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Hythiam Incorporated (NASDAQ:HYTM)

Q3 2008 Earnings Call

November 06, 2008 at 4:30 pm ET

Executives

Lisa Wilson - IR, In-Site Communications

Terren Peizer - Chairman and CEO

Chuck Timpe - CFO

Rick Anderson - COO

Gary Ingenito - SVP of Scientific Affairs

Chris Hassan - Chief Strategic Officer

Ian Worden - SVP of Disease Management Operations

Analysts

Ram Selvaraju - Rodman & Renshaw

Robert Cohen - Western International

Analyst for Ryan Daniels - William Blair & Company

Operator

Greetings, ladies and gentlemen, and welcome to the Hythiam Incorporated 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.

Christopher Hassan

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 will turn the call over to Hythiam's Chief Executive Officer, Terren Peizer, who will introduce the other participants.

Before that, I would like to call your attention to the following Safe Harbor statement. The statements which will be made during the course of this call that are not historical in fact 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, objective, 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 turn the call over to Hythiam's Chief Executive Officer, Terren Peizer.

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 of Scientific Affairs. Also on the call for management are Chris Hassan and Ian Worden, Senior Vice President of Operations.

As we discussed in our last call, we were ahead at curving responding to the changing financial landscape and we are reducing our operating cash expenses accordingly and significantly. As you were heard 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 have committed a target $5.3 million cash expenditures in the coming quarter.

I can assure that our management team is not stopping there and we continue the cash operating expenses significantly. To enhance our ability to achieve possibility 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 as a priority of our team.

This third quarter our organization achieved the number of important milestones regarding our Catasys business and CompCare. You will hear the details of these results from the management team short release.

I will turn the call now to Chuck Timpe for the financial details for the quarter and given that the level of our Catasys business that we believe that you will see this quarter, the fourth quarter and subsequently in the first quarter will be constructed for Rick Anderson to elucidate the product and at 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?

Chuck Timpe

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 $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 the 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 remainder of the year. In April, we took further action to streamline our operations by reducing operating cost an additional 20% to 25%.

We reduced our cash operating expenses to $6.9 million in the third quarter of 2008 and we expect the further reduced our cash 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 operation.

We are committing to further reduce our cash operating expenses by $10 million in 2009 from current levels. Resulting and total budget of cash operating expenses of $17 million in 2009 as we are focus in cash 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 same level compared the 52 locations in the third quarter of 2007, reflecting our decision to streamline operations by reducing operating cost to focus on managed care opportunities.

For the quarter, the Company’s average revenue per PROMETA patients treated were $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 claim expenses despite a decrease in revenues.

CompCare’s major contract in Indiana, the primary cause was significant claims costs 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.

Richard Anderson

Thanks, Chuck.

The recent financial and economic development have caused all businesses become focus on cost containment and reduction. This will be particularly true for health plans and other healthcare payers at healthcare costs are expected to grow 9.6% in 2009.

In the recent financial recovery legislation, the important element was included in the bill that will serve the further increase payers’ cost and that have a positive impact in our business. The Mental Health Parity & Addiction Equity Act of 2008 mandates for addiction treatment coverage be no more restrictive in coverage and payment for medical conditions. The single [feasible] legislation will have a significant impact on patients seeking treatment while creating increasing expenses prepares. [15.52] prepares this parity legislation requires that payment for behavioral coverage be no less favorable than payment from medical coverage, which will end the limiting of benefits, which is one way behavioral health payers have limited costs historically. This legislation will increase costs health plan.

In one version of the legislation, the Congressional Budget Office estimated that the direct cost of the mandate on the private sector would be $1.5 billion in 2009 [rise] in the $3.4 billion in 2013. It is further anticipated that the recent election resulting in democrat control congress and presidency will increase focus on healthcare coverage and regulation while seeking the further drive the cost of coverage down. This combined with the current economic downturn slightly to increase pressure on health plans that cut cost in anyway they can.

