I-Flow Corp. has made big strides persuading doctors to use its devices for treating pain after surgery. Now it has to convince Wall Street it can do so profitably.
The Lake Forest maker of post-surgery pain control devices has seen sales grow 242% during the past five years, from $34 million in 2003 to $116.4 million in 2007.
Profits have been more elusive. But I-Flow may be near a turning point.
In the first quarter, the device maker narrowed its loss to $537,000, versus $921,000 in the year-ago period.
Sales were up 17% to $28.4 million.
(The company did post a $40.4 million net profit in the fourth quarter, but that gain stemmed from the sale of its InfuSystem Corp. subsidiary.)
The device maker now is refocusing its strategy on building up profits. It won’t give any forecasts, “because that’s how you get in trouble,” Chief Executive Donald Earhart said.
“Right now, the only thing we tell the Street is we expect to be profitable by the end of the year,” he said.
As for I-Flow’s first quarter, higher expenses drove the loss. Sales, general and administrative expenses rose 10% to $23.3 million, while product development costs were up 48% to $922,000.
The higher costs come with I-Flow’s big sales runup, according to Matt Dolan, who follows the company for Roth Capital Partners LLC in Newport Beach.
“When you have increased revenue, you’re going to pay out more sales commissions,” he said.
I-Flow has de-emphasized profitability in favor of building and maintaining sales of its core On-Q pain-relieving pump and other devices.
That’s changing, according to Mark Mullikin of Piper Jaffray & Co.
“Management has decided to focus on bringing profitability to I-Flow, halting the sales force expansion and reining in expenses,” he said in a recent client note.
Sales Growth
Others contend sales growth still is critical for I-Flow.
Analyst Bill Miller of Hartwell Advisors questioned the strategy change during the company’s first-quarter conference call.
Miller’s thoughts: “Let’s have the sales growth because that’s really, ultimately how your company is going to be valued.”
“We are trying to do both,” Earhart replied. “We’re trying to give good growth. But we believe now it’s time to start showing profits as well.”
As for the current quarter, Wall Street expects I-Flow to post a $504,000 profit on sales of $34 million.
“We remain content with the company’s profitability prospects and have actually raised our (profit) projections to reflect a stronger gross margin outlook,” Dolan said in a note.
Investors are waiting to see. I-Flow’s shares are down some 12% so far this year with a recent market value of $345 million.
Mullikin downgraded I-Flow after its first-quarter results on concerns about its ability “to shift the standard of care in post-surgical pain.”
He said he didn’t believe the device maker could meet a 20% revenue growth projection Earhart made without hiring more sales representatives.
“I think 215 (reps) is the right number for right now,” Earhart said.
I-Flow could add salespeople if it chose to because it has $50 million of cash on hand, he said.
The company also sells some of its devices through hospital purchasing groups such as Novation of Irving, Texas, and San Diego-based Premier.
I-Flow’s On-Q is a pump and catheter that delivers pain-relieving, non-narcotic drugs to a targeted area in the days after surgery. The company touts its products as a more effective alternative to pain pills, which are the dominant method of post-surgical treatment.
“It’s the only way people have had for years,” Earhart said.
Pain relief made up 77% of I-Flow’s revenue last year, with the remainder coming from infusion therapy products.
I-Flow’s products are used for all sorts of surgeries, including orthopedic, cardiothoracic, general surgery, obstetrics and gynecology and weight loss.
The company’s biggest challenge is selling doctors on On-Q, said Earhart, who’s run the company for nearly 18 years.
“We are better at relieving pain (than pain pills but) we’re still not the standard of care because we don’t have enough market share,” he said.
To try and change that, Earhart said I-Flow’s salespeople present data on how patients do with On-Q and bring that information to surgeons.
“Those surgeons who really care, they start using the product on a regular basis,” Earhart said. “For the surgeons who don’t want to change, (those for which) the pain’s not something to worry about, those are the ones who are tough to convert.”
Takeover Target
Despite I-Flow’s profitability issues, its On-Q brand and other products could make it a potential takeover target, analysts said.
“The implication is that they could become an entity within a bigger surgical player,” Dolan said.
Dolan didn’t name potential suitors.
Earhart is realistic about keeping I-Flow’s options open: “The days of a little company becoming a Baxter (International Inc.) are over.”
When smaller device makers hit certain revenue, profit and expertise levels, they’re bought by larger players, he said.
As for I-Flow’s competition, narcotics still dominate, although Dolan said there some other companies making similar products, such as Stryker Corp. of Kalamazoo, Mich., which primarily serves the orthopedic market.
And Johnson & Johnson obtained Food and Drug Administration approval some two years ago for a device that used On-Q as a model.
“But we’ve never seen anything that’s come to the market yet,” Dolan said.
I-Flow also has diversified. In February, it bought AcryMed Inc., a maker of silver coatings for medical devices, for $25 million.
The AcryMed deal came shortly after it sold InfuSystem, a maker of drug delivering pumps, for $100 million to HAPC Inc.
I-Flow has 970 employees, including 125 in OC. The company counts about 500 workers in Tijuana, where I-Flow makes its products at its Block Medical de Mexico SA de CV unit.
