Hythiam Inc Q4 2007 Earnings Call Transcript

Hythiam Inc (HYTM)

Q4 2007 Earnings Call

March 17, 2008 4:30 pm ET

Executives

Lisa Wilson - In-Site Communications, IR

Terren Peizer - Chairman and CEO

Chuck Timpe - CFO

Rick Anderson - Senior EVP

Chris Hassan - Senior EVP

Analysts

Jonathan Aschoff - Brean Murray

Ryan Daniels - William Blair

Ram Shobraju - Rodman & Renshaw

Kevin Ellich - RBC Capital Market

Robert Cohen - Weston International

Presentation

Operator

Good evening, ladies and gentlemen, and welcome to the Hythiam fourth quarter and fiscal 2007 results conference call. (Operator Instructions)

It is now my pleasure to introduce your host Lisa Wilson, Investor Relations for Hythiam. Thank you, Ms. Wilson. You may begin.

Lisa Wilson

Thank you. Good afternoon everyone, and thank you for participating in the fourth quarter earnings results conference call. My name is Lisa Wilson of In-Site Communications Investor Relations for Hythiam. In a moment I will turn the call over to Chairman and CEO, Terren Peizer, who will introduce the other participants. Before that I would like to call your attention to the following Safe Harbor statements. Statements which will be made during the course of this call that are not historical in facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Similarly statements here in, that describe the company's business strategy, prospects, opportunities, outlook, objectives, plans, intentions, or goals are also forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors that are detailed in the company's SEC filing.

In addition, the statements in this call are made as of March 17, 2008. The company expects the subsequent events or developments will cause its view to change. The company undertakes no obligation to update any of the forward-looking statements made here in, whether as a result of new information, future events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing the company's views as at any date subsequent March 17, 2008.

With that I would like to turn the call over to Terren Peizer, Terren?

Terren Peizer

Thank you, Lisa. Welcome everyone, and thank you for joining Hythiam's 2007 fourth quarter and fiscal year end conference call. Presenting with me on the call today is Chuck Timpe, our Chief Financial Officer, also available for Q&A will be other members of management including Rick Anderson, Chris Hassan, Tony LaMacchia, Sanjay Sabnani and our newest arrival Dr. Gary Inginito, our Senior Vice President of Scientific Affairs.

I will review the quarter with you first, and then over the call to Chuck for his comments, then I will turn it back to me, and then we'll follow up and take your question. Before beginning, I would like to emphasize that Hythiam's business can be looked at from two angles. Our healthcare services business, with the most rigorous approach to treating and managing high class disease states, or as the technology business, with assets that lend themselves to the development of a distinct product offering, based on the quarter sort of uniqueability to reverse brain dysregulation. I will touch up on this later in the call when we discuss the significant recent path wins that we have enjoyed.

Hythiam has many accomplishments in the fourth quarter and throughout 2007, most importantly, the benefits of our patented PROMETA treatment program are becoming increasingly clear, based on the accumulation and combination of private outcomes of studied data. By using our treatment, providers are able to increase retention and program compliance by providing release from cravings to their patients.

Another recent validation, and I’d like to share with you, is the announcement last week by Community Bridges, and the results of this private study are to assess the PROMETA treatment program, as part of a treatment approach for methamphetamine addiction in the Medicaid population that it serves in the state of Arizona, outcome towards their participants, to receive either PROMETA, Plus, Community Bridges, [standard manualized], intensive outpatient counseling that consisted of a matrix based approach which is the industry standard of care for addiction, or participants who received only the matrix based intensive outpatient counseling.

I’m pleased to note that the group receiving the medical portion of PROMETA with intensive outpatient counseling remained in the program at a much higher level of retention. They also showed meaningful reduction in cravings over the 16 week pilot period. Retention in treatment programs and reduced cravings are important outcome measures in behavioral after-care, as they can lead to improved chances for long-term recovery.

Community Bridges has historically struggled to retain this methamphetamine dependent, typically mobile, difficult to treat population as participants in its behavioral intervention program. Typically, only around 2% to 3% of those accepted for treatment are able to cope with their cravings and complete treatment. By leveraging the medical component of our PROMETA Treatment Program, Community Bridges now has the prospect of a compelling addition to its standard-of-care treatment. We believe that the results from the pilot may support the discussion of adoption in the state of Arizona, and by Medicaid plans and HMOs throughout the country.

The results of the Community Bridges' pilot, when coupled with the topline results from Dr. Urschel's double-blind placebo-controlled study, which showed that the pharmacological component of the PROMETA Treatment Program versus placebo had a specifically significant reduction of cravings for methamphetamine, further validates that our program reduces cravings and improves retention. It also allows recipients to engage more actively in a psychosocial [conference], and thereby improves treatment outcomes.

