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Executives

David B. Holtz - Interim President

Nucryst Pharmaceuticals Corp. (NCST) Q2 2009 Earnings Call August 5, 2009 ET

Operator

Good day ladies and gentlemen. And welcome to Nucryst Pharmaceuticals 2009 Second Quarter Results Conference Call. Today's call is being recorded for replay purposes. At this time all participants are in a listen-only mode.

After the speakers remarks there will be a question and answer period. Before we begin, I would like to remind you that a number of statements will be made in this conference call. That constitute forward-looking statements of Nucryst within the meaning of the United States Federal and Canadian Provincial Security Laws or otherwise. Forward-looking statements and information are current predictions only and are not guarantees of future performance.

They involve significant risks, uncertainties and assumptions and our actual results could differ materially from those indicated by the forward-looking statements for reasons generally beyond our control.

For discussion of the risks and uncertainties that may affect these forward-looking statements, please refer to the risk factors section in our quarterly report on Form 10-Q for the quarter ended June 30th, 2009, which will be filed later today and our annual report on Form 10-K for the year ended December 31st, 2008.

These reports are filled with U.S Securities and Exchange Commission on anchor and with the Securities Authorities in Canada on CSA. Nucryst disclaims any intension or obligation to revise forward-looking statements, whether as a result of new information, future developments or otherwise after the date of the broadcast, except as required by law.

All forward-looking statements in this conference call are expressed to qualify in their entirety by the cautionary statement.

I will now turn the call over to Mr. David Holtz, Interim President and Chief Executive Officer and Chief Financial Officer of Nucryst. Please proceed, sir.

David B. Holtz

Thank you operator. Good morning everyone and thank you for joining us today to discuss Nucryst 2009 Second Quarter Financial Results and Business Update.

For those of you who might be new to our call we develop, manufacture and commercialize medical products display, information using our patented and anatomically disordered Nano-crystalline silver technology, we call SILCRYST.

We have licensed the worldwide rights for wound care products, using our SILCRYST coding to Smith & Matthew, which market these products in over 30 countries under their trademark.

We have also developed our proprietary Nano-crystalline silver in a powder form, which we refer to as NPI32101 for use in medical devices and as an active pharmaceutical ingredient.

I will now review our financial results and then provide you with the business update, following that we will open the call for your questions.

The total revenue for the second quarter of 2009 increased to $4.9 million compared to $4.7 million in the second quarter of 2008. The increase in revenues was due to a higher level of product shipments in the current quarter, which was partially offset by a slightly lower manufacturing profit and rocky revenue.

Under our agreement with Smith & Nephew we continue to provide them with an annual manufacturing cost rebate of $4.5 million, which is accrued quarterly and paid out in October of each year. The method we use to price the product in manufacturing supply to Smith & Nephew was changed from a fully allocated cost of manufacturing reimbursement mechanism to a system, where by, we recover a fixed overhead charge plus all direct cost incurred in manufacturing the Acticoat product.

This pricing mechanism allows us to recover the manufacturing cost rebate to the extent we were able to reduce our actual manufacturing costs below the fixed recovery amount.

This modified reimbursement cost approach was established for the three years through the end of 2009 after which we have had to negotiate a new pricing program based on the cost reductions, we have achieved over the three year period.

In addition to these cost reimbursement revenues, we received a manufacturing profit and royalties that are based on Smith & Nephew sales to their customers.

Revenues based on Smith & Nephew's and sales were down in the second quarter of 2009 compared to 2008 due to the impact of changes in foreign currency exchange rates.

Smith & Nephew end sales of Acticoat increased approximately 6% excluding the impact of foreign currency changes.

Our gross margin on product revenues was 43% in the second quarter of 2009 compared to 42% in the second quarter of 2008.

The improvement is due to reductions in per unit manufacturing cost, which were partially offset by a slight decrease in manufacturing reimbursement prices charged to Smith & Nephew.

