金百利克拉克 (KMB) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the I-Flow second quarter 2009 results conference call.

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

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded Monday August 10, 2009.

It is now my pleasure to turn the conference over to Don Earhart, Chief Executive Officer.

Please go ahead, sir.

Thank you, Allan.

Good morning, everyone, and thank you for joining us for I-Flow's 2009 second quarter results conference call.

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

For the second quarter ended June 30, 2009, we are pleased to announce net income of $888,000 or $0.04 per basic and diluted share, and operating income of $1.1 million on total revenue growth of 5% to $37.1 million.

Achieving both revenue growth of 5% and profitability in the second quarter takes us that much closer to achieving our guidance for 2009.

Regional Anesthesia sales of $26.2 million for the second quarter of 2009 were up only slightly from last year's second quarter.

The slowdown in surgeries that we have been talking about for over a year continued in the second quarter, largely due to the depressed economic environment.

On the bright side, however, while this macro condition does not appear to be improving yet, it does not appear to be getting worse.

With elective surgeries sharply lower and other non-life threatening procedures still down and only those surgeries deemed necessary being done, the second quarter seasonal uptick we historically enjoy was much less this year.

Despite these challenges, ON-Q revenues grew sequential by 6% compared to the First quarter of 2009, leading us to believe that the worst may be over and that many of the surgeries postponed last year and earlier this year are now being scheduled.

A significant growth engine within the ON-Q family continues to be the ON-Q C-bloc.

More and more anesthesiologists are adopting continuous peripheral nerve block therapy using ON-Q C-bloc based on the positive clinical, economic and patient outcomes, and our resulting sales momentum remains strong.

As nerve blocks replace incisional uses of ON-Q and expand beyond orthopedic surgeries, as the popularity of ultrasound technology grows and as more physicians get trained at our popular ON-Q C-bloc educational centers nationwide, we expect this trend to continue.

Additionally, we are beginning to see sales growth when ON-Q is used for trauma, especially for treating rib fractures, and for labor and delivery epidurals as an alternative to traditional electronic pumps.

It is also important to note that the average selling price for our ON-Q family of products was up slightly compared to a year ago despite the pressure from our customers to give them additional discounts.

AcryMed continued revenue of approximately $800,000, down significantly from last year's second quarter of $1.8 million.

The prior year quarter included $800,000 of new product sales to a major customer prior to the planned transfer of the new product manufacturing to their wholly-owned plan.

Our plan for AcryMed is to invest heavily in the research and development of AcryMed's core technology as we explore new revenue opportunities from licensing products and technologies and from the direct distribution of new products to current and potential new customers.

AcryMed enhances our long-term growth opportunity and shareholder value by expanding the portfolio of products for I-Flow to sell through our established distribution channels and increasing the number of relative call points for our sales people among physicians, surgeons, hospital administrators and case managers within a hospital.

By complementing our ON-Q line, AcryMed's products for the acute care market contribute to I-Flow's planned transformation into an integrated acute care products company that develops and markets proprietary disposable medical devices that improve patient outcomes.

Our IV infusion therapy revenue for the second quarter of 2009 increased 35% to $10 million.

We benefited from the withdrawal from the market of a significant competitor.

While we cannot predict at this time whether the double-digit growth will continue, we have no reason to believe it will not.

Second quarter 2009 gross margins decreased from 73% to 70% when compared to the second quarter of 2008, primarily because of the change in product mix which was more heavily weighted towards IV products that have lower gross margins than the ON-Q products.

IV products may have lower gross margins, but they are significant contributors to net income because of their low sales, marketing and distribution costs.

SG&A expenses decreased 11% to $22.1 million for the second quarter of 2009 compared to the same period in 2008, a direct result of the additional controls over operating expenses we implemented this year and the leverage we have in our sales compensation plan and our SG&A.

As we have said before, we pay salespeople significantly higher dollars on revenue growth than we do on their previous year's sales.

