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Obagi Medical Products, Inc. (NASDAQ:OMPI)

Q1 2008 Earnings Call

May 5, 2008, 4:30 pm ET

Executives

Ina McGuinness - Integrated Corporate Relations

Steven Carlson - President and Chief Executive Officer

Stephen Garcia - Chief Financial Officer

Analysts

Adam Greene - J.P. Morgan

Donald Ellis - Thomas Weisel Partners

Larry Neibor - Robert W. Baird

Angela Larson - SIG

Katherine Lu - Oppenheimer

Operator

Good afternoon ladies and gentlemen and thank you for standing by and welcome to the Obagi Medical Products First Quarter 2008 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, May 5, 2008.

I’d now like to turn the conference over to Ina McGuinness of ICR. Please go ahead.

Ina McGuinness - Integrated Corporate Relations

Thank you, operator. This is Ina McGuinness with ICR and earlier this afternoon Obagi Medical Products released financial results for the first quarter ended March 31, 2008. If you’ve not received the press release, it is available on the Investor Relations section of the Obagi Medical Products website at www.obagi.com. This call is being webcast and a replay will be available on the Company’s website for 30 days.

Before we begin, we’d like to remind you that today’s remarks contain forward-looking statements within the meaning of Federal Securities Law. These statements do not guarantee of future performance and therefore undue reliance should not be placed on them.

We refer all of you to the risk factors contained in Obagi Medical Products 10-K filed on March 5, 2008 for more detailed discussions of the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

All information provided in today’s call is as of the date of the live broadcast, Monday, May 5, 2008 and Obagi Medical Products assumes no obligation to update any such information.

Participating in today’s call from the company are President and Chief Executive Officer, Steve Carlson and Chief Financial Officer, Steve Garcia.

And with that, I’d like to turn the call over to Steve Carlson. Steve?

Steven Carlson - President and Chief Executive Officer

Thank you, Ina and good afternoon everyone. Sales for the first quarter of 2008 were 25.4 million, up to 10% from a year ago. While this revenue performance represents a record first quarter for the company, it failed to meet our expectations going into the year. We believe this shortfall was primarily driven by the current economic conditions.

We've spent considerable time and effort to gain a better understanding of how the economy is affecting our business. Let me take you through what we now understand regarding the impact of the economy, discuss performance by product line and geography, and outline where we fell short. Lastly we'll address our outlook for the remainder or the year.

In order to gain more complete understanding of this impact, in addition to our normal analysis in early April, we initiated a survey of our physician customers in an effort to assess physician sentiment, procedural trends, and customer buying patters etcetera. Based upon responses from more than 170 physicians, we know the two key responses.

Regarding the number of patients treated, 32% of the counts indicated they have experienced an increase in patients in the last six months while 36% indicated no change and 32% indicated a decrease. Regarding physicians sentiments, 50% believe the economy is having a negative impact on their business, while 37% indicated no impact, and 13% indicated the economy is helping their business.

Overall we're seeing an impact had been uniform across our accounts. The net affect is that with actual business weakness in certain accounts and sort of uncertainty about the near-term future, we've seen a reduction in our overall expectations for domestic revenue growth which were in the 20% range as we entered 2008.

Further in our own sales analysis and input from the field, we note the following: Our larger physician accounts that in many cases operate multiple offices have spot variations and service at broader customer base experienced few rotation visits and conducted fewer aesthetic surgical procedures. We believe this affected us by reducing their order rates most notably in Nu-Derm.

These accounts were more cautious in their purchases especially in late February and March which coincided with the height and medium awareness around tightened credit, record for closures and higher gas and food prices. Although it was difficult to estimate precise affect of the economic conditions on our business, we believe this translated to approximately 1.5 to $2 million and reduced purchases in the quarter, especially in the core products.

Turning to our top-line of segment performance, our significance was our expansion of Obagi's treatments systems from just the face to treating the neck and chest area with the ELASTIderm Decolletage system. The Decolletage system opens up a new segment in the market for aesthetic skin treatment for Obagi and is a testament to our successful development efforts. This patent new system consists of two skews and utilizes our penetrating therapeutics to deliver clinically demonstrated positive results for reducing hypopigmentation, age spots, and the appearance of fine lines and wrinkles.

