Aspira Women's Health Inc (AWH) 2003 Q2 法說會逐字稿

Welcome to the Ciphergen Biosystems second-quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session. Instructions will be given at that time. (CALLER INSTRUCTIONS). I would now like to turn the conference over to your host, Ms. Sue Carruthers. Please go ahead ma'am.

Good morning, ladies and gentlemen. With me today are William Rich, President and CEO, Matt Hogan, CFO, and others who may participate in the questions and answers. Copies of the press release were distributed yesterday and are available on our website. I would like to remind everyone that this call is for information purposes only. This call is being recorded and is copyrighted, and therefore, please note that it cannot be recorded, transcribed or rebroadcast without Ciphergen's permission. Your participation implies consent to our recording this call. If you do not agree with these terms, please drop off the line.

Our discussion today contains some forward-looking statements, including Ciphergen's expectations of future strategic plans and operational results. Various risks may cause Ciphergen's actual results to differ materially from these expectations. For a list and description of some of these risks and uncertainties, please see the reports filed by Ciphergen with the SEC. The information in this conference call related to projections or other forward-looking statements may be relied upon, subject to the previous safe harbor statement, as of the date of this call, and may continue to be used while the call is maintained on our website. I would like now to introduce you to Matthew Hogan, our Vice President and CFO.

Thanks Sue. I am going to begin with a discussion of our financials for the second-quarter, and I will then current turn the call over to Bill for a review of other corporate highlights. I will also be discussing some pro forma financial information, and I would like to point out that a reconciliation to GAAP figures is contained in our press release, which is posted on our website.

During the second-quarter of 2003, Ciphergen reported revenue of 14.3 million, a 65 percent increase over the same quarter of 2002. For the first half of the year, revenue was 27.1 million, a 75 percent increase over the first half of 2002. Our trailing twelve-month revenue was 51 million. Overall, we had solid growth during the quarter and for the half year, and we feel like we're pretty much on plan, although we did experience some softness in the US with respect to our ProteinChip Systems business. We expect business conditions to improve in the US in the second half, and continue to expect 2003 annual revenue to be in the range of our original guidance of 65-70 million.

During the quarter, we recorded revenue from the sale of 35 ProteinChip systems and interfaces, bringing our installed base to over 420. We're having considerable success selling higher end automated systems, as well as automation accessory upgrades to current customers. Recall that our AutoBiomarker system lists for 339,000, but we also are now actively going back to all of our current, roughly 400, customers to offer them automation upgrades. We can provide a customized (indiscernible) robot for applying samples to our arrays through our Beckman Coulter relationship at a $92,000 list price, and we can provide an auto loader that will read two cassettes of arrays for 35,000, and we offer Ciphergen Express, our database product to manage all the data generated, for 25,000.

Interest in automation is high, and we have set up a discrete customers success group within our field sales and service organization to market these products, as well as insure our users are successful, and therefore continue to buy arrays and other services, as well as publish their successful scientific results.

Instrument sales generated 51 percent of total revenue in Q2, with 7.3 million in sales compared to 4.6 million in Q2 of 2002, a 61 percent increase. Total consumable revenue, which consists of both ProteinChip (indiscernible) and chromatographic sorbents, was 5.1 million in Q2, or 35 percent of total revenue. Of this, 1.9 million represented array revenue, which is an increase of 83 percent in Q2 compared to the second-quarter of last year. Our growth in chip revenue is particularly encouraging to us, not only for the financial impact, but also because it is confirmation that we are seeing customers -- particularly in clinical proteomics -- move many projects fro discovery into validation phases or into routine assay use, as well as starting to take advantage of the robotics to add automation to their process.

The majority of our consumables revenue is generated through sales of BioSepra sorbents. Our BioSepra Process Proteomics division continues to perform extremely well, generating 3.1 million in sorbents revenue, which is 43 percent growth over Q2 2002. This operation is benefiting from the growth of a few very high value sorbents, and an increase in leads and prospects arising from our large sales force actively promoting and selling these products.

The remainder of our revenues were related to service activities. For the quarter, total service revenue grew to 1.9 million, as compared to 858,000 in the second-quarter last year. Collaborative service projects and our biomarker discovery centers accounted for about 563,000 of the total, with the remainder coming from providing maintenence (indiscernible) services to customers and paid training activities.

