Palomar Medical Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Palomar Medical Technologies, Inc. (PMTI)
by: SA Transcripts

Palomar Medical Technologies, Inc. (NASDAQ:PMTI)

Q4 2012 Earnings Call

February 7, 2013 11:30 am ET

Executives

Kerry McAnistan – Investor Relations Assistant

Joseph P. Caruso – President, Chief Executive Officer and Chairman

Paul S. Weiner – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Richard Newitter – Leerink Swann

Anthony Vendetti – Maxim Group LLC

Bill Plovanic – Canaccord Genuity

Operator

Welcome to the Palomar Medical Technologies Fourth Quarter and Fiscal Year 2012 Financial Results Conference Call. Please be aware that each of your lines is in a listen-only mode. At the conclusion of Palomar’s presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

I would now like to turn the conference over to Kerry McAnistan, Investor Relations Assistant of Palomar. Ms. McAnistan, you may begin.

Kerry McAnistan

Good morning and welcome to the Palomar Medical Technologies fourth quarter and fiscal year 2012 conference call. Before we start this morning's call, there are a couple of items we would like to cover. This conference call is on a recorded line and you may access the webcast replay at Palomar’s website, palomarmedical.com, through Thursday, February 21.

Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements, the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Form 10-K for the year ended December 31, 2011 and the company's Quarterly Reports on Form 10-Q, which are on file with the SEC and available through Palomar's website.

The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement as of the date of this call. The information in this conference call is the property of Palomar and should not be reproduced, recorded or otherwise published without the expressed prior written consent of the company.

Joining us this morning are Joe Caruso, Chairman, President and Chief Executive Officer; and Paul Weiner, Chief Financial Officer.

I would now like to turn the call over to Joe.

Joseph P. Caruso

Thank you, Kerry and thank you for joining us on our earnings release conference call this morning. The changes we made in our business over the past year are beginning to positively affect our financial performance. We were very pleased to announce this morning our first profit since the recession began in 2009 excluding, of course, the patent infringement settlement in the third quarter of 2011. This is a major accomplishment and a significant milestone as we look forward to building our business in the future.

In the past, our business model has shown tremendous operating leverage with increased revenue. In Q3, we announced a refocus on our core professional business as we continue to leverage the impressive research and development accomplishments we made in the unique low-cost consumer technology by incorporating it into some of our recently launched and planned future professional products.

During the past few years, we have made major investments in new technology and enhanced distribution. There’s always difficult to make major investments during a core economic period but these investments have positioned us well for growth as the economy continues to recover.

Over the past few years in particular we have made significant investments in semiconductor, diode laser packaging. With investment coincide with the many advances made in recent years in diode laser technology driven by industrial applications that are unrelated to the aesthetic market. Diode lasers are now up to 70% efficient by converting electrical energy to light energy as compared to solid state and other lasers that are only a few percent efficient.

Using these improved diodes in our innovative diode packaging means we can provide significantly smaller, more powerful, more cost-effective, more reliable and more profitable systems for us in our customers. This is a major competitive advantage. In mid-2012 we announced two new professional products based on our diode technology. The first is the Emerge non-ablative fractional laser. And the second is the Vectus high-power diode hair removal laser. The Vectus delivers twice the power with faster treatments, as compared to the popular Light Share diode laser that we sold to Coherent Medical in 1999.

The Vectus has the same modular design as our Icon system and like our other systems is service through our factory depot program, resulting in high up time for our customers and good service margin for us. The Vectus includes the Skintel melanin reader for individualized treatment and provides superior cooling for better treatment comfort. The Vectus opens the standalone laser hair removal market for us and its sales are providing and proving to be incremental to sales of the platform hair removal systems that we sell as part of the Lux and Icon product lines.

We believe we have the most advanced diode laser packaging and manufacturing capability in the aesthetic industry and the ability to leverage this capability to other important applications. The high peak power delivered by our diode package means better efficiency and fewer treatments. Our advanced compact diode laser package also allows the Vectus laser to have the largest spot size and the most uniform beam profile available today. Together with its high speed, the Vectus laser offers the fastest hair removal treatments on the market today. These advancements translate to more profit for our customers.

We designed the Vectus as a high average continuous power platform, which we can use in future diode products to address additional treatment applications. With the major investments in this core technology behind us we are looking forward to launching many new products using this unique and important capability.

