Rochester Medical F4Q09 (Qtr End 9/30/09) Earnings Call Transcript

Rochester Medical Corporation (ROCM)

F4Q09 (Qtr End 9/30/09) Earnings Call

November 5, 2009 4:30 PM ET

Executives

Anthony J. Conway - Chairman of the Board, President, Chief Executive Officer

David A. Jonas - Chief Financial Officer, Treasurer, Secretary, Director

Analysts

Tyson Bauer – Wealth Monitors

Ernest Andberg – Feltl & Company

Peter Sullivan - Private Investor

Michael Boulgaris (ph) - Boulgaris (ph) Investments

William Hanson - Private Investor

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the fourth quarter 2009 Rochester Medical Corporation earnings conference call. My name is Katy and I’ll be your coordinator for today. At this time all participants will be in a listen only mode. We will be conducting a question and answer session towards the end of this conference. (Operator’s instructions) I would like to now turn the call over to your host for today, Mr. Anthony Conway, CEO and President. Please proceed Mr. Conway.

Anthony J. Conway

Thank you for joining Rochester Medicals fourth quarter conference call. I am Anthony Conway, the company’s President and CEO. And with me is David Jonas, Rochester Medicals Chief Financial Officer.

To start I’ll go through some of the highlights for the quarter and then give you some insight into our activities and expectations. And then David will present detailed information on the financials and what they signify. And after that we’ll be happy to take your questions.

As always before starting let me remind you that we will be making forward-looking statements today. And I would refer you to the Safe Harbor Statement found in today’s press release. And also to the risk factors section in the company annual report on Form 10-K for the year ending September 30, 2009. These statements future clarify the risks and uncertainties that are associated with the forward-looking statements.

Now, first let me review the results as reported in the press release and then I’ll talk more about the quarter activities and what we might expect going forward.

As stated in the press release we reported sales of $9,009,000 for the current quarter compared to $9,512,000 for the fourth quarter of last year. In constant currency that translates to a 0.6% decrease for the quarter.

Also as stated in the press release, we had a good 15% Rochester Medical branded sales growth in the US and United Kingdom on a currency basis. Intermittent catheters were up 46% and Foley catheters sales were up 68%. As you know, these are the primary areas of our sales and marketing investments.

Private label sales were down 20% for the quarter, simply reflected the timing of large orders. As mentioned in the press release, private label sales were up 42% in the third quarter and up 2% for the year.

As planned, Rochester Medicals operating profits are being reinvested to assure long term strategic success in the key areas of opportunity. Thus the narrow bottom line for the quarter is as expected and reflective of our confidence in gaining future rewards from these investments.

We also announced final Medicare reimbursement approval for our disposal FemSoft insert devise. Which is used to manage female stress urinary incontinence. And just recently we also announced national health system reimbursement for FemSoft in the United Kingdom. And I’ll talk more about this later on.

I feel very good about the prospects for 2010. The new Strata Foley line is being very well received. And the magic Intermittent technology is going over very well both here and aboard. And of course the FemSoft opportunity is very exciting.

As of now, it looks like currency exchange values have become more stable. And hopefully won’t have a negative impact on our sales this coming year. We look forward to a very good 2010 starting with a strong first quarter in both Rochester Medical branded sales and private labels sales.

Now let me turn it over to Dave for some more of the financial details.

David A. Jonas

Thanks, Anthony. I’m going to spend a few minutes highlighting results reflected in our just released fourth quarter fiscal 2009 earnings release. Our sales, for ease of discussion unless otherwise noted, all sales information will be discussed in constant currencies. I’m doing this to exclude the impact of foreign currency exchange which will show a true reflection of our performance and sales growth.

As Anthony has explained, our sales results for the four quarter while flat overall showed a 15% increase from the fourth quarter last year in branded sales in the US and the UK. As I’ve discussed the last few calls we are keenly focused on and dramatically increased our investments in and activity in our branded sales, especially in the US and UK.

We are also increasing our efforts in both Europe and Japan. This has been done for many reasons including better market access, changing reimbursement rules and an increased clinical demand for infection reducing in all silicon devises.

We have called this our investment and growth strategy and so far the results are positive. These investments and focus feel the growth in our worldwide branded sales which were $6.4 million this quarter versus $5.8 million last year. An increase of 10% for the fourth quarter. This 10% increase included 49% growth in worldwide Intermittent sales a 3% decrease in Foley sales and a 4% decrease in male external catheter sales.

The Foley sales were up 64% in the US and down 46% internationally due to timing of shipments to a lesser extended because of our decision to strategically discontinue selling very low margin Foley products overseas.

