金百利克拉克 (KMB) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the I-Flow Corporation first quarter conference call.

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

Afterwards, we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Friday, May 2, 2008.

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

Don Earhart, Chief Executive Officer.

Please go ahead, sir.

Thank you, Jesse.

Good morning everyone, and thank you for joining us for I-Flow's 2008 first quarter result conference call.

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

Earlier this morning, we announced for the three months ended March 31, 2008, total revenue from regional anesthesia increased 18% to $22.6 million and revenue from continuing operations increased 17% to $28.4 million versus the first quarter of 2007.

Sales of I-Flow's newly formed acute care products business, which includes regional anesthesia revenues and AcryMed revenues combined increased 21% to $23.2 million compared to $19.1 million for the first quarter of 2007.

The loss from continuing operations narrowed to $500,000 or $0.02 per share.

Our first quarter performance reflected I-Flow's continuing evolution into an integrated acute care products company focused on developing and marketing proprietary disposable medical devices that improve patient outcomes.

We believe our strategy to leverage our sales and marketing infrastructure by layering in additional new products for our sales force to sell will deliver sustained rapid growth and enhance shareholder value for the long term, and we are well positioned to achieve these goals.

In our regional anesthesia business, underscoring the value of our ON-Q franchise, the growth in sales of our proprietary ON-Q products for relieving pain after surgery without narcotics, in the first quarter drove a significant improvement in our bottom line.

That said, our sales were impacted by the timing of the March Easter holiday and spring break which resulted in fewer selling days in the quarter.

Compared to a year ago first quarter, our sales people found many surgeons to be on vacation in March so caseloads were lighter than usual, especially in the last two weeks of the month.

ON-Q sales in the first quarter may also have been affected by a broader slowdown in surgical procedure volumes that we heard about anecdotally, read about in the consumer press, and saw glimpses of lower growth in our third-party market research data.

Surgeries like plastics and hernias saw negative trends, and while these do not make up a significant portion of our ON-Q procedure base, the fluctuation likely cost us a few percentage points of growth.

While the first quarter was clearly a challenge for us, today it is unclear to what extent the softness in procedure volumes through March is an accurate predictor of the future or if it simply represents short-term delays in surgeries due to the timing of the holidays and vacations.

We have just completed a very solid April, but one month does not a quarter make, or for that matter, a year.

Rest assured that we are staying laser focused on our regional anesthesia business and will carefully monitor meaningful fluctuations in surgery volumes going forward.

On a more positive note, we continue to see ON-Q C-bloc grow at a substantial rate.

First quarter C-bloc sales versus a year ago increased more than 100% and is fast becoming one of our more important regional anesthesia segments.

More and more orthopedic surgery, such as shoulders, hips and knees, are moving to continuous peripheral nerve blocks largely because of better patient outcomes and reimbursement for the physician.

We will continue to increase our capacity to train anesthesiologists so that they can become part of this fast-growing segment.

Additionally, average selling prices of our regional anesthesia products were up 3% versus last year's total average.

Gross margins were especially strong, increasing to 75% versus 74% in the first quarter a year ago.

Both of these improvements are partially due to the first quarter sales of our larger, more expensive and higher margin ON-Q pump models, many of which were introduced last year, and secondly, to a mix shift away from smaller pumps that are typically used in elective surgeries like plastics and hernias.

We maintained a tight control over total operating expenses which increased only 11% for this year's first quarter compared to the first quarter of 2007.

G&A expenses grew at an even slower rate of 10%.

An interesting statistic to note is that the total number of accounts purchasing in the first quarter was almost the same as the number of accounts purchasing in the year-ago first quarter.

Therefore, we believe the revenue growth in regional anesthesia was a combination of increased usage by existing accounts, or like same-store sales, sales force productivity, and a favorable mix change to larger and more expensive pumps and away from smaller pumps typically used in elective surgeries.

I will have more to say regarding AcryMed, our first quarter performance and the outlook for 2008 after Jim reviews the numbers.

