金百利克拉克 (KMB) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow First Quarter 2009 Results Conference Call.

(Operators Instructions).

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

Please go ahead, sir.

Thank you, Myra.

Good morning, everyone, and thank you for joining us for I-Flow's 2009 First Quarter Results 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 a 9% increase in total revenue for the first quarter of 2009 to $30.9 million compared to total revenue of $28.4 million for the first quarter of 2008, exceeding our guidance for total revenue growth for 2009 as a whole.

Sales of our Flagship ON-Q products in the Company's Regional Anesthesia business increased 9% for this year's first quarter to $24.7 million compared to $22.6 million for last year's first quarter, near the upper end of our guidance range for Regional Anesthesia growth.

Sales of Acute products, which include Regional Anesthesia sales and AcryMed, Inc.

revenues increased 10% for the first quarter of 2009 to $25.5 million compared to $23.2 million for the first quarter of 2008.

IV Infusion Therapy revenue increased 4% to $5.4 million for the first quarter of 2009 compared to $5.2 million for the same period in the prior year.

Gross margins were especially strong at 76% and SG&A expenses of $23.3 million for the first quarter of 2009 were basically flat with the same period in 2008.

This performance is a direct result of the additional controls over operating expenses we implemented this year.

And the first quarter results are even more impressive when you consider we incurred $1 million of additional legal expenses to protect our intellectual property in the first quarter.

For the remainder of the year, we expect to benefit even further from the new cost controls and from our increasing ability to leverage our SG&A expenses.

Product development expenses for the first quarter of 2009 increased to $2.2 million compared to $900,000 for the first quarter of 2008, reflecting the acquisition of AcryMed, Inc.

and our commitment to expand our R&D efforts.

We intend to take full and immediate advantage of the patented and unique technologies we procured with this acquisition.

The loss before income taxes for the first quarter of 2009 was $2.7 million.

The $2.7 million is attributable to a $1.5 million of loss contingency that the Company accrued in connection with ongoing litigation associated with chondrolysis, which is recorded as part of a certain litigation and insurance charges.

And as I mentioned earlier, $1 million in additional legal costs to vigorously defend our intellectual property rights.

This compares to a loss before income taxes for the first quarter of 2008 of $1.3 million.

The Company was cash flow positive for the first quarter of 2009.

Cash, cash equivalents and investments increased by $1.8 million during the quarter excluding a $5.3 million cash note payment received from InfuSystems Holdings shortly after quarter end.

At March 31, 2009, we had more than $50 million in cash, cash equivalents and short-term investments.

When you add the $50 million to the value of the note from the sale of InfuSystem, the sum is greater than $3.25 per share.

We are especially proud of our performance in light of the continuing slow down in elective surgeries and the continuing postponement of many non-life-threatening surgeries being reported by surgeons, anesthesiologists and hospitals across the country.

This slow down in the number of surgeries has made it increasingly difficult for our ON-Q salespeople to deliver I-Flow's targeted regional anesthesia growth.

In the first quarter, they found additional ways to serve our customers and to sharpen their focus on our core message.

So it is especially noteworthy that despite the slowdown in surgeries performed and a less than 1% increase in the first quarter's average selling price versus a year ago, Regional Anesthesia revenues grew 9%.

Almost all of the growth can be attributed to increased productivity by the I-Flow sales force.

Our strong sales productivity in a weak economic environment speaks to the value healthcare facilities, surgeons, anesthesiologists and their patients place on our ON-Q products for relieving post-surgical pain significantly better while reducing narcotic use after surgery.

And as a tribute to the effectiveness of our sales and marketing organization and the entire I-Flow and AcryMed team.

And as I mentioned on our last conference call, we continue to believe that we have the opportunity to use this period of economic weakness that is having an unprecedented impact on the delivery of healthcare in the United States to our long-term advantage.

We can leverage the combination of ON-Q's clinical and economic benefits to address the customer's need to reduce length of stay and infections; and in doing so reduce the hospital's cost for discharge.

This proposition resonates with our target audience and is well supported by the consistently positive results of more than 80 published or presented clinical studies together with the successful use of our ON-Q products in more than two million surgical procedures over the past years.

