Ontrak Inc (OTRK) 2008 Q1 法說會逐字稿

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  • Operator

  • Greetings, and welcome to the Hythiam, Inc. first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS.)

  • It is now my pleasure to introduce your host, Lisa Wilson from Insight Communications. Thank you, you may begin.

  • Lisa Wilson - Insight Communications, IR

  • Good afternoon, everyone. My name is Lisa Wilson, Investor Relations for Hythiam. Thank you for participating in the Q1 earnings conference call. In a moment, I will turn the call over to Hythiam's 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 in 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, outlooks, 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 made in this call are as of May 12th, 2008. The Company expects that subsequent events or developments will cause its views to change. Hythiam 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 May 12th, 2008.

  • With that, I would like to turn the call over to Hythiam's CEO, Terren Peizer. Terren?

  • Terren Peizer - Chairman, CEO, President

  • Thank you, Lisa. Welcome, everyone, and thank you for joining Hythiam's 2008 first quarter conference call.

  • Presenting with me on the call today is Chuck Timpe, our Chief Financial Officer, Rick Anderson and Chris Hassan, both Senior Executive Vice Presidents. Also available on the call from Management is Sanjay Sabnani.

  • Before turning the call over to Chuck to provide a brief overview of the financials and then to other members of the Management Team to discuss our business model highlights and a summary of our clinical study progress, I want to emphasize that we continue to make substantial progress towards our goal of standardizing and institutionalizing substance dependence treatment, and are excited by recent developments with CIGNA.

  • Although we have multiple opportunities pending, the agreement with CIGNA is extremely valuable to us. And, as you will hear later in the call from Rick, we are focused on dedicating our resources to operationalizing this opportunity.

  • We also continue to carefully monitor costs and control our cash burn. Due to dramatic cost reductions implemented in January and again in April, we have successfully streamlined our operations around the managed care opportunity, resulting in the preservation of capital and accelerating the pathway to profitability.

  • We believe that based on the 2008 expected revenues, our existing cash and marketable securities and reduced cash operating expenses that the Company will be able to operate well into 2009 or until profitability.

  • In addition, we are evaluating a number of strategic initiatives that capitalize on our strong asset base to create additional value and capital, and importantly actions that will be non-dilutive to shareholders.

  • I will now turn the call over to Chuck to provide our quick overview of the financials.

  • Chuck Timpe - CFO

  • Thanks, Terren.

  • For the first quarter, we reported consolidated revenues of $11.3 million, which included $2 million in revenues from our HealthCare Services business, and $9.3 million in revenues from CompCare's operations, compared to consolidated revenues of $8.9 million in the first quarter of 2007, which included $1.25 million in HealthCare Services revenues.

  • The net loss in the first quarter of 2008 was $10.7 million or $0.20 per share, compared to a net loss of $10.7 million or $0.25 per share in the same period last year. Included in the 2008 first quarter net loss was a net loss of $1.7 million from CompCare's operations, compared to a $577,000 net loss for CompCare in the same period in 2007.

  • The consolidated net loss included noncash charges of $3.2 million for depreciation, amortization, and stock based compensation expenses for the first quarter 2008, compared to $1.2 million for similar expenses in the 2007 period. The 2008 first quarter net loss also included a noncash gain of $2.3 million from the change in fair value of our warrant liability and $1.1 million in expenses relating to severance payments and other onetime costs incurred relating to actions taken in January to streamline our HealthCare Services operations.

  • As of March 31st, 2008 the Company had consolidated cash, cash equivalents, and marketable securities of approximately $35 million, including $4 million held by CompCare.

  • In January of this year we streamlined our HealthCare Services' operations to focus on managed care opportunities, reducing cash operating expenses by 25% to 30% for the remainder of the year. In April we took further action to streamline our operations by reducing costs an additional 20% to 25%.

  • We had approximately $10.7 million of cash operating expenses in the first quarter 2008, including $2.4 million for severance payments and clinical study expenses that will decline significantly throughout the remainder of 2008.

  • We anticipate that new agreements from health plans, self-insured employers, unions, and other third-party payers will add to the current private pay revenue base and result in higher revenues for 2008 over 2007.

  • We expect to spend cash of $7.7 million, $6.6 million, and $5.6 million in each of the consecutive remaining quarters in fiscal year 2008, compared to an average of $11.5 million per quarter in 2007 in our HealthCare Services operations.

  • Projected cash operating expenses at the end of fiscal year 2008 will be at a level sustainable in 2009. Assuming revenues of approximately $2 million per quarter for the remainder of 2008 from our private pay business, and without considering any additional revenues from managed care opportunities, we project a net cash burn down to $3.6 million in the fourth quarter of fiscal year 2008.

  • There were a total of 230 patients treated with the PROMETA Treatment Program in the first quarter of 2008 compared to 155 patients in the first quarter of 2007. During the first quarter of 2008 there were 40 licensed sites contributing to revenues versus 30 in the same period last year. For the quarter the Company's average revenue per PROMETA patient treated was $6,851 compared to $6,915 per patient in the first quarter of fiscal 2007.

  • I will now turn the call over Rick to discuss our CIGNA opportunity in greater detail.

  • Rick Anderson - SEVP

  • Thanks, Chuck.

  • We recently announced that the Company entered into an agreement with CIGNA to be reimbursed for providing a PROMETA based substance dependence treatment program in Texas. The program will be initially offered through a Hythiam managed treatment center in Dallas, and will not require any significant infrastructure investment by the Company to support the agreement. This arrangement provides a lower burden and a quicker timeframe to make the program operational.

  • CIGNA has already expressed an interest in expanding the program to Houston, and we will be looking to do that after Dallas is launched. Members will receive medical treatment, psychosocial treatment, and care coaching, and although we anticipate expansion beyond Texas, the clinical and financial impact of the program will be assessed as it proceeds.

  • In order to operationalize this opportunity we will begin by training CIGNA's case managers on the program and providing them with inclusion criteria for our treatment programs that will target high utilizers of medical services. CIGNA case managers will identify members and their population that meet these criteria, and after contacting these members will transfer them to our trained care coaches who will help the members engage and enroll in the program and schedule a visit to the treatment center in Dallas.

  • As members participate in the program they will continue to work with our care coaches, and during the program's progression we will provide CIGNA with operational reporting that covers metrics, such as craving, treatment participation, treatment retention, and others.

  • Financial metrics, based on pre and post claims data, will be evaluated for the financial impact. Because there is a lag in claims data, clinical indicators will be the first metric that CIGNA will have regarding the success of this program.

  • The agreement with CIGNA provides us with validation from a national health plan and will greatly enhance our marketing effort as we pursue other opportunities with third-party payers throughout the United States.

  • Now, I would like to discuss our business model and opportunities in further detail. As a result of our recent streamlining of our organization, our primary focus is to deliver our disease treatment management offering, newly named "Catasys," for managed care that over time we expect to also benefit our private paying government efforts.

  • We have set the bar high, and we continue to strive towards becoming the standard of care for substance dependence treatment for our Catasys model based on offering progressive medically and behaviorally integrated treatment programs to payers in an effort to improve quality of care, produce better clinical outcomes, and reduce medical and behavioral costs.

  • Approaching payers and helping them quantify and understand the magnitude of the problem they face with their substance dependent population and providing them with a solution of considerable value to our prospective customers, and represents an unexplored area for cost reduction and cost avoidance in the healthcare industry.

