金百利克拉克 (KMB) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow Third Quarter 2007 Results Conference Call.

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

Afterwards, we will conduct a question and answer session.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, November 1, 2007.

I would now like to turn the conference over to Mr.

Don Earhart, CEO.

Please go ahead, sir.

Thank you, Jose.

Good morning, everyone and thank you for joining us for I-Flow's third quarter 2007 results conference call.

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

Our regional anesthesia business delivered another impressive performance in the third quarter.

The sales of our ON-Q family of products for the relief of post surgical pain up a strong 32% to a quarterly record of $22.3 million compared to $17 million for the third quarter 2006.

Especially strong were our ON-Q C-bloc sales which increased to 159% for the third quarter of 2007 to $4.5 million from $1.7 million for the third quarter of 2006.

Sales of the two new larger capacity.

C-bloc pumps introduced earlier this year, that enabled a longer therapy primarily in orthopedics remained strong.

And in keeping with our previously announced guidance, we continue to expect growth in our regional anesthesia business to exceed 30% for 2007.

Sales in our IV infusion therapy, business decreased 14% to $5.9 million for the third quarter of 2007 from R6.8 million last year.

Those of you who have followed I-Flow for a while know that our IV infusion therapy business has a long history of quarterly volatility.

So this decrease was neither unusual nor unexpected.

Despite this to decrease our total revenue from continuing operations, regional anesthesia plus IV infusion therapy, increased 19% to $28.2 million from $23.8 million for the third quarter of 2006.

Based on IV infusion orders presently in-house and scheduled for shipment this quarter we continue to expect growth in our total revenue from continuing operations to exceed 20% for the year.

Our cash position for the third quarter increased to $32.6 million at September 30, up more than $3.6 million compared to where it was at the end of the second quarter and up nearly $5.2 million compared to where it stood at the end of 2006.

In addition to the Company's losses narrowed and bottom line results exceeded expectations.

Our focus in the regional anesthesia business is to continue increased usage of our proprietary ON-Q products for relieving pain after surgery without narcotics.

As we extend our track record of rapid growth and ON-Q sales quarter after quarter, year after year, we are increasingly confident that our products ultimately can replace narcotics as the standard of care and a multibillion-dollar post surgical pain relief market.

We are moving aggressively to build our ON-Q franchise by continuing to invest in our sales force expand our marketing program and initiate new clinical studies designed to confirm ON-Q 's benefit in areas other than post surgical pain relief.

Our ON-Q sales organization now numbers approximately 190 quota carrying sales professionals on a 290 person sales person team.

We are supporting the sales force with the aggressive marketing programs that include trade advertising, C-bloc educational centers and fresh collateral material on a routine basis.

We continue to invest in independent clinical studies which have played an important role in helping I-Flow established a position of market leadership for our ON-Q products among opinion leading surgeons and hospitals across the country.

To date, more than 60 studies have unequivocally demonstrated the efficacy of ON-Q products and relieving post surgical pain in a variety of surgical procedures.

More recently, we are seeing compelling clinical evidence that in addition to providing effective relief from post surgical pain, ON-Q may also significant protection against surgical site infections.

These findings are very exciting because they show that ON-Q has the potential to address the even broader market for surgical site care in addition to the already large market for a post surgical pain relief.

I'll have more to say about this later in the call.

Before I turn the call over to Jim to review the financial results in detail, let me comment briefly on the recently completed sale of our InfuSystems subsidiary to HAPC Inc.

On October 25, 2007, we sold in InfuSystem for $100 million, plus a contingent payment right up to a maximum of $12 million.

The $100 portion of the purchase price consisted of $67.3 million in cash and a secure promissory note with the principal amount equal to $32.7 million.

Prior to the closing on October 19, we announced that I-Flow has acquired 15% of the outstanding shares of HAPC in a private transaction.

Our investment in HAPC helped get the transaction done.

Since of course, we voted in our shares in favor of the deal.

But it really did a lot more.

It allows us to continue to benefit from the growth we believe is in InfuSystems' future and even as we focus all of our efforts and resources on building our ON-Q franchise.

So we see I-Flow's investment in HAPC as a win-win transaction for our shareholders.

Jim?

Thanks, Don.

Before we continue please note that this conference call will contain 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 Corporations' 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, 2007 revenue from continuing operations increased 19% to $28.2 million from $23.8 million for the third quarter of 2006.

