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Executives

Anthony Conway - CEO

David Jonas - Chief Financial Officer

Analysts

Peter Sullivan - Private Invesetor

Tyson Bauer - Wealth Monitors

Ernie Andberg - Feltl and Company

Beth Lilly - Gabelli

Rochester Medical Corporation (ROCM) Q4 2010 Earnings Call November 4, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Rochester Medical Corporation earnings conference call. My name is [Stacy] and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. Anthony Conway, CEO. Please proceed.

Anthony Conway

Thank you for joining Rochester Medical's fourth quarter conference call. I am Anthony Conway, the company's President and CEO, and with me is David Jonas, Rochester Medical's Chief Financial Officer. By the way, as most of you know, everyone calls me Jim.

To start, I will review the highlights of the quarter and then Dave will present additional information on the financials and what they signify. After that, we will give you some further insight into our plans for the future and then we'll take some questions.

Before starting, let me remind you that we will be making some 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's annual report on Form 10-K for the year ended September 30th, 2009. These statements further clarify the risks and uncertainties that are associated with the forward-looking statements.

First, let me review the results as reported in the press release. We reported record sales of $11,121,000 for the current quarter compared to $9,009,000 for the fourth quarter of last year. That's a very nice 26% increase in overall sales on a constant currency basis. Rochester Medical branded sales rose a strong 31% on a constant currency basis.

For the full fiscal year we grew at a solid 19% in overall sales with strong growth of 28% in branded sales. The branded growth continues to be led by sales of our all-silicone Magic3 and HydroSil, layered hydrophilic intermittent catheters and also our new Strata brand Foley catheters. We still have only very small market share with these products and we expect excellent growth going forward.

Script-easy sales in the UK are also growing nicely. These consist primarily of competitive products, which we ship directly to patients under our Script-easy brand prescriptions. We are still working with HHS to get fence off reimbursement rate resolved and we hope to have final reimbursement based on retail prices established in the near term.

As we said last quarter, it is still too early to predict the market potential for the device but we are far enough along to have confidence in the FemSoft as a viable and integral addition to our product lines, both in the United States and in the United Kingdom. We are also in discussion with interested potential distributors in other countries.

Now let me turn it over to Dave and he will give you further insight into the numbers and then we'll talk more about our plans going forward. Dave?

David Jonas

Thanks, Jim. I'm going to spend a few minutes highlighting the results reflected in our just-released fourth quarter and fiscal year and 2010 earnings release, our record sales. For ease of discussion, unless otherwise noted, all sales information will be discussed in constant currency. I am doing this to exclude the impact of foreign currency exchange which will show a true reflection of our sales growth.

As Jim explained, our sales results for the fourth quarter showed very good overall growth, especially in our key branded markets in the US, UK and the rest of Europe. As we have discussed the last couple of years, we are focused on and continue to increase our investments and activity in our worldwide brand sales. This has been done for many reasons, including better market access, changing reimbursement rules and increased clinical demand for infection reducing in all silicone, non-latex and non-PVC devices.

We have called this our investment and growth strategy and results have been positive. These investments and focus fueled the growth in our worldwide branded sales which were a record $8.2 million this quarter versus $6.2 million last year, an increase of 31% for the fourth quarter.

For fiscal 2010, our worldwide branded sales were a record $29.8 million versus $23.2 million last year, the $6.6 million in growth equating to a very strong increase of 28%. In Q4 we continued to show strong, solid growth in all of our products including 33% growth in worldwide intermittent sales, a 27% increase in worldwide Foley sales and a 19% increase in male external catheter sales. Our branded sales accounted for 72.7% of our total sales in the fourth quarter and ended the year at 71.8%.

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 $2.24 million versus $1.98 million last year, a 13% increase from last year's fourth quarter. For the year, our domestic branded sales are up 23.4%. Domestically, our advanced intermittent catheter sales grew 16% in the fourth quarter and are now up 33% year to date.

