Ontrak Inc (OTRK) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Hythiam Inc. third quarter 2008 earnings 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, Mr. Chris Hassan. Thank you. You may begin.

Good afternoon. Thank you, operator. My name is Chris Hassan, Chief Strategy Officer for Hythiam. Thank you for participating in the third quarter earnings conference call. In a moment, I'll turn the call over to Hythiam's CEO, Terren Peizer, who will introduce the other participants. Before that, I'd like to call your attention to the following Safe Harbor statement.

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 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 as of November 6, 2008. The Company expects that subsequent events or developments will cause these events 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 representative of the Company's views as of any date subsequent to November 6, 2008.

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

Thank you, Chris. Welcome, everyone, and thank you for joining Hythiam's 2008 third quarter conference call. Presenting with me on the call today is Chuck Timpe, our Chief Financial Officer; Rick Anderson, President and Chief Operating Officer; and Dr. Gary Ingenito, Senior Vice President and Global Head of Scientific Affairs. Also in the call from management are Chris Hassan and Ian Worden, Senior Vice President of Operations.

As we discussed in our last call, we were ahead of the curve in responding to the changing financial landscape, and we're reducing our operating cash expenses accordingly and significantly. As you will hear from Chuck Timpe, in the third quarter we reduced our cash expenditures to $6.9 million from $9 million and $7.6 million in the first and second quarters of this year. And we've committed a target $5.3 million cash expenditures in the coming quarter. I can assure you that our management team is not stopping there, and we continue to cut operating expenses significantly.

To enhance our ability to achieve profitability with our existing capital, thereby avoiding the need to raise capital in the equity market, we are implementing a program to cut our expenses further by $10 million in the coming year from the current levels, but importantly still growing our existing revenues. This process has been initiated and is a priority of our team.

This past quarter, our organization achieved a number of important milestones regarding our Catasys business and CompCare. You'll hear the details of these results from the management team shortly.

I will pass the call now to Chuck Timpe for the financial details for the quarter. Given that the level of the Catasys business that we believe that you will see this quarter, the fourth quarter, and subsequently in the first quarter, it'll be constructive for Rick Anderson to elucidate the product and its value proposition again as well as take you through the sales cycle process. Rick, will further review the progress made this quarter with Catasys. Next, Dr. Gary Ingenito will cover our data pathway, and then we will conclude and answer any questions. Chuck?

Thanks, Terren. For the third quarter, we reported revenues of $9.7 million, which included $8.4 million in revenues from CompCare's operations and $1.3 million in revenues from our Healthcare Services business compared to consolidated revenues of $12 million in the third quarter of 2007, which included $9.8 million in revenues from CompCare's operations and $2.2 million in Healthcare Services revenues.

The net loss in the third quarter of 2008 was $7.3 million or $0.13 per share compared to a net loss of $13.8 million or $0.31 per share in the same period last year. Included in the 2008 third quarter net loss was a $141,000 net profit from CompCare's operations compared to a $1.1 million net loss for CompCare in the same period in 2007.

The consolidated net loss for the 2008 third quarter included non-cash charges for depreciation, amortization and stock-based compensation expenses of $3.7 million compared to $1.5 million for similar expenses in the same period in 2007. The consolidated net loss for the 2008 third quarter also reflected a non-cash gain of $2.4 million from the change in fair value of our warrant liabilities, while the consolidated net loss for the 2007 third quarter included a non-cash charge of $2.4 million for an impairment loss.

As of September 30, 2008, the Company had consolidated cash, cash equivalents and marketable securities of approximately $15.5 million, not including auction rate securities.

In January this year, we streamlined our Healthcare Services operations to focus on our Managed Care opportunities, reducing cash operating expenses by 25% to 30% for the reminder of the year. In April, we took further action to streamline our operations by reducing operating costs an additional 20% to 25%. We reduced our cash operating expenses to $6.9 million in the third quarter of 2008, and we expect to further reduce our cash operating expenditures to $5.3 million in the fourth quarter compared to an average of $11.5 million per quarter in 2007 in our Healthcare Services operations.

We are committing to further reduce our cash operating expenses by $10 million in 2009 from current levels, resulting in total budgeted cash operating expenses of $17 million in 2009, as we are focused on cost reductions and new Managed Care contracts, evidencing the probability of achieving profitability with existing capital resources.

For the quarter ended September 30, 2008, there were 36 licensed sites that contributed to revenues at some level compared to 52 locations in the third quarter of 2007, reflecting our decision to streamline operations by reducing operating costs to focus on Managed Care opportunities. For the quarter, the Company's average revenue per PROMETA patient treated was $6,609 compared to $6,355 per patient in the third quarter of fiscal 2007.

As I mentioned earlier, CompCare achieved net income of $141,000 in the third quarter of 2008 compared to a $1.1 million loss in the third quarter last year. This improvement reflects the progress CompCare has made in managing its claims expenses despite a decrease in revenues. CompCare's major contract in Indiana, the primary cause for its significant claims cost and operating losses since January 2007, will end at the end of December. CompCare is working on methods to minimize and manage the exposure to the remainder of the claims that will be presented for payment in the first half of next year with several parties.

CompCare has broadened its pipeline of new business over the past two quarters and is increasingly focusing on the more profitable business and non-risk bearing services revenue streams. CompCare has also been awarded new contracts that begin later this year and at the beginning of next year.

For the nine months ended September 30, 2008, revenues were $32.6 million, which included $27.3 million in revenues from CompCare's operations and $5.3 million from the Company's Healthcare Services business, compared to consolidated revenues of $32.2 million in 2007, which included $26.5 million in revenues from CompCare's operations and $5.7 million in Healthcare Services revenues.