Let me take a minute to explain the accounting for our litigation settlement. Under the terms of the settlement, we paid LumiCyte 3 million in cash and issued 1.25 million shares of Ciphergen stock. In addition, Ciphergen will pay royalties, based on SELDI derived revenues, of up to 10 million over a ten-year period to Molecular Analytical Systems. So the cash portion of the settlement is 13 million, of which 3 million is upfront and the rest will be over time and tied to revenue. To account for the value of the upfront cash, future royalties and stock, we recorded approximately 7.3 million in a non-recurring expense recorded to cost of revenue. Starting in May and going forward, we anticipate recording approximately 1.2 million per year in additional cost of goods sold over the next 11 years in respect to this litigation settlement. In essence, this equates to about a 1.5-2 percent hit to gross margin, with that percentage declining in the future as our revenue base grows.

Our reported gross profit for the second-quarter was 2.3 million; however, if we exclude the onetime charge related to the litigation settlement, our gross profit actually grew 65 percent, from 5.8 million in Q2 2002 to 9.6 million in Q2 2003. And our gross margin was 67 percent in the second-quarter, which is the same as last year's quarter, and quite satisfying. Sales and marketing expense, excluding deferred comp, was 6 million in the second-quarter versus 5.1 million in the same quarter last year. These increases were driven by the growth of our sales and marketing organization, although the increase was only about four percent over the first quarter, which is probably a fairer comparison. Deferred compensation in sales and marketing was 74,000 in the second-quarter of 2003.

R&D expense, excluding deferred comp, was 6.9 million in the second-quarter of 2003, as compared to 4.9 million in the second-quarter of 2002. R&D expense was up about 9 percent in Q2 versus Q1. Deferred comp attributable to R&D was 95,000 in the second-quarter of 2003. We have recently announced two important product introductions, which Bill will describe in more detail, and we are confident our R&D dollars are being well spent.

G&A expense, excluding deferred comp, was 4 million in the second-quarter of 2003, versus 2.9 million in the second-quarter of 2002. A better comparison would be to note that G&A fell about 10 percent compared to the first quarter of 2003, as our legal expenses associated with the litigation began to tail off. Deferred comp attributable to G&A was 223,000 in the second-quarter of 2003.

We are now booking an income tax provision, as our BioSepra operation is rapidly using up its French NOL, such that we will wind up starting to pay taxes there this year. This impacted our net loss by about 302,000 in the quarter. We reported a net loss for the second-quarter of 15.6 million versus 7.3 million in the second-quarter of 2002. If we exclude the onetime charge for the litigation settlement, then our net loss was 8.3 million as compared to 7.3 million in the second-quarter of last year, but down from 9.2 million in the first quarter of this year. I would emphasize that decline in net loss is compared to the first quarter if one adjusts for the onetime litigation expense. We expect this trend to accelerate going forward. We ended the quarter with 28.2 million in cash and investments, which was slightly better than our budget. Now I would like to turn the call over to Bill Rich for additional comments.

I would like to briefly describe our continuing progress in establishing Ciphergen as a leading provider of tools and collaborative services for the proteomics market. We have made considerable progress during the second-quarter on several fronts, including broadening our customer base, developing and launching innovative new products and strengthening hours our patent estate, as well as a resolving important litigation issues related to the use of our core technologies in certain markets.

Let (indiscernible) through some of these in more detail. First, expanding biomarker discovery in cancer research. The American Association of Cancer Research meeting is a major event for us each year. This year's AACR meeting was originally scheduled to be held in Toronto in April, but was canceled due to the SARS epidemic. It just recently took place in Washington D.C.. We were very pleased that 48 clinical research studies presented at this AACR session highlighted the use of Ciphergen SELDI ProteinChip technology, up from 25 studies last year. These covered a wide variety of cancers and various clinical questions such as early detection of disease, mechanisms for drug resistance, and so on.

One study on lung cancer presented by scientists from the (indiscernible) Anderson Cancer Center was important in that it correlated gene expression data generated on the (indiscernible) gene chip platform with protein expression data generated on the Ciphergen ProteinChip platform. This rigorously prepared study showed that about 30 percent of the express proteins could not have been predicted from gene expression data alone, confirming the premise that one really should combine both gene and protein expression efforts to fully understand the biological puzzles related to disease. On the basis of this work, we hope to convince scientists doing gene expression to begin incorporating Ciphergen protein expression analysis in their research.

