Veru Inc (VERU) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Veru Inc.'s Investors Conference Call. (Operator Instructions) Please note that this event is being recorded.

The statements made on this conference call that are not historical in nature are forward-looking statements. Such forward-looking statements reflect the company's current assessment of the risks and uncertainties related to our businesses. Our actual results and future developments could differ materially from the results or developments in such forward-looking statements. Factors that may cause actual results or developments to differ materially include such things as the risks related to the development of the company's product portfolio, risks related to the ability of the company to obtain sufficient financing on acceptable terms when needed to fund development and company operations, risks related to competition, government contracting risks and other risks detailed in the company's press releases, shareholder communications and Securities and Exchange Commission filings. For additional information regarding such risks, the company urges you to review its 10-Q and 10-K SEC filings.

I would now like to turn the conference over to Dr. Mitchell Steiner, Veru Inc.'s CEO and President. Please go ahead.

Thank you, operator, and good morning. This is Dr. Mitchell Steiner, President and CEO of Veru Inc., and joining me are Michele Greco, CFO and CAO; and Kevin Gilbert, Senior Vice President, Corporate Development and Legal. Today, we will provide an update on the clinical development of our drug pipeline, commercialization of our products as well as provide financial highlights for the first fiscal quarter 2018.

We're making good progress as Veru transitions to a urology and oncology biopharmaceutical company. Our strategy for revenue growth is to have several near-term and midterm drugs under clinical development progressing at the same time to ensure that, in the near term, we file several NDAs and commercialize multiple drugs in urology and oncology.

Over the next 18 months, we expect to file 3 NDAs for 4 drugs. First, we have the proprietary new slow-release granule formulation of Tamsulosin in 2 drug products: Tamsulosin DRS, extended release granules for oral suspension; and Tamsulosin XR capsules.

These 2 new drug formulations address 2 important clinical challenges that are found in current branded and generic FLOMAX formulations. First, FLOMAX is only available in a capsule form. And according to FDA package insert, FLOMAX capsules should not be crushed, chewed or opened because it may lead to serious side effects of low blood pressure and dizziness. The new slow-release granule formulation, Tamsulosin DRS, may be given to the 60% of men in long-term care and 15% of men in the community who have difficulty or cannot swallow pills and cannot take FLOMAX as instructed by FDA.

A second clinical challenge with FLOMAX is that it has a food effect, meaning that a greater amount of Tamsulosin drug gets rapidly absorbed, resulting in higher drug blood levels when given on an empty stomach and must be given 30 minutes after a meal. The new slow-release granule formulation does not appear to have a food effect based on the bioequivalence studies we have conducted.

Because of this advantage for drug administration and compliance, we plan to offer these proprietary slow-release granules in a capsule form as Tamsulosin XR capsules. Tamsulosin XR capsules will allow us to expand to the broader, multibillion-dollar urology and primary care BPH markets, including those men who can actually swallow tablets or capsules. We expect final bioequivalence clinical data and filing an NDA in 2018 for Tamsulosin DRS, 0.4 milligrams, which is the Tamsulosin HCl extended release for oral suspension, and Tamsulosin XR 0.4 milligram capsules for the treatment of symptoms of an enlarged prostate causing difficulty in urination, also known as benign prostatic hyperplasia, or BPH. This launch is planned for 2019.

Our second urology drug is a proprietary Solifenacin DRG, delayed-release granule formulation of Solifenacin, the active ingredient in VESIcare, a popular drug for the treatment of overactive bladder, which is urgency, urge incontinence and frequency in both men and women. Similarly, as instructed for FLOMAX, the FDA package insert states that Solifenacin tablets must be swallowed whole. There are no granule formulations available for this class of drugs. The class is called a selective M3 muscarinic receptor antagonist for men or for women who have the common condition of overactive bladder and who have difficulty who -- or cannot swallow tablets. Our proprietary Solifenacin DRG formulation utilizes the same delivery technology platform as our Tamsulosin DRS slow-release granule formulation.

