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Executives

Francesca DeMartino - Senior Director of IR

Robert Taub - CEO

Marc Droppert - EVP

Sophie Hobbs - Interim CFO

Analyst

Amit Hazan - Oppenheimer

Vivian Cervantes - Rodman & Renshaw

Eli Kammerman - Cowen

Erik Schneider - UBS

Junaid Husain - Soleil Securities

Gregory Hertz - Citi

Debjit Chattopadhyay - Boenning & Scattergood

Omrix Biopharmaceuticals Inc. (OMRI) Q1 2008 Earnings Call May 9, 2008 8:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2008 OMRIX Biopharmaceuticals financial results conference call. My name is Lacy and I'll be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Francesca DeMartino, Senior Director of Investor Relations. Please proceed.

Francesca DeMartino

Thank you, Operator, and good morning, everyone. Before we begin, I would like to remind you that this call contains forward-looking statements. Forward-looking statements provide the company's current expectations or forecast of future events.

Forward-looking statements include statements about the company's expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements.

The company's actual results could differ materially from those anticipated in forward-looking statements for many reasons; including the factors described in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's 10-K as filed with the SEC on March 17, 2008 and the company's most recent quarterly reports on Form 10-Q and its current reports on Form 8-K.

Unless required by law, the company undertakes no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this call.

At this time, I would like to turn the call over to Robert Taub, OMRIX Chief Executive Officer. Robert, please go ahead.

Robert Taub

Thank you, Francesca. Good morning to everyone and thank you for joining us for today's conference call to discuss our financial results for the first quarter of 2008.

I am Robert Taub, the CEO of OMRIX Biopharmaceuticals and with me here in the room in New York are Marc Droppert, Executive Vice President; Sophie Hobbs, Interim Chief Financial Officer; and Francesca DeMartino, the Senior Director of Investor Relations who just introduced me.

Following our formal remarks, we'll open the call to your questions.

So in today's call, we will provide first a business update, then a review of our financial performance for the first quarter of 2008 and then some financial commentary regarding the rest of the year.

So let us start with our biosurgical products.

Evicel of our fibrin sealant product is continuing to gain market share and meet our expectations. The more than 600 accounts that purchase Evicel in quarter one, including a strong repeat customer business as well a significant number of the new first-time buyers.

In continuing its efforts to grow its Evicel business, three areas that ETHICON is focusing on in 2008 are orthopedic surgery, plastic surgery and burns, which all represent significant growth potential in our markets where advanced hemostats are historically underpenetrating.

Additional important use on the Evicel's front is that the European EMEA inspectors, EMEA being the European FDA agency, so these inspectors as the result of our filing for the registration of Evicel in the EU has now completed an inspection of our Israeli production facility last month with positive results.

We expect there were no critical observations and we expect the approval of Evicel with a general hemostasis in surgery indication in the EU by the third quarter of this year. We are also very pursuing very actively registration of both our fibrin sealant and thrombin products in a number of non-J&J or non-ETHICON territories, and now as a result also developing in parallel distribution relationships in anticipation of approvals being received.

Now turning to Evithrom, since it launched, Ethicon has continued to experience moderate growth, although 60% of customers purchasing in quarter one were a new first-time accounts. But, as we have expected, the standalone thrombin market is and will change slowly, it's a slow process.

While standalone thrombin will continue to be an important product, we also continue to believe that long-term thrombin growth will ultimately be driven by thrombin-based enhanced hemostats where thrombin is combined with other agents, such as various forms of gelatin, and which will be easier to use.

Now I'd like to provide you with an update on the development and the regulatory path of the Fibrin Patch, our breakthrough product. We have said numerous times that this is the key product candidate in our hemostat product platform.

Last update we provided you was on March 27, when we announced at the Analyst Day and then in the press release that the first patient has been enrolled in the Fibrin Patch mild-to-moderate bleeding Phase II clinical study. And I know that many of you have inquired us to what is this means for the development path to regulatory submissions and the severe bleeding indication as well.

