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TearLab Corporation (TEAR)

Q2 2013 Earnings Conference Call

August 13, 2013, 16:30 PM ET

Executives

William G. Dumencu - CFO

Elias Vamvakas - Chairman and CEO

Marguerite McDonald, MD - F.A.C.S

Cynthia Matossian, MD - F.A.C.S.

Ranjan P. Malhotra, MD - F.A.C.S

Thomas Burke - CEO of Ophthalmic Consultants of Long Island, OCLI

Analysts

Jeffrey Frelick - Canaccord Genuity, Inc.

Chris Lewis - ROTH Capital Partners LLC

Steven Crowley - Craig-Hallum Capital Group LLC

Chip Saye - AWH Capital

Ben Haynor - Feltl and Company

Operator

Good day, ladies and gentlemen. Welcome to the TearLab Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Bill Dumencu. Sir, you may begin your conference.

William G. Dumencu

Thank you, Melba. Just to remind everyone, certain matters discussed in today's conference call or answers that maybe given to questions asked including answers provided by the expert panel of current TearLab Osmolarity System customers from the eye care community are forward-looking statements that are subject to risks and uncertainties relating to future events and to other future financial performance of the company.

Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in the company's most recent public filings with the U.S. Securities and Exchange Commission and the Canadian Provincial Securities Administrators and can be accessed through the EDGAR and SEDAR data basis found at www.sec.gov and www.sedar.com respectively.

Please note that the company is under no obligation to update any forward-looking statements discussed today and investors are cautioned not to place undue reliance on these statements.

I'd like to now turn the call over to Elias Vamvakas, TearLab's Chairman and CEO.

Elias Vamvakas

Thanks Bill and good afternoon everyone. As with previous calls, I want to update you on our progress with respect to the commercialization of the TearLab system.

Total 2013 second quarter revenues were 3.5 million, up almost 400% from Q2 last year and up 42% sequentially from our previous quarter. Excluding non-cash charges associated with the continued reevaluation of outstanding warrants and with annual options that were granted and fully vested in Q2, our adjusted net loss was $0.15 per share. That's about $0.04 higher than last quarter and it was driven primarily by a 1.3 million sequential increase in sales and marketing costs, which of course includes commissions which were higher than projected given than we sold significantly more units. Higher costs were offset partially by higher total gross margin.

As we've discussed over the past couple of quarters, we have been significantly increasing our investment in our sales organization with the goal of building widespread awareness and adoption of the TearLab Osmolarity system. In fact, that was the principal use of proceeds from our recent financing. The good news is that those investments seem already to be paying dividends.

As we disclosed a couple of weeks ago, a total of 569 system orders were booked in the second quarter. Of those 327 systems were under the masters multiunit program, 221 were through our minimum use access programs, 6 were direct purchases and 15 were purchased outside the U.S. As an aside, a question I was asked several times over the last month was how many actual customers make up our masters placements? The answer is 57. We had 57 active masters accounts at the end of the quarter.

If you do the math on that with our current installed base it appears that the average number of active devices per masters agreement is 7.3. That number is not accurate since there are several accounts that have not yet received all their devices because of our current manufacturing backorder position.

On that note, another investment that we made this year has been directed towards increasing our system manufacturing capacity so that we can keep up with the higher than expected demand we've experienced. We are now producing between 700 and 800 systems per quarter. That's about triple our manufacturing capacity when we started the year. Even with this increased production, our sales have been so strong that we are still in a small backorder position but I expect that to clear up this quarter due to the fact that we're in a seasonally slow period for new system orders.

Also, the second system manufacturer that we secured to provide us with greater production flexibility as well as backup, Minnetronix of St. Paul, Minnesota is expected to go online late in this quarter. As many of you know there have been a lot of questions out there in the marketplace over the past couple of weeks about satisfaction levels amongst their doctor-customers and about returned units. Rather than just giving you our position on that, I thought it best that I invite an independent panel of TearLab customers to give you their individual perspectives in the Q&A session that will start shortly. But in the meantime I'd like to address some of these comments directly by providing you with the facts.

It is important to understand that the vast majority of our customers, especially those in new markets have no way of knowing what reimbursement looks like from private insurers in their market before they commit to their device. They only find out after they've treated patients and have submitted their claims. As I've mentioned many times in the past, private reimbursement is quite varied across different states and different carriers. For example in markets like North Carolina and Florida, Blue Cross/Blue Shield was reimbursing at levels that were below the actual cost of our cards. We understand that doctors need to be adequately paid for performing their services and we fully expect to take back a device in the market where a doctor can't financially offer the test.

I have to tell you that I've been pleasantly surprised with our performance even in poor reimbursement markets. I'm very proud to tell you that less than 5% of our customers have ever returned a device. Frankly with a level of variability in private reimbursement, especially early on I think this is really a tremendous endorsement of the clinical value and utility of our cash. It's also worth noting that we have been conservative in disclosing the numbers in both the new contracted units as well as our installed base, the numbers that we give out each quarter have always been net of any returns.

To finish off this particular discussion, I would also like to note the successes that we are now starting to have with private insurance. I'm going to have to stop using my examples of poor state brands since Blue Cross/Blue Shield in North Carolina has just changed their policy to include coverage of our test at the same rate as Medicare, and Blue Cross/Blue Shield in Florida has recently followed suite with levels that are slightly below Medicare.

