I-Flow Corporation Q4 2007 Earnings Call Transcript

I-Flow Corporation (IFLO)

Q4 2007 Earnings Call

March 18, 2008 11:00 am ET

Executives

Donald M. Earhart – Chief Executive Officer and Chairman

James Talevich – Chief Financial Officer

Analysts

Adrian Dawes - Hartwell

William Miller - Hartwell

Walter Ramsley - Walrus Partners

Tim Vesteil - Bannon Capital

Steve Kruger - Foresight

Matt Dolan - Roth Capital

John Crowther – Piper Jaffray

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the I-Flow Fourth Quarter 2007 year end results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Don Earhart, Chief Executive Officer, I-Flow Corporation.

Donald M. Earhart

Thank you, Frank. Good morning everyone and thank you for joining us for I-Flow’s fourth quarter and 2007 results conference call. Chief Financial Officer Jim Talevich and I will be available to answer your questions immediately following our prepared remarks.

2007 was an exciting and productive year for I-Flow. Once again we delivered a year of record sales and revenue growth in excess of our expectations for our proprietary ON-Q product lines for improving surgical outcomes without narcotics.

Sales in our Regional Anesthesia business increased 32% for 2007 to a record $89.6 million compared to $67.9 million for 2006. This growth exceeded our guidance of 30% Regional Anesthesia growth for the year. The total revenue from continuing operations increased 24% versus 2006, also exceeding our guidance of 20% growth.

For the fourth quarter, Regional Anesthesia sales increased 29% to a record $25.2 million compared to $19.6 million for the fourth quarter of 2006. And total revenue from continuing operations increased 27% versus prior year.

But that’s not all we accomplished. We also completed the sale of our InfuSystem subsidiary for $100 million plus a contingent payment up to a maximum of $12 million, which contributed to the increase in our cash position to $103.5 million at December 31, 2007, up from $27.4 million at December 31, 2006.

In addition we entered into a binding letter of intent to acquire our AcryMed Incorporated, a privately held Oregon-based developer of innovative infection control and wound healing products, for $25 million in cash. The acquisition of AcryMed closed this year, on February 15.

As I will explain, these actions position us to focus even more intensely on building our ON-Q franchise as we continue to penetrate what we believe is a multi-billion dollar market opportunity.

I-Flow is all about improving surgical outcomes. With our accomplishments in 2007 we are poised to capitalize on our leadership position in post-surgical pain relief and surgical side care products to drive long-term growth, and shareholder value.

I have more to say regarding our strategy and outlook after Jim reviews the numbers.

James R. Talevich

Thanks Don. Before we continue, please note that this conference call will include forward-looking statements. These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.

These statements are not guarantees of future performance and actual results may differ materially. A more detailed discussion of these risks and uncertainties is contained in this morning’s press release and I-Flow Corporation’s various filings with the SEC. The statements made during this call are made only as of today’s date and we undertake no obligation to update these statements.

For the three months ended December 31, 2007, revenue from continuing operations increased 27% to $34.9 million from $27.4 million for the fourth quarter of 2006. The increase included the effects of 29% increase in Regional Anesthesia revenue over the prior-year quarter.

IV Infusion Therapy revenue increased 23% to $9.7 million for the fourth quarter of 2007 from $7.9 million a year earlier. Net income for the three months ended December 31, 2007 including both continuing and discontinued operations, as well as the gain on sale of discontinued operations was $40.4 million or $1.66 per diluted share, including stock-based compensation expense of $2.2 million.

This compares to net income for the three months ended December 31, 2006 of $0.1 million or $0.01 per diluted share including stock-based compensation expense of $1.7 million. The gain on sale of discontinued operations, net of tax for the fourth quarter of 2007 was $45.4 million or $1.87 per diluted share.

SG&A expenses from continuing operations increased 16% to $23.9 million for the fourth quarter of 2007 from $20.6 million for the fourth quarter of 2006. As planned, growth in SG&A expenses moderated in the fourth quarter compared to the pace earlier in 2007 as the bulk of the incremental costs associated with our sales force expansion are now behind us.