So let me go a few minutes to go through this and you should first know that the Phase II clinical study that is currently ongoing here in the United States is enrolling patients at a very promising rate. Both expectations regarding the number of participating centers and a number of enrolled patients are being met.

The Fibrin Patch clinical trial is rather complex so I want to spend a couple of minutes describing its design to clarify things. Let us start the trial with initially enrolled 90-patient at 2 to 1 randomization of Fibrin Patch to SURGICEL which is the comparative, so two patients on Fibrin Patch for one patient on SURGICEL. This means that at 90 patients, we will have 60 patients treated with a patch and 30 with SURGICEL.

Once this point is reached, the data can be evaluated. And if the data clearly demonstrates superiority, and I'll remind you that that is hemostasis with in four minutes and no re-bleeding with in the subsequent six minutes. If the study demonstrates superiority at that time, the clinical trial will no longer be subject to the 2-to-1 randomization, and we will continue to enroll an additional 40 patients all of which will be treat with a Fibrin Patch in order to achieve the number of patients required for safety verification. If superiority is not achieved after 90 patients, then we will continue to enroll patients in increments of 30, always at 2-to-1 randomizations until the end points are met.

We continue to believe that we can complete the enrollment of the initial 130 patients by late 2008 or early 2009. But of course should we need to include additional patients in the trial, then it will expand the trial period by up to several months for each group of 30. Now if we meet this milestone, we would then file a PLA with the FDA in the first half of 2009. Assuming as 10 months -- standard 10 months review, we would expect to prove in the first half of 2010, as we have indicated before.

I also want to note that in addition to the Fibrin Patch study underway in the United States, we are also actively engaged in the initiation of Fibrin Patch studies in both the EU in Europe and in Israel, studies which are expected also to include the management of severe bleeding. With OMRIX and its marketing partner ETHICON's commitment to a broad hemostat product portfolio including Evicel Evithrom and Thrombin-enhance hemostats. We expect to continue a strong growth pattern in 2008 and beyond. This is reflected in our guidance, which we initially shared with you on February 5, where we stated that we expect 75% growth in our biosurgery product sales in 2008.

As we have said in the past, we are also developing products outside of the ETHICON relationship including of Adhexil, our Anti-Adhesion product candidate. Here I can report that we are on schedule with patient enrollment in a multinational Phase I, Phase II clinical study in the US, Germany and Spain, and we expect to complete enrollment by the end of Q2, 2008 by the end of June. This trial is evaluating the safety and initial efficacy of the product in preventing and/or reducing postoperative adhesions in patients undergoing gynecological surgery, and we ultimately expect this product to be approved for the prevention of adhesions in abdominal surgery generally.

We have also begun preparation for the Phase III study, and as been confirmed in our press release we have developed the vaccines without a development partner, and we expect to initiate discussions with prospective distribution partners in the second half of 2008 as we start the Phase III study.

Moving on to our passive immunotherapy business; much more straightforward product sales of $9 million in the first quarter of 2008, which represent an increase of 6% as compared to the same quarter in 2007. We're on track to fulfill our prior guidance of approximately $30 million of immunotherapy product sales in 2008. We will continue our long term focus on growing up our surgery business, and we will continue to expect growth but moderate growth in our immunotherapy business.

Before I turn the call over to Sophie, I would like to review our out coming milestones for remainder of 2008. So, one; the complete enrollment in the Evicel Phase I, II study in Quarter two, 2008; to obtain the EMEA approval of Evicel with a general Hemostatis in surgery indication in the third quarter of 2008; to obtain the approval of the intravenous Hepatitis B Immunoglobulin product in Sweden in the third quarter of 2008. I remind you that this product is used for the prevention of the re-infection in Hepatitis B positive liver transplant patients. Four, the complete enrollment in the Phase III clinical study of IVIG in the United States in quarter three, 2008; and as mentioned earlier, the complete enrollment in the Phase II clinical study of the Fibrin Patch in late 2008 to early 2009.

