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Executives

Robert Taub – CEO

Asaf Alperovitz – CFO

Michael Diamond – Director of Reproductive Endocrinology & Infertility Division, Detroit Medical Center and Wayne State University

Nissim Mashiach – President and COO

Analysts

Amit Hazan – Oppenheimer

Matthew Dodds – Citigroup

Erik Schneider – UBS

Jonathan Aschoff – Brean Murray

Vivian Cervantes – Rodman & Renshaw

Debjit Chattopadhyay – Boenning & Scattergood

Junaid Husain – Soleil Securities

Bruce Nudell – UBS

Omrix Biopharmaceuticals, Inc. (OMRI) Q3 2008 Earnings Call Transcript November 6, 2008 4:30 PM ET

Operator

Welcome to Omrix's third quarter 2008 financial results conference call.

Before we begin, I would like to remind you this call contains forward-looking statements. Forward-looking statements provide the company's current expectations or forecasts on future events. Forward-looking statements include statements about the company's expectations, “belief,” “plan,” “objective,” “intention,” “assumption,” and other statements that are not historical facts. Forward-looking statements are subject to known and unknown risks and uncertainties and are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by forward-looking statements.

The company's actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's 10-K as filed with the Securities and Exchange Commission on March 17, 2008 and the company's most recent quarterly report on Form 10-Q and its current reports on Form 8-K.

Unless required by law the company undertakes no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events that are after this date of this call.

At this time, I would like to turn the conference call over to Mr. Robert Taub, Omrix's Chief Executive Officer. Mr. Taub, please go ahead.

Robert Taub

Thank you, operator, and good morning, everyone. We meet today here in New York. Our Nissim Mashiach, the President and Chief Operating Officer; Asaf Alperovitz, the Chief Financial Officer; and Francesca DeMartino, Senior Director of Investor Relations.

I'm pleased to welcome Omrix new CFO, Asaf Alperovitz. Asaf officially joined Omrix in October and will review our solid third quarter financial results. I will then provide a business update. Asaf will then review our 2008 guidance and we will conclude the call with comments on the preliminary results of our Adhexil studies by Dr. Diamond, a leading expert in the field of surgical adhesion. Following our formal remarks, we will open the call for the questions.

Now I'll turn the call over to Asaf. Asaf, please go ahead.

Asaf Alperovitz

Thank you, Robert, and good morning, everyone. It is a pleasure to officially be on board at the Omrix and participate on today's call. I have had some time to get to know the company, and I'm even more pleased about Omrix than when I accepted the position. I look forward to getting to know our investors and analysts in the coming weeks.

We are pleased to report record quarterly revenues and product sales. Biosurgery sales amounted to $9.5 million, a 40% increase over the third quarter of 2007. The increase was principally due to increased unit sales of our Evicel, Quixil and Evithrom products.

Total immunotherapy product and byproduct sales in the third quarter of 2008 were $10.1 million, of which immunotherapy product sales were $8.4 million, a 17% increase compared to last year's third quarter. This increase was primarily due to a higher IVIG or Omrigam, unit sales and prices. Immunotherapy byproduct sales contributed $1.7 million to such sales, compared to no sales in last year's third quarter, as sales of this byproduct started in Q1 of 2008.

Total product sales in the third quarter of 2008 increased to $19.6 million, a 40% increase when compared to the third quarter of 2007, and total revenues in the third quarter of 2008 increased by 35% to $21.3 million.

Gross profit on product sales increased 48% compared to the third quarter of 2007 to $8.5 million in the third quarter of 2008. As a percentage of product sales, gross profit improved from 41% to 44%.

Gross profit was favorably impacted by increased production and sales volume and unfavorably impacted by raw material price increases and the devaluation of the US dollar versus the new Israeli Shekel.

Gross profit on development services and grants revenues was favorably impacted by the mix between services and products, and as a result improved as a percentage of revenue in the third quarter of 2008 to 31% from 26% in the third quarter of 2007. Total gross profit increased 45% to $9.1 million or 43% of total revenues in the third quarter of '08, reflecting the blended margin of product sales and development revenues and grants.

Research and development and clinical and regulatory expenses increased by 73% to $1.6 million in the third quarter of 2008 as compared to 2007. This increase was mainly driven by an increase in personnel and in expenses related to the development of Adhexil, the company's adhesion prevention product candidate, and other proprietary products for which we currently retain full rights.

Selling, marketing, general and administrative expenses or SG&A, increased to $4 million in the third quarter of 2008, a 31% increase, compared to the third quarter of 2007. SG&A expenses this quarter include a $300,000 reverse sale of a nonrecurring accrual related to the signing of a sublease agreement for our German office.

Excluding this nonrecurring expense, SG&A in the third quarter of '08 would have been $4.3 million or 20% of total revenues and a 40% increase when compared to $3 million in the third quarter of '07. This increase was mainly driven by a $600,000 increase in salaries and related expenses and costs for the Jerusalem plant of $400,000.

Operating income in the third quarter of '08 increased to $3.5 million, a 52% increase compared to $2.3 million in the third quarter of '07. This increase was mainly driven by increased production volumes, total revenues and gross profits, and it was partially offset by the declining value of the U.S. dollar versus the new Israeli Shekel and higher operating expenses.

Financial income, which includes interest income, bank charges and the amount generated by exchange rate fluctuations, amounted to $200,000. $500,000 of interest income and $200,000 of foreign exchange losses, compared to $1.4 million, $1 million of interest income and foreign exchange gains of $400,000 in the third quarter of 2007. This quarter also includes an income tax expense of $250,000.

Net income for the third quarter of '08 was $3.6 million or $0.21 per share on a diluted basis versus $3.7 million or $0.21 per share in the third quarter of '07.