Our clinical results also highlight a series of benefits that are especially valuable with the implementation earlier this year of the rule for Centers for Medicare and Medicaid reimbursement related to hospital-acquired conditions, commonly referred to as HAC or "never events".

Again our positive clinical study findings in evidence-based medicine is a compelling case for On-Q being essential.

Independent clinical studies show that when ON-Q is used hospitals have consistently better patient outcomes, reduced operating costs and increased efficiency that results in lower cost per discharge.

As our first quarter revenue growth shows, our sales team is doing a good job of protecting our ON-Q-based business while finding ways to grow ON-Q usage among new and existing surgeons and anesthesiologists nationwide.

The integration of AcryMed Inc., a developer of innovative infection control and wound-healing products, which we acquired in February 2008, continues to proceed smoothly.

AcryMed's products for the Acute Care market complement many of our existing ON-Q products and support our plans to become more of an integrated Acute Care products company that develops and markets proprietary disposable medical devices that improve patient outcomes.

We are supporting AcryMed's previous efforts to develop products for third parties, while we increase their efforts to develop products for I-Flow; new products that will expand our current scope of core competencies and may or may not be marketed through our existing distribution channels or to our current customers.

AcryMed's new product pipeline includes a patented oxygen dressing, which is now being manufactured and distributed in small quantities to a number of wound centers that have agreed to participate in a trial to document its effectiveness.

And once we understand its effectiveness, we will begin a broader marketing and selling process.

Other new products to be marketed soon include a new high-strength Silver Gel for the cleaning and healing of chronic wounds, a new family of silver-coated thin filmed dressings, a new family of Island dressings impregnated with silver and many more too early in the development stage to speak about publicly at this time.

I will have more to say about our 2009 strategies to overcome the challenges of a slowing economy and how we plan to delivery the growth expected right after Jim reviews the first quarter's financial results in more 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 toady's date and we undertake no obligation to update these statements.

For the three months ended March 31, 2009, revenue increased 9% to $30.9 million from $28.4 million for the first quarter of 2008.

Sales of Acute Care products, consisting of ON-Q and AcryMed revenues, increased 10% for the first quarter of 2009 to $25.5 million compared to $23.2 million for the first quarter of 2008.

Total revenue from RA increased 9% for the first quarter of 2009 versus the prior year quarter to $24.7 million from $22.6 million last year.

AcryMed revenues were $0.8 million for this year's first quarter compared to $0.6 million for the first quarter of 2008, subsequent to AcryMed's acquisition by I-Flow on February 15, 2008.

IV Infusion Therapy revenue for the first quarter of 2009 increased 4% to $5.4 million compared to $5.2 million for the first quarter of 2008.

Gross profit was 76% of total revenues for the first quarter of 2009 versus 75% for the first quarter of 2008.

SG&A expenses of $23.3 million for the first quarter of 2009 were equal to the same period in the prior year, reflecting effective control over operating costs despite the patent defense costs of $1.0 million in the first quarter of 2009.

Product development expenses for the first quarter of 2009 increased to $2.2 million compared to $0.9 million for the first quarter of 2008, reflecting the acquisition of AcryMed and internal growth.

Loss before income taxes for the first quarter of 2009 was $2.7 million compared to a loss before income taxes of $1.3 million for the first quarter of 2008.

The $2.7 million loss amount included the $1.5 million of loss contingency that the Company accrued in connection with ongoing litigation, which is recorded as part of certain litigation and insurance charges and $1.0 million in legal costs to vigorously defend its intellectual property rights.

The loss contingency figure is preliminary and will remain subject to change until the filing of the Company's financial statements on form 10-Q.

Net loss for the first quarter of 2009 was $3.6 million or $0.15 per basic and diluted share.

This compares to a net loss for the first quarter of 2008 of $0.5 million or $0.02 per basic and diluted share.

The net loss of $3.6 million for the first quarter of 2009 included income tax expense of $899,000 compared to an income tax benefit of $755,000, which was recorded as part of the net loss of $0.5 million for the same period in the prior year.

The increase in income tax expense for the first quarter of 2009 was primarily due to the impact from an increase in valuation allowance for deferred tax assets with uncertain future benefits.

