Acacia Research Corp (ACTG) 2005 Q3 法說會逐字稿

Good afternoon.

And welcome, ladies and gentlemen, to the Acacia Research third quarter earnings release conference call.

At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the Company, we will open the conference up for question and answer after each presentation.

And now I will turn the conference over to Mr. Paul Ryan.

Please go ahead, sir.

Thank you.

And thank you for being with us today.

Today’s call may involve what the SEC considers to be forward-looking statements.

Please refer to our 8-K which was filed with the SEC today for our forward-looking statement disclaimer.

With me today are Chip Harris, President of the Acacia Technologies Group, Robert Berman, our Chief Operating Officer and General Counsel; and Clayton Haynes, our Chief Financial Officer.

Today, I will give you an overview of our operating results for the third quarter.

Clayton Haynes will provide you with an analysis of our financial results, and Rob Berman will provide a brief update on litigation.

We will then open up the call for questions.

During the third quarter we made significant progress in building our business.

We are beginning to generate revenue growth from our current licensing programs, and we continue to acquire control of new patent portfolios for future growth.

Acacia Technologies revenues for the third quarter were 6,783,000, an increase of 202% from the year ago period.

We generated revenues from 32 new licensing agreements covering eight licensing programs.

New licensees in the quarter included Adidas, AMD, CBS Pharmacy, Gannett, LensCrafters, Priceline, 7-Eleven, Samsung, Sony, Matsushita, and the Tribune Company.

We generated revenues from three new licensing programs in the quarter and have now begun generating revenues from 11 of our 18 licensing programs.

During the quarter we acquired control of three new patent portfolios that relate to digital inkjet printing, high resolution optics, and hearing aid ECS technology, and we’ll commence licensing programs for these technologies.

We also have a full pipeline of potential deals that we are evaluating.

Our success in completing numerous licensing agreements with major companies and our increasing visibility is continuing to drive new opportunities to us.

We anticipate acquiring control of a number of new patent portfolios for licensing over the next few quarters.

In summary, Acacia is very well positioned with our licensing, engineering, and legal teams, pursuing 18 current licensing programs, and our business development team continuing to acquire new patent portfolios to rapidly grow our business.

I would now like to turn the call over to Clayton Hayne, our Chief Financial Officer, who will provide you with an analysis of our third quarter financials.

Thanks, Bob.

And I thank everyone for joining us on today’s third quarter earnings call.

First, I’d like to provide a review of the Acacia Technologies Group’s third quarter 2005 operating results, then address cash flows for the quarter, and finally summarize our financial position as of the end of the third quarter of 2005.

As Paul indicated, the Acacia Technologies Group posted a strong quarter of revenue growth for our shareholders and for inventors with whom we partner.

Licensing revenues recognized a total of $6,783,000 as compared to $2,240,000 in the comparable 2004 period.

Revenues were comprised of recurring license fees of 927,000, up from 740,000 in the comparable 2004 period, and paid-up license fees of 5,856,000, up from 1.5 million in the comparable 2004 period.

As Paul mentioned, during the quarter we executed 32 new licensing agreements and generated revenues from eight of our ongoing 18, from eight of our 18 ongoing technology licensing programs.

As a reminder, recurring license fee revenues are recognized from licensees that make recurring quarterly or annual license fee payments under their respective license agreements.

Paid-up license fee revenues are recognized from licensees that make paid-up license fee payments for past infringement and future use of our technologies under their respective license agreements.

Certain of our paid-up license agreements provide for a potential additional payments based on future activities.

The third quarter 2005 GAAP net loss was 1,558,000 versus 1,842,000 in the comparable 2004 period as illustrated on the Acacia Technologies Group income statement provided in today’s press release and related 8-K filed with the SEC.

The third quarter 2005 net loss included 205,000 in onetime employee relocation expenses and 225,000 in final inventor royalties expense related to the V-chip as a result of the anticipated conclusion of all V-chip related litigation activities shortly after quarter end.

Excluding the impact of non-cash amortization charges of 1,334,000 non-cash stock compensation charges of 123,000 and the onetime charges I just mentioned the Acacia Technologies Group reported third quarter 2005 operating income of 329,000.

