Aspira Women's Health Inc (AWH) 2004 Q1 法說會逐字稿

Good morning. My name is Chasity, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ciphergen Biosystems' First-Quarter 2004 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you. I will now turn the conference over to Sue Carruthers. Please ahead.

Thank you. Good morning, ladies and gentlemen. With me today are William Rich, President and CEO; Matt Hogan, Senior Vice President and CFO; Martin Verhoef, President of our Biosystems Division; and Gail Page, President of the Diagnostics Division and the others who may participate in the Q&A. Copies of the press release were distributed yesterday and are available on our Web site. 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 report filed by Ciphergen with the Securities & Exchange Commission. 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 Web site. I would like to now introduce Matt Hogan, our Senior Vice President and CFO. Thank you.

Thanks, Sue. I am going to begin with the discussion of our financials and I'll then turn the call over to Bill for a review of other corporate highlights. Ciphergen reported first-quarter revenue of $15.5m, a 21% increase over the same quarter of 2003. When you look underneath that overall revenue growth, our ProteinChip products and services grew 50%, partially offset by a decline in our BioSepra process Chromatography sorbents revenue. That 50% growth is clearly back on track with our expectations and really stands up the industry. During the quarter, we recorded revenue from the sale of 39 ProteinChip systems and interfaces, almost half of which were systems with some additional level of automation or advanced software packages, had an 18% growth in units sold and a far greater increase in revenue due to the higher end systems in automation accessories.

Instrument sales, which include upgrades and accessories, generated around 54% of our total revenue in the first quarter with $8.5m in sales, compared to $5.5m in the first quarter of 2003, a 55% increase. Total consumable revenue, which consists of both ProteinChip Array sales and Chromatographic sorbent, was $4.6m in the first quarter, or 30% of total revenue. Of this, $2.4m represented [Inaudible], which is an increase of 30% in the first quarter compared to the first quarter of last year. We think there is plenty of room for an acceleration of chip usage as automation becomes more widespread and if customers mature from discovery studies into routine assay use. Our BioSepra Process Proteomics business unit generated $2.2m in sorbents revenue, which compares to $3.85m in the first quarter of 2003. This business was always a little lumpy as orders can be as large as $0.5m to a $1m and Q1 2003 was quite strong. In addition, you may recall that our BioSepra business unit recorded other income of about 770,000 in the fourth quarter last year, related to a cancellation fee for sorbents that were to have been delivered in the first half of 2004. Relative to our expectations, going into the start of the year, we have experienced some delays in receiving certain other anticipated orders and in a few cases, received smaller orders for our traditional sorbents from existing customers than originally anticipated, which will affect you too.

We have just introduced MBI HyperCel in March, a novel high-capacity mixed-mode sorbent for the direct capture of antibodies, and we are quite optimistic about the prospects for this sorbent. Given the roughly 150 potential production applications for which BioSepra sorbents are being evaluated, of which more than 100 relate to MEP alone and the strong interest in SELDI in the process market, we see the second half being stronger for the BioSepra business than in the first half. The underlying trend for this business is very favorable, and the overall market for Process Chromatography Sorbent continues to grow. SELDI is the fastest way to screen chromatographic condition, and this will generate more BioSepra Sorbents business as the technology becomes more widely used. The remainder of our revenue was related to service activities. For the quarter, total service revenues grew to $2.5m as compared to $1.7m in the first quarter of 2003. Collaborative service projects accounted for about $956,000 of the total in Q1, 2004, with the remainder coming from providing maintenance services to our customers and paid training activities.

Our gross profit for the first quarter was $10.6m, which represents a healthy 68% gross margin. This compares to 62% in the first quarter of 2003. Sales and marketing expense, excluding deferred comp was $7m in the first quarter of 2004 versus $5.8m in the first quarter of 2003. This increase was driven by the growth of our sales and marketing organization and promotional activities. Deferred compensation in sales and marketing was $45,000 in the first quarter of 2004. Research and development expense, excluding deferred comp, was $6.2m in the first quarter of 2004 as compared to $6.4m in the first quarter of 2003. Deferred comp attributable to R&D was $18,000 in the first quarter of 2004. General and administrative expense, excluding deferred comp was $3.8m in the first quarter of 2004 versus $4.5m in the first quarter of 2003. That decline is largely due to the fact that we had considerable legal expenses than last year's Q1 due to litigation that was settled in the second quarter of 2003. Deferred comp attributable to G&A was $126,000 in the first quarter.