This growth which reflects both new patients and increased usage is very encouraging. Our domestic branded sales in male external catheters increased 6% in the fourth quarter and 7% year to date. Our domestic branded Foley catheter sales grew 23% in the fourth quarter and are now up 48% year to date. The majority of this Foley growth can be attributed to the acute care market and recent hospital conversions.

The launch of our all-silicone Strata technology has been very well received and interest, trials and conversions have never been higher in our advanced Foley products and anti-infection technology.

For the fourth quarter internationally, our branded business continued to grow nicely. Again, to make sure everyone understands our true growth, the following monies are using a constant currency, showing 2009 sales and 2010 exchange rates.

In total, our Q4 international branded sales were $5.9 million this quarter versus $4.2 million last year, an increase of 40%. So far this year we have sold over $21 million of branded products internationally, which is up 28%. The majority of our sales volume internationally continues to come from male external catheters.

The male external business was up 23% in the fourth quarter and is up 16% year to date. Our branded advanced intermittent catheter sales grew at a strong pace of 62% internationally in the fourth quarter. For the year branded intermittent sales internationally are up 96%. Our new triple core Magic3 technology launched last year received excellent reviews and should help us to continue to grow market share in this large European market.

Now let's take a look at our private label business. Rochester Medical continues to have a number of excellent private label partnerships. As previously discussed, their ordering patterns can be and have been erratic throughout the quarter. In 2010 we continued that trend with the first quarter being up 22%, second quarter being down 12% and the third quarter being down 16% and now the fourth quarter being up 15%.

Part of the decrease in the second and third quarter relates directly to the fact that one of our private label partners in Europe is not selling our Rochester Medical brand. Factoring that into the equation, our private label sales were up 28% this quarter and are actually up 10% year to date.

We still believe the sales of our products out our private label partners' doors are growing moderately and our sales to date almost show moderate growth over longer periods.

Our gross margin -- our gross margin was 48.5% in the fourth quarter of 2010, is now at 47.5% year to date. As seen in the third and fourth quarters, this year we fully expect our margins to slowly grow as sales volumes of our advanced products reach higher levels resulting in significantly higher efficiencies and lower per-unit fixed costs.

Our operating expense increased 10.7% or $480,000 in the fourth quarter to $5 million for the quarter and the $19.7 million for the year being very much in line with our expectations. We continue to increase our investment in sales and marketing in both the US and European markets. This investment has been targeted at growing our branded presence in both the home care market and the acute care market in both the US and Europe.

Sales and marketing costs for the fourth quarter were up 10.7% from last year and are up 14.9% year to date. For the year they represent 28.6% of sales, down slightly from last year's 29.7%.

Research and development costs for the fourth quarter were up 11.9%, are basically identical with last year. For the year, research and development costs represent 3% of sales, down from last year's 3.6%. This spending was directly related to new product development. We continue to cost effectively develop life-changing new products most recently bringing two new breakthrough products, Magic3 Intermittent technology and Strata Foley technology to the market.

I'm excited to say we also have two new fascinating technologies nearing completion in our R&D pipeline. Again, our superior technology is what drives this company and the ability to listen to the needs of the market, develop tests, create manufacturing processes and gain US and European agency acceptance helps keep us ahead of our competition and, more importantly, improves lives and patient outcomes.

Our administrative costs for the fourth quarter were up 10.5% from last year and finished the year up 6.4%. For the year, administration costs represent 15.4% of sales, which is slightly lower than last year's 17.3%.

This quarter we had net income after tax of $172,000 or $0.01 per diluted share versus a net loss of $229,000 or $0.02 per diluted share last year. I believe the non-GAAP disclosures in our press release are very helpful in understanding Rochester Medical's operating results, apples to apples so to speak.

Per the table in the press release, after tax-affected adjustments for non-recurring legal settlements, intangible amortization and stock option compensation expense, our fourth quarter non-GAAP net income was $506,000 or $0.04 per diluted share compared to $95,000 or $0.01 per diluted share last year. Year to date, our non-GAAP net income was up as well at $1,220,000 or $0.09 per diluted share versus $865,000 or $0.07 per diluted share last year.