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 or 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 March 31, 2008, revenue from continuing operations increased 17% to $28.4 million from $24.3 million for the first quarter of 2007.

Sales of I-Flow's acute care products, which include regional anesthesia and AcryMed revenues increased 21% to $23.2 million compared to $19.1 million for the first quarter of 2007.

Total revenue from regional anesthesia increased 18% to $22.6 million from $19.1 million last year.

IV infusion therapy revenue increased 1% to $5.2 million for the first quarter of 2008 from $5.2 million a year earlier.

This first quarter performance in IV fusion therapy reflects normal fluctuations in this business due to the timing of orders from distributors.

Gross profit increased to 75% of total revenues for the first quarter of 2008 versus 74% for the first quarter of 2007 due to the increasing proportion of revenues represented by the company's highest margin products.

SG&A expenses from continuing operations increased 10% to $23.3 million for the first quarter of 2008, from $21.1 million for the first quarter of 2007.

We expect SG&A to rise more slowly than revenue in 2008.

SG&A expenses from continuing operations included stock-based compensation expense of $1.4 million and $1.2 million for the first quarters of 2008 and 2007, respectively.

The loss from continuing operations net of tax for the first quarter of 2008 was $537,000, or $0.02 per basic and diluted share.

This compares favorably to a loss from continuing operations net of tax for the first quarter of 2007 of $2.2 million or $0.09 per basic and diluted share.

Income from discontinued operations related to the company's former InfuSystem subsidiary, divested on October 25, 2007, net of tax, for the first quarter of 2007 was $1.3 million or $0.05 per basic and diluted share.

The net loss for the three months ended March 31, 2008, was $537,000, or $0.02 per basic and diluted share.

This compares favorably to a net loss for the three months ended March 31, 2007, including both continuing and discontinued operations of $0.9 million or $0.04 per basic and diluted share.

At March 31, 2008, I-Flow reported networking capital of approximately $85.3 million including cash and cash equivalents and short-term investments of $57.6 million, no long-term debt and shareholders equity of $148.9 million.

Now I will turn the call over to Don Earhart for some final comments before we take questions.

Don?

Thanks, Jim.

AcryMed, Incorporated, an Oregon-based developer innovative infection control and wound healing products, which we acquired in February 2008, contributed sales of approximately $600,000 in this year's first quarter, subsequent to the acquisition.

AcryMed had revenues of approximately $4 million in 2007, excluding sales to I-Flow of coated catheters, and we believe that AcryMed's 2008 revenues will exceed that by approximately 50%.

This acquisition will allow us to continue building our ON-Q franchise in the multi-billion-dollar market for post-surgical pain relief and allow us to develop and introduce many more new and exciting acute care product like our new ON-Q silver dressings, a family of silver coated, transparent wound dressings.

Many of you may have read the announcement by Baxter to make the V-link Luer activated device with VitalShield protective coating available for all hospitals starting in April 2008.

This is the first needleless intravenous connector to contain an anti-microbial coating and has been shown to kill on average 99.9% or more of specific common pathogens known to cause catheter related bloodstream infections.

The coating, VitalShield protective coating, helps prevent contamination and the growth of specific common pathogens, including the well-known drug resistant staph infection MRSA.

Guess who is coating the V-link for Baxter?

If you guessed AcryMed, you guessed right.

Baxter provided this information to Dow Jones for a November 2007 article and I quote from the article, "Baxter is working with a silver nanotechnology developed by a small private company, AcryMed, based in Portland, Oregon".

The Baxter VitalShield protective coating is the same silver technology now used to coat the ON-Q SilverSoaker catheter and our new family of thin film silver dressings.

Not only is AcryMed doing work for Baxter, but they are providing products for Smith and Nephew and Medline, not to mention the numerous development projects in the works for I-Flow and other companies that could lead to additional opportunities.

The use of silver for reducing infections is becoming more popular every day, and I-Flow is now a leader with our antimicrobial nano particle coating.

