Executives
Joe Caruso - President & Chief Executive Officer
Paul Weiner, Chief Financial Officer
Dan Valente - Chairman
Kerry McAnistan - Investor Relations Assistant
Analysts
Dalton Chandler - Needham
Anthony Vendetti - Maxim Group
Jose Haresco - JMP Securities
Sharon DeStefano - Argent LLC
Bill Plovanic - Canaccord Genuity
Andy Schopick - Nutmeg Securities
Palomar Medical Technologies Inc. (PMTI) Q3 2010 Earnings Call October 28, 2010 11:30 AM ET
Operator
Welcome to the Palomar Medical Technologies third quarter 2010 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 at Palomar. Ms. McAniston, you may begin.
Kerry McAnistan
Good morning and welcome to the Palomar Medical Technologies third quarter 2010 conference call. Before we start this morning's call there are a couple of items we would like to cover. These conference calls are recorded live and you may access the webcast replay at Palomar’s website, www.palomarmedical.com, through Thursday, November 4th.
Various remarks that we’ll 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, 2009 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 Dan Valente, Chairman; Joe Caruso, President and Chief Executive Officer; and Paul Weiner, Chief Financial Officer.
I would now like to turn the call over to Dan.
Dan Valente
Thanks Kelly and thank you all for tuning into the conference call. We’ve met our financial and operating goals again for the third quarter. As you know, Palomar will be entering a new and exciting phase in achieving the company’s direct-to-consumer commercialization goals. We are very excited about our plans to introduce our first home product in 2011. Now let’s hear from Joe Caruso, Palomar, CEO.
Joe Caruso
Thank you, Dan. Although the economy remains weak, we are seeing signs of improvement in our business. There has been a decrease in physician components and an increase in lead generation and demos. We are yet to see any substantial change in the availability of credit to our customers. Fortunately, Palomar’s products are very well positioned for these challenging times. Even in this environment, our products make economic sense to our customers due to their high return on investment profile and the flexibility of our platform.
We also continue to add technology in product configurations that fits in today’s economy. Our sales force has the ability to match our technology to fit not only the clinical needs of our customers, but their financial constraints as well. This quarter was the fourth consecutive quarter of product sales growth, quarter-over-quarter. We also increased our product revenues 23% this quarter as compare to the same period last year. This is the largest such increase in more than three years.
There are also benefits from a diversified business model that includes a significant portion of our revenues being derived from multiple sources. 31% of our revenues during the third quarter were generated from sources other than one-time capital equipment sales.
Our distribution expansion initiative is moving along according to plan. The office we opened in Japan last quarter is working out well. We have hired direct sales and marketing staff, as well as set up people with peer capability with service technicians. This office will not only service the Japanese market, but help support our efforts in other Asian countries. Our business outside North America continues to strength. It now accounts for 38% of our overall product and service revenue.
This quarter we were able to achieve better gross margins than last year. Average selling prices remained stable for our products and we were happy with our product mix. Paul will give us more details during his comments in just a few minutes on the financial results for the quarter.
We continue to focus on executing our diversified strategy by addressing the professional light-based aesthetic market today, working for driving our technology directly to the consumer markets and capitalizing on the value of our extensive client portfolio. We continue to invest in more in research and into developments than our competitors as we position the company for future growth.
Earlier this year we launched a new platform system called Addison. It is positioned to penetrate the ever-growing skin rejuvenation market. It combines the best of our non-ablative and ablative fractional laser technologies with photofacial IPL technology. This combination of technologies can be used to provide milder treatments, plutonium texture up to the more aggressive fractional ablated laser treatments for wrinkles.
Physicians are able to have the multiple tools they need for an overall best-in-class treatment protocol, depending on individual age, skin conditions, potential down time and financial constraints at even more attractive price points. We continue to monitor the economic environment and adjust if necessary. Our intent is to balance our short-term operating goals with our long-term opportunities as we invest in research.