Besides our major overall presence at AACR, I would like to share 2 observations that came out of the meeting this year. Two years ago, the general theme at the meeting, as it related to SELDI, was that one could use the technology to discover interesting biomarkers. Last year, the theme fueled by the NCI work in ovarian cancer was that patterns of biomarkers analyzed with pattern recognition software could greatly improve early detection and prediction of disease, pre-symptomatically, with increased clinical sensitivity and specificity. This year, I would say a major theme was the large number of groups conducting studies using large sets of clinical samples and clearly describing their work in ways that highlighted the potential use of SELDI as a clinical diagnostic assay platform for disease diagnoses.

Scientific progress, as well as Ciphergen's leadership in this field of clinical proteomics, is fueling increased sales of Ciphergen systems and laying the groundwork for our expansion into clinical diagnostics. The second positive event for us was at one of the proteomics sessions, where the Chairperson, Dr. Bill Grissel from the University of Alabama, commented that their use of the ProteinChip system at seven separate laboratory sites -- which are part of the early detection research network, sponsored by the National Cancer Institute -- was experiencing excellent site to site reproduceability in validating Ciphergen systems for clinical, diagnostic testing in the area of prostate cancer. We have always been confident about the reproduceability of our system, which is obviously vital as we move our platform beyond discovery research use and into routine assay use, and it is gratifying to hear this independently confirmed in such a public forum by such an important group as the IDERN.

AACR was a very successful meeting for us, and we anticipate we will generate a number of leads that we can convert into sales in the coming quarters. Other important upcoming meetings for us include -- (indiscernible) protein biomarker meeting in Philadelphia in July the drug discovery technology meeting in Boston in August; the (indiscernible) AAC Meeting in Chicago in September related to infectious disease; society for neuroscience in New Orleans in November; the American Society of Cell Biology in San Francisco in December.

Finally, we are organizing a major seminar series in 18 major cities in North America, Europe and Japan, beginning in September. Highlighting our most recent application successes and new product introductions. We are optimistic that these meetings, combined with continued publication of application successes and introduction of our new products, will drive our growth in the second half of the year.

ProteinChip diagnostics discovery and commercialization rights have recently been licensed to a leading Canadian clinical diagnostic research and reference laboratory. Toronto medical laboratories, TML, and United Health Laboratories, UHF, acquired Ciphergen's AutoBiomarker ProteinChip system, as well as discovery and commercialization licenses recently, in order to identify new protein biomarkers that can be converted into commercial diagnostic tests in the disease areas of cancer as well as transplant rejection. The potential projects include studies on the early diagnosis of endometrial, thyroid and lung cancer, and the identification of predictors of response to novel pyramid therapeutic agents in colon cancer, leukemia and myeloma. And also, large organ transplant rejection rejection markers.

The TML relationship is significant for a couple of reasons -- first, TML and UHN are very respected in the diagnostic industry. They are currently running more than 9 million diagnostic tests per year and have a reputation for introducing innovative new tests. They are acquiring our technology and collaborating with us precisely because they want to discover, develop and introduce new diagnostic tests. Second, they are one of the first groups with which we have negotiated a diagnostic discovery license and a diagnostic assay platform license. These licenses will allow these diagnostic laboratories to use our technology to discover biomarkers and panels of biomarkers that can be developed into diagnostic tests in a reference lab setting to improve patient care. Our goal in these licenses is to ensure that we have access to any new diagnostic markers which are discovered and developed into tests by our customers, and used on our SELDI platform, and to share in the downstream value of these discoveries and tests.

Colon cancer collaborations with (indiscernible). During, the quarter, we also established a diagnostic biomarker discovery collaboration with bioMerieux, by which the two companies will work together to discover biomarkers and multi-biomarker panels that may improve the diagnoses and management of colon cancer using Ciphergen's ProteinChip technology. Cancers of the colon and rectum are the fourth most commonly diagnosed cancers, and ring second among cancer deaths in the United States. So this is a major health care problem.

bioMerieux is the eighth-largest bio biological diagnostics company in the world, so we are delighted to be working with them and consider their interest in working with us to be further endorsement of the diagnostic potential of of our technology. Regarding our activity in SARS research, Ciphergen's protein chip technology is being deployed by multiple groups including Health Canada's National Microbiology Lab, Beijing Clinical SARS Testing Center and the Genomic Institute of Singapore, in the hunt for novel protein biomarkers associated with Severe Acute Respiratory Syndrome, or SARS. A number of potential biomarkers have already been discovered in SARS patient samples. These proteins are being identified, and will be further evaluated further for their and developing accurate diagnostic tests for SARS.