Rest assured, you will be hearing more about this exciting technology on future earnings calls.

Our strategy to leverage the ON-Q sales force and marketing infrastructure by layering in new medical products for the acute care market, many of which will come from AcryMed, we believe will help us deliver sustained rapid growth and enhance shareholder value for the long term.

We are well positioned with the right products, the financial resources, and the experienced management team to effectively implement our strategy to become a supplier of acute care products that relieve pain, help reduce the incidence of infections and enhance healing.

We continue to expect I-Flow to be profitable for the year in 2008 on growth in regional anesthesia revenues of approximately 20% and growth in total revenue of approximately 20%.

We see the growth trajectory being more heavily weighted in the second half of the year as we launch new products.

In our newly formed acute care business consisting of regional anesthesia and AcryMed revenues combined, we expect growth of approximately 25% for this year.

And now Jesse, we are ready for the first question.

Thank you.

(OPERATOR INSTRUCTIONS) One moment, please, for the first question.

Our first question comes from the line of [John Crowler] from Piper Jaffray.

Please proceed with you question, sir.

Hi, this is John on for Mark Mullikin.

Quick question here on the sales force.

Was there any increase in the sales force in between the last call and are there any plans going forward to increase the size of the force?

The difference in the size of the sales force was approximately 10%, less of that was quota carrying.

Most of that was clinical specialists.

Okay, great.

And then, kind of my understanding here, so you said that the account level with the regional anesthesia business was the same, just more sales to those specific accounts.

Is it a goal to expand the account level, and is that more of a process of just getting the sales force up and running before they can expand your hospital base?

John, the philosophy and the strategy at I-Flow has always been to go deep and wide in accounts, and then when a sales person has extra time, they begin to work on new accounts.

But you really become most productive when you stay in an account that you I've spent several months bringing up to speed, and getting more and more surgeons to use the product.

So in to first quarter, they did exactly what they've been asked to do and told to do, and that is to spend their time in their existing accounts and grow them first, and then when the opportunity arises, open up new accounts.

Great.

And then one last quick question, and sorry if I missed this at the end when you were giving guidance, but does the overall growth rate that you have for the year of about 20% and the regional anesthesia growth rate, does that include now the introduction of new products during the year?

I seem to remember that last quarter that did not include new product launches.

We talked about new products in the last call.

We were referring to new product from AcryMed, not new products that we already have in the pipeline for ON-Q.

So, that's now in the acute care number, which is 25% growth.

Great.

Okay, thank you very much.

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

Please proceed with your question.

Hey guys, good morning.

Hi, Matt.

A couple of just kind of housekeeping questions, first.

Jim, can you break out G&A and sales and marketing, and secondly, Don, can you give us an idea of the number of reps that hit quota in the quarter?

Hi, Matt.

G&A was $4.383 million and sales and marketing was $18.398 million.

Okay.

About 30% hit quota, Matt.

30%?

Yes.

Okay, good.

And then, looking on your comments about a number of accounts being static year-over-year, do you have any idea what that looked like in a composition basis?

Are you gaining new accounts and losing others, or was it pretty consistent?

How many of those were reordering accounts versus brand-new?

I don't have that breakdown, Matt.

We've never provided that before, but I can tell you this, is that many of our plastic surgery accounts ordered little or nothing in the first quarter.

So, we did have some new accounts.

Okay.

Then looking at your guidance, the 20% level for ON-Q, 25% with AcryMed, last year seasonally you had a big bump-up in Q2.

Now it sounds like you're thinking the second half of this year will be stronger.

Can we compare last year to this year?

What should we expect seasonally here relative to what you saw last year?

Again, Matt, we don't give quarterly guidance, but you know as well as I do the comparables for second quarter of last year will be pretty high.

We had a huge second quarter, and if you remember, the third quarter actually came down over $1 million from second quarter.