Year-to-date the core competency in the light-based aesthetic devices and we intend on maintaining it as we navigate through this tough economic period. We also plan on investing in new markets prior to the economic turnaround to be best positioned for the next growth period. Although these challenging times could be with us for a while, we firmly believe that the long term outlook for light-based aesthetic devices remains a great opportunity.
We have made significant progress over the past few years with our long-term goal of taking our technology directly to the consumers. We have FDA over-the-counter clearance for the first at-home laser for periorbital wrinkle treatment. We announced that we will take the first step towards commercializing our consumer product probably next year. So this is a big challenge. We are excited about this initial launch. With our in house manufacturing expertise, additional manufacturing space in our new facility and FDA clearance, we plan to launch our consumer products on a limited basis through specific channels within the next few months.
Manufacturing is in process and we are building finished goods for our product launch. Our first target is into the specialty retail market. The specialty retail market includes potentially selling through television shopping programs, specialty retail outlets, the Internet and physicians. We will first build a basic business in those channels before expanding to the boarder markets.
We are very pleased with the final branding and product position. Having full control over the initial introduction of our consumer products will enable us to build a core expertise seamlessly in market. This is a great opportunity for us as we build the business and fill these in channels.
Our entry into the consumer markets is one of our core strategic initiatives. We understand that entering the consumer market is not going to be easy in the short-term. However, we believe our efforts will be worthwhile in the long run, as the consumer markets can substantially increase our business and increases the value of our technology and brands.
We firmly believe that in the near future, light-based aesthetic treatments at home will be the standard. Palomar will be well positioned to exploit this new opportunity because of the investments we are making today.
We continue to execute our intellectual property enforcement strategy. To date, we have received approximately $88 million in royalty payments from this portfolio. The U.S. Patent Office issued reexamination certificate for our hair removal patents confirming the validity of the claims in those patents. We believe we are in a stronger position now than prior to that reexamination. We expected to go to trial against Candela by the end of 2011.
In the short-term, our business, like many others is being affected by the overall economy. We are starting to see some positive economic signs. Over the years we have successfully built our business and accumulated the assets needed for our company’s growth. We are expanding our product portfolio in the commercial markets and remain focused on investing in the long-term for research and development and we will continue to strengthen our intellectual property position.
We are working on penetrating the very large consumer products market with our first product in the very near term. We believe we are one of the best-positioned companies in our states for the next economic growth period.
Now, Paul will give us some more detail on financial performance for the quarter.
Paul Weiner
Thank you, Joe. Revenues for the quarter were $15.8 million as compared to $14.5 million for the same quarter last year, an 8% increase. Products and service revenues for the quarter were $13 million as compared to $11.2 million for the same quarter last year, a 16% increase and product revenues excluding service were $9.3 million as compared to $7.5 million, a 23% increase.
52% of products and service revenues were in North America and 48% were outside North America. This compares to the year ago quarter of 62% of products and service revenues in North America and 37% outside North America. Royalty revenues increased $1.5 million from $1.3. This increase is a good indicator that the industry has significantly strengthened since last year.
Other revenues include the $1.25 million quarterly payment from P&G related to the non-exclusive license to Palomar’s technology and patent portfolio in female consumer light-based hair removal. Products and service gross margin was 60% this quarter as compared to 57% in the same quarter last year.
As a percentage of worldwide products and service revenues, products and service gross margin was positively affected by higher product revenues, which resulted in higher overhead absorption. This growth in gross margin was offset by an increase in products and service revenues outside North America, but international sales are at lower distributor transfer prices as compared to end customer prices in North America. Average selling prices remain stable.
Research and development expense for the quarter was $3.5 million as compared to $3.2 million for the same quarter last year. Research and development as a percentage of total revenue remain constant at 22% this quarter, as compared to the same quarter last year. We continue to invest in the research and development of both our professional and consumer platforms, in an amount that is significantly higher than the industry average. This should allow us to remain the technology leader over both the short and long-term.