We expect SG&A to rise more slowly than revenue in 2008. SG&A expenses from continuing operations included stock-based compensation expense of $1.7 million and $1.4 million for the fourth quarter of 2007 and 2006 respectively.

The operating loss from continuing operations for the fourth quarter of 2007 was $21,000 compared to $1.9 million for the fourth quarter of 2006. The company recorded an impairment loss of $6.1 million recorded on the common shares of InfuSystem Holdings Inc. formerly known as HAPC Inc. purchased by I-Flow in October 2007 in connection with the sale of InfuSystem to HAPC.

The loss from continuing operations, net of tax for the fourth quarter of 2007 was $4.4 million or $0.18 per basic and diluted share. This compares to a loss from continuing operations net of tax for the fourth quarter of 2006 of $1 million or $0.04 per basic and diluted share.

The loss from discontinued operations net of tax for the fourth quarter of 2007 was $0.6 million or $0.03 per basic and diluted share. For the fourth quarter of 2006 net income from discontinued operations net of tax was $1.2 million or $0.05 per diluted share.

At December 31, 2007, I-Flow reported net working capital of approximately $117.2 including cash and cash equivalents and short term investments of $103.5 million, no long-term debt and shareholders’ equity of $155.6 million.

Now I am going to turn the call over to Don Earhart who has some final comments to make.

Donald M. Earhart

Thank Jim. To see where we are going, let me take a moment to consider where we’ve been. Since 2002, sales of our ON-Q products have increased at a compound annual rate of 60%. What made this growth possible? For one thing ON-Q works and it works extremely well.

As I have reported to you on numerous conference calls over the past few years, study after study, more than 60 of them now, has demonstrated that our patented and proprietary ON-Q products offer a better solution to the problem of post-surgical pain relief than narcotics.

By reducing narcotic intake while providing superior pain relief, ON-Q has been shown to reduce the length of hospital stays, save hospitals money and increase patient satisfaction.

ON-Q is the unequivocal best practice to treat the acute pain following surgery. And as we will see later, evidence is building that using ON-Q may also decrease the incidence of infections.

Additionally, we have worked hard to establish the ON-Q brand by aggressively publicizing these trial results in our marketing programs to the surgical community. This increasing brand recognition and awareness in turn has made it easier for us to successfully launch the many new ON-Q product extensions we have developed these past few years to address an increasing number of surgical indications.

As I’ve already said, ON-Q is now established as best practice in a variety of bariatric, cardiothoracic and orthopedic surgical procedures. And we are making great strides in this direction in colorectal, plastic, neurological, OB/GYN and a variety of general surgical procedures as well.

But even the best products don’t sell themselves. The other critical factor in our growth is the dedicated sales force and marketing capabilities that we have steadily built up since 2002. At the end of 2002 we had just 26 sales reps selling a single product, the ON-Q PainBuster focused largely on orthopedic and surgeries with small incisions.

Today we have over 300 sales and clinical personnel across the country calling on surgeons in all specialties with a variety of ON-Q products designed to meet their specific patient and medical requirements. There is no doubt that our talented and successful sales force is one of I-Flow’s most important assets and provides the platform to take the company to the next level.

Our strategy to leverage our sales and marketing strength is simply to layer in additional products that build on our franchise ON-Q brand while at the same time maintaining our high gross margins. This is where surgical site infection control and wound healing in general, and the acquisition of AcryMed in particular, come in.

We are driving I-Flow’s evolution in a very exciting direction. Beginning from our development stage where we had a single novel product through the expansion of our infrastructure where we built critical mass in sales and marketing, we are now on the cusp of layering in products to leverage our existing sales channels.

All of this is leading up to our emergence as an integrated surgical products company with the franchise and resources to continue expanding our pipeline and growing financially.

Infection control has emerged as a major new growth opportunity for I-Flow. A recent announcement by the Centers for Medicare and Medicaid Services, CMS, has quickly focused everyone’s attention on this long neglected area.

CMS announced that for discharges occurring on or after October 1 of this year, hospitals will not receive additional payment for patients in which certain conditions were not present on admission, such as hospital-acquired infections.