Therefore, we expect the new cost controls and our increasing ability to leverage all of our SG&A expenses to continue to benefit the company going forward, particularly when the sales growth reignites.

I-Flow was cash flow positive for the second quarter, and for the first six months of 2009 our cash, cash equivalents and short-term investments increased by $9.1 million during this year's first half, including a $5.3 million cash note payment received from interest systems holding.

At June 30, 2009, we had more than $57 million in cash, cash equivalents and short-term investments and we are essentially debt free.

I will have more to say about our strategies to deal with the slow economy and how we plan to deliver on our growth expectations among various other topics.

But first, Jim Talevich will review in detail the financial results for the second quarter and for the first half of the year.

Jim?

Thanks, Don.

Before we continue, please note that this conference call will include forward-looking statements.

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

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

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and I-Flow Corporation's various filings with the SEC.

The statements made during this call are made only as of today's date and we undertake no obligation to update these statements.

For the three months ended June 30, 2009, revenue increased 5% to $37.1 million from $35.3 million for the second quarter of 2008.

Sales in the company's Regional Anesthesia business increased 1% to $26.2 million for the second quarter of 2009 compared to $26.1 million for the second quarter of 2008.

AcryMed revenues were $800,000 for this year's second quarter compared to $1.8 million for the second quarter of 2008.

The prior year quarter included $800,000 of sales for temporary pilot production prior to the planned transfer of manufacturing responsibility to a customer.

IV Infusion Therapy revenue for the second quarter of 2009 increased 35% to $10 million compared to $7.4 million for the second quarter of 2008.

IV Infusion Therapy sales in this year's second quarter benefited from the withdrawal from the market of a competitor as well as the favorable timing of shipments.

SG&A expenses of $22.1 million for the second quarter of 2009 were 11% below prior year, reflecting effective control over operating costs.

Chronic development expenses for the second quarter of 2009 increased to $2.7 million compared to $1.2 million for the second quarter of 2008, reflecting the investment in AcryMed's core technologies in 2009 and internal growth.

Income before income taxes for the second quarter of 2009 was $1.8 million compared to a loss before income taxes of $11.5 million for the second quarter of 2008.

The $11.5 million loss for the second quarter of 2008 included $12.2 million of certain litigation and insurance charges which consisted of a $3.5 million expense to purchase retroactive insurance policies to significantly increase the company's product liability insurance coverage, and $8.7 million in lost contingencies that the company accrued in connection with ongoing litigation.

No additional reserves were accrued in the second quarter of 2009 in connection with the ongoing litigation.

While a portion of the reserve for estimated legal fees was significantly increased in light of the increase in the number of cases, the estimated liability for the cases themselves was reduced to zero as the company does not believe that liability amounts are profitable or estimable at this time.

Net income for the second quarter of 2009 was $888,000 or $0.04 per basic and diluted share.

This compares to a net loss for the second quarter of 2008 of $11.4 million or $0.46 per basic and diluted shares.

At June 30, 2009, I-Flow reported net working capital of approximately $79.6 million, including cash, cash equivalents and short-term investments of $57.5 million and stockholders equity of $118.1 million.

The company is essentially debt free.

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

Don?

Thank you, Jim.

While the recession has slowed our rate of growth, it has not changed our view that the market for narcotic-free relief of postsurgical pain is still early in its development and is underpenetrated and remains a substantial long-term growth opportunity for I-Flow.

An example of another emerging opportunity is the recent news concerning the overuse of Vicodin and Percocet.

Any restriction on the use of these two narcotics will force outpatient surgery centers to look for a non-narcotic way to treat the pain following day surgeries.

We believe ON-Q will be the answer they find as it has been proven to be effective in over 2 million surgeries to date.

That is why we are pressing ahead with the strategy that has established our proprietary ON-Q family of products as the new best practice for postsurgical pain relief with the ultimate goal to replace narcotics as the standard of care.