Our private sales accounted for 67% of our total sales so far this year, compared to 65% last year.

Let me first discuss our domestic branded sales in more detail and then our international branded sales. In total, our domestic branded sales for the fourth quarter were $2 million versus $1.8 million last year. A 9% increase from last year’s fourth quarter. Year-to-date domestic brand sales are $7.1 million versus $6.6 million last year, an increase of 7%.

Domestically, our advanced Intermittent Catheter sales grew 13% in the fourth quarter, dollar wise. And for the year our domestic branded Intermittent sales are up 8% dollar wise and 20% unit wise. The difference in growth between units and dollars comes from the April 2008 Medicare change. In the short term it discourages kit usage as driving users towards Intermittent strips which carry a lower average selling price. Our 20% unit growth this year which reflects both new patients and increase usage is very encouraging.

Our domestic brand sales in male external catheters decreased 7% for the quarter and are now up 1% for the year. Our domestic brand of Foley Catheters grew 64% for the quarter and are now up 22% year to date. The majority of this Foley growth can be attributed to the acute care market and recent hospital convergence. The launch of our all silicon strata technology has been very well received and interest has never been higher in our advanced Foley and anti infection technology.

As Anthony has stated, fiscal 2009 showed solid growth in both Intermittent and Foley Catheter sales in the US. And both will be primed growth drivers in fiscal 2010.

For the fourth quarter internationally, our branded business continued to grow even though the exchange rate dropped masked the success we have made.

Again, to make sure everyone understands, our true growth the following numbers are using a constant currency, showing ’08 sales and ’09 exchange rates. In total, our international branded sales were $4.4 million this quarter versus $4 million last year. An increase of 10%. Year-to-date our international branded sales were $16.2 million versus $14.5 million, an increase of 12%.

Majority of our sales volume internationally continues to come from male external catheters. This male external catheter business decreased 3% in the fourth quarter, is down 1% year-to-date.

Our advanced Intermittent Catheter sales grew an amazing 214% in the fourth quarter. And are now up 174% year-to-date. Our new triple core magic 3 technology launch late in the first quarter has received rave reviews and should help us continue to grow market share in Europe. We are particularly excited about the market acceptance and growth in the UK.

As previously noted, internationally branded Foley sales declined 40% in the fourth quarter and ended up the year 13% down. Majority of the decrease comes from the non-European low margin sales we strategically eliminated during the year.

Our UK operations also include the direct to patient prescription sales under our Rochester Medical Script Easy brand. These sales are for any urological products and drug (inaudible) including products not manufactured by Rochester Medical. The non-Rochester Medical products sold under the Script Easy brand were up 52% in fiscal 2009.

Now let’s take a look at our private label business. Rochester Medical continues to have many excellent private label partnerships. And as Anthony has stated, the ordering patterns have been particularly erratic the last few quarters.

In 2009’s first quarter private label sales were up 18%, down 16% in the second quarter, up 42% in the third quarter and now down 20% in the fourth quarter. As we predicted and most importantly year-to-date our private label sales were up 2%.

We still believe the sales of our products on our private labels partners’ door are growing moderately. Our sales to them will show moderate growth over longer periods.

Our gross margin was 48% in the fourth quarter and full fiscal year in 2009. And I’m happy with this considering our cost of goods sold is still under pressure from exchange rate fluctuations, (inaudible) prices and advanced product mix changes.

We are dedicated to continuously improving our efficiencies and material costs and that effort is paying off. We also continued to dedicate resources and focus to increase the margins on our advanced products. Which is a key element in our future growth.

In the long term and sales of these advanced products growth we will see corresponding improvements in our margin.

Our operating expenses. Our operating expenses increased $175,000 in the fourth quarter to $4.5 million and the end of the year 2% higher than last year at $17.6 million.

We have increased spending with both our interested investment in sales and marketing in both the US and UK markets and investments in R&D related new Intermittent and Foley products. This is offset by a plan reduction in our admin costs.

Sales and marketing costs for the fourth quarter were up 9% from last year and are now up 9% for the year. For the year that represent about 30% of sales, which is up from last year’s 27%.

Research and development costs for the fourth quarter were down 12% versus last year, and are now up 19% year-to-date. For the year research and development costs represent 4% of the sales, which is up slightly from last year’s 3%. This increase is directly related to new product development.

Again, we continue to cost effectively develop life changing new products and have brought two new break through products from Magic 3, which is our exciting new triple core Intermittent technology and Strata, which is our exciting new Foley technology that will change the way people think about silicon Foleys, to the market.