Net loss for the nine months ended September 30, 2008 was $32.1 million or $0.59 per share compared to a net loss of $36.8 million or $0.83 per share for the nine months ended September 30, 2007. The net loss for the nine months ended September 30, 2008 included $5.4 million of net loss from CompCare's operations and related purchase accounting adjustments compared to a $3.0 million net loss for CompCare in the same period in 2007.

Consolidated non-cash charges for depreciation, amortization and stock-based compensation expenses were $9.6 million compared to $4.4 million for similar expenses in the year-earlier period. The consolidated net loss for the nine months ended September 30, 2008 also included a non-cash gain of $3.4 million from the change in fair value of the Company's warrant liabilities, while the consolidated net loss for the same period in 2007 included a non-cash charge of $2.4 million for an impairment loss.

I will now turn the call over to Rick for more details about Catasys and our Managed Care operations.

Thanks, Chuck. The recent financial and economic developments have caused all businesses to become focused on cost containment and reduction. This will be particularly true for health plans and other healthcare payers, as healthcare costs are expected to grow 9.6% in 2009.

In the recent financial recovery legislation, an important element was included in the bill that will serve to further increase payers' cost and thus have a positive impact on our business. The Mental Health Parity & Addiction Equity Act of 2008 mandates that addiction treatment coverage be no more restrictive than coverage and payment for medical conditions. This single piece of legislation will have a significant impact on patients seeking treatment while creating increasing expenses for payers.

The problem for payers is that this parity legislation requires that payment for behavioral coverage be no less favorable than payment for medical coverage, which will end the limiting of benefits, which is one way behavioral health payers have limited costs historically. Thus this legislation will increase cost to health plans.

In one version of the legislation, the Congressional Budget Office estimated that the direct costs of the mandate on the private sector would be $1.5 billion in 2009, rising to $3.4 billion in 2013. It is further anticipated that the recent election resulting in Democrat-controlled Congress and Presidency will increase focus on healthcare coverage and regulations, while seeking to further drive the cost of coverage down.

This combined with the current economic downturn is likely to increase pressure on health plans to cut costs in any way they can. The rise expected in healthcare costs, the declining economic climate, the parity legislation collectively strengthen the value proposition of the Catasys offering, an innovative program, which provides multiple types of care integrating the services for the chronic condition of substance dependence.

Substance dependence is a disease that has physical causes and behavioral components. As such, effective solutions require complete and comprehensive care that affects the patient across different care parameters. Today, the treatment is delivered in a fragmented way without continuity, sharing of information or continuous support for the patient. Payers either engage behavioral health companies, who generally provide overall management of benefit and review for necessity of different treatments or admissions to facilities, or develop similar cost management programs internally to address those members.

Behavioral health companies are focused on providing existing treatments and managing their own costs. If treatments are ineffective, the ultimate payer ends up paying not only for the behavioral health aspect, but may also incur significant medical costs from ER visits or increased expense from acute care visits at hospitals at higher cost from undertreated or untreated substance dependence.

In addition, substance dependence complicates the treatment of other chronic co-existing medical and behavioral conditions making these already expensive conditions even more costly.

No one in the industry is offering a comprehensive solution. Catasys provides that solution. At the beginning of the year, we found ourselves in discussions with payers who could see the value not only of new medical interventions such as PROMETA, but also creating fully integrated programs of care. This is the treatment modality that most chronic conditions have moved to or are moving to and substance dependence should not be an exception.

As we saw the full potential of the opportunity before us we created Catasys. With the launch this year of Catasys, we're able to engage a payer's members and work with the patient, the medical providers and the behavioral providers to provide state-of-the-art integrated treatment.

The Catasys program offers health plans a program that exclusively focuses on substance dependence and provides the ability to identify their current high cost substance abuse patients through data mining. During this process, we analyze data from medical claims, behavioral claims and prescription drug claims to identify those members that have a substance dependent diagnosis and are costing the plan $7,500 or more. We refer to these members as high utilizers. These individuals are targeted for enrollment into the program.

Utilization of a sophisticated outreach program to contact and engage members identified in the first step. These outreach programs are where our addiction expertise becomes a substantial advantage. We utilize our experience as well as consumer marketing research to develop the most effective methods to reach out and connect with these members and explain the value and differentiation of this program from other approaches they may have tried in the past. This process is performed by our care coaches who are all behavioral health professionals with a background in addiction.

Develop networks of providers, just like in our private-pay business, to provide our medical and behavioral solutions. These providers are trained on our programs to treat members.

Generally, members that accept the program are referred to the medical provider for a medical screening and enrollment. Then subsequent to completing the medical treatment, members engage in the proprietary cognitive behavioral therapy-based psychosocial program that we have developed, as delivered in a discreet set of sessions by one of our trained providers.

Provide care coaches focused on working with each patient to keep them engaged in treatment, assisting them in building the skills, knowledge and confidence required to sustain recovery. This process includes telephonic outreach that not only capitalizes on the initial medical intervention, but ensures coordinated delivery of substance dependence treatment and where appropriate refers patients to other providers or resources to help them address any other medical or life issues important for their recovery.

In order to maximize the connection between the care coach and the member, the program is designed so that the same care coach stays with the member throughout the 12 months of the program.

An IT solution that links all providers and care coaches to assist in care for the patient by providing one place where patient information, treatment and progress is kept and can be accessed. This enables each provider to see current information on the patient and thus provide the best possible care.

Another important aspect of the Catasys program is that the program is flexible and can be modified in a modular way to enable us to partner with payers to meet their needs. As a service delivery model, the Catasys program can be expanded to include other medical interventions for addictions such as buprenorphine for opiate dependent patients.

