NeuroMetrix Inc (NURO) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2005 NeuroMetrix, Incorporated, earnings conference call. My name is Jackie and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Brad Smith, Chief Financial Officer. You may go ahead, sir.

Thank you and good afternoon, everyone. Before we begin I would like to briefly discuss forward-looking statements. Statements we make on this call may include statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature; that depend upon or refer to future events or conditions; that include words such as believe, may, will, estimate, continue, anticipate, intend, expect, plan, or other similar expressions are forward-looking statements.

Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements, because our actual results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors, including those detailed in our SEC filings and other filings.

NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call. I would like to now turn it over to Shai Gozani.

Thank you, Brad. Thank you and good afternoon. I would like to welcome all of you to the NeuroMetrix fourth quarter of 2005 conference call. I would like to extend my thanks to all of you for joining us today. I'm joined today by Gary Gregory, our Chief Operating Officer; Brad Smith, our Chief Financial Officer; and Nicholas Alessi, our Director of Finance.

I will start today's conference call by providing you with a brief overview of our Company and products as well as key highlights for the fourth quarter of 2005. I will then turn it over to Gary for a discussion of our key sales and marketing metrics, and Brad for a summary and analysis of our financial results.

NeuroMetrix is a medical device company establishing a new standard of care through the design, development, and sale of proprietary products used to diagnose neuropathies, which are diseases of the peripheral nerves and parts of the spine. Neuropathies are frequently caused by or associated with diabetes, low back and other spinal disorders, and carpal tunnel syndrome, as well as other clinical disorders.

Our neuropathy diagnostic platform called the NC-stat System is used in nearly 3,300 physician practices and clinics, which is approaching 10,000 physicians throughout the United States. Our technology enables a broad group of primary care and specialty care physicians to effectively, accurately, and objectively diagnose neuropathies directly in their office. Our customers are finding that their ability to diagnose neuropathies earlier in the patient's care is impacting the way in which they manage their patients and make important therapeutic decisions.

The NC-stat System is comprised of single-use biosensors that are placed on the patient's body; we have eight different biosensors that are used by our customers for the testing of five different nerves. The NC-stat device, which is an instrument that performs a diagnostic procedure called a nerve conduction study; the device displays nerve conduction data in real-time on its LCD screen. And finally the NC-stat Docking Station and onCall Information System, which together provide the physician with an optional highly informative and detailed report, either during the course of the study or merely upon its completion, within minutes.

Because of the value created by this reporting system, we believe that essentially all of our customers use onCall. Our physician customers utilize the real-time data presented on the NC-state device and the onCall report, along with their clinical evaluation of the patient when they render a diagnosis.

Our revenues derive primarily from the sale of our disposable single-use biosensors, with the remainder coming from the NC-stat device and the NC-stat Docking Station, which includes access to the onCall Information System.

Key highlights for the fourth quarter of 2005 include for the quarter we generated revenues of $10.3 million, an increase of 79% compared with the fourth quarter of 2004. For the 12 months ended December 2005, our revenues totaled $34.3 million, an increase of 91% over the same period in 2004.

Our gross margin percentage was 74.5% in the fourth quarter last year, versus 74.2% for the full-year 2005. We had a net increase of $1.4 million in cash and investments in the fourth quarter, and for the year we had a net increase of $2.3 million.

The number of customers using the NC-stat System and the usage of NC-stat System continued to experience strong growth on a year-over-year basis in the fourth quarter of 2005. As I mentioned, we have nearly 3,300 active customers and approximately 1.5 million biosensors have now been used by our customers since the initial NC-stat launch in 1991.

We have continued making progress our next-generation diagnostic platform. This product line includes important technological advances and captures clinical and market experience gained over six years and over 1.5 million nerves tested. We believe that this system is particularly suited to our continued expansion in both the primary care and specialty care markets; and we expect to launch in this product in late 2006.

Of great importance, we also added two new Board members shortly after the end of the fourth quarter. Dr. Jack Lord is Senior Vice President and Chief Innovation Officer at Humana, Incorporated, and Dr. Allen Hinkle is Chief Medical Officer for Tufts Health Plan in Massachusetts.