We started shipping the Vectus system in limited quantities in mid-last year as part of an extensive field test to select luminary sites in Europe and then to select sites in the United States in September. We also outfitted our direct sales force both domestically and internationally with the Vectus demo systems during Q3 and Q4. The Vectus system is registered for sale in Europe and FDA-cleared in the United States, and just last month we received clearance in Canada. It is currently in registration in most of the Far East and South America.

Laser hair removal is the largest segment of the aesthetic market, with tens of thousands of systems installed worldwide. The Vectus is the biggest advance in laser hair removal technology in years, and offers a more profitable proposition. It combines speed, reliability, low cost of ownership, portability, and accuracy in one system. The feedback from systems already sold is extraordinary, and we believe the Vectus could be our best-selling product long-term.

The Vectus was a significant contributor to our 31% growth in product revenue as compared to the same quarter last quarter for the professional segment. The overall trend in our professional business is very positive with signs of improvement on every front, including cash generated from operations and, of course, profitability. We have been successful in our geographic diversification, as well as launching new product offerings. Our sales force is excited with the recent introductions of our new products and we are looking forward to launching additional products within the year.

We are expanding our product portfolio with high value, premium-priced platform offerings, as well as low-entry cost products with recurring revenue components. We have added products to our portfolio that reach segments of the market that we have not addressed in the past. Our goal is to expand our customer base with some of these lower-priced, entry-level systems and up sell these sites at a later time with our broad product portfolio.

This quarter was the thirteenth consecutive period of product sales growth year-over-year. Our international expansion initiative is moving according to plan. The offices in Germany and Spain are fully operational and contributed to our growth and profitability this last quarter. They have been established as a competitive force in their respective markets in a relatively short time. Our Management teams in those markets are strong and bring a wealth of knowledge and increased access to the overall market and opinion leaders in Europe. Although there is economic turmoil in Europe, our business in that region grew again in the fourth quarter. Our international business grew substantially in Q4, and we are now looking at other areas around the world to establish additional direct offices.

Sales of the Palomar Icon laser and Optimized Light System in the U.S. and other select countries is also going very well. We continue to upgrade our existing customers and establish new customer sites with the superior technology. Purchase interest continues to be driven by our MaxG technology used for the treatment of pigment and vascular lesions, our non-ablative fractional laser skin rejuvenation multiple handpieces for hair removal, and the Skintel melanin reader.

The Skintel technology is becoming a standard for many practitioners, allowing them to measure the melanin levels in the treatment area and then choose energy parameters on the Icon and Vectus systems for the best and fastest clinical outcome. The Skintel is the only technology of its kind offered in the aesthetic light-based market. It also enables treatment outcomes to be consistent and predictable to a level not previously attained.

We continue to see the market with the Emerge non-ablative fractional skin rejuvenation system. The Emerge offers fractional treatment in a system that is portable, lightweight, easy to use, and has an attractive price point. It is a combination of our well-established fractional technology and our low-cost fractional components originally developed for the consumer market. Over the past few years, we have developed low cost fractional technology that is used in our home use PaloVia skin viewing laser.

We are taking advantage of some of these low-cost components in a different way to offer a professional level non-ablative technology to treat wrinkles and pigmented lesions in a physician office setting. We are also leveraging some of our low-cost manufacturing lines to further drive down costs. This is especially important in certain countries where price is a major factor or where traditional high-priced lasers are not competitive. We are positioning this new entry in the broad non-ablative fractional market to appeal to first-time laser physician sites as an entry-level system.

We are testing expanded business models that are focused on increasing our recurring revenue established with some of our other professional products. Less aggressive than the Palomar Icon system, the Emerge laser provides a great procedure for individuals who want less down time and are willing to have more frequent treatments. Our goal is to penetrate into new physician accounts that have yet to purchase a Palomar product or any light-based product but are interested in expanding their aesthetic practice.

An expanding customer base will allow our sales force to across selling opportunities with our other higher price technologies. The clinical results for the Emerge are impressive and physician feedback is very good.

Regarding the consumer market – as we outlined last quarter, we are seeking to align ourselves with a worldwide consumer-based distribution partner. The PaloVia laser has been clinically tested and has proven customer satisfaction. We have engaged an investment banker to assist us in identifying and negotiating an arrangement with a partner that has the network and skills to market and distribute our consumer technology.