I'm proud to say that we executed our 2010 plan well investing in and growing our branded business nearly 30% with the increased profits generated while staying in the black and preserving our cash. We have built a foundation for meaningful, sustainable, profitable growth in growing markets desperate for better technology.

Our balance sheet highlights -- our balance sheet continues to be very healthy with secure liquid cash and very little debt. Our cash position is $35.5 million and our philosophy of tightly controlled management of working capital has served us well. As most of you know, most of our cash is in highly liquid and secure US government T-bills and CDs.

We have about $6.8 million in short-term and long-term debt and this consists mostly of the debt associated with our June 2006 asset acquisition of about $2.6 million and normal operation payouts.

Fiscal 2010 was a very good year for Rochester Medical. We have strengthened our product portfolio, our sales presence and market share while protecting our balance sheet. As Jim will explain, our future is bright with accelerating sales and profits.

I'd like to hand it back to our CEO, Jim Conway, and let him discuss our plans to double sales in the next three years. Thank you.

Anthony Conway

Thank you, Dave. Over the last two years we've been increasing our investments in sales and marketing in order to promote sales of Rochester Medical's branded products. As most of you know, we have been funding these increased investments with generated gross profits while remaining in the black or at virtual break even exactly as we planned.

We've seen very encouraging results from these efforts and we feel that this is the right time to significantly grow our US sales team. Our updated business plan aims for significant top and bottom line growth over the next three years.

As stated in the press release, our objective is to double sales in the third year and bring significant net profit to the bottom line. We expect the 2011 top line growth rate to be comparable to fiscal 2010 with growth rate accelerating in 2012 and 2013.

We expect to be modestly in the black for 2010 with significant bottom line improvement in 2012 and 2013. Given achievement of our top line goals, we expect net profit in 2013 to be in the $9 million to $10 million range.

Since the future acceptance rate of FemSoft si still hard to predict, our three-year plan or projections contain very modest figures for FemSoft. Most of the growth is coming from our intermittent and Foley catheter product lines.

Also, during the next three years we will continue to explore contractual and strategic opportunities that can also benefit sales and profit levels. Now let me briefly turn it over to David again for some additional details about these plans.

David Jonas

Thanks, Jim. I will give everyone some more detail on our plan for gross margins, operating expense and cash during the next three years, first off our margin.

We will continue to see gradual margin improvements as volumes increase, especially in our newer products. We should improve to 50% in 2011 and slowly work our way towards the mid-50s by the third year.

Our operating expenses -- we will be investing heavily in our sales and marketing infrastructure with most of the increases coming in fiscal 2011. The dramatic increases in our sales staff will results in approximately $5 million of additional spending in fiscal 2011 and only modest increases in fiscal 2012 and 2013.

Both our administrative and R&D expansions will require only modest increases in spending over the three-year plan. As the sales and margins growth continues to accelerate, our operating spending will flatten and, as a percentage of sales, drop dramatically. This allows for the rapid increase in profits in years two and three of this plan.

Much like the last two years, we are reinvesting our current earnings, which will accelerate both sales and earnings in the near future.

Lastly, our capacity and cash -- our strategic plan is to protect our cash while it continues rapid growth both effectively and efficiently. Capacity-wise we'll need an additional manufacturing facility operational by the third year of this plan. The good news is we plan on funding that addition and all other operational needs with cash generated from operations.

So, in summary, in the third year of our strategy plan we expect $83 million in sales, between $9 million and $10 million in profits, much greater manufacturing capacities and over $40 million in cash, subject, of course, to any further uses for cash such as acquisitions, if any.

Thanks, again, for allowing me to share this exciting news. I'll now hand it back over to Jim for some final comments before we answer your questions.