If successful, therapeutic, and or vaccine strategies based on insights provided from these biomarkers, may be pursued as well. Regarding new product introductions. At the ASMS which is the American Society of Mass the (indiscernible) meeting in June, 26 papers were presented based on SARS. We introduced 2 important new products -- interaction discovery mapping or IDM, and surface-enhanced neat disorption, or SEND, ProteinChip arrays.

IDM represents an important expansion of our technology into protein interaction applications and provides improved discovery and assay capabilities in clinical proteomics, enabling rapid protein interaction studies, which complements our proven expression difference mapping -- or EDM -- capability for biomarker discovery. Two of the most important applications in proteomics are, in fact, protein expression, which represents 85-95 percent of our ProteinChip sales over the last two years, and protein interaction studies, which is the next major growth area in proteomics. Our IDM product launches us squarely into that very large protein interaction applications arena and provides a powerful solution in this emerging field of functional proteomics. The IDM platform enables -- one, rapid discovery of new protein interaction-related biomarkers; two, elucidation of disease-associated biological pathways and (indiscernible), as well as novel therapeutic strategies; and three, development of rapid quantitative multi-marker assays for disease diagnoses, prognosis and treatment monitoring; four, greatly improves the discovery power, development speed and quality of traditional protein interaction assays, including Infiniti (indiscernible), (indiscernible).

In addition, Ciphergen just launched the first of an important family of matrix-free SEND ProteinChip arrays, which enable low molecular weight species to be detected and greatly improves (indiscernible), with better overall reproduceability and sensitivity with the SELDI-TOF-MS process. With the introduction of SEND technology and future array products, we believe that the major remaining shortfalls of MALDI can be eliminated, and the great potential of chemo proteomics and metabolomics can also be more quickly realized.

Expanding our Process Proteomics area. Ciphergen opened its newest Process Proteomics Center located nearby located near Boston, Massachusetts. Leveraging the Company's ProteinChip system and high-performance BioSepra protein purification technologies, the center is dedicated to providing rapid and effective solutions to difficult protein production issues in the realm of biopharmaceutical product development introduction. The new center's services will include novel approaches to research and large-scale protein expression optimization, chromatography purification development, analytical methods development and biomanufacturing process development. The opening of this center strengthens the Company's ability to provide advanced protein expression and purification solutions to its biopharmaceutical and biotechnology clients. Ciphergen is pioneering the field of proteomics (indiscernible) ProteinChip and BioSepra technologies are combined to dramatically simplify and accelerate the development and production of proteins of all scales.

Key patents issues. 2 key patents were issued during the quarter directed to Ciphergen's (indiscernible) technologies. The first was issuance in Europe of our core SELDI patent. This patent had previously issued in the US but had not issued till now in Europe. The second was issuance of a US patent that supplements our basic US patents, with coverage for the most important ProteinChip technology application, protein expression profiling -- which is the heart of our protein biomarker discovery process. We have now 32 issued US patents and 88 pending applications. These cover the gamut of systems, arrays, applications, sorbents and biomarkers. During the second quarter, we filed more new patent applications than in any previous quarter in our history.

On the litigation front, the settlement was a major accomplishment during the quarter. As a result of the settlement, we achieved unambiguous, exclusive worldwide rights to exploit the SELDI technology, and this frees us up to fully execute on our business plan, which includes collaborative services and expansions in the research tools market to include other very large markets -- such as diagnostics, theranostics and drug discovery. This has been a financial and management time drain over the last three years, and we're glad to have this obstacle to collaboration out of the way. We fully intend to exploit these rights aggressively.