In the meantime, we will continue to sell through existing channels and look for distribution opportunities around the world. We have decreased our marketing expansion programs during this quarter in 2013 to align with our distribution partnering strategy and help drive our operations toward profitability.

Overall, we are very optimistic and pleased with the direction that our business is going. We have turned the corner and posted solid profits for the quarter. We have refocused on the core professional market and leveraged our business model. Our research team did a great job developing professional product offerings incorporating our unique diode and low-cost consumer technology.

Professional product revenues grew by 31% year-over-year, driven by the launch of our new products Vectus and Emerge, continued traction with our Icon system, and the progress we have made expanding our distribution outside North America with our newly established offices. We are enthusiastic and excited as we enter 2013 and believe we have the ability to execute well in the quarters and years to come.

Now Paul will brief us on the details of financial performance. Paul?

Paul S. Weiner

Thank you, Joe. Revenues for the quarter were $23.4 million. Revenues for the same quarter last year were $23 million or $21.1 million net of $1.9 million consumer segment revenues that were deferred until the fourth quarter of 2011. Regarding the professional market, comparing fourth quarter 2012 to fourth quarter 2011, product revenues were $17.5 million as compared to $13.4 million, a 31% increase. 57% of product revenues were in North America and 43% were outside North America.

North America product revenues increased 19% and the rest of the world product revenues had even a greater increase of 49%. Our growth was strong in most territories throughout the world. Comparing calendar year 2012 to calendar year 2011, product revenues were $55.4 million as compared to $44.4 million a 25% increase. 56% of product revenues were in North America, and 44% were outside North America. Our growth was spread evenly with an increase in North America product revenue with 26% and an increase in the rest of the world of 23%.

Consumer segment revenues for the quarter were $900,000. As was discussed during the third quarter conference call, our goal is to substantially reduce our consumer market expenses starting in the fourth quarter and achieve breakeven for the consumer segment in 2013. We are on target for achieving this goal.

Royalties for the quarter were $1.6 million, an increase from $1.5 million in the same quarter last year. Other revenues were $35,000 which represents the quarterly P&G payment related to consumer light-based female hair removal product sales. Professional product gross margins were 60% this quarter an increase of 200 basis points from 68% from the year-ago quarter.

Research and development expense for the quarter was $2.2 million as compared to $3.8 million in the same quarter last year. Research and development as a percentage of total revenue was 10% this quarter as compared to 17% for the same quarter last year. We lunched Icon in 2011 and earlier in 2012 we completed our research and development efforts on Skintel, Emerge, and Vectus, which we introduced to the market in 2012. With the introduction of these products the major investments in core technology for these products are behind us. Therefore we believe that the Q4 R&D spending should be our new run rate throughout 2013.

Selling and marketing expense for the quarter was $6.9 million as compared to $7.1 million for the same quarter last year. Selling and marketing as a percentage of total revenue was 30% this quarter as compared to 31% for the same quarter last year. General and administrative expense for the quarter was $2 million as compared to $2.6 million for the same quarter last year. General and administrative expense as a percentage of total revenues was 9% this quarter as compared to 11% for the same quarter last year.

Income before taxes this quarter was $2.3 million, as compared to a loss before taxes of $1.8 million for the same quarter last year. This year, we increased revenues with the introduction of new products and increase in the international distribution, while at the same time reduced our operating expenses. We are excited to report that we have achieved our goal of profitability, and our goal is to continue to manage the business to increase revenues and sustain profitability as we move forward.

Net income this quarter was $2.3 million or $0.12 per diluted share as compared to a net loss of $1.9 million or $0.10 per share for the same quarter last year. The balance sheet is solid with cash and other investments of $100 million and no borrowing. Even with the increase in revenues, we have been successful in driving our accounts receivable day sales outstanding down to 44 days from 62 days in the previous quarter. We used $1.4 million in cash in the fourth quarter to buyback 160,000 shares of our common stock at an average price of $8.70 a share.

The Board of Directors approved the buyback plan on November 15 to purchase 1.5 million shares. Even with the $1.4 million use of cash for the buyback, we were able to increase our cash balance by $6 million since the end of the third quarter.

We are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Richard Newitter of Leerink Swann. Your line is open.

Richard Newitter – Leerink Swann

Hi guys, thanks for taking the question and congratulations on the profitability front.

Joseph P. Caruso

Thanks, Richard.