The rise expect in healthcare cost, the declining economic climate, the parity legislation collectively strengthen the value proposition of the Catasys offering, an innovative program which provide multiple types of care in upgrading the services for the chronic condition of substance dependence.

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

Behavioral health companies are focus on providing existing treatments and managing the wrong cause. If treatments are ineffective, the ultimate payor in the pain not only for the behavioral health aspects but may also incurs significant medical cause from ER visits or increase expense from acute care visits at hospitals at higher cost from undertreated or untreated substance dependence. In addition, substance dependence complicate the treatment of other chronic co-existing medical and behavioral conditions making this 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 to 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 move to or moving to and substance dependence should not be an exemption.

As we saw the full potential of the opportunity before us, we created Catasys with the launch this year of Catasys, we are able to engage to payers 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 in provide the ability to identify their current high cause substance to be stations to determine. During this process, we analyze data for medical claims, behavior claims, and prescription obtains to identify those members to have a substance dependence diagnosis and our cost in plan $7,500 and more. We refer to these members at high utilizers. These individuals are targeted for [19.18] into the program.

Utilization of a sophisticated outreach program the contact in engage members identified in the first step. These outreach programs are where addiction expertise becomes a substantial advantage. We utilize our experience as well as consumer marketing research to develop the most effective method to retail in 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 were all behavioral health professionals with the 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 a program to treat members. Generally, members that accept the program are referred to the medical provider for a medical screen [20.08] has been subsequent to completing the medical treatment. Members engaged in the proprietary cognitive behavioral therapy based such a social program that we have developed as delivered in a discrete set of sessions by one of our training providers.

Provide care coaches focus on working with each patient to keep them engage 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 we are appropriate refer stations the other providers 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 solutions that links all providers and care coaches to assisting 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 that is provide the best possible care.

Another important aspect to the Catasys program is it the program is flexible and can be modified in a modular way to enable us the partner with payers and meet their need. As the service delivery model, the Catasys program can be expanded to include other medical interventions for addiction such as buprenorphine for opiate-dependent patient. In this way Catasys can work with payers to identify, engage and treat medically and behaviorally a broader expect to patients struggling with substance dependence in a way that improves outcomes and thereby lower’s cost.

As you recall from previous calls, CIGNA contracted with us as a provider and agree to reimburse for the paramedic treatment program in Dallas to our managed facility. This program differs in many important insignificant ways from our Catasys offering but most importantly, we are not able to identification an outreach to their members, instead we are rely on CIGNA to possibly identifying individuals that need a high utilization criteria within a small geographical area around our center if and when those individual seek treatment. This is actually different than our Catasys approaching which we actively manage the engagement of the payers’ members versus being a positive reimburse vendor.

We are pleased to have CIGNA show continued commitment and support for this program in a recent decision to expand the offering to [22.31] system markets with multiple providers.

Today, the program is not yielded the number of referral that CIGNA was looking for. And CIGNA has identified that this is largely a result of the limited number of appropriate individual that have contacted CIGNA seeking treatment from the initial small geographic area of Dallas around the center.

As the result, CIGNA has expanded the geographic area from where members can be drawn both in Dallas and to other market and taken other recent steps that facilitate program in [23.01]. This clearly demonstrate CIGNA’s commitment to this program and its desire to increase the number of individuals in the program. This will allows CIGNA to evaluate the clinical and economic impact to the program, which we anticipate will lead CIGNA to adopting the component of the Catasys program in their system.

We aggressively continue to pursue opportunities to present health plans in other payers and we are in various stages of development with those opportunities. This progress is exciting given that we are 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 the organization which will put of the head of schedule for the corporate role of contracting of 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 we have been making we anticipate several additional contracts to close in the first quarter of next year. What is important to realize is that we are meaning with payers on that skill at this early stage for 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 like with health plan is lengthy, anywhere between nine and eighteen months which is consistent with comparable products in the healthcare industry. It is important to remember that we essentially launch Catasys at the beginning of this year and the typical sales cycle consist of educating the payer in the problem and how much substance dependence is costing their plan. To this end, the analysis we commissioned by a third party actually from looking at the composite database of claims on 20 million lives has been instrumental and demonstrating the high cost to substance dependence for payers. The payor providing its data for analysis by [24.48] or performing the analysis internally to evaluate their actual prevalence and potential cost savings. This stage typically can takes substantial time because of legal agreement to protect in 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 the complete pictures obtained.

