Ontrak Inc (OTRK) 2005 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Hythiam Inc. second-quarter earnings 2005 conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for this afternoon, Mr. Sanjay Sabnani. Mr. Sabnani, you may begin.

Good afternoon, everyone, and thank you for participating in our second fiscal quarter conference call. My name is Sanjay Sabnani, Vice President of Strategic Development at Hythiam. In a moment I will turn the call over to our CEO, Terren Peizer, who will introduce the other participants. Before that I would like to call your attention to the following Safe Harbor statement.

The statements which will be made during the course of this call that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Similarly, statements herein that describe the Company's business strategy, prospects, opportunities, outlook, objectives, plans, intentions or goals are also forward-looking statements.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors that are detailed in the Company's SEC filings. In addition, the statements in this call are made us of August 4, 2005. The Company expects that subsequent events or developments will cause its views to change. The Company undertakes no obligation to update any of the forward-looking statements made herein whether as a result of new information, future events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to August 4, 2005.

With that I would like to turn it over to our CEO, Terren Peizer.

Welcome to Hythiam's second-quarter conference call. With me today on the call are Chuck Timpe, our Chief Financial Officer; Tony LaMacchia, Chief Operating Officer; Monica Welling, Senior Vice President of Marketing; and Dr. Donald Wesson, Vice President of Scientific Affairs.

Since this is our first formal conference call I'd like to spend a little time providing an overview of the operational progress Hythiam has made from signing up new licensees to the initiation of controlled studies and marketing before turning the call over to other members of our management team who will provide more detail.

This has been an extremely eventful few months and we continue to execute on our business plan. At the conclusion of the formal presentation I will reiterate milestones and deliverables you can expect from us over the next few months. Hythiam has made significant strides in a relatively short amount of time, building the awareness of our protocol and in creating the foundation for launching a new standard in the industry. Momentum is starting to build as we begin to fill in our footprint across the United States and more and more patients are treated with our protocols.

Patients have been seeking out our protocols in their local area based entirely upon word-of-mouth and the established network of addiction service providers in those communities. The industry has also taken notice, since Hythiam has been featured in both Alcohol & Drug Abuse Weekly as well as Treatment magazine within just the last 30 days. Later you will hear from Monica Welling how we intend to begin our prelaunch marketing pilot so that when we have a nationwide presence of treatment providers we can then begin marketing and public relations in earnest.

As announced, we have retained the world's foremost branded consultancy, Interbrand, in order to help us create a unique identity that reflects the disruptive paradigm that our protocols represent. Monica will describe the rollout of the Prometa brand during her remarks. A critical aspect to the growing support of our protocol has been the industry's awareness of addiction as a chronic disease of the brain. This understanding of the relationship between neuromechanisms and addiction as well as the rising levels of methamphetamine abuse in the U.S. has drawn national media attention which in turn is creating growing demand for new treatment alternatives.

Particularly with meth abuse there is a high correlation between trying the drug and becoming addicted. An estimated 12 to 15 million people have tried meth and users tend to exhibit violent behavior with one in five prison inmates being incarcerated due to meth-related crime. In addition, a significant number of emergency room visits are related to meth and it is also becoming a major cause of child abuse and neglect.

Today there is nothing on the market or on the near horizon to treat the growing meth epidemic or for the treatment of cocaine. Even when you look at alcohol treatment, products such as Forest Labs' Acamprosate which was approved in Europe in 1989 and now in the U.S. in 2004, or Alkermes' Vivitrex, which is a delayed release version Naltrexone, which was originally approved in 1994 by the FDA, expected to be approved later this year -- neither one of these products can initiate abstinence and these products are generally considered incremental to the current paradigm for use in conjunction with psychotherapy as anti-craving, post-treatment aides. Also, these products are approved for alcohol only; not for cocaine, not for methamphetamine dependence. That's where our protocols for alcohol, cocaine and methamphetamine come in.

Early evidence from our licensees has shown that our protocols not only can initiate abstinence but there appears to be greater cognition and diminished craving which can provide people with a greater chance to beat their addiction and participate in the psychosocial portion of their recovery. While the substance dependence treatment and recovery industry typically does not report validated outcomes, Hythiam firmly believes that by demonstrating the success rates of our protocol that we can help make them an industry standard.

During the quarter we moved ahead on the execution of our data strategy and announced the initiation of two studies, one for alcohol and one for methamphetamine. We announced that Cedars-Sinai Medical Center will conduct a randomized controlled study comparing Prometa to standard medical treatment for alcohol dependence. The exciting aspect of the study is that we will not require previous abstinence and plan to show that our protocols can initiate abstinence. In addition, renowned addiction expert and board certified psychiatrist, Dr. Harold Urschel, has also decided to conduct a 30 patient study on treatment seeking subjects who are currently methamphetamine dependent.

These initial studies will be validated by biological markers and previous abstinence is not a prerequisite like it has been for the studies in which the pharmaceutical industry has shown only modest statistical significance on their compounds. We also expect to announce additional pilot programs and studies on the Prometa treatment protocols throughout the remainder of 2005 including comparative as well as double blinded placebo-controlled studies. These studies will be led not by contracted CROs, but by the leading researchers at the top ranking universities which, by the way, are also the leading NIH research nodes in the country.