Anthony Conway

Thank you. I want to reemphasize Dave's earlier statement that a key part of our future plans were the introductions of some exciting new technology over the next three years. Let me just finish by saying that we are pleased with 2010 and I believe that we have a very good plan going forward.

Now we'll be glad to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Peter Sullivan - Private Investor.

Peter Sullivan - Private Investor

It was, obviously, a very nice quarter revenue-wise. I'm wondering if there was one particular standout product or region of the world that contributed to that, say, significantly more than others.

Anthony Conway

We continue to do really well in Europe, especially in the UK and our main growth in that region comes from the Magic3 Intermittent catheters. The reason it grows even faster over there than over here is that that entire market is already a hydrophilic market and this technology is hydrophilic technology.

The US is just in the process of converting over to hydrophilic technology. It's actually quite new here and it's still a small percentage of the market. So the large percentage numbers that you heard Dave quote for the international market, primarily Europe, has got a lot to do with the hydrophilic catheter.

Peter Sullivan - Private Investor

Can you give us a sense of how big that European market is for those hydrophilic intermittents?

Anthony Conway

Yes, it's about a $400 million market, actually a little bit larger than that with about $100 million of that market being in the United Kingdom. So it's large and currently we only have a tiny percentage of it at this point in time with I think the year sales of about a total of $8 million. Is that correct?

David Jonas

Yes.

Anthony Conway

So we're just a bit player with the very best technology and we're getting a lot of attention for it.

Operator

Your next question comes from the line of Tyson Bauer - Wealth Monitors.

Tyson Bauer - Wealth Monitors

A couple of quick questions, one, in regards to our forward-looking statements; are there any watershed events or contingent events that need to occur to keep you on track with that forecast that are really things that are major that, if they don't happen, we readjust?

Anthony Conway

No, we kind of factored out of our projection the things that we're not sure of. We're not sure of revenue for FemSoft, for example, or the rate of acceptance, so we had very, very little built in for that. We're not sure if we're going to be successful with an acquisition, so we had zero built into that. We're not sure if we're going to get a contract in Japan, even though we're talking with companies, so we have zero built into that.

So what we've really got is a projection based on metrics from our current sales force really translated all those mathematically into a somewhat larger sales force based on our current products.

Tyson Bauer - Wealth Monitors

Well, this is really a baseline projection going forward with current products in the portfolio that -- we'll see how these other things transpire. But there is no fluff in these numbers?

Anthony Conway

We don't believe there is or we wouldn't be sharing them with you.

Tyson Bauer - Wealth Monitors

FX forecast, obviously, it's hard to know what's going to happen next month, let alone years out. Are we just using current levels as kind of a baseline, or are you hedging you bets on those?

Anthony Conway

For which forecast, Tyson?

Tyson Bauer - Wealth Monitors

Currency fluctuations, since so much of your business is still in the UK.

David Jonas

Yes, we used a very conservative exchange rate, Tyson.

Tyson Bauer - Wealth Monitors

Any one product that's more important to reaching these goals than others? Does the growth -- does it necessitate that it has to come from the domestic markets?

Anthony Conway

Actually, we have a lot more sales in the international market. We're projecting solid growth domestically. The most growth on a worldwide basis is coming from the intermittent technology. We see the US market moving to the same size as the European market, up to about a $400 million market and we have the best offering and we have more improved products in the pipeline related to intermittent catheters, so that's certainly the biggest one. Strata Foleys would be the second biggest one as far as growth increase.

Tyson Bauer - Wealth Monitors

How do you go about the sales force increase? What do you have now, the timetable on getting that where you want as far as results from those new hires? Then, FemSoft, is it a function of you need to get reimbursements settled before you can make real progress there?

Anthony Conway

Let me take the first question first. Our goal is to have the sales force increase actually finished, all the additional new hires, by calendar year end. We are well on our way to doing that. We've already hired the entire management team, both for extended care and acute care because we had to expand that in order to expand all the regions.