To be clear, as I've always said, there are regions where we are seeing less than satisfactory private reimbursement levels and while we're working hard to change that, it will take some time. That's the extent of my update. I'm sure our expert panels have much more insightful feedback for you. So I'll get us there as quickly as possible.

As with previous calls, let me close off my introductory remarks by sharing with you where we stand with respect to our sales infrastructure and our installed base. As of today, there are 54 people in our sales organization that consists of one exec, four general managers, five professional relations coordinators, 27 of our own territory managers plus 12 independent reps and five implementation specialists, but you can expect to see that increasing shortly.

Turning to device tallies, all the numbers that I'm about to give you as of the close of Q2 2013 and exclude devices used strictly for research and/or educational purposes. At the end of the second quarter, we had 1,654 commercial units ordered in the U.S. Of those 1,356 are active while 298 have yet to be activated. Of the 1,356 active devices, 238 were purchased, 701 were under minimum used contracts and 417 were under our masters program. Of the 298 U.S. units that have been ordered but not yet activated, 201 were part of a minimum use program and 95 were part of a masters program, two were purchased units. In the rest of the world, at the end of the quarter, we had 460 devices.

Thank you again for joining us today and as I've mentioned we have a panel of TearLab customers here with us today that have graciously agreed to share and discuss their own experiences with TearLab with you. To help matters sufficiently, I will moderate a Q&A session and try to involve our panel in answering your questions as much as possible to help give you realistic picture of our TearLab and diagnostic testing [venue] as used in the field.

First, let me introduce you to the panel. First, Dr. Cynthia Matossian runs a very successful private practice in Mercer County, New Jersey; Dr. Matossian is an early adopter of technology in fact so early that she went through the whole moderately complex screening process to be able to use TearLab. Her practice is well known for using the latest and best technologies not only in her practice but Dr. Matossian also does a significant amount of research and is one of the favorites for big pharma.

Also with us is Dr. Malhotra who runs a very successful surgical practice in St. Louis in partnership with Dr. Brady. Dr. Malhotra uses TearLab very effectively to provide outstanding results in his surgical practice. I asked him to join us particularly as he's experienced a very challenging reimbursement environment and had to struggle early with the financial value proposition of doing our tests. I'm happy to say that our clinical values kept him in the game as reimbursement has continued to improve in his region.

Dr. Marguerite McDonald's also supposed to be joining us although I received a message from her. She's been saying that she could be a little late as she's still in surgery. Many of you know that Dr. McDonald's one of the most recognized ophthalmologist in the country. She's a clinical professor of NYU School of Medicine at Tulane University, was Director of Corneal at LSU, is an editor of several journals and has a list of [first evers] that I can't go through today because we only have an hour for this call. Dr. McDonald is a recognized expert on Dry Eye Disease and lectures and consults around the world with a focus of building a successful practice in managing Dry Eye.

The last member of our panel is not a doctor. Tom Burke is the CEO of OCLI, one of the best managed and most successful practices in North America. OCLI has nine offices, 26 doctors and more than 300 staff that manage more than 170,000 patient interactions every year. OCLI also distinction of housing some of the biggest names in ophthalmology and Tom has been the head of all that for 12 of his 27 years tenure in ophthalmology. Tom started with three TearLab units in early 2012 and has been steadily adding with our masters program and they now have approximately 70 devices, almost one in every one of their lanes. I wanted to bring Tom to our panel so you can get an executive perspective of TearLab and the positioning of lab testing in general from the man that ultimately makes the purchase and implementation decisions.

So let's get started. I will take the questions and pass them on to our panelists to keep the process orderly. Melba, if you can open up our lines. And has Dr. Malhotra joined us yet?

Operator

No, sir.

Elias Vamvakas

We're expecting him shortly as well. He was just finishing of surgery. So well we have Dr. Matossian and Tom Burke, we can start some of the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Jeff Frelick of Canaccord. Your line is open.

Jeffrey Frelick - Canaccord Genuity, Inc.

Good afternoon, folks. Elias, maybe direct the first question maybe towards Dr. Matossian, curious if you could walk us through the decision process kind of was contemplated as they made a decision to go with TearLab? And then the second part of the question, what did they do previously to diagnose Dry Eye and how has the treatment decisions differed today? Thanks.

Elias Vamvakas

Sure. Cynthia, maybe you can do that, maybe you can give a quick little history of TearLab. As I mentioned, you were one of the very early adopters, so feel free to expand on that as well.

Cynthia Matossian, MD

Sure, and I'll try my best and please interrupt me if I don't cover all of the points that you wish. Because of all the surgery that I do and the very high expectations of our patient in exquisite outcomes with a refractive cataract surgery, I had to make sure I was able to deliver more than what I was promising my patients. One of the main parts of successful cataract outcomes is how healthy the tear film in the ocular surface disease issues that have to be treated well before the measurements are done to calculate an implant. So when TearLab first came out, I was so excited because I knew I could objectively get a measurement that then we can track and help the patient understand that he or she has ocular surface disease. Prior to that, it was more subjective. It was the way I would grade a Dry Eye based on fluorescein staining, lissamine green staining. We never did Schirmer. To me there were too unreliable and they take too long. But I used to do just fluorescein and lissamine green staining. So I have continued with those two but added to your osmolarity because you can't just rely on staining, sometimes you see very abnormal tear osmolarity numbers, sometimes patients are asymptomatic yet have pretty bad ocular surface disease. So it's helped me better understand who is and who is not a candidate for the more advanced technology implant and even more so help the patient him or herself understand that yes indeed there is something going on, it's preexisting, you as the surgeon didn't give it to the patient because of cataract surgery, so it's made a huge difference in our practice.