The scientific interest is driven in great part by the desire of these individuals to publish research on our protocols. These rigorous studies will generate a tremendous amount of data of the highest possible standard. We intend to use this data in order to increase professional, media and consumer awareness for Prometa. Initial data from Dr. Hershel's study is expected in early 2006 since the accrual and treatment of patients has already been initiated.

In the meantime, we continue to buildout our management team. We added several key new hires in the areas of business development and national site management as well as eight new site managers to support our new licensees in anticipation of local marketing launches. Joining our team were Rick Anderson, our Chief Administrative Officer; Alex Harpe, our Senior Vice President of Business Development; and Jane Hart, Vice President of Site Management. Additionally we have brought on board Arlandis Rush, formerly with the National Association of Drug Court Professionals as Vice President of Government Programs.

We also see exciting opportunities to advance our third-party payer strategy within the drug court system. We recently entered into a relationship with the National Association of Drug Court Professionals and were invited to present Hythiam's expertise on our protocol as a tool for tackling the staggering increase in meth-dependent individuals that enter the judicial and correctional systems. As you can see, there has been significant progress to date in 2005 and there are many exciting things to look forward to in the second half of the year.

I would now like to turn the call over to Chuck Timpe, our CFO, to briefly review our financial highlights. Following Chuck's comments you will hear an update of our business operations from Hythiam's Chief Operating Officer, Tony LaMacchia and then Monica Welling who will provide an overview of our marketing plan during this, our prelaunch phase of our business. Chuck?

For the second quarter our revenues were $230,000 compared to revenues of $203,000 in the first quarter 2005 and $5,000 in the second quarter of 2004. Our second-quarter revenues consisted of fees earned from our licensees who treated 40 patients in the quarter. While licensees are trained and brought online throughout the fiscal period, in the second quarter six of our 18 licensees were contributing to revenues at some level compared to just one site in the same period last year.

Typically there is a four- to six-month time lag between contract signing and when the sites begin to generate revenues. As sites undergo preoperational site initiation activities, which include our hiring and training of a local site manager, the education and training of the physicians and staff and the administration of the protocols, the development of a local marketing plan and the mutual approval by both parties of the implementation plan for site launch.

The net loss in the second quarter was $4.7 million or $0.16 per share compared to a net loss of $2.5 million or $0.10 per share in the same period last year. For the six-month period ended June 30, the net loss was $9 million or $0.30 per share compared to a net loss of 5.5 million or $0.22 per share in the comparable period in 2004. Our operating expenses during the three- and six-month periods ended June 30, 2005 were $5.1 million and $9.8 million compared to $2.5 and $5.7 million for the same periods last year.

The increase in operating expenses in 2005 over 2004 reflects the continued development of our Company and the execution of our business plan, including a national expansion strategy, hiring of key management personnel, investment in clinical research and the marketing of our protocols. We are planning to increase our marketing efforts in the second half of 2005 to provide for local marketing and advertising as well as brand awareness on both a local and national level.

At June 30, we had approximately $20 million in cash equivalents and liquid marketable securities after ending 2004 with 27.5 million in similar cash equivalents. We expect our cash operating expenses in the second half of 2005 to continue to increase from current spending levels of approximately $1.4 million per month as we sign up more sites and initiate targeted advertising in local markets and increase our marketing activity on a national basis.

In addition, we plan to allocate up to $3 million in the second half of 2005 towards clinical studies and our patient outcomes registry. Now I would like to turn it over to Tony, our Chief Operating Officer.

We entered 2005 with seven executed contracts, four of which contributed to revenues for Q1. The total number of treatments for the first quarter was 40, significantly ahead of our expectations driven by unplanned 17 treatments that were the direct result of Dr. Johnson being featured on the evening news of NBC2 in Fort Myers, Florida. Both he and another South Florida licensee were the beneficiaries of this publicity. Please note that we did not spend any money on direct site marketing for the first quarter.

For the second quarter we entered into a total of 14 licensees of which six contributed to revenues. Total revenues for Q2 also 40; however, only $26,000 was spent in the quarter on direct site marketing resulting in $430,000 in sales and 80 patients treated for the six months ending June 30th. We have stated on numerous occasions that in our prelaunch phase sales would be driven by word-of-mouth and local networks of referral sources.

As we look forward to the third quarter we now have 19 contracted licensees of which a total of eight should be operational and contributing towards revenues. As we deploy the new brand identity and accelerate local marketing activity we should see increased traffic towards the end of the calendar year and then on a sequential basis in calendar 2006. Based upon current negotiations we remain comfortable that we'll have 30 to 40 licensees on board by year-end. This will give us a meaningful backlog of sites which we'd convert into operational points of access over a steady continuum.

We are continuing training sites and hiring site managers in order to ensure a steady increase in operational licensees. Towards year end, with a new consumer brand in place, marketing efforts will increase in order to raise patient awareness of the Prometa treatment protocols. This awareness should drive patient volumes to our licensees.