So what can you expect from us going forward? One, continuing rapid revenue growth while achieving high gross margins approaching 70 percent. As we moderate the growth in our operating expenses, this should result in rapid decreases in our net losses in the coming quarters. Two, driving clinical proteomics with continued growth in biomarker discovery center revenues, discovery efforts and clinical validation studies. There should be an increasing news flow via publication of predictive diagnostics, studies results and further collaborations with both diagnostic and pharmaceutical companies. Three, expanding our business through emerging Process Proteomics services and product revenues. Four, increasing penetration of the research proteomics market with important new protein interaction product introductions, such as IDM and SEND, and applications of the technology in drug discovery. And of course, we will continue to bolster our organizational capabilities by drawing upon the expertise of industry experts. To this end, we're pleased to welcome Judy Bruner, Senior Vice President and Chief Financial Officer of Palm, to Ciphergen's Board of Directors. Judy's extensive experience in successfully managing technology companies through rapid growth phases brings important and relevant perspectives to our Board. We are looking forward to reporting on our continued progress during future calls. I think I will stop there and take questions. Operator?

(CALLER INSTRUCTIONS). Eric Schmidt from SG Cowan.

I don't know if Martin is there with you, but perhaps someone could comment on the softening purchasing environment in the US. Do you see a geographic shift in sales to Europe or elsewhere? What makes you feel good about a recovery in the second half of the year?

Softness in sales in the US particularly driven probably by two major issues there. One was the non-spending of the NIH and the other part is actually the pharmaceutical industry that was really not buying from us in the quarter. It makes us feel confident looking forward, actually two things, as we see a tremendous take up in the request for quotations from the NIH, and that is absolutely a sign that orders will come in, and as a matter of fact, we will start to receive our first order from the NIH this or next week, actually, so we are very confident that the NIH funding release is starting to happen. With regard to the pharmaceutical industry, the story is somewhat the same. We did not see any orders from them in the second quarter. We now have a fair number of quote requests and do expect the first two or three orders in the next 3-4 weeks out of the pharmaceutical industry, specifically in the US. Now, added to that, I can also tell you that we had a very successful quarter in process systems sales in Asia as well as in Europe, and there we actually saw the orders coming both from industry as well as academia.

A question on the numbers, probably for Matt. Bill mentioned that you expect to see some dramatically shrinking losses going forward. Is it still the company's guidance that by the fourth quarter you will be at or near breakeven? Is there any guidance for the year, in terms of EPS? And I guess the third part of the question is what might be the cost savings impact of the litigation settlement?

We are not really in a position to give formal guidance for the rest of the year, I don't think, in terms of net loss. I do think that I would emphasize an accelerating trend toward profitability, starting in the third quarter, and we can see a number of ways where that is just going to happen. As you kind of asked in the last part of your question, we probably had in the second quarter about $500,000 worth of ongoing litigation expenses with lawyers, because that activity continued through the end of May, so there is a bit of a pickup there. We also spent a fair amount in the second quarter. The accountants would dislike it if I used the word "extraordinary," but unusually high as we launched these two products and got them into the market, and also on some other things that are really in the works for next year's introduction, which we are not going to describe yet, and I think those numbers will definitely come down in quarters three and four, in comparison. As our revenues go up, with that high gross margin, we really are moderating growth in G&A and sales and marketing and R&D, so the net losses will come down pretty noticeably in Q3 and Q4. Will they really reach breakeven in the fourth quarter? Probably not. We do have this litigation settlement expense of $1.2 million per year that we had not counted on at the beginning of the year. We have some taxes coming out of BioSepra, as I mentioned, that at the very beginning of the year we did not quite anticipate. We do not have formal guidance for 2004 yet. We will provide that at the beginning of next year, when we have all of 2003 behind us and we are able to do a bottoms-up budget, but we really do feel like we are going to be on a trajectory toward profitability that will be quite apparent -- and we are also highly committed toward making that happen.

Sean McKenna, Merriman Truman Ford.

My question is this -- could you describe a little bit more the activity you are seeing in BioSepra and how many new customers you added or where you see that business going?

We cannot hear you. You are fading out.

Can you give us more color on the BioSepra piece of the business, where you see it growing, and actually your strategy for getting those accounts -- highlight that a little bit?