Both of these individuals are leaders in the healthcare industry with impressive legacies of innovation in delivering quality healthcare. We believe that they will bring the same spirit of innovation and progress thinking to NeuroMetrix. Doctors Lord and Hinkle nicely complement our other directors, Mark Lortz, Charlie LaMantia, and Dr. David Goodman, who have deep experience building successful and sustained medical device and technology businesses.

I will now turn it over to Gary Gregory, our Chief Operating Officer, who will outline our performance as reflected in certain key operating metrics.

Thank you, Shai, and I would like to reiterate our thanks to each of you for joining our call today. As Shai has noted, we're coming off another quarter that demonstrates the continued progress of our Company towards our objectives of establishing the NC-stat System as the standard of care, and NeuroMetrix as the leading company in neuropathic diseases.

In Q4 2005, we expanded our customer count to nearly 3,300 active customers, demonstrating a continued ability to secure and establish new customers across the primary care and specialty care segments. Testing with the NC-stat System in the fourth quarter of 2005 grew year-over-year by approximately 89% to 206,300 biosensors, compared with 109,000 in the fourth quarter of 2004. Through this performance, our average account now delivers nearly $9,000 in annual biosensor revenue based on their usage during the fourth quarter of 2005.

The distribution of our testing by our customers is as follows. 66% of our total testing was performed by our primary care accounts; and 34% came from within our specialty care segments. Here, 55% of total testing came from the orthopedic market; 11% of these tests were performed by physicians in the occupational medicine arena; and 34% of these tests were performed by other specialty care physicians.

Testing within the primary care market, which we define as internal medicine, family practice, diabetology, endocrinology, and rheumatology, grew by 135% year-over-year, illustrating our progress in this market segment. Testing by all specialty care physicians segments, which includes orthopedics, occupational medicine, pain management, neurology, and podiatry, grew by 36% year-over-year.

So to summarize, overall testing grew by 89% year-over-year to over 206,000 biosensors. This growth was manifested across all of our key market segments, which validates our continued progress in both the primary care and specialty care markets.

Of additional importance, new NeuroMetrix customers delivered annualized revenue of over $15,000 per account during Q4 2005 based on their usage. We're pleased with this positive progression relative to previous quarters, as it demonstrates that our new customers continued to adopt our technology within the practice.

As a final note towards our progression in customer testing, testing for diabetic peripheral neuropathy and low back and leg pain now represents approximately 55% of total testing in the fourth quarter of 2005. This position, which is evenly split between the two categories, details the Company's continued progression from our original foundation built upon testing for carpal tunnel syndrome to our present position of allowing all physicians to test for more and more effectively diagnose patients who present with major clinical conditions, such as hand and wrist pain, low back and leg pain, and diabetic neuropathy with the NC-stat System.

On an important DPN-related front, clinical front, Lilly and Dainippon have been engaged in Phase III clinical trials for their DPN-focused drug, and several other companies are also advancing drugs through their clinical trials. The potential for these therapeutic agents reinforces the market and clinical opportunities that exist for NeuroMetrix both in the present and into the future.

On an organizational front, we announced our plans on the last earnings call to hire an additional 10 to 15 regional sales managers during the first part of 2006. At present, we now have approximately 40 highly experienced regional sales managers and an additional three direct sales representatives who support the regional managers in the field. We plan to expand our field sales organization to a total count of six regional directors, 46 regional managers, and six sales representatives, and look to complete our field sales force expansion by the end of Q1, 2006.

We continue to build our field sales organization through a highly selective process; and this positions the Company to effectively deliver our technologies and solutions to our expanding base of new and existing customers.

In addition, we also have over 500 independent sales agents on the frontline calling on physician practice groups and generating qualified sales leads for our sales team. This extension of our sales organization is a key component of our market approach, and this allows us to better secure and ultimately service our customers.

On the international front, during 2006, we will evaluate the international opportunity for the NC-stat System. Our goal will be to gain a more thorough understanding of the market size, reimbursement environment, our distribution and launch strategies as we assess the possibility of a 2007 O-US market launch. As a noteworthy reminder, we have already received a CE Mark approval for the NC-stat System.

