stock comp piece in the current quarter for continuing ops was $1,279,000.

Is it fair to say that your D&A total was at 150,000?

Just look at the cash flow statement from the June 10-Q.

I'm sure it's nearly the same number.

It doesn't change much.

Okay.

And then, I know it's a discontinued business, but could you tell us what the oncology infusion revenue line was in the quarter?

Yes, it was--Bill, it was just short of 8 million and they are still experiencing some after effects of patients that were affected by the shortage who have still stayed on orals.

But more importantly is that we've been blaming [indiscernible] all year for their slowdown in growth.

But that group, the management team, since February of this year, has done nothing but management presentations to potential buyers and has done nothing but due diligence.

So you've got some of my top sales guys and you've got the management team that's been buried in getting this thing sold and hopefully close.

So there's been effort that could have been spent on selling that was done in other things.

Okay.

And then, in terms of the regional anesthesia business, what was the international contribution this quarter for the RA business?

On the international portion of the RA business.

I'm sorry, what was your question, Bill?

The international portion of the RA business.

It's usually a couple hundred thousand.

Yes, I'll have to dig a second, Bill.

And then--.

--It was about $700,000, Bill.

Yes, that's the correct number.

About 700,000.

And then, the last question, I do promise.

Actually, there's two more.

One is, the IV infusion was--I mean, that was a huge quarter.

Anything specifically going on?

Bill, we got the word back from [B.

Braun] who is our largest distributor in Europe.

They don't have all of the countries.

For example, they don't have England, but they have most of the other European countries.

And I guess their sales were up over 13% in their third quarter, which isn't the same as ours because they don't have the calendar set up.

But the other piece of information we did get, which comes out of Scotland, is that Baxter had some serious problems with infusers bursting.

And this is actually dated September 2006, the safety notice that I have in my hands.

And it looks like their large volume products - the balloon portion - has been breaking and bursting.

So, if this is true in Scotland, it's probably true in the rest of Europe, and that might be some of the reason why we're seeing the pickup in the third quarter.

Okay.

So, you're seeing a little market share shift during these times.

So hopefully, you can hang onto that.

They can--B.

Braun will be able to hang onto that.

Well, B. Braun's done a superb job for us.

So, yes, I think we can do pretty good.

And then, lastly, obviously you are waiting for the sale of the InfuSystems business.

Is there any reason why fourth quarter operating expenses would be significantly different, either on the nominal or a percentage of revenues basis in the fourth quarter relative to the third quarter?

From a nominal standpoint, we don't think so.

So from a nominal standpoint, you don't think so.

So we actually could see a little leverage as we move into the fourth quarter is what you're saying.

Yes.

Great.

All right.

That's all.

We expect sales to not be nominal.

All right.

Great.

Thanks, Don.

Thanks, Jim.

Okay.

Thanks, Bill.

Thank you very much.

And our next question comes from the line of Mr. Scott Henry of Oppenheimer.

Please go ahead, sir.

Hello, Scott.

Hello.

Thank you for taking the questions.

Just two somewhat modeling questions.

First, given this tax benefit in the quarter, upon profitability, does that put you more at a 38% tax rate, or how should we think about taxes once you're profitable, given this tax benefit?

That was an excellent guess, Scott.

Yes, 38%.

Okay, thanks.

And this one is somewhat related to the last question.

As we're really kind of getting new financials now, ex-InfuSystem, SG&A as a percent of sales, does that have kind of a quarterly drift to it?

I think you said it was pretty similar Q4 to Q3 on an absolute number.

But is there one quarter more than any other where you have a bounce or a decrease in that number relative to sales?

Just one minute, Scott.

Yes, and not necessarily.

It's usually the--it's usually pretty similar, Scott.

Okay, excellent.

All right.

Thank you for taking the question.

All right.

Thank you.

Thank you very much.

And we do seem to have another follow-up question from the line of Mr. William Plovanic.

Please go ahead.

Great.

Hi, Bill, again.

Yes, just clarification.

So a 38% tax rate.

So if you have a loss, then that would be a benefit?

So your loss per share would be lower?

Either direction, Bill.

Yes, we figured about 39%.

Okay.

Fantastic.

Thanks.

Thank you very much.

Mr. Earhart, there are no more questions on the phone lines.

I will now turn the call back to you.

Thanks, Tommy.

Our proposed sale of InfuSystem marks a fundamental turning point for I-Flow.

While I caution that this transaction has not yet closed, we are excited about the new opportunities the proceeds from this sale will give us to enhance our leadership in this more than $2 billion U.S. market opportunity for post-surgical pain relief.

As always, we thank you for your continuing support.

Thank you, Tommy.

Thank you very much.

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.

And have a great day.