We actually acquired BioSepra about two years ago, and when we acquired them, they were only active, I would say, in selling sorbents for large-scale purification of biopharmaceutical drugs. And what we have done since then is actually growth that business that year from $5 million to what we predict to be this year roughly $50 million, through a combination of their sorbent technologies with the SELDI technology and Internet introducing the concept of process proteomics, which basically means that SELDI becomes the underlying technology for both protein expression as well as protein production and protein analysis for these customers. That so far has been very successful, and as I said, that has already almost tripled that business over the past 2.5 or three years. What we are now going to do looking forward is actually broaden the segments in which we are actively (indiscernible) these products. Again, as I said, currently we are mostly focused on the large-scale chromatography of protein-based drugs. We are not going to abandon the laboratory skill market for these products, and that is a market that has a size of at least $300-400 million and is dominated by one or two players right now, and our products are very competitive and we can certainly enter that market. Secondly, what we are doing right now is we are actually completing the range of ProteinChip arrays that match the sorbents, and that means that we can then offer a full range of ProteinChip arrays for which the sorbents, the purification sorbents, are available, so that all scientists, from laboratory-scale work all the way up to large-scale work, can use the SELDI systems to predict their chromatography, their purification processes for the proteins of interest. With these two strategies together, we feel that we can certainly continue the rapid growth of the business. And lastly, we are very actively looking at complementary product streams that might really benefit that strategy in the future.

There's probably one other complementary aspect to what Martin was saying, and that is that some of the sorbents we have are extraordinarily unique and potentially in large-scale production therapeutic antibodies. And we have ceded those media now for the last couple of years, and are beginning to show -- we are in some early clinical trials, phases, with a number of companies in the antibody area. Should these sorbents be chosen for manufacturing and the drug approved, this can have a very substantial effect, which we hope will happen on the growth for the sorbent business.

Would you mind clarifying what you mean by substantial effect? Can you put any (multiple speakers)

You have to sort of understand how the process works in this large-scale sorbent business. It takes approximately five years from the time that a drug goes into Phase I trials to where it's finally scaled up to Phase II and Phase III, and then finally reaches approval stage. The use of the sorbents in the very beginning are in very small quantities and very low revenue numbers, so it takes a number of years. There is an attrition, of course, of drugs that reach Phase III that actually are approved, and so there is an attrition there. But when drugs are approved -- and we are in about 15 different processes now -- the size of that order can be in the millions of dollars a year of sorbent use, if your sorbent is chosen as one of the sorbents to be used in the production process. And in these -- particularly interesting, because an antibody production -- antibody therapeutics have a very high dose level. That means that the production scales of antibodies are probably the largest -- one of the largest uses of the kind of sorbents we use because the dose levels are so high and they have to make so much of it. So getting in this market, which is probably on the order today of anywhere from estimates of 70-$100 million in sorbent revenue today is projected to triple or quadruple over the next five years, because there is over 160 antibody therapeutics now in clinical trials. So we think that this could represent substantial markets for us. It's an extremely interesting and positive product for us.

I was wondering if you can comment about the actual -- how you were able to get into the (indiscernible). Are you supplying them? Would you supply them initially with the --

That's the nice part about the combination of BioSepra and Ciphergen. I will let Martin comment on that.

The way that we handle this process is traditionally -- actually was done by indeed giving samples and having these customers test. We have changed it around actually -- and we are actually actively helping and participating in the start up of these processes, where we offer services with a combination of SELDI and these sorbent technologies, and develop these processes for these customers and optimize these processes. And that really speeds up the acceptance of these sorbents incredibly.

Paul Knight with Thomas Weisel and Partners.

This Tim (indiscernible) siting in for Paul Knight. (indiscernible), could you comment on the accounting treatment for the settlement? What will happen to the 1.25 shares? Should we expect the share counts to go up in the future?

Yes. In fact, it is reflected in the average shares outstanding for the quarter. Sitting here today, we have about 28.8 million shares issued, which includes the 1.25 million shares that were issued in May.

A question for Bill. In the last quarter, one of your competitors introduced a (indiscernible) proteomic product. Do you see increasing competition from their products in the quarter?

We definitely see efforts to compete in this area right now. The product I think you are talking about -- this bead product that was introduced by (indiscernible) has some very, we believe, some very substantial limitations to it in being able to compete with us. I can be more technical about it if you like. So we have not seen any -- we've seen their presence in the market, but we have not felt any loss of sales at this point.

Do you see your protein arrays being used increasingly for interaction (indiscernible) and your new IDM product (indiscernible) --

I do. Of course, time will tell. But we are very enthusiastic about its potential, because we recognize that the protein interaction market is really huge, and that it is emerging now as probably the most critical piece in the proteomics -- the next part of the proteomics revolution. And this particular product is very attractive. It has a lot of applications, I think, potential in functional proteomics. So at this point in time, we are quite optimistic that it will affect our business. These things tend to take, though, 6-12 months to be picked up. So we are not looking for an immediate revenue impact. The real launch of this product will really be -- is just beginning right now, and will be (technical difficulty) in our seminar series and other marketing efforts in the fall. But we are very positive about it.