For the third quarter of 2005 the Acacia Technologies Group recorded positive cash flows from continuing operations of approximately $2 million which includes the impact of operating activity for the current quarter as reflected in the income statement and the impact of the timing of the receipt of cash from licensees and the timing of payments of inventor royalties, legal fees, and other expenses.

Third quarter 2005 operating expenses were 8,687,000 as compared to 4,238,000 in the comparable 2004 period.

The primary drivers of the quarter to quarter increase in operating expenses were as follows. 3.9 million in contingent legal fees and inventor royalties expense which are directly related to the increase in paid-up license fee revenues recognized during the quarter, third quarter of 2005, an increase in non-cash patent amortization charges related to the GPH acquisition, an increase in MG&A related to the addition of licensing and business development personnel, an increase in consulting expenses related to the consulting agreement executed with the former CEO of [Global Patent Holdings], and onetime employee relocation charges and final V-chip inventor royalties expense as described earlier.

Third quarter 2005 patent related legal expenses were 1,076,000 compared to 1,174,000 in the comparable 2004 period.

Third quarter 2005 patent related legal expenses included 183,000 in expenses incurred in connection with licensing programs for patents acquired in the GPH acquisition.

The prior year third quarter included 668,000 in previously deferred V-chip related legal expenses.

Excluding these amounts legal expenses increased by approximately 355,000 due to an increase in [DNT] technology related patent prosecution, litigation, and enforcement activity during the third quarter of 2005, as compared to the year ago period.

As a reminder, other than our DNT patent portfolio all other current litigation is handled on a contingent basis.

However, the Acacia Technologies Group is required to pay the out-of-pocket expenses incurred by these firms in connection with the ongoing litigation on a monthly basis.

Based on results for the nine months ended September 30, 2005 the Acacia Technologies Group’s fixed costs for fiscal 2005 are expected to be in the range of 6.8 million to 7.1 million.

As indicated on previous calls, the variable costs include inventor royalties, contingent legal fees, patent related legal fees, and patent related research, consulting, and maintenance expenses, and will fluctuate quarter to quarter based on licensing revenues recognized, patent related enforcement activities, and patent related research and prosecution activities, respectively.

The Acacia Technologies Group’s financial position as of September 30, 2005 continues to be strong.

Cash and short-term investment balances totaled 41 million at September 30, 2005 versus 39.2 million at June 30, 2005, and 28.6 million at December 31, 2004.

Total assets at September 30, 2005 were 68.3 million as compared to 33.1 million as of December 31, 2004.

In conclusion, I’d like to thank our team of licensing professionals for a strong year of revenue growth to date.

We are now generating revenues from 11 of our 18 licensing programs, and are scheduled to launch additional licensing programs, and continue to acquire additional patent portfolios to increase our revenue generation base in future periods.

I will now turn the call over to Rob Berman, Chief Operating Officer and General Counsel of Acacia, for his remarks.

Thanks, Clayton.

On the litigation front in the third quarter we entered into license agreements with defendants in six of our ongoing litigations.

In the quarter we also initiated three new patent infringement lawsuits against [Varco, NV] and [Miranda Technologies] with respect to our audio video enhancement and synchronization technologies;

Microsoft and Dell for our data encryption technology; and Circuit City, OfficeMax, and several other defendants for our credit card fraud technology.

In the last litigation the litigation will be stayed pending the re-exam of our credit card fraud patent.

In total, we now have 22 ongoing lawsuits.

Also, in the quarter on September 8th and 9th we went before Judge Ware in the Northern District of California for our Markman rehearing in the DNT litigation.

This is another step in the process of litigating our DNT patents.

There are several other steps to be completed, such as motions for summary judgment, discovery, and expert discovery as we move closer to a trial.

The court has not yet set a trial date, and we will be asking the court to do so as quickly as possible.

This past quarter we also received Markman decisions in two of our other litigations involving our audio video enhancement and dynamic manufacturing modeling technologies.

As we have stated in the past, Markman decisions are usually a mixed bag, where both sides claim victory.

However, I will say that we are very encouraged by the rulings and are anxious to move forward with the claim term definitions issued by the court in the Markman decisions.

As always, if you want additional information on any of our ongoing litigation you can access documents through the pacer online system.

Paul.

Thank you, Rob.