Our operating loss of $6.7m represents a 27% decline as compared to the operating loss of $9.1m in the first quarter of 2003. We had other expenses, mostly interest expense of $0.5m and we booked an income tax provision of $0.2m during the quarter. As a result of all the above, our net loss for the first quarter was $7.5m, a 19% decline from the first quarter of 2003. We ended the quarter with $39.6m in cash and investments, which compares to $47.3m at the end of Q4. One transaction I should touch on is our acquisition of the remaining 30% ownership of Ciphergen KK. Our operation in Japan has done extremely well, particularly over the last several quarters.

During the first quarter, we paid $1m in cash to acquire complete ownership. This purchase price representing only about 4.4-times of sales was attractive for us, and has allowed us to avoid in the future having to back up 30% of our earnings as minority interest. Perhaps, more importantly, we now use Ciphergen KK to expand all of our businesses in Japan, in particular our diagnostic opportunities without being encumbered by a minority partner or having to share any of that value. Looking ahead to our financial guidance, let me note first that the forward-looking comments I'm about to make are subject to risks and uncertainties as described at the beginning of this call. We do not intend to update these comments or forecasts prior to our next quarterly conference call. Based on seasonality and expectation of continued strength in our core ProteinChip products and services and also recognizing that Process Chromatography Sorbents sales are likely to be more back-end loaded this year, we are currently expecting Q2 revenue of approximately $16.5m to $17.5m. We reiterate our full-year revenue guidance of $76m to $82m. Now, I would like to turn the call over to Bill Rich for additional comments.

Thanks, Matt. Good morning, everybody. Let me start by saying that we are quite pleased by the way 2004 has started out for us. Our aggressive marketing and sales programs along with increased sales and [Inaudible] launched in the second half of last year, as well as implementation of competitive response programs, which began in Q1 of this year has resulted in SELDI ProteinChip products and services growing 50% over last year's first quarter. A word about competition, our competitive response programs have resulted in prospect demos in the first quarter that were greater than all of last year combined, a positive result for the expanded demonstrations of our benchtop biology solutions capabilities.

The prospective customers have been impressive. That's one of the factors giving us confidence going forward that our products and technology will find broad acceptance by biologists and clinical researchers and augment their labor-intensive dual-based biology methods with our faster, more powerful benchtop protein discovery, and assay tool demonstrating directly to our customers and prospective customers many times in their own laboratories, that integration of a biologist's in-depth knowledge of their research problem along with the benchtop problem-solving power and speed of our technology, provides faster scientific progress versus traditional geobased methods alone. It also resolves fears created by the core Mass Spect. Laboratory personnel that are competing with us for their business, but our technology will not be useful to them due to a variety of MS, Mass Spect. performance arguments. We are also seeing new biomarker discovery based clinical proteomics laboratories being established in both pharma and academic setting, which are similar to our own BDCs. Here, our ProteinChip interface with the tandem MS for ID is being combined with our fully automated ProteinChip Biomarker Systems to implement large complex Biomarker Discovery projects. Competition from Mass Spectrometry companies is expected to grow in this area, but we believe our products and approach will also define the goal standard in Biomarker Discovery.

Next, let me highlight business in the Biosystems area. First, Japan did well during the quarter highlighted by Ciphergen Biosystems KK being designated as one of the official technology suppliers to a major Japanese National project know as the Drug Discovery Proteome Factory. It was organized by the Japan Health Science Foundation to carry out a national project on the analysis of disease-related proteins. About 20 leading Japanese pharmaceutical companies are involved in this five-year project as members of this consortium with financial support of 4.5b Japanese Yen. Ciphergen's ProteinChip System was recognized by this consortium as one of the core technologies for clinical proteomics in Japan. This is obviously quite an honor and accomplishment and bodes well for future adoption of our technology in Japan and Asia. Next, US sales came back strongly relative to the fourth quarter of last year, and the first quarter of last year which was gratifying, and Europe had a solid quarter highlighted by increased pharma sales growth. The pharma companies are setting up Biomarkers efforts worldwide with increased spending in this area, which is a favorable trend for us going forward. Our task is to get our share of this increased spending by proving we are the best choice for biomarker discovery and assay development. We also began to see the release of NIH funding in the quarter, which resulted in several orders in the US.