With that, I would like now to turn the call over to Sophie Hobbs for the figures and for the financial review of the first quarter and the full year. Sophie.

Sophie Hobbs, Interim Chief Financial Officer

Thank you Robert and good morning everyone. I will begin my prepared remarks by discussing first quarter results, and then review our financial guidance for '08. So let's begin with '08 first quarter results. An increase of a 120% in our Biosurgery sales resulted in total revenues for the first quarter of '08 of $17.7 million, compared with $14.2 million in the first quarter of '07, a 25% growth overall. Biosurgery products sales in the first quarter of '08 were $6.1 million, compared to $2.8 million in '07.

On the immunotherapy side, product sales in the first quarter of '08 were $9 million compared to $8.5 million in the first quarter of '07. As mentioned in the press release, first quarter immunotherapy product sales included $0.7 million of previously deferred revenues related to 2005 sale of VIG, for which we have fully fulfilled all obligations under the contract.

Total gross profit for the first quarter of '08 was $7.6 million or 43% of total revenue, compared to $5.4 million or 38% of total revenue for the first quarter of '07. Gross profit on product sales increased by $2.3 million or 55% from $4.2 million to $6.5 million in the three months ended March 31, 2008 as compared to the three months ended March 2007. Excluding the recognition effect of deferred VIG revenues, gross profit on product sales improved from 37% to 41%. Gross profit was favorably impacted by increased sales volume.

During the quarter, we continued to invest in future growth, in particular in Adhexil, our abdominal adhesion prevention product candidate as Robert mentioned earlier. An increase in research and development employees from 36 in the first quarter of 2007 to 54 in the first quarter of 2008, led to an increase in expenses of 152% to $2 million in three months ended March 31, '08. As you may remember, these expenses include cost associated with the development of product not in collaboration with third party.

We expect research and development expenses to continue growing, as we increase the development of non-partnered products, trying to balance delivering short-term results with investment for long-term growth. In support of our sales and product development growth, selling, marketing, general and administrative expenses increased by 84% to $4.5 million excluding non-recurring severance payments to our former Chief Financial Officer of $0.3 million. The increase is mainly due to an increase in the number of employees and related cost, such compensation expenses $0.8 million and rent expense $0.4 million.

Financial income this quarter amounted to $1.4 million; $0.8 million of interest income and $0.6 million of foreign exchange gains. Regarding our interest income, our investment strategy is to put safety and liquidity ahead of yield. We have not incurred any losses related to auction rate securities and have invested in the company's cash reserves and safer instruments such as bonds and market rate security. Our internal forecast assumes a return on cash of approximately 3%. We have not forecasted any further foreign exchange gains for the remainder of 2008.

Last quarter we mentioned that our Israeli subsidiary will begin to be subject to income taxes that is, as it has used up all of its tax loss carry forward. Thus, for 2008, we anticipate our effective income tax rate to be approximately 10%. Net income for the first quarter of '08 was $2.1 million or $0.12 per diluted share, compared to $3.4 million or $0.20 per diluted share for the first quarter of '07. We expect our fully diluted shares in '08 to be approximately $17.6 million. On the balance sheet we had cash provided operating activities for the first quarter of '08 amounting to $3.5 million. We invested approximately $5 million in fixed assets, mostly in our new facility in Jerusalem.

Now, turning to the full year 2008 guidance on product revenue. As we have previously guided, we expect annual product sales to be in the range of $64 million to $67 million, and biosurgery sales to grow 75% in 2008. Second quarter 2008 biosurgery product sales to be $8 million. This guidance is based on the following assumptions. The current biosurgery sales forecast provided to us by ETHICON, no product or business acquisitions, and no VIG product sales.

I will now turn the call back to Robert for some final remarks. Robert?