On an account penetration basis overall, we were able to penetrate 1600 or 30% of our existing account base. New accounts that had not previously ordered in the ELASTIderm eye cream or gel equalled over 180. Account penetration which previously ordered ELASTIderm eye gel or cream was over 1400; overall a very strong beginning for this new Decolletage system.

With the positive initial efficacy results which are based on interim four-week study data and the early launch success, we believe our Obagi Decolletage system will become a major contributor to ELASTIderm growth.

Looking at the entire elasticity product category, sales in the quarter were more than doubled year-over-year to 4.6 million. We look forward to completing the 24-week study on the Decolletage system and releasing these data later this year.

Turning to CLENZIderm M.D. on April 28th, we had announced that a pooled analysis of CLENZIderm therapeutic system study data was published in the April 2008 issue of Cosmetic Dermatology and the analysis was conducted by Dr. James Del Rosso, who is the Clinical Assistant Professor in the Department of Dermatology at the University Of Nevada School Of Medicine. This analysis was comprised of three clinical trials of patients with mild-to-moderate acne. Results showed that solubilized 5% benzoyl peroxide in the CLENZIderm system appears to be more affective in reducing noninflammatory lesions and at least as affective in reducing inflammatory lesions than the market leading BPO and clindamycin gel.

Compared to other BPOs, the CLENZIderm BPO solubilized formulation better penetrated the skin follicles resulting in greater and more rapid reduction of acne lesions. Favorable skin tolerability and high levels of patient satisfaction were also observed in the clinical trials of the CLENZIderm system.

First quarter sales for CLENZIderm M.D. totaled 1.4 million, down from 1.5 million on a sequential basis but up 7% from the prior year. Account reorder rates reached 80% for the normal to oily system. We continue to believe that clinical data such as that published in Cosmetic Dermatology will give dermatologists more clinical proof in the support of dispensing CLENZIderm M.D. Of note, we have completed enrollment in our latest 140-patient comparative study which we look forward to releasing the study data in the back half of 2008.

Regarding our core products, a survey was most useful in shedding light on performance of core products which include Nu-Derm, C Rx, Professional-C, and our Tretinoin. These products on average were down 3% year over year with our most affected. The change in purchasing patterns from our largest accounts, which we believe are the accounts that serviced the most economically sensitive end-customers, impacted these sales the most.

We also believe that similar quarters in 2007 which we launched new products our sales and marketing resources were allocated more heavily showing the successful introduction of ELASTIderm Decolletage. This focus of resources also impacted the sales performance in Nu-Derm during the quarter. Additional clinical data on Condition Enhance will also be released later this year as we've completed patient enrollment in the latest IPL or Intense Pulse Light study.

Regarding sales by geography, sales in the United States were up 9% from a year ago and represented 84% of total revenues. International sales grew approximately 15% last year fueled by the launch of ELASTIderm Decolletage while the Decolletage system already experienced an 80% of the order rates from our international distributors. Licensing royalties were up 51%, due to our Japanese partner Rhoder, launching a new imaging packaging of the Obagi Vitamin C product line. We saw efficacy continued progress in the international front, particularly in the second half of 2008 as we have entered into new distribution relationship and have completely required local product registration processes.

Overall, while our performance in the first quarter did not meet our expectations, there were some positive signs during the period. The number of active U.S. accounts increased by 200 during the first quarter to now more than 5400 accounts representing a growth rate of more than 20%. These 5,400 accounts accomplish approximately 8,400 positions during now dispensing Obagi systems.

Our base of dermatology accounts grew 6% for required quarter, that is now 29% from a year ago. Our sales force of highly trained dedicated representative increased to 93 from 78 a year ago which is up two people from the end of Q4'07.

And last with our ongoing commitment to our physician customers we have hired a new Obagi partnership program in late Q1. The initial successes is generated a 100 plus accounts for Obagi and our product systems and training will become an every bigger part of their practice. Components programs include financial planning, business plan development, staff training and best patient education.

Overall, we slightly impact the economy downturn we are having on us and others in the industry. We believe we are well positioned to continue to grow our business despite an unfavorably economic cycle. We generated $7.6 million of free cash flow during the quarter and have a cash balance of $21.3 million in non GAAP. With this financial stability it allows us to continue to invest in opportunities that capitalize our position within in the industry.