On a final note, we're confident in our position as the market leader in this arena, and we look forward to reporting back on future Company developments as we continue to establish a new standard of care within the marketplace.

I will now turn it over to Brad Smith, who will discuss our financial results for the fourth quarter and year-to-date in 2005.

Thank you, Gary, and thanks again to all of you for joining us today. Total revenues for the fourth quarter of 2005 were $10.3 million, compared with revenues of $5.8 million for the fourth quarter of 2004, representing an increase of $4.5 million or 79%. Our biosensor revenues totaled $9 million or 87% of our total revenue in the fourth quarter of 2005, and our device revenue totaled $1.3 million for the fourth quarter or 13% of total revenue. This compares with approximately $5.1 million in biosensor revenue in the fourth quarter of 2004, which represented 88% of total revenue, and $700,000 of device sales in the fourth quarter of 2004 or 12% of total revenue.

Revenues for the 12 months ended December 2005 were $34.3 million, compared with $17.9 million for the same period in 2004. This represented 91% growth year-over-year. For the 12 months ended December 2005, biosensor revenue was $30.1 million or 88% of total revenue; and device revenue was $4.2 million or 12% of revenue.

Increasing revenues for the 12-month period in 2005 as compared to the same period in 2004 is a result of an increase in the number of active customer accounts -- it grew from 2,200 to nearly 3,300; the growth in average revenue per account, from approximately $13,000 to slightly over $15,000; and the expansion of our direct sales force. The direct sales force grew in 2005 from 22 at the beginning of the year to over 30 at the end of the year.

During the fourth quarter of 2005, our overall gross margins were 74.5%, compared with 72.9% for the same period in 2004. Looking at gross margins more closely by revenue type, biosensor gross margin was 74.1% in the fourth quarter of '05, compared with 73.3% for the same period in '04. The average selling price was relatively unchanged from period to period at $35 per biosensor.

Our device growth margins for the fourth quarter of 2005 are 77.2%, compared with gross margins of 70.2% in the fourth quarter of 2004. This increase was primarily due to an increase in the device list price from $3,500 to $4,000, which occurred at the beginning of 2005.

Gross margin percentage for the 12-month period ended December 2005 was 74.2%, compared with 72.9% for the same period in '04. The gross margin for biosensors was 74.1% for the 12-month period ended December '05, versus 73.7% for the same period in 2004. Then the gross margin for devices was 74.9% for the 12 months ended December 2005, compared with 67.2% for the same period in 2004. Again the improvement in gross margins on the devices was principally due to the increase in the list price, which again happened at the beginning of 2005.

Relative to our manufacturing, the parent company of the manufacturer of our biosensors announced during the third quarter of 2005 that they were being acquired by Johnson Electric, a large diversified business based in Hong Kong. This acquisition was completed during the fourth quarter of 2005, and we continue to work on a day-to-day basis with their Rhode Island based manufacturing team. We are also in the process of finalizing a supply agreement with them.

We also recently transferred the manufacturing of our devices to a new vendor in the Boston area, Sunburst EMS, which we had indicated in our 10-Q filing at the end of the third quarter. We're currently shipping devices to customers manufactured by this new vendor.

Total operating expenses in the fourth quarter of 2005 were $7.1 million compared to $5.2 million in the fourth quarter of 2004, representing an increase of 37% year-over-year compared with our growth in revenue of 79%.

The increase in operating expenses during the fourth quarter of 2005 was primarily associated with the expansion of our sales and marketing efforts, especially the increase in our direct sales force, and cost associated with Sarbanes-Oxley 404, other professional fees, and increases in staff supporting the overall growth in our business.

Operating expenses for the 12 months ended December 2005 were $25.3 million compared with $16.6 million for the same period in 2004, an increase of 52%, compared with our overall revenue growth rate of 91%.

Sales and marketing expenses increased to $14.2 million for 2005 compared with $8.5 million or an increase of $5.7 million or 67%; again due to the expansion of the sales force primarily.

G&A increased from $4.8 million to $7.3 million. This increase of 51% was due to increased expenses associated with being a publicly traded company.