In the first few months of operations we've learned quite a bit regarding the characteristics necessary for a successful licensee relationship and launch. For the purposes of gaining relevant feedback prior to our launch we engaged in an outpatient licensee project with two esteemed addictionologists in South Florida. Patterned on this success we recently announced licensing agreements with Dr. Trudy Hall and Dr. William Glatt. These physicians will provide care at preeminent institutions such as Bon Secours in Baltimore for Dr. Hall's practice and Mills-Peninsula in San Francisco for Dr. Glatt's group. Relationships such as these will give us access to the significant patient referral networks of these physician champions combined with the prestige and commitment to quality of care provided at these medical institutions.

Moving beyond our commercial licensee strategy, we have seen an increase in interest from commercial third-party payers. All indications are that they are very interested in the disease management aspects of our protocols and the potential savings that could ultimately result in the improved healthcare, decreased claims and reduced workplace liability. This coupled with reduced time away from work and resulting increased productivity results in a very appealing proposition to managed care which is currently limited to intensive outpatient counseling at their primary treatment offerings.

Based upon an advanced discussion with a large Northeastern insurance carrier, the biggest appeal of Prometa treatment protocols is it allows them to replicate successful outcomes multiple providers throughout their network, whereas today there is a great deal of inconsistency among the providers delivering psychosocial treatment. As part of our exploration with managed care we have conducted an in-depth meeting with key decision-makers involved in coverage and reimbursement for behavioral healthcare and substance abuse treatment from commercial health plans, managed care, behavioral health organizations, managed Medicaid plans and large employers. Surprisingly both employers and insurers seem to be ready to consider Prometa in advance of the conditional control data if there's validated outcomes through a pilot tailored towards third-party relevant metrics.

Another important factor was the opinion of treating physicians. We intend to rapidly move towards third-party adoption based upon their feedback. We'll engage and interact with key managed care decision-makers to obtain their feedback to generate interest and excitement in this new innovative treatment protocol to identify early adopters and then to begin the process of creating awareness and a positive reputation for Hythiam among the managed care clinical executives.

Simultaneously we are in the process of finalizing the design of a pilot that will allow for validated pharmaeconomic data for both potential employers interested in the disease management aspects of this dilemma as well as treatment providers who currently administer labor-intensive outpatient therapy on behalf of these employers. The benefit of this pilot will be an immediate revenue opportunity with significant managed care and several other large employers that they currently provide addiction treatment.

Also, we continue to make progress on the drug court strategy. As you recall, we announced a relationship with Dr. Kathryn Davis of Addiction Recovery Resources in Louisiana. Dr. Davis has undergone training and has already completed several treatments including her drug court patients just last week. As of this date we've not received specific indication of anticipated volumes for Louisiana.

Our great excitement is the commitment that we've received from a well-known Louisiana-based university to perform a pilot on a few select patients nominated by a panel of high-level members from various state drug, correctional and judicial agencies. The success from this pilot program will result in validation of our protocols as a tool for drug courts. But well in advance it provides as with the opportunity to directly show Louisiana judges and their drug court networks that our protocols have an immediate impact on real people and their lives.

To date actual clinical observations have been our most powerful marketing tool. We continue to look at Louisiana as a significant drug court opportunity; however, recent developments have led us to promising opportunities in yet larger jurisdictions. We have broadened our strategy for the judicial market beyond Louisiana by signing licensing agreements with the Village South in Miami and Community Bridges in Arizona. Both of these facilities are very much involved in government and grant funded drug court treatment programs in their respective states.

Additionally, we have announced we have added to our management team in order to focus specifically on the government opportunity since it's an extremely large and very distinct opportunity from the commercial pay opportunity that we're pursuing today. In addition to the Village South and Community Bridges, several of our other licensees are also providing services to Medicaid and are working with the strategy as we go forward to implement our plan. I now turn it over to Monica for (indiscernible).

Thank you, Tony. Today we are entering a new phase with our treatment protocols. The selection of the brand-name Prometa for our innovative treatment protocols marks a significant day for the products and Hythiam. Not only does Prometa mean positive transformation, it also marks a new change in Hythiam's public commitment to the brand. Over the last month we have spent significant effort in getting clinical studies underway as well as identifying and training new licensees. We now have 19 licensees in over 11 states including the East and West Coast and central region.

The infrastructure to support the licensees is now in place and systematic training programs for Hythiam's field force known as site managers have provided them with the tools they need to be successful. Our site managers have started working with licensees to implement local community outreach events. Each major event will be supported by advertising and public relations efforts with a goal of educating the local professional and consumer community about the protocol and to help create a local market buzz.

Local consumer print advertising will also be implemented in support of these events and to increase general product awareness in the area surrounding licensees. All of these efforts will lead to an increased spreading of the word regarding the new opportunity for better treatment for alcohol, meth and cocaine dependence.

With the launch of the Prometa name Hythiam is also transforming the market's efforts for the brand. Hythiam is committed to a new and broader reaching marketing platform. Radio spot advertising will assist in taking Prometa to the next level and pilot targeted cities throughout the US. Simultaneously a new consumer print advertising campaign will be launched. Public relations efforts will also be significantly stepping up with targeted press releases and proactive pitching to leverage the current market interest in substance dependents including the growing use of methamphetamines.