Elias Vamvakas

Jeffrey, did that answer your question.

Jeffrey Frelick - Canaccord Genuity, Inc.

It does, Elias. Thanks. And then just maybe a quick follow-up for Tom and I'll jump in the queue. Could he share with us maybe – for his company what percent of the patients that flow through other practices that what percent are actually tested?

Thomas Burke

I don't have an exact number for you, I apologize. As Elias indicated, we see such a large number of patients and some are in follow-up, so they may not have it done on every visit that they come in. But I believe it's probably 70%...

Elias Vamvakas

Tom, you may want to talk about sort of the protocol that you guys are working on putting in place and maybe a little history around – so maybe how different today than when you were starting.

Thomas Burke

Sure. It's really a point of contact test where we have patients come in and if they present and answer a series of questions that the doctor has designed, several doctors here had input into that design, the patients will answer that question. They get that at least once a year at least with their comprehensive if there are regular follow-up patients for their one year comprehensive exam. And if those questions are all – if a certain number of those questions are answered in a certain manner and the patient signs off on having the test done and the technician that's working them up has all this information in hand, they will do a test immediately during the workup. Then the doctor will look at the test in conjunction with the whole exam and determine whether the test was necessary to be performed and billed out. We like to make a distinction of billing for it or not billing for it, so the doctor also signs off on that order, that verbal order and written order for the staff to do this. So many patients present with symptoms. They'd don't know if it's Dry Eye, they don't know if it's cataract. So we look for those symptoms. We don't try and elicit it necessarily verbally so much, it's more of a pure here write down your answers while you're waiting and then we just look at that. We kind of score it and then the technicians make that decision. We've encouraged them not to worry about whether or not the doctor's going to say you should or should not have done this. It's a course of doing business as far as our company is concerned and we made that decision a long time ago that we were going to just use this because it's practical and functional. As the doctor said earlier, it truly helps especially when you have asymptomatic patients, it helps the doctor determine where to go from here and then what they might choose as far as options for the patient.

Jeffrey Frelick - Canaccord Genuity, Inc.

Tom, it sounds like the practice is very busy. Just curious how did you make it work as far as a workflow standpoint and then implementing it into the day-to-day operations? Thank you.

Thomas Burke

Sure. We work and typically a doctor may have pods, what we call pods are four lanes which are examination rooms. So as technicians work in those pods, they usually have a tech station that may handle one or two pods. So a tech station could be handling four to eight lanes. Initially we put them at those technical stations or perhaps if we had four pods of 16 lanes total, we only had one in that particular office when we started out. And that proved to be a bottleneck as you can imagine. Even though the test is very quick, if you have to walk down a hallway and some other tech is doing a test, if you wait even a minute or two and you're seeing somewhere between 6 and 10 patients per hour depending on the makeup of those patients and whether they're quick post-op exams or long new patient exams, you wind up with a bottleneck. And if you add a minute or two to a day where a particular office could be seeing 100 to 300 patients in that day with multiple doctors, you wind up just spending an inordinate amount of time just doing this simple test which is a point of service, a very quick test. So initially that was a pause for concern and I think it limited the number of cards that we purchased and a number of tests we performed because everyone was just a little concerned with slowing down the whole process. And this completes with the whole host of tests that we have to do and competes with things like data entry for electronic medical records which we're in the middle of rolling out and it just can slow you down or if as they now do with the masters program, they've enabled us to have it in each lane, the technician upon entry to the room has an immediate ability to do the test 30 seconds, 45 seconds, whatever it takes them. They don't have to exit the room whatsoever and they immediately enter the data for the doctor so that when the doctor shows up, everything is ready.

Elias Vamvakas

Dr. Matossian, you had a similar situation if you want to speak about that.

Cynthia Matossian, MD

Exactly and I want to concur with everything that Tom said. We are a busy practice as well and I completely agree. We were having a similar situation where our technicians were actually queuing up because they were waiting to use the one unit in each pod that we had. We realized that was creating a bottleneck, adding two to three minutes to every patient visit was becoming a problem. So we just signed up a masters program and were waiting for the additional delivery of our additional units so that we'll have a unit in each one of our exam rooms. This way right now the technician based on their patient symptoms, based on the questionnaire has the permission to go ahead and do the test before the doctor sees the patient because the test has to be done before the installation of any drop, otherwise you cannot go ahead with the test. So it has to happen before numbing drops, dilation drops, et cetera are instilled into the eye. They enter it into our EMR system. We have our OSDI questionnaire now in the EMR system, so we just look it up. We see the tear osmolarity numbers and I've instructed my staff so that when I come in and log into the room, the first thing I see is tear osmolarity and OSDI outcomes and then I start the rest of the exam.