That’s the conclusion of our prepared remarks.

Operator, if you can open up the line for questions?

[OPERATOR INSTRUCTIONS.]

And we’ll take our first question from [Paul Haber] with [Libe].

Hi.

I have one quick question.

When can we expect a ruling on the Markman?

There’s no scheduled date to do that.

Our estimate is that it may come as early as the end of the year because we’re down to a smaller number of matters than the original preliminary Markman ruling.

So, there’s no definitive timeframe to get a decision on the Markman.

But, you know, we’re hoping that sometime by the end of the year is a possible timeframe.

I’m sorry, one follow-up to that.

Is there anything we could read into the fact of how the Markman went as to whether it will be positive or negative?

The hearings themselves?

Correct.

Well, that information is available publicly, the testimony and the written testimony, so you can, you know, people can take a look at the information that was provided by our expert witnesses, certainly.

But it’s always very difficult to predict, of course, how the judge is going to rule, and so that’s why frankly we hesitate to do so.

Okay, thank you.

We’ll take our next question from [John Schneller] with [Knott Partners].

Hi.

Great top line number.

Thank you for taking my call.

I was wondering, the reason for your optimism that there will be a Markman ruling?

I was a little bit confused.

That is just because the judge has essentially seen all of the issues before and there are fewer issues at hand now, so it’s not because – isn’t it somehow related to what he has on his docket?

He’s got 50 other cases he has to see before that?

Well, that’s correct.

I mean we’re predicting that we may get a Markman ruling sometime in the fourth quarter.

That’s just a guess, frankly.

It’s really up to the judge’s schedule, how many other matters he has, how many trials he’s doing.

However, it shouldn’t take as long as last time in terms of what the judge has to do because instead of writing an opinion from scratch he will be modifying an existing opinion.

But, frankly, it’s difficult to predict when the judge will be handing down the Markman ruling.

Our best guess after talking to counsel is that it should be by the end of the quarter, but there’s certainly no guarantee.

Okay.

And then, a similar related matter, what’s the current thinking on the potential letter of allowance?

I’m sorry, I’m not familiar.

A letter, is it, and I could have the terminology wrong – a letter of allowance from the patent office?

Oh, I’m sorry.

You’re talking about a notice of allowance with respect to new patent claims that we have pending?

Yes.

On the DNT technology, is that correct?

Yes, correct.

Okay.

We’re continuing to go back and forth with the Patent Office on a number of our applications, and we certainly will be making an announcement if and when the Patent Office does grant additional patents.

But until that happens we’re continuing our communications with them and continuing to work with them in the hopes that they will allow additional claims.

In terms of timing, the Patent Office is probably even more difficult to anticipate than a judge is because of the amount of files and patents that they’re working on, and it’s just very difficult for us to predict.

Okay.

The, Paul, you may have mentioned this in your prepared remarks, but I got on the call a little bit late.

What is the LOI pipeline look like?

And if you can give us a sense of how many LOIs you think you might sign in the fourth quarter?

Well, as I indicated in the prepared remarks, I just said we have a ‘full’ pipeline which is through – we usually our experience has been in phase one we usually filter out, you know, roughly 98% of all the opportunities that come our way.

At that stage the ones that pass our standard test in phase one, we then will negotiate a letter of intent with the inventor and, or company that owns the patents.

So that we have confirmed the business deal.

And then we generally do anywhere from it can go 90 to 120 days on very extensive phase two due diligence.

And our experience has been even with the opportunities in the past, our standards for phase one, about 50% of them drop out in phase two with our more extensive due diligence.

I think it’s, you know, reasonable to assume that the pace that we had this quarter of finalizing and acquiring control of three new patent portfolios will probably be fairly typical of what we’ll be doing going forward.

Okay, great.

One last question.

On the – there was an increase, I think, in the consulting fee associated with the GPH acquisition, is that…

Well, that isn’t – that started at the beginning of this year.

Part of our transaction when we acquired GPH, which Clayton covered on last quarter’s call, is it’s a two-year consulting agreement, and that will impact us for another five quarters.

We are receiving, you know, real services for that consulting agreement, but it’s a fairly expensive consulting agreement which we will have.

It impacts, it’s about $250,000 per quarter, and that will stay in place for the next five quarters.