Our gross margin percentage may vary from period to period due to differences in the timing of product shipments to Smith & Nephew and when Smith & Nephew's sell products to their customers.

Our research and development spending in the second quarter of 2009 totaled $599,000 compared to $1.5 million in the second quarter of 2008.

The decrease is a result of reductions in our research and development staff and overall activity including the closure of our Wakefield Massachusetts Research Facility.

We intend to continue to control our development expenses so that 2009 spending will remain at a reduced level compared to 2008. We have significantly reduced or eliminated spending on several development programs until development for commercialization project for these programs are secured.

Our General and Administrative cost in the second quarter of 2009 totaled $1.4 million as compared to $2.2 million in the second quarter of 2008. As we begin to see the impact of the cost reductions achieved following the transfer of our U.S. headquarters to Princeton New Jersey and staff reduction.

We expect to maintain a reduced level of General and Administrative cost on a year-over-year basis for the remainder of 2009 as well.

We had an operating profit before interest income and foreign exchange losses of $191,000 for the second quarter of 2009 compared to an operating loss of $1.6 million for the second quarter of 2008.

The operating profit in the current quarter demonstrates the positive impact our cost reduction programs have had on our results. Our other income and expenses for the second quarter of 2009 included foreign exchange losses of $6,500 compared to foreign exchange losses of $178,000 for the same period in 2008.

The majority of these losses are a result of unrealized gains and losses created by changes in the U.S. dollar to Canadian dollar exchange rates.

Our net loss for the second quarter of 2009 was $413,000 or $0.2 per share. This compares to a net loss of $1.7 million or $0.9 per share in the second quarter of 2008.

Moving on to our balance sheet as of June 30th, 2009 we have 11.8 million in cash and cash equivalents compared to $23.4 million on December 31st, 2008. The significant decline is due to the $14.7 million distribution of capital to shareholders, we completed in the first quarter of this year.

Moving on to the update of our business, during the second quarter of 2009, we began to see the positive impact for the reductions of our operating costs as we continue our efforts to right size the operations to reflect the existing business.

We expect to maintain this cost discipline, while we evaluate the longer term strategic alternatives for the business. We also continue to work closely with Smith & Nephew on the new Acticoat Flex product.

We announced last week that Smith & Nephew had received 5, 10-K clearance from the U.S. FDA for Acticoat Flex. This clearance along with the Canadian market approval received last year will allow Smith & Nephew to begin a full North American launch this quarter.

Smith & Nephew has filed for a CE mark approval for the European market as well. The Acticoat Flex uses our SILCRYST-nanocrystalline silver technology with a new improved dressing material that makes it ideal for treating anatomical awkward areas and improving patient comfort going there.

Smith & Nephew has continued to receive positive feedback from clinicians on the use of Acticoat Flex. We are working closely with Smith & Nephew on pre-launch production activities in order to accommodate their product launch requirements.

We also continue discussions with third parties regarding our anti-microbial barrier cream product, which has already received 5 10-K clearance in the U.S. as well other development opportunities for our nanocrystalline coding technology outside of wound care.

In conclusion, we at Nucryst remain focused on driving the company towards a sustainable level of profitability with the existing revenue base from our relationship with Smith and Nephew.

We are also prepared to support Smith & Nephew with its product requirements for the launch of the Acticoat Flex product.

In my current role as Interim President and CEO our Board of Directors and the management teams remain focused on achieving the short-term goals, while maintaining the core components of the business as we look for opportunities to realize additional value from our SILCRYST technology.

We'll now open the call for your questions. Operator, please review the procedure for the questions with the audience.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator Instructions). Mr. Holtz, there are no questions at this time, please continue.

David Holtz

Okay. Well I think that we'll wrap up our second quarter report. And we look forward to updating you throughout the rest of the year. Thank you, operator, you may end the call.

Operator

Thank you. Ladies and gentlemen this concludes the conference call for today. Thank you for your participation and you may now disconnect your line.

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