The Internet will also serve as the fundamental component of our marketing effort and programs to enhance search engine rankings are well underway. Additionally, we'll use the Web as a means to leverage the patient goodwill and impact that our protocols have been generating. Marketing efforts continue to be supported by ongoing market research and key market learning. We just completed an initial phase of patient and family in-depth interviews which have provided support for current marketing programs and ideas for continued effort.

Next month marks the national alcohol a drug addiction recovery month. The theme this year is showing the voices of recovery. With the launch of the new Prometa branding and the significant increase in marketing activity we are confident that the voices of recovery have a new platform from which to make their presence known. I'd like to turn it back to Terren now.

Thanks, Monica. Again, I want to think everyone for joining us today. As you've heard, we have made considerable progress and there are many exciting opportunities ahead for Hythiam and we look forward to updating you on our progress next quarter. We have simultaneously increased our profile within the capital markets, increased the number of Prometa licensees, increased the number of treatments even prior to any marketing, built out our management team to accommodate for scale and we have learned real-time lessons from the field which will allow us to achieve greater leverage as we pursue growth.

Considering the fact that the audience on this call is predominantly from the investment community, I wanted to point out the significant progress we have made as a public company. We have successfully moved from the American Stock Exchange to the NASDAQ National Market Exchange. In April we held our inaugural analyst day in Texas. The analyst day was extremely well attended and those present were allowed access to senior management physicians at Memorial Hermann's Prevention and Recovery Center.

Additionally, attendees participated in a conference call where Dr. Raymond Johnson of LifeWorks in South Florida summarized his clinical experience with his first 20 patients. On the final day of the visit several attendees accompanied us to the annual conference for ASAM, the American Society of Addiction Medicine, where they had the opportunity to spend further time with more members of Hythiam's senior leadership team.

As a final note on our increased profile in the financial community, just a few days ago we were added as a founding member of the NASDAQ Healthcare Index. In conclusion we have several milestones that we intend to execute on in the near term. In the next three calendar months we hope to achieve the following. First, demonstrate significant progress on our third-party payer strategy, far in advance of what has been anticipated of us thus far. Look for us to affiliate with managed care and employers in a pilot that will quickly convert into the basis for a managed care program.

Secondly, leverage the key elements in place to execute on the tremendous opportunity inherent in drug courts. Our Louisiana licensee, ARS, will treat several deserving patients recommended by the members of the judicial branch and governmental agencies. This pilot will rapidly provide the basis for us to demonstrate the difference we can make on real lives and the value of that impact to Louisiana. A major university will be an integral part of that process.

Number three, we will also continue to capitalize on the momentum that has rallied behind our protocols from the medical and research community. Look for us to announce major clinical studies that will be led by the leading university investigators for alcoholism and cocaine and methamphetamine dependence in the country. These are not, again, CRO led corporate undertakings, but efforts led by true interest in what our protocols represent to the world of science and addiction treatment.

Number four, contracts will be announced on a constant basis as business development activity remains robust. You will see a steady progress of sites being trained, site managers being hired and marketing plans being implemented. Ultimately the sites will be made ready for when we initiate national marketing and public relations campaigns.

Number five, we will also have the official opening of a center of excellence in the next month or so. This center will serve as a flagship for Prometa. This will create a tremendous splash in the Southern California addiction treatment community and allow us the opportunity to create the correct image for the Prometa brand among the VIP clientele who have already been finding our licensees for treatment. Furthermore, the center will give us a perfect vehicle for business development and training opportunities. I don't want to give too much away now, but look for us to announce this very shortly. Also, look for us to hold another analyst day at our center sometime in October.

Number six, you may have noticed our 8-K filed on the acquisition of a certain treatment protocol for smoking cessation. Again, look for us to provide you with more detail on this exciting development in the next few months.

Finally, I would like you to know that we have always taken the position that you have always seen the tip of the iceberg when it comes to methamphetamine dependence. Dr. Urschel's study recently announced has already started treating patients and it's only a matter of time before the U.S. media is well aware that we possess a physiological medical intervention for this seemingly hopeless disease.

I would like to reiterate my gratitude towards our shareholders, our licensees and, of course, our employees all of whom share a common vision of helping to better the lives of those suffering from this devastating disease. With that I'd like to open the call up for questions. Thank you.

(OPERATOR INSTRUCTIONS). Glenn Garmont, First Albany Capital.

Good afternoon and congrats on the continued progress here. I just had a couple of quick questions. Of the 40 treatments that were administered in the quarter, I know that in the first quarter a majority of them were Dr. Johnson, how many treatments did Dr. Johnson perform in the second quarter?

Thanks for the question. We are not apt to break out individual treatments at each individual site. There are a variety of issues relating to that. I apologize for not breaking them out individually.

Okay. Fair enough. Also Tony, I was wondering if you could give us -- maybe give us a little bit more color in terms of how the center of excellence is going to work specifically as it relates to the Company's relationship with physicians that are going to be administering treatments in the center?