The increase included the effect of a 32% increase in regional anesthesia revenue over the prior year quarter.

IV infusion therapy revenue decreased 14% to $5.9 million for the third quarter of 2007 from $6.8 million a year earlier due to the timing of orders from a large distributor.

Gross profit improved to 73% for the third quarter of 2007 versus 71% for the third quarter of 2006 primarily the result of the increased contribution of higher margin ON-Q products to total revenue in this year's third quarter compared to last year.

Net income for the three months ended September 30, 2007 including both the continuing in discontinued operations was $1.2 million including stock-based compensation expense of $2.0 million.

This compares to net income for the three months ended September 30, 2006 of $13.6 million including stock-based in compensation expense of $1.4 million and an income tax benefit of $15.6 million recorded during the third quarter of 2006 due to a partial release of the valuation allowance for deferred tax assets.

Reflecting the expansion of the Company's sales force and marketing programs SG&A expenses from continuing operations increased 22% to $21.6 million for the third quarter of 2007 from $17.7 million for the third quarter of 2006.

SG&A expenses from continuing operations included stock-based compensation expense of $1.8 million and $1.3 million for the third quarter of 2007 and 2006 respectively.

The loss from continuing operations net of tax for the third quarter 2007 was $0.8 million or $.03 per basic and diluted share, this compares to income from continuing operations net of tax for the third quarter of 2006 of $14.4 million or $.59 per diluted share, which included a tax benefit of $15.6 million.

Income from discontinued operations, net of tax for the third quarter of 2007 was $2 million or $.08 per basic and diluted shares.

For the third quarter of 2006 net loss from discontinued operations, net of tax was $0.8 million or $.04 per basic and diluted share.

At September 30, 2007 I-Flow reported net working capital from continuing operations of approximately $59.8 million, including cash and cash equivalents and short-term investments of $32.6 million.

No long-term debt and shareholders equity of $100.8 million.

Don?

Strong clinical evidence is emerging that in addition to pain relief.

ON-Q may address and the even broader market for surgical site care.

A major multi-centered study presented in September at the 47th Annual Interscience Conference on Antimicrobial Agents and Chemotherapy we are out refer to that as ICAAC in this discussion concluded that ON-Q PainBuster with ON-Q SilverSoaker anti-microbial catheter was responsible for reducing surgical site infection rates following colorectal surgery.

Infection rates were reduced by 55% and hospital stays were shortened by more than 2.3 days when compared with traditional narcotic pain care.

ON-Q is the only pain relief pump to include an antimicrobial catheter and the first and only two document and infection reduction capability.

This is especially significant in view of the recent announcement by the centers for Medicare and Medicaid Services or CMS that for discharges on or after October 1, 2008 hospitals will not receive additional payment for patients in which certain conditions were not present on admission such as hospital acquired infections.

Based on the findings of this colorectal study, once surgical site infections become part of the new CMS program ON-Q 's potential to help hospitals reduce the number of surgical site infections could save them billions of dollars.

They randomized multi-centered study compared to two types of treatments for post-surgical pain relief.

ON-Q PainBuster with ON-Q SilverSoaker and a local anesthetic, versus systemic narcotics following colorectal surgery at 12 US hospitals.

The study measured surgical site infection rates 30 days after surgery and length of stay for 289 patients, including any hospital readmissions or other necessary infection treatments after the patients were released from the hospital.

Colorectal surgery was chosen for the study, as it is the most infection prone surgery and most hospitals.

Results showed that the ON-Q patients were less likely to develop surgical site infection when compared to the control group.

6.6% for ON-Q versus 14.6% infections for the control group.

Be patient average length of stay dropped to 6.1 days for ON-Q patients from 80.4 days for the control group, a 27% reduction.

These results are impressive and potentially very significant as the new growth catalysts for I-Flow.

Immediately following the presentation at ICAAC we began to process of educating surgeons and other healthcare professionals nationwide.

We feel that it is important to quickly raise the level of awareness of the study's dramatic results.

So we have provided our sales force with copies of the study.

The key thrust of our message is that ON-Q PainBuster with ON-Q SilverSoaker appears to significantly reduce the risk of surgical site infections and length of hospital stay and patients undergoing abdominal surgery.

We've plan to expand these marketing efforts in 2008 after we learn more from a market research study that will be completed shortly.