Administrative costs for the fourth quarter were down 1% from last year and ended the year down 10%. For the year, administration costs represent 17% of sales, which is lower than last year’s 19%. Majority of this decrease came directly from lower cost in legal, sacks compliance, insurance costs, partially offset by increase in the fees paid during our IRS audit.

This quarter we had a net loss after taxes of $229,000 or $0.02 per diluted share, versus net income of $342,000 or $0.03 per diluted share last year.

I believe the non-GAAP disclosures in our press release are very helpful in understanding Rochester Medicals operating results. Apples to apples, so to speak.

For the table in the press release, after adjustment for (inaudible) income, deferred revenue recognition and tangible amortization and stock option compensation expense, our fourth quarter non-GAAP net income was $95,000 or $0.01 per diluted share compared to $658,000 or $0.05 per diluted share last year. This decrease in non-GAAP net income is a direct result of our growth strategy and investments in the US and UK branded markets. And a strong tax benefit last year related to tax credits.

Our balance sheet continues to be very healthy. Our cash position is $36.3 million. Our philosophy of tightly control management of working capital has served us very well. Most of you know most of our cash is in highly liquid and secure US Government T Bills.

Our total assets are $76 million, down slightly from last year’s $77 million. This decrease is directly tied to fluctuation exchange rates. We have about $7.2 million in short and long term debt. This consists mostly of debt associated with our June of ’06 asset acquisition, about $3.8 million and normal operating payables.

I would like to hand it back to our CEO, Anthony Conway for some more comments. And I thank you very much.

Anthony J. Conway

Thanks, Dave. Before taking questions I want to tell you all a little about our FemSoft plans for 2010. Reimbursement becomes available in January and we plan to initiate our UK sales activity then through our existing UK sales force on confidence and our specialists.

Unlike in the US we fulfill prescriptions in the UK throughout Script Easy Prescription services and we bill the government directly for the devices.

In the US we plan to initiate FemSoft sales through partnerships with one or two well known national direct to consumer distributors and also to our own cooperative efforts with major confidence care clinics.

On another front, we are looking at a potential acquisition in Europe and we are discussing potential co-branding sales and marketing opportunities with other global companies.

We’ve said in the past that we’re no long focused on private label opportunities. But we’ve been approached with some interesting co-branding opportunities which we’re taking a very close look at.

I would say that it’s very difficult at this point to assess the 2010 sales impact of FemSoft of the impact of those other potential opportunities. But even without any consideration of those contributions we expect 2010 to be a very strong year starting with quarter one.

And with that, Dave and I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of Tyson Bauer.

Tyson Bauer – Wealth Monitors

Good afternoon, gentlemen. A number of things, I'll just hit a couple of real brief ones here. Just ending, you talked about co branding which is something you haven't mentioned before, previously talked about wanting to unwind some of the private label to increase (inaudible) and your branded sales with the better margins. How does the co branding work within this new strategy of yours and are you going to be able to garner a better margin out of co branding as opposed to private labels or what are the other benefits that made you reverse course?

Anthony J. Conway

Well, it's really not a course reversal. We have not been out seeking these discussion, actually we've been approached. And the potential goal for us is to put our brand into very large global sales forces and get a much, much larger reach than with our current sales force. These are discussions that have been under way, they are nowhere near complete, and I certainly can't promise you today that we'll even do this, but just the fact that we've been approached by major companies I think is of interest and we should tell you that.

Tyson Bauer – Wealth Monitors

Okay. In regards to the DTC partnerships and agreement, if you have a Jan. 1 start I would expect we're going to see something relatively shortly on those agreements?

Anthony J. Conway

We expect that. Clearly we couldn't finalize any domestic agreement until we had the final approval which we now have. We still don't have the exact date in January when this electronically goes into the system. We're trying to find that out. And although we know the approximate range of the reimbursement price, we've not been given the actual final figures so we need both of those things at this point.

Tyson Bauer – Wealth Monitors

Will there be any capital outlay for these agreements or are they paying an up-front fee to partner with you? How exactly do you envision this working?

Anthony J. Conway

Well, I can't go into detail today until we put out the announcement, but just at a very high level, these are companies that bill directly, ship products direct to the home, and do direct to consumer advertising. They interface with the clinician and the patient directly. We envision them helping bring the patient and the clinician together and one of the really nice things about it is we are building a very simple online training program for the clinician so any new patient that they get interested and any new clinician they get interested can go online for approximately 10 minutes, learn exactly how to size and fit the device, and then go ahead and do a prescription.

So they will be servicing multiple functions including paying money for advertising. I'll leave it at that for right now as far as the details, but we see them as a very valuable ally.