The overactive bladder market is also a multibillion-dollar opportunity. Prevalence of overactive bladder is between 16% and 23% in the United States and increases with age. According to a recent study conducted by the Department of Health and Human Resources, 37% of short-term and 70% of long-term nursing home residents did not have complete bladder control. Consequently, the initial target population will be men and women in long-term care facilities with overactive bladder symptoms who have difficulty who cannot -- or cannot swallow tablets. We expect to utilize the same sales channels that would be already in place for Tamsulosin DRS. We expect for Solifenacin DRG, a slow-release granules for the treatment of overactive bladder in men and women, final bioequivalence clinical data in 2018 and filing an NDA in 2019.

Our third urology drug is a new proprietary Tadalafil 5 milligrams/finasteride 5 milligrams combination capsule formulation. This proprietary combination formulation contains the active ingredient of Cialis, which is Tadalafil 5 milligrams, approved for the treatment of BPH and erectile dysfunction, and Proscar, which is finasteride 5 milligrams, which is approved for actually shrinking the enlarged prostate to treat BPH.

The Tadalafil/finasteride combination and capsule formulation will allow us to offer a portfolio of BPH drugs that have different mechanisms to treat different symptoms and signs of BPH. For example, Tamsulosin treats urinae symptoms of BPH quickly in men with smaller prostates whereas Tadalafil/finasteride combination capsule formulation quickly treats urinae symptoms of BPH while it also shrinks the size and prevents the progressive growth of the prostate in men who actually present with an enlarged prostate. We anticipate the Tadalafil/finasteride combination capsule formulation for the treatment of low urinae symptoms because of an enlarged prostate, the final bioequivalency clinical data in 2018 and filing an NDA in 2019.

We are well positioned to take advantage of the multibillion-dollar BPH and overactive bladder opportunities. These 4 products, Tamsulosin DRS granules, Tamsulosin XR capsules, Solifenacin DRG granules and the Tadalafil/finasteride combination capsules, will allow us to file NDAs as well as launch and partner, when appropriate, multiple urology drugs over the next 2.5 years.

The next wave of urology and oncology pharmaceuticals will include VERU-944, which is cis-clomiphene citrate for the treatment of hot flashes in men who are in hormone therapy to treat advance prostate cancer. In May of 2017, FDA agreed that VERU-944 may advance into Phase II dose-finding clinical study. We will file the IND and initiate the Phase II clinical trial in early 2018 with the clinical data expected in early 2019. It should be noted that the U.S. patent for VERU-944 was recently issued and will expire in 2035.

We're also developing VERU-111, a novel oral anti-tubulin therapy that targets alpha and beta tubulin subunits of microtubules for the treatment of metastatic prostate, breast, ovarian, endometrial and other advanced cancers. We're completing the required preclinical studies and we'll be able -- we'll be ready to begin the clinical trials by the second half of 2018. We will include in the trials, initially, men with metastatic castration-resistant prostrate cancer, who have failed current hormonal therapies, in a Phase I/II open-label clinical trial, which means we'll start to see the clinical data in the latter part of 2018.

In the Phase II portion of the clinical study, we will target men with metastatic castration-resistant prostate cancer who have become resistant to -- who have failed ZYTIGA, which is abiraterone, or XTANDI, which is enzalutamide. These are prostate cancer hormone drugs that are generating several billion dollars in annual revenue today and unfortunately men will break through. In addition, VERU-111 can be developed as an oral therapy for other tumor types that are currently being treated by intravenously given anti-tubulin chemotherapies, which is also a large market opportunity, well over $5 billion of annual revenues today.

Scientific preclinical data for VERU-111 was recently presented at the American Society of Clinical Oncology GU Meeting in San Francisco and has been accepted for future presentations at the European Association of Urology in Copenhagen, Denmark in March of 2018 and the American Urologic Association meetings at San Francisco in May of 2018.

We have a full and advancing pipeline of drugs. We will also continue to be opportunistic by both internally developing and/or finding new pharmaceutical products to license in urology and oncology. We have accomplished a lot this year by obtaining regulatory clarity and advancing the clinical development of our pipeline of drugs. We're able to do this with our existing resources and without undertaking a separate debt or equity financing. We paid for these activities this past year, in part, by the revenue produced from our commercial products, the FC2 Female Condom business from the Female Health Company division and PREBOOST.