I trust many of you read the Investor Business Daily article on October 26, 2007, which began with and I quote, "Two things you don't want in a hospital -- infection and pain." The reporter keenly picked up on the fact that the colorectal study points to reduce the infections that ON-Q's approved FDA labeling for treating pain confirms it provides significantly better pain relief.

In the future, we plan to initiate a study to assess the impact of ON-Q PainBuster with ON-Q SilverSoaker on the incidence of pneumonia and surgical site infections in patients undergoing heart surgery.

This study is being designed to address ON-Q's potential to reduce the incidence is of these life-threatening complications and heart surgery patients.

If the findings are positive, the study results could further expand the addressable market for ON-Q.

I'll have more to say about this new study during 2008.

Now, Jos we are ready for the first question.

Thank you.

(Operator instructions).

And the first question comes from the line of Brian Wong of Broadpoint Capital.

Please go ahead.

Hello, Brian.

Good morning, and thanks for taking my call.

Just was wondering first a couple of housekeeping questions.

Jim, what was the sales and marketing and G&A break out?

The G&A number, Brian, was $4.352 million so therefore sales and marketing is $17.208 million.

Okay, great.

And then, in terms of your ASC efforts how is that going.

Is there any quantitative or qualitative measures that you can give us for that?

On the ASC effort?

Yes.

Well, as the business grows, the ASC portion becomes smaller you're talking about the third party billing?

Or are you talking about sales?

Sales, ambulatory surgery center sales?

Sales are growing.

The billing portion is not growing.

More and more surgery centers are doing their own billing now which is exactly what we would like them to do.

And so the number of third-party billing has gone down while the number of sales has gone out and by the way many of those sales have gone our C-bloc business.

That's really what we promote now and ASCs.

So that is they opportunity for the ASC to get reimbursed so therefore they do their own billing.

Got you.

Okay.

Thank you.

And then one more question for Jim, what was your international sales for the quarter?

International?

Yes.

It was about [technical difficulty]

Sorry what?

It was just under $8 million.

It was just under how much?

$8 million

$8 million, and then lastly, you are a little bit lighter on the -- [technical difficulty]

Brian?

Excuse me.

Yes.

Brian, I'm old and blind here.

I picked up the wrong two numbers.

I've got a really long spreadsheet here, hang on a second.

Okay.

It looks like $4.3 million

$4.3 million

Yes.

Sorry.

For the quarter?

Yes.

Okay, I was going to say that was a little bit high but-- obviously your numbers came in below consensus.

I was wondering if you could tell us a little bit about what happened invest in the sales force kind of losing focus because of what was going on with InfuSystems or what?

Well wait a second now, Brian.

We came in with what we said we would do.

So we hit our targets.

So no we don't see any problems.

Third quarter is always a little bit iffy, because we have a we have the vacations by the surgeons, we have vacations by the sales force.

So it is always a little bit of a crapshoot to exactly what you're going to do in the third quarter, but we've always said that, but we hit our guidance.

So, no.

I don't know of any reason why we did or did not hit your consensus.

Okay.

That's fine.

And then lastly, you said you had 190 quote carrying reps 290 total.

Maybe you could tell us how that's grown over the last couple quarters in where you expect that to going into '08?

Whether that could grow significantly or are you okay with where it's at now?

Well, that number has been in place since the second quarter.

We did our hiring in the first quarter.

So the second quarter numbers were almost the same.

Third quarter numbers we did you view and fourth quarter numbers will be very similar.

Now, we do have authorization for 200 sales people quota carrying, but you're always a little bit below that and of course, the total number for the sales force could be as high as 300.

So between now and the end of the year, we will hope to fill some of those positions, if not all.

But there is always some level of turnover there is always some level of empty positions.

So we will add selectively, where it makes sense.

But we're not talking about any wholesale hiring.

Okay do you expect that to stay the same then around the 300 level total for '08 as well or do you expect to add significantly.

there are no plans at this time to add significantly in 2008.

Again, we might add some people but it should be a small percentage.

Okay.

Great.

Thank you, I'll jump back in the queue.

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

Please go ahead.

Thanks.

The large distributor that was the reason for the IV infusion issue, can you say who the distributor was?

Yes, that's B-Braun?

Okay, so if it weren't for B-Braun, that entire 14% down year-over-year would have been actually up year over year.

Are they that big of a distributor?

It probably would have flat.

And by the way, Alex, those orders are in fourth quarter.

Okay so should we interpret that to mean that the fourth quarter will be that much higher than it would otherwise would have been?