Selling and marketing expense for the quarter was $4.7 million as compared to $4.1 million for the same quarter last year. Selling and marketing as a percentage of total revenue was 30% this quarter, as compared to 28% for the same quarter last year.
General and administrative expense for the quarter was $4.3 million as compared to $2.5 million for the same quarter last year. General and administrative expense as a percentage of total revenues was 27% this quarter, as compared to 17% for the same quarter last year.
We incurred additional cost over last year of $1.4 million in patent litigation expense. G&A expense this quarter included $1.5 million in patent litigation products as compared to only $100,000 for the same quarter last year. The estimated patent litigation products are between $1 million and $1.5 million in the fourth quarter.
We also incurred additional costs over last year of $2.1 million in consumer commercialization spending. The estimated additional cost over last year related to commercialization of consumer products are between $1 million and $1.5 million in the fourth quarter.
Loss before taxes in this quarter was $2 million as compared to a loss before taxes of $176,000 in the same quarter last year. Net loss this quarter was $2 million or $0.11 per share, as compared to a net loss of $297,000 or $0.02 per share for the same quarter last year. This quarter’s loss over last year’s includes the additional $1.4 million in patent litigation expense and the $2.1 million in consumer commercialization spending.
The balance sheet is solid, with cash, cash equivalents, short-term investments and marketable securities of $102 million and no borrowings. We have been successful in maintaining our low accounts receivable days outstanding of 35.
We are now ready to take your questions. Operator.
Question-and-Answer-Section
Operator
(Operator instructions) And our next question comes from the line of Dalton Chandler with Needham. Please proceed.
Dalton Chandler – Needham
Good morning. Your comments about signs of improvement in the business, you did say that the credit is not improving. I was wondering does that include or are you seeing an increase in procedure volumes?
Paul Weiner
As far as procedure volumes are concerned, yes, we have seen that from the field and I can tell you from our sales reps, there is a lot more lead generation and demo requests and the activity has certainly picked up throughout this year and as you said the credit is still tight, but the activity has definitely picked up quite a bit from where it was last year.
Dalton Chandler - Needham
Okay, and Joe in your prepared remarks you mentioned investing in new markets. Can you elaborate on what you are thinking about there?
Joe Caruso
We have some plans in expansion both in geographies and in products, in some markets that were not really sourcing well today. So, we are looking at making some of the investments over the next, say 12, 18 month time period and we think that should be well timed with any economic turnaround that we might expect.
Dalton Chandler - Needham
Okay, are you considering on light-based products?
Joe Caruso
We rather not be specific right now Dalton for competitive reasons, but we are looking at maybe some moves to expand our business in the next 12 to 18 months time period. So we have a great position for the next growth period.
Dalton Chandler - Needham
Okay and just a final question. Can you give us the mix of core and non-core sales in the quarter?
Joe Caruso
Yes, this quarter it’s 55% core and 45% non-core.
Dalton Chandler - Needham
Okay, thanks a lot.
Operator
Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed.
Anthony Vendetti - Maxim Group
Thanks. I just wanted to dig a little deeper into the consumer-based product. What were the expenses associated with that this quarter and how much do you anticipate to spend in the next couple of quarters on launching the product?
Joe Caruso
As I said the, we spent about $2 million or $2.1 million more this quarter than at the year ago quarter on the consumer effort. We don’t give the total dollars amount spent each quarter on the consumer side, but as far as how it affects our financials, we spent an additional $2.1 million in this quarter over the last year and we anticipate generally spending around $1 million to $1.5 million in addition in the fourth quarter that this quarter will comp towards last year.
It’s a little bit early to tell exactly where our spending will be next year. We will be entering the retail market. We haven’t been there before. So we will certainly have some additional spending. I am not sure how it will compare to the spending that we have been doing in 2010. So that certainly increased from 2009 to 2010, as we’ve been taking control over the consumer market moving towards that, as compared to 2010 to 2011. It’s a little bit too early to tell what the comparatives will be in spending, getting into the consumer market.
