Teva Pharmaceutical Industries Ltd (TEVA) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2005 Bentley Pharmaceuticals earnings conference call.

My name is Candace and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Michael Price, Vice President and Chief Financial Officer.

Please proceed.

Thanks, Candace.

Good morning.

This is Mike Price and I'm the Vice President and CFO of Bentley Pharmaceuticals, and I do want to welcome you to our first-quarter 2005 conference call today.

Jim Murphy, our Chairman, President, and CEO, is here with me also.

Thanks for joining us this morning.

If you have not received a copy of our earnings release that was distributed yesterday after the market closed, please Porter, Le Vay & Rose at 212-564-4700, and they will make sure that you get one.

Before we begin I would like to remind everybody that all of the statements that we make on this call today are subject to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

All forward-looking statements involve risks and uncertainties which we have explained in detail in our filings with the SEC and, most recently, in our annual report on Form 10-K.

We have also familiarized ourselves with the requirements of Regulation FD, and we are confident that our disclosures are in compliance with that regulation as well.

Now I would like to turn the call over to Jim Murphy, our Chairman, President, and CEO.

Jim?

Thank you, Michael.

Good morning and welcome to Bentley Pharmaceuticals' first-quarter conference call.

For the past year, we have had to compete in a market that was and actually still is extremely competitive following the reduction of prices mandated by the Spanish government.

But we adapted, strengthened our position, and found opportunity where many competitors had found adversity.

We are pleased to report the results of those efforts with the very strong first quarter, revenues growing at a rate of 40%, and earnings doubling that of consensus.

I had mentioned in our year-end conference call that we expected the growth to continue in Spain while we await approvals in other more lucrative the markets later in the year.

We have progressed to a point where approximately 20% of our current revenues are from outside of Spain, and we expect this segment of business to greatly increase.

Our strategy to become a global company is well under way.

This will become more evident towards the latter part of 2005.

As many as you know, we have a large number of Spanish regulatory submissions pending approval.

During the first quarter, we have not seen an acceleration of approvals, but remain hopeful for the balance of this year because the Ministry of Health in Spain has recently hired 28 additional people, specifically to address the backlog of generic registrations pending approval.

Meanwhile, we are aggressively expanding into other EU countries where approvals are expected throughout this year.

In addition to maintaining a pipeline of approximately 100 regulatory filings pending in Europe, we have 129 license and supply agreements for distribution of our products throughout geographical Europe.

This assures our continued growth.

We have been preparing for the demands of these contracts, and our manufacturing facility is now ready for producing larger capacities that could far exceed the number of units currently sold into the Spanish market.

Concerning the domestic side of our operations, Testim, our licensed testosterone gel, currently holds more than 13% of the U.S. gel market, and Auxilium Pharmaceuticals is aggressively moving to increase sales in the United States.

They have recently announced a comarketing effort with Oscient Pharmaceuticals which adds 250 more salesmen to promote the product to high-volume prescribers.

Testim has already been launched in several European countries, and additional markets are anticipated to be added throughout 2005.

Concerning our antifungal nail lacquer, we have prepared the clinical designs for evaluating several formulations.

Quotations have been received, and we are preparing to initiate a study in Asia, as well as another study in Europe this year.

With regard to our intranasal insulin, we recently announced our first license of our intranasal spray administration to Dong Sung Pharmaceuticals in Korea, who will be working closely with us to advance the clinical development of our product.

Dong Sung is a research-based pharmaceutical company with capabilities to aggressively develop, register, and market this product.

The data from this program will be extremely valuable in supporting the development in other territories including the United States, Japan, Europe, and other parts of Asia.

The development program will begin as soon as regulatory authorities in Korea allow.

With regard to our expansion into the United States, we are working closely with Perrigo in co-developing products intended for the U.S. generic market.

This developmental program is well under way.

We also announced this week advancements in nanotechnology applications in drug delivery.

This technology was the result of a four-year sponsored research program with the University of New Hampshire.

Our technology is different from the vast majority of other similar research.

Most nanoparticles are comprised of submicroscopic solid particles that either contain the active ingredient or have the active ingredient on the surface of the particle.