That is to say that hospitals will have to absorb the bills for many hospital-acquired conditions which will undoubtedly affect their cost structures and profits.

With the closing of the AcryMed acquisition on February 15 of this year, I-Flow now owns the proprietary nanoparticle treatment technology called SilvaGard that has already proven itself on our ON-Q SilverSoaker Antimicrobial Catheter.

As I reported to you on our last conference call, ON-Q PainBuster with ON-Q SilverSoaker Antimicrobial Catheter is the only pain relief system to document an infection reduction capability in a controlled clinical trial.

A major research study reported at last year’s 47th Annual Interscience Conference on Antimicrobial Agents and Chemotherapy commonly referred to as ICAAC showed a more than 50% reduction in infection rates and a more than two day reduction in hospital length of stay, when I-Flow’s ON-Q PainBuster with ON-Q SilverSoaker Catheter was used to treat the pain following colorectal surgeries, versus traditional narcotic therapy.

Interestingly, it may have been the reduction of narcotics and less immune suppression when ON-Q was used along with the silver-coated catheter that explains why infection rates in this group were lower. But in any event, we know that ON-Q patients typically have less pain; fewer infections; get on their feet faster and go home sooner − all positive outcomes.

We have plans to significantly expand the commercialization of AcryMed’s innovative technology. For example, the technology will be featured in a new line of silver transparent wound-site dressings AcryMed will manufacture for I-Flow which we plan to bring to market this year.

We see additional new product opportunities on the horizon based on other wound care and infection control development projects now underway at AcryMed. In fact AcryMed’s SilvaGard nanoparticle coating technology is part of R&D development programs from over a dozen major medical device manufactures.

SilvaGard is an extremely attractive technology that is essentially a one step solution for producing an antimicrobial coating on a variety of material at a very low cost. We believe we can sell many of the planned infection control products during the same sales call to the exact same customers as we already are calling on successfully to sell our ON-Q pain relief devices.

As we have done for many years now with great success to support our ON-Q products for post-surgical pain relief without narcotics, we plan to use clinical studies to support the use of our SilvaGard products to reduce infections.

We have already initiated a new study to assess the impact of continuous wound catheters such as ON-Q, delivering a local anesthetic to treat the surgical pain on the incidence of pneumonia in patients undergoing heart surgery and we expect to support additional studies going forward.

We also are devoting considerable effort to increase awareness of the infection reduction study among surgeons and other healthcare professionals nationwide. We have developed a new ON-Q professional promotional campaign that combines the ON-Q pain relief message with the information on the infection study results and additional data establishing the relevancy and importance of infections in the hospital settings.

The thrust of our message is that ON-Q PainBuster with ON-Q SilverSoaker, when delivering a local anesthetic, appears to significantly reduce the risk of surgical side infections and length of hospital stay in patients undergoing abdominal surgery.

Additional new products are being developed within the old I-Flow as well. This is especially true of our new line of epidural pain relief pumps for labor and delivery applications, as well as for surgical applications. Since we presently call on anesthesiologists to sell ON-Q C-bloc we believe they will also be interested in using the ON-Q technology to do epidurals.

Several hospitals are now evaluating this new family of pumps as a replacement for electronic pumps and if all goes well we could begin selling this new line of pumps in the second quarter.

In the category of late breaking news, last night we announced that we signed new insurance contracts for ON-Q, so more patients will have access to superior pain relief following their outpatient surgery.

We are excited that this recent flurry of signing brings the total number of U.S. lives covered to nearly 60 million and increases the number of insurance contracts to 48.

We believe that this demonstrates that we are making progress in insurance coverage for patients who have outpatient surgery; we are providing them with significantly better pain relief than narcotics alone and significantly reducing the amount of narcotics they need making ON-Q a best practice that is also cost effective.

More and more insurance carriers are beginning to recognize the positive value that ON-Q delivers for their members having outpatient surgery by including ON-Q as reimbursable. Our road map to drive continued growth is clear as we transform I-Flow into an integrated surgical products company whose core mission is improving surgical outcomes.