No, I think what you should interpret is that we'll probably make our guidance in the fourth quarter.

Okay, you're --

We won't have a down quarter.

We don't expect to have a down quarter in IV.

Okay.

You're full year guidance -- when you say your guidance is what you mean?

Yes.

Alex, Okay.

Is the ON-Q gross margin still running around 92%?

I would say they are between and 88% and 92%.

We had very good gross margins this quarter obviously because we continue to sell larger pumps and our overall gross margin, as you know, because of the mix was actually very strong because IV was weak.

Yes, that's the reason I'm asking because you're overall gross margin was significantly higher than we had it because of your mix shift though we tried to back calculate what the gross margin would be for the IV Infusion Therapy business and if we assume that ON-Q was at 92% we get essentially 0% margin for the IV Infusion Therapy.

Is that business basically running at 0 margin?

Now, what we've said before.

No, it's got more than 0 gross margin.

But we would look at our gross margins in our ON-Q business as being in the high 80s.

Okay.

So you should think of it to be somewhere between 85% and 90%.

Okay and can you give us any similar guidance for the gross margin on the IV Therapy business?

No, we don't give that gross margin.

Okay.

Did you say that the pneumonia study start enrolling?

Not yet.

Any comments on how soon that will start?

I've given them a very important goal to start getting patients on that study in December.

So let's see if they do it, Alex.

You know Roger, our technical guy pretty well.

Roger's going to try to get us patients in December.

Okay and can you make an comment on the length of the entire pneumonia study so we know when we might look forward to some results?

Well, you know because we don't really know what to expect in the way of an incidence right now, we're planning on thing running at least a year.

So if we get patients started in December, we would probably run it all of next year.

But then again, if we start seeing some very good results, that could shorten the study just like it did to colorectal one.

Okay.

But I would plan on a year.

Okay, and then my last question.

The OPPS reimbursement.

Did I hear you correctly say that that's because the ambulance surgery center do their own billing for that you're not aware of how much or how well that reimbursement is going?

Or can you give us any update on how much reimbursement is being received?

Well, what's happening on the third party billing program is we're getting less and less billings.

The reason we're getting less and less billings I think are two reasons.

Number one, more and more of those pumps are being used for nerve blocks which is our C-bloc business which is growing very fast and of course there's all kinds of codes in place for the anesthesiologist and the facility to charge for the pump so it makes no sense to put it through our third party billing.

Second thing is that we believe at the end of the year, and I think it's already started that Medicare has begun OPPS billing in the surgery centers as well, which means that we cannot third party bill for the product.

That's on Medicare patients but we still can on private insurance.

But as private insurance companies begin moving towards the same method as Medicare, we believe that the billing program will actually go away in the future and everything will be sold into a facility as opposed to us doing third billing.

Okay and then independent of the Medicare billing or the third party billing, wasn't there also provision for surgeons to get reimbursed for their time?

To put it in?

For the procedure?

Some surgeons get paid; some do not, Alex.

There is no fixed number where they can get paid all the time.

It depends on the insurance company.

But do you see any trend there?

I know it's a small number but that's starting to get more.

Is that becoming an incentive for some surgeons.

Well, I think -- for C-bloc, of course, there is no issue.

That's the anesthesiologist.

But for surgeons it's still a little bit of a, I don't want to use the word crapshoot, but that's probably what it is.

It depends a lot on the insurance company.

It depends on how well the surgeon is at describing what he does.

But, yes, we are in the process of working with the professional organizations to hopefully sometime in the future get it so it's paid most of the time if not all of the time.

Okay.

All right.

Thank you.

Our next question comes from the line of Greg Brash of Sidoti & Company.

Please go ahead.

All right.

Thanks for taking my call.

Just wanted to follow up on Brian's question as far as the revenue was concerned missing consensus.

I think when I look at it, I see it as ON-Q is down a little bit sequentially and that's something that we haven't been seeing over the last several years.

Are we just chalking this up to seasonality?

Well, now we've said on numerous occasions, Greg, that you could second quarter to third quarter could have a down quarter, a slightly down or it could be slightly up.

We've always said that third quarter looks a lot like second quarter when you come to the ON-Q product line.

In this case it was down a little bit more than most people expected but we didn't see anything in the market place to be concerned about.

We still grew at 32% over the previous year and that's what our goal was.

Okay, good.

I just wanted to make sure there wasn't anything else going on.

