Rochester Medical Corp CEO Discusses Q1 2011 Results - Earnings Call Transcript

Jan.25.11 | About: Rochester Medical (ROCM)

Rochester Medical Corp (NASDAQ:ROCM)

Q1 2011 Earnings Call

January 25, 2011 4:30 p.m. ET

Executives

Anthony Conway - CEO

David Jonas - Chief Financial Officer

Analysts

Tyson Bauer - Wealth Monitors

Ernie Andberg - Feltl & Company

Larry Haimovitch - HMTC

Beth Lilly - Gabelli Investors

William Hanson - individual investor

Operator

Great day ladies and gentlemen and welcome to the first quarter 2011 Rochester Medical Corporation earnings conference call. My name is Thelma and I will be your coordinator for today’s event. At this time all participants are in a listen only mode. We will facilitate a question and answer session towards the end of this presentation. You may press star, 1 on your touchtone telephone at any time to pose a question.

If at any time during this call you require assistance please key star followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Anthony J. Conway, President and CEO. Please go ahead.

Anthony Conway

Thank you for joining Rochester Medical’s first quarter conference call. I’m Jim Conway, the company’s President and CEO and with me is David Jonas, Rochester Medical’s Chief Financial Officer. To start I will review the highlights of the quarter and then David will present additional information on the financials and more detail on the pending acquisition. After that we will give you some further insight into our plans for the future and then take questions.

Now 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 30, 2010. These statements further 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. We reported sales of 10,946,000 for the current quarter compared to 10,332,000 for the first quarter of last year. That’s an 8% increase in overall sales on a constant currency basis. Rochester Medical branded sales rose 18% on a constant currency basis and while that is certainly good branded growth it is somewhat less than expected primarily due to timing of orders from international branded distributors.

The branded growth continues to be led by strong sales of our all silicone Magic 3 and hydrophil layered hydrophilic intermittent catheters. Overall Foley sales were slightly down this quarter again primarily because of international order timing. Domestic Foley sales were very slightly down. We see this as an aberration especially since our overall hospital sales are up and evaluations and interest are at their highest levels ever. We expect excellent growth going forward with all these products. We believe sales levels of all branded products will certainly benefit from a sales force expansion.

Speaking of which, we are very pleased with the initial results of our US sales team recruiting effort. We have added 34 sales professionals during the first quarter, which more than triples our domestic sales force. The recruits are seasoned professionals with strong experience and we are confident that this will accelerate sales as laid out in our three-year plan. Also this quarter we negotiated our agreement in principle for the acquisition of Laprolan in the Netherlands.

As stated in the press release, for calendar 2010 Laprolan reported $11.2 million in revenue with a pre-tax profit of $3.5 million. We think the pending acquisition is a great strategic and financial move for Rochester Medical. Now I’ll turn it over to Dave and he will give you more detail and insight into the financials and into the pending acquisition. Then I will sum up and we’ll take your questions.

David Jonas

Thanks Jim. I’m going to spend a few minutes highlighting these results just released in our first quarter 2011 earnings release. First our sales - for ease of discussion unless otherwise noted all sales information will be discussed in constant currency. I’m doing this to exclude the impact of foreign currency exchange, which will show a true reflection of our sales growth. As Jim has explained, our sales results for the first quarter showed good overall branded growth especially in our key branded markets in the US and UK.

As we have recently discussed, we are focused on and continue to increase our investments and activity in our worldwide branded sales especially in the US and Europe. We have added over 30 sales people in the US this quarter alone and once completed, our Laprolan acquisition will give us direct access to the Netherlands and more direct access to mainland Europe. These investments and focus fuel the growth in our worldwide branded sales, which were $7.8 million this quarter versus $6.6 million last year, an increase of over 18% for the first quarter.

In this first quarter we continued to show strong, solid growth in our products highlighted by a 29% growth in worldwide intermittent sales and a 10% increase in male external catheter sales. Overall Foley sales were down 9% this quarter primarily due to the timing of international orders and also due to a slight decline in domestic Foley sales during the quarter. The overall outlook and trend in our Foley sales look very good. Field evaluations and hospital interest in our technology is stronger than ever and we expect good growth as we add more new customers in 2011.