The Dr. Urschel's study was also similar to Community Bridges' pilot, in that it included matrix in the psychosocial regimen. I would also add that Dr. Urschel has been accepted to present the results of this study at two prominent conferences in late spring and early summer of 2008.

Beginning in the first half of fiscal 2008, we anticipate completion of four additional double-blind placebo-controlled studies including Dr. Walter Ling's study out of UCLA on methamphetamine dependent individuals; Dr. Jeffery Wilkins study out of Cedars-Sinai Medical Center here in Los Angeles as well on alcohol dependent individuals; Dr. Volpicelli and Starosta's study on alcohol dependent individuals, and Dr. Raymond Anton's study out of the Medical University of South Carolina on alcohol dependent individuals.

This study, being conducted by Dr. Ling and Dr. Anton, could be completed and presented at major industry conferences in the late spring and early summer of 2008. We believe that the release of data from these and other studies will continue to drive increased adoption by commercial managed care entities, and have a positive impact on our private-pay business lines as well.

Hythiam continues to file new intellectual property worldwide, and in January, the United States Patent and Trademark Office issued Hythiam's US Patent which contains claims using a composition of matter for reducing a person's desire to drink alcohol. This adds to our notification of allowances and grants for inventions underlying the PROMETA Treatment Program in over 28 countries including the US and 19 European nations. We believe that the value of our intellectual property position is substantial, especially in the context of what this intellectual property is worth in the life sciences and pharmaceutical fields.

Recently in the media, there have been many articles about the association between addiction and anxiety, as well as the role of the GABA system in addiction and anxiety. It appears the scientific community is now catching up, what we have been establishing and validating for the past few years. Hythiam is the pioneering company, exploring and identifying GABA dysregulation as a key component of understanding how they treat addiction. In addition, it is becoming increasingly well established that the GABA system plays a role in generalizable anxiety disorders. With this growing body of evidence we believe that our repository of intellectual property will have substantial and increasing value to the life sciences and pharmaceutical fields.

Our entirely distinct applications for composition of matter and our used patents for treatment approaches for multiple CNS indications, and which GABA receptor dysregulation may serve as a critical pathology, are very meaningful. As a result we are actively pursuing a strategy to significantly monetize these assets separately from our current services focus. As we progress in our plan, we will provide appropriate details in due course.

I will now turn the call over to Chuck to provide a quick overview of our financials.

Chuck Timpe

Thank you, Terren. For the fourth quarter 2007, the company reported revenues of $11.8 million which included $2 million in revenues from Hythiam's healthcare services and $9.8 million from CompCare's operations, compared to Hythiam's revenues of $1 million in the fourth quarter of 2006. The net loss in the fourth quarter 2007 was $8.6 million, or $0.17 per share, compared to a net loss of $10.8 million, or $0.27 per share, in the same period last year. Included in the 2007 fourth quarter net loss was $1.2 million net loss from CompCare's operations and related purchase accounting adjustments. The consolidated net loss for the 2007 fourth quarter included non-cash charges for depreciation, amortization and stock-based compensation of $1.5 million, which was equal to the amount incurred for similar expenses in the fourth quarter of 2006.

The net loss for the 2007 fourth quarter also included non-cash charges of $741,000 for debt extinguishment, and a non-cash gain of $3.5 million from the change and fair value of the outstanding warrant liability. As of December 31, 2007, the company had consolidated cash, cash equivalents and marketable securities of approximately $47 million, including $6.3 million held by CompCare. For the fiscal year 2007, revenues were $44 million, which included $7.7 million in revenue from Hythiam healthcare services and $36.3 million from CompCare's operations, compared to Hythiam's revenues of $3.9 million in fiscal 2006.

The increase in Hythiam healthcare service revenues was driven by an increase in the number of patients treated across all of Hythiam's markets, expansion of the number of contributing license fees, administrative from new licensees, and other revenues from the commencement of international operations and license fees with third party payers. The number of PROMETA patients treated in 2007 increased by 63% to 922, compared to 567 patients in 2006.

Managed treatment centers, including PROMETA centers, contributed 239 PROMETA patients in 2007, and 31% of Hythiam's after services revenues for the year. The company reported a net loss of $45.5 million or $0.99 per share for the year ended December 31, 2007, compared to a net loss of $38.3 million or $0.96 per share in 2006. The net loss for fiscal 2007 included $4.1 million loss from CompCare's operations, and purchase accounting adjustments, and consolidated non-cash charges for depreciation, amortization and stock based expense was $5.9 million, compared to $5 million for the prior year.

Hythiam's consolidated net loss for 2007 also included the fourth quarter non-cash charge of $741,000 projected extinguishment, and a non-cash gain of $3.5 million from the change in fair value of outstanding warrants, and a third quarter impairment charge of $2.4 million.