But it doesn’t increase per se just because you happen to be generating additional license revenue from GPH portfolios?

It’s not correlated to that, at all.

It is a fixed monetary fee.

Okay.

Great.

Thank you very much.

Sure.

[OPERATOR INSTRUCTIONS.]

This will conclude the question and answer session for the Acacia Technologies Group.

You will now be placed on hold until 2:00 p.m. when the CombiMatrix presentation will commence.

Okay.

Thank you, everyone, for being with us.

And as the Operator said, at 2:00 the CombiMatrix portion of the call will commence.

Thanks.

Good day, and welcome back.

We will now begin the CombiMatrix Group presentation.

I will now turn the conference over to Dr. Amit Kumar.

Please go ahead, sir.

Thank you, Operator.

And thank you, all, for joining us for this call.

With me today is Scott Burell, our Vice President of Finance.

Before I begin, I want to note that today’s discussion may involve what the SEC considers to be forward-looking statements.

Please refer to our 8-K which was filed with the SEC today for our forward-looking statement disclaimer.

During my prepared statements I will highlight the financial performance for the quarter, provide more color on our numbers which were released earlier, and discuss the specific events of the quarter.

I’ll also provide more information about our influenza chip.

Because of the recent public health concerns we have received a number of calls regarding this array, and I want to clear-up any misconceptions.

Though the third quarter of 2005 was a challenging quarter for CombiMatrix we continued our progress.

Also, a recent financing strengthened our balance sheet and we ended the quarter with nearly $25 million on our balance sheet which will enable us to continue to move forward with additional product introductions, a more focused sales effort, and continued investment in our molecular diagnostics effort.

Our revenues for the quarter were 1,463,000.

Of this, 973,000 was for government contracting and 490,000 in product and service revenue.

Our operating loss for the quarter was 3.88 million.

Though this 490,000 in product and service revenue was significantly greater than the corresponding number in the third quarter of 2004 it was roughly 15% less than the product and service revenue for the second quarter of 2005 and it was lower than our internal goal for the quarter.

Moving forward, we have adjusted our sales and marketing strategy and have restructured that department.

We are focusing on sales of our portable bench top synthesizer, as well as blank arrays and reagents enabling in-house fabrication of microarrays by our customers.

In addition, we will continue sales and marketing efforts on the next version of our laboratory synthesizer to be manufactured by [Coruna].

We are also nearing the launch of our [e10] detector system, along with e10 detector arrays.

While we’ve focused on sales and marketing of our high value items, which will drive sales of blank microarrays and reagents, we will continue to utilize distributors for the sales and marketing of our pre-synthesized catalog arrays, as well as our customized arrays.

Our network of current distributors include InBio in Australia and New Zealand, [JK International] and IntraMedical in Japan, and our most recently announced distributor, VWR Scientific Worldwide.

During the quarter we launched our DNA array synthesizer enabling researchers to build microarrays in their own facilities.

We also launched our four by 2000 site sector of microarrays.

This product is built on our 12K platform and enables the sectoring of that array into four sectors that have 2000 probe sequences each.

For studies requiring an analysis of 2004 fewer genes this product enables more cost effective experimentation.

On the personnel side, we added biotech industry veteran Scott Greer as an advisor.

And CombiMatrix Molecular Diagnostics, our diagnostics subsidiary, added three experienced executives: Dr. [Matmore], Mr. Robert [Embry], and Mr. John [Besser], to its Management Team.

These three executives bring to CMD a combined 40 years of industry experience from companies such as U.S.

Labs, Laboratory Corporation of America, Quest Diagnostics, and others.

CMD also added to its Scientific Advisory Board.

Dr. [Eric Whitman], an expert in melanoma or skin cancer, which is the fastest growing cancer in the United States.

Dr. Whitman has been involved in melanoma research since his appointment at the National Cancer Institute.

His term on the faculty at the Washington University School of Medicine, and his appointment as Director of the Melanoma Center of St. Louis, one of the internationally recognized centers of excellence for melanoma care.

Dr. Whitman’s responsibilities will be to provide advise to CombiMatrix on molecular diagnostics, as we develop microarray based diagnostics for the diagnosis and the treatment of melanoma.