Anthony Vendetti – Maxim Group
Okay, I just want to see if it’s a little bit more than you originally thought, because I think you had said approximately I think earlier in the year a little more than $5 million to launch the product. So maybe you can answer that a little bit and then also can you talk about the lotion issue. Is that completely resolved now that you’ve moved ahead towards packaging and you finished with packaging and branding and just building inventories, so is that completely resolved now?
Joe Caruso
Right, yes, so it’s part of the spending really targeting or estimating that we’d be spending an additional $5 million this year. It’s coming up to a bit more than that. It’s obviously hard to get it exact, but we’re still somewhere inline or obviously little bit over the $5 million and we’ll see what happens in this fourth quarter.
As far as the lotion is concerned, we believe that that is all set and we are in production, we are building finished goods on the products and we should be ready to go in the beginning part of next year.
Anthony Vendetti – Maxim Group
Okay. So the schedule of launch beginning at next year, is that the same as by spring of 2011. In other words, has the schedule changed at all or is it pretty much on target?
Joe Caruso
Yes, it’s on target and we said before it’s by spring. So we anticipate it being no later than spring and so we are right on target.
Anthony Vendetti – Maxim Group
Okay. And then on the lawsuits, you expect Candela, the one against Candela to have a court date by the end of 2011, most likely the separate one against Syneron will be till 2012 and then is there any other one that's ongoing right now?
Joe Caruso
The Candela one we expect to be in trial by the end of 2011, that’s correct. We don’t have a court date on that, but based on the activity and the normal schedules, we expect that if things change then obviously we’ll talk about it.
The Syneron one started later than that obviously. We think that that could be in 2012, although again we don’t have a date for that. The only other one that we have, significant one that we have going right now is with TRIA. They have a home product and that’s moving along nicely. All of those within the same court, with the same Judge as we’ve had before. So we feel pretty comfortable with that situation and as I talked about it in my remarks, we feel that we are in actually an enhanced position now than we were in a few years ago because of the re-examination by the back-office.
Anthony Vendetti – Maxim Group
Okay. And then you said you saw a pick-up in terms of lead generation, demo request, procedure volume, is that a pick-up year-over-year or also a pick-up sequentially?
Joe Caruso
It’s both. We have been tracking demo request and lead generation and we see a seen a nice trend there. Unfortunately, the biggest factor in the North American market is financing. We haven’t seen any significant change in financing, and that’s probably why we see an increase in our international business that’s outpacing anything that we see in North America. North America is pretty flat, but we are seeing a significant increase in the international business.
Internationally, the business wasn’t tied directly to as much financing as it was in North America. There are some areas internationally where people just usually -- financing outside of these financing companies that we have in place in North America. So we see that increase and that’s a good sign, because at some point we will see something happen we think on the financing side and when that happens is, there is I think a good pent-up demand and we should see some pretty quick traction.
Anthony Vendetti – Maxim Group
Okay. And is there any particular international territory that’s helping drive the international growth that you’re seeing right now?
Joe Caruso
Yes, there’s a number of those actually. In Europe did very well year-over-year. In Asia-Pacific, Japan, we’re starting to make some progress in other areas, so that was good growth for us. And Australia with our subsidiary that we set up a couple years ago, that’s a good increase as well. So, those markets in particular were strong for us this quarter.
Anthony Vendetti – Maxim Group
Okay, great. Thanks very much.
Operator
Our next question comes from the line of Jose Haresco with JMP Securities. Please proceed.
Jose Haresco – JMP Securities
Hi, guys good morning.
Joe Caruso
Hello, Jose.
Jose Haresco – JMP Securities
Quick question for you. On the international sales, is there anything you can tell us about which markets in Europe are doing particularly well and what kind of products are they buying relative to the existing platforms that you have. In other words, are they buying the StarLux 500?