Many of these components are nonbiodegradable and may have associated toxicities.

Our efforts have resulted in a nanovesicle that is not solid, but hollow.

It protects the contents of active ingredients, which are completely enclosed within the vesicle and is biodegradable because all components are commonly used ingredients.

The hollow nature of these particles allow for automatic formation of nanovesicles as active ingredients are added, giving us greater loading capacity.

The Nanocaplets, as we call them, can then be enteric-coated and put into capsule or tablet dosage forms, but liquid, transdermal, or injectable formulation are also possible.

Based upon initial test production, the manufacturing of these Nanocaplets appear to be relatively simple, requiring only standard pharmaceutical equipment for gastrointestinal protection, such as the equipment that we currently use in our manufacturing facilities in Spain.

We are quite excited about the prospects of this new technology and look forward to exploring the multitude of potential applications.

Now I would like to have Mike Price, our CFO, review the financial results of the Company for the first quarter, after which we will open the call for questions.

Thank you.

Thanks, Jim.

Candace, could you do me a favor and make sure that all of the other lines are muted?

We are getting some background noise here.

You may recall that I mentioned on the year-end conference call in March that we should see a return to strong double-digit revenue growth rates in 2005.

Even though we indicated that in 2005 the growth would be more heavily weighted toward the second half of the year than the first half, you can see the first-quarter revenue is increased by 40% to a record $24.2 million.

While it is true that foreign currency fluctuation contributed about $1 million to that growth, 34% real growth in terms of constant currency is certainly nothing to be ashamed of.

When you exclude the impact of foreign currency rate fluctuations, first-quarter revenues still grew by $5.9 million or a very respectable 34%.

While we are pleased with the results of the first quarter, we are even more excited about the prospects for the balance of the year.

We think that the first-quarter results are indicative of the direction we're headed.

I will let you do the math, but historically our second-quarter revenues have been even higher than in the first quarter.

Third-quarter revenues then typically retreat slightly from the second-quarter levels, as we head into the holiday season in Europe; and then we usually finish with the strongest quarter of the year.

I don't see any reason that this trend should not continue, with one caveat.

We think that the third quarter may not necessarily slow down as it has in the past, because we anticipate ramping up for sales related to certain of our international licensing and long-term supply agreements, which is why we previously indicated that we expected the second half of the year to be even better than the first half.

As Jim mentioned, we now have 129 license and supply agreements executed, 67 of which related to products that have now been approved, and 62 that relate to products that are pending approval and will be drivers of our growth in the future.

I think it's important to note that we did not make any changes in our revenue recognition policy in the first quarter of 2005, which means that none of the growth this quarter is attributable to revenue recognition of previously deferred revenue on our balance sheet.

Our licensing and collaboration revenues grew by 39% to $1 million during the first quarter, representing primarily royalties from sales of Auxilium's Testim.

As Jim indicated, the latest market data indicates that we now have 13% of the prescriptions written in this market.

As of March 31, 2005, we still have Testim royalties from Auxilium totaling more than $1.3 million recorded as deferred income on the balance sheet.

When we have enough data to predict future product returns, we will recognize royalty revenues based on net product shipped to customers.

This change in revenue recognition methodology should come in the form of a onetime recognition of the related deferred income, which as of March 31 represents about $0.06 per diluted common share.

We anticipate that this change could occur sometime during 2005.

We have also received upfront payments from our licensees in Europe that have been deferred, and they total about $2.6 million as of March 31.

The deferred revenues associated with our licensing and supply agreements, while significant, are relatively immaterial when we compare them to the future revenues that we expect to receive from those agreements.

Gross margins on first-quarter net product sales, excluding sales of API's in Spain, were 53% compared to 50% in the first quarter of last year, primarily as a result of economies of scale.

We expect gross margins to continue to improve gradually as more units of throughput absorb the factories' fixed operating costs.

Operating expenses for the quarter increased by 24% to $9.1 million and now represent less than 38% of revenues, compared to 43% of revenues this time last year.

Income from operations more than doubled to $3.6 million as a result of the leverage provided by our strong revenue growth.