For the year ended December 31, 2007, there were 70 licensed locations that contributed to revenues at some level, compared to just 41 locations in 2006. In 2007, the number of licensing agreements with physicians and healthcare providers increased by 40, bringing the total number of licensed sites to 101 at December 31, 2007, as compared to 61 licensed sites at the end of 2006.

For the year, the company's average revenue per PROMETA patient treated was relatively unchanged at $6,374, compared to $6,357 per patient in fiscal 2006.

I will now turn the call back over to Terren.

Terren Peizer

Thanks, Chuck. I would like to add that much of our revenue in 2007 was largely based on our private-pay business segment. Despite reducing operating expenses that support private-pay by 50%, we are maintaining private-pay revenue levels into the first quarter of 2008 at the same levels as in the fourth quarter.

In anticipation of peer-reviewed publication of Dr. Urschel's double-blind placebo study, and with the results of the data from other double-blind studies, we expect private-pay revenue to grow during the remainder of 2008. The accumulation of published peer-reviewed data will enable us to articulate the advantages of the PROMETA Treatment Program to consumers and referral sources. And as a result of not having this data, we have not yet made, to-date, any claims to drive marketing and ramp revenues. Furthermore, due to our high out-of-pocket discretionary expense involved, our private-pay business must be evaluated in the context of the current economic environment, the private-pay substance abuse treatment industry-like environment.

The private-pay substance abuse treatment industry is not immune to the pressures of a weak economy. And we have learned that several local through Los Angeles Malibu based high-end residential treatment centers have either ceased or greatly reduced operations in 2008. We continue to focus on areas in private-pay where we have traction and strength; we'd also planned a leverage of remaining field force throughout all of our business segments. Our field force is benefiting from this broader experience, and is gaining positive momentum by integrating into the community treatment network in specific states, such as California, Florida and Texas.

We continue to have third party license fees, both core profit and non-profit, at our company managed PROMETA center. We currently have third party license fees in the US and abroad, but the PROMETA centers are only in the US at this time. The business segments that are addressed by these providers include private-pay, government and managed care in the US, and private-pay in Europe and Panama.

The products that will be available to service these segments include both PROMETA treatment program, as well as our substance abuse disease management program. Importantly, however, we're excited about the opportunities in disease management ,because we believe it provides us with a consistent contracted business that can generate significant revenue and create an operating leverage opportunity.

Every year, due to substance abuse, billions of dollars are lost in medical costs, and employers and organized labors throughout the nation are hindered by employee absenteeism, job related injuries, and loss of productivity. Historically, part of the challenges in addressing substance abuse has been the paradigm associated with the fault of the user, the negative stigma commonly associated with substance abuse, and the fact that substance abuse is traditionally treated with a behavioral focus.

Third party payers have historically carved out substance abuse population to behavioral health organizations who have sought to drive down the cost of substance abuse treatments without focusing on the resulting high medical costs incurred by the payment payer. While some large payers are trending towards carving in behavioral health to achieve greater operating efficiency, there remains little integration of behavioral and medical approaches to treatment of substance abuse population.

Even with better integration, the lack of effective solutions for treating substance abuse within current treatment infrastructures has not made this an area of significant focus. Why focus on the cost of things you have little ability to control? This leaves a largely untreated or under treated substance abuse population for a payer, which results in frequent emergency rooms, in increased in-patient hospital utilization, and long hospital stays. In addition to co-morbidities or other chronic disease state, the population may not be compliant in a drug base. The consequence is that medical costs remain high and the burden continues to be shouldered by the payer. Payers responsible for medical cost recognize that the cost of an untreated substance abuse population are significant. And therefore the industry has an unmet need for an integrated solution to adjust substance abuse treatment in an effort to reduce overall medical costs.

Payers are also aware of the impact of untreated substance abuse, and the cost of chronic disease, to the non-compliance with medical treatment, making these patients even more expensive to treat. It is estimated that chronic disease treatment costs can be up to 80% of all medical costs. So factors that multiply the cost are extremely expensive. Individuals affected by substance abuse are also more likely to suffer from other medical and mental health conditions. For example, some studies suggest that substance abusers are twice as likely to incur claims for injury and hyper-tension.

As part of our predictive modeling development efforts, and as a demonstration of value to our customers, we have been using a proprietary software model to evaluate commercial health plan records over a three year period. Some preliminary observations have come from this analysis to further support that substance abuse is significantly impacting health-plan costs. Based on the analysis, hospital readmission rates for substance abusers are equivalent to those for heart disease, and are second only to psychiatric disorders and cancer. If these rates are considered in the context of costs, there is a clear case where interventional treatment of the relapsing substance abuser.