Richard Newitter – Leerink Swann

Just, maybe I could start on R&D expense and your comments there that this is kind of – we saw a step down from the past two quarters, actually R&D as a percentage of sales. You guys have been kind of the highest margin spender in the industry for some time now. Just wondering why now are you kind of rebasing this R&D spend at a time when it seems like market growth has stabilized and is improving? It would seem that has been the life blood of kind of innovation for you guys.

Joseph P. Caruso

Right. Well, it's a good question. If you go back a few years, we had a higher percentage of research and development, but a lot of that was going into core technologies that we completed and it’s now behind us. So all of the new diode technology that you see coming out of our labs, it’s all basic research and sort of core fundamental work that was done in the last few-year time period. Now we can take advantage of that and productize some of the investments and some of the spending that went into that in previous years. So, I would expect levels of research around this amount going forward and it's more about getting productization of some of the core technologies that we've invested so much in the past.

Paul S. Weiner

As we said over the last couple years, we said that 2010 and 2011 were investment years as far as into research and development, and that we planned on 2012 moving towards profitability and moving forward from there. And as Joe said, the heavy investments in 2010 and 2011 we are now utilizing and putting into our products moving forward.

Richard Newitter – Leerink Swann

Okay. That’s helpful. Thank you. And just wondering – it looks like gross margin improved a bit on your home use segment, but the underlying profitability within the base business was a little bit below. I was wondering, anything going on there within the base business pricing wise or was that more -- what should we expect going forward for gross margin in 2013?

Joseph P. Caruso

No, I think we're happy with where the product gross margin was, I think the product gross margin was 60% this quarter as we said that 58% the year ago quarter gone up 200 basis points. And that's primarily based on volume. We get a lot of leverage from that. So, we are happy with where we are and the increase in product gross margins related to professional market.

Richard Newitter – Leerink Swann

Okay. And just you mentioned some new products on the horizon. Just wondering, should we expect anything at the upcoming Academy -- American Academy of Dermatology in March? Is that the venue?

Joseph P. Caruso

We have quite a few products that we will showcase at the AAD meeting in Miami. An additional product, obviously is effective that we launched towards the later part of 2012. We have some additional products that we’ll be discussing at the end of this year, 2013. So, quite excited about the product portfolio.

Richard Newitter – Leerink Swann

Okay. Thanks, guys.

Operator

Our next question comes from Anthony Vendetti of Maxim. Your line is open.

Anthony Vendetti – Maxim Group LLC

Thanks. Can we talk a little bit more about Vectus? I know, Joe, you spoke about it a lot on the call today, but can you give us any metrics in terms of how well it's doing? I believe you started selling that in June. Is that correct? And then, can you tell us a little bit about the ASP, I don't know if you can give us unit numbers. And also, can you tell us where else you are planning to start selling it internationally?

Joseph P. Caruso

So we stared them, we shipped the first few units in June, and those were to advance luminary sites for clinical testing and validation. We shipped a few more units in Q3 and we shipped a lot more units in Q4. We are building up our capacity. We have gotten demo systems out to most of our domestic sales force, our international direct offices has been systems that have installed for demo purposes to our distribution base. We just received Canadian clearance to sell, so we will start to penetrate that area. We still are in registration in South America and a lot of Far East countries. So there is still lot of open space that we haven’t placed any Vectus system yet.

We have a fair amount of luminaries that really like the system. Let’s say they have had it for quite a while now. Sales force is really pretty pumped up about this system. It’s a good technology; it’s a big advance in laser technology for hair removal. It’s a pretty easy demo. There is obviously – these are big-ticket capital equipment sales items, so it's not that it's so easy to sell systems at that price point. But sales force is very, very excited about the opportunity to really enter this standalone laser hair removal business haven't really addressed in the past.

Anthony Vendetti – Maxim Group

Okay. And in terms of the PaloVia unit, I know you guys are looking to look for strategic options for that. Is there any time frame? As soon as possible, or you think by a certain date you will have a resolution to that?

Joseph P. Caruso

Yeah, Anthony, there is no set time frame. We are continuing to talk to different parties regarding distribution as far as global institution, but it's a distribution target. But at the same time, we do continue to sell through the retailers that we have been selling through in the United States, and we have actually started to sell some PaloVias actually internationally so we’re expanding. At the same time that we are looking for a partner, we are expanding internationally at the same time. And as we said, our goal is to continue to sell through the inventory, at same time be around breakeven for the consumer market and drive professional sales.