We've already hired a number of the additional sales staff. It is a great time to hire. There are great candidates out there, some of which have been laid off by big pharma companies. We're also finding that there are a lot of sales people out there that are getting to know Rochester Medical that are already in this type of field and are very interested in our company.

So the process is well underway. We should complete it by year-end and we feel very good about it. As far as productivity, which was the next part of your question, it takes a while to make them fully effective, as you well know, which is one of the reasons we're not predicting a higher growth rate for 2011.

Our current sales force was so small before we started this expansion -- extended care, for example, we only had two people, one in California and one in Texas, and to maintain the current growth rate in that product line would have required additional resources anyway, as you can imagine.

As our baseline increases, in order to maintain the same growth rate, you have to have at some point some additional resource. We'll be going from two sales people in that extended care to 20 and we'll be covering 80% of the population center. So it's going to be a big change for us.

To your third part of the question, FemSoft, we really do need to get the reimbursement issue resolved. We have reimbursement but the figure that they came out with was calculated based on the wholesale price, not the retail price. We have met with them and resubmitted all the data as requested and they have taken it under consideration. I see no reason why they won't adjust it. That's what the rules call for.

Given that adjustment to the retail price, we feel really good about carrying it in the bag of extended care. These 20 sales people in all the population centers will be making calls primarily initially to sell the intermittent technology but on that same call in the urologist and uro/gyn-ie's office, some cases the gynecologist's offices, will also be selling the FemSoft.

So given the reimbursement we think that it's a very good opportunity. We're not certain how big that opportunity is and so in this baseline projection, as you called it, we've allowed only very modest sales for FemSoft.

Operator

Your next question comes from the line of Ernie Andberg - Feltl and Company.

Ernie Andberg - Feltl and Company

You're increasing your extended care sales force from two to 20 guys. That's 18-plus people. You say that you're shooting for 30. Where are the rest going and how does that expand the rest of the sales force?

Anthony Conway

The rest are going over into the acute care sales force, which will more than double. We'll basically have two sales forces of over 20 people in each sales force counting the management team.

Ernie Andberg - Feltl and Company

Then, by your suggestion, you're calling on the urology community in this extended care sales force to attack the endpoint? That's where you think you get the prescription written?

Anthony Conway

That's where the prescription is written for the intermittent catheters. Our greatest success is with new prescriptions, either for a new patient or a patient that has to come in and get their prescription renewed. It's very easy -- well, not very easy. It's easy for us to show a clinician, a urologist, the advantages for their patient with our technology and the good news is it does not cost a dime more than the inferior technologies.

The government reimburses them all at the same rate. The patient pays exactly the same co-pay, so in our case they can get Magic technology for exactly the same price. So it's a good call for us.

We also work with the distributors and providers of which there are about 300 in the US. They're the ones that actually ship and deal directly with the consumer and we do some co-op type advertising with them directly to the consumer. But our most effective sales route is to that clinician that writes the prescription.

Ernie Andberg - Feltl and Company

Dave, you said that-- I believe you said that the hiring of the additional 30 salesmen would add about $4 million to your operating expenses this year?

David Jonas

It's about $5 million.

Ernie Andberg - Feltl and Company

How should I expect that to play out? Jim, when you said by the end of the year, you mean by the end of this calendar year or your fiscal year?

Anthony Conway

By the end of this calendar year we should have them onboard.

Ernie Andberg - Feltl and Company

So by December you hope to have most of these guys onboard?

Anthony Conway

Exactly.

Ernie Andberg - Feltl and Company

Dave, how does that, then, $5 million sort of play out over the year on a quarterly basis?

David Jonas

Well, $5 million this year. It'll be $6 million going forward. That's the total amount that we're actually adding and spending. The majority of that $5 million will be in the last three quarters. There will be a little bit in the first quarter but the majority will be in the last three quarters.

Ernie Andberg - Feltl and Company

So then, in the next year, ex any variable sales expense, we should expect the $6 million to spread fairly evenly over the course of the year?