The Female Health Company division has revenue from both the global public health sector and the U.S. market. In the global public health sector, FC2 is the world's leading female condom. With growing international competition, now more than ever, we need to protect our brand, lead our competition and aggressively grow our product revenues in the global public sector, the channel where FC2 is purchased in bulk quantities by governments and nongovernmental donor agencies for public health distribution.

This first quarter felt the impact of 2 of our largest customers, Brazil and South Africa, who did not place orders due to their normal procurement cycles. We believe fiscal year 2018 should be better as Brazil is awarding a 50 million unit tender for this year, and South Africa is expected to award this year a 40 million unit tender per year for 3 years, totaling 120 million units. We're confident that we will get some orders from one or both of these tenders in 2018, 2019 and beyond.

In the U.S. market, FC2 is uniquely positioned as the only FDA-approved female condom to prevent both unwanted pregnancies and sexual transmission of STIs, including HIV/AIDS and the Zika virus. Our challenge was to create the distribution and marketing and to service U.S. market. As I reported last month, we're seeing traction with new revenue in these new areas of market access.

FC2 is reimbursable with a prescription by both public and private payers in the Affordable Care Act. And under the laws of numerous states prior to the Affordable Care Act, we have now -- we now have the pharmacy distribution, market access and reimbursement infrastructure in place so FC2 is available and reimbursable in over 98% of retail pharmacies across the country.

We have a small sales force of about 12 people that market to OB/GYN and primary care physicians. We have eliminated the middlemen, the FC2 distributors, and we will now sell directly to departments of health and community organizations with better margins. We have signed a master service agreement to sell directly to 340B covered entities, which is approximately 56,000 entities, such as HIV and STD clinics. We have partnered with the HeyDoctor telemedicine application, so that an FC2 prescription can be obtained by the patient via an Apple and Android smartphone via this app, where their prescription can be sent to their local pharmacy or shipped to their home by a specialty pharmacy. We have an uninsured -- or underinsured assistance program where the individual can purchase FC2 at a discount from our website. And finally, we have an active colleges and universities program that continues to grow.

As I mentioned, we're finally seeing new revenue being generated and growing in the U.S. market. Historically, the average annual U.S. revenues for FC2 over the past 3 years have been about $1.9 million a year. I'm pleased to report, because of these new marketing and selling efforts, in just the past 4 months -- the past 4 months -- the revenues for FC2 in the U.S. were $1.5 million. Because of this progress, we're exploring, in the near term, the possibility to expand our marketing and sales efforts of 12 people to a hybrid independent contracted sales force of up to 40 to 100 people, who are seasoned independent contractors with established relationships in primary care and OB/GYN offices. As this is a contracted sales force, our company should incur no additional expenses to ramp up to this number of sales people who will be compensated by commission on FC2 sales alone.

Our other revenue opportunity is PREBOOST 4% benzocaine wipes for the prevention of premature ejaculation. We launched PREBOOST via digital and social media marketing, and we also entered into a co-promotion and distribution agreement with Timm Medical Technologies, a specialty urology sales organization.

I will now turn the call over to Michele Greco, CFO, to discuss the financial highlights. Michele?

Thank you, Dr. Steiner. This quarter, we experienced a decline in the public sector volumes. This decline is primarily driven by the timing of public sector tenders and orders from 2 main customers, Brazil and South Africa, and it's also, in part, impacted by the U.S. political and geopolitical donor uncertainty, resulting in a downturn in our order frequency and in order size from some customers, such as UNFPA and USAID.

For the first quarter of fiscal 2018, the FC2 unit sales totaled 4.4 million compared to 6.4 million units in the prior year first quarter. Net revenues for the first quarter totaled $2.6 million compared to $3.2 million in the prior year quarter. Gross margin was 51% for both quarters. Operating expenses increased by $5.2 million to $8.8 million compared to the prior year quarter. Included in operating expenses is $3.8 million related to the settlement agreement we entered with our Brazilian distributor, Semina, during December of 2017. Excluding the settlement agreement, the increase in operating expenses is primarily driven by the increased research and development cost of $1.9 million. For the quarter, we recorded a tax benefit of $3.2 million compared to tax benefits of $530,000 in the prior year quarter. The bottom line results for the first quarter of fiscal 2018 was a net loss of $4.3 million or $0.08 per diluted common share compared to a net loss of $1.4 million or $0.04 per diluted common share in the prior period.