Our branded sales accounted for 72% of our total sales in the first quarter. 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 first quarter were $2.33 million versus $1.96 million last year, a 19% increase from last year’s first quarter. Domestically our advanced intermittent catheter sales grew 34% in the first quarter. This growth, which reflects both new patients and increased usage, is very encouraging.

The addition of our sales people in this area in just the last few months will also help drive accelerated growth going forward. Our domestic branded sales of male external catheters increased 21% in the first quarter. Our domestic branded Foley sales were slightly off, down 6% in the first quarter. As Jim alluded to, 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 first quarter internationally our branded business continued to grow nicely. Again, to make sure everyone understands our true growth, the Foley numbers are using a constant currency showing 2010 sales and 2011 exchange rates. In total our first quarter international branded sales were $6.6 million this quarter versus $5.9 million last year, an increase of 13%. The majority of our sales volumes internationally continue to come from male external catheters. This male external business was up 7% in the first quarter tempered slightly by the timing of orders to a couple larger distributors.

Our branded advanced intermittent sales grew at a strong pace of 23% internationally in the first quarter. Our advanced triple core Magic3 technology continues to receive excellent reviews and should help us to continue to grow market share in the large European market. This growth will also be accelerated with the acquisition of Laprolan. 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, the ordering patterns can be and have been erratic quarter over quarter.

Again, this trend continues as the first quarter in 2011 was down 11% while last quarter’s fourth quarter 2010 was actually up 15%. We still believe the sales of our products out of our private label partners doors are growing moderately and our sales to them will show moderate growth over longer periods. Gross margin - our gross margin was 49.4% in the first quarter of 2011. As seen in the last three quarters, 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 expenses - our operating expenses increased 19.5% or $958,000 in the first quarter. This increase is a mix of non-recurring items and recurring items. The non-recurring items include $200,000 for recruiting costs and $143,000 of M&A costs related to the pending Laprolan acquisition. The majority of the rest of the increase relates directly to costs associated with the sales head counts added in the US. Sales and marketing costs for the first quarter are up 40% from last year. They represent about 35.4% of sales, which is up from last year’s 27.1.

Research and development costs for the first quarter were down 37.2% and for the year research and development costs represent 2.5% of sales, down from last year’s 4.3. This spending is directly related to new product development and the costs can vary depending on what part of the cycle the products are in especially as they relate to outside testing and services. We continue to cost effectively develop life changing new products, most recently bringing two new breakthrough technologies, Magic3 intermittent technology and strata Foley technology into the market.

I’m excited to say we also have two new technologies nearing completion in this R&D pipeline. Again our superior technology is what drives this company and the ability to listen to the needs of the market, develop, test, create manufacturing processes and gain US and European agency acceptance helps keep us ahead of the competition and more importantly improves lives and patient outcomes. Our administrative costs for the first quarter were up 1.1% from last year. This increase comes entirely from costs associated with the Laprolan acquisition.

For the year administration costs represent 15.6% of sales, which is slightly lower than last year’s 16.5. This quarter we had a net loss after taxes of $169,000 or 1 cent per diluted share versus a net loss of $169,000 or 1 cent per diluted share last year. I believe the non-GAAP disclosures in our press release in understanding Rochester Medical’s operating results. Per the table in the press release, after tax affected adjustments for material, non-recurring costs intangible amortization and stock option compensation expense, our first quarter non-GAAP net income was $377,000 or 3 cents per diluted share compared to $148,000 or 1 cent per diluted share last year.

Our balance sheet continues to be very healthy with secure liquid cash and very little debt. Cash generated from operations has been used to pay down the debt associated with the 2006 acquisition in the UK. I’m happy to say we will make our last payment in June of this year. We believe our pending acquisition in the Netherlands will be funded in much the same way by using cash generated from the acquisition to pay for itself in five years or less. Our cash position is $34.1 million. This is down about $1.4 million solely because we paid off our line of credit.