David Jonas

Correct. In one of my statements I said we're going to have modest growth in year two and three in spending. It should be in the 10% range in total, year two and three off the first year.

Ernie Andberg - Feltl and Company

Is that in the sales side, or is that in all operating expenses, Dave?

David Jonas

It's all operating but the majority of the increase is going to be in the sales side.

Anthony Conway

Mostly the sales.

Ernie Andberg - Feltl and Company

Jim, have you -- describe your experience with the clinics that you were working with. Have you gotten any significant number of women currently using the product? I don't really know what significant means, and I don't know what you can tell me.

Anthony Conway

It's still a small number. We just doubled our FemSoft sales this last quarter, so it looks really good I think. It's still a small number. Domestically it's like a few hundred total. So it's negligible in overall monies. We're actually growing faster with FemSoft in the UK where the whole structure of community medicine fits the product much better. They're not allowed to come in, for example, and get a sling operation for several years. They have to go through and try the other alternatives first.

Over there we have our own actual continence care nurses that are very high on the product, so it's actually off to a faster start over there. But even there it's too early to tell ultimately. What we're hoping is that this becomes a mainstreamed classical hockey puck type of thing but we don't know that.

Ernie Andberg - Feltl and Company

You've got enough ground to grow your business on the intermittent side in the extended care market that you don't need -- you're saying you aren't depending on FemSoft to support those guys.

Anthony Conway

That's correct. The intermittents and the Strata Foley and we're just going to be launching our StrataNF in the mainland Europe with a very strong partnership, which I won't name today. It will be a major company that will be selling our brand, the StrataNF, in Europe. So we've got a lot of good things going on.

Ernie Andberg - Feltl and Company

That was going to be my next question. If you're attacking a quarter of the market, essentially, in Europe -- and now you've just given us a hint, Jim, that you're going to start attacking -- pardon me, in the UK -- and now you're going to start attacking Europe through a significant distributor.

Anthony Conway

Moreso than we have been with the Foleys, we already have some very significant distributors, particularly with NECs, in mainland Europe and we're building distribution with the intermittents in mainland Europe as well. So we're actually moving on all fronts and doing very well there.

Ernie Andberg - Feltl and Company

How long do you think it takes in the US for the US market to catch up in intermittents on a sterile-use basis, Jim, and where do you think we are right now relative --?

Anthony Conway

I just saw -- I'm trying to remember where I saw it. I just saw an article written on this and I don't remember the source but it was fairly reliable that estimated that at this point there is probably about $150 million market in the US, which is probably about right. We believe that it will move to an equivalent size as Europe, a $400 million market, and I'm hoping it will be there by the end of this three-year period. It'll be a lot closer than it is now but exactly where I'm not sure but I'll be much closer than it is now.

Ernie Andberg - Feltl and Company

Dave, I won't make us go through all the individual product lines' sales here but I'll call you later.

David Jonas

All right.

Operator

Your next question comes from the line of Beth Lilly - Gabelli.

Beth Lilly - Gabelli

Let's start with FemSoft. Can you help us understand exactly what's going on? CMS has come back with a reimbursement price but it's at the wholesale price instead of the retail?

Anthony Conway

Correct. The rules call for reimbursement at 80% or 90% of the retail price. When we submitted all the data at the very beginning of the year, the process that they were going to go through was they were going to examine that retail price for the first seven months along with the data that we submitted and then at the end of, I believe, July or August they were going to issue the actual price that it would be reimbursed at retroactive then to January 1.

They made a mistake during that process where they put us on the wrong list. They put us on the non-reimbursement list and came out initially with a mistake saying that it doesn't get reimbursed, which is just a total mistake, so it took us several weeks or over a month to get that straightened out and we got put back on the yes it is reimbursed list and several weeks later -- now I'm going to say a month ago or six weeks ago, I'm not sure -- they issued the actual reimbursement price which was based on our transfer price to distribution, not to retail.

