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Kinetic Concepts (NYSE:KCI)

Q2 2011 Earnings Call

July 26, 2011 8:30 am ET

Executives

Catherine Burzik - Chief Executive Officer, President, Executive Director and Chairman of Technology Committee

Lisa Colleran - Global President of LifeCell

Michael Genau - Global President of Active Healing Solutions

Martin Landon - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Todd Wyatt - Vice President of Investor Relations

Analysts

Christopher Cooley - Stephens Inc.

Ross Comeaux - JP Morgan Chase & Co

Tao Levy - Collins Stewart LLC

Lennox Ketner - BofA Merrill Lynch

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the KCI Second Quarter Earnings Call. [Operator Instructions] Thank you. I would now turn the conference over to Todd Wyatt, Vice President of Investor Relations.

Todd Wyatt

Thank you, and welcome to the KCI Second Quarter 2011 Earnings Conference Call. Today, we will review the results that were announced in our press release earlier this morning. Today's webcast and conference call will include prepared remarks by Cathy Burzik, our President and Chief Executive Officer; and Marty Landon, our Chief Financial Officer. We are also joined by other selected members of our senior leadership team. If you have not received a copy of KCI's earnings release, it is currently available on our corporate website at www.kci1.com. A replay of this webcast will be made available on our website shortly after the conclusion of the call.

Our conference call this morning will include forward-looking statements about our business, including guidance on future plans, revenues and earnings. These statements are based on current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ from our expectations. More information about potential risk factors may be found in our filings with the SEC. Also, quarterly results discussed on this call may reflect various GAPP and non-GAAP financial measures. A reconciliation between the two is contained in our earnings release issued this morning.

We have set aside approximately 45 minutes for the duration of the call, including prepared remarks and Q&A. After our prepared remarks, we will open the lines for the Q&A session. I will now turn the call over to Cathy Burzik, President and Chief Executive Officer of Kinetic Concepts. Cathy?

Catherine Burzik

Thank you, Todd, and good morning, everyone. We appreciate your joining us to discuss our second quarter 2011 results. On today's call, I will make some comments about our recently announced leveraged buyout transaction and review the highlights to the second quarter and the performance of our 3 businesses, including an update on our new product introduction and geographic expansion. Marty Landon will then review our quarterly financial results and we will conclude with a question-and-answer session.

On July 13, we announced that a consortium led by London-based Apax Partners together with the Canadian Pension Plan Investment Board and the Public Sector Pension Investment Board of Canada had offered to take KCI private at $68.50 a share. Their interest in KCI represents an endorsement of our market leadership, our differentiated products and the services and consistently strong performance.

As provided for in the Merger Agreement, we are actively soliciting offers now from other potential buyers during a 40 day go-shop window that expires August 21. If a superior bid does not emerge and our proxy is not reviewed by the SEC, we will then conduct our shareholder's meeting in the late September time frame. Leading up to this meeting, we would be taking the required steps to broadly syndicate the debt associated with this acquisition, although the debt financing for the transaction is fully committed by Morgan Stanley, Bank of America Merrill Lynch and Credit Suisse First Boston.

The transaction is also subject to certain regulatory approval. If approved by the shareholders, we expect the transaction to close in the fourth quarter. We see them as superior bid or an extended review by regulatory agencies may lengthen the timing, although any time extension is uncertain at this point. As you can appreciate, I'm not going to be able to provide any further detail at this time or during the Q&A session following our prepared remarks. Additional details will be included in our preliminary proxy and will be filed with the SEC no later than August 2, 2011.

Turning now to our second quarter results. Revenues totaled $520 million for a growth of 4% on a reported basis and 1% on a constant currency basis, driven by LifeCell revenue growth and favorable currency exchange rates. Diluted earnings per share in the second quarter posted a robust 45% increase on reported GAAP basis and a 22% gain on an adjusted non-GAAP basis. These results were driven by both operating and financial leverage during the quarter, including a full quarter release from the Wake Forest royalty. Our free cash flow was strong again in the quarter and was $162 million in the first half of 2011 versus $99 million for the same period last year.