Assessment by the payor the components, medical interventions and project that return on investment. A more detailed reviewed the program components including a [25.24] and how these components would work that that within their existing benefit structure in care guideline. This is the period where modifications to the nets of applying the program are typically discussed. This stage will typically also involve some [porn] of greeting proposals and can consist of several rounds of questions and meetings to define what is the implemented product will look like. Then approvals are required and contractual negotiations have been conducted, which involve legal departments and can be proactive profits.

We enter the fourth quarter excited at the continue reception from payers of the Catasys and a development achieved by our team to deliver on the [promise] that Catasys offers patient.

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

Gary Ingenito

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 timeframes that we have shared in the past were the best estimates given to us by the research organization. We have chosen leaders in the alcoholism and addiction research skills. 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 and 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 war 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 into [27.12] are currently under analysis. [27.16] and treatment in that study have been completed in July.

As a review, withdrawals symptoms are graded on a scale which fluctuates overtime depending upon the stage at which the patient is in withdraw. This scale is a clinical institute withdrawal assessment also known as CIWA scale. The study by Dr. Volpicelli was focus on lower CIWA alcohol dependent patients and we are allow further refinement for the best timing of PROMETA use. Compare and contrast Dr. Volpicelli study in only low CIWA patients to that of Dr. Anton, who studied both low and higher CIWA patients. There were the differences 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 use in treating patients suffering from alcohol dependents.

We anticipate that this data will broad in the adoption of the Catasys program in health plans, especially considering the prevalence of alcohol abuse in the health plan population versus the justice systems focus on illegal drugs including methamphetamine. Alcohol is a third leading cause of death in the US today. It is also well known [28.58] alcohol’s contribution to diabetes, cardiovascular disease, obesity, and cancer. The latest data from the Substance Abuse and Mental Health Services Administration showed the 22.6 million persons or 9.2% of the US populations 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 US populations with alcohol dependence.

Additional data showed that in 2007, 3.9 million Americans sought addiction treatments. On that $2.7 million or 69% retreated for alcohol. Contract 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 rate data from Dr. Walter Ling. We can give no insight into a definitive timeline for data delivery. However, given the relative timeframe, 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 to provide the clear and definitive proof of the efficacy of PROMETA in clinically meaningful endpoints that we need at the 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 to 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 consumptions, 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 patient 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 heath 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-study. What is so significant is how the patients did going out the entire 14-week period of the study in 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 understand to the medical and research communities focused on addiction. The functional MRI data could provide proof that PROMETA has a robust biological effect of brain areas which may elicit to a 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 activations. If PROMETA alleviate cravings, and this is reflected in the functional MRI study and correlates with the reduction in use, then PROMETA has demonstrated a direct objective effect on craving and the correlated reduction in use. The combined and 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.

Terren Peizer

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

As Rick discussed, we are continuing to achieve traction in the managed fair market and execute against our plans in Catasys. We expect our first two to three Catasys contract this quarter with several more in the first quarter of 2009. Additionally, we are working no 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 calls, we purchase the controlling interest in CompCare to provide us with the back office functionality needed to operate in the behavioral health market as well as access to the portfolio products and other behavioral disease state that complement our Catasys offering. The issue in the past quarters with CompCare was the under performance 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 payoff as the company achieved profitability. Additionally, the Indiana contract ends in December. CompCare is in discussions with the payer to minimize the exposure and to manage in the remainder of the client they represented for payment in the first half of next year.