Moving on to the balance sheet, cash provided by operating activities for the third quarter '08 amounted to $2.5 million. We invested approximately $4.1 million in fixed assets, mostly in our new facility in Jerusalem. At September 30, our total investment in the new plant was approximately $18 million. We ended the quarter with $80.6 million in cash, cash equivalents and short-term investments.

Now I would like to review our financial guidance. As a reminder, our guidance is based on the following key assumptions

Ethicon's current biosurgery sales forecast and no product or business acquisitions.

We are iterating guidance of 75% growth in biosurgery sales in '08 over '07. To reach this growth, we foresee biosurgery product sales in the fourth quarter to be $9.9 million. We recently announced an increase in our total product sale guidance to a range of between $70 million and $72 million for the full year 2008. Accordingly, we are increasing our annual immunotherapy sales guidance to approximately $36 million to $38 million for the full year of '08. As for 2009, we will provide financial guidance on our Q4 call once we've completed our working plan and budget for this year.

As we mentioned on our previous call, we expect research and development expenses to continue growing as we increase the development of proprietary products and work to balance delivering short-term results with investments for long-term growth.

In 2007, our SG&A as a percentage of total revenues was 22%. For 2008, we expect a slightly lower percentage when excluding nonrecurring expenses.

Regarding our interest income, as a reminder, our investment strategy is to put safety and liquidity ahead of yield. We have invested the company's cash reserve in relatively safe instruments such as bonds and market rate securities. In Q3 we reported approximately $500,000 in other comprehensive loss due to the devaluation of some of our investments at the balance sheet date.

We reached the conclusion that this devaluation is temporary, and accordingly, no losses were recorded on our income statement. Based on current returns on cash and investments of approximately 2%, we anticipate that going forward we will record approximately $1.5 million in annualized interest income.

We are pleased to report despite current market conditions we attained the market value of our portfolio. Excluding any potential foreign exchange gains or losses in the first quarter of '08, we expect financial income net for the year to be around $3 million.

I will now turn back the call to Robert. Robert, please.

Robert Taub

Thank you, Asaf. As Asaf mentioned, this quarter was another record quarter for biosurgery product sales – $9.5 million. Evicel is continuing to be a strong performer. The number of total accounts continues to increase steadily, and in quarter three, end user sales by our partner, Ethicon, once again included a very significant amount of repeat business. By year-end, we believe that total sales of Evicel will be approximately the same as our competitor.

Additionally, as mentioned in a recent press release, we announced that the EMEA approved Evicel in Europe. Evicel is now licensed for marketing in 27 plus three countries – the 27 countries of the European Union plus another three in Europe, and Ethicon will begin to sell Evicel on a country-by-country basis as Quixil is gradually phased out.

Next, Evithrom, our human-based thrombin standalone product continues to experience moderate dollar sales growth in this market. In quarter three, the total number of accounts purchasing Evithrom, however, increased by 50%, with new customers comprising 52%. As you're probably aware, however, there is currently fierce price competition in the thrombin standalone market, and as we have predicted, the market is moving toward thrombin enhanced hemostats, and we are currently developing two such products.

I would now like to update you on our Fibrin Pad. As you may recall, we have two trials, one in the U.S. in mild-to-moderate bleeding and a second one in Israel in severe bleeding.

With respect to the U.S. trial, we completed enrollment of the 90 patients needed to conduct interim analysis. We were pleased to report that the analysis showed superiority of the Fibrin Pad over Surgicel. Having demonstrated superiority, we are now able to continue with open-label enrollment. The trial will continue to enroll patients only to the Fibrin Pad arm, and according to the study design, we are required to treat at least 100 total patients for safety, which means another additional 40 patients with the Fibrin Pad.

Shortly after we announced that we had achieved superiority we were informed that the U.S. Phase II study had been suspended after a patient had experienced postoperative bleeding. This patient was not among the first 90 enrolled, but part of the subsequent 40 already. Many of you have asked why the trial was suspended if rebleeding is an expected event in surgery and in this protocol. The reason is simple. The protocol is written so that if there is a case of postoperative bleeding the trial must be suspended and an investigation must be conducted. Therefore, the decision to suspend the trial was an administrative one.

A Data Safety Monitoring Board, or DSMB, conducts the investigation and then provides a recommendation on how the trial is to proceed or if it is to be modified or even discontinued. We have now reported that the DSMB concluded their investigation and recommended that the clinical trial resume without any modifications, which it did.

I want to clarify that the DSMB's role is not to determine the relationship between the adverse event and the product. We, however, conducted a thorough product investigation and concluded that there is no issue with the clinical material.

I would still like to emphasize that a trial continuation with no modification is the absolute best case outcome. Therefore, we remain on target to complete enrollment of the 130 patients by the end of '08 or early '09. Although we still expect to be within the window of prior timeline guidance, due to the two-week investigation we are now more comfortable with an early '09 time frame. Once we complete the two-month follow-up and finish analyzing the data, we expect to file the BLA with the FDA in the first half of '09 and then assuming a standard 10-month review, we expect the approval in the first half of 2010.

Now, regarding the severe bleeding indication, I am pleased to inform you that we now have the approval from the British MHRA on behalf of the European Union to conduct a study in soft tissue severe bleeding.

I draw your attention to the fact that the indication and protocol are quite similar to the mild-to-moderate study which is ongoing in the United States. This EU severe bleeding study will be a pivotal study leading to an indication for the use of the Fibrin Pad in severe bleeding in soft tissue surgery. This kind of bleeding is different from the target bleeding in the exploratory Phase II study which we started some time ago in Israel.