Tyson Bauer – Wealth Monitors

Okay. And you talk about an active and a interesting year which are fairly ambiguous going into fiscal 2010, can you be a little more specific on where you see this growth coming from as fa as the new product introductions, greater acceptance, taken market share, either geographic growth with your new sales force in Japan or other parts of Europe — can you give us a little more to chew on here other than active and interesting?

Anthony J. Conway

Sure. We see very strong growth in the product lines that we introduced this year on a global basis, but primarily in the US and the UK and some increasing strength in Europe and by that I mean in MAGIC3, Intermittent Catheter Line, and the Strata. The Strata is receiving stronger, I would say, support, than we could have possibly expected, rave reviews — we're getting access to major hospitals immediately so we expect very good things to happen from the Strata and as Dave alluded to earlier, we're getting super good growth already with MAGIC3 and that's accelerating.

So we base the fact on what we know that we can state that we're going to have very strong growth in 2010 beginning in quarter one. Over and above that, the reason that I'm vague, admittedly so, Tyson — the FemSoft is going to kick in in the second quarter as far as our activity. Initially there will be investment on our part. Clearly it's going to take some time for it to build. We don't have a good prediction, if you will, at least to share with the public, as to what it will add this year and that's why I'm making the statement independent of any FemSoft revenue we're going to have a strong year and strong quarter, and independent of any potential acquisitions or co branding opportunities, discounting all those things we're predicting a strong year and strong quarter. I don't know if that helps.

Tyson Bauer – Wealth Monitors

Helps a little, thank you.

Operator

Your next question comes from the line of Ernest Andberg from Feltl & Company.

Ernest Andberg – Feltl & Company

Hello, Jim, Dave. On the FemSoft code I did find in the guidelines a coding for a urethral insert, is that your product?

Anthony J. Conway

That's our product. It's the only one on the market.

Ernest Andberg – Feltl & Company

Okay. And I did notice that there was no reimbursement noted in the filing, but you said that there's a range, can you give us an idea what that range might be right now, Jim?

Anthony J. Conway

We expect that just based on the discussions and application and all those sorts of things, we expect to fall in a certain range, yes. Let me give you a very wide range and that would be fair, but we would expect it come in somewhere around $2.40 or $2.25 or somewhere in there.

Ernest Andberg – Feltl & Company

And that's per insert, Jim?

Anthony J. Conway

Correct.

Ernest Andberg – Feltl & Company

Is there any limit on the number of insets per day that you found in the regulation?

Anthony J. Conway

Not that where we are aware of and some of that final data will be coming out very likely with the final reimbursement price.

Ernest Andberg – Feltl & Company

Okay. And have they set a time or a date when you expect that to happen?

Anthony J. Conway

Well, prior to it going into the electronic system which they tell us January, all that will be done.

Ernest Andberg – Feltl & Company

Fair enough. You mentioned, Jim, that you're actively looking at acquisitions again, did I hear you say that right?

Anthony J. Conway

Yes.

Ernest Andberg – Feltl & Company

And you mentioned Europe, within the bounds that you can talk about it, what do you have in mind?

Anthony J. Conway

Really product line extensions to our current market over there. They would be immediately accretive. They're just the type of acquisitions that we've been seeking. As you know about a year ago or a little more we got very active and looked at some very carefully and decided against them. We've gone through kind of a dead period of not being able to find ones that were a good fit and we are now in discussions potentially about a good fit.

Ernest Andberg – Feltl & Company

Would it include distribution, Jim, or do you have to do that yourself? Are you just acquiring product or product and distribution if you did it?

Anthony J. Conway

Essentially both.

Ernest Andberg – Feltl & Company

Okay. Tyson asked about the co branding opportunity, that's it for me, thank you.

Operator

Your next question comes from the line of Peter Sullivan, private investor. Please proceed.

Peter Sullivan - Private Investor

Hello, guys. Dave, I'm wondering if you have the breakdown of the branded and the international private label, advanced basic breakdown, that I've asked for before?

David A. Jonas

Sure. For the quarter domestic base is 147.6, advanced domestic is 230 — actually both of those numbers are private label, from the top to the bottom just the way it is in the K. The branded base is $1.66 million, the branded advanced is $919,000 which his all domestic. International private label base is $876,000 and advanced is zero. International base branded is $$2.902 million and advanced is $1.539 million.

Peter Sullivan - Private Investor

Okay thank you very much. One other question which has maybe got answered, but maybe I didn't understand the answer. With the FemSoft, the distributors, you said you don't have anything really finalized because the code isn't officially electronically in yet, but are the guys you're talking about, the distributors, are they ready to go as soon as that goes or are there still other details to work out?

