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Columbia Laboratories Inc. (NASDAQ:CBRX)

Q2 2014 Earnings Conference Call

July 31, 2014 08:30 AM ET

Executives

Frank Condella - President and CEO

Jonathan Lloyd Jones - CFO

Nikin Patel - CEO of Molecular Profiles

Analysts

Raymond Myers - Alere Financial Partners

Jeffrey Link - Invemed

Robin Davison - Edison Group

Operator

Good morning, and welcome to Columbia Laboratories Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms. Katja Buhrer. Please go ahead.

Katja Buhrer

Thanks, Kate. Thank you all for joining us this morning for Columbia Laboratories second quarter 2014 earnings call. If you have not already received it, please access the press release issued this morning at www.columbialabs.com, under the Investors tab, you can also access the webcast of this call from there. During the course of this call, management will make projections and other forward-looking remarks regarding future events and the Company’s future performance.

These forward-looking statements reflect Columbia’s perspective on current trends and information and can be identified by such words as expect, can, will, may, anticipate, believe could, should, intent, estimate, project and other words of similar meaning.

Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in today’s press release and Columbia’s filings with the SEC on Forms 10-K, 10-Q and 8-K. Actual results may differ materially from those projected in the forward-looking statements. Columbia specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law.

A telephone replay of the call will be available shortly after completion through Thursday, August, 7th. You’ll find the dial-in information in today’s press release. The archived webcast will be available for one year on the company’s Web site, columbialabs.com. For the benefit of those who maybe listening to the replay or archived webcast, this call was held and recorded on the July 31, 2014. Since then, Columbia may have made announcements related to the topics discussed, so please reference the Company’s most recent press releases and SEC filings.

I’m joined today by Columbia’s President and CEO, Frank Condella; Jonathan Lloyd Jones, CFO; and Nikin Patel, CEO of Molecular Profiles.

With that, I’ll turn the call over to Frank Condella.

Frank Condella

Thanks Katja and good morning, everyone. Columbia’s second quarter results once again benefited from the acquisition of Molecular Profiles’ services business as revenues from this part of business partially offset and anticipated in temporary decline in product revenues during the routine CRINONE license renewal in one high volume, high margin market.

Because no shipments to this market are permitted during the license renewal, we experienced a 44% decrease in first half CRINONE product revenues. Nevertheless, revenues from our newly acquired services business made up for the sharp decline resulting in stable first half consolidated revenues on a year-over-year basis.

The diversification benefits that the services business provide should become more pronounced in the coming year as it becomes a larger contributor to consolidated revenues overtime, even with shipments to Merck Serono return to normalized levels in 2015. I will discuss our second quarter performance and growth strategy in greater detail after Jonathan reviews the financial results. Jonathan?

Jonathan Lloyd Jones

Thank you, Frank. Good morning everyone. Total revenues for the second quarter were $6.9 million, down from 8 million in the year ago period. The result includes product revenues of $3.5 million from Merck Serono, service revenues of $2.3 million, and $1 million in royalties from Actavis and CRINONE sales in the U.S. As discussed in prior quarter results, the decline in second quarter revenues primarily reflects the absence of CRINONE progesterone gel orders from one of Merck Serono’s high volume, high margin markets.

In anticipation of routine license renewal, Merck Sereno built up its inventory of CRINONE during the first three quarters of 2013, resulting in exceptionally high prior year revenues. During the license renewal period which commenced in the fourth quarter of 2013, product cannot be shipped into this market without special agreement.

As a result, product revenues were down 3.5 million year-over-year. I’ll update you on the progress of our license renewal shortly. Service revenues were $2.3 million. As the acquisition of Molecular Profiles took place in September of 2013, we cannot provide year-over-year comparison on a GAAP basis. Royalty revenues rose by 109,000 due to highest net sales of CRINONE by Actavis. Gross profit decreased by $2.2 million to $3 million. Gross profit was 44% of total revenues compared to 65% in the prior period.

The higher gross profit and gross profit percentage in 2013 primarily reflects sales to Merck Sereno for building its inventory in the high volume, high margin market to meet demand during the previously mentioned license renewal period. Total operating expenses increased to $2.7 million in the second quarter from $2.3 million in the year ago period. The increase in operating expenses is due to sales and marketing costs related to the recently acquired services business, administrative costs related to UK facility acquired in September 2013, partially offset by lower personnel cost associated with a workforce reduction in the U.S. in the previous period, previous year.