Good question, Glenn. First of all, I want to emphasize that it's a managed center, it will -- we will manage all the administrative aspects of that center. There is an independently physician’d corporation that will, of course, make all medical decisions and we will support them in administrative activities. In regards to providing all those administrative activities we will, in fact, be compensated a management fee that will be a combination of our licensing fees as well as reimbursement for cost and a mark up on certain related items. Patients will come in just like they would with any other sophisticated physician group practice, receive their care and we will, of course, provide the administrative duties which include building, staffing, supplies and billing. Does that adequately answer your question?

Yes, I think so. So it in no way raises the Company's risk profile?

No, no. We had significant planning and advice of legal counsel and this is basically a management contract. It's important that the center, while it bears the name Prometa, we will be providing services other than just the Prometa protocol. We will be offering access to Buphenorphine and other medications deemed appropriate by the physicians. Again, I want to emphasize that the physicians will be practicing totally independent, their discretion and that Hythiam as the management company will have no influence over their clinical decisions.

Very good. And then finally, as I think about the $3 million that the Company's going to spend on studies the back half of the year, how will that break down between the third and fourth quarters just for modeling purposes?

Well, maybe Chuck Timpe could go through it, but in reality it's not only research oriented studies. But as you heard on the call, we have a variety of pilot programs whether they be pilots with third-party payers or employers in managed care, whether they be a pilot with another form of a third-party payer, the drug court system in Louisiana in conjunction with a well-known university in Louisiana. And plus we have the as of yet announced research that we'll be conducting.

I don't know if Chuck has a breakdown specifically, but it's really a function -- it's almost impossible to estimate at this time because some studies may start earlier, some studies could start later. It's really a function of the individual IRBs affiliated with the study. So I don't think we could really break it down at this time.

Okay. Thanks for the comments. I'll jump back in queue.

Raymond Myers, Emerging Growth Equities.

Congratulations on meeting the projection so far.

Thank you.

You actually precisely met the projections, at least that I had. Of the $3 million of clinical study expense that you expect in the second half, is that truly incremental to the current rate of spending or is that including some spending that just is continuing from the first half?

It will be incremental in the sense that they were budgeted in the aggregate of the clinical studies; however, as some studies, as Terren mentioned, the timing gets delayed so some of those expenditures are pushed out and so they didn't appear as actual expenditures in the prior quarter.

In the first two quarters the spending on the clinical studies has been relatively minor, so pretty much the 3 million we're estimating would be incremental to what we've seen so far.

Okay, great. That's the answer I was looking for, thank you. On the number of clinical sites, the target of 30 to 40 sites by year end, can we review how many sites we have today and then how we're going to get -- what the breakdown is expected to be in the third quarter and fourth quarter to meet the minimum of 30 sites?

As Monica stated, we're in 19 sites right now. We are not comfortable breaking down specifically per quarter. I'll give you an example, sometimes these deals get done in clumps and a lot of them relate to specific events within the industry and -- but we're extremely comfortable with the guidance that we've given in terms of the 30 to 40. It would be guesswork and speculative on my part certainly to break it out individually third and fourth quarter.

Okay. Do some of those clumps relate to the opening of your treatment center in Los Angeles?

Interesting question. I will have to say no.

Okay, incremental? That's nice. Terren, your average revenue per treatment by my calculation increased from $5,100 in the first quarter to $5,800 in the second quarter. To what do you attribute that favorable increase?

Chuck, do you want to handle that?

That's a good question, Ray. The pricing on our licensing fees vary a little bit by site. But during the early stages of training, getting the sites up and running, the pricing varies depending on how much training and discounting we might do in the early stages. So as we've brought more sites online and the early stage sites have gone into more normal treatments then we're going to see the pricing on average increase as we did from the first to the second quarter.

And if I could add and I think Sanjay might want to add something as well -- when we first train a site sometimes we have -- in that local geographical area we have other potential sites that would like to witness he protocol. So therefore we end up treating some patients for free relative to the training of that initial site and then subsequent free treatments for those that relate to business development purposes for other sites that might be in the same geographical region. Sanjay?

That's exactly what I was going to say as well, Ray. Thus far our most powerful business development tool has actually been demonstrating the protocol and having physicians that are potential licensees actually observe either a patient and a licensee or their own patient in many cases. And on a smaller base obviously you're going to note the impact of that, but as we keep growing and rolling out more site and increasing treatments and increasing revenues, the effect of that discounting is going to be negligible.

Clearly we have not discounted our price at all. That has not been an issue, nor are we seeing any resistance on our pricing whatsoever relative to alcohol and relative to cocaine and methamphetamine.

And that's still 6,500 for alcohol, 7,500 for meth, is that right?

No. It would be 12,000 for alcohol, $15,000 for cocaine and meth is the price to the consumer. I think you're extrapolating what you think our contribution margin would be out of that treatment. I'm not disagreeing with you, but that's your number.

Okay, got it. How much do we intend to spend on site marketing here in the second half now that that's starting to ramp up?