We now have $25 million available on that line of credit by the way. Our philosophy of tightly control and management of working capital have served us well. As most of you know, most of our cash is in highly liquid and secure US government t-bills or CDs. Fiscal 2011 has started strong for Rochester Medical and much has been accomplished that will drive our growth going forward. We have added over 30 sales people in the US and negotiated an agreement to add direct distribution in the Netherlands.

I believe we are in a good position to meet our three-year plan to double sales and to create meaningful profit. Now let’s talk about Laprolan. It’s my privilege to discuss in more detail our pending acquisition in the Netherlands. Laprolan is a 25-year-old medical supply distribution company currently owned by Fornix Biosciences NV. Laprolan possesses the exclusive selling rights for a broad range of innovative patented medical aids and disposables in the Netherlands and for some products in Europe.

In addition, a number of those products are increasingly being developed in-house under the Laprolan name. This range includes products for urology and stomach care, wound and scar care and anti-(decapodous) care. Rochester Medical has supplied our products to Laprolan for over 16 years. They have been a very good customer and we know them very well. Its physical location is near the center of the Netherlands, which is the most densely populated country in the world with a population of over 16 million people.

The deal is expected to close in April of 2011 and once closed, the businesses is ours as of January 1, 2011. Therefore we believe that the transaction will positively affect Rochester Medical’s second, third and fourth quarters especially in top and bottom line. Laprolan has a strong group of seasoned, experienced employees. Much like our UK operation, most of these employees are focused on sales, marketing and distribution. Rochester Medical has also hired Gerard Yung, a former owner of Laprolan, who will serve as our general manager.

We believe having strong, experienced leadership like Gerard is essential in these types of businesses. Gerard took over as Laprolan’s general manager this week and we look forward to his contributions and leadership. Laprolan’s calendar 2010 financials included sales of 8.2 million Euros, approximately $11.2 million, earnings before taxes of 2.6 million Euros, approximately $3.5 million, and a gross margin of approximately 57%. I also want to note that corporate taxes in the Netherlands are approximately 25%.

In summary, this will be a great fit for Rochester Medical. Much like our acquisition in the UK four years ago, this will give us immediate, growing access to this market. It is immediately accretive, gives us direct distribution in the Netherlands and is only 30 miles from mainland Europe. It fits our strategy perfectly and to be honest has been on our target list for quite a while. Thanks again for allowing me to share this exciting news. I will now hand it back over to Jim for some final comments before we answer your questions.

Anthony Conway

Thank you Dave. I want to make a few additional points and then we’ll take your questions. Last week we were notified by CMS that they’re holding to a US Femsoft reimbursement rate of $1.51. We are seeking help from our legislators to get this raised to a more appropriate level. Meanwhile, our extended care sales force will soon begin to include Femsoft on nationwide clinical sales calls in order to begin generating sales and familiarizing thousands of clinicians with the device. Because of its uniqueness, Femsoft serves as a great entrée to gain clinician access.

We expect this to indirectly help bolster sales of intermittent catheters as well. We are also exploring introduction of the device in mainland Europe where there is considerable interest. As we have previously stated, while we believe Femsoft will become an integral part of our product offering, the future acceptance rate of Femsoft is still hard to predict. Our three-year plan and projections contain very modest figures for the device with most of the organic growth coming from our intermittent and Foley catheter product lines.

As we said last quarter, our updated business plan aims for significant top and bottom line growth over the next three years. Our objective is to double sales in the third year and bring significant net profit to the bottom line. Also during the next three years, we will continue to explore contractual and strategic opportunities that can benefit sales and profit levels. In summary, given our recent progress, we are extremely well positioned to carry out our plans and objectives. Now we’ll be happy to take your questions.

Question and Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question pleas press star, 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question you may do so by pressing star followed by 2. Please press star, 1 to begin and please stand by for your first question. Your first question comes from the line of Tyson Bauer with Wealth Monitors. Please go ahead.

Tyson Bauer

Good afternoon gentlemen.

Anthony Conway

Hi Tyson.

Tyson Bauer

Quick question - that acquisition and all seems too good to be true with the numbers there. Congratulations. Doing the computations it looks like 21 cents annualized accretion EPS wise. Is there anything that we need to back out of those numbers such as intra-sales with your existing product that already was in the numbers or any other things that you may have to add to their expenditures that would reduce that accretiveness?