I'll now review some of the key events and operating highlights since our last call. We reported 2 encouraging developments in our AHS business in Europe during the quarter. The first was the award of 3 out of 4 regional contracts to provide our V.A.C. Therapy system to the German home care market. This is the maximum allowed by law. We anticipate that once the study is completed that NPWT will receive reimbursement in the home care setting in Germany likely in the 2014 time frame. The second was our announcement that V.A.C.Via was placed on the U.K. drug care tender list. We are the first Negative Pressure Wound Therapy product approved for reimbursement in the post-acute care market in the U.K.

Turning to our emerging V.A.C. business in Japan. We're pleased about the progress we're making there and we remain on track to deliver greater than $25 million of revenue in 2011. And we continue to be excited about the growth in our LifeCell business. And this quarter we once again delivered double-digit revenue dollar growth, which as occurred for this business an impressive 22 out of the last 23 quarters. Our LifeCell business is also quickly approaching $100 million in quarterly revenue. Two other key advancements in the business this quarter are the private launch of AlloDerm ready-to-use products. It has been very successful and the uptake so far surpasses our expectations. And this SPY Elite tissue perfusion system continues to be received with great enthusiasm by our surgeon customers.

In TSS, we're making progress towards having a stable business in the second half of 2011, as the year-over-year contraction we have been experiencing narrowed further in Q2. Let me turn now to review our second quarter performance by business segment, and I'll state all revenue growth rates in terms of constant currency figures. In our AHS business, global revenues were essentially comparable to the prior year quarter. AHS revenue in the Americas was stable year-over-year. Timing related to anticipated capital sales, together with continued softness in procedure volumes in U.S. hospitals and softness in patient visits to doctor's offices negatively impacted our performance in the quarter. That said, our base V.A.C. business remains very resilient, serving an increased number of wounds offset by modest price decreases and reduced average length of therapy.

Moving in to the EMEA region. Our revenue for EMEA AHS continue to be impacted by economic austerity measures, declining 8% versus the prior year quarter. I'm very pleased with the early success we are seeing with V.A.C.Via, particularly in Germany and in the U.K. Also importantly, we obtained our first government reimbursement for V.A.C.Via in the U.K. by way of the Drug Tariff tender list, which begins August 1, of this year.

Turning to our APAC region. AHS revenues increased 54% versus the prior year period. This was driven primarily by our Japan business, which continues to track toward exceeding $25 million in revenue this year. Now regarding our new AHS products starting with V.A.C.Via, in addition to the very strong uptake in Europe, in the U.S., we are making good progress through new product committee. Once through the evaluation phase, where V.A.C.Via is approved by the hospital, we are seeing an increased usage of Via, which allows patients to be discharged earlier from costly hospitals stay.

We ended the second quarter with our first $1 million-plus month for V.A.C.Via and we are encouraged about growth prospects for this product. Our Negative Pressure Surgical Management, NPSM product group, which includes the new product, ABThera and Prevena, is also showing good progress and is now on a $30 million run rate. ABThera in particular is gaining traction as we move in to the third quarter and we believe that an upcoming presentation of the ABTAC Study data at the World Congress of Abdominal Compartment Syndrome in August, could provide an additional boost to ABThera's adoption. Recall that the ABTAC Study is a major multicenter prospective trial studying our ABThera product versus the conventional Barker technique for clinically ill open abdomen patients.

Finally, let me think about GRAFTJACKET which is manufactured by LifeCell for our AHS division. GRAFTJACKET is an acellular human dermal based tissue matrix for hard to heal wounds, such as diabetic foot ulcer, and I'm pleased to report that in late May, we made GRAFTJACKET available throughout our AHS sales force. Starting on July 1, our sales force became the exclusive provider of this product to the wound market.

Turning now to LifeCell. Revenues grew 15% this quarter. Strattice revenues continue to grow nicely and now represents approximately 46% of LifeCell's revenue. In the Americas, LifeCell's revenue rose 13% compared to the prior year quarter, driven by the 16% growth in our Direct business, which includes both core applications, breast reconstruction and challenging hernia repair, as well as new products, including breast plastic surgery and SPY Elite.