Increasingly, med insurance leaders have recognized that substance abuse is a disease, and payers see the logic for disease management to address this complex disorder in the same way they address their other chronic conditions. For the first time, we are offering payers a solution to the high medical costs of untreated and under treated substance abuse populations, by managing these groups in a cost-effective manner on their behalf. Our substance abuse disease management offering can address a significant challenge and unmet need in the industry. As pioneers in substance abuse disease management, and with our proprietary based disease management solution, we will be able to manage our payers substance abuse population through identification enrollment, care management and coaching, experience based treatments and treatment algorithms designed to take the advantage of reduced cravings and better retention and with a specialized network of providers, all across an IT platform that enables the efficient info sharing and treatment integration.

Our disease management programs are designed for increased enrollments, longer retention, and better outcomes, so we can help payers achieve lower costs in the form of fewer ER visits, reduced in-patient utilization and hospital readmission rates, and help employers and organized labor reduce medical costs, absenteeism, job related injuries from the workplace, thereby improving their productivity.

In addition to engaging our first commercial reimbursement agreement with third-party payers in February 2008, we continue to garner interest in our disease management offering. We are currently engaged in discussions regarding our disease management services with approximately 10 significant third-party payers, the vast majority of which include health plans, and we will update you accordingly as we sign contracts.

In an effort to further augment our reach, we recently welcomed to our executive team Ian Warden, Senior Vice President of Operations, who joins us from LifeMasters, a leading national provider of health improvement and disease management services. Ian bring significant disease management operations experience to the Company, and we now have a necessary talent in place to help fully operationalize our existing opportunities, and to continue building enhanced functionality and scalability.

Ian has been invaluable in addressing perspective customer questions about operational assets of the disease management program. Recognizing that as substantive value-added disease management programs must have multiple components to integrate and to repair, we have been diligently assembling the pieces. CompCare provides the infrastructure, productive modeling solutions, IT infrastructure, proprietary content and a network of providers to deliver on this promise.

Now, with the scientific validation of PROMETA continuing and expected throughout 2008 and beyond, we have the pieces in place for initial traction and accelerated adoption. Consistent with our realignment and focus towards deploying our disease management offering, we streamlined our operations in January of 2008, which is expected to result in the overall reduction of 25% to 30% of cash operating expenses for the fiscal year ending December 31, 2008.

We continue to leverage our existing resources, to accomplish our strategic objective, and anticipate higher revenues for 2008 based on expected agreements from our disease management offering, on top of our growing private pay revenue base. Within these reduced operating expenses, we are continuing to invest in our disease management solution. We made a decision to focus on where we could provide the best customer benefit with a multi-efficient near-term leverage for us.

We are pleased with the level of interest that third-party payers are showing in our disease management solution. We are focused on signing up an initial group of third-party payers, and we expect that it will take time to finalize contracts, and then to implement and operationalize disease management for initial customers.

As we demonstrate better clinical outcomes and have return on investment over time, we will create a foundation of reference customers. And these efforts should result in broader adoption of our disease management programs in those customers and across the industry.

The sale of cycle involving commercial plan and other third-party payers can be wrong and somewhat unpredictable. And we recognize that there is a time factor involved in translating traction into revenue. But the leverage we are gaining with the disease management platform is worth the time required to engage a pair. In addition, the results from our remaining double-blind, placebo controlled studies, which we expect will be completed in 2008 and beyond, should facilitate our ability to execute our business development initiative.

The Company is in a strong position, with a healthy balance sheet, scientific validation, and established clinical relevance across the country. Our leadership team remains focused on the most efficient opportunities for 2008 and beyond. And we are confident as PROMETA is leveraged in our unique business model, we can preserve capital and effectively allocate resources towards the greatest revenue growth opportunity.

Overall, there are ample revenue opportunities in the marketplace across all of our business segment. Although we don't yet have significant contributions from our disease managed offerings, we are on target to achieve our budget revenue this quarter, and are achieving our desired net cash burn. We will continue to target our net burn to effectively modulate operating expenses and net revenues in each of our business segment. We will review our operating expense and revenue match quarterly for the focus on reducing expenses, if necessary, to more effectively deploy and leverage our resources across our business segments.

As we continue to make progress in all of our business segments, we're also learning that different levels of available data has an impact on customer perception, and how likely they are to proceed with utilizing PROMETA and our disease management offering.

Some perspective customers value the data that is currently available, and others are waiting for further results from our double-blind, placebo controlled studies. Thus the eventual publication of Dr. Urschel's double-blind, placebo controlled study in a peer review journal will help provide further context for scientific validation to our perspective customers. Each validating result, be it topline or published, will result in adoption by yet another set of customers.

The accumulation of outcomes and data continues to validate PROMETA, by showing the patients who are retained in treatment and no wonder craving are more able to engage in behavioral therapy, thereby improving treatment outcome and lowering costs to the health care system.