Income tax expense totaled $1.6 million in the quarter, or 34% of taxable income earned in Spain.

Unfortunately, we are not able to offset operating losses in the U.S. against income earned in Spain, because Spain and the U.S. are separate tax jurisdictions.

Net income for the first quarter increased by 168% to almost $2.2 million compared to about $800,000 in the first quarter of the prior-year.

Diluted earnings per share increased by 150% to $0.10 compared to $0.04 in the prior-year first quarter.

As Jim said, the financial results in the first quarter reflect the hard work and the perseverance that we put forth during 2004, and though our efforts in 2004 weren't always obvious or visible, they're now beginning to bear fruit.

Cash flows from operations more than tripled to $4.5 million in the first quarter, further confirming that our business model is on track and very healthy.

Strong cash flows from operations should provide a greater than expected source of cash to help fund our capital expenditures planned for the balance of this year, as we prepare to expand our capacity and gear up for continuing growth in 2006 and 2007.

With earnings and revenues continuing to grow, it's no surprise that our balance sheet remains very strong.

Our assets now total $123 million at quarter end, and we have about $36 million in cash.

We have a current ratio of about 2.6 to 1; and strong sales during the quarter resulted in a growing receivable balance.

However we reduced our trade and royalty receivables from 125 days of sales outstanding at your end to only 99 days of sales outstanding at March 31.

We did receive a substantial payment from an important and valuable export customer during the quarter.

We're still owed about EUR3 million by this customer.

At the same time, we owe this customer about the same amount, related to a comarketing arrangement that we have with them; and that means that there is essentially no exposure or financial risk associated with this declining receivable balance.

You probably know that the SEC has delayed the implementation date of the proposed accounting rule that would require that stock options be expensed.

It has been delayed now until 2006, and with all of the controversy swirling around this issue, who knows what may happen between now and then?

We are also pleased to tell you that we received a clean report from our auditors, Deloitte & Touche, on our system of internal controls as of December 31, 2004; and we recently filed an amendment to our Form 10-K that included their opinion that there were no material weaknesses in our system of internal controls.

As I mentioned, the weakening of the U.S. dollar in relation to the euro over the past year had a positive impact on our income statement because it did result in higher sales of about $1.1 million during the quarter.

But because the U.S. dollar actually strengthened during the first quarter of 2005, it resulted in a slightly weaker balance sheet at March 31.

Currency fluctuations had the effect of reducing our balance sheet by about $3 million during the first quarter.

So in summary, the results have been higher revenues and higher expenses compared to a year ago, but lower asset values and lower liabilities when compared to December 31, 2004.

In addition to increasing revenues by about $1 million it also increased cost of sales by about $0.5 million.

It increased operating expenses by about $300,000 and income tax expense by about 100,000.

The net impact on the bottom line was positive by about $167,000 or a little less than a penny a share.

Jim and are pleased with the first-quarter results, but we are even more excited about the prospects of the balance of 2005.

We're looking forward to providing you with updates as we progress through the year.

Now I would like to turn it back over to Jim.

We'd like to now open the call for any questions that the stockholders may have.

(OPERATOR INSTRUCTIONS) Mark Taylor of Roth Capital.

Excellent quarter.

Several questions, one at a time if I may.

First, just going through some of the products, I noticed there was no enalapril in the first quarter and there was some in the fourth.

So anything there?

No enalapril in the quarter;

I was just curious why.

We did have sales of enalapril during the quarter, but it just was -- what we did is when we prepared the information we broke down our top five leading products.

As a matter-of-factly we indicate that enalapril provided about 6% of our revenues during the quarter or about $1.4 million.

I see it in the branded side, but I see nothing on the generic side.

No generic enalapril in the quarter.

That is because it was not one of the top five generic products during the quarter, but we still did have substantial revenues that were sourced from that product.

Okay.

Fair enough.

On the other product category, on the generics, you did 2.6 this quarter versus 1.7 in the fourth quarter of '04.

So there is an increase there.

Is that all new?

Can we assume that that is new products approved last year that are now finally coming to market with price?

I believe that there is significant contribution in there for new product launches, Mark.

Also, you have to consider the market conditions that we were operating in.