Now regarding the warning letter we received this quarter. The FDA highlighted concerns about 3 clinical studies and some corresponding promotional activity. The FDA concerns were not about the product safety or efficacy. Rather, the letter relates to whether an investigation device exemption, IDE, should have been obtained prior to initiating the identified study. Strattice reconstructive tissue matrix is a clinically effective product for soft tissue repair and reinforcement. While we cannot predict the timing on a resolution, we are encouraged by the open dialogue we have had with the FDA.

On the reimbursement front, we did recently receive word by preliminary CMS HCPCS code for Strattice that will go into effect January 1, 2012. Additionally, we received regulatory approval in Canada for Strattice during the quarter that will compliment our AlloDerm product, which has been on the market in Canada for over a year. In Europe, LifeCell revenues rose 76% year-over-year with strong growth in Germany and the U.K. and increasing traction in Southern Europe. Overall, we are making solid progress with Strattice in Europe and expect our steady ramp to continue over the rest of 2011.

Regarding new LifeCell products, the pilot launch of AlloDerm ready-to-use, RTUs, is underway and targeted account and the initial response is exceeding our expectations. In fact, we are significantly accelerating the pilot launch given the favorable customer demand. The full launch of AlloDerm RTU remains targeted for January 2012. And finally, our SPY Elite tissue perfusion assessment system is ramping nicely. We are seeing significant increases in systems placed in hospitals for evaluation and although it is taking some time to get the SPY Elite system through value analysis committee, the conversion to revenue generating accounts at the conclusion of these evaluations is exceeding our expectation.

And turning to our TSS business. Revenues declined 6% in the quarter. Importantly as anticipated, we are on track to stabilize the business in the second half of 2011. In EMEA, the TSS business contracted only slightly, 1% in Q2 versus the prior year quarter as the Rental business began to show improvement driven by selected new product commercialization efforts. In the U.S., the market remains competitive, particularly on the rental side however, we saw improvements in capital sales. The launch of our innovative Skin IQ Microclimate Manager late last year is showing progress, and the compelling clinical results are being well received.

As a reminder, Skin IQ is a proprietary therapeutic surface approach for the prevention and management of pressure ulcers. We are now through more than 100 new product committee reviews with nearly 100 accounts ordering the product. Also the first product from our acquisition of TechniMotion Medical is currently under evaluation. New customer preference trials and remains on track to launch in the second half of 2011.

And in closing, we do not expect our pending change of ownership to affect KCI's business strategy. We will continue to be focused on innovation and change the clinical practice of medicine for customers and improve outcomes for patients, on globalizing our business and on meaningful diversification, and importantly, on maintaining the sound business fundamentals that has made KCI an exceptional company, for patients, for caregivers, for employees and for our shareholders.

These have been KCI's hallmark quality for 35 years and will continue to be well into the future. And with that I will now turn the call over to Marty Landon, to review our financial performance for the quarter. Marty?

Martin Landon

Thanks, Cathy. Good morning, everyone. As Cathy said, revenue for the second quarter of 2011 totaled $520 million. It's up 4% as recorded and up 1% on a constant currency basis. Net earnings for the second quarter of 2011 were $81.4 million, an increase of 52% from the same period 1 year ago. Second quarter 2011 net earnings per diluted share on a GAAP basis increased 45% to $1.09 from the $0.75 per share we reported for the same quarter last year. The second quarter earnings growth reflects higher revenue, improved mix, lower royalty expense and additional financial leverage compared to the prior year's quarter.

On an adjusted non-GAAP basis, earnings per share of $1.23 for the second quarter rose 22% from $1.01 per share reported for the same period of 2010. For your convenience, we have provided reconciliation of GAAP to adjusted non-GAAP earnings per diluted share in today's release. Breaking down our top line by business unit, our AHS business segment reported second quarter revenue of $358 million, representing growth of 3% from the prior year period on a reported base and essentially flat on a constant currency basis.

Overall, global volumes inclusive of our new products, rose 1%, which was offset by lower average pricing. Sequentially, worldwide AHS revenue increased 5%, reflecting our normal patterns of seasonality from the first to the second quarter. LifeCell revenues of $96.3 billion grew 15% over last year's second quarter on both the reported and constant currency basis. This performance is in line with our expectations for mid-teens growth for LifeCell in the year. And as Cathy stated in the Americas, our direct sales channel grew 16% in the quarter, which was partially offset by a contraction in our Partner business.