As we have seen at Community Bridges, it is clear how PROMETA could be utilized in the right structure, whether it's part of an existing treatment program or has leveraged in our disease management offering. We will continue to focus on engaging third-party payers with our disease management offering, and will leverage our existing resources without occurring significant additional capital outlays.

We currently estimate that our existing cash base will be sufficient to find our operations for at least the next two years, or until we achieve positive cash flows, and we are utilizing our existing resources across our business segments to execute our business strategy.

Lastly, and to reiterate, we fully anticipate the results of upcoming double-blind placebo controlled studies will add unique differentiating elements of validity to the PROMETA Treatment Program. We are excited about our opportunities. I look forward to sharing our future successes with you.

At this point, the management team and I will be happy to take any questions that you may have. Thank you for your time. Operator?

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions)

Our first question is from the line of Jonathan Aschoff with Brean Murray.

Jonathan Aschoff - Brean Murray

I am here[inaudible] John, can you hear me?

Terren Peizer

Yeah.

Jonathan Aschoff - Brean Murray

So I had a couple of questions one was, has there been any further analysis done by Urschel on the 30-day trial. And I was wondering given the flatness of the 4Q over 3Q, you had PROMETA publications a few months ago saying record bookings in Jan '08 and I think record revenues in December, but I was wondering if this 1Q '08 looks like it would be significantly higher than 4Q '07 given that disclosure a few months ago.

Terren Peizer

Okay. Well, first on the Urschel, obviously when we reported the topline result, we had reported the statistical significance versus [EBOW] and amongst the completer and cravings. Now, there were some talk that there was -- we showed it in completers and not an attempt to treat basis, but that again as we said at the time of the call was a standard in the industry and advice we got from our Scientific Advisory Board that would be those that comprise actually, the peer reviewers -- in a peer reviewed publication. Because that was a standard operating procedure. That said, I will point out that intent to treat basis was also calculated and also achieved the same statistical significance versus placebo in reducing or eliminating cravings.

The second part of your question, we reported that we had a record month in December, which still didn't create a flat quarter. There were many articles at the time discussing that expensive elective medical procedures were declining across the country, further the economy; we saw it in the residential treatment centers, the privately paid oriented residential treatment centers throughout the country.

And here in Los Angeles, we did have a tremendous boost in December, that was followed by a tremendous record month in January. And December, seasonally has been weak because of the holiday concentration, people deferring in treatment for after the New Year. It's fair to say that we did see a bump related to our 60-minute piece in December and January.

We have again set out budgeted revenue for the first quarter with the lower expenses that resulted from our plan of streamlining in early January. And obviously, there is still some time left in the first quarter. But again, we're on budget and we're achieving the revenues we set out. And we're managing, again, as we reallocate resources to disease management. We are managing the net burn to achieve the two years of cash that we'd like given our model, and that said we did it without reducing any expenses in the first quarter because we were achieving our revenue target.

Jonathan Aschoff - Brean Murray

All right, thanks a lot Terren.

Terren Peizer

You're welcome.

Operator

Our next question is from the line of Ryan Daniels with William Blair.

Ryan Daniels - William Blair

Yeah, good afternoon guys just a couple of quick questions. Terren, could you just go over again what you mentioned with the 10 health plans, I didn't catch it. Is that 10 health plans or other organizations that you are currently working with, are they fee processes or PROMETA diseases management protocols or those sort of a expressed interest; just a little more color there?

Terren Peizer

Okay. The 10 plan, I think actually it's a breakdown --I say it's mostly --it's like seven or eight of them are health plans and two very high profile unions. That's how the breakdown would be and to describe where we are and that each one is at a different point in their process, a lot of them have given the go ahead but are working through our internal process. Some are waiting on the publication of the Urschel data. One or two may be waiting on the linked data. Also as we have said they have various levels but all of those are people that have expressed -- I think its clear they told us that we have the right model. They told us that there is a need for their product. They have told us that they are interested in the product and I think it's just working through their process, now that's just the first way. Now, we're developing a second way of people that are interested in the disease management product, and in fairness, we just recently completed the product with the IT software platform that has a lot of proprietary nuances, and given that for the first time or actually, we're probably just finally completing it this week.

But that said, we just have all the pieces gathered that started with CompCare, then the Urschel scientific validation, now the IT platform to really have our completed products to sell. But I would say that the people, the first 10 definitely are validating our model, and it's just a matter of time, till we start seeing contracts, and then it's fair to say, once we see these early adapters, we do know of others that will jump on board.

Ryan Daniels - William Blair

Sure. And then it sounds like, if I am understanding your prepared comments correctly, you wanted those 10; I would assume that has already given you some access to claims data then that's what you've used to validate the model and the potential cost savings that they could achieve using the PROMETA disease management protocol in regards to medical costs and reemissions and things of that nature. So that one would want to assume is a little harder along, or they remain highly interested in the product?