There was nothing that we know of in the market place that was unusual and 32% growth isn't that bad.

No, I agree.

I was also wondering if you could just comment a little bit on when we can expect to see an impact on the revenues from this colorectal infection data?

Well, we have to be very careful on how we use that from a marketing standpoint because we are in discussions with the FDA to hopefully get a claim.

So we have to be very careful how we use it.

But we can provide our sales force with the actual clinical study and we will go into a fairly large program in January when we bring the sales force in for the national meeting and we will educate them on how to use the data.

But between now and the end of the year, we don't want them worrying about that right now.

We want them worrying about getting fourth quarter sales.

But some are using it.

Some have not used it yet because they don't totally understand the statistics.

That's what we'll teach them in January.

It is interesting.

I heard a story just this week where one of the representatives that we have in the field, one of our sales reps had dinner with a couple of colorectal surgeons, showed them the study, the results of the study and both of them started to use it immediately.

So they've agreed to use it just based on the study.

Now that's one example, but we believe that once we get out there with the word and they begin seeing the study, that we're going to see more and more colorectal surgeons and abdominal surgeons in general begin to use the product just because of the infection control indications,

Any idea how many potential procedures you can target?

Abdominal procedures:

Yes.

Just a second.

One of my clinical guys says it's well over a couple hundred thousand.

Just in abdominal.

Okay.

Can you also comment maybe the unit versus price growth in the quarter?

Price was up slightly.

We picked up about 2 percentage points in price.

And finally, can you comment a little bit on your plans for the uses of cash from the InfuSystem deal?

In fact, I was actually disappointed, Greg, that it took three of you before we finally got to that question.

We knew that was going to come up.

The best way to answer that is that we just closed on the deal.

So we are evaluating quite a few different things as I speak.

And so the Board's evaluating that, we're evaluating that, we really don't have anything that we want to talk about yet, but rest assured we have put it in a money market account that draws the highest interest we could get and we will evaluate where we want to with that and we'll let you guys know as soon as we've done that.

Okay, thanks Don.

Okay.

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

Please go ahead.

Hi, Mark.

Hello.

On the secured promissory note that's outstanding to InfuSystem, is that going to remain outstanding or do you expect them to replace that with another source of financing?

We're making the assumption that it's going to be there for a while because we don't know their plans.

So I don't really know how to answer that question, Mark, other than what we know is that it's in the bank drawing a very nice interest rate and we're quite pleased with that.

In fact, our interest, just to give you guys a little more color, it looks like our interest for next year will be about $8 million.

Almost $2 million a quarter is what we'll get in interest payments between the money we have in the bank and the note.

And, just on a housekeeping here.

What was the CapEx in the quarter?

Just one moment.

I don't have that number with me.

If you want to give me a call separately I can give you that number.

Yes, I'll do that.

And then the heart surgery study, I know you don't want to give too much detail here, but can you tell us how many patients, roughly, it might be?

We think it will be about 1500 based on our initial calculation.

But again, remember we had a very high number for the colorectal but because the results were so good, we were able to reduce that.

But we're planning on right now, about 1500 and the only thing that's keeping us from starting it today is we have got to get the IRB approved and that's what we're negotiating right now.

So, how many centers would that be across?

Well, I don't know the answer to that question.

But the more centers the better.

Okay.

We'd get to the number faster.

Right.

And can you just provide us an update on the agreement with GE.

How many placements you've made under that agreement?

We've made 30 placements and what's interesting here, Mark, is that it took us a while to get going, but now it's moving fairly fast.

We expect to have all the placements done by the end of the year on the first 40 units.

So we only have about 10 left.

And will you expand beyond that in '08?

I sure expect to.

Okay.

this is a very good program for us, Mark, so we are -- we definitely believe we're going to be expanding it next year.

Okay, great.

Thank you.

Our next question comes from the line of Jim Molloy of Oppenheimer & Company.

Please go ahead.

Hello, Jim.

Hi, thanks for taking my question.

I was wondering, can you comment, I know you said 2% on pricing.

Can you say what the actual pricing actual number of dollar pricing was in the quarter?

It was $198.

$198.

Very good.

And then that's remaining fairly steady from the prior year, $197 in the third quarter of last year.

Any thoughts on when we'll start seeing that move up as these higher margin projects get a large percentage of sales?

Well, that's a tough one Jim because as there's pressure on the smaller sizes, to reduce the price, we keep introducing larger sizes to keep it up.