Second quarter TSS revenues of $65.5 million declined 1% on a reported basis and 6% on a constant currency basis, a slight improvement from the 8% contraction we experienced in the first quarter. As expected, TSS revenue was down 3% on a sequential basis from the first quarter as the flu season abated from its seasonal peak. We continue to expect the TSS business to grow in the second half of 2011 and achieve stable performance driven by new products, including Skin IQ.

Consolidated gross profit in the quarter was $313.1 million, representing a gross margin of 60.2% a 400 basis point improvement from the 56.2% gross margin we reported in the prior year period. This increase was largely driven by lower royalty expense related to our previous licensing agreement with Wake Forest University and higher gross margin associated with our LifeCell business. In the second quarter of 2010, royalty expense related to Wake Forest patents was $23 million before income taxes or approximately $0.20 per diluted share.

SG&A expenses for the second quarter of $152.2 million increased 3% from last year. The SG&A increase resulted from a combination of foreign currency exchange movements, increased selling costs associated with our LifeCell division and higher marketing costs associated with new product launches and geographic expansion, partially offset by lower litigation costs and prior year charges associated with the TSS portfolio rationalization and our global business transformation.

Research and development expense increased 8% to $23.4 million, as our Center for Advanced Research and Technology started to hit full stride and we initiated a number of planned development programs, particularly in our LifeCell business. Our ratio of R&D expense to revenue was 4.5% in the second quarter versus 4.4% in the prior year period. And we expect R&D to track towards the planned 5% of revenue for the fiscal year. Second quarter operating profit reached $128.6 million or an increase of 27% versus $101.4 million in the year ago period, resulting in operating profit margin of 24.7%, which compared favorably against the margin of 20.4% in the same period last year. Below the operating line as a result of our deleveraging and favorable credit market, interest expense declined 22.9%, to $17.2 million compared to $22.3 million in the second quarter of last year. Over the past 12 months, we've made debt payments totaling $111 million while at the same time our overall interest rate has also declined. Compared to June 30, 2010, our total debt is down 6% year-over-year. Second quarter effective tax rate of 27% compares favorably to the 30% we recorded in the prior year period. The lower effective tax rate relative last year was a function of higher percentage of taxable income being generated in the low tax foreign jurisdictions.

In the second quarter, our balance sheet continued to strengthen, led by an incremental $56 million added to our cash balance. At the end of the second quarter, our cash balance was $498 million. Operating cash flow less net capital expenditures was $39.3 million for the 3 months ended June 2011, versus $34.5 million in last year's second quarter, representing a 14% increase period-over-period. For the first half of 2011, operating cash flow less net capital expenditures was $162.5 million, compared to $99 million in the prior year period. This 64% increase in the first half of the year resulted from higher net earnings, mainly to lower NPWT royalty expenses and improvements in working capital, particularly reduced inventory levels in our LifeCell business.

This operating cash flow increase was partially offset by an increase in capital expenditures related to our global business transformation initiatives and the building of a new corporate headquarter building here in San Antonio. We made scheduled debt payments on our Term A bank facility totaling $6.9 million in the second quarter as required under the credit facility. At the end of the second quarter our total debt on an economic or debt instrument basis was up $1.23 billion or approximately 1.8x our LTM EBITDA of $671 million.

Finally, in today's release, we are re-affirming our full year 2011 financial guidance. And with that, I'll now open the call to questions. Again, just a reminder that we are not at liberty to provide additional details beyond what has previously been disclosed regarding the merger agreement with the Apax consortium, potential debt syndication or the status of the go shop. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tao Levy of Collins Stewart.

Tao Levy - Collins Stewart LLC

So a couple of quick questions on my end, just looking at the U.S. AHS business, do you see much sort of cannibalization from the Via versus your regular V.A.C. product?

Catherine Burzik

I'll let Mike comment on that in a minute, Tao, but I'm encouraged very much by the utilization of Via, particularly in transition patients, where quite often in the past, we haven't talked about this too much, but quite often in the past, the V.A.C. is taken off from the person, InfoVAC, and then an ActiVAC is put on in the home. That obviously is an interruption of care, which is not good for the patient. Mike, you want to comment a little more on that?