Anthony J. Conway

We should be ready to go. The people that were dealing with are good customers of our already which we have a relationship with. They do this for a living right now with other devices from us and other devices from our competitors and so this fits right into the model of what they're already doing.

Peter Sullivan - Private Investor

And so you and them are basically just waiting for the deal to get in there electronically and then away you go?

Anthony J. Conway

Not exactly. We're doing a lot of work between now and then. I can't kid you and say we're all ready to go today. We're not. We're finalizing a bunch of activities. We're getting ads ready to go both local and test ads. We're working with marketing companies finding out what the right message is. We've done national surveys of incontinent women, focus group types, to find out what message they need to hear in order to get them to go to a clinician. So there is a lot of work going on behind the scenes.

Tomorrow we meet with the National Association for Continence and discuss with them how they can work with us to get to all the incontinence clinics around the country and get our message out into their publications. There's just a whole lot of work that's going on right now behind the scenes in order to get ready and I can't pretend to you that we're ready right today, but we're getting ready.

Peter Sullivan - Private Investor

Okay. Yeah, I guess by ready I was thinking sort of agreement wise. Obviously there's a lot of work to do, but they're ready go to a head in terms of there's no further agreements, just a lot of work to do?

Anthony J. Conway

They're very excited about this product as we are. We've described before the theoretical potential, I want to emphasize that. We're creating a market here, but ultimately if we can get a percentage of women to use this, the market can be clearly very, very large.

Peter Sullivan - Private Investor

Sure. And the main difference now compared to when you first rolled out FemSoft is the Medicare reimbursement thing and maybe better or more effective distribution?

Anthony J. Conway

It's the Medicare reimbursement thing.

Peter Sullivan - Private Investor

That's the main thing?

Anthony J. Conway

We've had a relationship with these major distributors now for a number of years with our other products. It's really very, very difficult for them to process claims and ship these products to the at-home market without this individual reimbursement code. It just doesn't work.

Peter Sullivan - Private Investor

Got it. Well, that's it for my questions then. Thank you.

Operator

(Inaudible) Michael Boulgaris (ph) with Boulgaris (ph) Investments

Michael Boulgaris - Boulgaris Investments

Thank you. What an exciting day for Rochester Medical, congratulations on reimbursement.

Anthony J. Conway

Thank you, Mike. We've been working hard on this for the last 2.5 years actually. I don't know if I mentioned that. It's a long process, but we feel just great about it.

Michael Boulgaris - Boulgaris Investments

And it's been a long ride. I believe if my memory serves me, you received 510-K approval in 2000 or —

Anthony J. Conway

I think that's the right year or maybe a little later than that, but let me correct you, that was not 510-K. We went to be the full PMA route. It's very extensive testing. We spent about $2 million just going through the testing; eight different clinical sites, 150 initial patients, then we did the five-year followup study and this is a full blown PMA device so there's a lot behind it.

Michael Boulgaris - Boulgaris Investments

You mentioned there were three companies that had preliminary approval for reimbursement, did all three receive reimbursement or just Rochester Medical?

Anthony J. Conway

I don't know and I never checked because that wasn't an area we had an interest in.

Michael Boulgaris - Boulgaris Investments

Okay. Can you just give me some basics in terms of how you see the market size of this? It seems to me potentially, given the numbers I've read in terms of female incontinence that this could either be bigger than all of the male incontinence markets that Rochester addresses today, but could you expand on that?

Anthony J. Conway

Yeah. When you started talking the numbers and potential it almost sounds ridiculous because they're so big, but let me put it in context. If we could get in the US and UK alone 5% incontinent females to use the FemSoft, and I use that number conservatively because we get that many to use male devices, more. 5% of incontinent females translates into a $1.2 billion market, and obviously 10% is twice that, 2.4 and upwards. So the key here is to get the product accepted by women. We know it works. We know it works well. We know there are no product issues with it. SE know the women that use I today love it. It's all about creating a market and getting it known nationally and getting it to be a choice that they know about and decide to use.

Michael Boulgaris - Boulgaris Investments

So switching gears to Europe, you mentioned I think in the last quarter press release that you work on some distributorships in Europe. Can you just followup on that? And also, if I'm not mistaken there were some issues in terms of insufficiencies or some regulatory issues with existing others on the market that might present some opportunities for Rochester on the silicon side. Can you also just followup with that for me, please?

Anthony J. Conway

Sure. Several months ago we hired a director of sales for mainland Europe and he's over there full time working with distribution to expand it. He's doing two things. He's working with our current distributors and expanding their line mainly adding the MAGIC3 line into what they're already selling, but we're also partnering with a very major company that has been selling some of our products on a private label basis in one European country and we are now expanding that partnership where they are selling our branded products into several of the mainland European countries.