Finally, R&D increased to $3.8 million from $3.3 million for 2005 -- $3.8 million 2005 versus $3.3 million in 2004 as a result of expanded staff and increased product development efforts.

We do anticipate that operating expenses will increase in the next several quarters, primarily due to the expansion of the sales force, as Gary has indicated.

Income from operations for the fourth quarter of 2005 was $581,000, compared with a loss from operations of $975,000 in the fourth quarter of 2004. Interest income for the 12 months ended December 2005 was $839,000, versus $214,000 for 2004. The substantial increase in interest income results from the investment of the net proceeds from the IPO and increased yields in 2005.

Interest expense was negligible for the 12 months ended December 2005, whereas we had nearly $1 million in interest expense in 2004. This is primarily related to a line of credit which was paid off in the second half of 2004, using a portion of the proceeds from the IPO.

Net income in the fourth quarter of 2005 was $805,000, compared to a net loss of $835,000 for the fourth quarter of 2004. Then net income for the 12-month period ended December 2005 was $938,000 compared with a net loss in 2004 of $4.3 million.

Our basic net income per share for the fourth quarter was $0.07 and our diluted net income per share was $0.06. That compares to basic and diluted net loss of $0.07 in the fourth quarter of 2004.

Basic net income per share of $0.08 and diluted net income per share of $0.07 was recorded in the 12-month period ended December 2005. That compares with a basic and diluted net loss per share of $2.35 for the 12-month period ended December 2004.

Focusing now on our financial position as of December 31, 2005, our total cash and investments was $32.3 million as of the end of the year. That compares with $30 million at the end of 2004, representing a net increase of $2.3 million for 2005. During the fourth quarter of 2005, there was an increase of $1.5 million in cash due primarily to positive cash flow from operations.

During 2005, $430,000 of cash that was previously restricted in connection with the deposit on our facility became unrestricted and was therefore now included in our total reported cash and investment position.

Working capital was $34.7 million as of December 2005, compared to $22.5 million at the end of 2004. The large increase in working capital was due to long-term investments that matured during 2005 and were reinvested in short-term investments, and, of course, due to our positive cash flow from operations.

Total assets were $42.9 million as of the end of 2005, compared with $38 million at the end of 2004. The increase was due to increases in cash and investments, as well as an increase of $1.4 million in our accounts receivables, and an increase of $1.4 million in inventory due to the overall growth in our business as well as a strategic decision to increase our inventory on hand.

Our DSO was 40 days as of the end of 2005, compared with 50 days at the end of 2004. Our inventory turn was 4.4 times per year compared with 4.1 in 2004.

As of December 31, 2005, we had no long-term debt on our balance sheet.

So we're pleased with our financial performance for 2005,wWith revenue growth overall of 91%, profitability in the last two quarters of the year, and an overall increase of $2.3 million in total cash and investment balances. This concludes the financial update portion, and I would like to now turn it back over to Shai.

Thank you, Brad. We're very pleased with our fourth-quarter performance and consider it further validation of the in-office neuropathy diagnostic opportunity.

There are now over 21 million people in the United States with diabetes and another 41 million who are pre-diabetic. Neuropathies affect two-thirds of the people with diabetes and lead to pain, foot ulcers, amputation, and in the elderly significantly increased risk of falls. The early and accurate detection of diabetic peripheral neuropathy or DPN and other neuropathy in people with diabetes leads to more effective patient management and treatment decisions, and also resulted in improved clinical outcomes.

Low back and leg pain and carpal tunnel syndrome, which together account for over 10 million physician office visits in the U.S. alone, are also closely associated with nerve damaged. Effective clinical management of these conditions generally requires early and accurate diagnosis of neuropathies.

Our neuropathy diagnostic solution is rapidly becoming a standard of care throughout the marketplace. The NC-stat System has FDA clearance as standard instrumentation for the performance of nerve conduction studies, which serve as the gold standard method for evaluating neuropathies.