Michael Genau

Yes, Tao. It's something that as we look at transitions also treating more wounds that are low exiting so split thickness skin grafts, more diabetic foot kinds of woods, we're seeing definitely an improvement in the quality of care of these patients are ambulating sooner, quality of life is resumed as they go home. In fact, in many cases now even in emergency room, we're preventing patients from being admitted. And so I wouldn't say there's much cannibalization this time. I think what we're finding is physicians are finding new ways to treat patients at a far lower cost, which is helping the system overall.

Tao Levy - Collins Stewart LLC

So when you look at the overall total revenue generated from AHS in the U.S, obviously rental was down, sales were higher, do you expect the sales part to eventually offset some of the declines that you're seeing in the rental part of the business, that's kind of what I was trying to get at with the first part?

Catherine Burzik

In the case, it's far a little bit more. As we talked about, Tao, over time and we were obviously here in a new phase of KCI, where we have more products for sale than we've ever had before between the Vias and the Prevenas that we have in the marketplace and the GRAFTJACKETs. So you're going to see that kind of switch, definitely over time. I will say that if you look at the acute versus the post-acute, the Acute business, I think was pretty strong in the quarter. It would have been stronger even though we had some capital timing issues but I think as you've heard people reporting now with the volume of procedure, surgical procedures, in particular, down in the hospitals over this past quarter, I think we have done a very good job in the penetration of our new products and I'd say a pretty tough environment in the hospital to date. We currently have in the post-acute, I think, that affected to some extent by lower numbers of physician office visits where we start to see some people once again kind of defer treatment. So you see the impact of that in the post-acute area and then obviously we obviously don't have those many new products in the post-acute, Mike, we just launched GRAFTJACKET this quarter.

Michael Genau

July 1, we launched.

Catherine Burzik

Yes. So we don't have all those sales products in the post-acute.

Michael Genau

I'd say just to add a comment that part of our strategy, the business model mix of rental and single patient use is exactly where we're trying to take the market, when you look at the combination of products between Via, between Prevena, and sooner we'll have with also in combination with our Rental business, and so what we're trying to do is accommodate patients and accommodate customers based on their needs. So I would say to you that our business model mix shift is what you're seeing and we fully anticipate to see more activity with single patient use or capital sale in combination with our Rental business.

Tao Levy - Collins Stewart LLC

A question on the LifeCell business, the U.S. business has slowed down a little bit and I think you'd mentioned that it might mainly be due to the partner sales as you transition to GRAFTJACKET, is that correct or was there also just general softness in the general surgery market, relative softness?

Catherine Burzik

Lisa, would you like to comment on that?

Lisa Colleran

Yes. Thank you, Cathy. First, I just like to kind of reiterate that our Direct business, so our sales force that sells directly into the surgical space, had a 16% growth rate, that includes our core application, breast reconstruction, challenging hernia repair, as well as our new products, new applications like DBS and our SPY Elite. The difference between that and the overall Americas growth is really 2 things. One is our Partner business and the second thing is the smaller product lines that we do not focus on, and that those growth rates have slowed. Now we have seen, for maybe the first time we've ever reported, a slowdown in procedures in our call points, which is really kind of funny, we didn't quite expect because we do tend to have the more high acuity patient population treated but we do believe that even those procedures have slowed down in this quarter. So that's the kind of combination of things that are driving the delta.

Tao Levy - Collins Stewart LLC

And just one last one, Marty, in the past I think you mentioned, maybe in the last several quarters, but you had indicated you'd be looking to be or the company to be in a position in net cash position sort of by 2012 or in the 2012 time frame, is that kind of still your general expectations, obviously barring acquisitions, et cetera?

Martin Landon

Barring acquisitions, you're going to be close to it, Tao, I think, that you're looking at what we are generating in cash, it would tell you that with the new credit agreement, the requirement to pay down debt is a little bit less than we are investing in a few areas but we will be moving in that direction certainly.

Operator

Your next question comes from the line of Mike Weinstein of JPMorgan.

Ross Comeaux - JP Morgan Chase & Co

This is Ross on for Mike. Can you talk a little bit about your pipeline within LifeCell? I know you mentioned a few programs that are in development there.