We sell to the provider, distributor, the liberator medicals of this world, and then they process the Medicare or the private pay insurance and then they supply the customer with the product. So clearly it has to be reimbursed at their retail price, not at our transfer price to them. But the calculation was made on our transfer price to them.

So we've gone and met with HHS face to face in Baltimore. We've submitted all the data and all the proof materials to show what the actual retail price is. They have taken it now under consideration and we hope and expect that it will be adjusted and changed but it has not yet happened.

Beth Lilly - Gabelli

So it's more -- it's not -- you're not arguing or discussing or at odds with them about what the actual price for reimbursement; it's just more the mechanics of them implementing it.

Anthony Conway

Well, it is the -- they calculated the actual price based on our wholesale transfer price, so it is the actual price and we went back and submitted the data to show that is not the retail price and gave them all the data and now they're going through their recalculation. They seem very reasonable. The wheels of government turn very slowly. As I say, I expect that we'll get a result but, as of today, the new price has not yet been issued.

Beth Lilly - Gabelli

Is that an issue holding up sales or anything?

Anthony Conway

To some extent, yes. It's pretty hard for us to operate through distribution if a distributor can't make any money and that is the key point. If the distributor only gets reimbursed for Medicare at the same price he has to pay us for the product, clearly you don't have a viable model. So that is exactly what we're trying to get straightened out.

Now for the women who are quite happy to pay full cash for the product, that's different. But, as we've said before, homecare medical devices are totally reimbursement driven. We've got great reimbursement going in the UK, no issues there. It's working very well. We need to get it resolved here.

Beth Lilly - Gabelli

In terms of the FemSoft product and the adding the additional sales force over the next year or so, can those salespeople, then, just carry the FemSoft product in their bag and so that can be an additional sale to the, as opposed to-- or do you have to hire different salespeople to make the FemSoft sale?

Anthony Conway

Well, that's exactly the good news is the same salespeople in our extended care, they will make the call and sell intermittent catheters and male external catheters and the FemSoft all in the same call. Let me say, Beth, just to clarify, too, if we didn't have FemSoft we would still be adding all those sales people to that extended care. So this is a bonus.

Beth Lilly - Gabelli

Then, in terms of the model that you've laid out, which is really helpful -- thank you for that -- does this include -- I think Dave in his prepared remarks or even you in your remarks -- oh, Dave did -- talked about R&D. You've got two new, fascinating technologies in the pipeline. So when you grow your revenue model out -- and suppose we get to $82 million in 2013 -- does that model include any of those products in the pipeline development, or is this just products that you have on the market today?

Anthony Conway

We've not factored them in separately but we believe they're related to the products we have out there already and conservatively we believe they will help us stay ahead technologically of the competition and perhaps even do much better than that.

One of the products in R&D is an improved anti-infective technology for Foley catheters. If we don't come out with that, if we didn't come out with that, we're still going to be -- we still have the world's best anti-infective technology but to some hopefully significant extent, as we come out with that improvement, that should help us improve our market penetration.

So it's hard to quantify how much that would help. This really is a baseline projection based on our current technologies and our current products.

Beth Lilly - Gabelli

So, in a way, they're product line extensions. It's not like you're developing a new category or anything.

Anthony Conway

That's exactly right. But they're very significant improvements.

Beth Lilly - Gabelli

In terms of your Foley business, which was, I think, up 48% this year -- is that right?

Anthony Conway

Correct.

Beth Lilly - Gabelli

Now, I know that's off a small base. But I listened to C. R. Bard's call and they said that the hospital market is tough and they're not seeing that kind of growth. Now, granted, they're the 800-pound gorilla. But what are you seeing in terms of the hospital market? My guess is, clearly, with that kind of growth, you're taking share.

Anthony Conway

Well, Bard is exactly right. I read their releases and they're exactly right that to some extent Foley usage is moderately down a little bit. Part of the infection prevention push is don't use them unless you have to but that has zero impact on Rochester Medical. Whether the Foley market is a $400 million market or a $390 million market is significant to Bard because if it goes down a little bit they show a decrease. But it has no bearing on us as far as taking market share.