Net income was 200,000 or $0.01 per diluted share in the second quarter compared to net income of $2.7 million or $0.24 per diluted share in last year’s second quarter. Non-GAAP adjusted EBITDA was $1 million versus $3.4 million in the year ago period. Cash and cash equivalents were $11.8 million as of June 30, 2014.

Looking ahead, we expect in-market sales of CRINONE to continue to be strong, growing at a low double-digit annualized rate. Our understanding is that the license renewal by Merk Serono will be completed in the second half of the year in which case normal shipments are expected to resume at the beginning of 2015. The new agreement will be valid for five years thereby restoring the predictability of this long-term revenue stream. In the interim, Merck Serono placed an order with us as part of a one-time exception during renewal process. This order will be shipped in the third quarter and benefit that quarter’s results.

Turning to services business. We expect revenue generation to improve in the third quarter and increase over medium term as we realize the benefits of our increased business development efforts and expanded suites of enabling technologies. The Company’s prior earnings guidance for the potential full 2014 revenues assumed that the routine license renewal will complete in the first half of the year with normalized CRINONE shipments resuming in the second half of the year. As normalized shipments are now not expected to resume until early 2015, Columbia is lowering its expected total revenue growth range for fiscal 2014 from an increase of 8% to 12% to an increase of 6% to 8%.

With that, I’ll now turn the call back to Frank.

Frank Condella

Thanks, Jonathan. Columbia has a unique business model that combines a growing core business which provides long-term revenue stream with an expanding services business that diversifies the Company’s revenues and support the potential in-house proprietary product portfolio. Starting with our largest revenue stream CRINONE, despite the temporary decline in shipments this year due to the license renewal, market data indicates worldwide ex-U.S. sales grew by 14.9% for the 12 months ended March 31st compared with the prior year.

So, looking ahead we expect to see low double-digit rate of growth maintained on a normalized basis as Merck Serono further expands its franchise as well as we will support their promotional activities through superior service levels and regulatory support, particularly with regards to entry into new major markets. We anticipate Merck Serono to receive additional marketing approvals in Europe and Asia in 2015 and 2016.

Turning to the second leg of our strategy. When we considered making an acquisition last year, we have gone for the Molecular Profiles business for its revenue growth potential. What we also saw was revenue stream will offset some of the lumpiness of the CRINONE franchise and provide greater predictability to our quarterly financial results. In both respects the purchase has been a success resulting in favorable year-to-date consolidated revenues even in the absence of CRINONE shipments to our largest market.

Nikin will shortly go into more detail on how Molecular Profiles is leveraging recent investments in new technologies and senior talent to win new clients and grow the business. And before he does so, I would like to provide some more context to the services business second quarter results.

Revenues in the services business relies on the completion of a number of phases of individual contracts, which may change, be delayed, cancelled or accelerated, depending on upon developmental success of the underlying therapeutic candidate and the needs and priorities of the client. As a result, revenues can vary somewhat on a quarterly basis. These factors resulted in a sequential decline in the second quarter revenues in services business. With that said, services revenue were up year-over-year and services revenue pipeline is strengthening as Molecular Profiles active resources and secures new business.

Revenue from the services business provides on the completion of a number of phases of individual contracts which may change due to a cancelled or accelerated depending upon the development of success of the underlying therapeutic candidate in the ease and priorities of the client. As a result revenues could vary somewhat on a quarterly basis. These factors resulted in the sequential decline of second quarter revenues in the services business. With that said, services revenue were up year-over-year and so was its revenue pipeline in strengthening over the Molecular Profiles actively sources and secures new business.

For example in the second quarter, we were able to add 12 new clients, up from four in the first quarter. The total value of potential new projects and proposals is also growing in size which should help minimize fluctuations in quarterly revenue going forward. The third leg of our strategy is the development of an in-house proprietary product portfolio. While we have several projects under consideration and recently expanded our intellectual property portfolio following receipt of a new patent, our focus this year remains on our extended-release lidocaine vaginal gel product candidate. We remain on track to pursue a 505(b)(2) development program later this year pending the completion of regulatory and clinical diligence.

Our target indication is the prevention of pain related to gynecological procedures for which there are currently no approved products despite its being a sizeable market. A recent review showed that there are approximately 5 million gynecological procedures performed in the U.S. every year including endometrial biopsies, hysterosalpingogram, IUD placements and removals, hysteroscopy and other procedures. Importantly, the most common reason for failure to complete a procedure is pain and which will result in relooking for general anesthesia. So, we view this as a significant unmet medical need and a large opportunity for Columbia.