David Jonas

Not really Tyson. The only thing that we might have to back out of earnings is we know there will be some intangible amortization. We don’t know what that number is yet but we will have to back - some of that earnings will come out as intangible amortization. That doesn’t affect cash flow but it will affect earnings.

Tyson Bauer

Okay. That’s still significant accretiveness is an understatement here. A couple of quick questions - your private label, obviously you’ve struggled to get any kind of consistency out of the ordering pattern of those partners. Are you developing any stronger ties or expansion with those private label providers that may smoothen that out as we go forward?

Anthony Conway

You know, we’ve tried that as we renegotiate contracts with those partners but they’re fairly adamant that they want to order on their own patterns while expressing great understanding for this dilemma. So we try to get more cooperation and I think that it’s still going to be pretty up and down as we go forward. But year over year it should be fairly steady with some decent modest growth.

Tyson Bauer

Okay. So you’re not seeing any weakening of their desire to carry your products?

Anthony Conway

No, not at all.

Tyson Bauer

Okay. Another quick question - any repurchases during the quarter?

Anthony Conway

No.

Tyson Bauer

And last question from me - in your three-year plan you provided in the last call was this acquisition within that plan?

Anthony Conway

No. Not at that time it was not. Our projection is doubling on organic growth. And at this time we’re one quarter into that plan so rather than changing the plan at this point in time we’re just saying we’ve got a really good jump on it.

Tyson Bauer

Another understatement. Thanks a lot.

Operator

Your next question comes from Ernie Andberg with Feltl and Company. Please go ahead.

Ernie Andberg

Good afternoon Jim, Dave.

Anthony Conway

Hi there Ernie.

Ernie Andberg

Let’s start with the branded product sales, the distributor slippage. Do you have an idea how that might have affected you relative to your expectations Jim? And any indication where that might fall going forward?

Anthony Conway

It was mainly two branded distributors and if they had fallen in a normal pattern we would have been certainly well north of 20% growth if that’s your question.

Ernie Andberg

Okay. Is there any indication that they have ordered or some timing on that and how it might affect branded product sales over the balance of the year Jim?

Anthony Conway

Well, we expect them to strengthen somewhat especially with the significant increase in the sales force. I guess I would leave it at that. We would certainly expect them to strengthen. You know, we didn’t mention it but this quarter there were other things that anecdotally kind of softened branded sales. And it sounds a little silly to say but in the last three months of the year in the UK and in the United States there were about three weeks where the populated areas were just pounded with weather.

And a lot of our growth in sales comes from new prescriptions when people are going in to see their doctor and getting new prescriptions and when continence care nurses are out and about seeing them. And that was certainly impacted somewhat and we have no way to measure that.

Ernie Andberg

That might square with what I saw on the headlines today that the UK actually saw a decline in economic activity in that December quarter with darn weather.

Anthony Conway

It was pretty unbelievable over there. There were about two weeks worth of when you know, if it really snows badly over there everything stops. So there’s some impact and it’s very hard to measure so we didn’t put it in our official statement.

Ernie Andberg

I know it’s hard to figure out when your private label customers are going to order Jim. But any indications if we’re going to get growth on an annual basis when we might see the orders this year?

Anthony Conway

You know, we’ve kind of fallen into a pattern of up and down quarter by quarter. But we are sticking to our prediction that year over year we get the modest growth.

Ernie Andberg

So no help for us poor outsiders trying to figure out quarterly patterns?

Anthony Conway

We don’t get that help Ernie and I apologize for that but we frankly don’t know.

Ernie Andberg

I understand. Okay. So Dave, the operating expenses particularly the sales were a little bit higher than I had expected in the quarter. You identified about $300,000 of spending Dave, which was one-time. How do you think the particularly sales and marketing line looks over the balance of the year? It was 3.9 and a couple hundred thousand for the hiring, which gets it down to 3.6. I had thought that that would go above 4 million in the next three quarters into the $4-1/2 million area by the end of the year. Does that look still reasonable?