Lastly and importantly, CompCare has been awarded new contract that is again in the new year. Our previously reported study had shown patient benefits that support the biologic intervention of PROMETA to improve the 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 describes that PROMETA act as a jumpstart for patients as it reduces their cravings and assist patients in moving forward into recover.

We have had providers describe patient's response as significant and robust when they include PROMETA into the patient's treatment plan. Patients who have failed multiple times in speaking recovery tell us that for the first time, they have a chance to be sober and succeed in the recovery as their cravings always lead them previously in the past. We want to emphasize while the studies may elucidate the biological effect and certainly does in the case of the Anton imaging and clinical study, these studies lack the important site social 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 destructions the economy could provide. I am really proud of the manner which the team has worked together to continue to move forward and execute against our plans. I look forward to the gains we will 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?

Question-and-Answer Session

Operator

(Operator's instruction) Your next question comes from the line of Ram Selvaraju – Rodman & Renshaw.

Ram Selvaraju – Rodman & Renshaw

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 subjected. If I heard you correctly, you are 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?

Chuck Timpe

Hi, Ram. What we said was we expect total cost expenditures to be $5.3 million in the fourth quarter but that is a decrease from the $6.9 million at least reported in the third quarter. It is not just the general and administrative expenses; all cost, operating cost, G&A, research and development throughout the organization.

Rick Anderson

Let me add something and Chuck you can try them in but I think one of the things that Ram was asking was the reduction in expenses for this last quarter would have them have much as we anticipated. I think, Ram that was your question?

Ram Selvaraju – Rodman & Renshaw

Yes.

Chuck Timpe

Okay. There were some wearing of those numbers and that as we decided to cut further, we obviously incur subsequent increases of expenses as it relates to severance, etc. That was one contribution or one contributing factor. The other contributing factors would be that upon a pretty event given that we have eliminated a lot of employees this year, we wanted to make sure that those debts we retained also received the promise at the end of last year colorizes which we are withholding and at the ranking 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 do that fell in. That is, and then you will see that coming through in the fourth quarter as well in terms of that is why you are saying further reduction and then finally, we did incur one additional expense that was not in our budget and that related to a several client study that is very cost effective initiated outside of addiction that we really have not discussed too much that we are very excited about and although that the total cost to that study I think will approximate $400,000 or so, I am looking at Gary but I think it is approximately $400,000 or so over the next year spread out, we did incur a couple of hundred thousand of that amount in the quarter.

So that is, I think if you add all those things up, it would reconcile that we were on target for the cost reductions and again, this quarter you will see some of that reduction magnified and certainly the $10 million reduction next year has obviously very significant late and I might add really will not impede our revenue growth and given the level of manage care interest and contracts that we think you will see, I believe you will see starting significant revenues.

Ram Selvaraju – Rodman & Renshaw

Okay and so just to clarify then the $17 million that you project an expenses for 2009, the same…

Chuck Timpe

The total operating expense budget, everything in the kitchen sink grows into that number.

Ram Selvaraju – Rodman & Renshaw

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

Chuck Timpe

Correct.

Ram Selvaraju – Rodman & Renshaw

And then just another follow up with respect to the timing of the data from the Volpicelli and Ling study, 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 log count do you expect seeing the Volpicelli data and the Ling data?

Rick Anderson

I will turn it over to Gary as his more in contacts. I would just say generally, assessing the releases and the release time and as we said, it is just that Volpicelli, it is quite possible Ling could come before Volpicelli but it is just, given where they ended and given Volpicelli contributed his treatment phase in July, August and promise those data in September. So we are just assuming that so far Ling is tracking the same consistency. We are assuming that Ling will come after Volpicelli but, Gary?

Gary Ingenito

So, Ram that is correct. It is really we are 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 completed accurate data that they can be able to tell the whole story about rather than first look at partial. So at this point, it is really under their control but they are very actively both working on getting that data analysis done.

Terren Peizer

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

Gary Ingenito

I would say two to three weeks.

Terren Peizer

Two to three weeks. That is what we say with Volpicelli. That is quite possible Ling comes in that timeframe too.