Dr. Whitman has also been charged to establish relationships with pharmaceutical companies that are interested in developing companion diagnostics for specific drugs in clinical trials.

On the strategic side, we also established a relationship with the Biodesign Institute at Arizona State University.

The Biodesign Institute is run by industry illuminary Dr. George Post, and its mission includes the development of new technologies that can enable personalized medicine as well as new technologies for biodefense.

The specific project will be led by Dr. [Neil Woodbury] and will focus on the development of a [peptide array] synthesizer.

Peptide is a small protein molecules composed of amino acid.

They are more complex and more difficult to synthesize than DNA, but they have attributes that make them attractive as the molecules in an array format for the development of drugs, diagnostics, research tools.

And in this particular case, catalysts for the efficient production of alternative energy sources.

Our deal is structured so that the Biodesign Institute will purchase equipment, reagents, and services from CombiMatrix and will fund the development work.

If a system and Electro property or peptide array product are commercialized both CombiMatrix and the Biodesign Institute will share in revenues.

This relationship leverages the investment we have made in our core technology and enables a partner to fund development of a product that CombiMatrix would ordinarily not have the resources to address.

We are encouraged by the Biodesign Institute’s validation of our array synthesizer technology by choosing our system as their development platform.

All of our other activities continue to make progress during the quarter.

Our work with the Department of Defense continues with roughly $3 million remaining on our existing contract and allocation.

Also, as recently reported by the press, we have a line item in next year’s budget of roughly $4 million to continue our DOD contracting work.

Should we receive this, that would make an additional commitment of $7 million, including the $3 million that is remaining on our existing allocation.

So, we are quite optimistic.

We cannot be assured of receiving this additional $4 million until the budget clears the U.S.

Congress and is signed by the President.

In addition to the additions of Management at CMD, the discovery effort at CMD continues.

We have expanded the technical staff at CMD focused on R&D.

As we near launch of our initial services we will staff up laboratory operations.

We are finalizing a number of protocols and are accessing and negotiating access to cancer biopsy samples to build our product offering.

I also encourage those of you who are interested to visit to the CMD web site at www.cmdiagnostics.com to learn more.

All of our drug discovery efforts continue as planned, as well.

Though progress has been made both internally at CombiMatrix and externally at [Leukemic], there are no specific milestones to report yet.

Our first compound for AML, acute myologic leukemia, is undergoing toxicology studies in rodents and large animals in anticipation of a regulatory filing.

Another subject of interest to the U.S.

Military is our work in influenza, which has resulted in the development of a microarray that is capable of identifying all screens of known flu viruses.

The current version of this array, which we hope to launch within the next 10 days, can identify all influenza strains that have been seen in sequence, including the H1, N1 strain of 1918 which killed some 60 million people, the 1957 Asian flu that caused a pandemic, the 1968 Hong Kong flu that also caused a pandemic, the 1976 Swine flu, as well as the H5 N1 bird flu which has public health officials concerned today because 50% of those infected will die.

With this array, researchers can type influenza in less than four hours.

In addition to identifying all previously seen strains of flu, if the strain is observed that has not been seen before, this array will identify the source of the new strain as well as provide information on the type of mutation that created this strain.

Also, this chip may be able to identify drug resistant variants.

H5 N1 variants have already appeared that show resistance to drugs like [tama flu] and others.

And, of course, as new mutations occur CombiMatrix can modify the chip very rapidly.

Some of this work was done in collaboration with the U.S.

Air Force.

And near the end of the third quarter we received a contract from the U.S.

Air Force to expand our influenza array to include additional pathogens that cause upper respiratory infection.

This contract expands our work with the U.S.

Military which includes the DOD activities already mentioned.

In this collaboration we will work with the U.S.

Air Force Institute of Occupational Health and the U.S.

Air Force Surgeon General’s Office to develop and evaluate the capabilities of this broad upper respiratory infection chip and use it in global monitoring activities.

The Air Force Institute of Occupational Health is part of the global influenza surveillance network and works with the U.S.

Centers for Disease Control, as well as the World Health Organization.

So, this array is very powerful and takes advantage of CombiMatrix’s superior technology.

It is a research tool that will be used for monitoring purposes.

It is also a tool that could get widespread use if an epidemic or pandemic occurred.