Looking at the balance sheet. As of December 31, 2017, our cash balance was $3.6 million and our accounts receivable balance was $3 million. Our net working capital was $4 million at December 31, 2017, compared to $4.8 million at December 31, 2016. During the quarter, we generated $300,000 from operating activities compared with $1.2 million in the prior period. We continue to make significant progress on our clinical programs. We're very optimistic about the U.S. market for FC2 and expect the global public sector to return closer to historical volumes.

Now I'd like to turn the call back to Dr. Steiner.

Thank you, Michele. We have established a foundation to make Veru a leading urology and oncology biopharmaceutical company. We have several near-term and midterm products progressing at the same time to have multiple shots to have drugs filed and launched in urology and oncology. We aspire to file at least one NDA each year for the next 5 years. This will provide the engine for growth as we continue to develop and commercialize these existing drugs in our portfolio. We're excited about VERU-111 as a novel targeted oral therapy for multiple types of cancer and look forward to starting the clinical trial this year and sharing the preclinical data at multiple scientific meetings.

We will continue to seek non-dilutive ways to finance clinical development and commercialization, in part, with PREBOOST and FC2 sales. We will drive shareholder value through lower costs and expedited clinical development for large market opportunities in urology and oncology. We're committed to becoming a leading urology and oncology biopharmaceutical company.

With that, I'll now open the call to questions. Operator?

(Operator Instructions) And our first question comes from Yi Chen of H.C. Wainwright.

My first question is could you be able to tell us some color on the design of the coming Phase II trial of VERU-111?

You mean the Phase I/II trial of VERU-111?

Sorry. Yes, Phase I/II trial for 111.

Yes. I'll be happy to. So VERU-111, we are in discussions with John Hopkins right now and working with them to design the protocol. We chose them because if you look at the literature on castration-resistant prostate cancer, one of the subtypes that's most important is AR-V7, which is a splice variant, that really does not see any benefit from the hormonal drugs and just marches right through. So it's a subtype of cancer that these men have that are resistant from the beginning, quite frankly, to secondary hormone therapy. So the folks at Hopkins that actually identified and have written most widely on this subclass of cancer, prostate cancer are helping us, okay. Now with that said, we're going to be broad. We're going to go after men in a Phase I/II setting. First, safety, where we do almost a 3+3 design, to make sure that as we escalate the oral doses of this medicine, that it's safe. And then the second part, we'll be looking for efficacy. And because the way that these men present with progressive prostate cancer is by an elevated PSA, then PSA is a perfect biomarker for us to determine whether the patient is going to respond to the medicine. And typically, we look at PSA response of greater than 50% reduction in PSA at 90 days or 12 weeks. And so the design will be looking at PSA responses, and of course, we'll be looking at metastatic disease and all the other endpoints that you would expect for prostate cancer. So the design is roughly -- we're still working out the exact numbers, but somewhere between 16 to 24 patients in the initial safety portion. But we'll be collecting efficacy data at the same time. So if all goes well, then the -- in summertime, we will actually start the study. And so that -- and it'll be Hopkins and other big centers like Hopkins. And then we would expect in the late fall to winter to start seeing some of the data. And so we're excited about it because, at the ASCO meetings, we had a lot of interest at GU ASCO from medical oncologists that were just saying, look, if we had an oral agent that was an anti-tubulin, this would be very, very big because, as you know, the hormonal therapies, the secondary hormonal therapies, enzalutamide and also -- which is XTANDI and ZYTIGA, which is abiraterone, or oral agents -- and so this would be the ability to let urologists continue to manage their patients. And medical oncologists will like this because the patient can take the medicine at home, and you can do things like take the medicine on a daily basis instead of coming in and getting an IV and sitting in an IV chair for 8 hours. So there's a lot of benefits. And of course, they claim that any cancer that has sensitivity to taxanes, like breast, endometrial, pancreatic, head and neck, lung, I could go on and on, that this agent could have activity. So we're likely going to have a lot of fun with this, but we're going to start out by making sure that in our wheelhouse, which is prostate cancer, that with an endpoint PSA, that people feel comfortable if you see a reduction, that that's going to be clinically meaningful from the standpoint of activity against metastatic disease and death of prostate cancer or overall survival. So that's the design of the VERU-111 Phase I/II. The idea is -- just to add -- the idea is that the reason we call it Phase I/II is because we're going to write ahead of time in the protocol that after we're done with the safety portion, then we'll expand into a cohort of patients. So basically, the Phase II portion would continue without stopping enrollment. So that allows it to be much more expeditious in getting to efficacy data in the Phase II study.