We've got such a small slice that if it's $390 million now instead of $400 million, that really does not matter to us. So that's the difference. So what you're seeing from them is correct but it has no bearing on us. Anytime you get a conversion it's likely to be from C. R. Bard but our Foley sales are still so tiny it's certainly not an impact on them that they would be reporting or talking about.

Beth Lilly - Gabelli

But you're gaining share, obviously.

Anthony Conway

Exactly, yes.

Beth Lilly - Gabelli

Then, what about that UK study that apparently was going to -- remember, the UK study comparing your product with Bard's product? Where is that all at?

Anthony Conway

The last that we heard is that it would be completed this month and that the results would be available six months after completion for the public. That's the last we've heard. Now there have been delay after delay, as you know, but it's got to be getting very close. They don't share the details with us.

Beth Lilly - Gabelli

No, they just publish it when they publish it.

Anthony Conway

Yes, right.

Beth Lilly - Gabelli

A couple more questions -- you talked about at the end of this three-year plan or in year three of this plan you're going to need to add an additional facility to meet your needs. Can you talk -- I mean, clearly you've got the land to do it. What would the cost be in terms of the actual physical plant and the equipment?

David Jonas

We've got $6 million or $7 million built into our plan for that. We would need it operational by the beginning of the third year, so more likely we would start building it in the second year.

Beth Lilly - Gabelli

Then my final question is something that we've talked about in the past and that is you have $32 million in cash on your balance sheet and at the end of this program -- or if you are successful in this, which I'm sure you will be, you'll have at least $40 million of cash on the balance sheet. So where do share repurchase programs fit into the mix -- and I know you have 1 million share authorization outstanding, correct?

David Jonas

2 million, actually.

Anthony Conway

Right now we have no plans for that. We've bought some back from time to time when we think that the price is just atrocious. Part of the reason for that has been symbolic but part of the reason has been it's so low that it's kind of good to reduce the number of shares that are out there for our other shareholders.

But in that three-year plan there are no specific plans to buy any shares back and we are actually hoping and exploring ways to use those monies for acquisition.

David Jonas

On top of that, that $40 million we have doesn’t take into account any stock option exercises that will happen. So the way I look at it is the cash we get from that kind of offsets if we buy shares back as well, so I don't have and upside or the downside. I don't cash [to figure that out]. That $40 million is strictly from operations, growing that from operations.

Beth Lilly - Gabelli

You didn't buy any stock back this quarter?

David Jonas

We bought it back in the fourth quarter, yes.

Beth Lilly - Gabelli

How much did you buy?

David Jonas

I think it's 132,000 shares.

Beth Lilly - Gabelli

So you did buy stock back, interesting. So barring you making any major acquisitions, is it fair to assume that if the price is an appropriate level you will be in the market repurchasing?

Anthony Conway

If the price is at inappropriate level.

Beth Lilly - Gabelli

Yes, I'm saying appropriate for you.

Anthony Conway

Yes, it's likely that if we feel that it's gotten a little bit goofy again that we do that but that's not in the plan and we don't expect that but you don't ever know.

Beth Lilly - Gabelli

Dave, how many -- what's the full amount that remains on the authorization in terms of the buybacks?

David Jonas

I think we're authorized for 2 million shares to buy back and we've bought back almost 200,000 shares.

Beth Lilly - Gabelli

We're very appreciative that you laid out this plan. It allows us to get a sense of where you think the business is going to go and what you can achieve because, if you're successful, you'll have -- by year three, you'll have close to 12% net margins and, as I calculate it, 17% operating margins. Those are big numbers.

Anthony Conway

Right, right.

Operator

At this time, I'd like to turn the call back over to Mr. Conway for closing remarks.

Anthony Conway

Well, thank you all for attending our conference here. We're feeling really good about where we are and where we're going and we'll see you next time. Thanks, again.

Operator

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a wonderful day.

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