Indeed, the Israeli study was purposefully designed to be the most challenging as it addresses the control of severe bleeding when the product is applied directly onto the resected solid organ, such as a kidney, a prostate, a liver or highly vascularized organs, and these organs are not soft tissues.

As you know, we reported a postoperative bleeding event in the Israeli trial. We are conducting an investigation, and pending the conclusion of the investigation of the rebleeding case we have decided to discontinue enrollment of additional patients in that Israeli trial and are focusing on initiating the European trial. But you should understand that the clinical development plan of the Fibrin Pad is proceeding well with a mild-to-moderate study in the United States and a severe bleeding study which will be initiated in Europe in the first half of '09.

Let me give you some details on the European study design. As I mentioned, it is a pivotal clinical study evaluating the safety and efficacy of our Fibrin Pad in soft tissue severe bleeding in abdominal, pelvic, retroperitoneal and noncardiac thoracic surgery. The study is a randomized multicenter clinical study evaluating the superiority of Fibrin Pad versus the standard treatment in controlling challenging severe bleeding in soft tissue for which standard methods of achieving hemostasis are ineffective or impractical.

Alright. Now, moving on to our passive immunotherapy business. Immunotherapy product and byproduct sales amounted to $10.1 million in the third quarter of 2008. And regarding our Phase III clinical trial in the United States for IVIG, the trial is proceeding according to expectations, and we are on track to file the BLA in the third quarter of 2009.

I would now like to review our upcoming milestones, the first one being the complete enrollment of the 130 patients in the Fibrin Pad, 30 in the United States, the Phase II clinical trial in mild-to-moderate bleeding, by late '08, early '09, and, secondly, to obtain the approval of our hepatitis B immunoglobulin, or HB in Sweden this year.

Now, moving to our anti-adhesion product, Adhexil. Adhexil is the first biological product to be developed in the rapidly growing anti-adhesion market, which is estimated to be about $300 million worldwide market opportunity. In the U.S., three main products compete in this market, Seprafilm and the Sepra family of products, Interceed and Adept. We believe we are developing a differentiated product due to Adhexil's ease of use, laparoscopic application and that it does not require a dry surface before it is applied.

As we very recently unblinded the Phase I/II study, we invited Dr. Diamond, the Director of the Division of Reproductive Endocrinology and Infertility at the Detroit Medical Center and Wayne State University in Detroit, Michigan and a leading expert in this field to provide an overview of our preliminary findings and share his thoughts on the potential of this product.

With that, I will turn the call over to Dr. Diamond to describe the preliminary findings of our Phase I/II study. Dr. Diamond?

Michael Diamond

Thank you. Good morning. A pilot clinical trial was conducted with Omrix's adhesion prevention product, Adhexil, in gynecologic surgery, with the aim of evaluating the safety of the product in such procedures as well as assessing its (inaudible) efficacy in the prevention of adhesion.

The study was a multicenter randomized trial involving patients with bilateral ovarian disease. These patients were selected due to the detrimental effect ovarian adhesions can have on a woman's ability to conceive as well as the clinical revenue [ph] of preventing adhesions in this target population.

In this study, patients were restricted to bilateral ovarian disease. The restriction allowed for each patient to be her own control. At the end of laparoscopic procedure, one ovary was randomized to treatment with Adhexil and the second ovary was randomized to the control or no treatment arm. All patients were then monitored for adhesions at a second laparoscopy that occurred approximately six weeks after the first procedure or the first look. A total of 16 patients were ultimately included in the study. Data from the study has been collected, and preliminary review of the data has been conducted and further review is ongoing.

The main parameters evaluated in the study were safety parameters, including occurrence of adverse events and clinically abnormal laboratory and coagulation assessments. Based on the preliminary data available, no adverse events attributed to the product were observed throughout the study, nor were there any abnormal laboratory assessments attributed to the product, further supporting the safety of this product for this indication.

Efficacy parameters included three parameters

The incidence, extent and severity of postoperative adhesions, with incidence of adhesions to the ovary being the primary efficacy endpoint.

Based on the preliminary data available, a clear trend of efficacy was found in the ovary treated with Adhexil for all of the three parameters evaluated when compared to the control ovaries.

Based on my experience and the data available from the development of similar products with the same indication, this preliminary examination is encouraging and supports the undertaking of a pivotal trial to demonstrate the efficacy of Adhexil for laparoscopic surgery for treatment of postoperative adhesions.

I'll now turn things back over to Robert.

Robert Taub

Thank you, Dr. Diamond. So to conclude on Adhexil, we just want to tell you that we intend to present the final data from that Phase I/II study at an upcoming scientific conference in early 2009. Also, we are now – and we are currently focusing our efforts on identifying a distribution partner and on commencing the pivotal trial for this product.

So now we would like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Amit Hazan with Oppenheimer. Please proceed.

Amit Hazan – Oppenheimer

Thanks. Hi. Good morning, guys. Nice quarter. And welcome, Asaf.

Asaf Alperovitz

Thank you, Amit.

Robert Taub

Good morning, Amit.

Amit Hazan – Oppenheimer

I thought I would start maybe with just a question on gross margin just coming off of the last earnings call. Can you help us out a little bit in understanding how we should think about that line item going forward and maybe just also comment on foreign currency? I know it's difficult and changing rapidly, but the dollar has strengthened a lot and what that might do to impact your business.

Asaf Alperovitz

Yes, sure. So regarding our gross margin, the gross margin actually reflects the blended margin of (inaudible) products, sales and development and the grant revenues. Additionally, the gross margin is impacted by factors such as changes in raw material costs, exchange rate fluctuation, as we mentioned, and the changes, of course, of production and sales volume. In the third quarter, we have seen a positive impact from the economics of scale, and we have seen also negative impact from the raw material price increases and the devaluation of the U.S. dollar versus the new Israeli Shekel. I can tell you that the influence is significant, and we are currently evaluating the exact amount and magnitude of this devaluation, and we will provide more information in that regard going forward once we've completed our analysis.