Based on the positive developments this past year, and before any contribution from new products scheduled for launch later this year, we currently expect to be profitable in 2008, on growth in our Regional Anesthesia business of approximately 25% and growth in total revenue from continuing operations of approximately 20%.

And now Frank, we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Mark Mullikin - Piper Jaffray.

John Crowther – Piper Jaffray

Hi, this is John on for Mark Mullikin. Couple of quick questions. I saw you ramped up the sales force in the fourth quarter. Do you have any more plans for sales force expansion in 2008?

Donald Earhart

We ramped up in the first quarter.

John Crowther – Piper Jaffray

So the 210 was this first quarter.

Donald Earhart

Yes, so we are basically where we want to be; we are very close.

John Crowther – Piper Jaffray

Okay, so no further huge expansion plans for the rest of this year?

Donald Earhart

No, we’ve ramped up less than 15%. By the way, John, that includes clinical people as well as sales people; that’s not all sales people.

John Crowther – Piper Jaffray

All right, okay. Second question is, do you know what interest rate you’re earning on the cash you’ve got from the InfuSystem sale?

Donald Earhart

It’s over 10%.

John Crowther – Piper Jaffray

Okay. Where are you currently holding that cash, like what sort of securities?

Donald Earhart

Very safe ones.

John Crowther – Piper Jaffray

Okay.

Donald Earhart

We don’t have any Bear Stearns stock.

John Crowther – Piper Jaffray

Do you know if you have auction rate securities in there?

Donald Earhart

No, we do not.

John Crowther – Piper Jaffray

Good to know. Another one more quick question for you and then I’ll let everyone else hop on here. You mentioned a couple of quick product launches in 2008. Beyond those, do you have any others that you are currently planning to introduce in 2008?

Donald Earhart

We have several other projects right now in the development stage, which may generate products before the end of the year, but because they are still in the development stage, we don’t want to talk about those yet.

John Crowther – Piper Jaffray

Okay, great. I will hop back in queue, thank you.

Operator

Our next question comes from the line of Adrian Dawes - Hartwell.

Adrian Dawes - Hartwell

Thanks for taking my call. Couple of questions surrounding your thoughts for 2008 and the guidance you gave. Can you talk a little bit about the impact of the infection requirement on hospitals and how you thought about that as giving guidance?

Donald Earhart

Adrian, the reason for buying AcryMed was heavily influenced by the change in the law, which takes place in October of this year. So everything we are doing on the AcryMed side will go towards supporting that change in the law and hopefully make us very attractive to hospitals with the kind of products we are going to bring them.

So that law goes into effect in October, that’s when they will start paying the price if they don’t change, so we believe that we will see some benefit from that. And we have built that into our guidance.

Adrian Dawes - Hartwell

Are you modeling benefit pre or post the October date?

Donald Earhart

They don’t get dinged until after the October date, but they have got to get ready for it now, some hospitals are in the very early stages, some have done nothing and some are already there. So it’s all over the map. I think the biggest benefit will come after the October 1 date.

Adrian Dawes - Hartwell

Regional Anesthesia growth, that’s a little less than in 2007; what’s your thinking there?

Donald Earhart

We are in a very tough situation from an economic standpoint right now. So, I think the numbers have gotten bigger; we still believe we can grow at a very significant rate. But right now with the economy the way it is, we don’t know what that’s going to mean.

A lot of surgeries can be postponed or not done at all. So, if people have got insurance plans, where they have got to pay a 10% or a 20% co-pay, they may think twice before they have the surgery now if they are buying gasoline and food.

We don’t know if that’s going to be an issue, but we are not going to predict anything greater than 25% at this time. As the new products kick in, that could change significantly on the upside. And by the way, if we don’t see anything from the economy, it could change without the new products. We are just being very, very conservative.

Adrian Dawes - Hartwell

So the 25% represents a higher degree of conservatism than usual.

Donald Earhart

Yes, we believe so.

Adrian Dawes - Hartwell

On the IV side, 3%-4% growth, could we have some pleasant surprises there, where the growth is in fact better than that as it has been in prior years?