I want to note that the bird flu has infected millions of domestic and wild birds and will continue to do so worldwide as birds migrate.

To date, it has only infected a relatively small number of humans who have contracted the disease through exposure to infected birds.

The major public health concern of the mutation that can facilitate human to human transmission has not been seen yet.

But I do not want to oversell the revenue implications of this particular product.

The sales of this product and associated services will be driven by what happens during the upcoming flu season.

With that, Operator, I’ll end my prepared comments, and ask you to poll for questions.

[OPERATOR INSTRUCTIONS.]

And we’ll take our first question from [Alan Dubros] with AG Edwards.

Hi, Amit.

How are you?

Hello, Alan.

Obviously, nobody is happy with a [50%] decrease in sales.

I know the goal was 50 to 100% per quarter.

Is the problem more with the products that we have or sales strategy?

I know a couple of quarters ago we talked about how the customers were raving about our products.

It’s hard to imagine they’re still raving with a 50% decrease, so is it the products or the strategy that’s the problem?

Well, I think primarily it’s the strategy.

And as such we’ve modified how we are selling our products in general.

What we’re doing is we’re focusing on sales of high value, high margin items like our desktop synthesizer and other capital equipment.

And all of these capital equipment sales will drive sales of blank arrays and other products and services.

And, as a result, we’ve modified our sales strategy and sales force to make more efficient use of the limited resources we have.

And we anticipate that this more focused approach will be successful in getting capital equipment out there that will drive revenue on the disposable product, such as the microarrays, the blank microarrays, and also we want to utilize our distribution network including VWR which is a $3 billion organization, to drive sales of microarrays and synthesized microarrays and catalog microarrays.

So, our strategy is to focus on selling to core laboratories in major universities, core laboratories at pharma companies and biotech companies, and major institutes, as well as service providers, companies that run microarray services for other clients, as opposed to focusing on individual researchers which we have been to date.

Are we missing the mark with our 12K chip?

It seems like the competition has moved a little bit ahead of us?

The market for microarray analysis encompasses high density [assays], as well as high density, meaning more than 12K, as well as the medium density which is our 12K and the lower density which is addressed by our [3012K] which allows researchers to [2K] at a time, 2,000 at a time.

Well, there is still a big enough market for that?

Each segment has its own size, and all of the segments are growing.

And, obviously, the higher the density the better, not only because it addresses a larger component of the market but also enables you to address the lower density component with lower priced products.

Are we happy with the performance of our distributors to date?

Our distributors, we are happy with our distributor in Australia, our Japanese distributors have taken a little bit of time to get going.

And VWR we just signed on.

We don’t, you know, we’re setting them up.

At the current time we don’t anticipate their revenues to start kicking in until Q1.

And my last question.

We talked in the past for a long time about a 50 or 100% growth per quarter as a goal.

What is our – is that still our goal going forward?

Our goal is to still achieve very significant growth, especially at these modest levels, baseline levels.

I hesitate to make projections, again, but, you know, I would like to see significant growth, whether it’s 50 to 100%, it’s difficult for me to say at this time because we have modified our strategy.

Okay, thank you.

We’ll take our next question from Dr. Richards, a private investor.

Can you hear me?

I can barely hear you.

Okay, is this better?

Yes, that’s much better.

Okay, fine.

Yes, this is Dr. Richards, and keeping up with the reputation of my profession I’m running late, and I did not get in on the beginning.

It is not clear to me how many products you have that are ready for manufactured production, and who is going to do this, and whether you’re licensing it?

And when these things are going to happen?

Okay.

We have a number of products that include capital equipment, microarrays, catalog as well as fully customized microarrays, reagent and some other components involved in running our tests.

All of these products are primarily manufactured by us.

Components of those products are manufactured by other organizations.

We have a series of upcoming products that include capital equipment, as well as additional microarrays and reagents.

Those products will be launched between now and the next few months, sequentially.

And these products include an electrochemical detection system that is for laboratory use; electrochemical detection micro arrays; as well as certain reagents that can be utilized on our existing optical detection microarrays; and a new version of our desktop or laboratory synthesizer which will be manufactured by a Japanese partner.

Am I still on?

Yes, you are.

Oh, good.

I’d like to do a follow-up or two here.