Terren Peizer

We have composite claim data over the country. I can't say that we're in the process of getting specific databases from health plans to run it through our completed software platform. We were waiting till some final pieces that are actually there in place this week and as a result, we will be running data shortly and there are specific plans. That hasn't stopped the process though.

Ryan Daniels - William Blair

Sure.

Terren Peizer

Over the composite plan across the country, of course every state will be different in its costs. Over the composite plan over the country, which obviously has more value to a national health plan than a particular regional plan, I think they have seen an assimilation and the predictive modeling enough to know that there is substantial medical cost savings with the result of the PROMETA disease management program.

Ryan Daniels - William Blair

Okay, great. A couple more quick ones and I'll hop off. Just on the Arizona (inaudible) or program you did versus the current method of care, standard of care. Was there any reason other than keeping it similar to the PROMETA on an in-patient basis versus a typical out patient?

Terren Peizer

I am sorry.

Ryan Daniels - William Blair

So it is from the -- where I am ramp reading the pilot program with the Medicaid eligible participants in Arizona and it looks like PROMETA was provided on a in-patient basis versus the typical outpatient therapy?

Terren Peizer

Correct and that was to match. Dr. Gary Inginito might want to add something or Rick Anderson might want to add something. However that was to match the Matrix Group because they had three days of in-patient detox as well.

Ryan Daniels - William Blair

Okay.

Terren Peizer

So we are trying to keep that as equal as possible between the comparative groups.

Ryan Daniels - William Blair

Okay. That's what I assumed, then the last question, you mentioned two of the double-blind placebo-controlled studies are expected to be by mid year. Do you have any thoughts on when we might see the Wilkins and Volpicelli data? Is that something year-end looking that still is in the '09; just curiosity there?

Terren Peizer

Right now and as you guys know, these are independent studies. Their study designs, it's their data. So we are somewhere at the winds of their own pace. And just as simple it is worth allocating more resources to speed up the base, which is a lot of times we wish we would have done in the past, but we're unable to. That said, so if we go to the line of just to reiterate, we expect in the not too distant future, the Urschel publication, which will be of incredible value to us.

And then, we expect the Ling data in the late spring, and then the Anton data in the early summer. And then, right now based on the estimates, we expect the Volpicelli data somewhere I would say Septemberish, September-Octoberish. And then the Wilkins possibly before year-end, but most likely I would say the first quarter of '09.

Ryan Daniels - William Blair

Okay, very helpful. Thanks.

Operator

Our next question comes from the line of [Ram Shobraju] with Rodman & Renshaw.

Ram Shobraju - Rodman & Renshaw

Hi, thank you for taking my question. Can you hear me?

Terren Peizer

Yes

Ram Shobraju - Rodman & Renshaw

Okay. Just a few guidance related items, if I could get some additional clarity here. Are you at this time able to provide some guidance as to what level of growth you expect to see over the course of 2008 in the number of licensed locations that you expect to end the year with?

Terren Peizer

Well, Chris Hassan will take the licensed locations. Now that's going to vary a lot with managed care contracts into disease management contracts, but I will talk in terms of private pay for?

Chris Hassan

Sure. In terms of private-pay, we probably, we are planning to continue to license in the areas where we have the resource. The quality of the licensee is that our continuing to license is improving, and they are addiction experts that are looking for a new modality or new tools to be able to use in their patient population and they are frustrated with the outcomes they are currently seeing. That being said, I don't believe that we'll continue to license at the exact same rate as we did last year but the rate should remain pretty healthy.

We've a number of providers that are in process right now both on a regional and even we've engaged in some early discussions with some national providers, but preliminarily I would say you should be able to see something about 60% to 75% of the rates that we had last year. All right. That means we can engage more managed care contracts as we begin to see those and coming with the DN product. We'll have to address the needs of the individual opportunities with the payers, the providers that are in the networks as well as augment those with the providers that we already have in our network currently. Okay. Does that answer your question?

Ram Shobraju - Rodman & Renshaw

Yes, and also I just wanted to get a little bit more color on what the national providers are looking for in terms of double-blind placebo-controlled data? Have they given you an indication that they would be willing to come on board post the release of the Ling data i.e., are they waiting for that or have they given you an indication that the Urschel data is sufficient or are they waiting for the publication of that data? Were they looking for additional details that weren't included in the topline or is it a mixture of both?

Terren Peizer

I'll let Rick Anderson, chime in, but let me just start off saying that it's a mixture. Certainly, there are some national health plans that have engaged and have not brought up the condition avoiding for the Ling double-blind data. That said, there are four or five depending how you look at that, but I think approximately five national health plans and we certainly want to be talking to all of them. I can't say that the ones we are not talking with aren't waiting, and or we're not, I shouldn't say talking, but we're talking with everybody in terms of engaged in a process.