As we've said many times before, the key to our strategy is to continue developing our highly motivated professional and effective direct sales force and to enlarge the portfolio of products they sell by steadily launching new products for additional surgical procedures where ON-Q can be both efficacious from a medical point of view and beneficial from a cost point of view.

We support the sales effort with targeted marketing and co-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 by cardiovascular, thoracic, bariatric, colorectal, trauma and other non-elective and often life-threatening procedures.

We use similar marketing and sales efforts to capture elective surgeries and surgeries that are not necessarily elective but are non-life-threatening, and therefore postponable.

Our growing library of clinical studies shows that the use of ON-Q as associated with high patient satisfaction, fewer infections and leaving the hospital sooner.

Benefits that are increasingly 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 per discharge goes down for the hospital and the patient's chances of acquiring a hospital-acquired condition or [never] event goes down as well.

While we have traditionally directed our sales and marketing towards surgeons and anesthesiologists, we are now also delivering an economic and cost savings message to hospital administration.

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 increase patient satisfaction, reduce length of stay, increase efficiencies, reduce infections, and therefore achieve lower cost per discharge and contain their cost on a facility-wide basis.

With the new US Government's plans to reduce payments to hospitals by as much as a trillion more dollars, there has never been a better time than now to sell products that contribute to a hospital's profitability and perhaps even its survivability, and to do so in many identifiable and quantifiable ways.

I-Flow's pumps are an efficient, efficacious and an inexpensive alternative 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.

In today's cash-constrained environment, these are important attributes when selling to hospitals, surgery centers and home care infusion providers.

AcryMed is also poised to contribute products that will help prevent infections, and if the infections are acquired, reduce the cost of treating patients.

Oxygen-rich dressings and gels used to close and heal chronic wounds are being developed.

The new products pipeline includes a patented oxygen dressing which is now being manufactured and distributed in small quantities to eight wound centers and has been used on more than 30 patients with chronic wounds looking at efficacy, safety and patient satisfaction.

The product has demonstrated substantial benefits in stimulating healing via an oxygen-rich environment.

It is important to note that these are chronic wounds with an average duration of over a year and had not previously shown a response to conventional therapies.

In all cases, there has been therapeutic and overall appearance improvement of the wounds, and notably a reduction in the odor of the wound bed.

The healing process of these types of wounds is slow, yet two cases healed within six weeks of initiation of the therapy.

Once we complete a reasonable number of case studies and complete the evaluation of results, we will begin a broad marketing and selling effort.

Our new AcryMed products to be marketed soon include a new maximum strength silver gel for the cleaning and healing of chronic wounds, two more sizes of our silver-coated thin film dressings giving us a total of four, a new family of island dressings impregnated with silver, an oxygen-rich gel for packing out wounds that are too big or too deep for a dressing, and many more which are still too early in the development stage to speak about publicly at this time.

Our cardiovascular study is also progressing nicely.

As noted in our release this morning, we continue to enroll patients in our cardiovascular multi-center surveillance study to determine the correlation between pain relief using ON-Q versus traditional narcotics alone and the incidence of hospital-acquired pneumonia and surgical site infections in cardiac surgery patients.

To date, there are 334 subjects enrolled at 12 active centers.

The study will evaluate the relationship between hospital-acquired pneumonia and surgical site infections and patient outcomes, including morbidity, mortality and length of stay.

We expect to complete enrollment by year end and present the data in late 2010.

And now on a final note, we also announced several new developments of a legal nature.

You may recall that we announced recently that the United States Patent and Trademark Office has once again affirmed the validity of I-Flow's 481 patent.

This patent covers intellectual property for the infusion apparatus used in our flagship ON-Q Pain Relief System and is also used as a basis for I-Flow's IV product lines.

On July 14, 2009, the Patent Office completed the reexamination proceeding of the 481 patent and issued a reexamination certificate.

The US District Court in San Diego also denied Apex Medical Technologies, its President Mark McLaughlin, and Zone Medical's recent attempt to limit the patent damages in the case.