So, we believe that we can hit the 20% for the year, and as I said in the conference call script, that the growth will probably be greater in the second half of the year than the first half of the year.

Okay.

Finally --

I'm not saying we will or will not hit 20% for second quarter, we just don't give that guidance.

I understand.

But last year, there was no one-time items in Q2 per se.

No, but if you remember, normally Q2 and Q3 are flat.

They're the same.

There was a significant difference between Q2 and Q3 last year, where Q2 was much higher.

Okay.

And then finally, just a broader question on ON-Q as we look at the numbers in the quarter, although it's not probably fair to do, if you strip out C-bloc, the base business is growing, I think, high single digits in terms of the legacy on key.

Can you describe the amount of focus the sales force has on C-bloc specifically, and then thinking of the base business, how is this infection message kicking in?

Do you think that's helping your growth at this point or is that kind of yet to have a more substantial impact, then I'll drop.

Thank you.

Well, talking about C-bloc versus what you called what the base business, remember, C-bloc is ON-Q, because they're the same surgeries.

On the orthopedic side, you can do it one of two ways.

You can do with it the surgical product or you can do with it the continuous nerve block product.

So you can't separate those out.

And it is our strategy to convert more and more physicians to C-bloc and away from the surgical incisional type, because the pumps are bigger, more expensive with bigger margins.

And the anesthesiologist gets paid.

So you can't separate those out, they're one in the same.

And on the infection side, yes, we think the infection message is helping us, no question.

I think it will help us even more as we get closer and closer to the October date when Medicare changes the rules.

Okay.

It makes sense.

Thank you, guys.

Okay.

Our next question comes from the line of Assaf Guterman from Lazard Capital Markets.

Please proceed with your question, sir.

Hey guys, good morning.

Good morning.

I'm sorry if you already mentioned this, but your ON-Q guidance of 20% growth for the year, the ON-Q stand alone without AcryMed, when compared to previous growth rates in the last four years or so, the ON-Q grew at over 30%.

Is there any other reason other than the lower surgery rates that you are seeing that contributes to this reduced guidance?

One of the things we're not doing today is we're not hiring large numbers of sales people with the plan to get to profitability.

So a lot of that growth in the early years came from expanding the sales force at very high levels, so we're not doing that today.

In fact, from the last quarterly call, which was the middle of the second quarter, we haven't added any sales people.

So we are focused on not only delivering good growth, but we're also focused now on turning profitable.

And you're planning to leave the sales force at current levels until year end?

Right now, we will probably only hire to replace those where we have openings.

Okay.

A quick one for Jim.

Can you just walk me through the difference in cash balance between December 31 and March?

I understand the $25 million or $27 million is associated with AcryMed.

Where did the other $20 million go?

Yes, okay.

As you said, we spent $27 million on AcryMed, then we also had a federal income tax deposit of $12.5 million for our profit on the sale of InfuSystem.

That was the other big piece.

We also spent some money on smaller items as well.

And then also stock buyback, we also spent money on that as well.

Right, which brings me to my last question.

Would you consider expending the buyback program?

I understand you have about 1 million share authorized.

Is that kind of a hard limit or are you considering buying back more than that?

It's up to the board.

And the board -- as far as you know, this is something that the board is entertaining?

The board is thinking about that, or is that something which not currently considered?

Let me jump in.

This is Don.

We've only been approved for 1 million shares.

So if we decide to go for more shares, we'd have to take that for board approval, and that approval doesn't exist today.

That doesn't say we wouldn't, but at the same time, we have no approval and can't speak to doing more.

That's what I'm assuming, you're not going to do anything without to board approving it.

The question is whether you, as management, are considering recommending the board to go ahead with an expanded buyback program.

Well, at this time, the answer is no because we haven't hit our limit on the 1 million shares yet, so we're not going in and ask for more.

Okay, got it.

Thank you.

Okay.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Bill Miller from Hartwell.

Please proceed with your question.

Yes, hi, Don.

Hi, Bill.

Couple of random questions.