  • No one else in the industry is offering a complete solution, and the cost of addiction to payers is not typically the cost of treating substance dependents due to years of utilization management on the behavioral health side. Instead, the cost drivers are medical costs and emergency room visits caused by untreated and undertreated addiction. In addition, substance dependence complicates the treatment of other chronic, coexisting medical and behavioral conditions, making these already expensive conditions even more costly.

  • Our Catasys programs are designed for increased enrollment, longer retention, and better outcomes, so we can help payers achieve lower costs in the form of fewer emergency room visits, reduced inpatient utilization and hospital readmission rates, and help employers and organized labor improve presenteeism and reduce medical costs, absenteeism and job related injuries from the workplace, thereby, improving productivity.

  • We are currently speaking with multiple customers that have an interest in solutions that improve patient care and control costs by addressing their substance dependent population. Payers have confirmed with us that they are seeking lower costs and improved clinical metrics, such as reduced cravings and use, treatment retention, and improved patient care.

  • Beyond the CIGNA opportunity, I would like to take a moment to describe what a typical payer would experience from the delivery of our complete Catasys offering. Ideally, while entering into an agreement, we would obtain a payer's population data, and perform analysis to identify the chemical dependent or CD diagnosis group, and then stratify this population between high utilizers and low utilizers, based on historical claims cost incurred. Conversely, the payer could also do this data mining.

  • Concurrent with the data mining, we will ensure that a trained provider network is available to deliver the necessary medical and behavioral components of our treatment programs and algorithms, designed to take advantage of reduced cravings and better retention.

  • The development of our provider network will start with existing licensees from our private pay business segment and, as necessary, expand by licensing the payer's existing network. Network development is a process that we have several years of experience with at this point, and depending on member geographic distribution we anticipate that only two to three medical providers are required per hundred thousand plan lives covered by our program.

  • After completing both the population identification and network development processes, we will work closely with the payers to make use of a blend of outreach, meaning Hythiam contacting the members, and inreach, meaning payer contacting the members, efforts to enroll identified members into the program. We have assembled a team with substantial experience in the engagement and treatment of substance dependent population, and we will leverage this expertise to engage members with the prospect of receiving a valuable, complete treatment program with no significant out-of-pocket cost to them.

  • High utilizing members will receive the medical and psychosocial intervention and care coaching integrated through our proprietary IT system. The low utilizing group will be dynamically screened and monitored by care coaches, provided education, prevention, and wellness materials, and for appropriate groups, care coaches will seek to engage the members and enhance their activation and involvement in their treatment. This screening and stratification will be a dynamic ongoing process and if any low utilizing member progresses to meet the threshold of the high utilizer, they would be reclassified as a high utilizer and receive a greater level of intervention.

  • From identification to enrollment, the care coaching, treatment, and ongoing monitoring and throughout all the facets of our comprehensive Catasys approach, our IT platform will help promote information sharing and treatment integration to deliver the best possible patient care. We will also ensure that the payer receives timely and accurate reporting metrics, including clinical outcomes and return on investment.

  • Our revenue from the payer will be based on a case rate for the high utilizers and a per-member, per-month, or PMPM rate for low utilizers. Although there is flexibility in whether or not a payer wants to address only the high utilizers or both the high and low utilizers, the payer will likely experience the greatest benefit by addressing its entire CD diagnosed population in one program.

  • While the cost savings benefit of addressing high utilizers is obvious to the payer, the data collection, screening and monitoring of the low utilizing population is useful to the plan, as well, especially with respect to cost avoidance by identifying coaching low risk utilizers before they begin incurring the significant claims and become a defined high utilizer.

  • I would now like to share with you the details of our revenue model. To demonstrate the impact of substance dependence on healthcare costs, and the overall opportunity for our Catasys offering, we have data mined commercial health plan records over a three-year period using our software model. Based upon the database of 400,000 commercial lives and 28 million records, representing a composite of commercial health plans throughout the U.S., we identified the population CD diagnosis incidence, and also stratified the population between high and low utilizers, based on historical claims costs.

  • It is important to note here, as well, that this analysis is being expanded into a database spanning several million lives. We then developed an economic model based on these and other assumptions from our historical treatment experience and projected that for every 10 million lives covered and addressed by our substance dependence Catasys offering we would generate approximately $175 million in revenue. Incidentally, 10 million lives is an opportunity the size of CIGNA's national membership or the combination of multiple regional health plans.

  • More specifically, this modeling assumes based on the analysis above, that the average of 1.6 of the population would have a CD diagnosis in any given year, and that approximately 30% of that group would be high utilizers, of which only 30% of that number would enroll in Catasys, leaving the rest to be included with the low utilizing group for monitoring possible enrollment into a high utilizing treatment program at a later date.

  • This model also assumed that we would be charging a case rate of $10,000 for enrolled high utilizers, and $25 PMPM for the remainder of the payers population with a CD diagnosis. Many of these assumptions are consistent with the experience of other disease management program approaches and concepts.

  • It is also important to note that the revenue figure does not include the opportunity related to undiagnosed CD population, and as part of our delivery model we will also use our predictive modeling to help identify undiagnosed, high utilizing patients for intervention enrollment in our program. This creates a sizable opportunity if we consider there are approximately 185 million managed care lives throughout the U.S.

  • Our calculation of return on investment for the health plan is also derived from the analysis of commercial data, as well as from our historical treatment experience. Based on our analysis, we believe that the projected return on investment for a high utilizing population is approximately $3 to $4 for every dollar spent. However, a payer's specific return on investment and value proposition experience may be higher or lower based on their population demographic, claims experience, and CD incidence rates for their population.

  • Due to a lack of competition and the compelling value proposition we offer health plans and their employer and organized labor customers, all of whom are focused on reducing healthcare costs, we expect significant penetration throughout the managed care industry.

  • I will now turn the call over to Chris to discuss upcoming events related to our completed and ongoing clinical study.

  • Chris Hassan - SEVP

  • Thanks, Rick.

  • The results of our completed and ongoing clinical studies and pilot programs continue to be an important part of achieving our objectives, and will not only aid in our marketing efforts but, more importantly, will help provide substantial, scientific validation to the PROMETA Treatment Program that underlies our Catasys offering.

  • Now, in March, based on the commercial pilot results of treating a community bridges, Medicaid eligible population, in Arizona, we received further validation that our treatment program reduces cravings, improves retention, and allows the recipients to engage more actively in psychosocial counseling, thereby improving treatment outcomes. These results will also help us as we move into addressing substance dependent Medicaid populations in the future.

  • Now, we'd also like to reiterate that we expect the upcoming publication of Dr. Harold Urschel's "Double Blind Placebo Controlled Study" in a peer review journal. You will recall the Dr. Urschel study showed that the pharmacologic component of the PROMETA Treatment Program versus placebo had a statistically significant reduction of cravings for methamphetamine and further substantiated that our program reduced cravings and improved retention into treatment. We also anticipate that Dr. Urschel will present the results of this study at a prominent conference this June.

  • Lastly, we are very excited about the upcoming completion of Dr. Raymond Anton's study out of the Medical University of South Carolina on alcohol dependent individuals, and Dr. Walter Ling's study out of UCLA on methamphetamine dependent individuals. The study being conducted by Dr. Anton will likely be completed and presented at a major industry conference this summer, and Dr. Ling's study will likely be completed in July or August, and top line results will be made available at that time.

  • We believe that the release of data from these and other studies will continue to drive increased adoption of commercial managed care entities and have a positive impact on our private pay business lines, as well.

  • I'll now turn the call back over to Terren.

  • Terren Peizer - Chairman, CEO, President

  • Thanks, Chris.

  • As you've heard from the Senior Management Team, we are moving towards operationalizing our comprehensive disease management offering on a broader scale, and continue to cultivate opportunities with multiple regional and national payers throughout the United States.