Are they buying more older systems? And what is their interest and some of the newer products if you’ve had coming out over the last year or so? And then maybe you also compare that or contrast that to what you’re seeing here in the Unites States when you talk about lead generation demonstration sessions, what are they looking at that potentially buying?
Paul Weiner
Yes in Europe, I think there were a lot of companies that were strong. It varies quarter-by-quarter, just based on timing when you’re selling capital equipment. So I wouldn’t say any particular area within, where it’s particularly stronger than others, in comparison to what we’ve been selling to in the past. I think that across the board, it is pretty good growth.
The premium product that we sell, the StarLux 500, that has the biggest versatility as far as being able to do all the applications and that is a good portion of our sales generally throughout the world and whether you’re talking about in Europe or international or in the United States.
And then certainly we are selling the SlimLipo for laser lipolysis is out there and depending on certain countries, not in the United States, but different than the United States, some countries like in India and some other lower price countries might be buying more of our older generation StarLux, the StarLux 300, but a good part of our sales still relates to and we will continue to expect it to be tied to the StarLux 500, which is the most versatile platform.
Jose Haresco – JMP Securities
Okay.
Paul Weiner
Did that cover all the questions you had Jose on that?
Jose Haresco – JMP Securities
Yes, it seems like pretty much here in the U.S. the trends, they are still leaning towards the newest products that you have out there.
Paul Weiner
Yes and when you drive the new products, I mean, one of the new products we’re going to do this year which is somewhat of the applications, but not all the applications of the StarLux (Inaudible) and so that’s starting to go out there for people that are looking for specifically fractional-type treatments and some skin rejuvenation treatments as well. So the Artisan is doing what it’s supposed to be doing as far as addressing that particular market where they don't need the total versatility of the StarLux 500.
Jose Haresco – JMP Securities
Of the increased lead generation that you’re seeing, would you say that they’re still in the traditional markets? In other words, are you bringing back the derms and the plastics who perhaps had put off purchases or are you seeing any influx from the non-core?
Paul Weiner
I think across all the physicians, there’s certainly a lot more activity, but we are actually closing the deals. As you can see from our percentages here core versus non-core, which has gone up quite a bit in the core market. Core markets now as I said 55% of our sales, where typically that was about 45% of our sales. So it increased into the core market and that’s really related to their ability to get financing easier than the other markets, but I’d say that the lead generation and activity is somewhat across the board, but being able to close deals is primarily within the core market.
Jose Haresco - JMP Securities
Okay. Great. Alright, I guess last questions, what was the international revenue growth number for this? If we just look at for example the core system sales, or the core product sales, what was the international growth versus the U.S. growth?
Paul Weiner
Yes, international growth, year-over-over the same quarter is 50%, five zero and in North America, a decrease of 4%. So there’s a relatively flat slight decrease domestically with a very large I would say increase internationally.
Jose Haresco - JMP Securities
Okay. That's the seasonally odd, right I mean. Usually Europe is pretty weak at this point. So does that imply anything for the fourth quarter or is there something you can tell us about why it was particularly so strong, because it seems Europe is usually pretty weakest in the third quarter?
Paul Weiner
We are really making a big push internationally and we’ve been concentrating a lot more on the international sales in this past year or two years than we had in the past. So, I think that accounts for quite a bit of growth before we really concentrate on North America. Now we are out there and increasing the strength of our distribution and we would expect to see that continued strength going into 2011 and into 2012 with some of the things that we are working on internationally.
But also we held a show, we hold shows in different countries, different times of the year and we happened to have one in the third quarter which might help some of the sales, but we would expect going forward our international sales to get stronger based on the efforts we are making.
Jose Haresco - JMP Securities
Great. Okay. Thank you very much.
Operator
Our next question comes from the line of Sharon DeStefano with Argent LLC. Please proceed.