But again, as our C-bloc program continues to grow at 159% we do believe we'll cross the $200 mark here pretty soon.

And then I think you mentioned that the reps are going to stay flat so before we discussed how you're going to accelerate the growth of the reps and drive for revenue with the InfuSystems' sale.

I assume that the level of reps you have now is encompasses the total number of reps you want to have for the next couple of years?

Well, I don't look out that far, Jim.

I can't predict 2 years out but all I can tell you right now is that the plans for next year do not include a large of hiring of sales reps.

We'll be very selective.

We may hire a few but we're not talking about a large number.

Any comment on -- there was an issue with the shoulder surgery and using a pain pump.

Any comments on how that might impact the ON-Q ?

Again now, assuming that, again, I said assuming that there is a problem with our product or any other pain pump and nobody really knows that, assuming there is, we have moved surgeons away from -- number one we do not recommend the replacement of a catheter into the joint.

If you're going to place it anywhere close to the shoulder, you put it outside the joint which does not seem to be a problem.

And number two, we'd really rather you did a no-bloc and that's really what we promote.

Because with a nerve block there is no question about whether or not there is a danger.

And, you get just as good if not better pain relief.

And everybody gets paid.

So, and of course, we do recommend, I guess, and have been since 2003 the use of epinephrine which seems to be or is pointed towards to being the danger drug.

So, we're already protected.

Now anybody who wants to know more about that can go right to our corporate website and click on the physician column and take a look at our technical bulletin and that will educate you.

That's exactly what we've told the sales force is on the technical bulletin.

So we don't see this thing as effecting our business going forward because we don't promote the use of a pump in a joint and do not promote epinephrine.

Excellent.

My last question.

I know that it was addressed earlier.

The InfuSystems sale just recently closed and you're obviously sitting on a pile of cash, but you've been expecting this for a while now.

Are there two or three top ideas that you would like to do with that cash besides buying a large boat?

A large boat?

I think the best way to handle that is is that I think you would agree with me, Jim, there were some time there before it closed that most people didn't feel it was going to close.

So, it was quite a roller coaster ride.

So, to answer your question is, we have discussed what we want to do with it but nothing serious yet.

As soon as we get some serious things, we'll be sure to let you guys know.

Right now it's in the bank collecting interest.

Thank you for taking my questions.

Our next question comes from the line of Matt Dolan of Roth Capital.

Please go ahead.

Hello Matt.

Hey you guys.

Good morning.

Most of the things have been touched on but just to follow up on the GE deal, Don, when do you expect to see some data in terms of effectiveness of C-bloc combined with ultrasound?

Just one second, let me see how many centers we've got gathering data.

[technical difficulty] My clinical guy tells me probably mid-next year.

Mid-next year.

We'll see some significant data, and by the way, we're collecting data as I speak not in all 30 units, not all 30 centers yet, but we have started collecting data and so, we should have something meaningful to talk about by mid-year 2008.

Okay, but you still expect it to expand either way, without really seeing all the data.

Oh yes, yes, yes.

This is a very good program for us and it's a very good program for the centers.

Okay.

And then in terms of the annual RA guidance of better than 30%, you're year-to-date performance gives you a little opportunity to potentially decelerate growth in Q4.

Is there any reason we shouldn't anticipate continued strong regional anesthesia ON-Q growth there?

Again, we don't give guidance by the quarter, but I can say this much.

I know of nothing today that says that we're going to miss our annual guidance.

Okay.

And then finally on the sales force -- appreciate the update there.

Any turnover?

Sounds like quota-carrying stayed pretty constant.

Can you give us an idea of what turnover might have looked like?

Again, we don't give turn over numbers but it's very low.

You know, we've been pretty solid.

If I were to give a number I would probably say it's probably less than 10%.

Okay, very good.

Thank you guys.

Okay.

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

Please go ahead.

Hello Adrian.

Hello there.

Couple of questions.

First one, in terms of the opportunity to grow market share, what are the things are you working on and prioritizing to maintain the growth rate that we've seen or perhaps improve it as we look out to '08?

Well, we will continue to expand our nerve block program.

We're still adding centers to teach anesthesiologists how to do that.

And as you can see, it continues to grow at a very fast rate.

We will continue with our ultrasound program which is part of our program with continuous nerve blocks.