In this way Catasys can work with payers to identify, engage and treat medically and behaviorally a broader spectrum of patients struggling with substance dependence in a way that improves outcomes and thereby lowers costs.

As you will recall from previous calls, CIGNA contracted with us as a provider and agreed to reimburse for the PROMETA Treatment Program in Dallas through our managed facility. This program differs in many important and significant ways from our Catasys offering, but most importantly we are not able to do identification and outreach to their members. Instead we are relying on CIGNA to passively identify individuals that meet the high utilization criteria within a small geographical area around our center if and when those individuals seek treatment.

This is vastly different than our Catasys approach in which we actively manage the engagement of the payers' members versus being a passive reimbursed vendor.

We are pleased to have CIGNA show continued commitment and support for this program in their recent decision to expand the offering to Los Angeles and Houston markets with multiple providers. To date, the program has not yielded the number of referrals that CIGNA was looking for; and CIGNA has identified that this is largely a result of the limited number of appropriate individuals that have contacted CIGNA seeking treatment from the initial small geographic area of Dallas around the center.

As a result, CIGNA has expanded the geographic area from where members can be drawn both in Dallas and to other markets and taken other recent steps to facilitate program enrollment. This clearly demonstrates CIGNA's commitment to this program and its desire to increase the number of individuals in the program. This will allow CIGNA to evaluate the clinical and economic impact of the program, which we anticipate will lead CIGNA to adopting the components of the Catasys program in their system.

We aggressively continue to pursue opportunities to present to health plans and other payers and we're in various stages of development with those opportunities. This progress is exciting given that we're currently in discussions with 34 accounts covering approximately 80 million lives.

We anticipate closure of our first two to three contracts in the fourth quarter with organizations which will put us ahead of schedule for the corporate goal of contracting with payers with 3 million covered lives by the end of 2009. As previously stated, 3 million covered lives allows us to achieve profitability.

In addition, based on the progress that we have been making, we anticipate several additional contracts to close in the first quarter of next year. What's important to realize is that we are meeting with payers on that scale at this early stage of our development because we have been able to educate payers on the magnitude of their problem and they see the value of the Catasys program.

The sales cycle with health plans is lengthy, anywhere between 9 and 18 months, which is consistent with comparable products in the healthcare industry. It is important to remember that we essentially launched Catasys at the beginning of this year, and that the typical sales cycle consists of educating the payer on the problem and how much substance dependence is costing their plan.

To this end, the analysis we commissioned by a third-party actuary firm looking at a composite database of claims on 20 million lives has been instrumental in demonstrating the high cost of substance dependence for payers.

The payer providing its data for analysis by Hythiam or performing the analysis internally to evaluate their actual prevalence and potential cost savings. This stage typically can take substantial time because of legal agreements protecting the privacy of individuals must be executed, the data must be compiled and transferred, and then the transferred data must be configured in such a way that the analysis can be done. Once the analysis is done, the results must be reviewed to ensure accuracy and evaluated by clinical staff to ensure that a complete picture is obtained.

Assessment by the payer of the program components, medical interventions and projected return on investment; a more detailed review of the program components including enrollment and how these components would work best within their existing benefits structure and care guidelines. This is the period where modifications to the method of applying the program are typically discussed.

This phase will typically also involve some form of written proposal and can consist of several rounds of questions and meetings to define what the implemented product will look like. Then approvals are required and contractual negotiations are then conducted, which involves legal departments and can be a protracted process.

We enter the fourth quarter excited at the continued reception from payers of the Catasys and the developments achieved by our team to deliver on the promise that Catasys offers patients.

I will now turn the call over to Dr. Ingenito. Gary?

Thanks, Rick. We share everyone's frustration with the timelines for the delivery of study data, and we look forward to the additional data. The time frames that we've shared in the past were the best estimates given to us by the research organizations. We have chosen leaders in the alcoholism and addiction research field, and their priority is to ensure that the information is complete and accurate before they release any information.

Previously, Dr. Walter Ling at UCLA had proposed giving a presentation of interim data in the methamphetamine study at the College on Problems of Drug Dependence in Puerto Rico this past summer. Dr. Ling elected to wait until the study was completed to review his data. The final patient's last visit was roughly three weeks ago and so the data analysis process is underway.

Additionally, the results from Dr. Joseph Volpicelli out of the Institute of Addiction Medicine in Philadelphia are currently under analysis. Enrollment and treatment in that study have been completed in July. As a review, withdrawal symptoms are graded on a scale, which fluctuates over time depending upon the stage at which the patient is in withdrawal. This scale is the Clinical Institute Withdrawal Assessment also known as the CIWA scale. The study by Dr. Volpicelli was focused on lower CIWA alcohol dependent patients and will allow further refinement for the best timing of PROMETA's use.

Compare and contrast Dr. Volpicelli's study in only low CIWA patients to that of Dr. Anton who studied both low and higher CIWA patients. There was a difference in the clinical response between the two groups.

We anticipate that together the results will provide additional insights and refinement on the best timing of PROMETA's use in treating patients suffering from alcohol dependence. We anticipate that this data will broaden the adoption of the Catasys program in health plans, especially considering the prevalence of alcohol abuse in the health plan population versus the justice system's focus on illegal drugs including methamphetamine.

Alcohol is the third leading cause of death in the US today. It is also a well-known fact of alcohol's contribution to diabetes, cardiovascular disease, obesity and cancer. The latest data from the Substance Abuse and Mental Health Services Administration show that 22.6 million persons or 9.2% of the U.S. population suffer from substance dependence. Of that total, 15.6 million were dependent upon alcohol alone and another 3.2 million were dependent on alcohol plus another substance. These 18.8 million individuals represent 7.7% of the U.S. population with alcohol dependence.