Catherine Burzik

Yes, I think Lisa will able to do that, I just like to highlight in particular and compliment the LifeCell team, particularly on the launch of the AlloDerm ready to use, which is a great product. Lisa, maybe you want to talk about some of the other ones you have in the pipeline?

Lisa Colleran

Sure. So I would like to reiterate Cathy's comment on AlloDerm ready to use product that has been in the works for several years, and we very capitally focused on our processing techniques in order to be able to make that product both ready to use versus freeze dried as well as a sterile product and still have the performance characteristics of our truly regenerative tissue matrix. So we plan on rolling that out in a pilot phase, very sort of awfully small pilot, but the market demand has just been so high we have accelerated that very significantly and plan a very successful launch starting the beginning of next year, which is a great add to our portfolio. The other thing that we're focused on in the most short term, of course, as you well know is our SPY Elite System. We launched the second version of the SPY system, SPY Elite, in the second half of this year and we're seeing huge success associated with that. As we look forward in our portfolio, we have several new products that are focused both in the challenging hernia arena and advancing our portfolio there, as well as in the breast re-construction and then a couple of new products that are sort of above and beyond the traditional regenerative tissue matrix portfolio.

Ross Comeaux - JP Morgan Chase & Co

And then on the V.A.C. business, is there any change in your view on the competitive landscape post last year's ruling or are you seeing any new competition in the U.S.?

Michael Genau

We are seeing competition across the globe. We think competition makes us better and so as the marketplace looks for value they keep coming back to V.A.C. Therapy due to our outcomes. We've seen a lot of free trialing going on. I think we've commented on this in prior calls and that free trialing, while it doesn't appear to be slowing down, has given us an opportunity to reposition the overall value that we bring tied around 360 degrees to healing. So when you're looking at how competition is trying to make inroads, we see a lot of focus on price but when it comes down to service and overall expectations from customers, V.A.C. Therapy still seems to come out on top far more often.

Operator

Your next question comes from the line of Lennox Ketner of Bank of America.

Lennox Ketner - BofA Merrill Lynch

Just one quick one for Lisa. You had mentioned that you're seeing a little bit of a slowdown in procedures that's having a slight impact on the LifeCell growth. Do you have a sense as to whether that slowdown is more on the hernia side or the breast reconstruction side or if it's affecting both?

Lisa Colleran

Yes, we believe and again it's a little hard to report quarterly specific numbers but we do believe that is affecting both, the Breast Reconstruction and the challenging Hernia Repair businesses. They're both, I'll say equally, and a lot of it is what we hear back from our surgeon customers and our field base folks, who say, there just don't have as many surgeries occurring as we have seen in the past.

Lennox Ketner - BofA Merrill Lynch

And then on the V.A.C. business, 2 questions. First, I know you talked about the reimbursement that you got in the U.K. for home care and the fact that you can potentially get a home care reimbursement in Germany. I guess I'm just wondering, when we think about the market opportunity there, given the fact that in the U.S. the home care market makes up 50% to 60% of your V.A.C. revenues over time, would you expect something similar in Europe with more than 50% in the market in the home environment or is there anything structurally different there that would make the market look different?

Catherine Burzik

I think I can comment most on the German business because we have been anticipating the German home care fits and starts for the last several years, and it's really good that we're finally off and running here. I think we look at the number of wounds that will be treatable in the home care environment and in the hospital environment, it's relatively equal in Germany, couple of hundred thousand both spots. So in the ideal, you'd like to see German home care business that aspirationally could be as large as the Acute business in Germany, another $100 million. I said I'd be disappointed if we didn't get to at least $50 million. I realize that this is going to take some time, trial is starting, but I'm very encouraged that we've got 3 out of 4 lot. Quite honestly, we weren't sure we'd be that successful in doing that. We got the maximum allowed by law which was a huge tribute to KCI Germany and I'm not familiar, Mike, with the details of the U.K.

Michael Genau

So the U.K. Drug Tariff as I think you read, that goes into August 1. We think there's about 100,000-plus wounds that we will be able to treat in the post-acute space and so we're very excited about what we've been awarded and what we see to be happening with the Post-acute business as we now invest in resource, more people, there to treat more patients.