Next, regarding the annual American Association of Cancer Research or AACR meeting held in March, our customers continued to have major successes with the SELDI ProteinChip technology resulting in 49 presentations at this important meeting. Many of these presentation described new and exciting progress in the discovery of biomarkers and development of multi biomarker assays. It may improve early cancer detection and drug treatment decisions, as well as inside into mechanisms of disease and drug pharma co-dynamics and toxicity. Next, Ciphergen received a US patent covering pattern recognition methods directed to finding protein patterns in mass spectrometry data. The patent covers software and methods that use a pattern recognition algorithm called classification and regression tree analysis or CART, to identify diagnostic patterns of proteins derived from master commentary data. This method is used in Ciphergen's Biomarker Patterns Software and ProteinChip Biomarker Systems for biomarker discovery, validation and assay development. Related to this, Biomarker Patterns Software 5.0 was launched during the quarter. Biomarker Patterns Software is the only commercially available clinical proteomics software that addresses both discovery of Protein multi-markers, and their translation to sell the multi-marker assays. BPS, as we call it, 5.0 incorporates a major analytical advance with a boosting algorithm called TreeNet, is used to identify the proteins that are relevant to a particular disease, and then the CART algorithm is used to summarize and display the best multi-marker protein sets or patterns in a clear and concise manner allowing the development of diagnostic assays with high predictive accuracy.

Now, let's turn our attention to the Diagnostic business. During the quarter, arguably the most significant development revolved around the establishment of our new diagnostics division. In order to convert the company's many biomarker discovery programs into commercially viable diagnostic test, Ciphergen recruited Gail Page to become President of a newly formed Diagnostic Division. Gail has a 25-year career in the diagnostics industry, covering all of the critical functions ranging from senior management to sales/marketing and business development, technology assessment, and acquisitions, as well as operations. Beginning in 2000, Ciphergen established the first of a series of Biomarker Discovery Centers or BDC laboratories, and established a major BDC collaboration with the Johns Hopkins University School of Medicine. In order to utilize the latest Ciphergen technology to discover biomarkers and develop assays based on panels of biomarkers, which might have greater predictive power to diagnose cancer and other diseases, these BDCs now form the core of the new division. Also, Bill Sullivan has joined Ciphergen as Vice President of Diagnostics Division Operations, bringing with him 25 years of experience in diagnostic laboratory operations and manufacturing.

The new Diagnostics Division offers shareholders a major new business opportunity in the $22b in vitro clinical diagnostics market, a strong synergistic boost to our clinical research tools business. Our aim is to become the leader in proteomic diagnostics by commercializing high-value protein, multimarker diagnostic tests, revolutionize the current protein diagnostics market, utilizing low value single market tests. We believe multi-biomarker assays can provide a breakthrough in early detection and prognosis of disease, as well as beat pharmaceutical clinical development, and lead to real implementation of personalized medicines and theranostics.

In terms of specific accomplishments at the start of the year, let me cite a few items. First, regarding our ovarian cancer clinical diagnostics program, we and our collaborators at the Johns Hopkins University School of Medicine have made significant progress. First, the results of our completed multi-site study employing over 500 patient serum samples have been accepted for publication in a major cancer journal, and we expect publication later this year. Second, our follow-on evaluation study using over 1,500 samples obtained from seven sites around the world is progressing on plan, and we expect to have the results of that larger study this summer. Third, our commercialization program is on plan, and we have experienced excellent interest from both clinical laboratories and in vitro diagnostic companies in the ovarian tests, as well as other tests in our pipeline, and independent discovery programs into these areas. More details of our overall commercialization strategy, business plans, and progress will be made public later this year.

Next, we reported on a novel diagnostic approach based on inflammatory host response. In conjunction with the Johns Hopkins University School of Medicine, we presented data at the AACR describing a novel approach to diagnostic testing based on the detection of combinations of protein fragments associated and well-known with the inflammatory response of disease for the detection of ovarian cancer. This inflammatory response cascade, which is present in even early stage tumors, may be amplified in the serum of cancer patients by disease-specific enzymes associated directly with the tumor itself. Ciphergen and its collaborators reported that different cancers and other diseases generate unique host response proteins and protein fragments can be distinguished by quantitative SELDI detection in serum, potentially opening up a novel approach to the inflammation diagnostics for a variety of cancers and other diseases. Ciphergen has applied for patents on this concept, which we term Host Response Protein Amplification Cascade and its use in biomarker discovery and diagnostics.