  • On the financial side, we continue to drive down our operating expenses, and now have a business model predominantly focused on increasing revenue through managed care opportunities, while realizing value and capital from our strong asset base, without the issuance of shares.

  • We also continue to receive scientific validation from our clinical studies, which demonstrate that PROMETA is a powerful tool to minimize cravings and increase patient retention, thereby enabling the psychosocial therapy to work more effectively.

  • Because of our strong value proposition to health plans, employers, and organized labor, and the breadth of population coverage in the managed care plans, Hythiam is strongly positioned to institutionalize and standardize substance dependence treatment.

  • We are excited about our current positioning and of all of our opportunities, and we look forward to sharing more success with you in the future.

  • At this point, the Management Team and I will be happy to take any questions that you may have. Operator?

  • Operator

  • (OPERATOR INSTRUCTIONS.)

  • Our first question is from Jon Aschoff with Brean Murray, Carret. Please go ahead with your question.

  • Jon Aschoff - Analyst

  • Oh, hi. Thank you. Hey, Terren.

  • Terren Peizer - Chairman, CEO, President

  • Hi.

  • Jon Aschoff - Analyst

  • I was wondering, could you be in any way specific as to what CIGNA most used in their selection process? And maybe if you could help us a little more on what triggers going from Dallas, to let's say Houston, as you suggested, or out through the rest of Texas and outside of Texas and national? Can you be a little more clear on those triggers?

  • Terren Peizer - Chairman, CEO, President

  • Sure. Well, firstly, the relationship with CIGNA goes back pretty much to the fourth quarter of '07. And I would say the tipping point clearly was the Urschel double blind [control] data, not so much by what the data said specifically, but by the mere fact that it scientifically validated that there was a scientific basis beyond the mechanisms of action of the preclinical data and beyond the many pilots and clinical experience of the doctors or providers around the country and the patients. But the scientific validation gave them the comfort of moving forward, and then looking beyond, and how it can impact their own patient population.

  • They did exhaustive due diligence. And they've spoke to every possible, or I should say, they picked up every stone unturned, and they came to the conclusion that they believe that this would benefit their patient population. They intuitively knew it would drive down medical costs, as well. But obviously before they could roll it out throughout the country, they need to see it in their patient population, and then see what the ROI or at least project the return on investment would be in terms of the cost savings relative to the payment of the Catasys offering.

  • As far as the expansion, I think it's safe to say they'd like us to be in Houston tomorrow. We are going methodically to operationalize Dallas. We don't think it'll be too long until we're fully launched in Dallas, and then we will begin our launch in Houston. And, again, it was CIGNA's intention that we would expand throughout Texas, and then in the process, evaluate the data, both clinically and financially, and to determine the mechanism for rolling it out throughout the country.

  • Jon Aschoff - Analyst

  • So it's accurate then to say that Texas is purely executional, and ex Texas is success based?

  • Terren Peizer - Chairman, CEO, President

  • I would say that's accurate. And I think -- I don't think there's a question, when you look at the treatment success of a little under 3,000 patients that have been treated, when they've talked to the providers, when they looked at the data, both whether it be something like the Arizona data, or whether it be something like some of the pilot studies, I don't think there's any question in their mind of the clinical outcomes, and I don't think there's a question in their mind about the cost reductions. They just have to create, if you will, the right pricing mechanisms to roll it out throughout the country.

  • Jon Aschoff - Analyst

  • Okay. Thank you.

  • Operator

  • The next question is from Kevin Ellich with RBC Capital Markets. Please go ahead with your question.

  • Kevin Ellich - Analyst

  • Good afternoon, guys.

  • Terren Peizer - Chairman, CEO, President

  • Hi, Kevin.

  • Kevin Ellich - Analyst

  • Just had a couple of questions to start off with. Maybe Rick could come back on and explain, he went through his assumptions on the -- on Catasys, on the Catasys model, with the PMPM basis, and I really wanted to go back over the, you know, he mentioned for every 10 million lives you guys could generate about $175 million in revenues based off of the diagnosis, and 30% of the high utilizers, 30% would be enrolled in the Catasys, I believe?

  • Terren Peizer - Chairman, CEO, President

  • Right.

  • Kevin Ellich - Analyst

  • So does that equate to 900,000 lives, or how should we think about that?

  • Terren Peizer - Chairman, CEO, President

  • Why don't I -- because I understand, and someone slipped me a note during the call, and I apologize, that when Rick was speaking the mike might have been a little far away from him, so I'm not sure if people heard it.

  • Kevin Ellich - Analyst

  • Okay.

  • Terren Peizer - Chairman, CEO, President

  • Were you able to hear it clearly?

  • Kevin Ellich - Analyst

  • Yes, kind of, but at the same time if you could just address those points, that'd be fabulous?

  • Rick Anderson - SEVP

  • Sure. The assumptions that I was referring to on a 10 million member lives is that the diagnosis rate for CD within that population would be about 1.6%, and that was based on the analysis of claims data that we had done, which we're also continuing to expand. And that 30% of that CD diagnosed population would be a high utilizer, and then that 30% of that high utilizing population would be our enrollment rate.

  • Kevin Ellich - Analyst

  • Okay. So it's actually 6.1% of the 10 million first, and then 30%?

  • Rick Anderson - SEVP

  • Correct.

  • Kevin Ellich - Analyst

  • Okay. Okay. And then the case rate basis, you said would be ten hundred, 10,000?

  • Rick Anderson - SEVP

  • For the high utilizing population, $10,000 case rate. For the low utilizing population, if you will, a $25 per member per month.

  • Kevin Ellich - Analyst

  • Per member per month, got it. Okay.

  • Unidentified Company Representative

  • OF the CD population.

  • Rick Anderson - SEVP

  • Yes, the CD diagnosed population.

  • Kevin Ellich - Analyst

  • Sure, that -- that's helpful. Thank you. Just looking at the Q1 results, volumes in the various buckets that you guys report in the Q were a little bit lower than expected. Is that seasonal or are you guys seeing any impacts coming from the economy, or anything like that?

  • Terren Peizer - Chairman, CEO, President

  • Well, let me just address that, I'm not sure, lower the life, or lower--?

  • Kevin Ellich - Analyst

  • Than my assumptions?

  • Terren Peizer - Chairman, CEO, President

  • Okay. Keep in mind, I'll say a couple -- I'll say three things, one is keep in mind we reduced our cost structure by 45%, yet we're not really reducing our revenues to the extent that you want to consider we're reducing our revenues, we're not really reducing our revenues, so it's definitely in low single digits.

  • So it's difficult to take that much out of -- capacity, for example, out of the system, and even, if you recall, exit certain areas to focus on the managed care and disease management opportunity that yielded CIGNA, but hopefully it will yield a lot more in the not too distant future.

  • So from that basis, we would -- I mean the fact that if we can maintain in the private pay segment $2 million a quarter this year, although I suspect that we'll see a pick-up as a result of the clinical data, first, the peer review publication, then Anton and [latent] data, et cetera, we'll see a pick-up in that, I would imagine.

  • But to maintain $2 million quarterly in private pay by taking so much out of the cost structure, is I think a testament to still the success of PROMETA in the field and physicians' and patients' experience with it.

  • With respect to the economy impact and with respect, because it is a private pay, it's a relatively high cost product. Generically speaking, $12,000 for alcohol treatment, and $15,000 for the stimulant treatment. You've undoubtedly read in many newspaper articles, in the Wall Street Journal, as I have, that talked about elective medical procedures, high cost elective medical procedures, being down significantly in the first quarter, and it was down significantly in the fourth quarter.