The NC-stat System meets or exceeds the most stringent technical specifications for this type of electromedical instrumentation. Furthermore, the diagnostic accuracy and clinical utility of the NC-stat System has been demonstrated in multiple published peer review studies. It is for all these reasons that the NC-stat System is rapidly becoming a standard of care in the evaluation and management of patients at risk for neuropathies.

We look forward to keeping you updated as we continue progressing and building the standard of care, and ultimately expanding it to the additional diagnostic and therapeutic applications. We believe that we are establishing NeuroMetrix as a premier brand in the assessment of neuropathies.

We have now reported six consecutive quarters of strong growth since our IPO, and we expect continued growth in our business in 2006 as we pursue our goal of establishing a new standard care with the NC-stat System.

As we transition to the question-and-answer session, I would like to note we're pleased to discuss the fourth quarter and full year 2005 business details and relative metrics, but we do maintain a policy of not providing specific guidance on future financial performance. We look forward to your questions.

(OPERATOR INSTRUCTIONS) Bill Quirk from RBC Capital Markets.

Congratulations on a solid quarter. First off, with respect to primary care accounts that are currently running -- I think I heard you right -- at $15,000 per year, if my math is correct that would suggest about 2.3 or so tests per week. Nerve conduction studies, rather, per week. Do you anticipate utilization growing beyond this $15,000 a year level? Where we think this can ultimately get to?

Thanks for the question, Bill, and it's a good one. Your math is spot on. It is approximately 2.3 patients per week. The question as to where it goes is -- it is not a matter of if it will go upward over time; we firmly believe that will occur. The question is -- how broad or expansive can it become?

To elaborate, the average physician who might see 25 patients in the day, 125 in a week, 500 in a month, that is pretty healthy patient load, but probably close to a national average. Statistically, 9% of all patients who present to that physician's practice have low back and leg pain. Another 2% have hand and wrist pain. Then there is also the diabetic neuropathy patient population.

So if you just took a conservative number of 5% of that patient volume, that would be 25 patients a month. Or if you used the 9 plus 2 plus more percent, you are well over 50 patients a month from a single physician practice.

So the answer is, there is a lot more room for growth and we plan to get after it. As we create a new standard of care, our job here is to make sure that the physician continues to understand and expand their utilization of our technology, appropriately utilization, to really grasp the clinical benefits that are available on how they diagnose and ultimately treat their patients.

Thanks for the answer, Gary. Understanding that obviously you have a pretty long runway ahead of you with existing accounts, are there any specific marketing plans that you guys are putting into place? Or is there anything -- do you feel that you need to put a program direct into your existing customers?

Or do you think this is something that, as the physicians become more and more familiar with NC-stat, that they're just going to start to gravitate towards this and utilize this more within their existing practice?

I think it's a combination of both. We have a powerful field sales organization, which is now at a count of 40 region managers. Their job is not only to accrue new customers, but to drive appropriate utilization on a practice-by-practice basis.

So the first strategy is practice-to-practice consultants, where our NeuroMetrix region manager walks in and, as a highly experienced, highly trained, highly dedicated individual, sits down with the physician and reviews who they are testing, who they are not, the clinical benefits obtained, and is there greater opportunity to utilize our technology to advance their patient care. That is the first element and that is what is happening day in and day out.

The second is there are definitely marketing initiatives underway to help support that. Some are directed to a broader market approach through advertising etc. But most of it is directed to the practice itself, where we can have the greatest impact and really educate the physician on the value here in using our technology.

Understood, thanks for the answer. Then lastly, and maybe it's a question for Brad, did you guys raise prices on either NC-stat or on the biosensors at the beginning of 2006?

I will take that one if you don't mind, Bill. We did raise our list price on the system from 3995 to 4995. An important note on that, though, is that we were definitely receiving some customer concern, because they were basically paying list price for all of their purchases.

So we're not sure when that price effect will start to take root, because we are using that as an opportunity for the customer to earn a discount right out the gate, if they make an appropriate decision to take advantage of our technology.

So in terms of modeling it out, I think it is safe to say that it was done more to increase an opportunity for a customer discount than to provide a price increase, at least in the near term. As we move forward in 2006 I think it will take greater root and we will take advantage of that from a business perspective.