David Jonas

I mean, that does look reasonable. To be honest with you we did a really good job of recruiting our people and getting them in here, which means that our expenses are a little bit stronger this quarter than maybe you would have projected. But your number is still reasonable.

Ernie Andberg

Okay. I won’t ask you for the actual sales numbers on all of the domestic and international products Dave but do you have those available to talk offline about what the actual results were and I can give you a call?

David Jonas

Yes. Absolutely.

Ernie Andberg

Okay. Tyson covered the issue of Laprolan was not in your numbers. How should we expect the numbers to flow if you now think that you get this closed in April? That means that you’ll have three quarters - pardon me, six months of revenues in this year’s earnings. Will they all fall in the fourth quarter or will you restate the two quarters or three quarters?

David Jonas

Those contractors, they call this a black box transaction in Europe and I guess it’s a very common transaction in Europe where we’re actually going to close on the business in April but we’re actually getting the business as of January 1st. So we believe that we will the second, third and fourth quarters will reflect Laprolan’s business activities in our consolidated financials. But we’ll get sales and earnings in the second, third and fourth quarter.

Ernie Andberg

Okay. So even if you close it in the third quarter, which is the June quarter, you will be reporting sales?

David Jonas

We’re going to close the deal in April, Ernie. That’s the goal right now.

Ernie Andberg

Okay.

David Jonas

So that’ll be before we release our second quarter and therefore when we release our second quarter, which will probably be a few days later than it normally is just so we can get all the Laprolan financials into our numbers, we will be reporting that as a consolidated unit.

Ernie Andberg

Okay.

Anthony Conway

Yeah. It could be as much as a week or two late just to do that. So but that is the plan.

Ernie Andberg

So is there any seasonal pattern to Laprolan’s business Dave, that would say you won’t get three quarters of their revenue for you guys?

David Jonas

I looked through the last few years of their business and I did not see any seasonal aspect. Their business is a lot like our business. It’s driven by people that use those products and they need them all the time.

Ernie Andberg

Okay. Then I’ll leave it there. Thank you.

David Jonas

Thank you Ernie.

Anthony Conway

Thanks Ernie.

Operator

Your next question comes from Larry Haimovitch with HMTC. Please go ahead.

Larry Haimovitch

Good afternoon gentlemen.

Anthony Conway

Hi Larry.

Larry Haimovitch

I wanted to ask about the acquisition. It’s my understanding that you have not actually paid for the acquisition and that it will be in Euros. That being the case, wondering if you have hedged against the euro? I noticed that the euro for the last few days has been going up although not dramatically. I’m just wondering if there is any risk to the purchase price by not having any hedging in place before the deal actually closes.

Anthony Conway

We did not hedge so it could continue to edge up between now and closing. Of course for the long term that’s a good thing for us but we did not hedge. We talked about it and we did not think we were smart enough to know which way it was going to go.

Larry Haimovitch

Right. So the purchase price that you’ve quoted to us is based on what price euro? About 1.30?

David Jonas

I think it was 1.35.

Anthony Conway

I thought it was 1.32. I have to go back and look at the exact amount.

Larry Haimovitch

I think the euro is about $1.35, $1.36 so there hasn’t been a big move. I’m just concerned if the euro were to for any reason really take off it would change the economics of the deal for you a little bit although as others have pointed out, it looks like a very, very attractive deal for you.

David Jonas

Yeah. We’ve got resources Larry, this is Dave, with our US banks where we can almost immediately hedge that entire model. And we’ve had conversations with them and just to be honest we haven’t gotten any information if anybody knows if it’s going to go up or go down obviously.

Larry Haimovitch

Yeah. One other question - just out of curiosity I know you were scheduled to speak at the Piper Jaffray conference. You did not appear there. Was it the Laprolan deal that was taking so much of your time you couldn’t be distracted? Was that what was going on?

Anthony Conway

That’s correct.

Larry Haimovitch

Okay. Well, we thought something was going on. We just didn’t know what. You kept it a good secret. But it looks like a lovely acquisition. How long have you been working on it Jim? Was it something in the works for quite some time?