  • So despite that headwind to still maintain $2 million in revenue base, private pay, despite the cost takeout. And then, finally, in the substance dependence field in general there's been, as we reported I believe last call, there have been a number of closures due to, again, the lack of high priced elective medical procedures.

  • I'll say one more thing on that, I think a lot of times, and I know personally a lot of times when families, individuals and families seek on a private pay basis to get treatment, they look for all ways -- they might not be able to afford it, they might not have the cash for it, they look for all ways to pay for it, including borrowing against their homes, which is obviously more difficult to do, and borrowing against their already maxed out credit cards, which is increasingly more difficult to do.

  • So I think despite that backdrop, I actually believe we're doing quite well by maintaining that $2 million rate, but we will look to expand it. Please keep in mind, as well, that the private pay segment is still only 8% of the overall substance dependence treatment market.

  • Again, as Rick pointed out, we're -- given the value proposition, we are highly confident that we can have significant penetration across 185 million lives in managed care, and then doing the math that you have inquired about in the beginning, you can see we create a very big revenue opportunity. But it's not just a grossed up revenue opportunity, it's what we expect, again, going through that 30% being high utilizers, and then 30% of that number being those that are actually enrolled, you get down to the numbers that are pretty consistent with the industry.

  • Kevin Ellich - Analyst

  • I got it. Thanks, that's helpful. And then one more quick question on the licensee revenue build, the ASP came in at like [5678], I think, which is down YOY and sequentially. Is there anything going on on the pricing that you could talk about?

  • Unidentified Company Representative

  • I can answer that.

  • Terren Peizer - Chairman, CEO, President

  • Yes, sure.

  • Unidentified Company Representative

  • Late last year we implemented a patient assistance program to help with financing some of the patients that just could not afford the full price, so together with our licensees, we've offered, as I just said, a discounted program to some of those patients who qualify for it. And that's why our overall price per patient is lower in the private pay licensee section.

  • Kevin Ellich - Analyst

  • So should it stay at these levels, do you think, or I guess is this a good run rate to use going forward?

  • Unidentified Company Representative

  • I think it is, yes.

  • Kevin Ellich - Analyst

  • Okay. Thank you.

  • Terren Peizer - Chairman, CEO, President

  • Also, we should definitely point out that we still are not making claims to grow the revenue base. We are waiting for the peer review publication of Urschel to start making claims, and that'll be the first time we could actually grow revenue. And, again, as I said over and over publicly, is that I believe our $2 million in revenues is as much of the response by osmosis than it is by anything we're marketing or selling.

  • Kevin Ellich - Analyst

  • Sure. And then I just have two quick ones for Chuck. Cash and equivalents look pretty good. Of the $23 million in short-term, how much is invested in auction rate securities? And have you seen additional auction sale?

  • Chuck Timpe - CFO

  • We still have the $11.5 million in auction rate securities that we reported last time, and as you know they're -- right now, those are still fairly illiquid in the marketplace (inaudible) still hold.

  • Kevin Ellich - Analyst

  • Okay. Do you think that those will have to be transferred over to long-term investments, or do you see any impairment charges coming down?

  • Chuck Timpe - CFO

  • We're watching it. We don't know yet. I think it's a question as to how the markets play out. At the moment, as of this point in time, we believe that the liquidity markets will free-up within a 12-month period, so we've kept them in short-term.

  • Kevin Ellich - Analyst

  • Okay, thanks. Thanks, guys.

  • Terren Peizer - Chairman, CEO, President

  • I'll elaborate a little further on that, since I'm intimately involved. We had the -- although we do not anticipate accessing that money this year, and we're really more focused on it for next year, the reality is that there are loans taking place throughout the street now against those securities. Obviously, since we don't need the cash now, we're not going to borrow against it because they're cash flow positive right now for us, so it doesn't make sense to borrow the money at this time, but there are loans available throughout the Street, and there actually are some trades starting to take place. I'm sure you'll read about more in the future.

  • There's a second, be it slowly -- the problem with the secondary market is that people really don't want to let go of these securities at any significant discount. The pricing of them to date, the lowest pricing to date, is what we've seen out of UBS, which has been approximately $0.95 on the $1.00 at the lowest. And there are some, John Thain of Merrill Lynch was out last week, saying that he expects all of them to be refinanced within the year, and he believes that and Merrill Lynch has believed, that they should be carried at par. A number of firms on Wall Street have taken a similar position.

  • Kevin Ellich - Analyst

  • Excellent. Thanks, guys.

  • Operator

  • The next question is from Ryan Daniels with William Blair. Please go ahead with your question.

  • Ryan Daniels - Analyst

  • Yes, guys, good afternoon. A couple quick questions, and appreciate all the detail on the revenue build and the details about the CIGNA contract. I guess the first is are there any portion of at risk fees going forward, that you either contemplate with CIGNA or the broader business model? I know that's something we've seen in the DM space in the past, kind of providers putting their fees at risk to improve the ROI. So anything in the future with the CIGNA contract in that regard?

  • Rick Anderson - SEVP

  • There's nothing currently that's at risk in that relationship. I would anticipate that as we go forward that some of the fees may be at risk in different arrangements. As you said, it's certainly something that's been common in the industry in terms of people looking at the ROI.

  • Ryan Daniels - Analyst

  • Okay. And then on the CIGNA contract, it sounds like the CIGNA case managers are going to be mining their internal claims data to identify the high utilizer and then, you know, try to encourage them to get PROMETA and pass that along to you, versus Hythiam actually running through the predictive modeling. Can you kind of address that, why in this situation did they decide to do that portion of it internally before turning over patients, and with the full Catasys, do you think you might be able to identify more patients to enroll?

  • Rick Anderson - SEVP

  • Well, I think that, just to go back to something that was said earlier, the CIGNA relationship developed prior to when we had the full Catasys offering, so we came at that originally with PROMETA as a standalone solution, and have added components of the Catasys offering to that to demonstrate what we can do with that program.

  • So I think that what you're going to have over time with Catasys in total, would be that we would do some of that externally or internally to Hythiam. Either way, in terms of analyzing the data to understand what the high utilizers are, I don't know that that matters.

  • We decided or, and CIGNA decided with us, that in this particular program they're going to start by transferring the people to us, but we've left the door open on a go-forward basis to be able to do outreach, like I discussed, later on in terms of other programs that we would be doing. So I would anticipate that there's a possibility that we could be doing both inreach and outreach in the future. We'll see how that develops over time in terms of the program and what we both think adds the most value to that.

  • Ryan Daniels - Analyst

  • I see, that's helpful. And then if we think of the CIGNA contract, is there any exclusivity, i.e., they have the rights to that market now, so you can't sign other payers, or is it still open for you if other opportunities open up in the State of Texas in the future?

  • Rick Anderson - SEVP

  • There's no exclusivity.

  • Ryan Daniels - Analyst

  • Okay. And then the last question I had, another one, and I'm sorry to beat this to death, but should we assume that the fees are somewhat similar to the CIGNA contract? I don't know if you can discuss that, in particular, but to those fee structures you laid out in discussing the revenue build, the 10-K and $25 PMPM, is that fair to assume CIGNA is similar to that?

  • Terren Peizer - Chairman, CEO, President

  • Let me ask -- let me take that question. The bottom line answer is yes, but let me explain. The CIGNA relationship precedes the completion of our Catasys product, and originally when we were discussing with CIGNA at the -- in the fourth quarter, end of the third quarter, beginning of the fourth quarter of '07, the discussion centered around reimbursement because we didn't have the -- we didn't know when, what would come first, and we didn't know when the Catasys offering would be complete.