Amit Hazan – Oppenheimer

Directionally, if we are modeling some slight improvement in gross margin, are we okay there?

Asaf Alperovitz

Sorry, can you repeat the question?

Amit Hazan – Oppenheimer

Directionally, if we are modeling some slight improvement in gross margin going forward, are we okay?

Asaf Alperovitz

Going forward, as I said, for the third quarter, we've seen a positive impact from economics of scale. Going to '09 and above, we'll get – we'll provide further guidance on our fourth quarter call once we have completed our budget and plan for that year. For the fourth quarter, you can expect the same level of gross margin as in the third quarter.

Amit Hazan – Oppenheimer

Okay. And then, Robert, I know you talked about this, but I just want to be clear, because I think there is some confusion in the investment community on the two SAEs and their relationship. Can you just maybe, again, just clarify for us the difference between the two SAEs and their relation to the actual product?

Robert Taub

Yes, I think Nissim will answer the question for me but there is no relationship between the two SAEs, and a causal relationship to the product has not been established. And we have conducted full investigation on our product and there's nothing that we found wrong with the product. But Nissim will give now more.

Nissim Mashiach

I think – Amit, hi, good morning.

Amit Hazan – Oppenheimer

Good morning.

Nissim Mashiach

What we can say is this is what is more important here, that we conducted a thorough investigation and we found no evidence about the clinical material that we used both in Israel and also in the United States. And I think that the – what is also very important, that we are moving ahead with our original plan, meeting the timetable for the completion of the U.S. trial and also to file the BLA on time in the U.S. And we are now focusing more on the European pivotal severe bleeding, which will eventually give us the indication for severe bleeding study for the Fibrin Pad.

Amit Hazan – Oppenheimer

Okay. And then, just the last one from me and I'll jump back in the queue. On biosurgery or Evicel now, in particular, in Europe, how should we be thinking about that now that that's going to be launched? Is that going to completely cannibalize Quixil, and then will you be generating a higher percentage there so we could see a nice bump in Europe?

Robert Taub

I don't think there will be a hockey stick bump. You have to remember, Europe is Europe, and many countries.

Nissim Mashiach

Yes. I think that in terms of Evicel, first of all, there will be – like Robert said before, there will be a phase out of Quixil, and we estimate that this phase-out of Quixil and Evicel entering into the European market will take a period of over two years. And in Europe, like Robert said, Europe is difficult, so Evicel should go through (inaudible) hospital code, all of that. So we'll see –

Robert Taub

Gradual.

Nissim Mashiach

Gradual, I would say, yes, growth, phasing out of Quixil, entering Evicel. However, you need to understand that Evicel do not have the contraindication for neurosurgery. And also, with Evicel we do have additional countries approval through the recent EMEA approval for Evicel, which we didn't have with Quixil, such as Spain, Greece and Austria. So these are, let's say, in a way, an upside and a potential for us to have additional sales.

Amit Hazan – Oppenheimer

That's great. And I lied. Just one more question on that. Are there any countries that you're focusing on over the next 12 months, 18 months, 24 months to sell Evicel that are not under the J&J relationship?

Robert Taub

First of all, if it is not under the J&J relationship, it will not be called Evicel. Evicel is a brand of J&J. But, yes, the answer is yes, and Nissim –

Nissim Mashiach

Yes, we are doing efforts in different countries. I would say our focus is to work with either distributors or also to sell for ourselves the product in, let's say, in the Far East and also Eastern European countries. And this product, by the way, Robert mentioned that Evicel is the brand name of J&J, our brand name for this product is Amoxil and this is the brand name that we are going to distribute the product. So basically we are focusing either on direct sales or by looking for distributors in all countries which is not J&J rights.

Amit Hazan – Oppenheimer

Okay. Thanks very much, guys.

Nissim Mashiach

Thank you, Amit.

Robert Taub

Thank you. Bye-bye, Amit.

Asaf Alperovitz

Bye, Amit.

Operator

And your next question will come from the line of Matthew Dodds with Citigroup. Please proceed.

Matthew Dodds – Citigroup

Hi, good morning, Robert. Just a couple questions.

Robert Taub

Good morning, Matthew.

Matthew Dodds – Citigroup

On the Fibrin Pad, when could we see the clinical results of the Phase II study? I know when you're talking about filing it, but is there a particular conference or even a timeline where we might see the actual results? That's the first question.

Robert Taub

You're talking now of the –

Matthew Dodds – Citigroup

Phase II US, which is not complete yet, but generally is there a conference or a timeline where you would expect to see the clinical results presented?

Robert Taub

Presented?

Nissim Mashiach

Hi, Matthew. First of all, we are – what we are going to report – let's say what we are going to report of the Phase II study, of course, there are a few milestones. One is the completion of the recruitment of the 130 patients. And, like Robert said before, we anticipate that we are going to finish the recruitment by the end of this year or maybe early, slightly early next year because of this two-week delay that we had to do the recent investigation. And then we will file the BLA. We are not going to report the results of the study before, we are going to file the BLA and before we are going to have a discussion with the FDA about it.

Matthew Dodds – Citigroup

Okay. Then the second question is on the European pivotal trial for the pad, Robert, how many patients roughly do you think will be in that trial?

Nissim Mashiach

The European study, I would say, the way that the study is designed is a group sequential study, meaning that it's similar to the study design that we did also in the United States. So there will be first group of 90 patients. We are going to evaluate the frequency result of the 90 patients. And then, if we meet those criteria then we stop the study. If not, then we need to add another 30 and another 30 and another 30, similar to the design that we had in the United States.