So it's a very good partnership, it shrinks our private label sale a little bit, but it more than offsets it with increased, we believe in the coming year, increased branded sales.

Michael Boulgaris - Boulgaris Investments

And in terms of regulatory pulling some products off the market because of the incipient —

Anthony J. Conway

Yeah. The other thing I think that you're referring to, Mike, is that in March of 2010, PVC products that contain phthalates and we'll have to put warning labels if you will, on the products. They're not being pulled off the market. It's kind of like the latex phenomenon over here of 10 years ago. They can still sell latex products, but they have to put these indications on the packaging. So we see that as a bit plus. For us, 90% of that market in Europe is PVC. I'm talking the intermittent market and we're the only ones that have the silicon and we think that's one of the big reasons why in the UK our MAGIC is doing so very well.

Michael Boulgaris - Boulgaris Investments

Sounds like you're off to a great start with the new product rollouts. And lastly, in terms of — and maybe you could give conservative guidance or if you want to stretch that far, but recognizing we have new product introduction here ramping up FemSoft at a maybe very gradual rate, but in terms of margins looking into 2010-2011, what trends can you suggest? Do you feel there' san opportunity for margin expansion now that there some things lining up in terms of our organic branded products and other — the UK and so on. Would you be willing to give some guidance in that direction?

Anthony J. Conway

Yeah. The guidance we've given, we're very confident in that as we reach significantly inferred volumes, we believe that we'll move to kind of a steady state of an overall margin of about 60%. But there's kind of a counterintuitive step along thew ay. Our advanced new products like MAGIC and Strata are at relatively low volumes right now relative to our products like the MEC that we've had on the market for a long time at much higher volumes.

So in the short term as increases in the sales of our advanced products, they actually put a little pressure on the margin. And in the long term as we increase those volumes they will contribute very greatly to our margins and help push it up to the 60%. I don't know if I'm making myself clear there, but that's the way it works.

Michael Boulgaris - Boulgaris Investments

Gotcha. Thank you so much.

Operator

Your next question comes from the line of William Hanson, private investor. Please proceed.

William Hanson - Private Investor

I have a question, do you do any hedging for foreign currency?

Anthony J. Conway

We have not in the past. We have looked into it and have not. It's really difficult to gamble on what the exchange rate's going to do. So we looked like geniuses when it went up and not geniuses when it went down, but we have not in the past. We can do that. We have a relationship with Barclays over in the UK and US Bank and UBS here n the US and all three of those are very capable of doing that.

William Hanson - Private Investor

It just seems like you have a lot of cash on hand and that would be cheap insurance to avoid these negative earnings and sales numbers that have been coming up for the past few quarters if there was that kind of — I mean, I know it/s 20/20, but it just seems like it's kind of disappointing to see this quarter after quarter.

Anthony J. Conway

Yeah. Even if we hedged our money it wouldn't affect our sales or it would show up in other income if we —

William Hanson - Private Investor

Right. But it offsets to improve the bottom line, wouldn't it?

Anthony J. Conway

Yeah. If the exchange rate went down and we locked in at a higher rate, that's exactly right. And if it does go up again it's been steadily climbing up a little bit here, we more likely could do that.

David A. Jonas

Yeah. Right now Barclays is predicting a return of 1.8, isn't it?

Anthony J. Conway

Correct.

David A. Jonas

And it's been going back up an as of this first quarter here we won't be punished if it stabilizes where it is or if it continues to rise. As a matter of fact in Q1 this stays where it is, we'll gain a tiny bit, I believe, as a result of the exchange rate for the first time in a year, but your point is well taken.

William Hanson - Private Investor

I have another question. It would seem to me that with the dollar being lower that American made products should be cheaper for foreigners to purchase, so wouldn't that make it more attractive and actually it should drive improved sales as far as quantity of sales?

Anthony J. Conway

Yeah. So as the dollar gets weaker that's very good for us.

William Hanson - Private Investor

So then why haven't seen that in our numbers here?

Anthony J. Conway

We've actually been strengthening against the pound throughout the past 12 months. Now it's reversed itself and we should benefit. I'm talking about year over year, quarter over quarter.

William Hanson - Private Investor

Are you guys satisfied with these kinds of sales and earnings numbers that have been coming out for the past year?