Next, a research team at Johns Hopkins published in the Journal of Clinical Cancer Research that our ProteinChip System was used to discover panels of novel serum biomarkers that are able to differentiate patients with pancreatic cancer. Ciphergen's Diagnostics Division and Johns Hopkins' research team are currently recruiting additional patient samples in order to perform follow-on validation studies. Pancreatic cancer is the fifth leading cause of cancer death and has the poorest survival rate for any solid cancer. No serum test currently exists for the initial diagnosis of pancreatic cancer. Next, we reported during the quarter that our SELDI ProteinChip System was certified by the State Food and Drug Administration or SFDA in China as a Medical Device and has met the quality control requirements of the SFDA. It is the first step required to deliver diagnostic test in China using the ProteinChip System, and it is the first time that a mass spectrometer has been approved as a medical device in China. Future individual diagnostic tests will have to be individually cleared by the FDA based on their performance in specific clinical trials, but the core ProteinChip System itself will not have to be recertified for each diagnostic test. We expect to have approved tests within the next 12 to 18 months, but this approval has significant short-term impact on sales of the system to the research hospitals in China already.

Finally, we have made progress in our Alzheimer's development program. We have received strong interest from pharmaceutical companies from our preliminary data for developing diagnostic assays for use in their clinical development programs related to drug candidates for this disease. Furthermore, we and our collaborators will be presenting results of our most recent studies at two major Alzheimer's meetings in Europe and the US in the coming months. Dr. Kaj Blennow, a collaborator and leading expert in Alzheimer's research from Sahlgren University in Sweden, will give the plenary lecture at the Ninth International Conference on Alzheimer's in Philadelphia in July to several thousand of researchers. He was recently quoted in Drug Discovery magazine as saying, “ The AD, Alzheimer's disease, profile discovered in this study using the SELDI ProteinChip technology may be a major breakthrough as a method to help clinicians identify AD very early in the disease process. We expect the findings to promote new system sales in the Alzheimer's research area and increase interest at pharmaceutical companies in potential clinical development collaborations with Ciphergen.”

Now, let me finish up with the description of some of our key objectives for 2004. First, we achieved the rapid revenue growth we've described in our guidance, as well as other financial parameters we've outlined including seeing our losses decline throughout the year. Next, to continue to introduce new and improved products which enhance our leadership positions in the field of Biomarker Proteomics and SELDI ProteinChip and Biomarker patents technology. Third, we established collaborations and alliances that can expand our process Proteomics business and the acceptance of the SELDI ProteinChip technology at core laboratories. Fourth, to complete our 1,500 sample ovarian cancer study by midyear and establish the commercial partnerships by year-end with a goal of launching a commercial assay in 2005. And finally, to advance several other projects from our Biomarker pipeline into larger multisided validation studies, assay development, and potential diagnostic commercialization. We expect to have a lot of accomplishments to report to shareholders during the course of this year. We believe it will be a highly significant year of progress for Ciphergen. I will stop there and take questions. Operator?

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Shawn McKenna (ph) with Meyerman (ph).

Hi guys, how are you doing?

Great.

Can you hear me okay?

Yes.

So, a couple of questions, first I wanted to talk about the chromatographic sorbent sales. I just want to go over why you think they will pick up in the second half? That's the first question. The second question is if you could give a little bit more detail on what it is you are trying to accomplish in the second ovarian cancer study with the 1500 subjects? Thanks.

Martin, why don't you take the first one and Gail take the second?

Okay, it's Martin Verhoef here. With regard to the sorbent sales, why we would think they are going to pick up in second half of the year is that this business is somewhat predictable. We do get our orders or indicators of orders weighing at pounds and because these sorbents are used in production processes and that's why we actually know that we can expect an uptick in orders in Q3 and particularly Q4 actually this year.

And so, essentially you expect to sort of make up for the light sales in Q1 and in those later quarters, do you have visibility on that?

Yes, but I think Q2 has indicated probably flattish to Q1, maybe even a little bit wider, but Q3 and Q4 are higher than in the first half.

Okay, excellent. And then the update on the second study?