Matthew Dodds – Citigroup

And there's the same randomization?

Nissim Mashiach

Two to one, yes.

Robert Taub

However, Surgicel is not the control.

Matthew Dodds – Citigroup

Right. Just standard of care?

Robert Taub

Yes, which is –

Nissim Mashiach

Yes, exactly, suture, cautery and – but also, another thing that you need to take into account is that, unlike the US study in which we had, we were required to have at least 100 patients for safety, we don't have this requirement in the European study.

Matthew Dodds – Citigroup

Okay. Perfect. Thank you, guys.

Robert Taub

Thank you.

Operator

And our next question will come from the line of Erik Schneider with UBS. Please proceed.

Erik Schneider – UBS

Good morning, all.

Robert Taub

Good morning, Erik.

Erik Schneider – UBS

Just on the – I know it's not the focus, but on the plasma products side, can you give us a sense of how many dollars worth of products you have that you produce now that you don't currently market or sell? Or are you literally selling everything that you produce, all the potential fractions that are in any reasonable volume?

Robert Taub

Are you talking of the byproducts?

Erik Schneider – UBS

Correct.

Robert Taub

The byproducts? Yes. The whole, I would say (inaudible) for good operational margin is to extract all the proteins that we can from a liter of plasma and sell them either as finished products or as developed material. So we are very carefully purchasing the necessary raw materials to meet our forecast, which is led by biosurgery. And currently we are manufacturing optimally out of every liter the – all of the products that we sell. So, yes, the byproduct sales are extracted from every liter of plasma that we process currently. Now, as we will be processing more plasma in the future, in the coming years, then we will have also more of such products. Is this the answer to your question?

Erik Schneider – UBS

Well, what I was trying to figure out is what other products are potentially producible from what you have? Like how much of your plasma is essentially not being sold on because you don't have byproducts in enough scale or you haven't determined a viable market for those byproducts that you do have?

Robert Taub

No. I mean, you can always extract other proteins, but then they have to become finished products, et cetera, so there's a lot of development time, et cetera. So there are, of course, other proteins that are in there which we are not exploiting, many of them. But there is nothing in a built form that we could sell that we are not selling currently.

Erik Schneider – UBS

Okay. Great. Evithrom in the U.S., you previously said that it was – had higher sales than Zymo's Recothrom. Both are now in IMS. What is it – what's different about that channel that the IMS data show Evithrom with smaller dollars, but you're confident that they're actually larger?

Robert Taub

No, we don't know what ZymoGenetics sales are other than what we read in a press release from analysts or from their own public statement, so all I can say is that we definitely are way ahead of ZymoGenetics in terms of sales.

Erik Schneider – UBS

Okay. And what we've heard from them is that they're having trouble selling the product and in fact they're seeing pricing pressure in that market, particularly, with hospitals focused on saving money where they can. Have you seen anything like that with either Evithrom or that could be affecting Evicel going forward?

Robert Taub

No, I think that I mentioned in my script that there is a fierce price competition in the thrombin area, and I think ZymoGenetics itself is triggering that. So yes, there's tremendous competition in pricing currently ongoing, but we haven't seen anything in Evicel or in the (inaudible) area. So I don't think it's an overall statement here that has to be made about the Zymo stats in the United States, but rather a very specific thrombin related situation with Kings, ZymoGenetics, Ethicon and Omrix.

Erik Schneider – UBS

Okay. And then just one more question. You previously described R&D, mentioned it again on the call that you expect R&D to grow over time both in dollars and relative to revenue. Is there a cap on how high you'd expect that to go at least in terms of relative to the revenue?

Asaf Alperovitz

Probably we didn't determine a cap. What we will do in our fourth quarter call, we'll provide more information also regarding the R&D, both in terms of dollar value and in terms of a percentage of sales for the 2009 expected results.

Erik Schneider – UBS

Longer term, four years from now, five years from now, would it be – could it get up to 20%? Would you stop it at 15? Would you stop at 12? Do you have any sense?

Asaf Alperovitz

Well, we'll not provide any specific in that in this regard currently. As I said, going back to the fourth quarter call we'll provide more information on '09, but I wouldn't think we'll provide further information for longer term.

Erik Schneider – UBS

Okay. Thank you.

Asaf Alperovitz

Sure.

Operator

And your next question will come from the line of Jonathan Aschoff with Brean Murray. Please proceed.

Jonathan Aschoff – Brean Murray

Good morning, guys.

Robert Taub

Good morning, Jonathan.

Asaf Alperovitz

Good morning.

Jonathan Aschoff – Brean Murray

I was wondering could you guys provide any description of the European severe trial to come and how that may differ from the Israeli trial that you stopped?

Robert Taub

Yes, I mean –

Nissim Mashiach

First of all, it's a totally different study. The type of organ is different. I don't think that you can compare. I think you can compare – there is, like Robert mentioned during the opening of the discussion, there are a lot of similarities between the U.S. trial, the mild-to-moderate, and also the European study. And –

Jonathan Aschoff – Brean Murray

I'm talking about a severe trial though. I thought you mentioned that you would do a severe bleeding trial in the EU.

Nissim Mashiach

Yes, so, yes, the severe study in EU is, let's say, the design is similar to the design in the U.S. mild-to-moderate. There is no similarity whatsoever on the way that the study was designed in Israel, the type of origin, everything is very different.

Jonathan Aschoff – Brean Murray

Would you exclude kidney cancer patients?

Nissim Mashiach

Excuse me?

Jonathan Aschoff – Brean Murray

Will you be excluding renal cancer patients?

Nissim Mashiach

Excluding cancer patients?