Got it. My next question is will Tamsulosin DRS be marketed by a separate sales team that is currently focused on FC2?

Good question. So the answer is -- the first question is what is our strategy. So the strategy at this point is to focus on long-term care. Long-term care is basically nursing homes, both short-term and long-term nursing home care, but it also means home health. Because it turns out a lot of the older folks are choosing to take -- be taken care of at home. And so it's much bigger than what you and I are thinking about just having a hospital facility. With that said, we do know that about 3 GPOs manage about 80% to 90% of these nursing home formularies. And so think of the long-term care business as almost like the hospital-based business. In a hospital-based business, you can typically cover the entire United States between 12 and 18 account managers or salespeople. And so it's not a big sales force. So the idea is that the infrastructure that we have built to support FC2 as a prescription product, much of that infrastructure can also be used to help us support the launch of Tamsulosin DRS in long-term care. And part of the reason why we're moving to a contract sales force, where we don't have to pay them their salaries and bonuses, it's all done by commission, so there's no additional fixed cost for us, is to allow us to take our 12 salespeople that we have now and begin to cultivate them to help us with the Tamsulosin launch. And so you don't need a big number. And interestingly, Solifenacin DRS (sic) [Solifenacin DRG], which is the slow-release granules for the overactive bladder drug, would also go into that same channel. And so you would be able to have these 18 account representatives that we would have in our company going into long-term care have 2 products in their bag, if you will, as they go and talk to long-term care facilities. As it relates to urology and the primary care markets, which are large, our initial approach would be to see if we can find a partner and co-promote that into those areas -- we just have to see where our cash position is at the time and what is the best way to gain as much market share as possible. And -- but initially, we'll be focusing on long-term care and no additional headcount because we can use our existing headcount.

(Operator Instructions) Our next question comes from Peter McMullin, a private investor.

Yes. I got just a couple of questions here. First of all, on the write-down you took, does that mean Brazil doesn't owe you the money or it'll be just later in coming? Can you just describe that a little bit? And I guess the second thing, with the ambitious plans, just how you're going to finance the growth.

Yes. So the first part is -- just to give you a little color. When we started the -- when Aspen Park Pharmaceuticals was acquired by the Female Health Company approximately 16 months ago, we were looking at accounts receivables from Brazil of approximately $13 million to $14 million. Brazil then said to us that they plan to pay us half of that in calendar year 2017, and Brazil paid about half of that in calendar year 2017. Then as you saw, the political landscape became pretty unstable in Brazil, Temer was being -- vote of confidence and they found a corruption tape and the whole world was upside down. All the plans, the formidable plans that Temer had started to fall. And as you know with the Brazil politics, when the leader falls, then everybody doesn't stay behind him. As a result, we started getting signals from Brazil that yes, we're going to pay, because Brazil has never defaulted, but it may be delayed. And so in our world, that delay is money. And so is there a way for us to do something about it? So our feeling us, instead of leaving us with a Brazilian overhang for accounts receivables, is there a way that we could settle? And so we settled. And we settled -- so literally right now, as far as the accounts receivables are concerned, we're settled. And when we go into the new tender, we're going to be very, very aggressive to make sure that we're not put in this position again in the way that we handle it with our distributor in Brazil and the way the distributor in Brazil is going to try to work with the government. 50 million units over a year coming from Brazil is a big deal for us. And so again, Brazil ended up paying but we've got to figure out how to get that money sooner rather than later. So that's kind of the story behind Brazil. And part of the reason why it looks like we have a bigger loss this quarter is because we had to take -- what's the word I'm looking for, we had to record that settlement in a way that -- to reflect it. But really, it's good for us because we end up getting the money now. Michele, do you want to add anything to that? Or...