Additional data shows that in 2007, 3.9 million Americans sought addiction treatment. Of that, 2.7 million or 69% were treated for alcohol. Contrast this to the same survey by SAMHSA, which estimates that there are 731,000 persons dependent on methamphetamine to put the magnitude of the alcohol problem into perspective.

As of this call, we still await data from Doctors Volpicelli and Ling. We can give no insight into a definitive timeline for data delivery. However, given the relative time frames, we would anticipate that the alcohol data from Dr. Volpicelli would be released first.

I do want to focus you on a study that we believe potentially could provide the clear and definitive proof of the efficacy of PROMETA in clinically meaningful end points that we need as a Company. This is important as addiction studies are difficult and have multiple factors that cannot be controlled.

As previously released, the clinical trial in alcohol dependent patients by Dr. Ray Anton showed a beneficial effect of PROMETA for those patients with higher withdrawal symptoms as measured by the CIWA scale. In those patients, Dr. Anton concluded that the biologic intervention in the PROMETA treatment program reduced alcohol consumption, promoted abstinence, reduced craving, while improving mood and sleep.

To put this into context, it is estimated that 50% of patients suffering from alcohol dependence may potentially be in the higher CIWA grouping at some time during withdrawal.

Additionally, 70% of alcohol dependent patients have access to healthcare coverage. It is these patients that are specifically targeted by the Catasys program as they are the most costly members in the health plan and, as shown in the initial data of Dr. Anton's study, will respond significantly to our treatment.

It is also important to remember that Dr. Anton has only released data from the first six weeks of his 14-week study. What is of significance is how the patients did going out the entire 14-week period of the study and the analysis of the high versus low CIWA patients.

Additionally, Dr. Anton performed acoustic startle testing and functional MRIs on all study patients. To date, this data is being reviewed by Dr. Anton and none has been revealed. This data should add significant understanding to the medical and research communities focused on addiction.

The functional MRI data could provide proof that PROMETA has a robust biological effect on brain areas, which may elicit drug craving, and craving is strongly correlated with subsequent use. Given the specificity of functional MRI, the size of the patient groups should be adequate to provide evidence of the effect.

Craving has been shown to be related to areas of brain activation. If PROMETA alleviates cravings, and this is reflected in the functional MRI study and correlates with reduction in use, then PROMETA has demonstrated a direct objective effect on craving and the correlated reduction in use.

The combined Anton and Volpicelli data will aid health providers in identifying those individuals in whom PROMETA will have the greatest effect.

And now, I will return the call to Terren.

Thank you, guys. As I stated at the top of the call, we have managed our burn rate in the third quarter and are focused on continuing to even more aggressively manage expenses going forward. We're managing our capital to achieve profitability through continued cost reductions and analysis of all resource allocations without sacrificing our emerging revenue opportunity.

As Rick discussed, we are continuing to achieve traction in the Managed Care market and execute against our plans in Catasys. We expect our first two to three Catasys contracts this quarter with several more in the first quarter of 2009. Additionally, we're working on joint venture opportunities with major managed care organizations in order to expedite and broaden Catasys' industry penetration.

Another important development this past quarter was the progress made at CompCare. As you recall from our previous call, we purchased a controlling interesting CompCare to provide us with the back office functionality needed to operate in the behavioral health market, as well as access to the portfolio of products and other behavioral disease states that complement our Catasys offerings.

The issue in the past quarters with CompCare was the underperformance of their major Medicaid HMO contract in Indiana. This contract prevented CompCare from achieving profitability. Additional issues existed within the organization. To address these issues, we worked with management to recruit a new CEO to lead the improvements at CompCare. This quarter saw these improvements pay off as the company achieved profitability.

Additionally, the Indiana contract ends in December. CompCare is in discussions with the payer to minimize the exposure to managing the remainder of the claims that will be presented for payment in the first half of next year. Lastly and importantly, CompCare has been awarded new contracts that begin in the New Year.

Our previously reported studies have shown patient benefits and support that the biologic intervention of PROMETA can improve that patient's physical and mental ability to participate in the recovery program. In the field, many of the healthcare providers currently utilizing PROMETA in their programs describe to us that PROMETA acts as a jumpstart for patients as it reduces their cravings and assists patients in moving forward into recovery.

We have had providers describe patients' response as significant and robust when they include PROMETA into the patients' treatment plan. Patients who have failed multiple times in seeking recovery tell us that for the first time they have a chance to be sober and succeed in the recovery, as their cravings always led them previously to fail.

We want to emphasize while the studies may elucidate the biological effects, and certainly does in the case of the Anton imaging and clinical study, these studies lag the important psychosocial services and the Catasys delivery system that the integrated Catasys program delivers to the health plans and patients. This is what excites the health plans and the managed care field that will result in the coming contracts that you will hopefully see shortly.

In summary, we continue to make progress in spite of the potential distractions the economy could provide. I'm really proud of the manner in which the team has worked together to continue to move forward and execute against our plans. I look forward to the gains we'll achieve in the coming months. I look forward to discussing them with each of you on our subsequent calls.

I will now take your questions. Operator?

Thank you. (Operator Instructions). Our first question comes from the line of Ram Selvaraju from Rodman & Renshaw. Please proceed with your question.

Hi. Thanks very much for taking my questions. Can you hear me?

Yes.

Okay. First, a couple of detail items on the P&L, Chuck, if you would maybe help me out here. So it looks as though your cost-cutting efforts were not as successful as you might have liked in the third quarter. There is a pretty significant reduction between the third quarter and the fourth quarter that you have projected.