Anthony Conway

You know, we looked at this a couple of years ago and had some conversations along these lines. And then Fornix the parent decided that they did not want to take any action at that time. And then fairly recently a couple of months or so ago they announced Fornix again the parent, announced that they had made the strategic decision to go ahead and sell Laprolan. So it’s been over the last quarter it’s kind of been very intensive discussions. Dave and Marty, poor souls, have been flying back and forth across the Atlantic, meetings in the Netherlands and meetings in Rochester and a couple of other places.

Larry Haimovitch

Yeah.

Anthony Conway

So a lot of activity and we feel very good about it. It’s such a good fit and like Dave said, we’ve known them for a long time.

Larry Haimovitch

Yeah. That’s always nice to make an acquisition where you’re comfortable with the people and the product line and the threat of surprises is so much less likely, isn’t it?

Anthony Conway

Right. We’ve known our new general manager that went in place today for a number of years, the prior owner. And he knows it so well so we’re very lucky to get him signed up.

Larry Haimovitch

Jim, were there any other buyers that were seriously contending to buy this company? Or was it pretty much?

Anthony Conway

We know there were. We don’t know who they were other than we know for sure that there was also a management buyout that was a contender.

Larry Haimovitch

Did prices get jacked up a little bit because there was some competition or did you feel the price didn’t?

Anthony Conway

We negotiated back and forth as you can imagine over time based on what you find out over time. And we felt that it was a good strategic fit as well financial fit for us. So we offered them a pretty good price right up front and it’s a great price for us as well. So it’s a very good deal for both companies, that’s the way I look at it.

Larry Haimovitch

Yeah. And one last question and I’ll jump back in queue. I know when Dave Circleson and I visited you three or four months ago or whenever, before winter started, we talked about the profile of some of the reps you were going to hire. And as I recall either you or Dave were saying there were a lot of good pharmaceutical reps that you think you could attract. Is that how it worked out in terms of being able to ramp up the sales force so quickly?

Anthony Conway

We did get some pharmaceutical reps and there are a lot of good ones out there. But as soon as word went out that we were looking gosh, we had people contacting us and experienced medical device sales people as well from the industry. So we did very well in that area also.

Larry Haimovitch

Great. All right Jim and Dave, thanks very much.

Anthony Conway

Thank you.

Operator

Your next question comes from Beth Lilly with Gabelli Investors. Please go ahead.

Beth Lilly

Good afternoon Jim and Dave.

Anthony Conway

Hi Beth.

Beth Lilly

I want to ask two questions. Let’s talk about Femsoft. You said something about CMS at the end of the call and I want to be clear about what you said. Can you repeat it?

Anthony Conway

Sure. Basically we have been - they settled on a reimbursement rate of $1.51 several months ago. And we felt that that was an incorrect calculation and it was much closer to the wholesale price rather than the retail price. So we went back with them and met with them several times presenting them with data and asking them to provide data to us letting us know how they came up with the $1.51.

And so they agreed that they would re-review everything that they did and we just got notified last week that after their re-review for now they were going to stick with their initial calculation, which involves a very complicated formula, which is applicable probably to most devices, which takes the retail price today and backs it all the way down to what it was in 1986 and 1987 and then does some strange calculations based on the 1986/87 prices. And of course the product wasn’t even invented back in those days so we feel that the formula is faulty and the lowest retail price that we have ever seen was $2.14.

And when we started selling it to our distributor and we have no control by the way over the retailer’s price other than what we charge them, their prices were up around $3 and sometimes a little bit more. So we felt the $1.51 is quite inadequate if you will. So we’re going to have our legislators get involved and try to help explain to CMS that we don’t think their calculation is correct. But in the meantime we are going ahead with the product. There is tremendous interest in it. We can we think sell a lot of them.

We won’t make a lot of money at these levels but we can sell a lot of them and we think it’s a great adjunct to our other extended care products. Clinicians are very interested in this device, urologists I’m talking about in particular because it’s new and we’re the only ones that have it. So it’s a great entrée to get in to talk to a clinician and these are the very same clinicians that prescribe the intermittent catheter. So all the way around we think that it’s good to move ahead while we are having these negotiations.

Beth Lilly

Do you make money at $1.51?

Anthony Conway

We do but it’s a small amount.