Sharon DeStefano - Argent LLC
Hi, thank you. I’m still a little bit fussy. The $2.1 million that was spent in G&A for the consumer product, what specifically was it spent on, because this is pretty much pre-launch and in the next quarter, in the fourth quarter, what’s it going to be spent on, it's still pre-launch. You know what I'm saying?
Paul Weiner
It’s not in G&A, it’s not inside of the G&A. $2.1 million is getting the product ready for launch. So that’s a combination of some marketing branding work, it’s a combination of gearing up manufacturing; it’s a combination of a lot of things throughout the P&L. So one thing if you go back, when we first picked this up about a year ago, it was obviously front-end loaded in finishing the products and then back-end loaded on marketing and launch expenses. So the flavor of the expense will change over time quarter-to-quarter as we limit the launch.
Joe Caruso
Also before we move on, probably 2.1 that also takes into consideration that we received $800,000 last year in product development funding, where we did not received it this year. So we are saying as a difference of 2.1 in our financials last year to this year, that includes almost $1 million in revenue of funding that were not received in this quarter, but we did receive it in a year ago quarter.
Sharon DeStefano - Argent LLC
Because that work is primarily done, correct?
Joe Caruso
No, because we were receiving funding from Johnson & Johnson at that point of time.
Sharon DeStefano - Argent LLC
Okay, initially there was an expectation to move this through the physicians practice first? Is that sort of not the case now. You’re going to go right in to the TV shopping networks, the Internet and then the broader markets?
Joe Caruso
No, we have the same plan that we had initially. It’s a multiple plan, not just physician first, it was something even that.
Sharon DeStefano - Argent LLC
Alright good. Okay, of that how long do you expect it to stay in the physician’s office before it could be -- because, will it need a prescription to be bought in the physician’s office?
Joe Caruso
This is confusing there on the side. This is an over-the counter care device. This is not something that needs to be prescribed by the physician, this is over-the-counter.
Sharon DeStefano - Argent LLC
Great. Okay, so in other words, I walk in to my dermatologist office who happens to do aesthetic surgeries and I’ll see some kind of placard or something announcing the product and then I make enquiries.
Joe Caruso
Yes, some physicians carry products, retail products. You can go into some physicians that have a cosmetic practice and buy lotions and creams and different things and those physicians may seem to carry this on a retail basis, but not on a prescriptive basis.
Sharon DeStefano - Argent LLC
Okay, because there is no prescriptive basis, it's OTC?
Joe Caruso
This is OTC. This is all FDA approved over-the-counter device. It can be sold anywhere.
Sharon DeStefano - Argent LLC
Okay good, but do you have a sort of a timeframe as to when to move it out? It’s launched in spring. Are we defining spring as the vernal equinox, March 21?
Joe Caruso
I don’t think that was exact.
Sharon DeStefano - Argent LLC
Alright. We’ll say when the buds come out on the trees. Okay, alright so at that time, I go to Dr. Hedaya in Hamilton, New Jersey, excuse me, didn’t mean the plug and he may or may not be pitching this. So then two months down the road will I expect to see it on Home Shopping Network? I mean do you guys have a timeframe? Do we need to work out more on the manufacturing end?
Joe Caruso
No, we have a plan, we have a launch plan that includes where it will be and when. We haven’t detailed that to the public.
Sharon DeStefano - Argent LLC
Okay. Fair enough. Now, the lotion. My last question, the lotion. What is it? Is this for the periorbital wrinkles or for more than the hair removal, which would lead me to believe that you would be doing an add-on with the hair removal very soon after the periorbital product that’s coming out?
Joe Caruso
The first product is for periorbital wrinkles. It’s the only over-the-counter device that’s been cleared so far and the lotion that we spoke about earlier goes with the product.
Sharon DeStefano - Argent LLC
Okay. So in other words I would be smearing some type of lotion, something inert, that has had some Retinol in it? Is there an add-on expense? Do I have to buy the lotion with the device, how does that work?