Donald Earhart

Adrian, the interesting thing is, is every time I get on this call, I talk about the fact that the IV products are dying. And then they turn around and do very well. You just never know; we have not seen that dying stage as of right know. And we think that IV will contribute somewhere in the mid single digits again this year just like it has in the past.

Adrian Dawes - Hartwell

Okay. How about gross margins as we look out to 2008? Should they be stable, rising, moderately deteriorating?

Donald Earhart

No, I think they should stay approximately where they are; they may go up a little bit. The new products that we are launching have extremely high margins. So as those kick in and the IV products become less in terms of the total, margins will go up.

Adrian Dawes - Hartwell

And last question, a point of clarification, in the guidance there is no AcryMed revenue at all, is that correct?

Donald Earhart

Yes, there is AcryMed in there, on the overall.

Adrian Dawes - Hartwell

Okay. How meaningful is that?

Donald Earhart

It’s not very meaningful at all. When you take out the work they were doing for us with the catheters, there was very little revenue in AcryMed.

Adrian Dawes - Hartwell

Okay, so that makes sense. Okay, I will get back in queue. Thanks, Don.

Operator

Our next question comes from Matt Dolan - Roth Capital.

Matt Dolan - Roth Capital

A follow up on the wound dressing product; how should we look at the product in terms of pricing and margins? You said it’s a higher margin, but can you give us an idea of where pricing comes in?

And then a second component to that is, in terms of the sales cycle, is this a product that adds to revenue per procedure and then could you see some follow on actually on the nursing floors, when wound dressings are reapplied?

Donald Earhart

Initially Matt, we are making only one size, and that size will end up in our kits. So, our catheters with the SilverSoaker will also have a silver dressing; so that’s how we will sample it. That’s how we will get it in the hands of the hospitals and the surgeons, and that’s how we will get them to start using it.

We are following with a second size, which we hope to be able to put through our IV distribution channel, which is a smaller dressing, which will be used for any IV sticks. So, we already have a series of distributors around the country that do our IV products. So, we believe we will be able to put that dressing through that distribution channel as well; that will be in the second half of the year.

Then as the program unfolds and we find out what sizes hospitals want, we have plans to make another half a dozen or so different sizes until we have a complete line of dressings.

The first dressings goings out will be very similar to Tegaderm, they will not have an island, there will no absorption pad in them. The second family of dressings, which we hope to launch towards the end of the year will actually have a silver coated island in it, so that will absorb as well.

So that will give us two different families of dressings, those who want absorption and those who do not. And we hope to as we get out of this year to add more and more sizes.

Matt Dolan - Roth Capital

And what will that do for pricing on your ON-Q kit?

Donald Earhart

We won’t charge anything for the sampling initially; but when the dressings are sold individually, they will be sold at a premium, and the margins will be in excess, we expect, of 90%.

Matt Dolan - Roth Capital

Okay. And then secondly on the sales force, as we look long-term, it sounds like you are getting close to your 2008 goals, but is there an ultimate long-term target in mind for the total size of your sales force relative to the number of hospitals, and to maybe to give us some clarity on that, can you give us an idea of where or how you are adding reps today geographically speaking?

Donald Earhart

Yes, we are pretty much there Matt. Again, we did not add very many from last year; and I think we are pretty much where need to be now. We have reached the point where we have reps where we need them. And there is no need to spread any more territories at least at this time.

Matt Dolan - Roth Capital

Okay. And then in terms of some of the financials here, HAPC stock, do you have any intent or plans for that? And secondly, the secured note for InfuSystem, is that expected to remain a note or could that get paid off here in the near future?

Donald Earhart

I’ll tell you what, that would be great if it got paid off, but 10.5% interest isn’t all bad. And if that does give us the opportunity to look at selling that note, which we might do − we don’t know yet at this time. The HAPC stock, I don’t know how to address that question, I don’t know where that’s going.

Matt Dolan - Roth Capital

No plans to liquidate that position?

Donald Earhart

Would you like buy it? If we can get Roth to handle it for us, we might be interested.