Understood. And prices on the -- I guess Brad mentioned it earlier with respect to the fourth quarter. But prices on the biosensors themselves also have not changed? Or have not changed from what we have seen earlier in the year?

That's correct.

Okay. Thanks, guys. I will jump back into the queue.

[Emily Johnson] from WR Hambrecht.

Congrats on the quarter. Just a quick question about the P&L. Notice that there was about a 900 basis point sequential downtick in R&D as a percent of sales. Is that indicative of you backing away from -- or I should say, would we expect that kind of a trend to continue? Or is that -- are you going to grow that a little bit faster, especially considering the drug delivery platform you guys of are looking towards in the future?

Emily, thanks for the question. We are -- in absolute dollars our R&D did increase slightly, you are right; is a percent of revenue it declined slightly, sequentially, quarter-to-quarter. We do expect to be adding additional resources and to be making an additional investment in R&D as we move forward. So we don't expect that trend to continue.

Do you guys care to comment anything more about that? About anything, plans for R&D, any R&D spending in the future?

As we have talked about, we have a number of different programs ongoing. We have obviously got the R&D efforts related to the NC-stat System. We have R&D related to our third-generation platform that we have talked about that is slated for the later part of this year. And we have our drug delivery platform, and then some additional diagnostic opportunities that we have not talked about in any detail at this point. We will be doing so going forward in this year.

So there is actually a very heavy R&D agenda. I think what you saw is really just a timing of bringing on people and so forth. There is a very significant commitment to R&D, and you will be seeing that growing. But obviously relative to the top line, it may not exceed the top-line growth by any means.

Okay, great. With the other pharmaceutical companies developing DPN drugs, any indication as to whether or not you guys would be used for their quantitative measurements or for their later phase trials?

We are -- the NC-stat is used in numerous clinical trials, epidemiological trials as well. They are in at least two or three trials right now of drugs by biotechnology companies, and three or four NIH, CDC, NIOSH studies of thousands of patients. So heavily used in that arena.

At this instant it is not being used by a company for assessing a diabetic peripheral neuropathy drug. Those trials have been ongoing for some time and so forth. But that may or may not occur. Regardless of whether that happens, we would still be the measurement of choice once those drugs get into the marketplace.

Okay, thanks very much.

Ryan Rauch from Jefferies.

Congratulations on a good quarter. Just a handful of just quick questions. Where do you stand with your next-generation NC-stat System? Sort of what is the planned rollout and what will the ASP for that be, if you have disclosed that?

We have not, Ryan, and so I am sorry to disappoint you on the details. We are -- it is slated for this year. It will be the latter part of the year. The product is coming along very well. As far as ASP, rollout plan, upgrades and so forth, we really are in the process of defining that plan and so are not presently able to give details on that.

Okay, but it is an '06 rollout, correct?

That is our expectation, correct.

Okay; and I ask it on every call, do you care to give any more color on your rest of world initiatives? I know you indicated it could be '07. I'm just trying to figure out what exactly are you waiting for? To figure out whether to use a distributor or go direct or -- ? It seems to be a pretty sizable market opportunity in at least Europe, and you already have approval. So anything else that you could add there? Or just going to stick with sort of evaluating it in '06?

No, definitely, your assessment, Ryan is spot on. It is a big market, virtually all of our [sale] efforts today have been focused upon the U.S. market. We're getting after the international opportunity. What we need to do is really best understand the landscape to prioritize our launch efforts and to develop those launch efforts.

So market size, reimbursement, distribution landscape, all of that is underway. We clearly look to make that a firm '06 project; and as we roll into '07 that is our projected timeline.

Then finally, Brad, what do you expect your tax rate to be going forward? I know you don't give guidance. But just sort of what is sort of your best guess, if you don't mind giving us that?

The reason we had a very modest tax provision for the quarter, for the fourth quarter, is because we had some alternative minimum tax. We did not have any regular income tax because of net operating loss carryforwards that we have.

So the only thing we expect in the near term is a very modest AMT or alternative minimum tax effect. We don't have any actual tax payable. It is just a GAAP tax provision that we have to record for AMT.