I'll turn that over to Monica, but just as a blanket statement just so we're very clear -- we're about to engage for the first time in actual launches within the specific pilot market that we're targeting. We're doing pilot marketing program systems -- so since we don't really know which programs are going to be appropriate yet for which particular local market, that it could be an iterative process. But obviously we're going to -- since we're, as Monica mentioned, using print, media, radio, television as well as building national awareness and, as you know, seen and evidenced by the southern Florida example, this is an area whether it be alcoholism or particularly methamphetamine these days where you get a lot of free marketing publicity and public relations that can really significantly drive volume. We saw what happened just in Fort Myers; when you see it in L.A. or when you see it in either Dallas or Houston or Miami or the broader Fort Myers and Naples area, you can imagine it has a dramatic effect. Actually Sanjay would like to add something.

If I could talk about the specifics on your question, Ray, which is how much we intend to spend. A lot of it is built into the ongoing monthly expense. You have to keep in mind while direct site marketing -- advertising to generate business was basically very small, about 26,000 I think for the six-month period. We have been spending an ongoing marketing expenditure. Obviously we hired Interbrand; we've been dealing with positioning the Company in market research, getting learnings out from the field. So I don't think that it's easy to break out and a lot of it is variable based upon our deployment and rollout of sites.

As you're aware, we're building up a backlog of contracts and sites and as we put them out there's a certain time progression before we can actually start marketing. But I think a lot of it would be built into sort of the core numbers that you have.

Monica, would you like to add anything?

Yes, just to I think tie those two comments together, Ray, is that we are in the process of starting to get ready to roll out those pilot marketing programs and take some of those key learnings from the pilots to see how much and how aggressively we want to start ramping them up to other sites across the United States. And at the same time, it is a learning in terms of how quickly we'll be able to ramp up the new sites as we sign them on in terms of the training, hiring a site manager and getting them ready clinically and also getting them ready for a marketing launch.

As they said, it is very difficult to set specific numbers in terms of how much money we'll be spending, especially if you want them to be broken out by quarter three or quarter four. The only thing we can say is we will be ramping up, we have had investments and those investments in marketing will increase as we move toward the latter half of the year and we take the feedback of our learning so we can start ramping up to prepare more for a more aggressive approach in 2006.

And clearly, just as we shown in the care of not needlessly and inefficiently spending marketing dollars on a name of a protocol that we knew we weren't going to be going forward with. We take the same type of care in that and spending marketing dollars very efficiently because we know what a small amount of marketing dollars, as we've seen in the example of $26,000 that yielded 400 and something thousand dollars in revenue. We see that there's huge leverage, particularly companioned with that free advertising that we get from the news media. So we're very focused on being very efficient with our marketing dollars.

We've definitely seen that when the HANDS Protocol was put on television the treatments really flowed. So it sounds like a big opportunity. Is there a way that investors can take a look at some of these pilot print ads, Internet and have some way of sending the local radio ads out to people so we could hear them for ourselves?

Well, clearly, when we launch them we'll certainly distribute them. So you can see if you're not in that local market you'll be able to see what our marketing and advertising campaign looks like.

We'll have them on equipment Website, Ray. We'll have the audio streams of the radio ads and examples of the print advertising so you can look at them.

Great. Thanks, Sanjay. I think that would be of great interest to all the investors.

Actually we're very excited. We've been spending a lot of time in the last couple of weeks looking at these ads and they're ads that you'd be proud of on a national and a major multinational basis.

Great. We look forward to seeing them and also the many items that you expect to have progress in in the next three months. Thank you, Terren, and the whole team.

Scott Cummings (ph), Agile (ph) Assessment Management.

Could you elaborate further on the alcohol study that you have planned with Cedars-Sinai in terms of maybe when that may start, the scope of the study vis-a-vis patients, etc.?

Sure. I'm going to turn it over to Dr. Donald Wesson who's with me to review that with you. Thanks for the question, Scott.

That's a study that basically patients will be randomized to either treatment as usual or more or less standard treatment for alcohol versus the HANDS Protocol. There will be 40 patients for group. That study has been approved by the RRB and is now in the start-up phase and will start before the end of the year. Start recruiting patients.

Is there any -- as you had suggested with the meth study, is there any projected time frame by when you might see some of the results from this study?

That's going to be a function of accrual. And that -- obviously it's in everyone's interest, whether it be Cedars-Sinai, whether it be Hythiam, that there are marketing dollars associated with the recruitment of those patients to enhance and speed up the accrual. Everyone is motivated to have the accrual be as complete and as quick as possible.

Also, Scott -- this is Sanjay -- just wanted to add our internal estimate has been that you're going to start seeing data on a very steady basis beginning with Dr. Urschel's study ballots (ph) which should be early next year. you'll probably see an initial population from the outcomes registry sometime next year. Then following that Dr. Wilkins' study. And as Terren mentioned, throughout this period there's actually commercial pilot programs that are underway. And as these are announced we can handicap them a little bit better, but you're going to see constant data in the market.

All right. Despite the fact that the actual numbers are small, I think it's been a great first conference call and I particularly, as an investor, appreciate the time you took to share with us the upcoming milestones and objectives that you hope to achieve as a company. Thanks very much, guys.

We thank you very much, Scott. Obviously we are extremely excited -- of course, everyone is working really hard. As you can see for a new emerging company we have a lot on our plate. Quite frankly, a lot of this was -- and the speed of which and the immediacy of which was not exactly expected to occur this quickly.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Greg Lewin (ph), Lewin (ph) Capital Partners.