This is Gail Page. On the second study what you do in the process of taking these assays to markets is, you have to increase the multisites that you incorporate because that gives you further validation of the assay, so what you look for is improved performance and you look to make sure that you can achieve maximum [Inaudible] -- and in that process so you begin to develop the assay into a true commercial -- take it from a research base of commercial assay.

Okay. So, basically you're using the larger sample to validate the results?

Absolutely.

Okay, and then finally one more if I may. Could you comment please on any changes you've seen since last quarter in the competitive environment with respect to instrument sale, I know you did 31, some of those -- pardon me 39, some of those were from Q4, were those all new box sales or does the 39 include upgrades? Thanks.

That all systems are the 39, we don't count an upgrade as a system but regards to the competitive environment, we've taken a lot of steps as we had promised after Q4, and they seem to really help, right now they seem to pay off. We have a tremendous focus on the presales process, focused very much on the running customer (ph) solving problems, and that is really resulting in this order rate, and it's a much more attractive strategy to fight off competition. We have reported in Q4 that there were some ten systems that were delayed or lost or weren't coming in in Q4. We have, of course, held the count on those systems, and we can say today that five of those systems literally did come in in Q1. Two of those systems will not happen because they have been changed to that particular laboratory, and they won't be spending their money at all, and there are some three systems that are still pending, and might come in in Q3 or not at all.

Okay, great. So, you've taken it from -- now how many people net did you add for the quarter sales people?

If you take the score on December 31, we have gone actually from 27 active sales people to 33, and with regards to the field scientists support group, we went 37 to 48. So those increases are roughly 28% in the program managers, and some 40% in the field scientists. We have really scaled up the sales team, and will continue to do that.

Great. The field scientist, do they help the sales of consumables at all or?

Yes.

Okay. Thanks a lot guys; I'll get back in the queue.

Thank you. Your next question comes from the line of Eric Schmidt with SG Cowen.

Just another follow-up question for Martin on the competition, I think you mentioned last quarter that one of the issues there was competitive noise and lengthening in your sales cycle. Have you seen that remedied at all in Q1?

Eric, would you repeat that again.

I am wondering if the sale cycle has come down over the last few months, as maybe customers have become less enamored with what the competition is offering?

What we're seeing -- I think we see some of that, and has everything to do with our actions, but focusing much, much stronger on the pre-sale side of the sales cycle curve, and so, it's more back to what we were used to seeing, and in this quarter and particularly in quarter one, we've had only very few cases of people saying, `I'm going to delay this order because I am going to look around a little bit more partly (ph) seen that it all actually.’

Have you seen the competition actually place a number of systems or is it still noise?

There is a lot of noise. With actual placements, we are not aware of actual placements and specifically with clean fold system of what I refer to, what we have seen as an increase of noise, because companies like Waters-Micromass, ABI, and Finnegan all of the mass spect companies are now talking about participating in the biomarkers market, and that is of course a change from their focus which was originally this protein identification based proteomics, and they have all seen that the biomarker segment is the quite far more attractive side of it, and so they are all trying to participate, but it is noise right now.

Okay. And can you comment on whether the new competitive response strategy has resulted in an increase in backlog quarter-over-quarter?

No. We usually don't really comment on it. I mean there is backlog, there is shadow backlog, it's kind of like, what do you want to call backlog?

Okay.

So we have kind of historically shied away from that.

And last question, could you just remind us of what new instruments or substantial upgrades we're going to be seeing in 2004, if any, on the equipment side?

On the equipment side, we typically don't comment because that could already jeopardize future sales. What you will see is, we have just introduced the next version of Biomarker Patterns Software BPS 5.0 that includes the TreeNet algorithm that is extremely important. You can also expect a fast expansion in our consumables program, but if you don't mind I don’t want to comment on instrument improvements or changes for this year.

Okay. Thanks. Congrats on the good quarter and the environment returning.

Thank you very much.

Thank you. Your next question comes from the line of Adam Chazan with Pacific Growth Equities.

Thank you, guys. Just a couple of quick questions. On the sorbents business, can you comment or let us know whether or not the business in the second half is covered by contracts, or their pricing, or kind of volume minimums built into this that ensure some level of revenue that you are kind of building into the forecast?