We are taking greater market share in select areas as well.

Okay, so based in your comments earlier, we should expect that segment to grow this year as new products get approved and priced and you launched them.

I would believe that would be a true statement.

Okay.

In the past, you used to sort of single out contract.

But now it has been I suppose combined into what is called sales to licensees and other.

But can I assume then that in the other, in the sales within Spain in the other, the 3.6 million -- is that contract manufacturing?

We do have contract manufacturing included in that number, Mark.

You're right.

What we try to do is create a little more clarity with respect to that.

I think when people think of contract manufacturing they think of low margin toll manufacturing.

In fact a lot of the revenues that have been previously described as contract manufacturing for us were in fact manufacturing for our licensees under contract; and they were at margins that were much more similar to our remaining margins, as opposed to lower-margin toll manufacturing.

We were trying to clarify that, to make sure that the reader can understand that this is a good margin business for us.

Two more questions.

Thanks.

The royalty that you show for Testim coming from Auxilium, and then based on Auxilium's reported quarter today of 8.8 million, 300 of which is overseas; so it is 8.5.

So that really implies a 10% royalty.

Is that about in line with where we should be?

I am not sure that you can draw a parallel between what Auxilium is reporting and what we're reporting, Mark.

I think that they are using an estimate of prescriptions written, using whatever database they contract with.

We're using another different independent source of that information.

Our estimate of prescriptions written may not necessarily match up to theirs.

But they pay you, so somehow you guys have to come to the table.

The pay us, and we are in agreement with that.

Our numbers do match up with respect to the amount that they pay us, the amount that we record as a receivable, and the amount that we record as deferred revenue.

But our revenue recognition on the income statement may not necessarily correlate.

So consequently, I can tell you what we said in the past.

Although we have not disclosed the royalty rate, it is a double-digit rate.

It's been previously estimated at 12%, which we have indicated is close and even conservative.

And conservative?

Okay.

Because at that rate you would have, based on their shipments today, at 8.8 million you would seen more Testim than we see.

It is entirely possible that had we used the same database that they use that our revenue recognized would have even been higher than we reported.

I think our numbers are conservative.

Okay.

Maybe they owe you.

All right, lastly, in G&A expense I noticed that is up.

Can we assume that is mostly in corporate, or is that over in Spain?

Where?

It's a combination of corporate and in the U.S., and it really relates -- if you have been reading reports of the cost of Sarbanes-Oxley 404 compliance, we have had a lot of cost, as other companies have, to make sure that we were okay.

I have to tell you, we're very proud of the fact that, with a company of our size and with our resources, that we had no material weaknesses reported and we got a clean report from our accountants.

Great, thank you very much and congratulations on the quarter.

(OPERATOR INSTRUCTIONS) Mike Bruyard (ph) of SAMCO Capital.

It was an excellent quarter.

I did have a couple of questions.

One, you show that deferred income increased by 1.2 million during the first quarter to 4.7 million.

That is right.

Is that from one particularly good licensing agreement or just a number of different ones?

It is from a number of different ones, Mike.

It includes not only those licensing and supply agreements that we have signed in Europe, but it also includes an increase from Testim royalties.

And it also includes a deferral of some of the revenues from the last two days worth of sales that we make, because we want to make sure that when we do our revenue recognition that we are certain that the customer has received the product.

So we make sure we have a proper cut off at year-end.

Any product that has been shipped out of the warehouse, but has not clearly been received by the customer is deferred.

So it also includes some product that has been shipped in those last two days.

Okay.

Also, the testing that you'll be doing in South Korea, you said that you have to wait on the Korean authorities.

Do you have any idea of when that might start, and how long the test might take?

We don't know exactly, Mike.

We're going to be feeding additional information from some preclinical studies that we are doing in the United States.

In particular we're doing a 28-day repeated dose toxicity study, which is actually a repeat of what we had done before.

That is underway.

That would be supportive safety data that will be used in Korea and other parts of the world.

Following giving them that information, and giving them all of our final information on our Phase II work, and maybe even some additional shorter Phase II type studies.

But then I believe the Korean regulatory agencies can make an adequate review and give us the go-ahead.