Catherine Burzik

And that whole situation just to comment, too, and we talked about this had been in the past but because there has not been home care reimbursement, particularly in the U. K., and because the V.A.C. rental units are so expensive, obviously at $20,000 or so if the person didn’t bring it back, it's been very difficult to get home care going in the U.K. And the fact that we've got Via now is the perfect product for home use in the U.K. I'm very encouraged about that and was really pleased that the U.K. government gave that approval. I thought it was a big tribute to Via.

Lennox Ketner - BofA Merrill Lynch

And then just last one is on competitive bidding. I'm wondering if you could just give any update there. I know CMS had mentioned in one of their recent press release that there's likely to be a delay in the timing in terms of an announcement on round 2. I'm just wondering what you're hearing in your conversations with them in terms of a potential time line and any update in terms of whether negative pressure may not be included.

Michael Genau

So what we heard, Lennox, is that it looks like end of the summer before they're going to announce the groups and the category for round 2. They're still tracking best we know for implementation of July, 2013. So we're working closely with our team and the government officials to do what we can to see how the NPWTs will play out in round 2.

Catherine Burzik

I visited with Marilyn Tavenner, the number 2 person at CMS with Steven Blaum and some of the staff [indiscernible] earlier in the first quarter and I recently received a very nice letter from CMS and Marilyn, saying that they are strongly considering our recommendation around accreditation for NPWT. They acknowledged the fact that NPWT is a very serious therapy for the home and obviously, I think our message, which is not just the KCI message, but an industry message has resonated here that you can't just randomly bid NPWT based on price. So I'm encouraged by what I'm hearing from CMS. So we'll see what happens at the end of summer.

Lennox Ketner - BofA Merrill Lynch

So sorry, end of summer is when they're targeting to announce it or end of summer is the earliest that they would announce it?

Catherine Burzik

Earliest.

Michael Genau

It's the earliest that they would announce the categories in round 2.

Operator

Your next question comes from the line of Chris Cooley of Stephens.

Christopher Cooley - Stephens Inc.

If I may, just going back to the AHS business, some of the accounts you just spent time with, it seems like you're seeing an extension in the number of days you used with the V.A.C.Via. Is that a broader market trend and as Via gets adopted over time, can that potentially reverse the decline in data you've seen historically on the acute care aside?

Michael Genau

Chris, this is Mike. Actually length of therapy has come down just a little bit from about 9.7 to about 9.4 days over the quarter. So we're seeing some change there but the adoption of V.A.C.Via, which as you know gives us 7 days of therapy is something that is helping us transition to treat more patients. But we are seeing a slight change in the average length of therapy overall.

Christopher Cooley - Stephens Inc.

And then on the new product side on the AHS front, I haven't heard you mention Ulta, and I guess the last couple of quarters, could you just briefly update us on the status of Ulta as well?

Michael Genau

Sure, happy to do it. Ulta is a combination of V.A.C. Therapy with installation. What we've heard from surgeons over the years is a combination of the V.A.C. system with this therapy would be advantageous as they look to treat more wounds that have infection, especially where there's hardware from orthopedic procedures. We are in what we call our customer preference testing trial right now, which means we have FDA approval. We're out making sure that the finished manufactured product is meeting the expectations of our customers and the final validation piece before we go live and we have units that are in Europe and in the U.S. We fully expect to roll that product out by the end of this year.

Christopher Cooley - Stephens Inc.

And if I could just squeeze just one other quick one as well. Just maybe for Lisa, when you think about AlloDerm RTU, do you think have sufficient tissue sourcing for that to be able to sell across both sterile freeze dry and now with the RTU or is that going to be a product that we should think about as being possibly capacity constrained initially?

Lisa Colleran

Thanks very much for that question and I'm happy to answer this question because we actually have a very robust supply of our human tissue here actually on site for some time to come. As Marty mentioned we're actually working on inventory reductions and that even comes in our human tissue supply. So we are very healthy and we expect to have no shortage of either the ready to use or the freeze-dry version of AlloDerm.

Catherine Burzik

Thank you, Chris, for the question. I think that will conclude the call for today. I'd like to thank all of you for the questions, and have a great day. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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