If I heard you correctly, you're expecting general and administrative expenses of about $5.3 million in the fourth quarter. Could you provide some more color on how you expect to achieve that?

Hi, Ram. The -- what we said was, we expect total cost expenditures to be $5.3 million in the fourth quarter. So, that's a decrease from the $6.9 million that we've reported in the third quarter.

Okay.

It's not just the general and administrative expenses, it's all costs, operating costs, G&A, research and development throughout the organization.

Let me add something, and Chuck, you can chime in, but I think one of the things that Ram was asking was the reduction in expenses for this last quarter might not have been as much as we anticipated. I think, Ram, that was your question?

Yes.

Okay. The were some blurring of those numbers in that as we decided to cut further we obviously incur subsequent increases of expense as it relates to severance, et cetera. That was one contribution, or one contributing factor.

The other contributing factors would be that upon a liquidity event, given that we've eliminated a lot of employees this year, we wanted to make sure that those that were retained also received the promise at the end of last year COLA raises, which we were withholding, and at the rank and file and the lower levels the incremental bonuses, if you will, that were also promised to them when we had a liquidity event, which we achieved with some liquidity versus our auction rate securities.

So that was a timing issue relative to which quarter that fell in. That's -- and then you'll see that coming through in the fourth quarter as well in terms of that's why you're seeing further reduction.

And then finally, we did incur one additional expense that wasn't in our budget. And that related to a double-blind study that is very cost effective, initiated outside of addiction that we really haven't discussed too much, but we're very excited about. And although that -- the total cost of that study I think will approximate $400,000 or so, I'm looking at Gary, but I think it's approximately $400,000 or so over the whole -- over the next year spread out. We did incur a couple hundred thousand of that amount in the quarter.

So that -- I think if you add all those things up, it reconciles that we were on target for the cost reduction. And again this quarter you'll see some of that reduction magnified.

And certainly the $10 million reduction next year cuts obviously very significantly, and I might add really will not impede our revenue growth. And given the level of managed care interest and contracts that we think you'll see, I believe you will see starting significant revenues.

Okay. And so just to clarify then, the $17 million that you project in expenses for 2009 --?

That is our total operating expense budget, everything and the kitchen sink thrown into that number.

Okay, but this does not include the line items in the P&L that pertains to CompCare right?

Correct.

Okay.

Thank you. That is correct.

And then just another follow-up with respect to the timing of the data from the Volpicelli and Ling studies, so you are anticipating now that the Ling data would come after the Volpicelli data. When specifically do you expect the Volpicelli data? And what kind of lag time can we expect between the Volpicelli data and the Ling data?

I'll turn it over to Gary as he is more in contact. I would just say generally, as it says in the releases -- in the release and as we've said, it's just that -- it's quite possible Ling could come before Volpicelli, but it's just given where they ended and given Volpicelli concluded his treatment phase in July, August and promised us data in September. So we're just assuming that -- so far Ling is tracking the same consistency; we are assuming that Ling will come after Volpicelli, but Gary?

Ram, that's correct. It's really, we're looking at the relative end dates and also the cleaning of the data, the complexity. I know Dr. Volpicelli has been looking at it.

But as we pointed out both have decided that it is really better to have complete and accurate data that they can be able to tell the whole story about rather than first look or partial. So at this point it is really under their control, but they are very actively both working on getting that data analysis done.

I think we believe Volpicelli could be more imminent, like in the next week, two weeks or three weeks.

I would say two to three weeks.

Two to three weeks would be what we say, Volpicelli. Now, it's quite possible Ling comes in that time frame too.

So -- but can you state with any kind of definitive certainty that we would be able to see the results of both studies before the end of this year?

If you go back in time, we would have -- I could tell you that based on what they are saying to us. But if we would have done that back in the summer when they both were committing to by the end of September we would have been obviously significantly wrong.

So, yes, do I -- do we expect it, yes. But do we expect it more so now given --- it's a conditional probability, obviously. Given that they've gone this long without giving us the data, yes. But I do want to caution you.

But reasonably -- then you get into this holiday time, and who knows, but reasonably, yes, we should expect it before year-end.

And we are still waiting for Dr. Anton to finish.

Yes. By the way, that's a -- Gary brings out a good point. Dr. Anton was supposed --- I mean if you go back, Dr. Anton's study finished well before that and we're still waiting on that data. And we do expect that data, quote, imminently.

But look at how long after Anton finished his study that he is finishing the data analysis and still hasn't submitted us the report. Anything you want to add to that?

I mean we -- obviously everyone is -- appreciates that we are certainly waiting and anxious and the importance of the rest of the data. But as we pointed out, we picked the top gentlemen in the field and they are making sure that it is to their satisfaction before giving it to us.

Yes, what's unusual for everyone in the audience and the Wall Street community and it's unusual obviously for us is that remember, we didn't do these studies. Usually, when you do the study -- when a company does a study or they sponsor a CRO -- or CRO does the study, you have a pretty good idea on the timing of the data and where you're tracking.

Since we took the route of totally -- total independence and letting the top people in the field do the studies, we are beholden to them and these are -- I'm sure you know, these are academicians at heart and they also function differently with different timelines, different time pressures, different distractions than a clinical research organization sponsored by a company.

Okay, thank you. And then just one other thing, Chuck, could you comment on the amount of auction rate securities that Hythiam currently holds and what their level of liquidity is and how vulnerable they might be to value fluctuation, please?

Sure, right. We -- as you remember, we had $11.5 million in auction rate securities and they've been valued now currently at $10.4 million. That value has fluctuated a little bit from quarter-to-quarter.