The intent is then to go into Phase III.

We have got some guidance as to what would be required in the Phase III.

It is very interesting and could be accelerated quite quickly.

So we're very, very enthused with the opportunities to get this accelerated, because the data could be very valuable to us in parallel programs in other territories.

So we're talking a matter of months there instead of years, possibly?

We're certainly not looking years out, no.

Thanks very much.

Murray Vandevelde (ph), UBS.

I concur with the other questioners.

Very impressed with the direction that you have finally turned.

Several questions.

Can you help me?

I'm having a little trouble with the charge presented in your release.

I am trying to get some sense of traction outside of Spain; and I am wondering if you could shed some light on that, so we could see how in fact you are doing.

Let me give you a little bit of a history.

In Spain, we have the ability to get the margin a little bit quicker than other parts of the EU.

We can accelerate our research in Spain; whereas France, Germany, the UK, and others have to wait for certain triggers by patent expiration to advance their products, which really gives them somewhat of a disadvantage.

If you have got a good quality research department and a good solid registration package submitted and approved in Spain, where you have also your chemical and manufacturing process all in place, manufacturing rolling, that is a very attractive package for huge generic companies who are looking for a source of finished goods and a very solid registration file that they can use and get to market quicker.

There has been a sudden recognition of this.

If you look to the largest European generic players in the world, they are amongst the 129 that we have announced today.

We will supply finished goods to them.

They will be packaged in their boxes; in some cases they will work with us actually in regulatory filings.

They do pay us for our registration package, and they're obligated to us for a minimum of five years exclusive, must purchase from our manufacturing.

So it really does represent very significant growth, especially in areas where we are highly specialized; in particular in more complex manufacturing process, in microgranulation and microcapsulation.

So it really does represent significant and potential explosive growth as products are approved in other EU nations and/or patent expiration dates come forth.

How would I look at your tables in here to figure out where the sales are outside of Spain in generics today?

Okay.

I am going to let Mike take a look at it there.

Are you looking at the comparative quarterly charts that show the sources of revenue?

You can see that revenues outside of Spain in the first quarter of this year are 4.6 million or 19% of our revenues.

I just got to get the right --

In the column, it would be the fourth column of numbers.

Revenues within Spain, outside of Spain?

Yes, okay.

4.6 million; 19% of our revenues from this quarter compared to 3.5 million this time last year or 21% of a lower revenue base.

Okay.

So that is the number, 4.6, right there, out of the total?

That's right.

Okay.

Two other questions, again go a little bit more in terms of future.

Could somebody explain to me a little bit -- and I am sorry because I did miss the first five minutes of the call -- thermodynamically stable biodegradable Nanocaplets?

What are we looking at or thinking about there in the work you're doing with the University of New Hampshire?

What we have been able to achieve, there is a great deal of interest by the pharmaceutical companies, as well as you know any other industries, in nanoparticle technology.

Most researchers have been looking at the application of polymers and a number of other things.

But most successful, at least at the exploratory level, most successful nanoparticle research has resulted in embedding the active ingredient into a solid, in the matrix within the solid.

Or in the alternative, coating it on outside.

Then they are faced with the problem of how do you get it into perhaps (ph) the acidic medium of the stomach?

How do you get it released and to the proper pH in the small intestine?

And that sort of thing.

Ours is different.

Ours is different.

What ours is is in fact a hollow vesicle.

So if you could envision this long string chain that is in solution, we simply add the active -- the active which we have tested for example with insulin, a sensitive peptide; but other things, such as Ipo (ph), Seradase, or other biotech products.

As it gets added to the solution, this long string with a hydrophilic and lipophilic end actually forms around and encapsulates the active ingredient.

So you are not limited to the surface area of the particle for loading.

It actually is encapsulated and trapped on the inside.

So you get a lot (ph) greater loading capacity.

Now the other interesting thing we found is that in the formation of nanoparticles, it's a relatively inefficient process, in that only about 13 to 20% actually get adhered to the surface or incorporated in nanoparticles.

We found by contrast that 80% of the active actually occurred as the fully encapsulated intact molecule.