Ram Selvaraju – Rodman & Renshaw

But can you state what is the time; the definitive certainty that you would be able to see the results of both studies before the end of this year?

Terren Peizer

If we 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 we expect it? Yes but as we expect it more so now given the condition of probability obviously, given that has gotten this one without given us the data, yes but I do want to caution you but reasonably then you get into this holiday times, who knows but reasonably yes, we should expect it before the year…

Gary Ingenito

And we are still waiting for Dr. Anton.

Terren Peizer

Yes, by the way that is terribly a good point. Dr. Anton was suppose, I mean if you go back, Dr. Anton's study will be before that and we are still waiting on that data and we do expect that data "imminently" but look at how long after Anton finish his study that is finishing the data analysis and still has not submitted us the report. Anything you want to add?

Gary Ingenito

Yes, I mean obviously everyone 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 gentlemen in the field and they are making sure that it is to their satisfaction before giving it to us. It was unusual for everyone in the audience and the Wall Street community and it is unusual obviously for us is that remember we did not do these studies. Usually, when you do the study, when a company does a study or a sponsor or CRO does the study, you have a pretty good idea in the timing of the data and where you are tracking. Since we took the rod of total independence and letting the top people in the field do the studies, we will be holding to them and if these are, I am sure you know, these are academicians at heart and they also function differently with different timeline, different time pressures, different destructions than a clinical research organizations sponsored by a company.

Ram Selvaraju – Rodman & Renshaw

Okay, thank you and just one other thing, Chuck, could you comment on the amount of auction rate securities that Hythiam currently hold and what is their level of liquidity is and how vulnerable they might be to the value of fluctuations data?

Chuck Timpe

You are right. As you remember, we had $11.5 million in auction rate securities and they have been the value now currently at $10.4 million that value is fluctuated a little bit from quarter to quarter but as you may also know, we have a proposal to accept a writes offering that is called from UBS where they would buy the securities at par value but their timeframe 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 have already announce we can borrow the 50% of that as of this date.

Rick Anderson

And so, Ram one thing I would like to add is how the reason that we do not expect and to your point how vulnerable is that. We do not expect given that it is now UBS' credit and as you are talking about UBS' credit over roughly two-year note, again well today their credit rating has been changed. They will trade as time goes on and as if we need that is if and when we need that additional liquidity as you get closer, they will trade more and more like a short-term instrument.

Ram Selvaraju – Rodman & Renshaw

And what is the par value of these securities?

Chuck Timpe

Par value is $11.5 million [space] and that that is the amount we will say would do which recurring roughly [50.52] the dollars more in value.

Operator

Your next question comes from the line of Robert Cohen – Western International.

Robert Cohen – Western International

Yes, I got three questions here. You guys have stated you are not 100% sure when the data is coming out from these studies but in the same breadths, you are also saying that you will have two to three insurance fields by yearend an additional 4 to 5 in the first quarter. So, are we to assume that the data that we are all excited in waiting for has no relevance to the decisions that these insurance companies are making?

Terren Peizer

Well that is an excellent question. I would not say it has not relevance but as was pointed out an external where Rick amplify upon what I am saying, as it was pointed out, the ring now we have conversations with, more than conversation, we are discussing the adoption and implementation of Catasys would approximately 30 to 35 plans or what have you that comprise the majority of the industry, which is pretty incredible team b in that dialogue and in some cases, if you take, I do not know as you use the number four but we did not 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 us say it is somewhere in the five to eight or five to ten plans, we will call those the early adopters.

Now those five to ten plans cover significant amount of covered lives towards that 3 million and in some cases, could have well exceed 3 million covered lives so 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 pass their medical review based on the data that we have. A number of them had certainly pointed out that this is more data than what we currently have for what we are currently doing. And that is not a surprising response there. Remember what we focus on today is the delivery system of Catasys and the management program of Catasys and that has what resonate very loudly to these plans. When you go down the road, these plans at the end of the day, will not care as long as it is stayed obviously, they will not care what medical intervention you use if you are managing that population. They care about the cost reduction in some cases that they ask you to go at risk, they just want the result versus, this is not like a formula of FDA-approved drug whether waiting on publication.