Beth Lilly

Yeah. Okay. Have you ever had this type of incident occur before with maybe any other product lines with CMS?

Anthony Conway

No we have not. We’ve never had any difficulties with them and I hope and foresee that we can get through this.

Beth Lilly

Interesting.

Anthony Conway

I said also - maybe you missed this part too Beth - I said also we’ve got some very strong mainland European interest and with our Laprolan acquisition that puts us in a better position also to sell into mainland Europe. We’re already selling into the UK. It’s still at very small levels but the interest is building and you know, we’re selling several thousand devices a quarter. So it’s a start.

Beth Lilly

So CMS obviously doesn’t apply over in mainland Europe.

Anthony Conway

It does not and our reimbursement discussions over there and in the UK have been very positive and reasonable.

Beth Lilly

Okay. So you’re not running up against the same factors there as you are in the US?

Anthony Conway

We are not.

Beth Lilly

Okay. Great. And then I just wanted to make sure so on the branded side it sounds like you talked I think in the last call about you see the 20% plus growth as a reasonable assumption for your revenues to grow this year, okay? And I understand about the private label side just it’s so lumpy and erratic and it’s hard to predict. But on the branded side would you say that this quarter is just simply an anomaly in terms of orders and things like that?

Anthony Conway

No, not that. 18% is still pretty good. We would have liked to have been and expected to be north of 20 as you said.

Beth Lilly

Yeah.

Anthony Conway

But apart from a couple of distributors, fairly large ones internationally, we were very close to what we expected in dollars.

Beth Lilly

And I think somebody already asked this question but do you expect those same distributors to maybe then order this quarter?

Anthony Conway

Yes.

Beth Lilly

Yes. Okay. So it’s a timing issue simply.

Anthony Conway

It’s exactly a timing issue. That’s what it is.

Beth Lilly

Okay. All right. Good. And then I wanted to ask you about Laprolan just so I can be clear about the numbers. So you’re paying $13.7 million, correct?

David Jonas

Correct. It’s 10.3 million Euros so whatever the euro is going to be.

Anthony Conway

Right. Whatever that is at that time.

Beth Lilly

Okay. But give or take at today’s exchange rate it’s 13.7 million, right?

Anthony Conway

Correct.

Beth Lilly

All right. So that’s a little less than four times EBIT, right?

Anthony Conway

Right.

Beth Lilly

And 1.22 times revenues.

Anthony Conway

That’s about right.

Beth Lilly

Okay. And how fast have Laprolan’s revenues been growing over the last several years? What’s the revenue growth rate then?

David Jonas

That’s a complicated answer Beth because they’ve got some products that are growing fairly rapidly and they’ve got a couple product lines where they’ve actually lost the distribution rights to it. Coincidentally the two big ones that they lost last year were both for intermittent products, which fits us just perfect because we want to of course focus on Rochester Medical branded intermittent in that market.

So if you look back over the past couple of years their sales in total have actually come down a little bit. But the products that we’re moving forward with have been growing very nicely.

Beth Lilly

So have they been growing over 20%?

David Jonas

I would say yes.

Beth Lilly

Okay. All right. So just in terms of modeling purposes that 11. - let’s see what’s the revenue number you gave us - 11.2 million in revenues. That’s the revenue number. I can take that and grow it 20%?

Anthony Conway

For 2011 I would use that right about as it is.

Beth Lilly

Okay. Great.

David Jonas

They lost two products.

Anthony Conway

That’s based on the loss of their product lines.

Beth Lilly

Okay. Right. And then I was going to ask you one other question but then I forgot. This is the last thing. So as Tyson pointed out, you know, if we tax affect the number, the 3.5 million in pre-tax that you gave us and that’s a 25% tax rate, that 2.6 million after tax or 21 cents accretion, that’s going to all go to your bottom line this year. Is that correct?

David Jonas

Everything except we are going to have some intangible amortization. Some of it’s going to be attributable to goodwill and some of it’s not and we don’t know what that number is yet. We won’t know that until we get closer to the completion of the deal. And when we did it in the UK, that number was $650,000 roughly of amortization. And I don’t think this one will be quite that high. So I can’t tell you exactly Beth, what that number is going to be but it’s going to be a little bit lower than that number.