Ranjan P. Malhotra, MD

This is Dr. Ranjan Malhotra. I'm sorry I joined the call later but I'd like to concur with that. We joined the masters program and have four units in our office and we have like one unit each of my (inaudible) offices and as we do in OSDI but we found that just the symptoms of the patient if they have fluctuating visions, foreign body contusion, red burning eyes that about 80% or sometimes even more patients that present have these symptoms and so – but sometimes they don't necessarily correlate it or know that it's Dry Eye, so this test is done by technicians as the patient arrives and that way it kind of helps and it again is one of the first things we look at when I come in to see a patient because I know I need to hone in on that because many times patients are coming in for cataract evaluations or LASIK evaluations and this helps me kind of tell him that part of the visual symptoms isn't on only the cataract, like 70% of the cataract and 30% is their Dry Eye. And they like to have that objective number and in clinical patients, it's kind of like measuring tear quality or air quality where your tears are kind of polluted. So if this number is really high, you got polluted tears and I'm going to try to decrease your tear pollution, so patients kind of understand like a high number is worst just like a polluted eye. So I don't want your tears to be like [Beijing].

Cynthia Matossian, MD

That's a good analogy.

Ranjan P. Malhotra, MD

And sometimes they even seem to (inaudible) testing in our office and sometimes they even correlated to someone who has a really – you could even see [debris] in their tears and that would raise their osmolarity also. I see it correlates high with allergies too. And since we know that allergy and Dry Eye go hand-in-hand, I'm in St. Louis, Missouri so we see tons of allergies here, I've kind of seen the correlation between allergies in their high osmolarity test also.

Jeffrey Frelick - Canaccord Genuity, Inc.

Thank you. Got it.

Elias Vamvakas

Next question.

Operator

Thank you. Our next question comes from the line of Chris Lewis of ROTH Capital Partners. Your line is open.

Chris Lewis - ROTH Capital Partners LLC

Hi, guys. Congrats on the progress.

Elias Vamvakas

Thanks, Chris.

Chris Lewis - ROTH Capital Partners LLC

I guess first just for the panel, I was hoping the participants could talk a bit about what types of patient feedback they've received with the test this far? How important is it for those patients to see that quantitative osmolarity resolved at the time of that first appointment? And then going forward, is it important for those patients to see the improvement from appointment to appointment as they progress with their treatment process?

Elias Vamvakas

Why don't I let our doctor panel answer that? So, maybe Dr. Malhotra if you can answer that first?

Ranjan P. Malhotra, MD

Sure. So sometimes when I first diagnose the patient and tell them they have Dry Eye, a lot of patients don't necessarily realize that a lot of their Dry Eye symptoms are causing their visual symptoms, and so they're kind of not even believing it to begin with. So having that number and telling him, gosh, this number should be in the 250 to 275 range and yours is 385 and that's contributing to a lot of your visual symptoms. And when I start him on therapy, if I'm going to start him on a prescription like Restasis, I will have him come back in six weeks to eight weeks, it's kind of nice to – because sometimes it can take the Restasis time to work, it could take three months to work so that next visit kind of making sure the patient's holding accountable to make sure they're using their medicines but they also like to see that number drop, so I think it's helpful to have that objective measure because sometimes even at that two-month visit they're visual symptoms or their symptoms from Dry Eye haven't improved but that continues – it allows them to continue therapy for another three months or at least it encourages them when they see that number drop. And by and large the number drops in most patients and if it's not dropping then we start to look for another diagnosis that maybe contributing to it. So I think it's very helpful to have that objective test.

Elias Vamvakas

Dr. Matossian, you have any feedback on patients?

Cynthia Matossian, MD

Patients like to know more objective numbers just like they like to follow their cholesterol numbers or what's happening with their high blood pressure or blood sugar numbers, they really like the objective numbers that tear osmolarity is generating. And I also have found that once they see the benefit of whatever treatment regimen that I've let's say designed for that patient, they adhere to it better because they are now [listing] the improvement in the numbers. Whereas before without that objective number, I think complaint was not as good. It's very hard to get our patients to become complaint with medicines just in any field of medicine, but when they are seeing the positive results and seeing the numbers dropping and reaching our goal, then they understand the value of their treatment and stick to that regimen.

Elias Vamvakas

Thank you. Chris, any other question?

Chris Lewis - ROTH Capital Partners LLC

Yeah, that's great. Thanks. Yeah, one more for the panel. Where do you think we are now in terms of the awareness levels of TearLab within the physician community? And Elias I'd like your thoughts about that question as well.

Elias Vamvakas

Dr. Matossian, do you have any idea?

Cynthia Matossian, MD

Well, fortunately Dry Eye and ocular surface disease is a hot topic right now. Any journal you pick up has at least one or two articles if not more on this very topic of tear film instability, of Dry Eye, the importance of it and preoperative assessment and so forth. And often not always in these articles the importance of tear osmolarity and measurement with TearLab is mentioned and it's actually mentioned and to the American Academy of Ophthalmology, tear osmolarity through TearLab has become one of the preferred practice pattern, it's called PPT. So even the Academy is promoting it. So it is definitely becoming a goal standard. How deep the penetration is? I think it's getting there. There is a movement forward and penetrating into different physician's practices. I don't think it's so widespread yet. Not every practice in ophthalmetry and ophthalmology has a unit yet but I think the importance of it and how to utilize it is becoming better recognized.