I will comeback with some closing remarks. But first let me hand Steve Garcia take you through the rest of the financials. Thank you Steve.

Stephen Garcia - Chief Financial Officer

Thank you, Steve, and good afternoon everyone. As Step has already discussed our sales metrics I will now focus on the inner aspects of our financial performance for the first quarter of 2008 compared with the first quarter of 2007. Net income totaled $3 million or $0.13portfolio per fully diluted share on 22.8 million fully dilutive weighted average shares outstanding. This compares with $2.9 million or $0.13 per diluted share on 21.9 million fully diluted weighted average share outstanding for the comparable quarter last year.

Our gross profit margin was 81.4% compared with 82.8% in the same quarter last year and compared with 81.9% in the immediately preceding quarter. This was primarily due to sales and sales incentives offered during the launch of ELASTIderm Decolletage and lower sales of our high margin product line Nu-Derm which is affected by the change in economic conditions and the Decolletage product launch. The launch phase for Decolletage is now completed. And similar to the last time we launched new product, we expected sales force to return to a more balanced focus across all product lines. As such, we believe margins will slightly improve for the year.

Selling, general and administrative expenses were up $2 million to $14.3 or 56% of net sales. The increase is primarily due to additions in the sales force, increased physician training and patient acquisition activities, and an increase in commercial and general support cost.

Although, SG&A as a percentage of net sales has historically been higher in the first quarter due to seasonality this is magnified by revenues that were lower than our expectations. Going forward, we have realigned expense management – our current expectations or revenue and we believe SG&A expenses as a percentage of net sales will decrease for the remaining three quarters of the year.

R&D expenses increased 15.4% to $1.4 million compared with $1.2 million for the first quarter of 2007. As a percentage of net sales R&D cost were 6% compared with 5% for the first quarter year ago. We continue to invest in developing our product pipeline and drive growth and expand our dominant position within the physician expense market. This investment has resulted in the development and launch of new Condition & Enhance, the CLENZIderm system, ELASTIderm eye gel and eye cream and the . ELASTIderm Decolletage system. We believe research and development cost as a percentage of sales to remain fairly consistent for the year.

Operating margins decrease to 19.4% compared with 24% for the first quarter a year ago. As a result of lower anticipated net sales, as well as the concentration of cost related to reporting as a public company, we have prudently relined our expenses with our new revenue targets, and therefore operating margins are expected to improve going forward. Our effective tax rate over the quarter was 39.9%. We expect our effective tax rate to remain similar for the rest of the year.

Moving to our balance sheet, as of March 31 2008, we continue to strengthen our balance sheet through the generation of operating cash, continued profitability and prudent management of our resources. Cash and cash equivalents totaled $21.3 million compared with $14.1 million at December 31, 2007. We also have an untapped $10 million line of credit. Working capital totaled $38.1 million compared with $34.2 million at December 31, 2007. And stockholders equity total $53.2 million compared with $49.7 million a year ago.

Turning to financial guidance for 2008. Based on the quarters, first quarter s results, the trends in our core business and economy we are reducing our net sales and earnings forecast for the year. We now estimate net sales for 2008 to be in the range of 113 to $117 million representing year-over-year growth of 10 to 14%. This is down from a 120 to a $125 million on our previous guidance. Earnings are now expected to be in the range of $0.81 to $0.85 per fully diluted share representing year-over-year growth of 17 to 23%. This compares with our previous EPS estimate of $0.94 and $0.98, and is based upon 22.8 million shares outstanding, fully diluted shares outstanding.

For the second quarter, we estimate net sales to be in the range of $27 million to $28 million which would represent a year-over-year growth of 3 to 7%. Earnings are estimated to be in the range of $0.18 to $0.20 on fully diluted shares of 22.6 million. For second half of the year, our year-over-year revenue growth bases are expected to be higher than the first half of 2008. This is due to more announced seasonal trends and a new product plans for launch early in the fourth quarter.

Our revise guides reflects a reexamination or expenditures for 2008 in order to align them with our revenue growth expectations. Our strategy on cups is controlling expenses in share they are totally aligned with our net sales growth, while continuing to invest in key growth initiatives. We will continue to monitor any changes in the economic conditions and evaluate their effect on our business.