As for delivering it orally in rats, in two different studies, we found in fact that we could get it through, into the small intestine and be absorbed and released there.

So we really recognize this as a potential breakthrough in nanoparticle technology, especially from the drug delivery perspective, and really wanted to capitalize on that as fast as possible.

We don't want to go into too much specific detail right now because we're in the midst of various patent filings which have already been done.

So we are trying to be very guarded about this at this time.

But we are very, very excited.

We think that this will certainly augment and could very well exceed the potentials of other drug delivery systems that we have.

That sounds exciting.

Lastly, no comment and I was disappointed a year ago or so because I thought your technology would present itself, or your early work you had done, would present itself for working, if you will, on the toenail fungus.

You were unable to find a partner.

Obviously, you still haven't found a partner.

I just wondered if you could bring us up-to-date on that.

We did do two exploratory studies; we will call them pilot in nature, because the numbers were quite low, 18 and 20 patients in fingernails and one in toenails.

It really didn't have a large enough sample population to really drive the nail home with potential collaborators.

They really have a great deal of interest, but they want to see larger studies.

We were very excited even with the very low numbers; but it wasn't sufficient to get them to step forward.

We are still fully committed in this area.

We still have faith in that technology.

We know there is a tremendous need for this type of application to avoid the problems of oral ingestion of highly or potentially highly toxic molecules.

We are totally committed, and we will be looking to do studies in Asia where it can be done under GMP GCP conditions by approved FDA clinical research groups, but can be done at a fraction of the cost.

Meanwhile, we're also looking to conduct studies in the European market where there is many reference products, other product on the market that we can compare ourselves directly to.

So we are proceeding down that path very rapidly.

Either we will market it ourself; or in fact with more compelling numbers of patients we will go back to the same people.

In the very limited trials you did, if I am not mistaken, you were getting what you thought might be absorption rates of -- I think there were 80%-plus versus maybe high single digits or something for a competing product.

Right.

What we were doing, we were finding that about 80% of the population were responding with evidence of clear nail growth.

Which is visually you could see the improvement.

Meanwhile, the FDA bar has been lifted much higher from the time when Penlac, the only other topical, was on the market.

The FDA is more stringent now.

They don't want to just see evidence of clear nail growth; they want to see total clear nail growth.

In addition they want to see a negative KOH, which is a diagnostic tool to say is there a presence or absence of fungal tissues.

Regardless of whether it's alive or dead, just whether there is any fragments, further to that they want a negative culture.

So the bar has been raised pretty high in the United States, and it can become very costly.

So we don't want to abandon the program, so we decided let's go where it could be cheaper, get supportive data, and then come back to the United States.

Okay.

We have not abandoned our interest in that area.

Okay, that's helpful.

Thank you very much.

Manny Reiser (ph) of Wachovia Securities.

First, congratulations also, gentlemen.

A few questions.

The initial question concerns the agreement that we have with Dong Sung Pharmaceutical of Korea.

They had to conduct Phase III trials, if I understand this correctly, and yet some additional preclinical trials ought to take place before the Phase III, Jim?

There is one preclinical trial, which is a 28-day systemic toxicity.

That program is already underway with Covance Laboratories in the United States.

So it is really just a toxicity trial?

And it's a repeat, because we have slightly altered the formulation.

It's a repeat of data that we already have in our file.

Okay.

And once that is completed and we analyze the data, Dong Sung takes over and conduct Phase III trials?

Well, hopefully their regulatory agencies will accept that as being sufficient preclinical work.

Meanwhile, we are going to do in Asia continuation of characterization of this formulation in a brief clinical program, which could be Phase I for bioavailability and some additional Phase II work.

We don't expect that to be lengthy, but those are going to be underway shortly as well.

If you had to predict a timetable for Dong Sung to do Phase III, what would we be looking at in terms of when would they begin initial work, and how long do you envision the Phase III trial taking place?

I believe the preclinical work will certainly be completed in the year 2005, at least to a point of a summary report.

Hopefully, all of the histopathology, clinical chemistry, urinalysis, all of the other components of that would be sufficient just short of a final report.

Maybe we will even have the final report, but in parallel, we will be doing some clinical work in Asia as well.