Elias Vamvakas

Thanks. And aside from Dr. Matossian, any thoughts? Given your – maybe the way to think about that is when you go to meetings or stuff that people know about or are they surprised that you have a device, they ask you about it and how does it fit in?

Ranjan P. Malhotra, MD

I can tell you I go around the country and speak a lot giving talks for Dry Eye and on Restasis. And so I know a lot of doctors are inquiring about it. They ask about reimbursement for it, they ask about how easy it is to institute it. And I think the other thing is that (inaudible), the last meeting I attended that's kind of a hot topic is diagnostic testing that's in the office so there is other companies that I think maybe coming out possibly with newer test like measuring inflammatory mediators in the tear film, we do an antiviral test to look for antivirus. So I think there is awareness. I mean I've seen more ad and stuff regarding TearLab and I think the sales force has increased here recently from what I've seen from TearLab because it is – I definitely think there's more awareness from what I'm seeing. And even though I'm in a building full of ophthalmologists with competing practices and we were one of the first to get the TearLab machine but now I think almost every practice except for the retina practice has one of the TearLab machines in their office. I'm definitely seeing more awareness and this test being utilized more and more, so at least in the last year because I also think that the initial battle was reimbursement and initially I had – when I was early on getting this, the reimbursement wasn't what I felt it should be or we're sometimes even breaking even or losing money on the test. But since many doctors are using it more and more, reimbursement you could actually get this test, it becomes helpful for you and your practice and you could actually make money doing it especially since you're not having to buy the machine upfront, you're making roughly maybe $25 or $30 a patient when you're doing this test and also helping them. So it's nothing to retire off of but it's something that at least you're not losing your shirt doing this procedure or doing this test.

Thomas Burke

Elias, can I answer that? It's Tom Burke.

Elias Vamvakas

Please.

Thomas Burke

We often speak of it now in our administrative meetings and I also speak around the country several times a year and the questions are coming up. We also get some phone calls periodically throughout the country. So it's definitely more well recognized and understood by administration and doctors who make these decisions. One point of clarification on the percentage that we use and the doctors could perhaps talk about their practice, but if you look at in OCLI which is multispecialty, we do it on maybe 35% of all of patients. We have retina patients, we have glaucoma patients, we don't do it on 70%. If you look at a cornea specialist practice, which was what I was referring to earlier when I said 70%, it could be even higher than 70% and that's where the doctors on the line might be able to answer that question a little bit more clearly.

Elias Vamvakas

Thank you for that clarification. My view – I'm going to say that if I could take a guess, I think we've done well because we've been focusing on the ophthalmology community, so I would say we've had pretty good exposure. So I think probably 50% of ophthalmologists know that we exists and I think a really small percentage of ophthalmetrists do but that's one of the areas of focus for us for next year and now we have the financial capability to really be able to market and get everybody to at least know about us and know the value of the test.

Chris Lewis - ROTH Capital Partners LLC

Okay, great. Thanks. I'll jump back in queue.

Elias Vamvakas

Thank you.

Operator

Our next question comes from the line of Steven Crowley of Craig-Hallum Capital. Your line is open.

Steven Crowley - Craig-Hallum Capital Group LLC

Folks, thanks so much for joining us today. This is really valuable. I wanted to throw out one question to the panel overall. As Elias said, there's been some noise in the investment community from all of the smart guys in the investment community about the value of a yes or no diagnosis of Dry Eye Disease versus something that gets you to the root cause of the Dry Eye Disease and maybe you could help us understand the value of that yes or no? And then where you go after you get that yes or no?

Elias Vamvakas

Why don't we start off with Dr. Matossian?

Cynthia Matossian, MD

That's a very good question. See, the Dry Eye Disease is a spectrum of an inflammatory process from very mild or nonexistent to extremely severe that can be vision threatening. So it's a continuum depending on where a person is on that spectrum. So what this is doing is helping the patient understand and the physician understand that yes, there was a process and then it's up to the ophthalmologist to really figure out how bad the process is, what type of treatment that person is in need of. So I too speak across the country for Dry Eye products like Restasis and there is definitely more interest and people are asking this. So it does help confirm the disease, it does exists because sometimes as I said earlier, it can be asymptomatic and the patient may not even feel that they have a problem. But their numbers can be very abnormal. So, it definitely helps us confirm it and then design a treatment plan. That's very individualized.

Ranjan P. Malhotra, MD

If I can comment, the other thing is I think there's a push among let's say Allergan with the Restasis on early diagnosis of Dry Eye because if you wait till someone has really severe Dry Eye, the treatment itself is not tolerated very well by the patient because the treatment itself burns and stings. So the way I think of it is the more chapped someone's eyes are, the more it's going to burn when they put the medication on there, especially a prescription medicine. So, this test is helpful on early diagnosis of it in confirming the patient's visual symptoms along with some objective findings on an objective test. So I think that yes, no, like whether they have a disease or not is helpful. It helps us convince the patient to essentially buy into and spend the money for a prescription medicine which can cost them a significant – $50 to $100 for a prescription medication and so it kind of helps build our case what do we know through the half dry eye, especially on the less severe cases which tend to improve quicker because they're not as severe but it also helps us – and it also in my practice it helps establish a diagnosis which may become a problem if I'm going to be doing surgery on a patient which may cause symptoms afterwards, I want to let the patient know they had this before I did surgery on them. And so I have objective evidence that they have Dry Eye preoperatively.