As to when we actually start reflecting fully taxed numbers in our income statement, it depends on the progression of our profitability as we go forward, how many quarters of profitability we have had. It becomes a judgmental area.

It could be later in 2006 or it could be in 2007 when we start recording fully taxed numbers. We would expect our -- at a rate of 34% plus state rate, less some adjustments. We will be in the 35% to 40% effective tax rate once we start. That is what we would expect, once we start reporting fully taxed numbers.

Okay, thanks a lot. Good quarter. Have a good afternoon.

Juan Sanchez, from Punk, Ziegel.

Congratulations on the quarter. When will you consider another expansion of the sales force? When do you finish the evaluation of the performance of this current wave of expansion?

The second question will be, where you see the gross margin going?

I will take the first one. We are completing this wave of expansion and will have it completed by the end of this quarter. We will be at a count of 46 region managers; and both the field sales management and sales representatives in place to support that engine.

The next wave is to be determined. We look for all of our new hires to gain and be productive within a very compressed period of time, six months on the outside. But we have got a realigned map, if you will. We have got the talent ready to roll.

And I think it's important for us to let this one settle, as we have done in the past, and build success with the current team or the new team, newly expanded team; and then evaluate it on a quarter-to-quarter basis. We continue to do that and will continue to do that as we build the market.

With regard to the gross margins, we have seen a very good positive progression of our gross margins over the last six quarter since we have been public. We are not setting any expectation that gross margins will improve from here. We would expect them to stay in the range that they are at right now. But again we have seen a very nice positive progression over the last six quarters.

Thank you very much.

Harris Hall from Singular Research.

Congratulations on your quarter. A question on the biosensor revenue. It looks like the number of units you sold was higher than the revenue growth. Did the ASPs fall there?

No, they didn't. Our ASPs have pretty much been maintained at a plus or a minus $35 dollars per biosensor. That has been a trend that we have seen really over the last four quarters of 2005.

Okay, then -- because you had 89% biosensor unit growth, right?

89% growth in testing. That was testing quarter over prior year's quarter. That's one of the key metrics that we really drive the business off of.

There is also -- we report on actual usage by our customers. Our revenue reflects actual shipment of biosensors, since we record revenue upon shipment.

So it is just a shifting, timing difference that would explain the revenue growth numbers being different than the testing?

Right, that's correct.

On the diagnostic device, I know you said you implemented new price -- list price increase for the first quarter. Should we expect that the diagnostic device revenue will start tracking customer growth, or do you expect it to continue to exceed customer growth?

I think fundamentally, just to give a bigger picture on this, our customers buy the system and buy the biosensors. Since every customer that we sell to is in essence -- a majority of them, I should say -- are in essence individual business owners, there is no reason for biosensors to get ahead of the utilization, or for biosensors to get ahead of the equipment sales for our business.

Fundamentally, these individual owners have no desire or penchant for stocking their shelves with product. So we see a very consistent quarter by quarter relationship between biosensors, used biosensors purchased, and the equipment sold. And that should continue well into the future.

Right, my question, though, was on the revenue for the device. Because of the price hike you had, it has exceeded your customer growth.

I see. Yes, that hasn't taken root and it probably won't be an impact in Q1.

Okay. Great, thank you very much.

Bill Quirk from RBC.

Gary, did I hear you correctly, it takes about six months to get a rep up and fully producing?

Yes. Is there a tag on to that, or do you want some flavor on that?

No, that was one question. Actually I have a second follow-up. So Six months there. Then secondly, once we get through the current sales force expansion, how many territories do you feel that we are going to be still underrepresented? How would that compare with, say, a year ago?

Okay. The six months is -- our terminology here is that in six months a region manager is fully experienced. We expect production out of a region manager literally the first month on the job. Those expectations are based on the talent that we hire, the tremendous technology we have, and the direction and -- for lack of other words -- the playbook that we provide to each and every regional manager.

So their learning curve is compressed to six months, whereas in many companies in the device arena it takes six months just to figure out what you're doing. So we expect production from month one; but by the end of six months, we give them a badge of experience and consider their production to be consistent with someone who has been around four years. So that is an overview on that.