The development of a proprietary product portfolio is just one of ways we can leverage the capabilities of our Nottingham team and our operating cash flow. We plan to develop our products in-house in proof-of-concept after which we plan to partner for later stage development and commercialization. Nikin Patel will expand on our strategy and performance of our services business which we can expect to be a key towards a revenue generation in the coming years. Nikin?

Nikin Patel

Thanks Frank and good morning everyone. I’d like to expand on some of the recent progress Molecular Profiles has made in growing new business and leveraging the investments undertaken since our acquisition by Columbia. As we’ve discussed in the past, there is increasing demand for outsourcing services by pharmaceutical companies who are looking for lower cost, reduced time to market, minimize operational risk and focus on core competencies. This trend includes the outsourcing of formulation development and clinical trial manufacturing to companies such as ourselves.

The market that we target is currently valued at over $20 billion and because of its strong growth prospects, it attracts healthy competition. As a result, the ability to differentiate ourselves is crucial. Let me talk about some of the ways we are setting ourselves apart from the competition. Earlier this year, we completed an investment in additional new enabling technologies including the addition of GMP, hot melt extrusion equipments which improves the bioavailability of poorly soluble growth compounds.

Given that poorly soluble growth candidates account for more than 70% of new chemical entities in development, there is a growing requirement for these technologies. Another key advantage is that we have a team of top scientists working on rapid screening services that reduce both the time and cost of preclinical developments. In less than two to three months, we are able to provide strong scientific evidence as to whether a pharmaceutical candidate can enter into formulation development on clinical trial manufacture. During the same timeframe, we are also able to provide in-vivo animal data to show the improvement these formulation approaches make.

These services combined with the need for minimal amounts of valuable drug substance, our key competitive advantages differentiate us from other CROs. Our expanded technical offerings have quickly transitioned into new additional revenues, resulting in four new fee paying contracts in the second quarter and significant interest by medium to large pharmaceutical companies as we are able to compete for a broader value projects. This fast and competitively priced service cements our position as a company fully equipped to develop complex drug formulation from prototype to the phase to manufacture. As an example, the current client project for a novel oncology product is now progressing into clinical trial manufacture as a result of using these enabling technologies.

In order to further expand the opportunity set, today we announced the collaboration between Molecular Profiles and XenoGesis that will support pharmaceutical and biotech drug developers during the preclinical and formulation development stage. As part of the alliance, Molecular Profiles’ pharmaceutical development services will be supported by XenoGesis’ expertise in preclinical drug metabolism and pharmacokinetics, giving clients a smarter route into formulation developments and a better understanding of compounds’ bioavailability.

The partnership builds on successful drug development alliance is already in place and means we can seamlessly offer a comprehensive service from initial drug discovery through clinical supply with best-in-class companies. In the third quarter, we will roll-out the new suite of services complemented by a coordinated marketing campaign. These new enabling technologies combined with our expertise in high-end analytical characterization clearly differentiate us from other technology companies that are more platform based.

We continue to generate strong revenues from our consulting and analytics services in the quarter. In total we were asked to assist on 24 different marketed products during the quarter to provide consulting and scientific testing and we’ve brought on two new experts to further strengthen our offering in an effort to increase the scale of this business. Backed by a world-class range of pharmaceutical development services and internationally acclaimed scientific knowledge and expertise, I believe that we are well positioned for growth within the expanding pharmaceutical outsourcing markets. With that I will now turn back to Frank.

Frank Condella

Thanks, Nikin. Columbia’s newly diversified revenue stream, first, firm footing in the expanding outsourced pharmaceutical development market and revenue growth potential, a key differentiator and I am confident that our three-legged strategy will deliver a long-term growth.

With that, we will now open the call to questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Raymond Myers from Alere Financial Partners. Please go ahead.

Raymond Myers - Alere Financial Partners

My first question is about the XenoGesis partnership. Can you help us understand how that differed from simply outsourcing to XenoGesis, what special arrangements are made?