  • Since and subsequent to Catasys being complete, we have gone back and drawn in more of the services out of the Catasys offering, working backwards a reimbursement rate. So it's commensurate with the pricing of the Catasys offering, but it's structured a little differently. If you notice, in the press release, it's structured as a provider being reimbursed, and then as you notice, but it's still ties back the services of psychsocial, care management, and coaching. So we kind of, we reverse integrated back to Catasys, if you will, so it's a little different. This subsequent relationships that you're going to see and subsequent agreements, both regional and national, are going to be the Catasys offering, working from there.

  • Ryan Daniels - Analyst

  • Okay, perfect. That's exactly what I was looking for. Thanks, guys.

  • Operator

  • The next question is from Donald Hooker with UBS. Please go ahead with your question.

  • Donald Hooker - Analyst

  • Good afternoon. In terms of the kind of thinking about your income statement over the next few quarters, now what is a reasonable ramp rate for the CIGNA contract? That's sort of the big unknown here. Obviously a big win for you. Is it kind of a trickle, trickle -- I mean can you kind of give us a sense of the patient volumes you might see coming out of that?

  • Terren Peizer - Chairman, CEO, President

  • Well, first off, I'm sorry, I guess I also want to clarify, because I think when Kevin Ellich was asking a question, something might have gotten confused. When Kevin was asking, we have two obvious sections in our balance sheet, the cash and cash equivalent section, which was $11 million and change, and then the market rolled securities, which was $23.7 million and change.

  • Kevin was asking out of the marketable securities portion, not our total cash and marketable securities portion. So if you're trying to figure out how we were so sure that we wouldn't need to access that money or et cetera, that -- I just wanted to clarify it. Obviously, the total cash position was approximately $35 million and then subtract out a little bit from CompCare got you to $31 million in total, so I just wanted to clarify that.

  • Don, obviously, it's new for us, as well. I think that's fair to say.

  • Donald Hooker - Analyst

  • Understood.

  • Terren Peizer - Chairman, CEO, President

  • We -- there are several ways that we're going to go about it to -- it's obviously going to start out slowly, as we make sure that all the I's are dotted, the T's are crossed, to make sure what's important to CIGNA, as well, is that this is executed smoothly, that their members are -- goes through the process, as seamlessly as possible. That it's a good experience for obviously the patient and the provider, so we're going to -- we're not focused on the ramp of revenue per se, initially. We're focused on execution and delivering the best possible product to CIGNA and their members.

  • That said, once we got it smoothed out, we're going to go as quickly as possible, and run as quickly as possible. But I think if you still want to use the backdrop of a -- Rick's model, that he outlined, the revenue model, and you assume that I don't know, I would assume somewhere in the neighborhood of maybe 10 plus percent of CIGNA's overall population might be in Texas. And then you can kind of work backwards, and figure out how much, you know, the high utilizers would be, and then figure out a ramp of that.

  • Your guess would be as good as ours. That's why we're not going to give you any kind of forecast right now, because as a lot of people have said, I'd just be lying to you if I gave you a number, because I don't -- we won't know yet. But I think that's the basis to get a gross number, and then you can kind of figure out at what point we're hitting on our cylinders.

  • That said, relative to the company, as a whole, I caution everyone, or actually I shouldn't caution, I should welcome to offer to everyone that it's quite possible, and particularly in a regional plan, that we start off with the Catasys offering and we start having more predictable revenue streams as a result of the Catasys offering.

  • Donald Hooker - Analyst

  • Okay.

  • Terren Peizer - Chairman, CEO, President

  • And hopefully those will be agreements that we could solidify obviously the sooner the better we could have contracted revenue streams.

  • Donald Hooker - Analyst

  • Okay. And then I guess following an earlier question, I mean the number of active sites is down. I know this is purposeful for you guys, but could you just elaborate on that? Is there certain regions you're focusing on now?

  • Terren Peizer - Chairman, CEO, President

  • I'll let -- Chris, you want to take that?

  • Chris Hassan - SEVP

  • Yes. In January we announced that we were refocusing and tooling. And Terren has kind of discussed some of the magnitude of that, but that is really what's driving this. We're focusing deeper into fewer markets, and we're seeing that that strategy is paying off, and that's why even in fewer markets, the number of patients that were treated and the revenue that we saw in the market was marginally decreased. And so that's really what's driving that.

  • Donald Hooker - Analyst

  • Okay, that's fair. And I guess, I know, again, the focus is managed care, but in terms of the [drug course] there were a couple of pilots. I mean are you just kind of scrapping them, or, like I think [Bolton] County, and there are a couple other ones, you know, in the past we had talked about. I think, I know that's not a focus for you now strategically. Is that just kind of scrapped?

  • Chris Hassan - SEVP

  • It's not a focus for us as much strategically now. I mean that's true. However, those counties that are still engaged, we'll continue to work with them, and work through the process to help them be able to see how they can best utilize the PROMETA Treatment Program to treat their clients.

  • Donald Hooker - Analyst

  • Okay.

  • Terren Peizer - Chairman, CEO, President

  • I think, also, as more -- because of managed care, you're going to get a lot more providers, and a lot more patients being treated. You're also, and I don't want to belabor the fact, but you're also real close to a double blind placebo controlled, peer review journal article on the Urschel study that will go a long way to validating PROMETA, waging uncertainty about PROMETA, et cetera.

  • I think the rest of the country is getting there, and I think the justice system will, as well. And I think over time the managed care, those 185 million lives, will push or pull along both the private pay and the justice system and other government programs. And we suspect that as data comes -- the peer review publication will be the important aspect, I think we'll start having more and more of those conversations.

  • Donald Hooker - Analyst

  • Okay, great. Well, I'll jump off. Thanks for your comments.

  • Terren Peizer - Chairman, CEO, President

  • There's also the Washington study that's being done.

  • Donald Hooker - Analyst

  • Yes, that's true.

  • Chris Hassan - SEVP

  • Yes, and we were very encouraged that the $395,000 stayed within the State budget to continue to treat the patients that were in that program, and then to finish that pilot, and then, of course, to do the University of Washington review of the results. So I mean that's very encouraging, as well.

  • Donald Hooker - Analyst

  • Right. Thanks, again.

  • Operator

  • Your next question is from Raymond Myers with Emerging Growth Equities. Please go ahead with your question.

  • Raymond Myers - Analyst

  • Thank you. Terren, I was hoping you could describe the CompCare business strategy? There was a $1.7 million loss in the first quarter, can you explain what they're tracking to do this year?

  • Unidentified Company Representative

  • Strategically, what they're tracking to do? The $1.7 million loss also included a couple of events, including the termination of the CEO and the severance payment related to that. The new CEO came on the beginning of this year, and then also some of the plans that they had discontinued membership in, they were paying out claims related to those that had already terminated.

  • Their strategy is around expanding their business. They're looking more and more at ASO type arrangements and things that don't have risk, and then they also have plans to expand into other products that would have higher margins.

  • Raymond Myers - Analyst

  • Well, I guess the bottom line for you is will they -- when will they return to breakeven?

  • Unidentified Company Representative

  • Well, I think that they're looking in terms of what they've said in their Q and other places is that they believe based on these new agreements that they have in place and some rate increases coming online that they have sufficient cash resources to move through this and into their new strategic direction.

  • So we don't have any plans at this point in terms of providing them any funding, I guess, if that's what you're getting at. And they're continuing to provide us with the services that we need from our strategic standpoint.