One, the -- what kind of buzz or other indications that people are paying attention to this October 1 date.

Have you gotten any inquiries from insurance companies or hospitals bugging you about the silver coating, or can you give us some idea of why you are confident about this, other than the fact that it's a date some but lots of these dates get pushed back or out into the future, and I wonder if this one is really going to stick and if it is, it's going to stick, what you think it will do for you, but also what evidence you have that it will stick.

That's the first question.

Second question is, you seem to be going for profits again and I think lots of people don't care about profits, we care about sales growth, and one or two pennies of profits per quarter is irrelevant to some people, me, and sales growth is very relevant.

So the October 1 date and sales growth, could you try to link those two for me?

And finally, could you give me some idea, since you paid almost $14 for your stock before, whether you are going to [facility] the 1 million share quota?

Finally, where have you lodged the stock position in InfuSystems and has that been marked to the market?

Bill, you've got about six questions there.

Which one do you want to us answer first?

Start with the top question.

I'm sorry, start with the top question?

Well, I was just worried about -- or not worried, I was interested (multiple speakers) --

You talking about --

-- first date and what kind of buzz you thought was accompanying that, what kind of feedback you've got from the insurance companies and hospitals about how real that date is.

Well, that date is real.

That is law.

And the private insurance companies are already converting.

There's already been several announcements by private insurance companies that they are going to follow the same process.

I believe -- was it United Health?

And I think Aetna has already started.

Several of the big insurance companies have already started to notify hospitals they're not paying for errors, and that's before the October date.

Okay.

So you really think that's going to be enforced, and the hospital is going to adhere to it, et cetera?

Well, yes, we know they're going to enforce it.

Hospitals are getting ready right now, Bill and you've got companies like Baxter, for example, that think it's real, too, because they're paying us money to put coating on their device.

How many devices do you think Baxter represents, Don, and what kind of sales numbers does that represent?

I can't give you any of that information.

That's confidential, Bill.

Okay.

I can't tell what you we have contracted with them.

The only reason --

-- (multiple speakers) Baxter that will come to you because of the October 1 deadline?

They already are.

-- (multiple speakers) great product?

They already are.

Could we expect further announcements as you get these contracts, or is that going to be something you'll just wait to do on conference calls?

No, no, since we're a public company, any contracts we sign that are meaningful we will have to announce.

So the answer is, yes, we'll announce them as they come.

Okay, then the next question concerns really, your desire to show profits rather than your desire to show growth, sales growth, because obviously your sales growth is coming down, and you are going to show profits, and I'm in the camp that says let's have the sales growth, because that's really, ultimately how your company is going to be valued.

Well, the answer to your question is, is we are trying to do both.

We're trying to give good growth, but we believe now it's time to start showing profits as well.

So that is our strategy, Bill.

Okay.

And then finally -- or not finally, necessarily, but the idea of having a stock purchase program, you've already taken the (technical difficulty) stock at $14, part of the 1 million share program, what are your plans?

Are you going to fulfill that or are you going to hang around and wait for awhile or what?

And then finally, where is the stock position in InfuSystems on your balance sheet?

What part of it are you going to have to mark it to the market or is it mark to the market now?

And then finally, again, another question, what does solid mean?

How should we color that?

Well, on the stock buyback, we are serious about buying 1 million shares.

Okay.

We can't tell you when we're going to do that.

That's not something we're allowed to do.

We wouldn't want shareholders to know when we is or isn't.

But, yes we are going to buy all 1 million shares, and we will do that, we will start doing that, we expect, as soon as the window opens.

That process will be free to do that.

We have been in a closed window situation with the exception of I believe three days after we announced the year-ending results back about six weeks ago.

So we only had three days to buy.

Okay, good.

So we have not been able to buy because of the first quarter results.

So we'll be free to buy, I believe in two days, 48 hours.

Okay.

So our goal is to buy all 1 million shares.

Thank you.

and on the other question, Jim, you want to answer that one?