Nikin Patel

It’s Nikin here. XenoGesis offers quite an exciting proposition for us. It’s not just simply a model whereby XenoGesis performs its part of the equation and we perform our services. There is a very close synergy between the services we offer meaning that working closely with XenoGesis, we are able to offer our clients a much better solution in the preclinical development phase. And so, we consider from both parties that this is an exciting collaboration and plus it is partly driven by the needs of our clients. Our clients are asking for this type of service, which if you look at, there is a contract research or contract organizations that are competing against us, but we think we are offering quite relatively unique service offering.

Frank Condella

Also I think, Ray just to add to what Nikin said, I think the opportunity is there. You have more of a sales effort, both companies are selling combined services as opposed to just us selling the service and then outsourcing it to XenoGesis. So, they’re selling our services and we’re selling theirs and together we are both benefiting.

Raymond Myers - Alere Financial Partners

So, what kind of sales effort can they make? How many sales people do they have or can you help us understand how they work? In other words do you expect they can contribute in the next year or so?

Nikin Patel

XenoGesis has its own client base as is Molecular Profiles and there are some common clients in between. XenoGesis is growing. It’s a relatively small company that based in Nottingham. So, we will be working alongside their business development team to actually actively promote the early stage preclinical services that both companies can offer.

Raymond Myers - Alere Financial Partners

Okay, next I wanted to ask you about visibility to the services revenue. How do we think about the increase to 12 new customers in the second quarter from four in the first quarter? And Frank, you seem to be optimistic about this becoming a growing part of the overall business. Can you give us a sense of what kind of growth you expect?

Frank Condella

Well, Ray, when we announced the acquisition of Molecular Profiles, we said that they had a historic compound annual growth rate of 15% and we are seeing that continue at least for the immediate future. But we are very excited about the investments that we’ve made into the business in the first half of this year in its enabling technologies. But I think what’s most important to point out is that we have got more new clients which is good but as clients come on-board they typically start with an initial, what we call feasibility study or a smaller contract and that builds over time. So, if things move as we expect then the business could accelerate faster than our current expectations but that remains to be the thing.

Raymond Myers - Alere Financial Partners

And just I wanted to shift to visibility to this CRINONE special shipment, last quarter it was reported that we expected that would be shipped over Q2 and Q3 and now you’re saying we expect all of it in Q3. Do you have an order in-hand? Can you describe what the visibility is?

Frank Condella

Yes, we have orders in hand and they are actually on their way. So, we know that they are being delivered in the July, August timeframe. Renewals moving ahead, we expect that to happen probably in the third quarter but with regulatory approvals you can’t be certain. And then we expect the regular shipments which we do have visibility to as well, to commence early in 2015. But since we’re still about six months out, we can’t finalize those orders until we have the new labeling requirements that will come from the regulatory renewal. So, we expect renewal to come in the third quarter and with that will come the labeling requirements and then we will use our normal lead times to fill product. So, we’ve already got visibility of what the expectations are in early 2015 and since the renewal will be for a five year period, we expect starting in 2015, we will get back on a normal quarter cycle and revenue should smooth out.

Raymond Myers - Alere Financial Partners

Can you give us some sense of how large this special order is that you expect in July and August?

Frank Condella

It’s pretty significant. It hit our revenues for about $3 million.

Raymond Myers - Alere Financial Partners

And the shift from Q2, previously I think it was Q2..

Frank Condella

That comes to that one shipment.

Raymond Myers - Alere Financial Partners

Yes, so previously we expected Q2 and Q3 for that 3 million to be spread. Is there a particular reason why it’s now all shifted into Q3 or is it just a timing? What I am asking is previously you have guided that you thought that that special shipment would be provided between Q2 and Q3 and now it’s entirely Q3. Was that a function of anything material happening with the contract?

Frank Condella

No, with the way that the regulatory process, they have to open up a window to refill their inventories, so good news is that the in-market inventory is still going out at a very good rate. As we’ve said in 2013, it was quite a significant build up in inventory that’s built in through this renewal period now that we’ve got the renewal hopefully coming through soon, but they needed inventory and so they applied for a window to be open for an exceptional shipment. So, they are shipping in as much inventory as they can to presume, so when they expect they can have the next renewal order under the new labeling.

Raymond Myers - Alere Financial Partners

And just one question before I come back into queue, with this special order happening in the third quarter that would imply a very strong earnings quarter in the third quarter. Is there any reason that would dislocate us from expecting a very strong earnings quarter?

Frank Condella

We think that the second half will be good. We said that the revenues through that one shipment will be significant in the third quarter but we don’t expect anything like that in the fourth quarter. So, in terms of overall guidance, I think Jonathan gave that our full year revenue guidance is 68% on a normal operating revenues.