  • Raymond Myers - Analyst

  • Okay, good. SG&A expense in the second quarter, it looks like it would go down again, based on your cost reductions in April. Can you give us a sense of what special charges we should expect in Q2, and then what kind of run rate SG&A and R&D would we look for after all these cost reductions are through?

  • Chuck Timpe - CFO

  • The -- we'll have -- it won't be significant onetime charges in Q2, as much as we had in the first quarter, but we reduced costs throughout, so through salaries and benefits, as well as other operating costs, it's pretty much an across the board reduction of, as we said, 20% to 25% from what we've been running at.

  • Raymond Myers - Analyst

  • Well, can you give me a number for what it can be? It's tough to estimate because there's so many onetime charges in Q1 that to say it's going to be 25% off -- it's off of what base? So can you just give us the -- what run rate SG&A do you expect to have after the April cost reductions?

  • Chuck Timpe - CFO

  • Well, we're looking at, again, I didn't break it down this way when we looked at our projections, but we've got -- we're looking at total operating costs of about $7.5 million in Q2, and then down to $6.5 million in Q3, but I haven't worked through the details of breaking it out between SG&A and the other operating costs. And we said in our, on the call, that our total cost expenses, total cost expenditures are going down to $5.5 million by the fourth quarter, so we are taking costs out in all areas.

  • Terren Peizer - Chairman, CEO, President

  • Well, let me interject. I mean the critical study expenditure is winding down. For all intents and purposes it goes down significantly in the second quarter, and down dramatically from there, so that's I think that was one of your questions.

  • Raymond Myers - Analyst

  • Yes, that would be the R&D side.

  • Terren Peizer - Chairman, CEO, President

  • Correct, and from an SG&A standpoint it's commensurate. We can work with you and give you like theoretical constructs, but we can't obviously give you specifics.

  • Raymond Myers - Analyst

  • Okay. So that's not including the CompCare, the behavioral health side of it?

  • Terren Peizer - Chairman, CEO, President

  • No, no, no, no.

  • Raymond Myers - Analyst

  • Okay. So that would include cost of healthcare services, the SG&A, the R&D, and the depreciation?

  • Terren Peizer - Chairman, CEO, President

  • Yes, the depreciation would be consistent, the clinical R&D expense going down dramatically. The severance, the bulk of the severance was in the first quarter, won't be seen in the second quarter. We also, because at the time, what's -- again, it was before we had signed CIGNA and before we had visibility on other managed care relationships.

  • And as well as we were at the throes - obviously, when we initiated the first week in April, it was something we were focused on in March. And, if you recall, in March, particularly around mid March, the world looked very bleak, and we just didn't want to take any chances. So we initiated -- and, of course, in the January month we certainly didn't even have an auction rate security fail, an auction fail yet.

  • So there were circumstances that given the outlook and the environment in mid to late March that we initiated in April, we now feel, the good news is what we feel, now that we have traction on the managed care side, now we feel we have a model that we can work with where our costs are bare bone and now we're going to focus on ramping revenue.

  • Raymond Myers - Analyst

  • Well, it would certainly seem that your costs would be down drastically, if you're talking about $7.5 million operating expense.

  • Terren Peizer - Chairman, CEO, President

  • Right. And then going down to $5.5 million or $5.6 million in the fourth quarter. Now, the good news is those are things we can control. We can't control revenue yet, particularly if we're not making claims, but we can control our expenses.

  • Raymond Myers - Analyst

  • Well, then just to make sure I'm thinking of this correctly, G&A, R&D and depreciation totaled roughly $14 million in first quarter, and you're saying that's going to be cut in roughly half to $7.5 million and then $6.5 million?

  • Chuck Timpe - CFO

  • I think you're looking at --

  • Terren Peizer - Chairman, CEO, President

  • You're looking at CompCare in that number.

  • Chuck Timpe - CFO

  • Well, we had $13.5 million in the quarter in those categories that, in our healthcare segment, and that includes -- what you have to remember is that includes stock based compensation of $2.3 million in the first quarter. So we have to look, get down to the cash operating expenses, is how you want to look at it.

  • Raymond Myers - Analyst

  • So these numbers, the $7.5 million and the $6.5 million are merely cash operating expense?

  • Chuck Timpe - CFO

  • That's correct, that's what we said, right.

  • Raymond Myers - Analyst

  • Okay. That's where it's a little confusing. But, okay, I'll sharpen my pencil. Thank you.

  • Operator

  • The next question is from Ram Selvaraju with Rodman and Renshaw. Please go ahead with your question.

  • Ram Selvaraju - Analyst

  • Thank you very much for taking my question. I just wanted to ask about the eventuality of off label usage of one or more components of the Catasys [pharmaco] therapy regimen, by external parties? And how specifically the mechanism that Hythiam has in place to prevent such activity from occurring works, and how that represents an effective competitive barrier to entry? For example, if we think about once the Anton and Ling studies are published, and once the Urschel data is out in a peer review form, whether or not that might induce companies that supply the agents utilizing the Catasys program to begin encouraging the off label use of that?

  • Terren Peizer - Chairman, CEO, President

  • Okay, well, I'll start off. The unique nature of our disease, we'll call it comprehensive treatment and management model, is that it's a services based model, not a pharmaceutical based model, number one.

  • Number two, and to our knowledge people in delivering healthcare services, and that would include insurance companies, providers, et cetera, to my knowledge, there's never been someone who has violated intellectual property knowingly as a provider or as a service provider, because it's obviously the liability associated with it would be -- it's pretty clear if they're violating our intellectual property they'd pretty much, their lawyer would tell them they would lose on the infringing side pretty immediately, and that would be [treble] damages. And, of course, I'm not sure what their revenue would be, what they could possibly charge without being in the construct of our model, and without having the use of the pharmacologics.

  • And, again, I want to point out that the pharmacological aspect is one component of our disease management model, and it's a lot, besides the psychsocial, the case management, the care coaching, the quantification of the cost, their calculation on the return on investment, the predictive modeling, the -- all of this combined is really what Catasys is.

  • And we believe, and it was always envisioned this way, is really what, to your point, offers us the greatest protection of our franchise, because, a, it's protected by the intellectual property, b, it's protected by liability insurance. And, c, there's not an economic basis for someone to copy it, because I'm not sure how they're going to get paid for it.

  • Ram Selvaraju - Analyst

  • Okay. And it's not your opinion at this point that medical practitioners who routinely see patients suffering from addiction would take the Urschel, Anton, and Ling study data and use that as a basis for essentially going out and utilizing components of the pharmacological part of the Catasys program off label, without using the actual program, itself?

  • Terren Peizer - Chairman, CEO, President

  • Right. And here's an important distinction. And, frankly, when we first started, several years ago, it was a, certainly a novel idea. It's less so today. In fact, if you look at it, in a pharmaceutical model, for example, a physician uses anything he wants off label to treat a patient, as he feels is warranted in the practice of medicine.

  • The difference is that, so that would be a -- they'd be utilizing someone's use patent presumably. The difference is that the pharmaceutical company doesn't mind that he uses his -- their patent, because the more they sell of the particular underlying pharmacologic, the more they benefit by it.

  • In our case, we're not -- that's not what we're selling, we're selling our comprehensive disease management program, number one. Number two, we do care very much that someone uses any aspect of our intellectual property that infringes on our intellectual property. But, more importantly, I'm still struggling to find the cost benefit to that provider in doing so, and I would also say liability is a powerful, because you have to -- if the treatment worked 100% of the time, period, it'd be more of a concern, but it doesn't, so there's liability.