Robert Taub

Renal cancer patients. The main difference is that in the EU trial it's a soft tissue severe bleeding. So you can have a severe bleeding in soft tissue. In the Israeli Phase I/II study, Phase II study, it's a direct application to a resected organ.

Nissim Mashiach

Solid organ.

Robert Taub

Solid organ. So that's the main difference if you want in terms of indication. And then all the other differences that are related to the design of the study, et cetera. The European study being a pivotal study and the one in Israel being actually a true Phase II exploratory study. Just want to say one thing, by the way, that I want to correct you. You said the Israeli trial which we stopped. We did not stop the Israeli trial. We discontinued patient enrollment.

Jonathan Aschoff – Brean Murray

Okay. What I also wanted to know, philosophically, when there is a rebleed, how do you really call that a safety or an efficacy problem? Because the rebleeding is – it is like a lack of efficacy and it's also a safety problem. So how do you call it one versus the other?

Robert Taub

Well, first of all, it has to be related to the product, right? You can have a rebleeding that is not necessarily there where the product was applied.

Jonathan Aschoff – Brean Murray

Right. This would apply only to rebleeds when the product was properly placed.

Robert Taub

Right. So what was your question?

Jonathan Aschoff – Brean Murray

The question is how do you call it efficacy shortfall rather than a safety problem, because the rebleeding, it kind of satisfies both criteria, doesn't it?

Nissim Mashiach

It's all dependent. First of all, let's be more specific. You are talking about a rebleeding, so if it's, let's say, unexpected in the surgery, unlike what we had, then it may be a safety issue. Because if the patient starts to bleed and it was unexpected, then it's a safety issue. In our case, this bleeding was expected in the protocol, like we said before. And related to the product, we did investigation and found out there is nothing that may indicate any problem whatsoever in the clinical materials as we prepared for those two studies.

Robert Taub

And Jonathan, I want to tell you that in terms of efficacy, of course, the product met the efficacy end points. So I would say you can call it maybe a safety issue if it is product related. But the efficacy means that –

Nissim Mashiach

Time to hemostasis.

Robert Taub

Time to hemostasis must be achieved within four minutes, et cetera, all these things. So –

Nissim Mashiach

All of that met.

Robert Taub

All of that was met. All of these criteria were met. So it's – rebleeding in surgery, in these kinds of surgeries, are not –

Nissim Mashiach

Surprising.

Robert Taub

– are not totally unexpected. That's why it is an expected serious adverse event in the protocol. And there is data or literature on such events. Of course, if there would be a cluster of events, then that would be a different thing, but – so –

Jonathan Aschoff – Brean Murray

Is there any way, Robert, that we may be able to gauge the extent of any cannibalism to understand the European sales as a fraction of your total biosurgery sales?

Robert Taub

I don't think – no, Jonathan, that's information that we will not provide and I think it's too detailed.

Jonathan Aschoff – Brean Murray

Okay. And the last quick one. The tax is 6.5%. Any reason why that was so low?

Asaf Alperovitz

Yes, as you know, we actually started paying taxes in 2008 after we utilized all of our tax loss carry-forwards, our NOL. We do, however, enjoy the tax benefits under the Approved Enterprise Regime, our status in Israel. And according to that, a significant portion of our taxable income will enjoy – enjoys and will enjoy in the future reduced tax rate in 2008 and going forward. In calculating the provision for income taxes, you can use on an ongoing forward basis roughly or approximately 10% as the effective tax rate that we expect. I hope I clarified your question.

Jonathan Aschoff – Brean Murray

Yes. I'll just stick with the 10%. Thank you very much.

Asaf Alperovitz

Yes, 10% will do. Thank you.

Operator

And our next question will come from the line of Vivian Cervantes with Rodman & Renshaw. Please proceed.

Vivian Cervantes – Rodman & Renshaw

Hi. Good morning. Thank you for taking the question.

Robert Taub

Hi, Vivian.

Vivian Cervantes – Rodman & Renshaw

Hi. Shifting gears a little bit, understanding that the European market is a little difficult and you're sort of positioning to sort of upgrade from Quixil to Evicel, to the best of your knowledge, do you think we'll get some any like pricing premium push-through given the upgrade with the new product being rolled out? And any chance of that filtering down to the gross margin line?

Robert Taub

I think the answer is no, because I think we were up to now at a disadvantage in the European market with Quixil. As Nissim mentioned earlier on the call, Quixil is contraindicated in neurosurgery. So I think now we are going to be at par.

Vivian Cervantes – Rodman & Renshaw

Okay. That's fine. And then, going back to gross margin, understanding that volume helped and you have some offsets with couple factors, largely, the raw material cost, and that you're already preparing your budget and so on and so forth, but do you have a sense at this time of how much more price increases you are going to see on the raw material end? Is the supply in that market going to improve any time soon or should we just continue to expect steady price increases over the next year or so on the raw material front?

Asaf Alperovitz

We expect an increase in raw material price going forward. We don't know exactly by how much. For the fourth quarter, as I said, let's assume we'll remain at the same current gross margin level and for 2009, once we'll have the call for the fourth quarter, we'll have more information, and we've completed the budget we'll provide you a projection for '09 on gross margin.

Vivian Cervantes – Rodman & Renshaw

Okay. And then last quarter we had talked about Ethicon moving ahead and leveraging some of their relationships on the orthopedic side to try and push the product for hip and knee surgeries. Do you have a sense for where things stand right now? Have they begun to do this? Is this something that we will see more of a benefit from in '09? Any color there would be helpful.

Nissim Mashiach

Last quarter, we reported about the effort that J&J are doing together with (inaudible) in Europe, mainly focusing on the orthopedic market. And what we can say at this point is that both J&J and Omrix are happy with the performance. There is a steady growth in sales in this indication, mainly the orthopedic. And there will be also further growth later on also the same level in 2009.