That said, we note some heath plans that are waiting on publications of data not necessarily the top line result but it is just having publication.

Robert Cohen – Western International

Okay, can you, I do not think you two or three you plan on having by yearend or any of them national insurance companies?

Terren Peizer

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 are not saying, okay if a health plan has 5 million covered lives for example, the regional plan have 5 million covered lives, we are not caring the whole health plan. We are just carrying where we think they are going to implement. So it could be a national plan that has 20 to 30 million lives or 10, 20, 30 million lives, we are only protruding the amount of where they plan to implement.

Robert Cohen – Western International

Well, but do you in its first, two or three by yearend, is one of those in national plan that you feel could come aboard?

Terren Peizer

Well, that depends if you are talking about if it is two or three or what have you but we are cautiously optimistic, we could have a national plan and again, this should be contracted with Catasys. This will be what we previously announced with Cigna although we are quite thankful that Cigna this quarter steps up and start seeing that it is important to expand access to the patient to actually get the patients treated. But we are hopeful, we are cautiously optimistic that we could have a national plan before yearends and that would obviously based on whether that plan falls, and when that plan falls and if that plan falls in the fourth quarter of first quarter, we are cautiously optimistic that that plan alone could have a significant portion of the 3 million lives or achieve the 3 million lives specifically.

Robert Cohen – Western International

So, they would not go to a city. They would pretty much do like complete stay. They would not do the same what Cigna is doing starting in Houston or whatever. They would start in an entire state. Is that correct?

Terren Peizer

Well, they could start in a city. The discussions we are having right now are speaking more in state than 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 are international plans that we are speaking with that does want, that they really embrace Catasys and would appear their want to roll it out continually throughout the coming year but time will tell. It was time deal, we have announced the contract and…

Robert Cohen – Western International

With this company?

Terren Peizer

Specific for the company.

Robert Cohen – Western International

So, one other subject only to ask about and then I will other to ask a question. Maybe toward to the Anton study with images, those images were done during the double-blind controlled group study during the craving stage. Is that correct?

Terren Peizer

That is correct.

Robert Cohen – Western International

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

Terren Peizer

I will let Gary but not in conjunction with a double-blind study that shows of to the clinic, a lot of them.

Gary Ingenito

Yes. So, Terren is correct. The study is actually done because this is a very, Dr. Anton is one of the leaders in the field and [58.53] for cravings and has conducted a study with some other medications just to look at brain image but it was not correlated with actual use outcomes.

Robert Cohen – Western International

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

Gary Ingenito

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.

Robert Cohen – Western International

So that would be a physiological scientific change and is that why you does or really emphasizing this Anton study? It seems because of this.

Rick Anderson

Well, let me add what Gary had said for a second because I have been with it for the last, I do not know, five, six, seven years now. There has been an ongoing discussion and debate even if you go back to when we announce the Urschel cravings data, does craving matter? And the problem you get in that is there are a lot of papers that said that cravings matter. NIDA, National Institute of Drug Abuse, says cravings matter but at the same token, when you try to correlate it with use do then lack with a series of data had said to report craving is, if you look that it is just a double-blind study that just looking at craving and cravings, it shows it is well fit at that which I might add, have not happened in alcohol than do often but in the Anton study, we did see it with PROMETA, [61.08] because they say, "Oh, that is self report. It is subjective," and that is what Gary is referring to whereas importantly when you combine in the same study with the same patient which is never shown before, the increase in the activation of the neurochemistry in the part of the brain that shows craving 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 like we said in earlier, addiction studies, just like antidepressant studies, in antidepressant studies, I will tell you half of them failed, half of them work and the problem is because you get the high placebo rate because it is 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 are excited about and again we do feel this is going to show it. We are 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 doubt, you can have a double-blind study exceed and then they could say, "Well, how big was the study?"