Steven Crowley - Craig-Hallum Capital Group LLC

Now Dr. Matossian it was mentioned in the windup that you've done quite a bit of clinical development work and in terms of the emergence or the prospects for a new therapeutics, I'm wondering what you're thinking about that equation and what it means to the Dry Eye Disease ecosystem? And has there been a role for tear in that clinical development work that's been meaningful and sets the stage for a meaningful clinical role because of that experience in the clinical trials?

Cynthia Matossian, MD

We participate in many clinical trials and it's across the spectrum from different types of implants to anti-inflammatory medication to now looking at tear film. TearLab is the only one that does tear analysis at this time. There is one which Dr. Malhotra mentioned, there is one that's coming that is going to access the inflammatory mediators, it's going to have a name or something like InflammaDry…

Ranjan P. Malhotra, MD

InflammaDry, yeah.

Cynthia Matossian, MD

Where it's going to check for inflammatory mediators on the conjunctivae surface or in the tear film, so that one will be more like a yes or no; are there inflammatory mediators or not whereas the TearLab assay that we do actually tells us the improvement or possibly the opposite to progression of the disease if somebody is not adherent to their treatment regimen. So it gives us data whereas the other one is the yes/no. So I definitely see that the two can work very well hand in hand. One does not cancel the other one. But InflammaDry is not yet approved in the United States.

Steven Crowley - Craig-Hallum Capital Group LLC

And then a final question from me as it relates to the phase of implementation, maybe Tom Burke, you've gone from three units to a bunch more than that. It sounds like you're in the early to middle part of that implementation process, but maybe you could talk to us about where you are and the other doctors with their experience could give us a similar picture, that might be helpful to understanding how early we are even in some of the early adopter's progression with the assay?

Thomas Burke

Certainly. It varies office by office and there are factors that cause that. If we're rolling out electronic medical records, it slows down a lot of the patient volume purpose we sell, so we've encountered months where because of that rollout, we had to slow down the number of patients we're bringing in there for the number of tests performed reduced accordingly. If we've just acquired a practice, it could take me a couple of weeks before I get the tear osmolarity test devices in there. Fortunately we're opening up a new practice in another month and half that was already shipping out the new devices for me ahead of time. So, there's a lot of things that go into it. But frankly at this point we've got it down to a routine. It's just that something cause a hiccup again because there's competition for time, for test and time and for technicians. So I say we pretty much have it down on science, it's just all of a sudden we know this when we went to EMR but we slowed down and we figured out what the reason was and we took steps to address it.

Steven Crowley - Craig-Hallum Capital Group LLC

Do you think as the year plays out, you'll wash through those factors and six months from now, you'll pretty much have caught your stride with the use of the TearLab system and then it will just be a function of our practice is growth?

Thomas Burke

Yes, I would say – so I mean we're doing about 3,000 a month as it is, somewhere between 3,000 and 3,500 a month. So we're on a pretty good clip. And I think just from – we've implemented, we had one machine that was centrally located and similar to the other documents describing, it was hard to – I know there were times the test weren't being done because just the tech didn't want to wait or it just was forgotten. Now that we have one in each of our tech workup firms, it's made the thought of using it there to remind the tech to use. And as soon as the patients are describing these symptoms, they do the test. So I know that it's been utilized much better now that the test is more accessible and we have one unit in each one of our tech workup firms. And so I think that – there was an issue of the techs missing it. Now I think that as we implemented with multiple machines in the office, it's helped significantly.

Elias Vamvakas

Steve, can I go back to – this is Elias asking the question, but I want to finish off the discussion earlier with regards to other tests and one of the things that has been asked many times is, tear science and we get the view of how we've got a competitive technology to what we're doing. And Dr. Malhotra I know that you have a TearLab device. Tom, I know that you guys have several TearLab devices. Can you talk about whether you see – how you see TearLab and how it fits in with what you're doing with tear science?

Marguerite McDonald, MD

So before Dr. Malhotra answers, I just want to say I'm Marguerite McDonald. I'm an ophthalmologist, a cornea specialist with the Ophthalmic Consultants of Long Island, Tom Burke's practice and I've been on the call for five minutes. I'm calling you from the operating room. So if you have any questions, let me know.

Elias Vamvakas

Thanks, Marguerite. I did tell everybody that you might be a little late because you're expecting surgery. So maybe we'll have you chime in on this question as well. Dr. Malhotra, maybe you want to start.

Ranjan P. Malhotra, MD

Yeah, sure. So we have the tear sciences with the LipiFlow treatment and I could say not necessarily competitive in anyway. It seems to be synergistic because the LipiView device is assessing one component of dry which is the oil component or the (inaudible) component and the TearLab device is measuring osmolarity. So it's definitely synergistic. One big plus to TearLab is that it's covered by insurance where the tear sciences one is not. So we're utilizing the TearLab osmolarity test much more frequently than the LipiView test but we use developments as a prescreening and if we institute therapy, the patient's symptoms don't improve despite the osmolarity improving, we look at the evaporative component of the dry, so that's when we do the LipiView test and then maybe the LipiFlow treatment. So that's something that definitely – I don't see a competitive thing. It's the same patient. You can do both test on a patient but it definitely seemed to be synergistic not agonistic or competitive in any way.