Robert Taub

Thanks Sophie, thanks. Well, I want to thank you all for your attention and for your ongoing support of OMRIX. I hope our prepared remarks demonstrate our commitment to provide additional visibility into OMRIX business, which is consistent with the presentation given at our Analyst and Investor Day on March 27. We continue to be excited about the opportunities in front of us, and we look forward to updating you as we achieve our milestones. And now I'd like to open the call for question so operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question will come from the line of Amit Hazan with Oppenheimer, please proceed.

Amit Hazan - Oppenheimer

Thanks. Hi, Good Morning guys.

Robert Taub

Good Morning Amit

Sophie Hobbs

Good morning Amit.

Amit Hazan - Oppenheimer

First question I had on the Fibrin Patch. I just want to make sure we're clear on this. Are you still in discussion with the FDA with regard to a control arm for this severe study, and what would be the pathway there? And then, I think we get a lot of confusion because we're calling this current study a Phase II study. The second question would be; is there a possibility that you would have to do some kind of a Phase III study on this current moderate study that's ongoing.

Robert Taub

Okay, you have actually two questions here. Thanks for asking that question, because I know it is still confusing. So first of all regarding the first question, Phase II but still we're talking about filing and would there be a need for Phase III. It is a Phase II study, however if all the end points on efficacy and on safety are met, it is, if you want, in the company's prerogative to file a BLA at this point of time and the FDA will look at the data, and it is if you want based on the risk that the company would take upon itself.

The FDA is not stipulated that this study will be followed by another study or need to be followed by another study. So that's just the first question. We are intending, if the data is satisfactory, meeting its superiority, is proven, and if there are no safety concern to use this as the pivotal study and to file and that is not against the - start to get an opinion the FDA.

The second question that you are asking me is about the additional study to test the Fibrin Patch of severe bleeding. And yes we do intend to file at some point in time in 2008, an amendment to the current IND to add another study, and that study would address the control, the management of severe bleeding. As you aware, there were questions about what is the severe bleeding, and this discussion with the FDA is still ongoing.

A severe bleeding is, I think [Dr. Bokekeo] said at the Analyst Day is that, well I know it when I see it, and its very difficult to standardize a severe bleeding, but it's going more or less in the direction of a [propocitile] or fast flowing bleeding that requires immediate attention. So, discussions if you will with the FDA are still ongoing on how to define that second protocol, and we will keep you informed as we along. And we do think that we will filing an amendment to the IND in the next few months.

Amit Hazan - Oppenheimer

Okay. Great, and then just on Evithrom, I am wondering if you can give us a little bit more clarity if the current units that are being sold, to what extent they are actually being sold as virtual kits, and then also give us a sense of where we are in the filing process of actually getting the approval for formally selling Evithrom in a kit?

Robert Taub

You are talking about this virtual kit at the moment, yes. Because it is of lets say the commercial nature, I don't think I am at liberty to tell you what the spilt is between thrombin stand-alone and thrombin sold as a virtual kit. Suffice to say that also from the text that you heard, it is the focus of ETHICON to try to move away from thrombin stand-alone, and use thrombin enhanced hemostats with current products meaning virtual kit then through kits but also through products which we are in a process of discussing and developing with them. And I think that gives you a bit more clarity but unfortunately I cant tell you more than that.

Amit Hazan - Oppenheimer

But should we be expecting some approvals for some of these kits this year perhaps?

Robert Taub

We will be expecting some approvals for some thrombin product in 2008, sometime yes.

Amit Hazan - Oppenheimer

Okay. And then just lastly for me maybe for Sophie. The gross margin, the product gross margin actually looked pretty good and surprised us because we thought maybe the strength of the Israeli shekel could hurt you. So I am wondering on the gross margin, if you can give us a little bit of sense of, how that currency issue is impacting you and then also maybe just give us an update on where we are with you guys utilizing Talecris if that is helping as well, and how much it might help for the rest of this year and even recovered thrombin if we should expect that approval sometime this year.

And you guys last quarter helped us out with actually thinking about what gross margin level to model for the rest of the year. I am just wondering from a product sales perspective if you can help us on that.