Looking at sales for the year in contrast of what we saw in 2007, we believe that seasonality in sales in 2008 will be more of announced, which would be more similar to the historical, our business experienced in 2006 and earlier years.

And now I will turn the call back over to Steven Carlson.

Steven R. Carlson - Chief Executive Officer

Thank you, Steve. Let me take a minute talk about for changes and our executive ranks. And as you know Steve Garcia will be leaving Obagi effective July 15th. I want to take this opportunity to thanking for his contribution and dedication to company, and for his role on helping us make the transition from a private to a successful public company.

Based on the positive ones from prospects and continued growth we foresee at Obagi. So our object is to see successor certain a role that one encompass finance, accounting, IT and operations. This person also played a strategic role on our business development activities and administrative functions. We continue to conduct our search for the right candidate and look forward to reporting to you upon its conclusion.

In summary, the first quarter brings us to a point at Obagi history in which we are better positioned with a market share that is approximately three times greater than any of our competitors. With more products and FK used than ever in the company’s history, strong reception to our new products, our continuing ability to attract new accounts to Obagi, and plans for the new product launch in the fourth quarter, we certain certainly positive about the fundamentals of the Obagi business. Further, we believe that the compelling and clinical efficacy of products in the long terms in this marketplace present us with opportunities to continue to drive growth and gain incremental market share.

Now let’s open the call to your questions.

Question-and-Answer Session

Operator

(Operators instruction). Our first question our first question comes from the line of Adam Greene, J.P. Morgan. Please go ahead.

Adam Greene

Hi guys, I had a couple of questions, I just wanted a little more commentary on for the growth increase in second half of the year, specifically, 3Q, 4Q you talk about double digit growth due to increases in anilities, that’s just based on this conference due to historical trends or just what other kind of market dynamic are you seeing that gives you the confidence that you could return to the double digit growth?

Stephen Garcia

I think what we look at in marketplace and what the survey data be more in depth analysis on the impact of the economy, the strength that we had in first quarter over a year ago despiteness in our expectations. We believe the guidance that we put out there is appropriately cautious, conservative and prudent as we work at expense management, and if one looks out normal trends in this business in 2007, 2006 we historically have and seasonality of the holidays is stronger back half of the year then we do the front half.

Adam Greene

And then for the leverage on the SG&A as a percentage or Rev, due you expect that it was kind of linearly decrease or sort of a step down dramatically in the second half of the year?

Steven Carlson

We believe that it will be more of a linear type of decrease taking place throughout the year.

Adam Greene

And then on gross margins you said that it’s suppose to slightly improve in '08, is that slightly improve from 81% to 1Q of improve from the 82% for the historical range?

Steven Carlson

From the Q1 prospective because of the sales incentives that were offered of surroundings on the Décolletage launch.

Adam Greene

And then finally Nu-Derm a you commented was down, I mean, what can you -- due to reaccelerate, do you think that you got too many products in the bag, and you’ve talked about adding three to fives reps per quarter, at what point do you think `08 to put another way, what number do you think you need to get to feel confident you have the right size sales force?

Stephen Garcia

Let me answer the back half of that question first. As we’ve always indicated we look at adding new sales people and investing in our sales organization is in important component of driving growth. We’ve always done that based on new account demand, and one of the very positive signs that we still saw in Q1 as we have historically is we continue at a very strong new account growth and adding over 200 in the quarter. Respectively we work to continue to add sales people as that account demand requires. Today as we look at the guidance that we have put out there, we will adjust our sales growth accordingly with the demand in supporting that revenue projections. As we looked at NU-Derm what we indicated in the discussion part of this is we saw those larger more stable accounts in the back part of the quarter become more cautions in their purchases. Given the lot of our larger accounts, their historical business volume is more associated with NU-Derm and that’s where we saw that adjustment. As we look at modeling and forecasting the business going forward, we think we reflected appropriately that more cautions conservative and a returns in NU-Derm growth.

Adam Greene

Well thank you.

Stephen Garcia

Thank you, very much.

Steven Carlson

Also I just wanted to followup on the expense question, one more point on that in, that there is linear improvement on the expenses, but I also want to know that there is a -- due to the seasonality of our business Q4 operating margin and income tend to more heavily weighted in the Q4 timeframe. So just an important note again the seasonality not only effects the sales, but it also effects our profitability.