Joe Caruso
Alright, the lotion comes with the device, but as you use the device and you need more lotion, and you need to buy it.
Sharon DeStefano - Argent LLC
Okay. So is the lotion just something, some inert materials? Does that special magical qualities that enhance…?
Joe Caruso
It has special qualities. It’s proprietary formula we use with that device.
Sharon DeStefano - Argent LLC
Did you joint venture with somebody to develop that or is that developed in-house?
Joe Caruso
We developed it on our own.
Sharon DeStefano - Argent LLC
Okay, good. Alright, sorry again, one last thing. I didn’t catch it; did you say a company by the name of TouchRule has a home-based product?
Joe Caruso
No, TRIA. T-R-I-A, TRIA.
Sharon DeStefano - Argent LLC
TRIA, okay.
Joe Caruso
It has a hair removal product that is we believe it’s something on our patent portfolio.
Sharon DeStefano - Argent LLC
Okay, okay, so we got to worry about that. Are they OTC in the marketplace?
Joe Caruso
They are OTC, correct. Hair removal, that's the product. Steve we believe will fringe our patent portfolio.
Sharon DeStefano - Argent LLC
Okay, good. Alright, gentlemen. Thank you.
Joe Caruso
Okay, thanks.
Operator
Our next question comes from the line of Bill Plovanic with Canaccord Genuity. Please proceed.
Bill Plovanic – Canaccord Genuity
Yes, actually my questions have been answered. Thanks.
Joe Caruso
Okay, thanks a lot.
Operator
Our next question comes from the line of Andy Schopick with Nutmeg Securities. Please proceed.
Andy Schopick – Nutmeg Securities
Thank you. After that series of questions, I want to be sure that I have a little better clarity here. What I thought I heard you say in you prepared text is that you will be launching this to specialty retail markets first, is that correct?
Joe Caruso
Right, we defined what we say, what we believe to be specialty retail markets. These specialty retail markets include physicians, direct shopping networks, specialty retail, brick and mortar locations.
Andy Schopick – Nutmeg Securities
Okay.
Joe Caruso
And all of those things, Internet selling. That’s all in a group of class that we refer to as specialty retail.
Andy Schopick – Nutmeg Securities
Alright. Now secondly, with respect to the funded development revenues, of which there really have not been any of this year. Now last year I think year-to-date there is over 1, 6. I don't have the actual annual number in front of me, but when we're talking about these incremental expenses to launch, when you say it will be over $5 million above what was spent last year if I understand correctly, that would include the fact that you did have R&D funding, which you do not have available to you this year?
Paul Weiner
Correct, and just to be clear, that’s $5 million we are talking to grew bottom line effect if you will.
Andy Schopick – Nutmeg Securities
Right.
Paul Weiner
And that of what we spent money last year, we received some money in, we spent X amount last year in net of funding.
Andy Schopick – Nutmeg Securities
Yes and the problem that we have right now is that we don't really know specifically what those specific numbers are, because you choose not to be that specific. But you're giving us some general framework here and clearly it's not that you’ve spent $2.1 million this quarter, you spent $2.1 million approximately above what was spent a year ago.
Joe Caruso
Either spent or and received.
Andy Schopick – Nutmeg Securities
Received.
Paul Weiner
In revenue, yes.
Andy Schopick – Nutmeg Securities
Yes okay. It might be helpful if you be more specific, but at least I think we've given as much clarity to this as we can have at this time. Thank you.
Joe Caruso
Thank you, Andy.
Operator
There are no more questions at this time. I would now like to turn the call over to Dan Valente for closing comments.
Dan Valente
Thank you, operator. Thank you all for your questions. We appreciate them. We hope that we’ve answered them in a direct and clear possible way and thanks for tuning in. We look forward to hearing from you in our next call. Thank you. Have a good day.
Operator
This concludes Palomar’s third quarter 2010 financial results conference call. Thank you for attending. You may disconnect at this time.
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