Operator

The next question comes from Jeffrey Link from Invemed. Please go ahead.

Jeffrey Link - Invemed

Actually the follow-up on just the issues with the high volume market, it was mentioned that Merck Serono is going through some new approvals in Europe and Asia. How closely are they keeping you abreast of how that process is going and can you discuss any of the markets that may be of significant size that they are currently working on?

Frank Condello

Hi, Jeff it’s Frank, yes I mean we meet with them on a regular basis. We actually have assisting them quite a bit on these regulatory approvals or applications. And what I can tell you is in Europe, the markets that are not currently have approval for CRINONE include France, Poland and number of Eastern European countries. I think that Spain is not approved yet. So, how you get approval in Europe is to go through, let’s called MRP. And we know that that’s ongoing and we expect it to be hopefully come to conclusion early next year and then they will start to ship in these markets. But these are more mature markets but there will be new openings for CRINONE. And then in Asia, the biggest market opportunity obviously is Japan and that’s progressing nicely but we don’t have excellent visibility yet on so when that approval will be expected. So it’s most likely probably 2016 but we are not sure.

Jeffrey Link - Invemed

And are the margins similar to the types of margins in the high volume market that’s being relabeled for the both European, potential European and other Asian markets?

Frank Condella

I really don’t know on that yet. I don’t have that visibility on the pricing strategy.

Jeffrey Link - Invemed

And in the U.S., I saw the royalty sales for CRINONE were up, any reason as to why that is?

Frank Condella

I mean Actavis continues to grow their business in the U.S. and since it’s a royalty stream, it more accurately reflects what’s going on in market. With our Merck Serono sales, we are shipping inventory to replenish inventory that’s going out. And so, if you actually looked at Merck Serono sales in-market, it would probably more reflect what you see in Actavis in the U.S. So, we are seeing a nice high single-digit, low double-digit increase in the U.S. and the royalties are reflecting that.

Jeffrey Link - Invemed

I guess what I was curious about is, is it mostly going toward the off-label use for pre-term birth that you think the growth is taking place or is it just the fertility side?

Frank Condella

The only prescriptions that we track and review, it isn’t split out by indication and we tried in the past to try to split out but we have some people that we know are using CRINONE for pre-term birth, there is really no way to quantify that.

Jeffrey Link - Invemed

Okay, I wanted to just step back to the July 17th press release on the two patents that you announced. I don’t have a medical background and so I was wondering if you could just explain to those of us who don’t have a medical background, what exactly these two patents do and I guess how are they somewhat differentiated in the market?

Frank Condella

They are delivery patents and addition of this we have done in process for a while. They are just really expanding our portfolio of bioadhesive technology and sustained release technology. They incorporate, one is what we call ion channel exchange that does apply to the formulation we used in our lidocaine product. So that gives us some protection there as we advance that product. The one regarding the bioadhesive tablets is related to the patent family that we developed STRIANT under. And we are think we that this whole portfolio of what we are doing now is we’re using the experts in Molecular Profiles different ways and we can expand and build upon these patents further. So, on formalized basis of drug delivery that we hope to expand as we’re looking at growing our product portfolio.

Jeffrey Link - Invemed

What I wanted to ask and then just as a follow on to that is, can either of these two platforms be used to incorporate progesterone for preterm birth in a way that was being delivered differently than the way you tried to get an approval and is it possible that using a new platform would allow you to go back to the FDA to try and get approval for a new trial and I don’t know if either of these platforms can be used for that and if they would be considered differentiated?

Frank Condella

Well, as you know Actavis have the rights to pre-convert and they are our partner in that and I think the only way that we could advance vaginal progesterone for preterm birth would be to have a new patent protected formulation of progesterone, because the CRINONE also known as PROCHIEVE, delivery patents are now expired. The patent portfolio that we currently have in place to have the protection out to probably 2019 and maybe into early 2020s. Ideally we would like to have formulation patents that go beyond that. So, we are looking at a number of different opportunities there but ultimately we are going to have to have some level of cooperation with Actavis.

But I will say that we’re actively looking at technologies that might allow us to do lifecycle management with progesterone not only to approach our partner Actavis but also for a Merck Serono. And I have to emphasize that there is nothing under full development now and these are all just conceptual ideas and things that we continue to look at as part of evaluating a number of product opportunities.