But as you may also know we have a proposal to accept a rights offering, it's called, from UBS to where they would buy the securities at par value, but their time frame is beginning in 2010. So we have the rights to get the auction rate securities back at par value. In the meantime, they will provide a margin loan of up to 75% of the value of the auction rate securities. And we've already announced, we have borrowed 50% of that as of this date.

And so, Ram, one thing I'd like to add is so how -- the reason that we don't expect, and to your point how vulnerable is it, we don't expect, given that it's now UBS' credit in essence, you're talking about UBS' credit over roughly a two-year note.

Again, well today their credit rating is maintained. But they will trade as time goes on. And as if we need that, it's if and when we need that additional liquidity, as you get closer they'll trade more and more like a short-term instrument.

And what's the par value of these securities?

Par value is $11.5 million face.

Okay.

And that's the amount they would do which would create roughly $6 million, $7 million more in value.

Okay, thank you.

Thank you. Our next question comes from the line of Robert Cohen with Western International. Please proceed with your question.

Yes, I have got three questions here. You guys have stated you're not 100% sure when the data is coming out from these studies, but in the same breath you're also saying that you'll have two to three insurance deals by year-end and additional four to five in the first quarter. So are we to assume that the data that we are all excited and waiting for has no relevance to the decisions that these insurance companies are making?

Well, that's an excellent question. I wouldn't say it has no relevance, but as was pointed out, and I could turn it over to Rick to amplify what I'm saying, as it was pointed out, right now we're in conversations with -- more than conversations, we're discussing the adoption and implementation of Catasys with approximately 35 plans or what have you that comprise the majority of the industry. Which is pretty incredible to even be in that dialogue.

And in some cases if you take, I don't know, as you used the number four or five, we didn't say that, but if you take two to three plans in this quarter and you take more in the first quarter of '09, so let's say it's somewhere five to eight or five to ten plans, we'll call those the early adopters. Now, those five to ten plans cover a significant amount of covered lives towards that 3 million and in some cases could well exceed 3 million covered lives. But you never know what happens.

But that said, I would categorize those as the early adopters; and they have not been focused on the data at all. Or they have already done their medical review and we have already passed their medical review based on the data that we have.

A number of them have certainly pointed out that this is more data than what we currently have for what we're currently doing, and that's not a surprising response to us. Remember, what we focused on today is the delivery system of Catasys and the management program of Catasys, and that is what resonates very loudly to these plans.

When you go down the road, these plans at the end of the day won't care -- as long as it's safe and obviously -- they won't care what medical intervention you use if you're managing that population. They care about the cost reduction. In some cases if they ask you to go at risk, they just want the result versus -- this isn't like a formulary of a FDA approved drug where they are waiting on publications.

That said, there are -- we know of some health plans that are waiting on publications of data. Not necessarily the topline results, but just having publication.

Okay. Can you -- out of the two or three you plan on having by year-end, are any of them national insurance companies?

We expect both national and regional in the fourth quarter and in the first quarter. And I think as we look out in the horizon, when we look at 3 million covered lives just to be clear, we're not saying, okay, if a health plan has 5 million covered lives for example, it's a regional plan and they have 5 million covered lives, we're not covering the -- counting the whole health plan, we're just counting where we think they're going to implement.

So, it could be a national plan that has 20 million to 30 million lives or 10 million, 20 million, 30 million lives. We're only including the amount of where they plan to implement.

Right, but do you -- in this first two or three by year-end, is one of those a national plan that you feel could come aboard?

Well, that depends if you're talking about is it two or three or what have you, but we're cautiously optimistic we could have a national plan. And again this should be contrasted with Catasys vis-a-vis what we previously announced with CIGNA. Although we are quite thankful that CIGNA this quarter stepped up and started seeing that it is important to expand access to the patients, to actually get the patients treated.

But we are hopeful, we're cautiously optimistic that we could have a national plan before year-end. And that would obviously based on whether that plan falls, and if and when that plan falls, and if that plan falls in the fourth quarter or first quarter, we do -- we are cautiously optimistic that that plan alone could cover a significant portion of the 3 million lives or achieve the 3 million lives specifically.

So they couldn't go to a city, they would pretty much do a complete state? They wouldn't do the same what CIGNA's doing, starting in Houston or whatever? They would start in a entire state, is that correct?

Well, they could start in a city. The discussions we're having right now are seeking more in states, a state. Then perhaps if all goes well after a few months rolling it out, in terms of the implementation, rolling it out in another state and then another state every three months or something along those lines.

There is a national plan that we're speaking with that does want -- that they've really embraced Catasys and would appear to want to roll it out continually throughout the coming year, but time will tell. If it was a done deal we would announce the contract and we'd be discussing the specifics of the contract.

I've got one another subject I'd like to ask about and then I'll let someone else ask a question. In regard to the Anton study with images, those images were done during the double-blind control group study during the grading stage, is that correct?

That is correct.

Okay. So my question is, has there ever been a study done today on images where any drug in regard to alcohol had shown a brain change to the positive side to date?

Not in a --- I will let Gary answer, but not in conjunction with a double-blind study that shows also the clinical outcome.

Yes, Terren is correct, that the study actually done, because this is a very -- Dr. Anton is one of the leaders in the field in brain imaging and visual cueing for cravings, and has conducted a study with some other medications just to look at brain image, but it wasn't correlated with actual use outcomes.

Right. So, Gary, real quickly, if for some reason hypothetically, PROMETA shows that the brain in a -- in the brain -- wait, let me ask this question again. In regard to this study, if it shows that the brain changes back to normality after taking PROMETA, would that -- that would obviously be incredibly significant, would it not?