At March 31, 2009, I-Flow reported net working capital of approximately $72.8 million, including cash, cash equivalents and short term investments of $50.2 million, stockholder's equity of $115.7 million and was essentially debt free.

Now I will turn the call back to Don Earhart for his final comments before we both take questions.

Don?

Thanks, Jim.

As I outlined on the February 26, 2009 conference call, our success in establishing our proprietary ON-Q family of product as the new best practice for post-surgical pain relief with the ultimate goal of replacing narcotics as a standard of care is due to a simple, well-defined strategy.

This strategy helped us reach the $100 million revenue milestone in our Regional Anesthesia business in 2008.

Yet we still believe that the market for narcotic-free relief of post-surgical pain is early in its development and is under-penetrated and remains a substantial long-term growth opportunity for I-Flow.

Our strategy revolves around the development of our direct sales force, coupled with the steady introduction of new products that expand the range of surgical procedures where ON-Q can be efficacious and cost-beneficial.

The sales effort is supported with targeted marketing programs and call marketing programs to increase awareness of ON-Q and with focused educational efforts to accelerate ON-Q adoption and usage.

In addition, we consistently support independent, third-party clinical studies to establish our products value for use in surgeries like cardiovascular, thoracic, bariatric, colorectal, trauma and other non-elective, and often life-threatening, procedures.

Similar marketing and sales efforts are used to capture elective surgeries and surgeries that are not necessarily elective and are not -- non-life-threatening and therefore, postponable.

Our library of clinical studies show that the use of ON-Q is associated with patients getting well faster, having fewer infections and leaving the hospital sooner.

Benefits that are becoming increasingly more important in today's cost conscious environment where efficiencies as well as better patient outcomes are the mandate.

.

When patients recover and leave the hospital sooner, the cost for discharge goes down for the hospital and the patient's chances of acquiring a hospital acquired condition, or "none event" becomes less as well.

The shorter the hospital stay, the less time for a patient to acquire a "never event".

Most private insurance companies are following Medicare's lead and, slowly but surely, are refusing to pay for "never events" as well.

While we have traditionally directed our sales and marketing efforts towards surgeons and anesthesiologists, we have recently expanded our call points to include hospital administration, to deliver an economic and cost savings message that is now starting to resonate.

By using our strong clinical study findings and ongoing evidence-based medicine results, we are demonstrating to hospital administrators how ON-Q can help them to reduce length of stay, increase efficiencies, achieve lower cost per discharge and contain their costs on a facility-wide basis.

The expanded call points for sales managers includes, hospital CEOs, CFOs, CMOs and Chief Nursing Officers, while our 200 quota carrying territory managers are adding administrators like case managers, hospitalists and quality control directors to their list of people to visit.

We believe the efforts to educate a new audience is beginning to pay off as evidenced by the growth in Regional Anesthesia revenues in the first quarter.

The number of surgeries performed in the quarter is believed to be down from first quarter 2008, yet our sales people, without the help of higher average selling prices grew Regional Anesthesia revenues 9%.

There has never been a better time than now for a medical device company to be selling a product that contributes to the hospital's profitability and perhaps even its survivability, and does so in numerous identifiable ways.

Hospital administrators are looking for ways to reduce costs and are now starting to listen.

And when convinced, they can become an important advocate to help us drive future ON-Q sales.

Another important fact to remember is that I-Flow's products are disposable and designed for one-time use only and are relatively inexpensive for hospitals to purchase.

They are not considered a capital item; with most hospitals running short on cash, yet still needing additional drug delivery devices to deliver a multitude of different drugs, I-Flow and our family of disposable infusion pumps are in an enviable position to meet this need.

Purchases that would normally go to electronic pump manufacturers can now go to I-Flow.

I-Flow's pumps are efficient and efficacious alternatives to capital intensive electronic infusion pumps for the delivery of continuous IV antibiotics, epidurals for labor and delivery and IV drugs for chemotherapy to name just a few.

We continue to enroll patients in our cardiovascular, multi-center surveillance study to compare the incidence of pneumonia, surgical site infections, narcotic use and length of stay when ON-Q is used to treat the pain following surgery versus traditional narcotics alone.