Yes.

Our balance sheet, we do mark to market, Bill.

We follow the accounting rules, of course, and those securities that we own, the stock we have in HABC, now known as InfuSystem, we -- those are classified as available for sale securities, so we took a write down in December that we charged to P&L, but then any fluctuation going forward, unless they are considered to be a permanent decrease in the value of that stock, those differences go through equity but we do mark to market, so they are stated at current market price on our balance sheet.

Okay.

Terrific.

And Jim or Don, can you give a little more color on exactly what solid means?

That's a term I don't really understand.

It means April.

Oh, oh, oh.

You're talking about the results for April?

Yes.

They were above expectations.

They were above quota.

Great.

I'm delighted.

Finally I dragged it out of you, Don.

That's terrific.

I am delighted for you and for us.

Bill, that's only one month.

But it was a very strong month.

You've got to start someplace.

Okay.

(laughter)

I'm delighted to hear.

Now I know what solid means, which really is very helpful to me for future calls.

Yes.

Solid means we beat quota.

Thanks, Don.

Good luck.

Bye, thank you.

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

Please proceed with your question.

Hey, guys.

Just a couple of follow-ups.

First on AcryMed, I was impressed to see that revenue number there.

In terms of their pipe line, I think on the last call we talked, they may have around a dozen potential contracts coming through.

Is there a possibility to see a proportion of those this year?

Yes.

What we'll probably see this year from them is, we could see some actual product being manufactured for another big player, but we'll see probably development revenues, because a lot of people have showed up and started to contact them, really in the last six months to a year.

When this infection control thing became a hot topic, AcryMed has been flooded with requests for people who want them to see if they can coat their device.

So that's what we're at.

Basically what we're doing up there, it's an R&D operation.

The Baxter one has turned into a product we can manufacture and sell.

They manufacture and sell products for Medline, and by the way, we're talking to Medline about other products beyond the ones we're doing today and they do some stuff for Smith and Nephew.

But there's other companies that they're doing work for, but it's still very much in the development stage.

Okay, very good.

And then, Jim, on the gross margins, a pretty strong number there as well.

Can you talk about the impact pricing had in the quarter and how favorable is that mix, i.e.

what should we look for going forward here?

Well, I think the main thing going on there is the mix between RA and IV, but in addition, as you're very familiar, we do have price increases that are resulting simply from more C-bloc, et cetera.

Matt, if you remember my comments in the conference call, we have a mix towards big pumps, more C-bloc, and away from the small pumps which are used for elective surgeries, which confirms the fact that we didn't see as many orders from our plastics accounts as we normally would.

So what was your pricing expansion in Q1?

We said it was 3% versus last year's average.

It's significantly more than that versus fourth quarter -- I'm sorry, versus first quarter of last year.

So if you go back to first quarter 2007, to first quarter of this year, it's significantly more than that.

It approaches 10%.

And then finally, a broader question on profitability.

With respect to operating profit, Don, do you have maybe an update in terms of what you would expect the run rate to be on ON-Q for profitability?

I'm lost.

You're talking about the break-even point?

Operating break-even for the ON-Q business.

We don't have that number.

We don't give that number, I guess I should say.

I think we're kind of there.

We're at a $0.5 million loss for the quarter.

If you're talking about where our break-even point is we're not too far off.

Operating income, not net.

Oh, I see, you're talking about before interest.

Yes.

Just model that out, I would suggest.

Alright, thanks, guys.

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

Please proceed with your question.

Hi, thank you for taking my call.

Don, I was wondering if you could clarify just the guidance a little bit.

You maintained revenue guidance of 20% but it looks like the regional anesthesia guidance was decreased from 25% to 20%, and I was wondering, is that because AcryMed revenues weren't included in your prior guidance?

No, we've actually dropped the guidance from 25% to 20%, Greg, and the reason is, is because of the unknowns as we go forward from the economy standpoint, and the loss in surgery that we might have experienced with plastics being down and some of the other elective surgeries being down.