I can't say that they are not waiting on billing data, I have no idea. But there are some plans that -- as I stated there are some plans, but I won't say it's broken down national versus regional that they are. Rick, you want to add anything?

Rick Anderson

No. I would agree with that.

Ram Shobraju - Rodman & Renshaw

Okay. And with respect to revenue trend per patients, could you just go into that a little bit and give me any sort of an idea of how you expect the different sort of tiers of per patient revenue levels to change going forward if you expect to see a significant difference in percentage breakdowns there? And what impact has this likely to have on the average revenue per patient going forward?

Terren Peizer

I would like to pass it.

Chuck Timpe

In the last half of last year, we've actually seen an improvement in the average revenue per patient. What we will see through the 60-minute presentation, there was a real clarity when the patients were calling up and contacting us with self referring themselves, there was a real clarity as to what the products were, what the program was, what the pricing was.

So there were very little presentations of people who were indigent or were financially challenged. So that kind of cropped up the revenue per patient as we're seeing that remaining this year. We do have a very robust patient assistance program that allows patients to either finance or to be able to engage the treatment program that will reduce cost. But realistically, right now, we've seen it remain pretty sick. And I think we also detailed that out in the call earlier today.

So, we can't foresee what the economy is going to do in the long-term for us. Yes, but currently I can only speak to what we're seeing in the short-term. It's staying pretty firm.

Ram Shobraju - Rodman & Renshaw

Okay. And I just wanted to ask one other thing which is, with respect to the acceptance of cravings and the connection between reduction in cravings and reduction in actual usage, now, what are you seeing currently in your talks with both providers as well as addiction experts with respect to how well accepted the connection between cravings and usage is?

And is there any sort of specific support maybe from NIDA or NIDA affiliated experts that you can draw upon in your conversation with these individuals to convince those who may not be a 100% convinced?

Terren Peizer

Well, it's interesting. Thank you for asking that question because it's something that comes up from time-to-time and I find it one of the major paradoxes. In fact, just on the cover of a recent behavioral health magazine. It said addressing cravings and it's kind of still like the last frontier that we're not really doing too well yet.

I think it's fair to say that NIDA, if you look at all the NIDA studies, they are all focused and they're called craving studies. NIDA is focused on cravings, spends $1 billion a year on cravings. Most of the top leaders and scientific leaders, all focus on cravings as well. And I would say, that amongst the clinicians and the health plans at all, they get it.

Cravings is the leading and it's a publication. Cravings is a leading determinant of relapse. These are facts, it's not speculation. Now, obviously, we see in the Community Bridges a pilot that there is a clear connection between cravings and use. We assume that the 90 -- and I'll let Dr. Inginito and Rick and Chris to [comment], but we assume that the 99% to 100% of the patients that drop out of the metrics only arm were using.

Whereas we saw over a longer period of time and whether it's at 54% down to 28%, and most studies are done over a 12-week timeframe not a 16-week timeframe in a very mobile Medicaid population, that may not even have the home address. We see that the PROMETA patients were retained in the treatment, and we also see that those that were retained weren't using by large.

So we have shown in that the correlation between cravings and use. We anticipate that in the UCLA data, you will see the correlation between cravings and use. Although, as we've said many a time that patients who had wanted to stop, and not be able to stop because of their cravings conversely there are people of that crave, that I mean people that aren't craving that still want to use for other behavioral reasons.

And, of course, the placebo group then used analysis also under therapy. And they could not be using, they could be while knuckling it, they are cravings to be intent, and it might be just a matter of time before they relapse. You guys, want to add anything?

Rick Anderson

Yeah, I will. First of all my background originally before this I was working with opioid addiction, and the whole focus for opioid addiction treatment is in dealing with cravings. This year I had asked you to go to the hythiam.com website; there will be a link there for the facts of PROMETA. And in there we detail up a number of the leading thought experts who are asking how the thought leaders in the industry view cravings.

And there are a number of different published references there in the leading journals from Chuck O'Brien from Penn who states that cravings are viewed by many of the primary symptom motivating drug use and the appropriate target of behavioral interventions to [heart set] all to Dr. Mann. So you can go there if you need additional information beyond those you can feel free to contact us.

But it is clearly the biological marker for addiction, it is the foundation for hundreds of million of dollars being spent right now in the opioid dependence management alone.

Terren Peizer

Well, yes, if you look at where Chris came from Reckitt Benckiser's buprenorphine and same excess methadone for heroin or opioid dependence, that's all using agonists or using a safer version of an opioid is all about curbing craving.

Chris Hassan

And Terren, I think one of the things that's important there, one of the studies that we're talking about in similar dependence, it was shown that in the one population, in the test subjects who did reviews the cravings scores were 2.7 times higher than those in the group who did not use. So it's clearly a marker that drives relapse.