  • So the fact is is that you need the right intake and assessment criteria, the right exclusion criteria, the right dosing algorithms, the right education and training. And somewhere down the road, you are not going to be practicing best practices, and that's a liability that not only providers don't want to take on, their insurance companies don't want to take on. And even more to the point, I'm still not sure what the reward is. Can there be a [rogue]? Yes, there could be a rogue out there that does it. Are there people that ripped off Microsoft Windows? You bet. Did they build a successful business without that? In context of that, you bet.

  • I think from our standpoint, you have to understand that the anchor drug, [Flamzonel] is only used in two places. It's used in the emergency room to wake someone, if someone tried to commit suicide and they swallowed a bottle of Valium, it's an anecdote to [benzodiazepine], it's a benzodiazepine antagonist. And if someone was getting surgery and to wake them up out of anesthesia.

  • So it's only used in a hospital, so a physician would be hard-pressed to explain why a patient made a scheduled appointment for next Tuesday at 10:30 because they knew they were going to overdose on Valium and be rushed to the physician's office for care. So, and then, alternatively, a physician would be hard-pressed to explain why they are performing surgery in their office.

  • So I think, it's if -- I don't mean to belabor the point, but there's obviously so many obstacles. And, more to the point, I think interestingly is that the third-party payers that we're working with, the managed care segments that we're working with, it's not even a low level hurdle, let alone a high level hurdle for them. If anyone would try to get around that angle it would be the insurance companies saying, "Well, why should I pay for this?" But, in fact, the insurance companies and managed care segments are making a different claim. What they're saying is, "We want this comprehensive management program, and that's the real value." It's not the pharmacologic.

  • Ram Selvaraju - Analyst

  • Right. And just to further discuss Flamzonel, clearly, there's going to be in the course of this year a significant body of clinical data indicating what the impact of the therapy is going to be. But could you talk a little bit about sort of the ongoing efforts out there in the scientific field to clarify the mechanism of action of Flamzonel specifically? And the affect it may have on GABA receptor subunit composition?

  • Sanjay Sabnani - Management

  • Yes, Ram, this is Sanjay. While it's exciting what's happening in the literature, and I know that you've been aware of it, some of the understandings of the trends, the affect of Flamzonel on the GABA receptors, both on a translational and transcriptional basis. The issue is the field of addiction treatment is so far removed from hard science, that there really is a wide gap there.

  • And I think we, as a Company, are taking a leadership role in actually basically trying to correlate real life human results with preclinical, both animal, as well as cellular, and I think you're correct in your understanding that this will be a very [seminole] year in terms of all of those pieces fitting together nicely. Every time I do a literature search, it's just so reassuring to see what keeps coming out of there from independent labs all over the world.

  • Terren Peizer - Chairman, CEO, President

  • But the amazing thing is, just to interject, is that we seen cell line data, we've seen animal data, all substantiating the mechanism of action. What's interesting is that, and I don't know when the functional MRI data of Dr. Anton's study will actually be available, but that might be the first time we ever see validation in a human model on our mechanism of action, or at least some correlation.

  • One of the benefits of the Anton study was it was such a small study, was the, although it was a small study, it's the largest functional MRI study to date, so that'll be very interesting. If we, if that comes through and shows something, we would have the first time where we've been able, someone has been able to validate on all three levels.

  • Ram Selvaraju - Analyst

  • Okay. Thank you. That's very helpful.

  • Operator

  • The next question is from [Robert Cohen] with Western International Securities. Please go ahead with your question.

  • Robert Cohen - Analyst

  • Hi, guys. Can you guys talk a little bit about the CIGNA deal, in reference to the treatment in alcoholism, meth, and cocaine, which one do you believe you will be treating mostly, percentage wise? And give a break-down, also, of where CIGNA might think most of the treatment will be in that area?

  • Terren Peizer - Chairman, CEO, President

  • That's actually a good question. The, as you know, since Urschel has done two clinical studies there on meth, you would think there are only methamphetamine addicts in Dallas, but I would say, like all populations, alcohol is still going to be the biggest segment of the patient population that we treat.

  • Commensurate with that is the fact that when you're talking about high utilizing population, high utilizer of medical services, you're talking about severe alcoholics is the target market. The lesser severe are functional type alcoholics, might be more cost effective, depending, might be more effective to use kind of like a low touch, more psychsocial model versus the more severe alcoholic. And, of course, we look forward to Dr. Anton's data to see if we could validate in a severe alcoholic population, if we've had an impact relative to the high utilizing model of our disease management model. So I -- we expect most, to be consistent with the industry, we expect the biggest concentration to be alcoholics, and then cocaine, then meth.

  • Robert Cohen - Analyst

  • Can you talk about, CIGNA looks like it took about six months to get. And I believe, Terren, on the last conference call, earnings you stated you were talking to about ten different managed care providers. Can you tell us how many of these you actually started talking to prior to CIGNA? And since you landed CIGNA have you gotten any calls from any of these now wanting to move on a more faster pace because of the CIGNA deal?

  • Terren Peizer - Chairman, CEO, President

  • Well, the CIGNA deal, you know, they always say the longest is your first, and we're hopeful that that's, in fact, the case. I clearly believe that CIGNA is a very powerful name in the market. They're known to be an innovator. They're known to be also the toughest to get something with. So we are very confident that it'll be a catalyst for many more agreements.

  • As well as the ten that you're referencing from the first -- I'm sorry, the fourth quarter call, that was about 45 days ago or whatever, those are obviously going to feel more comfortable moving forward, because we get asked all the time, who else is using it? And as we know in any commercial operations the first is the most difficult because there's no reference, and people love comfort in numbers.

  • If you would have asked me awhile ago, I wouldn't have said CIGNA was going to be even first, but so we obviously feel that we will be having more agreements. We obviously believe that the value proposition that we've outlined today is so compelling, it's hard-pressed to find any healthcare plan that, if their customer benefits, their customer being their employer and the labor union, benefit by not only lowering medical and behavioral healthcare costs, but also enhancing productivity, there isn't another medical treatment that I know of that does it as much as an effective treatment program for substance dependents. So if your customer wants the product, and it lowers your cost, I really believe we're going to see traction throughout the country, and I do believe CIGNA was a powerful catalyst to getting us there.

  • Robert Cohen - Analyst

  • Well, I've just got one other question. There seems to be a feeling out there that your procedure you use, protocol, whatever you want to call it, gets significant results with helping these people with this addiction. And I happen to have been lucky enough where I was able to talk to Dr. Urschel about three weeks ago, and he made it real clear to me that he plans on using your product along with other therapies that he's used because with treating meth -- I asked him what his rate of getting people better were, and he said, "It was less than 10%." And he believes very strongly that if he used Hythiam along with the other therapies that he's used, he actually stated that, "He thought he could get a 90% success rate."

  • Is it my understanding that you guys welcome to work with these other therapies, you don't want to be singled out and say these other therapies you can't use with it? Can you give us your philosophy or policy on that?

  • Terren Peizer - Chairman, CEO, President

  • Actually, that speaks right to the heart of our comprehensive treatment and management program. We are, frankly, at the end of the day, PROMETA, we can't deny got us here. PROMETA is a powerful tool, and it will be continually used throughout the behavioral health field, in our opinion. It might be variations of PROMETA, but in reality we're agnostic. We're about disease management, taking a problem that's throughout the country, and created the first integrated solution that incorporates all the finest innovations in disease management and comprehensive treatment, synthesize it into one product offering to obviously provide a solution to one of the last frontiers of medical problems. And so, yes, we -- remember, everything is on a cost benefit analysis. We start with the benefit, and how do we improve the benefit and also lower the cost? And I think that's basically the backdrop.