Sure. So in the P&L, we took the loss of $3.8 million right before the end of the calendar year December 31. They still -- they owed us the remaining $3.8 million. They paid $2.2 million, and the remaining balance of $1.6 million is going to be collected before the end of this month. And then we'll be all settled with Brazil.

The second question has to do with, gosh guys, how are you going to finance all this, okay. And I can remember over a year ago when we started outlining this ambitious program, everybody said, my gosh, these guys are going to have to go out and raise lots and lots of money. And that was the mood out there in the investment community. We're now 16 months later, and we have not raised a red cent. And so that's not true. What we've been able to do is 2 things. One is we have a product portfolio that does not require a lot of investment because we're doing -- 3 of our products are bioequivalency studies alone, and those are typically 36 patients of non-expensive studies. But the thing that's important is that we can file NDAs, and these are going after big markets. So we went after products that we didn't have to put big amounts of capital to begin with. As you know, that pathway is called the 505(b)(2) pathway, where the FDA lets you reference a lot of the current existing information. So for example, for Tamsulosin, for Solifenacin, for Tadalafil Cialis, we do not have to prove clinical efficacy and safety. It's purely blood levels, okay? With 944, which is a phase II study, I think I've said publicly that study is about 120 patients, that'll be a $4 million study over 18 months, not a big number, we do have to show efficacy and safety. And for VERU-111, which is a cancer product, that's a Phase I/II. That should be a handful of patients. And any signal that we see there is going to change the enterprise value of our company. So we are being incredibly aggressive in taking advantage of the asset -- the revenue-producing asset that we have now because that revenue-producing asset has been the reason why we have not had to go to the marketplace. And so one of the biggest concerns was that we were out of phase with the 2 big customers, Brazil and South Africa, how to phase with their procurement cycles, meaning that we've seen this 2 other times over the last 10 years. When they both don't order that year, you get a bad year. Well, we had a bad year. Now they're both coming back. So we expect that's going to be reflected in our numbers. Second issue with the female condom was that it was a kind of a lumpy business because of the fact that we didn't -- and it wasn't growing because it was done by 4 or 5 customers, nongovernmental agencies and government customers. And so if any one of them order, didn't order, it was quite lumpy, but no one got worried because it always sort of caught up. So we've taken a different initiative and that was is there a way to get rid of that lumpiness by -- revenue lumpiness by investing and showing that in the U.S., we can have significant growth. And I don't know if you caught on my comments, in the last 3 years, even though I'm not trying to -- I'm not providing any guidance here. I'm just giving you sort of a snapshot of where we are. You'll see that the U.S. markets or U.S. revenue for the last years, last 3 years historically in the U.S., had been about $1.9 million the entire year in revenue dollars. And we're seeing $1.5 million in revenue just the past 4 months of this year, year being the last 4 months being the fiscal year. And so we're like really excited that this is finally telling us that, that could be pretty high value money for us to help us invest in our programs. And it's also showing that we just -- just having launched the U.S. sales force in April, here we are now less than a year later and we're starting to see some positive trends. So this is good for us. This is the reason why I said that we're hoping to finance through non-dilutive dollars being internally generated. I'm a -- we're very sensitive to the shareholder, and we want to make sure that we finance this thing appropriately and that the stock price has to go higher so that we feel comfortable if we do something with equity. Right now, we're trying to focus on non-equity-type financing.

As this happens, don't you have kind of a standby financing mechanism in place?

Yes, we do. And in those, we haven't touched it, and that's a -- we have an Aspire capital agreement of $15 million. Basically, it's a put. And it's valuable to us because it just means that we're being fiscally responsible in a sense that: one, we authorize new shares; second, we put a shelf up haven't touched it -- but we put a shelf up; and finally, we put a mechanism in place that we can -- allow us to continue to finance internally, knowing that we're good in the future if we need to be. And that can be opportunistic for us because that's going to be an efficient way to do something if we need to. But yes, so that's in place, another lever. So our thinking is, let's focus on using our own resources coming from our own products and putting the mechanisms in place by which to make us look strong going forward that we're able to finance without necessarily having to push those buttons right now.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Mitchell Steiner for any closing remarks.

Thank you. Thank you, operator. I appreciate everybody joining us on today's call, and I look forward to updating you all on our progress in our next investors call. Thank you so much.

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