To the last point you made, Terren, to my ear the most surprising thing is the speed with which anything associated with managed care third parties can be introduced to the whole equation. I think it deserves some additional commentary, if you wouldn't mind, regarding what a study would look like. How much are third parties payers paying for drug treatment programs, alcohol treatment programs, what have you? What is the scope of the study? It's a very interesting topic, I would love to hear some more elaboration on it.

I'm going to turn that over to Tony who, as you know, is a seasoned veteran in managed care. But I would just say that you're right in highlighting what is occurring completely ahead of our time frame and the surprise -- just to summarize what the surprise was to us if it wasn't clear in our presentation because we might have spoken more generally. The surprise is that when we first endeavored with our business model we really were counting on having managed care third-party payers outside of the drug court system, which is a legitimate third-party payer, but we really anticipated the broader managed care market to come in in 2008.

What was to our surprise, as a result of extensive meetings with the top providers in the country and the top managed care companies as well as self-insured employers, was the fact that they didn't need double blinded placebo-controlled studies, that was completely unanticipated. And their desire to do pilots that related to their specific metrics and their desire -- also we obviously had a key learning that they have a desire to standardize their outcomes and to also cut down on the administrative aspects of the providers providing care under existing standard of care. So those were major unanticipated events that have accelerated a lot of activity with us and third-party payers and self-insured employers and Medicaid and Medicaid models and generally managed care. Tony?

Actually you said quite a bit there, so let me just maybe augment that response. Greg, what in addition would you like me to fill you in on besides what Terren shared with you?

Just to expand upon that. (multiple speakers). How much do Medicare and these managed care groups -- are they currently involved in paying for alcohol and drug? You also mentioned large corporations. Is the impetus coming from the third-party payer, is it coming from the corporations, is it coming from some concert of the two? What kind of pilot program are they looking for? What is the defining variables for them since there are no standards of care for them to judge success and failure? Just a few examples.

That's fine. In regards to Medicaid and Medicare, of course Medicare does in fact have some DRGs as well as APCs set forth for the treatment of alcoholism and substance dependence. It's usually in two components -- one a detox component, the other the behavioral health component. The detox component averages approximately $4,000, it varies depending upon the length of stay, the average length of stay would be anticipated to be three to five days.

In terms of the Medicaid for -- if one were to go into a residential treatment facility and receive both the detox as well as the rehab component of the behavioral healthcare you would see something typically in the $6,000 to $8,000 realm for that 20, 28 day stay.

You should note that detox, again, doesn't have anything to do with cessation or abstinence so it's a repeat phenomenon. So the same patient -- like a Medicaid patient, and 20% in a particular state might be detoxed once a week and then another 50+% might be detoxed once a month. And then that's not including the emergency room visits. So detoxes, as we've said painlessly over and over again is that detox is a euphemism with treatment, but it's just really an acute medical intervention on an acute toxicity event.

You had mentioned employers who --

Actually I was going to comment on that, but go ahead.

It wouldn't be Medicare and Medicaid, so the third-party payer's principal interest can't be that?

No, no, no. I was just mentioning part of your question about the Medicare/Medicaid part. In terms of the employer, of our interviews with the large employers, they're primarily looking for something that, first of all, defining the total scope of their costs associated with the disease, not just the outlay in terms of the behavioral health component or the detoxification, but also the attempt to bring in other exasperating medical expenditures for people who are noncompliant whether with their blood pressure medicine, whether it's diabetic or any number of factors. And as such with regards to our study that we're looking to do with the large Northeastern insurance carrier, we're building in those metrics in terms of the study.

However, also what they're looking for in regards to -- and this one gets back to the managed care plan to of course or downloaded the dollars to manage on behalf of the large employers is the ability to replicate a high level of consistency because they are so dependent upon just the psychosocial aspect of that and that is only as good as the individual counselor as well as the group of counselors are maintained. One thing that was immediately recognized as a potential is the ability to replicate consistent results throughout the network and therefore minimize the variability, if you will, in the psychosocial aspect of the care delivered.

And what's implied there is in fact we just achieved what their results are today which obviously we expect to do far better but even if we just achieve their standard of care for the success rate of today, they would reimburse just on the ability of their -- to duplicate the results throughout their network.

And Terren, is it then the proper assumption that they actually have a standard of care performance that they currently can measure against?

They have data -- I won't say that there's been uniform adoption of a standard measurement. I think you won't find that in the industry. What they do have is by analyzing the data they've collected is what is commonplace in terms of the treatment which we see today in the industry is using benzodiazepines, phenobarbital to detox someone over three to five days and then to typically enter into group therapy on an outpatient basis for a long period of time. Now there's variability with that of course on an individual basis based upon their diagnosis or comorbidity, but that's fairly standard treatment and reimbursement throughout large employers and managed healthcare plans.

Just two thoughts, one, because I'm going to work with the assumption that our performance will be far in excess -- what would be the judgment of that cost ongoing, going back to Karen's reference that a lot of people come back for detox again? Is there some perspective on a cost that they incur for some period of time? I don't know if you know that or if they've given that. And secondly, as you develop the pilot program how useful will this be -- how useful will the data be do you in marketing to additional third-party payers.