Elias Vamvakas

Dr. McDonald, you've done a lot of work with tear science. You might have some comments.

Marguerite McDonald, MD

I think they are absolutely synergistic. As a matter of fact after a LipiFlow treatment, I let the patient go for three months. I told them you'll get a little bit better every day and you'll reach maximum benefit at six months and you'll hold that benefit for nine to 12 months. But I have them come back three months after the LipiFlow treatment. Inevitably their tear osmolarity has improved and they really get into the number. So you know, before your LipiFlow you were 350 and today you're 310. You're on your way down to the normal range. And it's just like patients want to know about their cholesterol level, their blood pressure, et cetera. They want to know that number. They're very impressed with it and they remember it and ask for it when they walk in. So what is my test score today? So I've used it to reinforce their decision. As you know, LipiFlow is expensive – a very expensive treatment. So they walk out inevitably better. They've picked up some lines on the acuity chart and they know their score. I think they work beautifully together.

Cynthia Matossian, MD

And I'm going to jump into this. This is Cynthia Matossian. We use IPL treatments and I do the same thing and it does absolutely work synergistically because after the IPL treatments when I see them back at about four to six months and we repeat the tear osmolarity invariably their numbers have improved and the patients now understand what they have paid for out of pocket. The numbers in tear osmolarity is improving and so are their visual acuities, they have less eye fatigue, they're not blinking as much and on and on. So it definitely works hand in hand.

Steven Crowley - Craig-Hallum Capital Group LLC

Elias, this is Steve Crowley if the mic's still open.

Elias Vamvakas

Yeah.

Steven Crowley - Craig-Hallum Capital Group LLC

Okay. Maybe a question for Dr. Marguerite McDonald, in terms of how the TearLab has changed the way that you deal with patients and treat patients prior to surgery and coming out of surgery, has there been a practical change given this tool that's been put in your hands?

Marguerite McDonald, MD

Absolutely. I have an algorithm that I've worked out where I use the score to guide the treatment. All inflamed eyes are not red and it's been I'm sure earlier in the call the other doctors talked about disconnect between signs and symptoms with Dry Eye. So I'll get the score and I'll say, okay, a 317; we're going to start with Restasis therapy. And if you're osmolarity score of 325, we switch you to Preservative-Free Tears. So the score tells me exactly how I'm going to direct therapy and it's an algorithm that has worked beautifully.

Steven Crowley - Craig-Hallum Capital Group LLC

Excellent. Thank you.

Elias Vamvakas

Thank you. Next question.

Operator

Our next question comes from the line of Chip Saye of AWH Capital. Your line is open.

Chip Saye - AWH Capital

Elias, I just want to say thanks for getting this panel together because it's great. This is like being at an AAO panel meeting, so I really appreciate the participation of the doctors here today. With the reimbursement improving and the word of mouth spreading in more and more of these ophthalmologists and I guess coming in the next year or so ophthalmetrist inquiring about the product, it seems pretty obvious to me the reason someone would say yes, but I'd like to ask the panel why some of their colleagues if they go to the Academy meetings, why a physician would say no to the product?

Elias Vamvakas

Thanks. Dr. McDonald, do you want to start with that?

Marguerite McDonald, MD

I think for many years, ophthalmologists have sort of been trained to screen for surgical pathology only. We are surgeons and that's what we do. And in the past there has not been good diagnostic technology and there's has been much to treat these poor patients with before Restasis, we really didn't have a single pharmacological agent. The tear science technology I feel is all fairly new. So ophthalmologists handed these patients off as fast as they could in the past. I think more and more ophthalmologists though are realizing that especially with the bloomers they're all getting dryer. If you can make that middle age bloomer, man or woman, usually a woman happy, the halo effect is enormous. She may have been to seven or eight ophthalmologists who blew her off and the one who fixes her, who diagnosis using the latest technology like TearLab who treats, she is going to send her – her LASIK, she's going to eventually have her cataract surgery with our practice and Bruce Miller who is probably familiar to you all that's one of the top ophthalmic consultants in the United States, he has worked out a financial model about Dry Eye and how much money you can make while doing good for people. And it's an extremely conservative model. And all the qualifiers are there and he's using 2013 Medicare reimbursement numbers and it's staggering how profitable it can be. So the doctors who are sort of into Vanguard, who are the early adopters, they have figured this out and the rest are coming along.

Chip Saye - AWH Capital

Got it.

Elias Vamvakas

Dr. Matossian, do you want to comment on that? Why wouldn't someone…?

Cynthia Matossian, MD

Well, I agree with all the things that Marguerite said but there are few other things that some ophthalmologists are not early adapters, just by their nature they are more in the middle tier or maybe in the back tier where they just don't follow the newest or the latest or the most advanced trends they practice in a fashion that maybe they've trained in and haven't done much innovation along the way. Some ophthalmologists are threatened by how to integrate a system this complex that practically done on most adults who have symptoms of Dry Eye, how do they implement and integrate that into their patient flow. There are concerns of running behind, there are concerns of the staff becoming overwhelmed. There were initially more concerns about reimbursement which were passing that hurdle. So I think all of those were concerns. Now that those are definitely getting better with the ability to do the questionnaire and do the test prior to physician seeing the patient, I think we're working through these hurdles and I have a feeling there are going to be a lot more adapters of this technology.