Anthony Vendetti – Maxim Group

Okay. And because you took the charge in the third quarter, this had – this quarter here in the fourth quarter, the PaloVia had no impact or no negative impact on your bottom line. Correct?

Joseph P. Caruso

No. There was a negative impact of about $340,000 this quarter, because we took, we didn't reserve all the inventories, we did take our big reserve, but we have unreserved inventory going into 2013. So, as long as we continue to sell this unreserved inventory, we should stay at about the same margins we’ve been in the past. So if you look at even in the press release we break down the consumer market for $340,000 loss related to that segment -- which, as we said, we plan on minimizing even more going into 2013.

Anthony Vendetti – Maxim Group

Okay, great. And then, just lastly, Paul, if you could just give us the stock-based comp throughout the operating expense line?

Paul S. Weiner

Sure. It's about $602,000 in total, where COGS is at $73,000, sales and marketing at $194,000, research and development at $208,000 and G&A is $127,000.

Anthony Vendetti – Maxim Group

Okay, great. Thanks, guys.

Operator

Our next question comes from Bill Plovanic of Canaccord. Your line is open.

Bill Plovanic – Canaccord Genuity

Great thanks. Yeah, good morning or good afternoon for you. So my question is, your G&A ran about $2 million in the quarter, which is really low if I look back at any quarter for going back a while. Just any one-time events in there that brought it down? Or - and is this a new run rate going forward? How should we think about this?

Paul S. Weiner

G&A as you said, as you point out was a bit lower so we've been running at this quarter. We expected probably to be at around a little bit higher in 2013 probably around $2 million that we had this quarter, probably around $2.5 million in that neighborhood. Maybe a little lower than that moving forward on a quarterly basis.

Bill Plovanic – Canaccord Genuity

Is there a reason it was so low? I mean, did you not pay year-end bonuses or anything in particular?

Paul S. Weiner

Well no, I mean, nothing that’s all obviously we’ve been watching expenses in the fourth quarter, I mean nothing being low lower than we expect. So I would just expect it to be a couple, $300,000 lower than what it was in the fourth quarter.

Bill Plovanic – Canaccord Genuity

And then, as we think about aesthetics, a lot of it is all about product cycles. As we look at Icon that was launched a little over a year ago, I believe, where are you in that product cycle?

Joseph P. Caruso

We are pretty early in Icon. Icon was a big advance from the previous systems for just a lot of reasons that I’ve talked about over the past couple of quarters. And it’s really starting to take on a life of its own and get some really good traction. MaxG is just a phenomenal product on that platform, and the 1540 which is really good clinical results, so most of the things that go out an Icon platform system that goes out as a MaxG 1541 on it. There is also some hair removal handpieces, or may be some pigmented lesion, or may be a specialty handpiece like 2940, but really great clinical results, good reliability on that system. People like the modular from simply like the modular approach, they like the service. So that’s a system that we will be with us for quite a while and again in pretty early in that product lifecycle.

Bill Plovanic – Canaccord Genuity

Okay. And then, as we think about consumer, I guess you have really dialed back spending. Maybe you got a year-end pop out of that for the Christmas holiday. As you really deemphasize that business and just try to run it breakeven, do the revenues stay the same? Do they degrade? How are you thinking about it as you do your planning?

Joseph P. Caruso

We see that as a pretty much a steady business for the next few quarters. Lot of the spending that we had in previous quarters was really to break into new channels, different channels, new way to selling it and that was very expensive from a sales and marketing standpoint. If we look at the channels that we have been successful and we manage those channels efficiently, we should be able to maintain. So the revenue run rate obviously some seasonality in that type of business.

But we can manage that business with a fairly low amount of investment and babysitting and run that for at least for the next few quarters all the way through 2013 no problem. As Paul said, we finished up some of the contracts that we had in Q4. We should see some decrease in what it takes to manage that business in 2013, so I think it will be pretty much what you see.

Bill Plovanic – Canaccord Genuity

Okay. And then, I think in regards to a previous question – as I think about this for AAD coming up and even ASRAMS soon thereafter, the Vectus which was launched last year or first commercialized is really starting to gain the momentum. So, that will be the focus and we will see anything new and differentiated from the current platforms would not likely be till late 2013 or 2014 event. Is that the way to think about that?

Joseph P. Caruso

Yeah, that's correct. We'll talk about some new product and technologies towards the later part of 2013.