Yes, and actually an objective measure of PROMETA's efficacy; and if you can tie that to decrease in use then you actually have the whole picture.

So that would be a physiological scientific change. And is that why you guys are really emphasizing this Anton study it seems, because of this?

Let me add on to what Gary just said for a second because I've been living this for the last, I don't know, five, six, seven years now. There has been an ongoing discussion and debate, even if you go back to when we announced the Urschel cravings data. Does cravings matter?

And the problem you get in that is there are a lot of papers that say that cravings matter. NIDA, National Institute of Drug Abuse, says cravings matter. By the same token, when you try to correlate it with use, you are then left with a theoretical debate on self-report. Cravings is -- if you look at just a double-blind study that's just looking at cravings; and cravings could show statistical significance, which I might add hasn't happened in alcoholism too often, but in the Anton study we did see it with PROMETA. Some people dismiss it because they say, well, that's a self-report, it's subjective, and that's what Gary is referring to.

Whereas importantly, when you combine in the same study with the same patients, which has never been shown before, the increase in the activation of the neurochemistry in the part of the brain that shows cravings, with the reversal with the medical intervention of PROMETA, and then exhibited in the same patient population the decrease in use, that has never ever been shown before.

And you can't -- like we said earlier, addiction studies -- just like antidepressant studies, there were -- in antidepressant studies everyone will tell you, half of them failed, half of them worked. And the problem is because you get the high-placebo rates because it's all very subjective and people's expectation going into a study becomes subjective and can be altered by that hope and expectation.

So what happens is what we're excited about -- and again we don't know if it's going to show it. We're just saying, if it does this is going to be the definitive proof that everyone has been waiting on that says without any shadow of a doubt. You can have a double-blind study succeed and then they could say, well, how big was the study?

Gary, do you agree with that?

Yes, absolutely.

And they would say, how big is the study? And then you'll say, okay, well, 80 patients, 100 patients, Oh, well, that's a small study. Let's see a bigger study.

The importance is to show it in the functional MRI because the picture in the brain doesn't lie on a statistically significant basis. Show it in a functional MRI in the same patient population you are showing it in the clinical double-blind placebo controlled statistically significant outcome, you can't get a more comprehensive proof (multiple speakers)

Okay. I'm going to leave you with this, Gary, then, and let someone else ask. Gary, just real quickly, if the Anton study shows a change in the brain during cravings during a double-blind control, wouldn't that make all these other studies irrelevant? Because this is a scientific change in the brain that physically happened. It would make all these other studies irrelevant, would it not?

Not irrelevant.

I think it adds a significant piece in terms of the objective proof of the efficacy of PROMETA. It ties into what we know about the preclinical mechanism that repeatedly has demonstrated that PROMETA causes a change in the GABA receptor. So you're getting all the pieces now out of the different studies fitting together to create the whole story, but certainly this one ties together the actual action of the drug on activation in parts of the brain along with clinical use.

Right, thank you.

I think it will be helpful. I think this will be very helpful for everyone. Maybe just quickly, because you've said it over and over and over again, how every data piece you've looked at, all ties to the same results. And you might want to comment although it hasn't been published yet, on the different work -- the work that Sheryl Smith did in the preclinical, and the changes in the biology, and how that's translated as what you see in the other data sets.

So, briefly the -- I mean what we know is that there are certainly changes in the preclinical model, the animal models, in rats, with substance use, alcohol, stimulants, we see it. And you see the same one.

It particularly is highlighted that the biggest change in the brain happens during the withdrawal period from the substance and that there is a loss of the inhibitory calming activity over the brain that's normally produced by the GABA system. Sheryl Smith has shown with alcohol; this has also been shown in other laboratories, in [Biagio's] lab in Italy and at the Bowles Institute at the University of North Carolina. Same findings, that the components of PROMETA are able to reverse that effect of the substance on the GABA receptor in the brain.

And in fact a recent study that Sheryl just completed was in chronically methamphetamine dependent rats. And there she analyzed the fact that there was obviously as we saw a change in the neurons in the brain cells of the rats when they were withdrawn from methamphetamine. But what she said was, okay, so that's the change in a cell. What does it do in terms of changes in behavior? Can you translate that it has a behavioral effect that is reversed by PROMETA?

And so she did an acoustic startle, which is the same test that Anton is doing in humans. There is the same model for preclinical for rats. And PROMETA was able to reverse the effects of methamphetamine withdrawal in the acoustic startle in rats.

So again, you see consistency of our preclinical data with what we're finding in our clinical data with the results of pilot studies that were done at health plans on the East Coast and the West Coast. There is a tremendous reproducibility of the effect of PROMETA in whatever model you want to look at.

Gary, now I've to ask you one on -- are you guys emphasizing alcohol over meth now? And if so, why beyond the sheer numbers?

And if this Anton shows what hopefully it will show, would this be front page of Science?

Let me answer that question from a business standpoint and Gary could talk about whether it's front-page Science. From a business standpoint, it's interesting because for the last three to six months everyone certainly has been focused on Ling and UCLA. It's almost like it was the deciding factor of our Company's future.

I could categorically tell you that nothing further can be from the truth, in that -- is the Ling data important to us? Sure, of course it is. Every data, every piece of data is contributory to the overall data of PROMETA, the overall usefulness of PROMETA and how it can get incorporated within Catasys to health plans.

But if you take a step back, what got lost in the -- it's been a very obviously chaotic year. There is something that did get lost in the translation.

If you recall, back when we said -- for those that haven't been around since the beginning of the Company, initially in 2004 and 2005 -- 2003, 2004 and 2005, alcohol was, quote, our story. And then because there was a direct tie-in to the GABAergic system and alcohol, because alcohol is active in the GABAergic system, alcohol is a sedative; and therefore the story evolved. The story initially 15 years ago came out of an alcohol backdrop. So alcohol was the story in 2003, 2004 and 2005.