15 centers have approved IRVs and more than 250 patients have been enrolled to date.

We hope to complete enrollment in the fourth quarter of 2009 and to subsequently publish the data in 2010.

We announced last week that the United States Patent and Trademark Office has concluded its re-examination of US Patent number -- the 481 Patent and have issued a notice of intent to confirm its patentability.

This patent covers intellectual property for the infusion apparatus used in the Company's Flagship ON-Q Pain Relief system and is also used as a basis for other I-Flow products.

As you can imagine, we are extremely pleased with the Patent Office's decision and with the best interest of our customers and stakeholders in mind, we will continue to aggressively defend our intellectual property.

In closing, I want to reiterate the revenue and earnings guidance we gave you on our last conference call.

Bearing in mind that today's volatile market conditions make forecasting even more of a challenge than usual, we continue to expect I-Flow to be profitable in 2009, excluding any special charges and cash flow positive on growth in the total revenue of approximately 5% to 7% including growth in Regional Anesthesia of approximately 5% to 10%.

And now, Myra, we are ready for

Thank you.

(Operator Instructions) Our first question comes from Matt Dolan from Roth Capital Partners.

Please proceed with your question.

Good morning, everyone.

This is Matt Pommer in for Matt Dolan this morning.

Thanks for taking the questions.

With regard to procedure volumes, now with more hindsight, when do you expect the continuing slowdown in the number of procedures to stabilize?

And what actions might you take?

And what are the implications for growth in this new environment going forward?

Matt, this is Don.

Your question is a very difficult one because I don't think the administration can answer that question, let alone I-Flow.

We do not see any turnaround in the economy in the second quarter.

We can't predict third and fourth quarter, but we still see surgeries going down.

However, our sales force is adding new customers and we continue to be able to make our numbers.

But it's not because we're getting any benefit or any help from the economy, because the economy has not turned around based on what we see in the hospital market place.

So I don't know how else to answer your question because I'm not very good at predicting the future in terms of the economy turning around.

So you have not seen any stabilization in procedures?

No, we have not seen any stabilization in procedures.

And to add to that, how has the mix of product use by procedure type shifted since the downturn began, specifically with regard to elective and more non-elective procedures?

Well, the good news is that it shifted towards our more expensive devices because the elective surgeries and the postponable surgeries typically use a less expensive device because they need therapy for fewer days.

So, in fact, it's positive for us, we believe, because if you noticed we had very strong gross margins.

And I'm sure that's because we sold more of the larger pumps, which are -- have better margins associated with them.

So we see elective surgeries still very, very slow.

We don't see plastic surgeries coming back anytime soon and people are still postponing those surgeries, especially in orthopedics, that can be postponed.

What percent of your product use is elective at this point?

Well, I believe we said on the conference call in February that approximately 25% of the surgeries we do fall into the elective and the postponable categories.

And shifting --

But remember now -- remember now, Matt, postponable surgeries sooner or later are no longer postponable.

So as we get to that period where maybe they can postpone for six months, they can postpone for a year or whenever, ultimately that surgery will probably have to be done.

It's the elective surgeries that you may never get.

Okay.

And shifting gears here towards the litigation, can you tell us or do you have any projections on what the cost will be for 2009?

No, we don't have any projections for that and we don't really talk about that part of our business.

Is the litigation at all impacting the Company's ability to grow its business?

No.

As you can see we're growing -- we grew in the first quarter very nicely.

Okay.

And can you comment on the number of cases currently with regard to chondrolysis and when you expect the first case to come -- I believe there was some commentary on the second half of 2009 on the last call.

Yes, right now we have 69 cases.

And again, we don't know when, but we believe sometime in the latter part of the year, the first case will be tried.

Okay, great.

Thanks very much for taking the questions.

Okay.

Thank you, Matt.

Thank you.

The next question comes from Tim Vestal from Kleinheinz Capital.

Please proceed with your question.

Hi, good morning, guys.

Hello.

My first question is on the InfuSystem's non-receivables, how much was left standing in that at the end of the quarter?

At the end of the quarter, about $30 million wasn't it Jim?