I'm going to answer those in reverse. We think the data will be pivotal in terms of marketing. We think that we'll get a tremendous amount of leverage out of that because we will be answering most of everyone's questions. I'm sure we won't answer everyone's question; however, with that being said, the first question in terms of the cost, we actually are still in the process of gaining access and scrubbing the database in order to identify the total associated cost.

To give you an idea of what we're looking at in this particular study is we're going into the database six months pre-treatment to look at their historical record and then the treatment period is over a six-month period where the patients will be treated and assessed and that's driven in large part by that particular plan's premier provider and what they do today and I'll emphasize the fact that they're only one of many, many providers. They just happened to pick their best provider in terms of yielding outcomes to measure us against. And then post-treatment we will monitor for another six months so we will have 18 months of data in which to measure the patients with the Prometa protocol versus the control group.

And what would they need in order to begin to use your protocols?

They've actually defined we can just show efficacy equal to this particular provider if they'll use it because they realize that they can then replicated through the rest of their network which they've been unable to do at this particular provider because the provider is unable to maintain the quality control to service throughout the Metro area.

I was referencing what level -- what length of time will they want to see the conditions persist or is all just detox?

No, it's over that period. So the patients will be monitored, but it's for six months -- right, Don? 22 weeks, right. So basically six months. So it's a six-month period in which the groups will be compared and they'll assess the outcomes.

Also, it's important to note, this is just a large insurance company, but we also are working on specific Medicaid pilots with specific states, and those will be of quicker duration.

Terren, I wanted to say that you did say 2008 when this would be first a subject that we could consider. And it really also happens to say something that they would be interested -- people don't appreciate how much it says that they would be considering you at this stage. So it's a really great accomplishment.

Essentially what they said -- thank you -- but I can't emphasize enough how surprised we were by it. I wish I could take credit for having the vision that this would happen so quickly. But really I can't nor can anyone else at the Company. But what's interesting about it from our standpoint is they said look, we don't have the appropriate data on our existing standard of care, so that was number one. Number two, what they have said, just show us -- whether it be a pilot study like Tony just described or whether it ends up being one of the Medicaid pilots that we're working on or whether it be just for example a Hal Urschel study that shows efficacy of our protocol. What -- they were very clear -- just show us a third-party validated properly designed study, it does not have to be double blinded placebo controlled. It does not have to be a great significant size, just show us a good, properly run study by a known investigator.

And they have not requested that for other potential treatments. Again, this is their --.

Again, we didn't anticipate it. I don't know if this is precedent setting or not, but we always knew that we were in the right industry because it's a tremendous unmet need and at every level of society. And what we're seeing with the Medicaid -- particularly what we didn't elaborate here is that methamphetamine is really blowing these states out of the water right now. They have no way of treating methamphetamine so they don't know what to do. And weather it be the drug court systems or the prison systems or whether it be the Medicaid systems, they are over flooded and the costs are mounting. So it just means when the right place at the right time with the right treatment and therefore things are happening at a quicker pace, but we knew we were in the right industry with the right product.

Wonderful news, guys, thank you.

Phyllis Kalista, Emerging Growth Equities.

Terren, I was just wondering -- first of all, the third-party pilot study, will that be for alcohol, cocaine and methamphetamine or will there be separate studies for the different addictions?

Hi, Phyllis, thank you for the question. I can let Dr. Wesson answer it, but I think it's just alcohol.

That's correct, Terren. The particular study that we've been referencing here is of alcohol. There will be additional studies that will be for methamphetamine.

Right, and particularly one state that has a particular methamphetamine problem wants to see a quick pilot just on -- and you'd be surprised at -- the number hasn't been finalized, but you'd be surprised at the small number of patients that they need to see an effect on which speaks to the point that there isn't any effective treatment for methamphetamine and if you show any type of result it's good enough because it's better than what they have.

Okay. And my other question was out of the 19 sites that -- licensees that you have signed up now, do you anticipate all of those being operational by year-end?

Don, do you want to --?

Sure, Phyllis, out of the 19, as Tony had mentioned, several of them have a dual purpose. Many of them represent positioning for us in certain key markets for when we begin advertising and as such they're basically distribution points. A couple of the facilities as well are there for key governmental programs like the Medicaid one that was alluded to or drug courts in their various states. So it's difficult to say whether 19 out of the current 19 will be up by the end of the year, but whether out of the 30 to 40, approximately that number should be operational. I believe that would be the case.

Okay, thanks.

Ladies and gentlemen, we thank you for your participation. I may now turn the floor back over to Mr. Sabnani for any closing comments.

It's going to be our CEO, I believe, Terren?

Well, first of all, I know it's the summer and I know it's warm probably in New York and it's getting late anyway and it being our first conference call I'm glad we had the opportunity to communicate as we will always communicate as best we can with everyone. I want to thank everyone for your continued support and for participating in yet this Company's first inaugural conference call. Thank you, everyone, and we'll see you next quarter.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your participation and you may disconnect your lines at this time.