In terms of the current coverage, the 46 region managers appropriately cover the current U.S., Alaska, Hawaii in full and detailed support. So we have got the coverage. I guess if you are asking could we -- is there room for further expansion? We certainly believe that may be a possibility downstream, as we have evidenced or done in the past.

We have had four waves of field sales expansion in the past couple of years, and I am sure we are not done, although we are not providing any outlook on when and/or if that will firmly occur in this year or beyond. But the path says that it will occur again.

But bottom line is that we cover the U.S. well. We have an average account of 70, 80 customers per RM, along with the new customers that they accrue every month. And that is a good number for us right now.

Is there a specific target of accounts per regional manager that you would like to stay within? Say the 70 to 80; and then at that point, that kind of triggers something internally that says, hey, we need to hire some additional help for XYZ territory? Or is it less cut and dry than that?

The reason it is a little less than cut and dry is because the geographies continue to shrink. So 120 accounts over three states versus 100 accounts over a quarter of the state, the game is changing for us. So we really have to evaluate that equation over time. How we looked at it in the past may not be as relevant to how we will look at it three or six or a year from now, three or six months or a year from now.

Understood. Thanks, guys.

[Robert Blumbach], Presidio Management.

I have got a couple quick questions on what you have termed the sales reps. The first of those questions is, do they carry any sort of quota at this point?

They do not. They have three primary roles. The first is to basically be our bullpen, to use a baseball analogy, where they're in the bullpen and ready to go. So they are in training and development. The second is to support lead generation. The third is to support strategic initiatives, whether it is open region coverage or going after a specific targeted market for us that we want to further penetrate. So they do not carry a specific quota.

Are they actually making any sales themselves? Or are the sales all attributed to the RMs?

The sales are attributed to the RMs. So their goal would be to generate a lead; the RM is the one who comes in and closes it, and aligns the doctor not only for the close but long-term utilization.

Okay, and I take it this role is similar to that which they had, say, a year ago or whenever it was your first rolled out the sales rep function?

That's correct.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) [Andrew Kops], from Kops Capital Management.

Thanks. Gary, still on the reps and the productivity, the way I have been modeling it, I have had a tough time seeing that number rise. The average productivity, the average placements per unit of time, quarter or whatever you want to use. Is that true? DO you think that will continue to be the case, that it will stay the same, or fall as less experienced reps are brought on?

The productivity in terms of our productivity for the past four quarters, that was based on a count of region managers that we had at the start of 2005. So we ran with approximately 30 region managers throughout all of 2005. So if those ratios you're looking at are holding firm, that might be one of the reasons why. The sales rep role was basically a bullpen, and we're hiring really talented individuals for that.

Gary, sorry, I meant to refer to the regional managers, not the reps.

Okay, got it. Got it. So the expansion of the sales force really didn't take root until the beginning of this quarter. We have been on a ferocious campaign and have built the organization rapidly, and will close that out by the end of this quarter. But our expansion from 30 to what is now 40 would not have had any impact upon our 2005 results.

So that being the case, the way you are measuring things, are you seeing steady placement productivity, rising or falling?

It is definitely steady. It is a highly predictive performance to date, and we see that continuing in the future.

Okay, and so it sounds like your experience is showing some type of a max or a comfort zone or a reliable number. There is not a -- that you are having a tough time having that trend rise?

I think a good way to look at it, if I may offer, is it's definitely not a comfort zone. It is doing the job right. So if an RM sells X numbers in a month, they are back within less than a month installing that customer, focused on the customer and their utilization of the technology, and understanding it on a clinical level, on a practice integration level, and also on an economic level.

So we do a -- we're a very strong consultant to the practice. So I think we have got the right equation. Obviously, if you expand the sales force and the numbers are predictive, it should have an impact, a positive impact upon the business. We certainly project or foresee that to be the case.

That all makes a lot of sense, thanks.

And at this time, gentlemen, you have no further questions.

Okay, well then, we will wrap up. Thank you very much. We appreciate your joining us on our fourth-quarter 2005 conference call and we look forward to updating you as we go into 2006. Thank you very much.

Thank you.

Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.