Robert Cohen – Western International

Okay, Gary do you agree with that?

Gary Ingenito

Yes, absolutely.

Rick Anderson

And you can say, how big is the study and then that is you will say, "Okay, 80 patients or 100 patients. Oh, that is a small study. Let us see a bigger study." The importance is to show in the functional MRI because the picture in the brain does not lie in at statistically significant basis. Shown it in a functional MRI in the same patient population, you are showing it in the clinical double blind uncontrolled statistically significant outcome, you cannot get a more comprehensive…

Robert Cohen – Western International

I may really do with this Gary than with some else there. Gary, just really quickly, if the Anton study shows a change in the brain to [6.32] in storing in double-blind control, would not that make all these other studies irrelevant because this is a scientific change in the brain that physically happened? I would make all these other studies irrelevant, would it not?

Gary Ingenito

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

Robert Cohen – Western International

Great thank you.

Gary Ingenito

I think this could be very helpful for everyone. Maybe just quickly because you have said it over and over and over again how every data piece you have looked at all ties to the same result and you might want to comment although it has not been published yet on the different work that show at [64.51] in the preclinical and the changes in the biology and how that translated as what you see in the other data set.

So briefly what we know is that there are certainly changes in the preclinical animal model than in rest with substance use, alcohol stimulants, we see it and we see the same one and particularly, it is highlighted that the biggest change in the brain happens during the withdraw period from the substance and that there is a loss of the inhibitory calming activity over the brain that is normally produced by the GABA system and [65.42] with alcohol, this is also been shown in other laboratories in various lab, in Italy, the [Bold] Institute at the University of North Carolina same findings that PROMETA are able to reverse that effects of the substance on the GABA receptor in the brain and in fact a recent study that show just completed with a chronically methamphetamine dependent rats and there, he analyze the fact that there was, I will say, we saw a change in neurons in the brain cells of the rats when they were withdrawn from methamphetamine but what she said is okay, so that is the change in the cell, what does it do in terms of changes in behavior? Can you translate that has the behavioral effect that is reversed by PROMETA and so she did in acoustic startle which is the same test that Anton is doing in humans the same model for clinical for rats and PROMETA was able to reverse the effects of methamphetamine withdraw in the acoustic startle in rats.

So again, you see consistency of our preclinical data with what we are finding in our clinical data with the results of pilot studies that were done. It help clients on the east coast and the west coast was a tremendous reproducibility of the effect of PROMETA in whatever model you want to look at.

Robert Cohen – Western International

Gary, now I have to show this one on, are you guys emphasizing alcohol over met now and if so, why beyond this is your numbers and at the same time shows what hopefully it will show with this in front page science?

Terren Peizer

Well, let me answer, just to answer that question from a business standpoint and Gary could talk about whether it is from paid science. From a business standpoint, it is interesting because for the last three to six months, everyone certainly has been focused on Ling and UCLA, it is 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 piece of data is contributory to the overall data of PROMETA, the overall usefulness of PROMETA and how we can get incorporate it within the Catasys to help them. If you take a step back, what got loss and it has been a very obviously chaotic year, there is something that did get loss in the translation. If you recall back when we said, for those who have not bee around since the beginning of the Company, initially in 2003, 2004 and 2005, alcohol was 'our story' and then because there was a direct high end to the (OTCPK:GABA)ergic system and alcohol because alcohol is active in the (OTCPK:GABA)ergic system, alcohol is a sedative and therefore, the story initially 15 years ago came out of at alcohol backdrop. So alcohol was a story in 2003, 2004 and 2005.