Okay. Let me answer this in the following way. There is a sort of an annuity built in the sorbents business because we sell these sorbents to pharmaceuticals companies that use these to produce their protein based drugs. So from that perspective, these orders tend to return on a regular base. What is also a fact there is that, if we get two orders, for example for three years, let's say that, that the utility socket is one and a half year, then there is a [Inaudible] to where orders can accumulate and those years where some of these orders just don't happen because they are still having a sorbent in use. So, there is a part of that is very predictable because you participate in regulatory approved processes, so they can only order from us and part of it is in-predictable because your never know exactly how long the utility of the sorbent is in their processes. Did that answer your question?

Looking contractually, we don't have a -?

We don't have spending contracts, but that also typically happens in this industry.

Okay. If we can shift gears, and just can you talk about the geographic mix of the business in the quarter where things kind of shook out, you know, Japan versus the rest of the markets?

In their units, which I guess, is the probably easiest way to look at it really, frankly, in the first quarter, it's about a third in Asia, about a third in North America, and about a third in Europe.

And then, can you just let us know, is the company planning on having a big presence or a larger presence this year in ASMS, or what might we be looking for at that conference if you guys are participating? I know you don't want to comment on new systems, but I just thought that we should be looking forward if we are planning to attend?

We will have [Inaudible] again here. We will have a strong presence at ASMS as we did have last year again, of last year as well. However, we will stick to our strategy of biology, and what I mean with that is that we are very much a company focusing on Biomarker discovery and putting these Biomarker discovery into assays, and that will be our focus, again this year at ASMS. And what we are seeing right now, what we do expect, and what we are already observing in the market is that, all the other mass spectrometry companies seem to now follow us right now and instead of portraying themselves as purely protein identification companies that are really in our space, and also trying to portrait themselves as Biomarker discovery companies. So we will continue to stick to our strategy because we believe it is the right strategy. We will have a very access presence at ASMS, and so we will see how the other companies react there, and it will be the end of this month of course.

Great. Thanks. I going to jump back in the queue.

Thank you. Your next question comes from the line of William Hope at Piper Jaffray.

Hi there, how are you all doing? First question, can I just confirm that your $16.5m to $17m total revenue guidance is, or is it for total revenues, not product revenues?

Total revenues, yes, $16.5m to $17.5m.

Okay. $17.5m. Can you kind of -- my model shows considerable growth into -- in the fourth quarter for products revenues. Can you describe a little bit what is driving that?

Well, it is a combination of a number of factors. Number one, frankly as we add sales people, and we have tracked this for many, many quarters in the past, if we give one of these sales people about two quarters to get up to speed, on average they sell a certain number of systems. Historically somewhere between 1.6 and 2 systems per quarter. So as Martin just mentioned, we have added lot of people in the fourth quarter of last year, the first quarter this year. We will add more in the second quarter. So, all of those start to roll in to be really productive starting in the third quarter and increasingly sell in the fourth quarter. So if you just assume sort of a linear relationship as we've had in the past and given the lag factor, that is one thing that will drive second half performance in a particular fourth quarter.

Second comment would be fourth quarter typically, last year was an exception, but typically is the strongest quarter for companies like ours. Some companies have budgets to spend or lose by the end of the year, so a certain amount of it is a normal seasonality phenomenon. As we've already mentioned, we expect sorbents to do better in the second half than the first half, so that will help us. And then I think lastly two other comments, one is what you hear out there is a slight improvement and we expect that it to continue in overall spending on biomarker, biomarkers among industry, which we expect to continue throughout the year and that should benefit us. And lastly to a lesser extent, we're certainly targeting additional collaborations during the course of the year, and those would occur more toward the end of the year than the first half.

Okay. And one another question, I noticed an uptick of your gross margins from about 65 and 48 to the 68.3. Any comment of where you gained that improvement?

Gross margins were very strong in systems. They improved most in our chipware area where we had a number of programs underway here to improve the gross margin. And they are well within our expectation for the year of 67% to 70%, so it really just reflects the fact that what we've done is, we have tried to price our product as if it's an enabling technology. And we've just sort of stuck to that and we may add some improvements on the cost side as well.

Thanks. Great. Thank you.

Once again, I'd like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. If there are no further questions, thank you for participating in today's Ciphergen's first-quarter conference call. This call will be available for replay beginning at 2:00 PM Eastern time today through 11:59 p.m. Eastern time on Saturday, May 8, 2004. The conference ID number for the replay is 6440311. Again the conference ID number for the replay is 6440311. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you.