Vivian Cervantes – Rodman & Renshaw

Okay. And then one last thing, on the Israeli trial, understanding you've discontinued patient enrollment, is there going to be a point in time post your investigation that maybe you'll restart enrollment and somehow get back into ongoing review with Israel, with the Israeli trial? Or what's that your pathway there?

Nissim Mashiach

At this point we are focusing, our main focus is on the investigation. We don't know whether we are going to continue enrollment in the future. But, as we said before, the main focus now is to execute the severe study in Europe and to get it done as soon as possible.

Vivian Cervantes – Rodman & Renshaw

Okay. But do I get the sense that you've given up on the use of the Fibrin Pad for direct application to solid dissected organs?

Robert Taub

No.

Nissim Mashiach

No, we never said that.

Robert Taub

No. That is an interpretation that is going too far.

Vivian Cervantes – Rodman & Renshaw

Okay. Very good. I'll jump back into queue. Thank you.

Robert Taub

Thank you.

Operator

And our next question will come from the line of Debjit Chattopadhyay from Boenning & Scattergood. Please proceed.

Debjit Chattopadhyay – Boenning & Scattergood

Hey, good morning, everybody, and thank you for taking the question.

Robert Taub

Good morning.

Debjit Chattopadhyay – Boenning & Scattergood

Just a housekeeping question first, I'm not sure if I understood this. Should we model income taxes for '09 at the 10% level as well?

Asaf Alperovitz

Yes, I think 10% is a solid number you can also use for your '09 model. Yes.

Debjit Chattopadhyay – Boenning & Scattergood

And the interest income for '09, that's supposed to be in the $1.5 million range for the whole year?

Asaf Alperovitz

Yes, general interest income, assuming, of course, the yield on our cash and invested portfolio will remain as is. If that's the case, you should expect $1.5 million for the entire year. If the yield or the interest or return will get higher or lower, then it's going to change accordingly, of course.

Debjit Chattopadhyay – Boenning & Scattergood

And question regarding the definition of severe bleeding here. I mean, in the EU you're going to start a severe bleeding trial. So what is the difference in definition from the EU regulators versus the FDA in their hesitancy in starting a severe bleeding trial out here?

Nissim Mashiach

I think the difference is mainly that it's – I would say severe bleeding is well defined in Europe, and this is also a reason why we succeed to go ahead with the study in Europe, and the definition of severe is mainly when based on the judgment of surgeon for the level of bleeding that's coming, the rate of bleeding, and also the risk for the patient during the surgery. If the surgeon believes that the kind of bleeding is such that it may risk the life of the patient, then this will be treated as severe bleeding.

Debjit Chattopadhyay – Boenning & Scattergood

And one final question from the Adhexil program, for the 16-patient data, was that powered to show statistical significance or it was just too few? Just 32, basically you're looking at 32 ovaries, or was that too few to see any statistical significance?

Robert Taub

Dr. Diamond can comment on the protocol.

Michael Diamond

Yes, the 16 patients and the pilot study itself was never intended to be showing statistical significance with this small number of patients. It's far less than was identified in the pivotal trial in other products and have utilized. The hope was, number one, to show safety, which was demonstrated, and number two, to get a demonstration of efficacy so that the pivotal trial could be powered and the final protocol design determined.

Debjit Chattopadhyay – Boenning & Scattergood

In terms of the final protocol design, you still got to go for self-controlled patients?

Michael Diamond

Say it again, sorry?

Robert Taub

The same control. The same control.

Debjit Chattopadhyay – Boenning & Scattergood

One patient being her own control. Or are you going to extend into other organs as well?

Nissim Mashiach

No, no. I mean, I want to understand the question. You are talking about –

Robert Taub

Question about Phase III.

Nissim Mashiach

Phase III.

Robert Taub

We haven't finalized the protocol yet.

Nissim Mashiach

Yes, I think that at this point we are focusing on concluding the Phase I/II study, and we will discuss with the FDA by the early next year, the design of the study and will start early next year the clinical study. At that point, when we finalize it, then we will be able to give more information about the study design and also the control.

Robert Taub

The patient enrollment is challenging, because there is a second look. So this is also one criteria to be evaluated when designing the Phase III, because otherwise the study may last very long.

Debjit Chattopadhyay – Boenning & Scattergood

And one question regarding Evicel, I think you mentioned during your comments Evicel should be at the same level as the competitor. Am I right for that interpretation?

Robert Taub

No. First of all, we – the question was whether there will be a premium on the pricing, Evicel versus Quixil. Is this your question in Europe?

Debjit Chattopadhyay – Boenning & Scattergood

No, in terms of the current sales from Evicel. It was a part of your –

Robert Taub

Right. Well, yes, what was meant is that it's basically 50% in dollar value between – for each of the two products competing in the United States.

Debjit Chattopadhyay – Boenning & Scattergood

And taking Evicel forward would – how – what is Johnson & Johnson going to focus on right now? In terms of plastic surgery or burns or orthopedics in the label expansion, is that going well?

Robert Taub

Sure. Obviously, yes. And we are going to focus on two things. Our partner will continue to focus on obtaining market share and at the same time grow the market. Now that we have reached that level, then I think the emphasis will be double.

Debjit Chattopadhyay – Boenning & Scattergood

Thank you. Thank you for taking the questions.

Robert Taub

Thank you.

Operator

And our next question will come from the line of Junaid Husain with Soleil Securities. Please proceed.

Junaid Husain – Soleil Securities

Good morning, gentlemen. Can you hear me?

Robert Taub

Good morning.