Jeffrey Link - Invemed

And then I guess to follow-up in the same line of questions. Other than the lidocaine, which I would like to address in a minute, are there other drugs or other things like you can discuss that you are working on. I mean you touched on it very briefly now but is there anything else that you’re working on beyond the lidocaine so we look at other things going forward?

Frank Condella

All I would say is that right now our initial focus is in women health, that’s our history and where I think we have the most probably early focus but we not went into that therapeutic area, but there is a number of unmet needs in women health area that we are looking at.

Jeffrey Link - Invemed

I am going to ask one final question then I will get back in queue. Can you please just explain to me again the 505 (b)(2) process from the time that if you do make it through kind of your additional due diligence and you begin to actually implement it. Can you just go through for me how that timeline would work?

Frank Condella

Well it depends on where we are and how many clinical trials you have to do but the 505(b)(2) process allows you to reference the safety data that exist for no molecules. So, you can use the 505(b)(2) process if you can access that safety data. So, for example, lidocaine as a compound it set around, there is a lot of safety information. We don’t have to go and do a lot of preclinical work which is work in animals or doing long-term safety studies, most of what we expect we will have to do our clinical efficacy trials and that’s the basis of which most 505(b)(2) products are approved. And the nature of those trials really rely upon the nature of the indication and with our lidocaine product it’s an acute indication, so we expect that the trial maybe shorter. But then it comes down to the real timeline driver of any kind of product development is the recruitment of patients and the completion of clinical trials. And so, we have a clear steer from the FDA and what would be required with each product we develop then we can give you and other investors a clear timeline of what our expected approval will be.

Jeffrey Link - Invemed

And so then just follow-up piece to that, is this something that given the cash that you have on the balance sheet that you will be able to do yourself in terms of funding the trials and so forth, is this something that you get have to partner with somebody?

Frank Condella

We certainly can afford taking the product and we believe we can take the product through significant clinical trial, what we will call a proof-of-concept and then we could probably afford to take it all the way through to approval given what we know today, but we don’t have clear signal from the FDA yet. And once we have that we can give a more definitive answer.

Jeffrey Link - Invemed

And just one word to do that and take it to the point where you are doing it yourself, does one have the ability, I mean is it more effective to then bringing sub-contract to sales organization at that point and continue to keep it in-house you think or is it best to, at that point find a pharmaceutical partner to distribute it?

Frank Condella

Well, as we have stated our current strategy is to find a commercialization partner because it is economies of scale. In market one product is, unless it’s a very targeted audience, there is a lot of startup cost and so I mean our expectation would to be is to out license at this point to remove the further investment required to commercialize the product and to generate a quicker return to investors.

Operator

Our next question comes from Robin Davison from Edison Group. Please go ahead.

Robin Davison - Edison Group

Just a quick one on the lidocaine gel product, I am still struggling to understand what is the sort of ticket for going ahead with the program obviously you said that you are on track to sort of initiate the program once you completed the diligence. I mean are you waiting for specific regulatory sort of query to be answered and that will allow you to go ahead, is it something as simple as that?

Frank Condello

Certainly that’s one of the steps before we finalize our development pathway is a meeting and discussion with the FDA and we have not had that yet.

Robin Davison - Edison Group

Okay and the other thing is, just I wondered if you can probably say a little bit at this point about what the target product profile is, I mean how is it different from existing lidocaine gel?

Frank Condello

This is a controlled release formulation of lidocaine that we administered a slow release of lidocaine overtime that will, we believe will benefit from what we call the first-pass urine effect and that is the higher concentration of lidocaine in the urine tissue versus circulating in the blood stream. Number of years ago, this company done of number of studies on the first-pass urine effect and we believe that it’s a preferred way to administer a product that you want to act on the uterine muscle and so what we believe causes the pain is not only topical pain but uterine contractility based on these procedures. And so what we are hoping to do the target product profile is that the patient would self administer the product prior to a procedure and therefore be self an exercise if you will going into the procedure and therefore reduce pain. And that’s what the product portfolio or product profile that we are working towards and the exact dosing et cetera I am not going to get into at this point.

Robin Davison - Edison Group

I mean just looking I mean you’ve got the formulation work sort of largely done or done, you’ve got the, you can achieve the delivery that you want to within the same formulation, you are not trying sort of welcome on both things at once, the regulatory pressure is on the formulation.