So we're being very conservative.

Okay, and you spoke to some of the slowdown in elective procedures.

I was just curious, where are you seeing the growth?

What types of procedures?

I know the C-bloc in orthopedic has been really strong for you, but what other procedures have been strong contributors?

Well, our bread and butter, which is heart surgeries, colorectal, bariatrics, many of those surgeries are still very good, and that's why our average realized price went up, one of the reasons why is because we continue to sell our bigger pumps, which are for the bigger surgeries.

Our orthopedics has still been very good, as we saw with the C-bloc, because that's all orthopedics.

It's really in the areas that are elective.

Hernias were down; your plastic surgeries were down.

Plastic surgery is elective in many cases, and hernias can be postponed for a long period of time.

Okay.

Jim, just going back to C-bloc, is there any update on the study you are doing in conjunction with GE or the pneumonia study?

Yes, let me answer that question, Greg.

We have over 400 patients now in the study, and we expect to do another 600 or so to get to 1,000.

So we're well on our way to getting there.

Okay, and you are pleased with the results so far?

Well, yes, we're very pleased with the fact we have 400 patients in the study, and again, I can't give you the results, because that would be cheating, but, yes, the study is going along great.

Okay.

When do you expect to see, or expect to report results maybe by calendar year end?

Is that a possibility?

That's a very good possibility.

Okay.

And then just one housekeeping question.

Can you supply us with the total number of quota carrying reps and the total number -- total number of reps?

A little over 200.

And the total organization size is a little over 300.

Okay.

Thank you, Don.

Okay.

Our next question comes from the line of [John Nebbins] from Wachovia Securities.

Please proceed with your question.

Hi guys, good morning.

Hi, John.

My question is follow-up to what the last gentleman had, the question about the studies.

Just to clarify, when you said 400 patients and going to 1,000 is that the pneumonia heart study or the continuation of the colorectal study, and either way, could you give us an update on the colorectal infection study and the heart study and any dealings you've had with the FDA with any possibility or hope of getting any kind of labeling, thank you.

First of all, let's take the study that was discussed by Greg.

That is the ultrasound study with GE.

That's ultrasound and whether or not ultrasound makes doing nerve blocks easier and better.

Okay.

That's the study that we've got about 400 patients in.

On the heart study, we're still in the very early stages there.

We've signed up one center, and so we're just getting started there.

That's been a very difficult one to get everybody to agree on a protocol.

Okay.

So we're finally off the dime though, John, which is always good.

That is good.

On the colorectal study, as it pertains to the FDA, we're -- those discussions have come to a -- kind of a standstill.

They're still in the process of determining what they want us to do, but I think we will probably to have do quite a bit more work to get a claim, especially in today's environment where they're very reluctant to give anybody a claim for anything.

However, that study is being written as I speak, and we expect to submit it very soon, very shortly, for publication in a respectable magazine.

Okay.

A respectable journal.

So that would give us a study.

Is there more patients than the last we've heard of it, or is it still the original -- I can't remember the number of patients that you've already put out, or are there more patients since then?

We did more patients, but for the sake of writing this thing up and getting it published in a respectable journal, we froze it at the 280 some.

Okay, alright.

Fair enough.

Thanks, guys.

Okay.

Mr.

Earhart, there are no further questions at this time.

I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Thanks, Jesse.

We continue to be excited about our opportunities in regional anesthesia, and we are even more bullish on the new opportunities in our newly formed acute care products business.

We believe our efforts to expand our ON-Q franchise into the vast market for acute care products will support additional growth in the years ahead.

Products that treat pain, reduce the number of infections and speed healing are just what hospitals need today and in the future.

With the implementation of the new Medicare rules to not pay for hospital-based errors, we offer hospitals products that reduce mistakes, get patients back to normal faster, and home sooner, all of which save hospitals money.

We look forward to reporting our progress on our second quarter conference call in about three months.

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.