Matt Dolan - Roth Capital

Sounds good, we’ll follow-up on that.

Operator

Our next question comes from the line of William Miller - Hartwell.

William Miller - Hartwell

You’ve got more salesmen; you’ve got a range of new products. You have a wider group of insurance companies going to pay for your procedures. You have the October 1 deadline coming up and yet the growth rate for the RA is down. I can’t quite come up with why it should be down. I don’t really buy the economic recession depression arguments at all. It seems to me you should probably have better than your normal 30% growth rate; that’s the first issue.

Second issue is that your use of cash you indicated you are going to buy back stock, you have $103 million in cash, $4 a share in cash less $25 million, which I assume you’ve now paid out for AcryMed. But you got $3 a share in cash; your stock is close to a new one year low. And I wonder if you are doing anything there or what will prompt you to do anything there particularly when the outlook is so bright.

Donald Earhart

Let’s address your growth question first. The growth we have given as guidance is without the new products. So, as the new products kick in, it might be better, Bill. But that’s the number without new products.

On the cash side and the buyback of stock, we are subject to the same rules that an individual shareholder is subject to. And up until today, we have been under the same rules, where we can’t do anything. So, I think the key is you should look forward on that as to what we do after we get through with this conference call. But up until now, we haven’t been able to do anything based on the SEC rules.

The intention is to buy stock.

William Miller - Hartwell

But the fact you have just even without the new products included in this 25% is not up to your 30%. It seems to me that’s really quite a low ball number, considering the sales force numbers have grown. Considering that you have this insurance coverage, which is now more widespread and you have the infection studies more complete. In those three factors alone, you should have higher sales for your regional anesthetics. Why isn’t that taking place?

Donald Earhart

Bill, the best way to answer the question is our guidance is approximately 25% without new products and that is the guidance. There is a lot going on out there right now in terms of the economy. People can postpone their surgeries if they want to; people got to buy gas and put food on the table, we don’t know what all that means yet. So, we are just taking a very conservative position at this time, and we hope to be able to beat those numbers.

William Miller - Hartwell

Have you seen that slowdown in the first quarter, Don?

Donald Earhart

We don’t address anything on the first quarter at this time, Bill. We are two weeks away from the end.

William Miller - Hartwell

I just wondered whether all those factors you just mentioned had been brought to your attention in the first quarter by the sales force.

Donald Earhart

Again, we don’t address any questions concerning the first quarter at this time. We are too close to the end.

William Miller - Hartwell

Okay, well thanks very much.

Operator

Our next question comes from the line of Steve Kruger - Foresight.

Steve Kruger - Foresight

Hi, Don. Congratulations.

Donald Earhart

Thanks, Steve.

Steve Kruger - Foresight

Don, I want to come back to the question the last caller raised in terms of the growth rate of ON-Q, because I agree with him. With all the things that you’ve got going for you as you pointed out, it seems to me you should be coming pretty close to a tipping point to here in which you see very dramatic acceleration in the growth rate.

When a product that is really going to be a home run at this stage it’s pretty normal to see growth rates of 50% and 60% annually, not 20% and 25% and I wondered if you could share with us what your thoughts are about what indications you may be seeing about approaching that kind of tipping point?

Donald Earhart

Steve, I don’t know quite how to answer the question other than to say that the ON-Q still is a product that requires the sales people to be in surgery. It’s still what we consider here to be what we call a grind. It’s not the kind of product that you can sit and take telephone calls and place orders.

It’s still very much a people to people thing, because if we got less than 5% penetration, it’s still a new product to a lot of people. So, it is what it is. The growth rate last year was over 30%; we think that’s pretty good. And remember now, all of our growth is organic. It’s not because we’ve made acquisitions or anything like that. So, I don’t know how to answer your question, it is what it is.

Steve Kruger - Foresight

How many hospitals are now actively using the product ON-Q, Don?

Donald Earhart

In the fourth quarter we had over 3,000 accounts order, that’s up from about 2,200 at the beginning of the year. Again our goal is not to add more hospitals, it’s to get more sales within our existing hospitals.