Frank Condello

That’s right Robin, just to be clear, this product was being developed for a different indication and one challenging indication in our view was, so we already have two Phase I studies and two Phase II studies that were completed with this product. So, we have quite a bit of data on its PK profile and also on its utility and efficacy and safety in a couple of areas.

Operator

Our next question comes from Raymond Myers from Alere Financial Partners.

Raymond Myers - Alere Financial Partners

Frank, I just wanted to clarify what you were saying about the development of the lidocaine gel opportunity. It sounds the like the critical milestone to move forward is a meeting with the FDA in order to clarify the critical path that if you require to take? Could you describe when is that meeting that scheduled and what risk do you see to moving forward?

Frank Condella

Ray, I think so I am not going to get into the scheduling of the FDA meeting right, I would say that yes it’s required before you move forward because out of that discussion with the FDA will come a clear clinical study program of what they would want to see required. And obviously when you going to talk to the FDA, you’ve got to balance speed and requirements and so we’ve got, there is a lot of strategy that goes into planning for meeting with the FDA and getting in there and hopefully coming out with what you want. But once you have had that meeting and you’ve got a clear steer from the FDA then you can math out your program and you can cost it out. So, from a timeline and expense perspective, we would expect to update the market on the timing once we have that meeting scheduled and also the outcome of that meeting. And as I said, we hope to be further advance by the end of this calendar year.

Operator

(Operator Instructions) We have another follow-up from Jeffrey Link of Invemed. Please go ahead.

Jeffrey Link - Invemed

Just on a couple of different topics. Nikin, I was curious how things are going since you’re beginning to pursue the U.S. market, how that has been progressing?

Nikin Patel

Sure, just to let you know that through the history of Molecular Profiles, we had a very strong interaction with the U.S. market and significant portion of our revenues we generate from the U.S. So, we are very comfortable in doing business development activities in the U.S. One of the challenges we have faced to-date though has been, or most of our business development activities and interactions has been done based from the UK. So, having the Boston office and a sales person in the U.S. will certainly make that business development process for us going forward a lot easier.

Jeffrey Link - Invemed

How long has that individual now been in place there?

Nikin Patel

Just roughly between three and four months now probably approaching 4 months.

Jeffrey Link - Invemed

I also wanted just ask and I don’t know if you can reveal a specific number or maybe give an idea just on the percentage basis, but if you take a look at the size of your pipeline, I’m talking about Molecular Profiles pipeline in this quarter and you compare it to for example to a year ago. I mean it sounds to me like the pipeline has increased, but can you give us an idea in terms of last year versus this year or how you would measure, how much more business you are potentially going to generate? What metrics you use?

Nikin Patel

Sure, we have a lot of metrics behind the scenes. I’m not comfortable divulging all the different types and metrics because we have to maintain a level of competitiveness in the market. But we track the usual metrics such as pipeline enquiries, through to opportunities, through to proposals that we have there in the marketplace which are outstanding, through to sales that have been won or sales that have been lost. And so we have a large degree of information that we track. Certainly as Frank mentioned earlier on, our revenue is up year-on-year. Our pipeline is strengthening and so I am very optimistic about the great prospects of our services business.

Jeffrey Link - Invemed

And I wanted to ask you about the XenoGesis; I don’t know if Nikin or Frank can answer this but obviously Frank, we are able to take advantage of Molecular Profiles’ R&D staff to help with some of our drug development. I’m curious as to whether or not this relationship with XenoGesis will also be able to be utilized and if so how does one go about compensating them for that since they are not actually part of our company?

Nikin Patel

The interaction with XenoGesis is largely based on the interactions with our services clients. It’s really demand our services clients are asking for, so hence the tie-up with XenoGesis. And typically when we’re working with our clients in the services area, we are looking at new chemical entities and so the services that XenoGesis provide are clearly preclinical services which are partly towards new chemical entities.

Jeffrey Link - Invemed

I see and just a numbers question, are we expecting to be cash flow positive for the next two quarters?

Jonathan Lloyd Jones

Hi, Jeffrey, this is Jonathan. Yes, we are we expect to be cash flow positive for the rest of the year and beyond.

Jeffrey Link - Invemed

And Frank, now we have discussed this but has there been any consideration to doing or announcing some kind of a stock buyback?

Frank Condella

I think as you know Jeff, we always consider it but there are no plans right now.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Katja Buhrer for any closing remarks.

Katja Buhrer

Thank you for joining us today and we look forward to speaking with you in the next quarter.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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