Ram Shobraju - Rodman & Renshaw

Okay. And just a subjective sort of adjourns to that last question, is do you see or is there a perception in the addiction expert community that given the type of addiction whether its cocaine or methamphetamine versus, say, alcohol or nicotine that's the importance of cravings diminution is changed or relatively speaking, can be more or less important .i.e. cravings may be very important to knockdown in situations where you're confronted with cocaine or methamphetamine addiction, but may not be as important in the case of somebody who is addicted to alcohol. Is there any kind of prevailing viewpoint on that?

Chris Hassan

No. I think irrespective of your drug of choice or your behavior of choice that you use to manage your anxiety, whether that's alcohol, opioid, sex addiction, eating disorders, whatever. Everyone will tell you that truly managing the cravings is the first and primary step that you got to do. Otherwise the behavior would just continue to reinforce.

Ram Shobraju - Rodman & Renshaw

Okay. Thank you very much.

Terren Peizer

Yes, this is as a tag. This is one of the few diseases whereas historically, because it's been behavioral base, and AA (inaudible) oriented one of the few chronic diseases, which has had a surrogate marker established that or there's a behavioral, certainly, when you're a diabetic, you don't abstain from sugar, you manage the sugar. In cardiovascular disease, you don't abstain from cholesterol, you manage your cholesterol.

So it's just a paradox that it's slowly breaking down, and I think, NIDA has done a great job with that by exercising cravings in their studies. And I certainly know that everyone we speak with, cravings matter. And it's clear that if a patient is retained in the treatment, which lack of craving is going to help retain patient the treatment, then, they're not in an emergency room likely or they're not in a hospital stay likely. So, it's very important from a disease management context.

Ram Shobraju - Rodman & Renshaw

Okay. That's very helpful. Thank you

Operator

Our next question is from the line of Kevin Ellich of RBC Capital Market.

Kevin Ellich - RBC Capital Market

Good evening, and thanks for taking my question. Almost everything has been answered and I just have one financial question for you Chuck. Could you remind us on the balance sheet, how much of your short-term investments, if any, are held in auction rate securities? And if so, have you not seen any reaction sale?

Chuck Timpe

We had at December 31st, we actually had $19 million in auction rate securities, but the portfolio was reduced through successful auctions through March actually through February before they started down. We have $11.5 million at this point in time.

Terren Peizer

And of that it's further reduced by the ability to borrow against it. And we actually have seen now movement in the secondary market in some of our securities.

Kevin Ellich - RBC Capital Market

Okay.

Terren Peizer

But more importantly, the point is that the excess cash we need to go doesn't come in that part the $4 million or $5 million of that, that we wouldn't have excess immediately now.

Kevin Ellich - RBC Capital Market

Right.

Terren Peizer

We will need that money for next year anyway. And obviously, we anticipate at some points that it clears up.

Kevin Ellich - RBC Capital Market

Okay. And what was the operating cash flow or cash burns this quarter?

Terren Peizer

In which quarter?

Kevin Ellich - RBC Capital Market

Q4?

Terren Peizer

All right. Do you want to answer?

Chuck Timpe

Yeah, the Q4 cash burn or operating cost of cash burn was about $3.6 million.

Kevin Ellich - RBC Capital Market

Okay.

Chuck Timpe

Plus some R&D. So figure about $4 million was our cash burn in the fourth quarter last year.

Kevin Ellich - RBC Capital Market

$4 million per month.

Chuck Timpe

I am sorry, $4 million per month.

Kevin Ellich - RBC Capital Market

Per month? Okay. Excellent. Thank you.

Operator

Ladies and gentlemen, we've reached end of our allotted time for questions, and we do have time for one last question. That question will be from line of Robert Cohen with Weston International.

Robert Cohen - Weston International

Yeah. Hi, guys. Gary, can you briefly go through, again, I heard you speak recently in a couple of conferences and you talked about insurance reimbursements. Are you saying that you don't believe you'll get any insurance reimbursements either from regional or national insurance companies until Urschel pre-review is out and the link or is there a possibility that you could get some prior to that because that's what I felt you were saying in these conferences.

Gary Inginito

Well, like we said we're in the processes and these are big organizations. So the timing is somewhat unpredictable. There are some that seem a lot closer than others. And it's quite possible that we have something before the Urschel publication.

Robert Cohen - Weston International

Okay. Great. Thank you.

Operator

Ladies and gentlemen, we have reached the end of our allotted time for questions. I would now like to turn the floor back over to management for closing comments.

Terren Peizer

Well, thank you again everyone for joining us today. As usual we appreciate your support and look forward to discuss our company with you at the next quarterly conference call. Thank you.

Operator

And ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time.

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