Just a second, Jim's looking it up.

I've got my 10-Q here; I'll just add up the number here and get you an exact.

Okay.

We'll get you an exact number here in just a minute, Jim -- Tim.

Okay.

And, Tim, while he's doing that --

Okay.

Go ahead.

Tim, while he's getting that number, remember we had a $5.3 million early payment in April.

Okay.

What was the number?

Yes, $29,432,000.

Okay, great.

Thank you.

And then there was also another -- like I -- Like Don said, there was another -- they made us a payment in first week of April for another $5.3 million in addition to that.

So it's really about $24 million right now to date.

Okay.

Great.

The second question is on the share repurchases.

Did you guys repurchase any shares in the quarter?

Yes we did.

Jim's going to get you a number in just a minute.

Yes, we -- on the open market we bought 129,000 shares for $298,000 that are -- so an average price of $2.32 a share.

Okay.

Great.

And then the last question is related to AcryMed.

Can you just refresh my memory?

The -- when you guys made the acquisition last year, what were the -- what was the acquisition criteria?

And then maybe kind of talk about how it's performing relative to your initial expectations.

And then also just kind of some specifics for the rest of '09; how you will measure success for the acquisition.

When we purchased AcryMed, we purchased AcryMed for two pieces of technology both related to antimicrobial and healing technologies; the Silver technology and the Oxygen technology.

The Silver technology can be used in gels, it can be used as a coating, and it can be used as a mist.

I can be used in many, many different ways.

And on the oxygen side we weren't totally sure how that could be used, but the first product we have developed and actually have in the market place today in clinical studies is the Oxygen Dressing.

So we bought AcryMed as an R&D opportunity to develop technologies that would fit in very nicely with our I-Flow story on the ON-Q side where we have products that reduce the chance of infection and speed up healing.

So that was the main reason we bought AcryMed.

It wasn't for the revenues or anything they were doing with third parties; it was for what they could do for us.

So last year, we spent our time changing the way that operation works.

And now it is heavily involved in developing products for the I-Flow sales organization, either for our existing sales force or possibly even for new opportunities outside our existing distribution.

So we have continued to increase our R&D spending there.

We have continued to develop products that they had in the works and we've also continued to develop new products that they hadn't even thought of before we bought them.

So we look at AcryMed as an R&D operation to support the I-Flow effort overall for Acute product sales.

So how much of your R&D budget is related to AcryMed specifically?

Most of it, probably two-thirds.

Two-thirds.

Yes, I'd say two-thirds.

Great.

Thank you very much.

You're welcome.

Thank you.

The next question comes from Bill Miller from Hartwell.

Please proceed with your question.

Hi, Don.

Just getting back to AcryMed for a second, when will we see any pick up in sales, which were down versus last year obviously?

And what -- that's the first question.

Second question is what do you think the tipping point for the hospitals will be before they grasp the idea that I-Flow's products really do help them with this infection problem that they have?

And thirdly, that seems like a really paltry amount of stock when it was trading in the two to three area to purchase -- repurchase.

And you've got $50 million of share in cash, as you pointed out, $3.25, whatever the number was.

And yet you're not buying stock in aggressively.

I just -- I don't understand that at all.

Let's take AcryMed first, Bill.

On the AcryMed side, remember now that the revenues at AcryMed do not reflect the sales that I-Flow generates from the products they develop.

So you're not seeing that in the AcryMed revenues.

So that's -- so if you were to look at products they have provided for us in our sales then you would see sales increasing as opposed to being basically flat.

On the hospital side, we are making progress.

And I believe that's what I said in the conference call.

With surgeries actually down from a year ago, that means our sales force actually has to replace base business that they lost just to get to breakeven in terms of growth.

And they have to add additional surgeons and customers in order to get the growth.

So when you take a look at 9% growth, it's actually better than that because we lost a lot of our base business because surgeons have fewer patients to cut on.

So when is it going to turn around?

We believe we're beginning to see some light at the end of the tunnel right now because we have been able to use the economic message to not only conserve our business and protect our existing business, but we've been able to use it to grow.

So we believe we're getting some benefit immediately out of our economic message, and we'll get a lot more benefit as we go forward.