I am, of course, somewhat appalled at the amount of blabber that’s going on about the Avian flu, already, although obviously we do want to try to be prepared.

So, my question is sort of double-tracked here.

When are these more medical things going to be out there to help solve the problem and quiet the TV people?

And what are the other products?

I mean how, what’s the timeframe that you expect to start making some money from these things?

Well, it’s not clear to me how we could keep the TV people from talking; but our Avian flue microarray as I indicated, is a very powerful chip that will, that can do a number of different things that are necessary by people who are studying the Avian flu.

But I don’t want to oversell it.

Certainly, this chip would be in tremendous demand should there be a case of Avian flu which has been documented to be transmitted from human to human.

The general consensus is that there will be, at some point in the near future, whether it’s this flu season or some other flu season upcoming, that the Avian flu H5 N1 version will mutate or recombine with other viruses, other strains of influenza, resulting in a virus that can be transmitted from human to human.

We are seeing and we’ve had some discussions with some organizations that are very concerned about this.

We’ve seen situations where LAX, Los Angeles International Airport, for example, is considering quarantining patients who come in with influenza before they let them out of the airport or on to U.S., international passengers on to U.S. soil.

They may want to type those patients.

It’s not clear to me where all of this is going to go, and so it’s difficult for me to predict how many of these chips we’ll sell or how much we will make on them.

What we do anticipate is that there will be some sales of this microarray, and should there be anything that indicates that there is some transmission from human to human we anticipate significant sales of this microarray.

Because even now, even though there hasn’t been any human to human transmission, there’s been significant economic costs.

Millions of dollars’ worth of domestic birds have been slaughtered because of this infection.

And as we can remember a couple of years ago from the SARS incident, even though on a relative scale the number of people who died from SARS was relatively small, the economic impact of SARS in the regions where it had been seen was very significant.

So, to make a long story short, it’s hard to predict.

We do know that this chip is a very powerful and we feel it’s a best product available for studying influenza.

Well, it definitely sounds like a most worthy endeavor.

And, well, let me add that many public health departments have veterinarians, so it sounds like this is something that the veterinary doctors need to be up on, at least as much, perhaps more, and I think your economic assessment there is hugely correct.

Do you see this technology evolving to the point where most general hospitals across the country have this ability, so that doctors might be able to know exactly which virus – I’m spreading this out, obviously, to more than just the bird flu – which virus is causing which symptoms in their patient today?

From a technical standpoint the microarray and future microarrays that could be developed on our platform will definitely have that capability.

However, to have it rolled out across hospitals and doctors’ offices will require FDA approval, as well as a significant cost reduction.

Our healthcare system is not able to support a $500 chip for every person who comes in with influenza.

Typically, being a physician, you would know that if someone comes in with flu you would simply ask them to take some aspirin and hopefully three or four days later the virus had cleared.

This chip becomes very important and critical if a very deadly influenza virus like the H5 N1 becomes viral enough to be transmitted from human to human.

Yes, yes, that’s a most excellent point, and perhaps eventually even some forensic issues might merit such expenditure.

Just to summarize my own thinking here now, or to get it clarified would be more precise, the current standing is now and then will it always be that it’s one chip per patient?

One chip per investigation?

That is our current standing.

Okay.

Do you have any reason to believe it would ever be different?

Those are regulatory matters that are difficult for me to answer.

I think ultimately those will be made, those decisions will be made by the USFDA.

Oh, but scientifically if you had carte blanche, scientifically you could use a chip for more than one patient?

That is correct.

So, it’s a cross contamination problem that’s…

It’s a number of different issues.

Typically in the medical industry you use a product once for a patient, a disposable patient once per patient.

Oh, so it’ll be marketed as a disposable product?

That’s correct.

All right.

And that’s essentially just because that’s the way the FDA would want it?

Probably.

Dr. Richards, perhaps I could, we could take this discussion offline, if you’d like to continue asking questions so that other people…

Oh, well, I got on so soon, I figured maybe there weren’t very many other questioners.

I will be happy to…

I don’t know if there are, but…

I will get off.

Thank you.

Thank you.

And that is actually all of the time that we have for questions.

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This concludes our conference for today.

Thank you all for participating, and have a nice day.

All parties may now disconnect.