Bill Plovanic – Canaccord Genuity

Okay. And then last question, I promise on gross margins. Does Vectus changed the gross margin profile for the Company at all?

Paul S. Weiner

No, it got the same margin as the rest of our product. Obviously as volume increases we can leverage that for higher margins, but as far as the profit.

Bill Plovanic – Canaccord Genuity

Okay, that's it. Thanks so much, appreciate it.

Operator

Our next question comes from Andy Schopick. Your line is open.

Unidentified Analyst

Yes, thank you. Paul, I would like to follow-up on a couple of other financial-related questions. Can you give us any guidance or your expectation for the effective tax rate for 2013?

Paul S. Weiner

Yeah, we are going through that it's going to be in 2013, I don't have any answer for you right now. We do have about $45 million in net operating losses remaining, but we don't have as of today what our effective tax rate is going to be in 2013 as of yet.

Unidentified Analyst

So, we will have to wait till the first quarter's report and see what your general thinking is on that matter?

Paul S. Weiner

Yes.

Unidentified Analyst

Deferred revenue, I would like to drill down into that a little bit more, too. How much of the current deferred revenue, which looks like it was down from the year-ago figure by nearly $0.5 million, how much of that deferred revenue is consumer product-related for the current portion of it?

Paul S. Weiner

I think as far as the deferred revenue, it’s mostly related to service and service contracts, which is on the professional side.

Unidentified Analyst

Okay. So, most of your deferred revenue account, both short and long-term, is related to the traditional service-related business on the professional side?

Paul S. Weiner

Yeah, I think pretty consistent, I mean if you I know you're talking about the year ago, a year ago it was around $3.7, now it’s about $3.3. But for all of 2012 it’s been running at $3.3.

Unidentified Analyst

And you made reference to about $1.9 million, I believe, in deferred revenue related to the consumer portion. Was that what was recognized during 2012 from prior deferred revenue in 2011?

Paul S. Weiner

That was – what was recognized in the fourth quarter of 2011.

Unidentified Analyst

Okay.

Paul S. Weiner

Related to all the sales prior to the fourth quarter of 2011. So we launched at the end of 2010 obviously we had Q1, Q2 and Q3 of 2011 we were deferring most of that revenue and in the fourth quarter we start recognizing the revenue from Q4 2011 as well as all the deferred revenue prior to that.

Unidentified Analyst

And how much was recognized during 2012 of prior deferred revenue?

Paul S. Weiner

We've recognized all this in the fourth quarter of 2011.

Unidentified Analyst

Okay. Excellent. Thank you very much.

Paul S. Weiner

Very good, Andy.

Operator

Thank you. We have a follow-up question from Richard Newitter of Leerink Swann. Your line is open.

Richard Newitter – Leerink Swann

Hey guys, thanks for the follow-up. I just wanted to ask one last one on the litigation strategy. That has been a – provided a nice royalty for you on the hair removal patents. I know those come up for expiration in the not too distant future. Any thoughts on kind of where that strategy takes you over the next year, as you look to replenish perhaps those royalties in I guess 2015? And what does that possibly mean for operating expenses? Thanks.

Joseph P. Caruso

We have one enforcement action right now against Tria. The patents that we are suing Tria on actually go beyond the innocent patent, so looking at not just the innocent patent lifetime, but actually quite a few years after that with these additional patent if you remember couple of quarters ago we had some patents in the second suit on that. There are some other opportunities in the herbal that were fulfilling and we're also looking and taking a deep dive into the rest of the patent portfolio, we have some gems in there that we think will be valuable going forward. We’re looking at what’s the right strategy is with those, but we don’t want to necessarily increase our litigation expense in the short term. So we’re trying to balance all those things right now.

Richard Newitter – Leerink Swann

Okay. So just to be clear, so kind of fair to assume that at least over the next six to twelve months, we shouldn’t be expecting any major ramp-up on legal spend?

Joseph P. Caruso

Right, that’s correct.

Richard Newitter – Leerink Swann

Okay thanks.

Operator

Thank you. There are no more questions at this time. I will now turn the call over to Joe Caruso for closing remarks.

Joe Caruso

Yeah thank you operator. I hope we answered your questions as directly and clearly as possible. We thank you for tuning in we look forward to our next call. And have a great day.

Operator

This concludes Palomar’s fourth quarter and fiscal year 2012 financial results conference call. Thank you for attending, you may disconnect at this time.

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