  • I don't, you know, what PROMETA does, and it's not even appreciated in the clinical study data that you'll see, but -- because those are scientific studies. What PROMETA really does strongly is in the context of comprehensive management, with a strong psychsocial program, with support groups, with any other pharmacologic effective treatment, what the Catasys platform does is it takes whatever percentage you want to apply on a pure pharmacologic basis, and takes it as close to 100% as you could possibly get, and that's how you're going to drive medical costs down and treatment success up, and get adoption across those 185 million managed care lives, and then pull in all the government and private pay programs.

  • Robert Cohen - Analyst

  • Okay. And just one other quick thing. The gentleman from Rodman and Renshaw asked you a question about could a doctor basically go out and do what you're doing? Can I assume with what you guys have had to go through to get this deal with CIGNA that CIGNA isn't just going to reimburse that doctor for doing a procedure based off of what you guys were doing without having to deal with them, or could he?

  • Terren Peizer - Chairman, CEO, President

  • No, see, you have to understand, anyone in the chain that contributes to an infringement is party to that infringement. That's why in healthcare services you don't see infringement of intellectual property. Again, our model is a services model based on comprehensive disease treatment of substance dependence.

  • Robert Cohen - Analyst

  • Okay. Thank you.

  • Operator

  • The next question is from Murray Vanderbilt with UBS. Please go ahead with your question.

  • Murray Vanderbilt - Analyst

  • Good afternoon, gentlemen. Long call, so I'll try and be quick.

  • Terren Peizer - Chairman, CEO, President

  • Just a lot of questions.

  • Murray Vanderbilt - Analyst

  • Yes. Can, first of all, for the PROMETA treatment, as the Catasys, that's the wrong name, sorry, but that's the complete treatment. So to simplify it, the PROMETA, you originally thought on the third-party basis it would be around maybe $2,500. Is that still the target with CIGNA for that portion of the treatment?

  • Terren Peizer - Chairman, CEO, President

  • No, no. Let me clarify. If you go back in time, PROMETA was a three-legged stool. It was the pharmacologics, which are three FDA approved drugs used off label within the treatment protocol.

  • Murray Vanderbilt - Analyst

  • Right.

  • Terren Peizer - Chairman, CEO, President

  • With [pramzonole] hydroxizine, and Gabapenten, those are, that's the pharmacologic portion. The other portion was the psychsocial treatment, and the third leg of the stool was the nutritional, recognizing that all substance dependent individuals are malnourished.

  • So those three formed PROMETA that was -- is being sold on a private pay basis today for $15,000, again, for stimulants, and $12,000 for alcohol. We imagine that pricing will come down commensurate with the adoption of managed care, et cetera.

  • We then went off into the justice system, where we were looking in the justice system, given the, again, not a commercial enterprise, but in the justice system, and given the stretch budget, the states, counties, and municipalities, we initially, before there was ever even any data out, we had a $2,500 licensing fee on that.

  • What it's evolved to now is Catasys, to clarify for you, Catasys is our comprehensive disease management and treatment program that provides not only those three legs to the stool, but also provides things like care management and coaching and different algorithms within that.

  • Murray Vanderbilt - Analyst

  • Right.

  • Terren Peizer - Chairman, CEO, President

  • And all the software. Like I said, we've quietly over the last several years have spent millions of dollars on the software platform that has provided a very valuable tool, not only to create the value proposition to a health plan of their own data, but further to provide the predictive modeling to be able to keep patients out of the high utilizing population from the low utilizing population and then, as well, to provide the financial and clinical data to further expand our business. So it's a, definitely much more comprehensive than what we knew as PROMETA.

  • Murray Vanderbilt - Analyst

  • Okay. So it's PROMETA plus, basically?

  • Terren Peizer - Chairman, CEO, President

  • It's PROMETA plus --

  • Murray Vanderbilt - Analyst

  • Yes.

  • Terren Peizer - Chairman, CEO, President

  • -- a lot of things that insurance companies need. And, frankly, one day we expect state programs, justice system, country programs, to adopt a similar disease management platform from us.

  • The reality is this, there is no magic bullet pharmacologically for substance dependents treatment, and all these pharmaceutical models you see for substance dependence treatment are I think destined for failure, without a comprehensive management program in place. And we're not the only ones that recognize it, it's the whole healthcare system that recognizes it.

  • Murray Vanderbilt - Analyst

  • That's what I've heard back from the docs. The last thing, and I don't know how to do it, but to make it simple for those of us who are a little slower than the others, if you were to think of it in terms of the sales to date of PROMETA on a same-store basis? In other words, I've got a doc that's been prescribing it, let's say, for a year, have you been able to track whether there's an increase or a decrease as to his using the regimen? In other words, hopefully, you'd see an increasing trend, but I'm just wondering if there's anyway you could track it from that level rather than the number of service centers and the fact that the patients have gone from 150 to 230?

  • Chris Hassan - SEVP

  • Now, we have looked at different angles and different ways to look at the markets. It tends to be that the people that have been in with us the longest have seen growth in their utilization of PROMETA. Now, one of the things that's really important, that Terren has brought up multiple time this afternoon, is that to date we've tried to take a very ethical and high standard with how we've marketed this, and we really haven't even started marketing it per se.

  • So without any claims and without a lot of activity to drive patients into that market, what tends to happen is the physicians are utilizing this as another tool, as Dr. Urschel had mentioned, in their [armentarium] or their regimens that are available to patients, and then their clinical presentation of these patients coming in, they make a diagnosis clinically as to what's the best treatment regimen for them.

  • Now, we also track our activity within the call center, and see how that measures out, and what the activity is through there. But typically what we've seen is that it tends to be cyclical, it tends to be seasonal, it tends to also have other impact, as Terren has brought up with the economy. But for those healthcare providers who have been using this for some period of time, you see people who have embraced it, and you've seen that they either stay steady or there is an increase in their utilization, especially based upon the percentages of the patients that are appropriate for it, that they see in their practice.

  • Murray Vanderbilt - Analyst

  • In other words, anecdotally, forget that you're not marketing it, if I'm a doc and it's working and somebody comes in and I think they quantify, I'm going to jump to try and push them to use this, I would think?

  • Chris Hassan - SEVP

  • Yes, based on their clinical presentation, if they fit the right profile, if they look right to that physician, and their experience has been, that's what we find, you know. And so and we've seen that a number of our healthcare partners, the licensees have actually engaged in spending their own money to market their practices, because they see how this is such an important additional therapy they have in their practice, and they want to do it as much as possible to help patients in their communities get better, that clearly are suffering and are not getting the treatment they deserve.

  • Murray Vanderbilt - Analyst

  • Okay. Thanks. Last, is a very simple question, weighted number of shares, and YOY I presume that's through the stock based compensation, because I don't remember a financing taking place over the last 12 months?

  • Chuck Timpe - CFO

  • Weighted average number of shares.

  • Murray Vanderbilt - Analyst

  • 43 million, up to 54?

  • Chuck Timpe - CFO

  • Right, well, we did have a financing. We did -- we raised -- we issued 9 million shares in--.

  • Murray Vanderbilt - Analyst

  • Fine. Terrific, that's what I wanted to hear. Thank you very much.

  • Terren Peizer - Chairman, CEO, President

  • Okay. Well, thank you again for joining us today. As usual, we appreciate your support and look forward to discussing our Company with you at our next quarterly call. Everyone have a nice night. Thank you.

  • Operator

  • Ladies and gentlemen, this does conclude the teleconference. You may disconnect your lines at this time. Thank you for your participation.