Steve Kruger - Foresight

Sure. It just seems to me at some point, Don, you should see growth rates like 50% to 60% when this product really catches on, but I will leave it with that. Thanks

Operator

Our next question comes from the line of Tim Vesteil - Bannon Capital.

Tim Vesteil - Bannon Capital

Can you talk a little bit about sales overseas, especially in Europe, what was going on there? It seems like they should have accelerated.

Donald Earhart

Today we have very little sales in Europe on the ON-Q products. We have a very good business on the IV side, but on the ON-Q side it’s still small. But we are getting close, we believe, to having a very large partner internationally to pick up the product. And hopefully, we will able to announce something in the second half of the year, in which we will have a very significant distribution force working for us in Europe.

Tim Vesteil - Bannon Capital

How many sales people do you have in Europe now for the ON-Q product?

Donald Earhart

We don’t have any; we have an international organization of two people in Europe, but they are responsible for the IV products as well as identifying distributors for the ON-Q products.

Tim Vesteil - Bannon Capital

Okay, great. Thank you.

Operator

Our next question comes from the line of Walter Ramsley - Walrus Partners.

Walter Ramsley - Walrus Partners

Thanks a lot, congratulations. I had a couple of more accounting related questions. The impairment charge, can you explain where that number came from?

Donald Earhart

Let me let Jim handle that.

James Talevich

Sure, it’s pretty straight forward. Those shares in HAPC stock were purchased as you may know immediately before the closing of that deal, for the purpose of voting those shares in favor of the deal. And we purchased those shares for $5.97 per share, at year-end; the market value was $4.15 as quoted. And we judgmentally took an additional 9% discount off of that just due to the fact that those are restricted shares. So, that’s where that number came from.

It’s just our investment in HAPC common stock, that’s what the value has gone down to.

Walter Ramsley - Walrus Partners

Okay. And in the fourth quarter anyway, the stock option expense was $1.7 million; is that more or less the rate you anticipate in 2008 per quarter?

James Talevich

It wouldn’t be a meaningful difference from that. The expense will be between $7 million and $8 million for next year, just to simplify things, in terms of stock-based comp.

Walter Ramsley - Walrus Partners

Okay, thank you. The competitive landscape, have any other technologies begun to merge on to the scene, other than narcotics that the company needs to contend with?

Donald Earhart

No, other than the fact we continue to compete with Stryker for the local anesthetic part of the market, there’s really been nothing new; there is new technologies, if that’s what you’re asking. It’s still narcotics so the delivery of the local anesthetic using a device like ours.

Walter Ramsley - Walrus Partners

So, at this point, it’s still 90% to 95% narcotics.

Donald Earhart

Yes, that’s what patients are getting.

Walter Ramsley - Walrus Partners

So, to go back to Steve Krueger’s question about the tipping point, basically you just have to do what? Convince the medical community to stop using the narcotics and start using your products. What has to happen in your view?

Donald Earhart

I think the light has to go on that there is cost savings and a lot of benefits associated to eliminating the narcotics. And that’s what all of our marketing materials identify, that’s what our sales people preach. And so we think that we are making pretty good progress. 25% growth, which could be greater than that with the new product this year, that will be pretty good.

At some point I think the light will go on, and I do agree with Steve and others that the rates will accelerate even further as it becomes evident that if you are under the gun financially as a hospital, you need to put some thing else in there to give you cost savings; that’s what we are all about.

So, whether the surgeon wants to use it or not, he may be forced to use it in the future, because of the hospital being in financial trouble or needing those savings.

Walter Ramsley - Walrus Partners

Appreciate the comment, Don, thanks a lot.

Operator

We have a question from William Miller - Hartwell.

William Miller - Hartwell

I am sorry to bother you for the second time. But I am just musing to myself for a second here and it seems to me that with all of the new procedures that your product is now used for and that the market opportunity, which we used to think was $2.5 or $3 billion worth of eligible operations, (inaudible) expanded.

On top of that, talking about layering, could you give us some idea of when these new products get developed, how much the market expands? Where you think it is now and how much the opportunity has expanded because of the AcryMed acquisition; that’s the first part.