David Woods with Rodman and Renshaw (ph).

Just two questions. On the 35 systems placed in the quarter, what types of labs were generally buying those systems?

A large portion of our business tends to go to the, what we call clinical research laboratories, and those are laboratories where people are interested in finding biomarkers that are associated with disease state or detection of disease.

You also mentioned that there seems to be a strong and growing interest in automated systems. Going back and looking at the installed base, is there a number that you targeted as being most likely to add upgrades, or is it something where you think most of these types of existing customers are looking to upgrade? Any sort of ideas on that?

It's difficult to say for sure. We don't have any firm projections. This is only about the second or third quarter since we have introduced the full automation package right now, and so we are simply really calibrating the rates right now. Probably the most important element there will be the clinical proteomics people, who have bought -- probably in the last two or three years will be the most important and fastest adapters to the automation. And that probably represents on the order of about -- I'm guessing -- 30 percent of the installed base in that subpopulation right now.

Are a majority of the systems being placed now the fully automated systems?

I would say about 25 percent are the fully automated systems.

Do you expect that to increase in subsequent quarters?

Yes.

Edward (indiscernible) with Piper Jaffrey.

I wanted to doublecheck -- as the business focuses more and more on the clinical side, what has been your interaction with the FDA, just in terms of development and potential approval on those types of products?

I am going to have our head of business development, Bob Mauer (ph), answer that question. We have had our first first actual meeting with the FDA.

We have started a dialogue with the intention of understanding the view that the FDA would take on the whole process of adoption of diagnostic tests, and that's really started a conceptual level to describe how our platform is applied to testing. And it is our expectation that we will go through two phases -- the first will focus on laboratory developed tests through reference labs, has traditionally really only been monitored -- and not regularly -- by the FDA. But during that process, medical consensus emerges as to use, and then typically a company will go in and get approval for kits with specific claims. And in the long run that is what we expect to do.

Sean McKenna from Merriman Truman Ford.

Thanks guys, you already answered my question.

Paul Uke (ph) from Galyan.

I just have a question for clarification on the sorbent business you were talking about. Could you give us a little bit more detail on what stage of development some of these projects are? You mentioned 15 projects, I think, in clinical trials?

In the sorbent area? Actually, I'm not able to comment on that, and there is not anyone here directly from the process unit. So I don't want to speculate on the exact number. I can get back to after I find out that information. It is a multiple number, but I don't want to speculate on the exact number.

Are these Phase I or earlier trials, or are some of these actually in Phase II or Phase III?

They are in all phases right now, but I don't know the exact number. We have it in Phase I, II and III, as well.

On the NIH, you mentioned that you have been seeing some pickup in quota activity. During the second quarter, what percent of the systems were NIH-related, and how ah out historically -- say, in 2000 or 2002 or so -- what percent of your business is NIH business?

The NIH orders were actually zero in quarter 2. There was just absolutely no NIH spending. Typically, what we do get is about -- I would say (indiscernible) -- let's say 15 percent of our orders could be -- yes, in quarter 2 about 15 percent of our orders do come from the NIH.

What would you expect a normalized run rate for the next two quarters, when you say you have some pickup in quota activity?

I have to be a bit careful here with the answer here, because the spending pattern of the NIH is actually very atypical this year. What we have actually seen is the majority of the NIH orders coming in in quarter 2 and 3, and just very few in quarter 1 and quarter 4. So this year we have not seen any spending in quarter one and quarter two from the NIH -- directly from the NIH. So it's all been postponed. So if I assume that quarter 2 and 3 are now moving to quarter 3 and 4, I would expect about 10-15 percent of the orders this quarter to come from the NIH.

The absence or the lack of any system shipped in Q2 to NIH customers -- was that because of the delay and disbursements of funds?

Yes.

Was business development or sales activity -- just quota activity -- relatively strong during the second quarter?

(indiscernible).

(CALLER INSTRUCTIONS). There are no further questions at this time. Please continue.

I think we will just thank everybody for participating, and look forward to reporting our progress after the third quarter. Thank you very much.

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(CONFERENCE CALL CONCLUDED)