The trial is now scheduled to begin in October, and we are pleased that I-Flow will now have its day in court.

We remain confident that the jury will recognize the innovation in our ON-Q pump and stop Apex from violating our patent and misappropriating our trade secrets.

As always, we will forcefully defend our patents whenever we believe it is in the best interest of our shareholders.

The company was also pleased about favorable developments in its product liability lawsuits.

I-Flow was involved in lawsuits alleging that pain pumps caused a shoulder condition called Chondrolysis.

On June 26, 2009, a US district judge in Florida granted a motion for summary judgment and dismissed the first Chondrolysis case against any pump manufacturer to be decided on the merit in a case filed against Greg Incorporated, a former competitor of the company, by plaintiff Kilpatrick.

The judge dismissed the case by applying the US Supreme Court's Daubert decision on the grounds that plaintiff, one, had not sufficiently demonstrated that a pump delivering a local anesthetic continuously over multiple days could cause the type of injury the plaintiff suffered; and number two, had not sufficiently demonstrated that the brake pump specifically did cause the type of injury the plaintiff suffered.

Under Daubert, Federal district courts act as gate keepers admitting expert testimony only if it is both reliable and relevant so as to prevent speculative and unreliable testimony reaching the jury, sometimes called junk science.

The Daubert precedent applies in all federal courts and in the approximately 30 state courts that have adopted Daubert or similar principles as law.

A majority of the company's outstanding lawsuits are in jurisdictions that either follow Daubert or have adopted some form of Daubert principles.

Although other judges are not legally bound to follow the Kilpatrick case decision, in similar lawsuits involving the company -- and the company cannot reasonably predict the outcome of any of these cases -- the company believes that the decision is highly beneficial to the company's position.

We experienced a sharp increase in the number of lawsuits in July.

The company believes that plaintiff attorneys are rapidly filing claims because of their evaluation of the statute of limitations is expiring in many jurisdictions.

Many of these lawsuits name two or more pain pump manufacturers in addition to the company as defendants in the same lawsuit, presumably because plaintiff's attorneys have not yet determined the manufacturer of the pump used in the surgical procedure.

If only a small minority of the outstanding lawsuits have we confirmed that an I-Flow pump was used.

The company believes that a significant majority of the outstanding lawsuits will ultimately be dismissed, either because ON-Q was not involved or because of plaintiff's failure to prove causation.

Both that any pump delivering a local anesthetic continuously over multiple days can cause the type of injury the plaintiff suffered, and secondly, that the ON-Q pump specifically caused the type of injury the plaintiff suffered.

In closing, and 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.

In addition, we expect growth and total revenue of approximately 5% to 10%.

And now, Allan, we are ready for questions.

Thank you.

(Operator Instructions) One moment, please, for the first question.

Our first question will come from the line of Matt Dolan with Roth Capital.

Please proceed with your question.

Hey, guys.

Good morning.

Good morning, Matt.

First question on operating expenses, they've clearly come down nicely even on an adjusted basis from the comparable periods.

Can you talk about what's helping that specifically?

How much legal spend did you see in the quarter, and secondly, where does your sales force stand today?

Have you seen any turnover, or is it simply that payouts are less give the constrained growth environment we're in?

Let's talk about the sales force first.

Okay.

We have had very little turnover.

In fact, the only turnover we've had of any significance is that which we cause.

And as you remember, non-performers get turned over on a quarterly basis, but I would guess our turnover today is closer to 10% or less.

People aren't leaving today because there aren't too many places to go, Matt.

So that actually hurts us a little bit and we have to make decisions on people that don't perform.

As you remember in the past, we've talked numerous times about how our commission plan is leveraged towards growth.

So as the growth slows, the percentage of commission we pay is much less.

So that's a significant savings and that will continue to be there.

And if the growth then reignites, well then, the revenue and the gross margins will offset whatever we would have saved in expenses if the growth had not been there.

So we should win either way.