Operator

Our next question comes from the line of Donald Ellis, Thomas Weisel Partners. Please go ahead.

Donald Ellis

Thank you and good afternoon. I have four questions I will ask one at a time. The first question is regarding your guidance, and somewhat subjective, but can you tell us how much of your guidance now is due to objective information you are seeing in the field versus just a conservative subjective assumptions about how bad you think the economy might get?

Stephen Garcia

Don, we have modeled this with greater transparency and granularity around the survey and spending a lot of time in direct conversations with our accounts and the influences that they saw as a result of the change in the economy. Of note, it certainly was heightened in February and March following I think a pretty heightened media awareness surrounding credit tightening, Bear Stearns, Wall Street, the Fed, gas, food. So, what we have done I think is, put an appropriate guidance out there to be cautious and to be conservative and yet to be prudent in expense management to still have solid fundamentals in our business.

Donald Ellis

Okay. With respect to that physicians, I mean how much of - if you are seeing some decrease in buying, how much you think it's because they are seeing fewer patients or they bring the inventories that they carry in their offices down a little bit?

Stephen Garcia

What we have heard anecdotally is it account specific and geography that the West Coast and across the Sunbelt in Florida, some of the larger plastic surgeons saw more marked reductions in February and March. We also saw a more macro level as we look at our surveys and our input from the field just more caution of how much inventory they’re going to carry while they make sure they've got a stable patient flow.

Donald Ellis

Okay. And last question is regarding pricing. If there any price increases in the last couple of quarters and do you see what you are seeing out there in the economy now restricting your ability to raise price on some of your products?

Stephen Garcia

We did initiate at the end of the year approximately 4.5% price increase and we don’t anticipate and did not receive any negative sensitivity to that price increase.

Donald Ellis

Great. Thank you very much.

Stephen Garcia

Thanks Don.

Operator

Our next question comes from the line of Larry Neibor, Robert W. Baird. Please go ahead.

Larry Neibor

Thanks. Good afternoon.

Stephen Garcia

Good afternoon, Larry.

Larry Neibor

What is this new partnership plan that you discussed Steve, how does it differ from your normal relationship with these physicians?

Steven Carlson

What we highlighted at the end of Q1, we coined as a business partnership program and I think the difference from what our normal business is we put more structure and we’re putting more tools in the tool box of how to help physicians continue to increase retention of their existing patients and equally put more emphasis on the tools and vehicles in which to bring more new patients into their practices. Specifically, we have more former lines, our financial planning and the financial analysis tool. We now have a standardized business template and we have specific training and education and patient training and education events. In addition to, Larry, we have engaged in a relationship that we have a Web-based site now called obagimarketing.com, which provides our physicians the ability to customize everything from postcards to fliers to patent brochures to education materials realizing that more formally as a business consultant with our accounts and inclined for the commitment and investment that we are making in creating that partnership, we are asking them to connect their business more to Obagi than ever before.

Larry Neibor

Are they required to carry a certain level of inventory of Obagi products?

Stephen Garcia

No.

Larry Neibor

How much would you anticipate this is going to hurt your margins this year?

Stephen Garcia

There actually isn't a incremental expense to us other than the formalizing of the packaging, all of these tools, we’re putting in place late in Q1 in the development and now we are just formalize in the delivery of those with the business accounts, so there is no incremental development expenses associated with that in Q1 or going forward.

Larry Neibor

Okay. What are the -- your largest saying to you right now, in terms of how they see their business developing?

Stephen Garcia

Our larger accounts anecdotally or saying I think the worst of the times are over.

Larry Neibor

Okay.

Stephen Garcia

But it’s really anecdotal, and they are still very cautious, because just the unpredictability in the news flow and the things that have happened in the United States and around the world.

Larry Neibor

Right.

Stephen Garcia

And again I think where we have only been redundant, but we have looked at that and said, lets be appropriately cautious, conservative and lets be very prudent on investments and management of our investments in SG&A.

Larry Neibor

Okay. And then the final question please, what is the new product that you refer to as the fourth quarter launch and what type of revenue contribution are you expecting from it in that quarter?

Stephen Garcia

As we said before Larry from competitive reasons we don’t want to signal what the product launch is, where [audio gap] and how impact full we think it’s going to be.