Anthony J. Conway

No. We're never satisfied and we don't like having to explain and break down the numbers to show that what is happening is good progress. We think that if the money markets stabilize, as I think they will now over next 12 months, we won't have to do that explanation, we'd think that the branded sales will accelerate. We're trying to negotiate with our private label customers to at least smooth a little bit those private label variations and I would be very surprised going forward if we do have to explain our progress. I think it would be apparent.

William Hanson - Private Investor

So I guess you're not planning on making any changes going forward to try and alleviate these kinds of problems?

Anthony J. Conway

Well, we have no influence over exchange rates. We don't have a lot of influence over our private label customers to when they place orders, but we do have some and we've been working with them trying to smooth that out. We don't think we will smooth it entirely, but the other influence that we have is we've been investing very heavily in sales and marketing and we believe that it will continue to pay off at an accelerated rate. So if you look at 2010 stating in quarter one, we won't have to make excuses for the exchange rate anymore unless things change. So we won't have to explain that away.

Our investment in sales and marketing should pay off more than it has been so we should see strong branded sales, and we should be able to at least smooth the private label sales a little bit, and at the same time we've got these new product introductions which we could be more significant than any of that. So we feel very good about the years ahead.

William Hanson - Private Investor

I'm just thinking if I have a home, I have insurance. I'm sure you gentlemen have homes and you probably have home insurance. Wouldn't you want to ensure your selves to — what are these unforeseen things that come out?

Anthony J. Conway

Yeah. Like I say, point well taken on that. We have looked at it. We haven't done it in the past. Dave and I have talked about it. If we get back up around the 1.8 like Barclays think it will get to on the exchange rate, then we'll take a hard look at locking that in as you suggest.

William Hanson - Private Investor

Yeah. And I agree with that because I'm not trying to say you should — I mean, now is not the time to all of a sudden start locking in numbers that are going to be unfavorable because you could —

Anthony J. Conway

Yeah. We want to take advantage. If everything recovers to where it was we want to be able to take advantage of that, but its' very likely if it does recover to that original exchange rate when we did that UK acquisition, we would be smart to try and lock that in no doubt.

William Hanson - Private Investor

Okay. So it sounds like you are trying o start thinking about protecting yourself for the future if there would be that kind of a potential risk again?

Anthony J. Conway

Yes. You are right, yes.

William Hanson - Private Investor

And then did you say that the sales and marketing expenses were like 30% of the sales for the quarter?

Anthony J. Conway

Correct.

William Hanson - Private Investor

So that's like $3 million?

David A. Jonas

Actually it's 30% for the year so it's like $10 million.

William Hanson - Private Investor

Oh $10 million. So, it seems to me like sale have actually gone down from the last year. And yes there's been all of this money spent on sales and marketing. I guess to me that seems rather disappointing.

Anthony J. Conway

Well, we set out on a strategy purposely and basically opened ourselves up and told investors that we're going to invest fairly heavily for our size company clearly. And there's a time lag. We built our sales force up domestically and we built it up significantly in the UK in order to generate extra sales and generate the growth rate, if you will, of our advance products and we see that happening. It's been happening and it will pay off in the long run, but there is a lag, no question.

William Hanson - Private Investor

How much is that lag period, what are we looking at a year, two years?

Anthony J. Conway

I'm not going to predict but I'm predicting a strong year in 2010 as I've said, starting with quarter one. So I'm not going to lay the number out there, but we feel very good about it.

William Hanson - Private Investor

What part of those sales costs are fixed and what part are variable? Do yo have any idea on that?

David A. Jonas

I guess I don't understand your question, William, what part of the sales and marketing expense are fixed and variable?

William Hanson - Private Investor

Right. Because I mean I could understand this year you might have a rather large sales with marketing expense because maybe you have to establish offices and things like that, but I would expect next year you don't have to establish offices and some of these fixed costs more the costs of being just variable so I would think that those numbers would be getting smaller. That's what I'm assuming, but I mean —

Anthony J. Conway

We would certainly assume that over time that percentage of sales of revenue that is attributed to sales and marketing will definitely go down. And just to illustrate the point, we could in 2010, we're not going to do this, but we could eliminate all of our sales and marketing costs and bring a huge amount of that margin right to the bottom line for the entire year. We'd look really great in the short term, but strategically it would be very foolish. And right now we're doing the opposite. We're actually investing very heavily taking our gross profit and getting our name out there and it's working and you're going to see it working even better in the year to come.

William Hanson - Private Investor

Well, it's working, but I guess from a standpoint of the shareholder value we haven't really seen much for the last few years. I guess my question is when will the shareholder start to see some benefit from these investments?

Anthony J. Conway

I am not going to set a date, but again, I can tell you we look forward to a very good year in 2010 and usually the share price will reflect that.

William Hanson - Private Investor

Okay. Well, thank you.