Elias Vamvakas

Dr. Malhotra, do you want to add anything to that?

Ranjan P. Malhotra, MD

No. I mean I would agree 100%. I just think that like everyone had said, there's early adopters and that's true to pretty much any technology that's come out whether it was like [OCT] in years passed or GDX or – now I think it's going to become more and more mainstream especially I think the hurdle in the past was maybe at least from what I've heard from friends or colleagues that most will be reimbursement, a fear that they're going to get this machine and they're a little afraid of the commitment of getting (inaudible) with the paperwork. So I think that's – now the reimbursement issues are better and if that becomes more common, I think more and more doctors will do this.

Chip Saye - AWH Capital

Okay. I guess as a follow-up to the doctors, I want to – maybe it's just early adopters at this point that have taken on the technology and incorporated it in their practice. A lot of times, sometimes investors like to refer to what inning are we in, in this rollout to ophthalmologists and ophthalmetrists. In your opinion what inning are we in?

Elias Vamvakas

We can just go around. Dr. Malhotra, are you there?

Ranjan P. Malhotra, MD

Yeah. I'd say maybe the second inning.

Cynthia Matossian, MD

That's exactly what I was going to say. This is Cynthia Matossian. Not that I'm a baseball player or a fan but I think it's the second inning. It's not the first but it's second moving on to third.

Marguerite McDonald, MD

I would exactly agree.

Chip Saye - AWH Capital

Okay, that's really all I had and I appreciate it.

Elias Vamvakas

Thank you. Next question.

Operator

Thank you. Our final question comes from the line of Ben Haynor of Feltl and Company. Your line is open.

Ben Haynor - Feltl and Company

Good afternoon, folks. Thanks for taking the questions. This actually follows on a little bit with what Chip's line of questioning was. I guess I'd like to ask the panel is there any reason that you could see why the TearLab system wouldn't ultimately make its way into nearly every ophthalmologist office in the country?

Elias Vamvakas

Marguerite, you want to start.

Marguerite McDonald, MD

No, I cannot. I really cannot. The number of people trying to start a Dry Eye center of excellence is amazing. I get calls every day of people who want to watch me for a day. I think in addition to the other things that I mentioned, all the stars are aligning in favor of this technology being adopted by ODs and MDs across the board. There is a growing realization that in addition to doing good and the halo effect and the increase in your surgical volumes on these happy patients, there's virtually no medical liability. If you talked to someone and told them that your tear osmolarity score and you talk about the LipiFlow treatment and they go ahead and have it, you're margins are about the same as if you did LASIK and you have virtually zero liability. I've never heard of a dry eye lawsuit. So I see no obstacle honestly – we have reduction perhaps but no reasonable, nothing on the horizon.

Cynthia Matossian, MD

And I see no obstacles expect that some people like we talk about earlier just don't move too quickly with advancing technology. So those people no matter what the technology was, they might still be doing extracap surgery or something like that. So you're always going to have that some group of ophthalmologists or ophthalmetrists who aren't focused on Dry Eye, maybe they're focusing on (inaudible) or something like that. So obviously the retina folks possibly won't be getting into that. So there will be some field of ophthalmology where I can see much lower penetration possible pediatric ophthalmology, things like that.

Ben Haynor - Feltl and Company

All right. And I guess the only thing I sometimes hear from doctors that I speak with is why do you even need the test because you could diagnose Dry Eye without the test I mean which we had done in the past, so you could from just looking at your breakup times or just from the patients OSDI or their history, but I think that as doctors are becoming more educated and as to how this test is helpful and explaining to the patients and also objectively as you started treatment, there are going to be more compliant with treatment, I think some of the analogies that you mentioned checking cholesterol, checking blood sugars in the diabetic, this is just a more objective way of treating in the dry eye than we have in the past, so kind of the old school way of doing it where we never really measured anything objectively is just that's what I see the only (inaudible). I guess if you have a very conservative doctor who is trying to save I guess Medicare dollars if they're arguing that, they're basically old school, they're not going to adopt it because they think it's going – they say I don't need it. But I think most doctors who are starting to treat more Dry Eye, they see the value in it and I think that's kind of like what the trend is at our meetings and from pharmaceutical companies, from educational talks that Allergan giving and I think that if – I understand are going to start doing some training in educating doctors and that's really going to help get the word out there and help promote this product even more?

Cynthia Matossian, MD

I don't think TearLab will go away but I do think the old school doctors will go away.

Ben Haynor - Feltl and Company

That's all I have. Thank you very much panel and Elias.

Elias Vamvakas

Thank you. Melba, do we have any other questions.

Operator

We have no further questions, sir. I'll turn it back to you for closing remarks.

Elias Vamvakas

Thank you very much. Thank you so much to our panel. It was incredible that – I know that you were in surgery and in your practice and thank you for taking the time to join us, very much appreciate it and I think our investors and analysts and everybody that's on the call appreciated your time as well. If anyone else has any other questions, you always know how to get us. Thank you again for taking the time to join us and we'll talk soon.

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