So I would say by year-end, we will be pretty well along in collecting the data.

Then it is a matter of making sure we get through the regulatory agencies and get allowance to start.

They have already had meetings with their regulatory bodies who have given them some guidance, and we are following that guidance to try to accelerate as fast as possible.

So realistically, we are looking at a potential 2006 commencement of Phase III?

That would be a reasonable expectation.

Then the Phase III programs, if it looks like they are going to be needed, are -- it looks like three separate but relatively, by U.S. definition, relatively small numbers of people than what you would expect in the U.S. or European market.

That is because of the well-characterized nature of insulin.

It is already known what toxicity or hazard would be with different blood levels.

So it might in fact be even a more reasonable approach to development.

One final question related to this.

I am curious as to how Dong Sung came into this.

Do they have much experience in this area of working with insulin?

I looked at their website, and it seems like they predominantly, if I understand it correctly, a company dealing with the cosmetic area.

No.

They are strong in cosmetics, much like you would Procter & Gamble in the United States with some cosmetics, some OTC, some prescription.

It is a diversified company.

But they have concentrated efforts in anti-inflammatory, cardiovascular, gastrointestinal, antispasmodics, respiratory agents, dermatology, antibiotics, and antifungals.

In addition to a diabetes side with oral hypoglycemic agents, hormones, and hypnotics and sedatives.

It is quite an established company.

Very aggressive, research based, and they do have another division where they dominate in some cosmetic areas, in particular in hair dyes.

But that is a different division.

Okay.

Thank you for enlightening me on that.

If we can move over to the Nanocaplet side, this sounds very exciting and certainly I understand the reluctance to talk in great detail about it.

But again in terms of a timetable, what realistically might we be talking about?

How much further work would be done with the University?

What kind of additional testing would be necessary before commercialization or joint ventures?

Could you give us some more color on that?

Yes, let me give you some ideas.

Obviously this type of technology should be specifically targeted to those worldwide products that are selling currently in the realm of $6 billion a year and soon to come off patent.

Any way to protect that heavily invested franchise that have been built by a new and improved delivery technology that will give them another 20 years of patent life should be quite interesting to them.

The fact that all constituents in the formation of these Nanocaplets or nanovesicles are well-characterized and commonly-used ingredients should give us some sort of an edge over others that have nonbiodegradable and polymer type of technologies, where you could have associated toxicities, especially if they were inhaled, for example.

So we think we are in quite a unique position that is quite dissimilar (ph) to our other strategies of taking well-characterized components and adding them to formulations to make the performance better, such as a CPE-215.

So this is a very similar strategy where we want to get into low-risk R&D.

And we are quite enthused about the results that we have got.

Okay.

The final question I have to ask you is, with everything that seems to be going on, so much is very positive, how do we deal with the fact we're relatively small?

We don't have a huge force in terms of marketing or things of that nature.

Yet we have a love of agreements on the table, a lot of wonderful announcements.

Could you share with us how you prioritize what you expect to see or would like to see in the near future, intermediate future, et cetera?

Yes.

The reason that we employed the strategy of going into licensing and supply agreements with these 129 entities throughout all of geographical Europe was the realization that we do not have marketing and sales in all of these other territories.

It is quite a costly venture to go in and establish an office and marketing, sales, and promotional advertising, which could be quite a demand on the Company.

We want the Company to continue to grow in critical mass, continue to grow in EPS.

We don't necessarily want to take a step back with losses in each of these areas.

Now what we have done is, when we have filed our products in Germany, France, Holland, Belgium, Scandinavian countries, Ireland, England, we've made multiple registrations.

One is used on a nonexclusive basis to be licensed out to a number of other market leaders.

One sits in our desk drawer, resident in that particular territory.

When the critical mass gets great enough there may be an opportune time for us to open our own office, and have a limited number of salesmen, and able to directly move into those territories, hitting the ground running rather than trying to build from a greenfield up.

Okay, thank you very much.

And again congratulations on an excellent quarter.

(OPERATOR INSTRUCTIONS) Philip Miller (ph) of Scolts (ph).

Jim, I think you were in Spain about the time that the Ministry of Health announced their intent to amend the price reference system.