Operator

You have a followup question from the line of Tyson Bauer with Wealth Monitors.

Tyson Bauer – Wealth Monitors

One for you — your known for choosing your words very carefully and both yourself, Jim and Dave, have talked consistently about the difference between strip and kit reimbursement being short term or for now, other phrases as such. What do you see that you like to put that little extra tag on with that reimbursement change that occurred for '09? Are you expecting that to reverse itself for better reimbursement going forth or what are you seeing that you want to pay special attention to your wording in that regard?

Anthony J. Conway

If I understand your question, Tyson, the unit growth and the dollar growth should start coming together, is that what you're getting at?

Tyson Bauer – Wealth Monitors

Well, that's what you guys must be seeing given — so I could (inaudible) that.

Anthony J. Conway

Yeah. That is what we're seeing.

Tyson Bauer – Wealth Monitors

Okay. So the 20% growth we have seen we will now start to see 20% dollar growth or revenue growth in that product line going forth should that continue?

Anthony J. Conway

That's correct.

Tyson Bauer – Wealth Monitors

Okay. Now that you have the Strata out for a little while, reactions by your competitors and their initial — obviously they're not going to say well, you beat us. What kind of reactions are you seeing and what's their comeback against your new product?

Anthony J. Conway

I can't get into detail about what our competitors say exactly, but let me say that they're scrambling a little bit to say that somewhere down the road they're going to be able to match our product. Right now no one can. We essentially have the only silicon product that is soft and has all the benefits of latex without any of the deficiencies of latex.

Tyson Bauer – Wealth Monitors

But obviously you don't have a patent on silicon so is it more of a manufacturing on — what protections do you have on the product?

Anthony J. Conway

We have patents on some of our processes and the way the catheter is formed the way the balloon is formed. Part of the reason that this is so good is that the balloon is completely integral and there are no seams. It's just very smooth over the entire balloon area which is not true of the competition and they can't make it with our patent. So we do have patent advantages as well and process advantages as well. And then over and above that our biggest advantage is we have the best anti-infective device on the market.

Tyson Bauer – Wealth Monitors

You mentioned in Q3 you had a major hospital win, anything tangible or anything you'd like to share in addition to that news regarding in Q4 going forth you have been able to expand or leverage off of that endorsement for that hospital?

Anthony J. Conway

I don't know if necessarily off that particular hospital, but certainly we have lots of things under way, some in major institutions as a result of the introduction of Strata. It always helps if we can tell a hospital to call another hospital that's using our product and we find out how much they like it. So in that sense it helps.

Tyson Bauer – Wealth Monitors

Okay. And are we expected to see any raw material relief in Q1 or at the beginning of calendar 2010?

David A. Jonas

Really hard to predict, Tyson, I sure hope so. There are a lot of people predicting inflation.

Tyson Bauer – Wealth Monitors

Well that'll change your dollar value, won't it? The UBS conference here recently, you were a last minute cancellation, are we far enough removed that you would like to shed some light on that decision to postpone or not attend that conference?

Anthony J. Conway

There were a couple of reasons and I think you know, Tyson, that I'm not going to go into it. There was a death in the family that affected it and there were some other business discussions going on as well.

Tyson Bauer – Wealth Monitors

Okay. You are open for other conferences, presenting —

Anthony J. Conway

Oh we're attending one first week in December, the Piper Jaffray Health Care Conference in New York.

Tyson Bauer – Wealth Monitors

Okay. And you mentioned earlier your outlook for growth is much more concentrated in the US on a relative basis to the international, where do you hope —

Anthony J. Conway

Woh, that's not correct.

Tyson Bauer – Wealth Monitors

Okay. In terms of US and international growth, do you still expect to see greater growth opportunities in the international market then?

Anthony J. Conway

I wouldn't say greater, but both very significant. We are much stronger still in the UK than we are in the US.

Tyson Bauer – Wealth Monitors

Okay. And there were talks earlier, I can't remember if you went ahead and did this or not, but as far as expanding manufacturing operation, does your outlook now dictate that that will be necessary?

Anthony J. Conway

We believe it will be.

Tyson Bauer – Wealth Monitors

Okay. Thanks a lot.

Operator

You have a followup question from the line of Ernest Andberg from Feltl & Company.

Ernest Andberg – Feltl & Company

I'll pass right now.

Anthony J. Conway

Okay, Ernie.

Operator

At this time I'm showing you have no further questions. I'd like to turn the call back over to Mr. Anthony Conway for closing remarks.

Anthony J. Conway

Thank you very much, everybody for attending this conference and we look forward to a great year. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.

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