Larry Neibor

Okay. Thank you.

Stephen Garcia

Thank you Larry.

Operator

Our next question comes from the line of the Angela Larson SIG. Please go ahead.

Angela Larson

Hi guys, I have a couple of questions for you this afternoon. Have you changed any of your credit measures with accounts or the discounting that’s available and are they asking for it?

Steven Carlson

We have not changed any of our credit terms with our exiting accounts. We have seen a little bit stretching on our receivable but they remain fairly healthy, and there has not really been any across the base request for extension or lengthening of terms of our credit.

Angela Larson

Okay. On the….

Stephen Garcia

Angela if you look at the amount of cash generated in the quarter is not an indication that our accounts are trying to hold off in payments suits.

Steven Carlson

As well as DSO went down from Q4 to Q1.

Angela Larson

Okay. And as we look forward, I just wanted to be clear on the guidance. At the end of the year you had said R&D was hopefully around -- you know, shooting for around 70% of sales, and now you are saying more consistent with what we saw in first quarter which was about 5.7%. Is that accurate that we should be looking at something closer to 6% of sales than 7?

Unidentified Company Representative

That is correct. We are -- our expectation is that it remained consistent at above 6% for remainder of the year.

Angela Larson

Okay. And then on SG&A, and sale force in particular, I am struggling with his one. When you reported fourth quarter earnings you said you had 88 reps at the end of the year and now you’re saying you have 91 and you’ve expanded the 93, now I coupled this with an SG&A line that improve a little bit more than normal and between fourth quarter and first quarter. And the last component to this that I struggled with is that you have a demand driven model, you expand your sales force as their demand -- from accounts and there is an account base, yet, maybe those accounts are not ordering quite as much. So could you help me reconcile how the sales force grew over the course of the last 3 to 5 months and it bear to continue to increase on the same number of accounts or the accounts are not buying as much?

Steven Carlson

Well one of things that we did at that, we have actually been again changing some of the dynamics of our sales force and we have actually added a training component to that sales force as well and there was an internal sales force aspect which we call our practice development group and if we added some additional people within the training area and find those prudent to now expand what we are to abandon the net that we looked at for that sales force. And so, the growth that you see over the years is not only field sales people, but its internal support sales group as well as increasing our training capacity and personnel. These trainers actually not only train our field sales group, but also train the physicians.

Angela Larson

So how many sales reps do you actually have?

Steven Carlson

On the street, I would have to say that's 85 to 87 right in there. And then the PES and the training group would make up the rest.

Angela Larson

Okay. And then last question, on the Obagi partnership program. Is this just a web-based system or is there a face associated with the company that actually built the relationship with the account?

Steven Carlson

It is a face, it is our sales reps. The web-based ObagiMarketing.com is a web-based component of a tool to be able to customize a lot of their in-office, back-office, and communication vehicles out to their patients and/or the public that they can customize their logos and add any text that they want to. So, it’s a tool that is serviced to them much as they would go to a rapid color or at Kinkos or at FedEx. They actually pay for those services in their own credit cards. We are providing the template of that for them to be able to customize.

Angela Larson

Okay, but for the – teaching them about how to run their business more efficiently or to retain patients and keep the patients coming in, who is teaching them that or is that also online?

Steven Carlson

Those are combination between our sales organization, and as Steve indicated the incremental people that we've hired in the training component. So, we actually have trainers that is focussing sessions on how to build a more successful physician dispensing practice.

Angela Larson

Okay. Thank you.

Steven Carlson

Thank you.

Operator

Our next question comes from the line of Katherine Lu, Oppenheimer. Please go ahead.

Katherine Lu

Hi, good afternoon. Thank you for taking my questions. First, I want to followup on Angela's question in terms of sales force expansion. I am just wondering on the one hand you probably need to continue to expand sales force in order to support CLENZIderm penetration in dermatology market and new product launches. And on the other hand, the slow down in consumer spending probably can freeze some man power in aesthetic areas. So, I'm just wondering if you feel you have the flexibility to switch the sales force between these two areas a little bit to maximize your current sales capability or you feel it is definitely needed to add additional headcount?

Steven Carlson

Yes actually we do have that flexibility within our aesthetic base to refocus and help the derm's sales force in the push for and now the CLENZIderm's system in addition and also opens them up to also do additional prospecting a new account dropped as well.