And of course, now that we have the infection study, we will spend a lot of time getting ready for the national sales meeting in January and then we will provide them with quite a bit of material on how to promote that next year but we think that's going to be a growth driver and then in the mean time we have been in the magazines and the professional magazines with advertising not only on the meta-analysis for pain but we're now we're advertising and giving the results of the clinical study.

So, infection could be a very good significant share gainer for us.

Following on that thought, given reimbursement changes effective October '08 for the hospitals for acquired infections, what are you doing or how will you approach that to stimulate both surgical demand as well as administrator acceptance?

We are in the process right now of gearing up to go after the administrators, the infection control people, the insurance companies and CMS to let them know about these results, so they understand the results.

And we remind them when we meet with them about the changes that are going to take place in October.

Now today CMS has not yet defined all of the items that are going to be in that infection measurement.

Surgical side infections by themselves are not yet part of it.

But there is a lot of talk on getting that part of it by 2008.

One of the other things that we are looking at to grow the business next year is we are looking at surgical epidurals.

Our device could be used for epidurals just like it is used for wound-side.

So we are looking at expanding our product into the epidural area starting with surgical epidurals.

So there are a lot of things we are working on Adrian to increase the growth next year.

Okay.

As we think about the pace of growth of regional anesthesia, there was a question earlier on the fourth quarter which would imply a slowdown if you simply meet the annual target given the success you have had year to date.

Is there anything we should be thinking about that would suggest a slowdown in the fourth quarter?

Historically that has not been the case?

No, we are not forecasting a slowdown.

Okay.

As we look out there for '08, what would be reasonable to expect in terms of growth, a continuation of what we have seen or with the myriad of positive news coming out a step up in growth going forward?

Wouldn't that be a logical conclusion?

I think the best way to answer that question today is we have not given guidance for 2008 yet.

So as we think about all of those things we will be ready to talk about that at the next conference call.

Great, thanks very much.

You're welcome.

(OPERATOR INSTRUCTIONS) And our next question comes from the line of George Dai of M.A.

Weatherbie & Company.

Please go ahead.

Yes, good morning everybody.

Hi, George.

You guys had some interesting results in the exploratory colorectal study.

I'm just wondering, could you comment on your dialogue with the FDA.

That's number 1.

And number 2, do you plan to do a prospective study to better define and better demonstrate the clinical benefit because it seems to be very interesting, however because you guys just stopped the trial design ahead of the previously stated target and some people may have some doubt in the study results.

So could you comment on that please?

Well, George, we have submitted to the FDA I believe 167 patients, which was an interim study, while we were still waiting to get to the 289.

And they have looked at that, they have commented and we are in the process of providing them answers to their comments.

At the same time we are going to add to that 167 the remaining patients to get us to 289.

So we expect to be in discussions with the FDA over the next few months.

Hopefully we will convince them that there is a claim here by the middle of next year.

So our target really with the FDA is to get a claim by the middle of next year.

I don't see anything wrong with our results so I am not sure why I would want to re-do the colorectal study.

And based on the comments we got from the FDA, they haven't criticized our study either.

It is just a matter of convincing them that we have a claim here.

And as you know that is not always easy.

To go after more infection information we think it is a better idea and a smarter idea to go after a different kind of surgery so that we can tell people that it is not just colorectal surgery that there is a benefit, there are other types of surgery.

So that is why we are starting the heart surgery or the CVCT study.

That is the one we expect to get going in December.

So that is really our plan; we don't plan to re-do the colorectal because there is nothing wrong with the one we got.

I guess I understand there is nothing wrong but after your dialogue with the FDA if they require you to confirm your results would you do another study?

No, the only thing we would do with the FDA is if they want more patients we would just add to that which is always something that the FDA could ask for.

So far they have not asked for that, George.

But if they do ask for more patients, yes we would do more patients and just expand on what we have and then we would combine the results of those new patients with our other ones and re-do the statistics.

Alright thank you.

You're welcome.

And there are no further questions at this time.

Thanks, Jose.

These are exciting times at I-Flow.

We continue to build share for our ON-Q family of products in the enormous market for post-surgical pain relief.

And now we are beginning to develop meaningful evidence that ON-Q may also provide important benefits for the even larger market, surgical side care.

Our team is now even more focused with the sale of InfuSystem complete.

And we are determined to take full advantage of the growth opportunities before us.

We look forward to reporting our progress to you on our year-end conference call in a few months.

Thank you.

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

Thank you for your participation.

You may now disconnect your lines.