Jim, do you want to add anything to that?

No thank you.

Does that help you out, Matt?

Yes.

What's the size of the sales force then?

Quota-carrying and the whole group?

It's a little over 300 still.

With 200 quota-carrying?

Yes, we have about 185, 190 quota-carrying people.

Okay.

And the second part, Jim, was any legal in the G&A line this quarter?

Yes.

We still -- since we're still in the Apex litigation, we still are incurring legal costs, so that is in there.

The reduction in expense was not due to a reduction in legal expenses.

How much was it?

You can call me after the call and I'll get that number for you.

I don't know what that number is offhand.

Okay.

And secondly, Don, you mentioned in your remarks that the worst might be over.

Can you give us a sense for procedure volumes, maybe how they have been tracking month to month since -- probably as you went through the quarter.

And then even with your overall growth guidance and the strength of IV, it seems that you're maintaining your RA growth.

So should we see an improvement in the growth rate towards the end of the year?

Is that how we should take your comments, particularly as we anniversary what was a tough end of 2008?

Well, let me step back a little bit.

We had the top sales people in for a meeting last week by top management.

And they're actually very optimistic and upbeat.

They believe that we have seen the floor, and we don't know when it's going to turn and grow significantly, but at least we don't think it's going to get any worse.

They were very optimistic about what is happening with continuous nerve blocks.

It appears that trauma has a significant opportunity because, again, you're talking about doctors who get paid every time they do the procedure, and nobody cares about the cost of a pump when somebody is dying or has cracked ribs and is in terrible pain.

So trauma is a natural for us.

We're also starting to get some traction in epidurals.

I don't know if you saw the announcement this morning, but Cardinal has had another recall on electronic pumps.

Many of those pumps compete with us in epidurals.

They compete with us in pain delivery at the hospital delivering narcotics versus our regional anesthesia, and they also compete with us in the home care market.

So another recall just helps us out if we can take advantage of that.

So when we look at what's happening, we don't think it's getting worse.

We think it's bottomed out.

It's been over a year and a half now since we talked about surgeries being down, so the electives are out of the picture.

We're not being compared against electives.

And we've also heard rumors that people are afraid of what's going to happen with healthcare going forward, and many of them are starting to schedule their surgeries for fear they won't have any insurance in the future.

So there's a lot of things going on out there, Matt.

And, again, it's very difficult to predict what's going to happen.

But I think most of it is favorable for I-Flow.

Okay.

I guess another way to put it was how did Q2 in regional anesthesia track relative to your expectations, and you've changed the language on your guidance somewhat.

Are your expectations for that segment of the business -- are you maintaining those here for 2009?

Well, yes, we were very pleased with the fact that we grew from first quarter to second quarter.

And, again, if you take elective surgeries out of the picture, you take postponable surgeries out of the picture, you lose a lot of seasonality.

The quarters begin to look very similar across the board.

Because a lot of people would schedule their electives and their postponable ones just before summer, and we didn't see a lot of that this year.

So, again, we were very encouraged, though, by the fact that we did get the sequential growth of 6%.

Now remember, third quarter is always a tough quarter because you've got doctors going on vacation.

But with electives out of the picture and postponables out of the picture, it's hard to say what the third quarter is going to look like.

And, again, my people were very optimistic about what is going to happen in the second half of the year.

That's really all I can tell you.

Okay.

Great.

I'll get out of the way.

Thanks.

(Operator Instructions) One moment for the next question.

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

Earhart.

All right.

Thank you, Allan.

Our second quarter results represent a solid performance in a continued weak and fluid environment.

We're using our significant uniqueness and competitive advantages, cost saving drug delivery devices, a robust library of intellectual property, share leadership in most of the markets we serve, and a strong balance sheet to increase our customer base, gain share in the markets we're in today and expand into new markets using our proprietary infection control and wound-healing technologies.

Thank you for joining us this morning, and we look forward to reporting our third quarter results in approximately 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.