Katherine Lu

Okay, thank you. And talk about CLENZIderm sales, the sales appeared to decline slightly from Q4. I'm wondering if you can give some comments on that front. If it’s naturally due to the sales force focus on ELASTIderm launch, or it is due to inventory stocking or it is due to slowdown in consumer spending? I think it is probably – should be less impacted?

Steven Carlson

I think it is really a combination of few of the items you mentioned and one yes indeed the current economic conditions did have an impact on the therapeutic line. But also we have –with the launch of Decolletage, it did have an impact as well on that. Most pronounced is what we saw from the Nu-Derm system, but still it did have an impact on the product line as well.

Katherine Lu

Okay, I see. Finally I'm wondering you also touched about international expansion, just wondering if you can remind us which products we should be expecting to get approved outside the US this year and specifically in which countries? And I would appreciate if you can give us some insight in terms of international market dynamics. I think Steve touched that previously. And also, should we still be expecting international growth to outpace US growth in late '08 or this expectation has sort of moved up a little bit due to the sluggish domestic market demand?

Stephen Garcia

Thank you, Katherine. Yes, we continue to invest in international and it is significant opportunity for growth for us going forward. As you know, at the end of last year we restructured our organization as it relates to manpower, we hired a dedicated sales manager to build our European business beyond our initial UK basis. So we are looking at additional opportunities through distributors and product registrations in the EU. Similarly we have a focus of hiring an individual, a sales manager to build our Asian business. Today we are very strong in Japan. But if you look at all of Asia, we have a small footprint. And equally as we look at South America and Latin America, we are looking to hire a dedicated individual to drive that business and hopefully we will be able to announce the conclusions of those searches in the near future. Having said that, as we've indicated in previous calls; CLENZIderm and ELASTIderm represents product opportunities that requires less argueless, timely and expensive product registration. So we have put emphasis on those two technologies to get registered and parallel with the identification of better and the right appropriate distributors in new countries and new regions. So we do expect to see incremental leverage of that with those people on the ground. And we would expect to see a much strong back half of 2008 as the contribution from our international business.

Katherine Lu

Okay, great. Thank you very much.

Stephen Garcia

Thank you.

Operator

Our next question comes from the line of Angela Larson SIG. Please go ahead.

Angela Larson

Hi guys, thanks for taking some follow-up. Looking at ELASTIderm, and I apologize, if you have answered this. But I am just struggling with the little bit of the strength of the growth quarter-over-quarter and I understand the expansion of the line. But how much of that do you think is some inventory buying, physicians who are excited about the expansion align and how much should we be looking at it to continue at this rate?

Stephen Garcia

Certainly accounts that are excited about the opportunity with Decolletage that it fell in love with the technology from the use of the eye gel and the eye cream, we made a decision to launch on the preliminary four week data because it was so strong. So I think there is a balance between those who have prior experience with the ELASTIderm technology they purchased it because of the feedback they got from patients for the eye cream and gel was so strong that if we were introducing a similarly effective product the neck and chest area is a anatomical location that has not been well served or not, highly effective products available anywhere in the market, whether that’s retail, physician or even prescription based products. So I think it’s a blend Angela of enthusiasm because of the cream and gel around the eye, and enthusiasm on an off the face approach as I indicated in the call, we had almost 200 accounts that were not a ELASTIderm eye cream or gel accounts that block Decolletage on the strength of -- its new application on which to apply attractive topical products.

Angela Larson

But are you looking for 4.5 million from the product mix?

Steven Carlson

I am sorry, can you speak up Angela.

Angela Larson

But are you looking for the strength of 4.5 million from the product next quarter or are you looking for it to settle down a little bit and then view consistent growth?

Steven Carlson

Well and I think that you can take a look at the ELASTIderm launch that we had last year and it does teach us some things about the product line and product launch. And so yes, in the sort of first few months of new product brought in the market there is some initial stocking that does take place by the physicians. And so, we see that -- and there is a spike up in sales and then kind of a normalization that takes places in the following quarters. So we would expect to see that as well for Decolletage.

Angela Larson

Great. Thank you very much.

Steven Carlson

Thank you Angela.

Operator

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Source: Obagi Medical Products, Inc. Q1 2008 Earnings Call Transcript
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