Beth Lilly

Okay.

Anthony Conway

We still get the cash but you have to amortize part of it.

Beth Lilly

Okay. Well, just the price that you paid for that business is astounding. Good deal. Good job.

David Jonas

Thank you.

Beth Lilly

Okay. Well, that’s all of my questions. Thanks so much you guys.

Anthony Conway

Yes. Thank you Beth.

Operator

Your next question comes from William Hanson, individual investor. Please go ahead.

William Hanson

Good afternoon.

Anthony Conway

Good afternoon.

William Hanson

I was wondering with this Laprolan acquisition how many employees are included with that deal?

Anthony Conway

I believe it’s 22.

David Jonas

22, yes.

William Hanson

Then how many of them would be like sales or sales reps?

David Jonas

I think 18 are in sales and marketing.

Anthony Conway

Yeah. It’s almost all.

William Hanson

Okay. In reserves is there like a warehouse or just an office building that they use?

David Jonas

They actually have an office building and they really have an attached warehouse and then a detached warehouse. So they really have a couple warehouses.

William Hanson

Any idea how many square feet or anything?

David Jonas

You know, I don’t remember right off the top of my head.

William Hanson

Would they be the size of your office buildings in Rochester?

David Jonas

No. They’d be more akin to what we have in the UK. I’d say it’s almost the same to what we have in the UK.

Operator

Ladies and gentlemen as a reminder, please press star, 1 on your touchtone telephone if you wish to ask a question. Our next question comes from Ernie Andberg with Feltl and Company. Please go ahead.

Ernie Andberg

First just to clear up something that Beth was asking about, you’re actually only this fiscal year, fiscal 2011, only going to have three quarters of Laprolan in there, right Dave?

David Jonas

That’s correct.

Ernie Andberg

Not the full $11 million.

David Jonas

Correct.

Ernie Andberg

Okay. That’s first. I looked at the Fornix Biosciences press release and they indicated that there was a contingency of 2 million Euros that is subject to audit. What kind of contingencies would change the purchase price Dave in your favor?

David Jonas

It has to do with the distribution agreements they have with their suppliers. And we before close have to get all of those distribution agreements assigned to us with no change in control assignments, which we believe is going to happen. But if that were not to happen with some of those agreements then our purchase price would go down.

Ernie Andberg

By the 2 million euro contingency at the max. Does that say there’s any of this business at risk?

David Jonas

Potentially yes. I really don’t believe that’s going to happen. I believe all of these suppliers are going to welcome the fact that Rochester Medical has bought Laprolan and help us help them get their products into the Netherlands. But we had to protect ourselves.

Ernie Andberg

Okay. Last question back on Femsoft - if CMS is reimbursing the $1.51 here in the US you’re suggesting revenue is probably still very small. But if someone is selling it here you suggested a range from 2.14 up to $3 that it was getting sold for. Where is the difference coming? Is it coming out of the distributor’s pocket that he can’t collect it all from the end user? Or is the end user paying the difference?

Anthony Conway

Where possible the end user pays the difference. Now a Medicare end user you cannot charge them the difference. So basically any Medicare user the distributor and Rochester Medical has had to eat that difference if you will.

Ernie Andberg

Okay.

Anthony Conway

But on private pay it doesn’t quite work like that. Private pay can pay and normally does pay for reimbursed products approximately 80% of that retail price. Now once we go out there and start selling en masse so to speak and we get a lot of Medicare patients at $1.51, that’s certainly going to force private pay closer to that number.

Ernie Andberg

Is private pay right now paying 80% of the retail price?

Anthony Conway

Yes. We have had some payments that - we have insurance companies that have paid that.

Ernie Andberg

All right. Fair enough. Thank you. I appreciate your answer. Thank you.

Operator

We have no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Anthony Conway

Well, with that we think it’s been a really great and active and very, very busy quarter and we think we’re very, very well positioned going forward and thanks everybody and we’ll see you next time.

Operator

Thank you for your participation in today’s conference. This concludes today’s presentation. You may now disconnect and have a wonderful day.

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