In 2005, there was the event of two drugs that everyone at Wall Street was very excited about and it actually afforded one of the drugs, Vivitrol, a billion dollar market cap and there was Vivitrol which is [69.51] drug and Camprol which supports labs drug and there were Time Magazine [69.58] and everyone was wondering, why are you mentioning this [70.02] and PROMETA, why does everyone talk about PROMETA and we have said at the time that we are very glad that they are getting this big market values a billion dollars. This is going to be a billion-dollar drug. We just agreed, we did not think that they were clinically relevant endpoints and separating and looking at the alcohol data we have and separating out the images, I will still tell you that this day that no one has shown what we have shown in clinical study with reduction of using and cravings in a human clinical study, period.

Forgetting about the clinical of those endpoints, in 2006, we changed our business plan from a strict private paying model that we started out to reject the system because we saw traction in the judgment system and what they saw was in the judgment system, you are obviously focused on illegal drugs. Although you have alcohol is still going to be the biggest factor in the justice system but at the time, everyone was so focus on Vivotrol and Camprol for alcohol. We as a small company, we decided to work at our knish of methamphetamine addiction because we knew that we are effective in treating the same amount 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 low and behold the year, you will remember about a year ago, we ran into headwinds in the justice system and 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 unprofitable for us to really scale that business to maximize the return to shareholders and manage care was always our end game. We just did not think to see it at the end of 2007 and the beginning of 2008 and then we accelerated the development of Catasys to respond to that, we did not expect managed care to come in to 2009 to 2010. So what happened was is that now with the development of Catasys, the completion of Catasys and now going to their process and their sales cycle, we now see that the Catasys is here. You will see contracts of Catasys momentarily.

Now, so in health plans, health plan is buying large, do not cover methamphetamine addicts. Buying large, alcohol is one of which we said, of the $50 billion of direct medical expenses, alcoholism is approximately 2/3 or 70% of that number. So obviously, if you have something of $40 billion market that you are targeting to show cost savings too 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 because alcoholism is the biggest problem in addiction generally. Methamphetamine in the managed care contract has a lesser role. It does not mean we are emphasizing the Anton data or the Volpicelli data over UCLA and Ling or vice versa. That is not the point at all. The point is that the Anton data because it is combined the imaging with the critical double-blind human controlled study and clinical outcomes of cravings and reduction of use, there is no better, more comprehensive definitive proof of the PROMETA's efficacy. So, yes we might emphasize whatever the results there and it might not show. Whatever those results are, are going to be vitally important. I will let Gary answer if we can just led by June 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..?

Gary Ingenito

Terren is correct and the front page, I do not know but I mean I think it offers a significant tool for clinician in order to be able to again assist patients with substance dependence, alcohol being a very large problem but also believe that PROMETA works very well and stimulate as well and that will 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.

Terren Peizer

Yes, that is a good point. In fact, addiction alcohol and stimulants in all parts. I mean you are going to see, at that you will see more cocaine use perhaps than methamphetamine use in the managed care health plan context but and I think our data set that we assembled with in stimulants from Dr. Sheryl Smith or show cravings and then you will see in the future plus the Medicaid pile that we did I mean in medication population in Arizona in methamphetamine, it is all contributory. Keep in mind, health plans, insurance company care about better outcome and patients benefit and will ring a cause. Some plans are going to care about publication. Some plans are going to go forward under disease management basis without publications and that is what you are seeing right now because that is tearing. There is 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.

Operator

Your next question comes from the line of Ryan Daniels - William Blair & Company.

Analyst for Ryan Daniels - William Blair & Company

I just have a couple of quick question. 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?

Gary Ingenito

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

Analyst for Ryan Daniels - William Blair & Company

930,000?

Gary Ingenito

Right.

Analyst for Ryan Daniels - William Blair & Company

Okay, great.

Terren Peizer

And Rick you want to answer the later question?

Rick Anderson

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

Terren Peizer

Wait, I am sorry, was the question about the CompCare is additional lives? There are additional lives.

Analyst for Ryan Daniels - William Blair & Company

On CompCare.

Operator

Thank you and 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.

Terren Peizer

Well thank you. No, it is getting late in the day and first, as we announced in the 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 destructions but we look forward with sharing with you our progress in the very near future. Good night everyone.

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