Yes I was.

I was there for eight days.

Having been over there, what are your -- can you share with us -- are your expectations for change coming from that (multiple speakers) summer?

Due to the sensitivities of the last reduction in prices, which are reference price based, we were quite concerned.

I wanted to make sure I was very much on top of it, and I wanted to make sure that it would not be harmful to us in any way.

Many people have started rumors and they are posted on different boards and that sort of thing in an alarmist sort of way.

Probably have different agendas than the vast majority of us.

But let me clarify the situation.

The Spanish Ministry of Health is only looking to reduce the minimum price for a generic that has been written, a script that has been written not specifying a specific laboratory.

So rather than saying omeprazole Davur, omeprazole Belmac, or omeprazole Rimafar, if it just says omeprazole the Ministry of Health is saying that pharmacist, without guidance on that script, must fill it with a script at or below what we're going to establish as the minimum price.

Now this at this stage, it is only being discussed as an alteration in their policy.

We are not concerned or worried about it.

There has been no official decree of any nature.

There is no change at all in the reference price system, which really had a big effect on us throughout all 2004.

We're already amongst the lowest priced.

With our Laboratories Rimafar, in some particular provinces of Spain it has always been that policy.

Like Andalusia province, which is in the southern part of Spain, that has always been the policy.

That if it is written without a specific laboratory reference, it has got to be filled with one of the lowest ones.

With physicians, (ph) Laboratories Rimafar has always been amongst the lowest price.

It is not the lowest priced anyway; that is our insurance policy.

So if they do enact it, we are already in that position.

Finally, if they do elect to do a slight alteration in lowering the price, it is totally voluntary.

Totally voluntary.

Not mandatory for laboratories to reduce prices.

If you have got a strong marketing and sales team, that is calling on physicians and clinics and pharmacies, you want to make sure that the scripts are written through an effective marketing sales force with your name on it.

And that is what we have always been doing.

That is the majority of our scripts now.

So we do not see this as being detrimental.

We really see this as an opportunity.

If you remember back when they initiated the reduction of prices, the beginning of 2004, we reacted quickly, defensively.

We increased the number of units.

We have ended up in a dominant position in some areas, and we have prospered as you can see from this first quarter.

We see this as an opportunity, not a problem.

Just a quick follow-up question.

You mentioned gaining market share in Spain.

Are you doing that through the low prices or more effective marketing?

It is actually a combination of more efficiencies in the manufacturing unit, getting more units into the market, taking market share.

We have done some price alterations, especially in a defensive reaction beginning in January of 2004.

But our strategies are working quite well.

Quite well.

Obviously.

Thank you.

Mike Bruyard, SAMCO Capital.

Just another quick question.

You haven't mentioned anything about the acetaminophen product.

Could that possibly be approved any quicker now through the Ministry of Health?

Mike, it is equally frustrated for us.

We've had numerous meetings with the Ministry of Health saying we have put in a solid good registration file.

You have looked at it.

You have got no objections, no deficiency letters.

We know it is not a high priority for you.

You are looking to put new generics on the market that have massive savings to this socialized healthcare system.

But we're getting a little frustrated.

And we have told them of our frustration.

Their response back to us, without specifically saying that they are going to approve that, is that in fact they have hired 28 new employees to address the backlogs, and hopefully that will help us.

Okay.

But no promises?

I would love to ever get a promise out of any regulatory body, but no.

I don't think that will be the case.

And you have roughly 100 different formulations there awaiting approval?

Throughout all of Europe, and that has been staying pretty static.

We get two, three, four approved, but they are quickly replaced with new registrations that we have developed.

Okay, thank you.

Gentlemen, you have no further questions at this time.

Please proceed to your closing remarks.

I want to thank you very much for taking the time to listen.

We're quite enthused about the first quarter of this year.

We think this year is going to be a very solid year for us, and certainly going to lead -- a very strong foundation for continued growth beyond 2005 into 2006.

So with that, if anybody has additional questions that they didn't have an opportunity to ask, please feel free to call PLR or our corporate offices in New Hampshire.

Thank you very much for your time.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.