Second part is that AcryMed given the proprietary nature of their product must have others − Baxter, Abbott, J&J, I don’t know who − coming and beating down their doors to get their hands on this product as well. Can you give us some idea of how you are planning to control that kind of competition if you will or those potential customers?

Donald Earhart

First of all let’s talk about the market increase with the new products. We believe the epidural products actually have a market close to $1 billion all by themselves if we were to get all epidurals. And again our competition on epidurals will be electronic pumps as opposed to using devices like ours.

Hospitals have been through numerous recalls with electronic pumps. Electronic pumps cause a lot of airs and problems for hospitals, plus they are very expensive. So, only time will tell whether or not we will be successful in replacing those electronic pumps with what we believe is a better solution and a safer solution. That market if we were to get at all, we believe is an excess of $1 billion.

The second question you had was what now, Bill? I forgot what the second one was.

William Miller - Hartwell

You are now having a larger range of operations and procedures that your products can be used for. Because you do have this wider range of operation, what do you think the estimated market size is particularly because you now own the anti-infection company?

And then as part of that, what happens to people like our Johnson & Johnson, Baxter, Abbott, to name just a few, who might like to have the same access to AcryMed that you do; how are they going to be treated as potential customers or a potential client for AcryMed or competitors?

Donald Earhart

Bill some of those companies that you named are already talking to us and AcryMed about utilizing our coating technology for different products. So to answer your question, we will continue to license and in some cases actually do the coating for others’ products, that we would not be willing to sell through our sales organization because we wouldn’t have the call points.

So for example, we are working with some very large companies, I mentioned in my conference call over a dozen, large companies some of which you’ve already mentioned for coating their products and those would either be licensing deals or we would actually do the coating for them.

How big that opportunity is, I am not sure. We don’t know the answer to that because there is no way to define how big silver can be. But we do know that AcryMed can also produce products for us that we can put to our sales organization. And so when you add the epidural opportunity along with the dressing opportunity along with our ON-Q previous opportunities, we believe the market opportunity in the U.S. alone is close to $4 billion.

And I don’t have any idea, Bill how much we can do on the silver side working with other companies as well. But I know there is a lot of interest.

William Miller - Hartwell

That’s like the great opportunity on both sides of the coin for AcryMed. It sounds like a terrific acquisition. Thanks very much.

Operator

Our question comes from Adrian Dawes - Hartwell.

Adrian Dawes - Hartwell

Don, just a couple of quick questions. The average selling price of devices in the latest quarter, how much did they go up?

Donald Earhart

From last year, it went up $1.50. So we are at about $195 to $196.

Adrian Dawes - Hartwell

So organic growth then in the fourth quarter for the ON-Q would have been $26, $27?

Donald Earhart

Yes. The sales force is the same size and we picked up $1.50 on pricing, so the rest is all organic.

Adrian Dawes - Hartwell

For 2008, what are the quota levels that you set for your sales force?

Donald Earhart

Again, let’s just say they are significantly higher than our guidance.

Adrian Dawes - Hartwell

Okay. And do you anticipate the sales force meeting their target?

Donald Earhart

Last year, about a third. A third to 40% hit their targets; we expect the same thing to happen this year.

Adrian Dawes - Hartwell

Right. Thanks, Don.

Operator

Mr. Earhart, there are no further questions at this time. Please continue with your presentation or closing remarks.

Donald M. Earhart

Thanks, Frank. We are proud of what the I-Flow team accomplished in 2007. We continue to drive usage of our ON-Q family of products and to expand our leadership position in the enormous market of post-surgical pain relief.

At the same time, we set the foundation to take advantage of another large opportunity in the emerging market for surgical-site infection control and in the future, wound healing. We have the sales in marketing platform as well as the management, R&D and financial resources to take full advantage of the growth opportunities ahead of us.

Again, I-Flow is a leader in post-surgical pain relief and surgical-site care segments and we are thus positioned to drive long-term growth and shareholder value. We look forward to reporting our progress in 2008 on our first quarter conference call. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everybody.

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