Junaid Husain – Soleil Securities

Robert, relative to your new manufacturing facility in Jerusalem, could you remind us where you guys are with this? When do you expect the facility to be up and running?

Nissim Mashiach

The facility will be up and running by the end of next year. The end of 2009, it should be operational, meaning getting the approvals from the EMEA and also the FDA. Right now, we are at the process in which we are doing some validation activities for the equipment, and the facility is going to be handed over from the engineering company to us by the end of the year.

Robert Taub

And then during that time, we will be doing the validation of clinical batches and of course undergo the inspections from the authorities from Europe, United States. And that's why we believe that sometime in the fourth quarter of '09 the facility will be fully operational and manufacturing commercial product.

Junaid Husain – Soleil Securities

So by the fourth quarter of 2009 we should expect commercial product to be produced in the Jerusalem facility.

Robert Taub

Correct.

Junaid Husain – Soleil Securities

In terms of how we should be thinking about this transition from Tel Aviv to Jerusalem, any expectations for maybe some soft growth margins on this manufacturing transition?

Asaf Alperovitz

Can you hear us, okay? You have some noise in the background.

Junaid Husain – Soleil Securities

I'm sorry. I'm at the airport.

Asaf Alperovitz

Okay. If you can just press mute it will be helpful. Regarding the gross margin, we'll also relate to that in our fourth quarter regarding running the operations with two facilities, and we'll discuss that in details once we'll get to the fourth quarter. But that's really Mashiach as he states. Okay? Did you hear that right?

Junaid Husain – Soleil Securities

Thank you. No, I didn't hear that. And then, actually, Robert, if you can still hear me, relative to your IVIG business, and just to be clear, if you can confirm for me that all the IVIG sales that you got in the quarter were basically all in Israel?

Robert Taub

Yes, correct.

Junaid Husain – Soleil Securities

And what have you noticed on the pricing front for IVIG in Israel, and how would you say that compares to U.S. pricing?

Nissim Mashiach

I think the prices in Israel are still not reaching the U.S. prices. They are lower than that. But there is a worldwide trend for increase because of high demand, short supply of IVIG in general, and we would expect also some, I would say, moderate growth in IVIG prices also in the Israeli market.

Junaid Husain – Soleil Securities

Okay. Good enough. Thanks so much, guys.

Robert Taub

Thank you.

Nissim Mashiach

Thank you very much.

Operator

And our next question will come from the line of Bruce Nudell with UBS. Please proceed.

Bruce Nudell – UBS

Hi, Robert. Good morning.

Robert Taub

Good morning, Bruce.

Bruce Nudell – UBS

Good morning. I had a couple of questions about the differentiation between soft tissue and solid organ severe bleeds. First of all, in the surgical setting, what's the percent breakout of solid organ versus soft tissue? And then also are there unique technical challenges posed by solid organ versus soft tissue? And just to complete the thought, in the setting of – is the burden of proof for launching a product for solid organ versus soft tissue different in the sense that I can imagine that a solid organ wound, you close the patient up and maybe follow-up surgical access is less easy. If you could just comment on that, that would be great.

Robert Taub

Well, I think that first of all, I don't have – or we do not have an answer to your first question, and I would be glad to discuss this with you in a different call, so please schedule a call and we'll find out. I don't have an answer to that first question.

Bruce Nudell – UBS

Sure.

Robert Taub

I think it is true to say a severe bleeding in a resected solid organ, highly vascularized, like a prostate is more severe than a severe bleeding in soft tissues. So I think that answers partly your question. So it is a different kind of severity in the bleeding. And what was your third, the third question?

Bruce Nudell – UBS

The third one was just the burden of proof.

Robert Taub

Yes, no, it remains time – I mean, according to the protocol it remains time to hemostasis. So efficacy is time to hemostasis, and it's related – your question is a bit related to the question that was asked by Jonathan, what about rebleeding, because you were saying about the patient being rolled out of the operating room after having had an application of the Fibrin Pad, what happens if he rebleeds? So from an efficacy point of view, it's time to hemostasis, and it is of course during – if it's intraoperative, that is the way the protocols foresee that.

Bruce Nudell – UBS

But I guess in terms of adoption, let's say it was approved, am I mistaken in thinking that a deep surgical wound such as for a kidney or a liver, where the patient is resected, closed up, then it's deep in the patient's body cavity as opposed to a superficial soft tissue wound that had bled profusely, but is more accessible in the postop setting or more obvious even. Does that create a different market hurdle that you have to face in terms of the reliability of the product?

Robert Taub

Okay, I just want to make a clear statement here. Rest assured that the product that will be launched and sold will have also the market authorization to be used in solid organs. It will not just be in soft tissue, eventually. There may be a series of approvals. Regarding the market acceptance, I think it's a little too early now to discuss theoretical, what I'll say, situations about how the market will accept the product. I think when all the studies will be done and all of the clinical data will be available and everything will be reviewed and we will have this whole body of data, that's when our partner, Ethicon, will be best able to see how they're going to position the product and where it will be sold and how. So I think I'd like not to answer your third question fully, but I hope I've given you some color to what our plans are.

Bruce Nudell – UBS

Great. Thanks for your time.

Robert Taub

Thanks.

Operator

And at this time we have no further questions. I would now like to turn the call back over to Mr. Robert Taub for closing remarks.

Robert Taub

Well, thank you, everybody, for joining this call, and for all the interest in our products and in the company. And I look forward to speaking with all of you early next year when we will be talking about our fourth quarter call. And I want to thank especially Dr. Diamond, who is on the West Coast for having joined at call today. Thank you very much, everybody. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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Source: Omrix Biopharmaceuticals, Inc. Q3 2008 Earnings Call Transcript
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