In 2005, there was the advent of two drugs that everyone on Wall Street was very excited about and it actually afforded one of the drugs, VIVITROL, a $1 billion market cap. It was VIVITROL, which was Alkermes drug, and Campral, which was Forest Lab's drug. And there were Time Magazine articles and everyone was wondering -- why aren't you mentioned in these articles and PROMETA? Why doesn't anyone talk about PROMETA?

And we had said at the time that, yes, we're very glad that they are getting these big market values, $1 billion, it's going to be a $1 billion drug. We disagreed, we didn't think that there were clinically relevant end points.

Separating -- looking at the alcohol data we have and separating out the images, I would still tell you to this day that no one has shown what we have shown in clinical study with reduction of use and cravings in a human clinical study. Period.

Forgetting about the clinic relevance of those end points, in 2006 we changed our business plan from a strict private-pay model that we started out to the justice system because we saw traction in the justice system. What they saw was in the justice system, you're obviously focused on illegal drugs. Although you ask, alcoholism is still going to be the biggest factor in the justice system, but at the time everyone was still focused on VIVITROL and Campral for alcohol.

We as a small company, we decided to look at our niche of methamphetamine addiction because we knew that we were effective in treating stimulants. And we started doing pilot studies in the justice system and that became the biggest part of our business plan in 2006 and in 2007.

But lo and behold, you'll remember, about a year ago we ran into headwinds in the justice system, along the same time that we started seeing a lot of traction in managed care. And the political nature of the justice system made it unpalatable for us to really scale that business to maximize the return to shareholders. And managed care was always our end game, we just didn't think to see it at the end of 2007, the beginning of 2008. And then we accelerated the development of Catasys to respond to that. We didn't expect managed care to come in till 2009 to 2010.

So what happened was -- is that now with the development of Catasys, the completion of Catasys, and now going through their process and their sales cycle, we now see that Catasys is here. You will see contracts with Catasys reached momentarily.

Now, so in health plans, health plans by and large don't cover methamphetamine addicts. By and large alcoholism, which we said of the $50 billion of direct medical expenses, alcoholism is approximately two-thirds to 70% of that number. So obviously, if you have something of $40 billion market that you're targeting to show cost savings to, and 70% of all alcoholics are under managed care, alcoholism is going to be the most significant factor driving adoption of PROMETA within the Catasys delivery system in the country.

Alcoholism is the biggest problem in addiction generally. Methamphetamine in the managed care context has a lesser role. It doesn't mean we're emphasizing the Anton data or the Volpicelli data over UCLA and Ling or vice-versa, that's not the point at all.

The point is that the Anton data, because it combines the imaging with the clinical double-blind, placebo-controlled study in clinical outcomes of cravings and reduction of use, there is no better, more comprehensive, definitive proof of PROMETA's efficacy.

So, yes, we might emphasize whatever those results are -- and it might not show it. Whatever those results are going to be vitally important, I'll let Gary answer if he thinks it's front-page news. But that said, I think the alcohol data set is going to be very important to the health plans across the country. Gary, you want to comment about --?

No, I think that is correct. Can it be front-page, I don't know, but -- I mean, I think it offers a significant tool for clinicians in order to be able to, again, assist patients with substance dependence, alcohol being a very large problem.

But I also believe that PROMETA works very well in stimulant as well, and that we'll be able to ---- there, where there are no treatments that really are very effective in the stimulant population, also offer an option to those patients.

Yes, that's a good point, and plus poly-addiction, alcohol and stimulants. I mean, you're going to see -- odds are you'll see more cocaine use perhaps than methamphetamine use in the managed care health plan context. But -- and I think our dataset that we assembled was in stimulants from Dr. Sheryl Smith, Urschel cravings, and data you will see in the future, plus the Medicaid pilot we did, I mean in the Medicaid population in Arizona in methamphetamine, it's all contributory.

Keep in mind, health plans and insurance companies care about better outcomes and patient benefit and lowering of costs. Some plans are going to care about publications. Some plans are going to go forward on a disease management basis without publications. And that's what you're seeing right now is that tiering. There's always going to be the early adopters and there are going to be people that need different criteria as you go along and expand throughout the country.

Thank you. Our next question comes from the line of Ryan Daniels with William Blair. Please proceed with your question.

Good afternoon, guys. It's [Christina Blaishek] for Ryan today. I just had a couple of quick questions. What is the current number of lives under management for the CompCare operation?

And then also an extension of that, what do you think is the potential number of additional lives that will be contributed from the two or three new contracts that you talked about earlier in the call that may begin later this year or in the first quarter of '09?

Right now CompCare has -- it looks like we have about 930,000 lives under contract.

930,000?

930,000 lives, right.

Okay, great.

And Rick, you want to answer the latter question?

The total amount is still in question, but it is -- for the current year additions you probably got another roughly 100,000 lives that they are looking at which are government-based lives.

I'm sorry, was the question about CompCare's additional lives or our additional lives?

CompCare, sorry.

Okay, great.

Thank you. Ladies and gentlemen, at this time there are no further questions. I would like to turn the floor back to management for any closing comments.

Well, thank you. I know it's getting late in the day. And first, as we announced last call Chuck Timpe, our CFO, is retiring. This is his last quarterly call, and I want to thank you, Chuck. We wish you lots of relaxation.

And I want to thank everyone on the call for joining us tonight. I know it is a difficult environment with lot of distractions, but we look forward to sharing with you our progress in the very near future. Good night, everyone.

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