On the stock purchase, I really don't know how to answer that question.

We are limited to daily volume and at the same time we're very careful about at what price we buy.

And whether or not we pay too much or too little or whatever, we have a program in place.

We have a price at which we buy at.

We will consider changing that after we get out of this quiet period, but right now it is what it is.

Don, just to follow up on that.

What is your limit on a daily basis?

We don't give that information.

Well, I mean are you limited to 10% of the volume or 20% of the volume or what?

What is it, Jim?

Yes, it's -- I think it's 25% -- it changes every week so it's like something like 25% of the rolling previously four weeks' daily volume or something like.

Okay, because I just -- I looked back at this and you've been trading well over 100,000 shares a day, as you know.

And that would imply that there's plenty of space for you to buy in stock.

And I'm just kind of intrigued by the fact that when it was selling below cash, you're cashing a balance sheet and you didn't buy more in.

Well, you would have had to sit next to us on each day and say what's today's volume limit, et cetera.

So you guys don't put an order in and say look, when we can get stock in this range we're going to buy it for us?

We do.

Well, yes.

But I'm just saying that it's hard right now.

I don't know how good you are with this kind of math, but right now you would have had to look at the particular days when you would have liked for us to buy more stock and calculate at that point what the daily volume limitation was for us.

Yes, I can do that math.

I'm just looking back over the last weeks of trading.

You've traded over a 100,000 shares and --

Well, it is what it is and presumably if we weren't buying those shares you were.

So all is well.

25% of that would be 25,000 shares, yet you only bought 129,000 all told, and the last time we had a reckoning of this, you'd paid well over $10 a share when you had less cash in the balance sheet.

And so I'm just sort of curious whether you're saving your cash for something or you're waiting for the outlook to get more clear.

Or what you're trying to -- what message are you sending us by not being more aggressive on this when you have, as you point out, $3.25 or whatever the number was, of cash in the balance sheet.

I don't think our objective was to send you any kind of message at all, Bill.

We were just trying to buy a lot of cheap stock and we did the best we could.

So you consider 129,000 shares a lot?

Bill, I don't think the question is gaining anything by going any further.

We did what we did.

I just wanted to know what your plans are.

It gave you an opportunity to buy some cheap shares too.

And I took advantage of it, Don, and I'm very grateful for that opportunity, as always.

The -- do you expect this ongoing litigation expense to persist, or was there something special in the first quarter that -- I know the million dollars was to defend your patent and now you've gotten that out of the way.

Will you still have to have that kind of litigation expense to defend your patent now that you've gotten confirmation from the patent office?

Again we don't speak to the legal side, Bill.

We don't make any projections in that area.

Okay.

Well there we are then.

Thanks.

Thank you.

(Operator Instructions).

Mr.

Earhart, I'm showing no further questions at this time.

I apologize; we do have a follow-up from Don Miller.

Please go ahead, your line is open.

Yes, it's actually Bill Miller.

Don, last time you were talking about the cash and the use of cash, you indicated that you thought there were a number of acquisition opportunities out there, small product pick ups and things like that.

Could you refresh us on exactly what you said and what you -- what your view of that opportunity is now?

Well, our view has not changed, Bill.

If the opportunity arises we will take advantage of it because we have cash to do so.

When something happens, we'll make an announcement.

But is that -- is that still part of your strategy for growth?

Absolutely.

Okay, thank you.

Thank you.

And there are no further questions at this time.

Thank you, Myra.

We are pleased to report solid revenue growth and positive cash flow for the first quarter of 2009 as well as the further strengthening of our cash rich and debt free balance sheet.

And despite the difficult economic environment we face in 2009, our cost saving drug delivery devices, our significant library of intellectual property, our market leading position in most of the markets we serve and our solid balance sheet give us an important competitive advantage in today's healthcare markets.

We are using this advantage to increase our customer base, gain additional share in the markets we presently serve.

And while doing so, expand into new markets where our technology in the areas of infection control and faster healing are needed.

Thank you for joining us today and we look forward to reporting our second quarter results in about three months.

Operator?

Yes.

Ladies and gentlemen, that concludes the conference call for today.

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