Sophie Hobbs

Alright that’s a lot of questions at one. Okay let's start with the foreign exchange. The impact on the gross margin is actually marginal as we have sales in euros, with a positive impact and production costing shekel with negative impact. Now the gross margin has been positively impacted by the VIG but also by the sales of volume. We anticipate reaching the 50% product sales gross margin some time in 2009 like we have previously mentioned. Talecris is now fully ongoing and is helping the margin. And then the last point was -- Robert?

Robert Taub

Yeah that the, you mean the approval of the recovered plasma remain to manufacture Thrombin. That is delayed, it's still ongoing with the FDA and that's delayed. We are now anticipating the approval early '09.

Amit Hazan - Oppenheimer

Okay, thanks very much.

Robert Taub

And many a times when it is delayed because recovered plasma is plasma which comes from community blood banks in the United States. Community in the United States do not have to follow the same guidelines as a commercial plasma forensic centers and therefore the documentation that is necessary to have such raw material although our community blood bank is approved by the FDA like in commercial plasma forensic center, it’s a different kind of approval and what we're really trying to obtain is the certification of certain selected community blood banks, the certification to use the plasma for industrial purposes. So the delay is actually linked to the collection still on that kind of documentation.

Amit Hazan - Oppenheimer

Okay and if I lied, one follow up real quickly. Sophie we're at 41% gross margin ex VIG for the quarter on product. How much improvement should we be modeling for this year? I mean is it just a few points or is it steadily going towards 50% in mid '09. I just don't want to just model it too aggressively if we shouldn't be.

Sophie Hobbs

Certainly to 50% in 2009.

Amit Hazan - Oppenheimer

Okay, all right. Thanks very much.

Sophie Hobbs

You're welcome.

Operator

And our next question will come from the line of Vivian Cervantes with Rodman & Renshaw. Please proceed.

Vivian Cervantes - Rodman & Renshaw

Hi, thank you for taking the question. Good morning.

Robert Taub

Morning, Vivian.

Sophie Hobbs

Hi, Vivian.

Vivian Cervantes with Rodman & Renshaw

Hi, good morning. I just wanted to follow up quickly on the previous question just so I make sure I (inaudible). So it appears that the Phase II for the Patch is going simultaneously with conversations you’re having with the FDA on an amended IND application, that's correct?

Robert Taub

For a second study there, I mean ballpark we think there will be two studies ongoing eventually with six months, that's more or less kind of a six months delay.

Vivian Cervantes with Rodman & Renshaw

Okay. So then the Phase II for mild to moderate and the potential workout that we're doing on the severe it's going simultaneously but may be from a delay standpoint with the Phase II being ahead roughly six to nine months?

Robert Taub

Yes. And then you have to remember that we have a Phase II study ready to run in Israel, where the Fibrin Patch will be applied directly on to a solid organ. This is a partial refractomy that is a severe bleeding, and we have all the approvals from the ministry of health and even the ethical committee, so the IRB. So that is also going to start very, very soon and we will be issuing a press release when we have the first patient in. And then lastly we have started, this is very preliminary, but we have started consultations with the European authorities on our protocol.

Vivian Cervantes - Rodman & Renshaw

Got you. So, do you think this international data can be submitted to the FDA to sort of help along the amendment filing process and maybe speed things up a bit?

Robert Taub

I cannot speak on behalf of the FDA, but I believe that gathering more and more patients for safety, I think is definitely a plus. And in particular when you are thinking of the Israeli study that we are talking about now, this is a direct application on to a severely bleeding solid organ. So that is something that I think is for safety reason its good. You have remembered all the patients are also followed for two months, so I think so yes.

Vivian Cervantes - Rodman & Renshaw

Right. How many patients are you targeting for this Israel study?

Robert Taub

20 I believe.

Vivian Cervantes - Rodman & Renshaw

Thanks. And then question on the (inaudible) and all stuff, are you seeing any potential constraints in capacity from a raw material 'standpoint' that could hurt manufacturing and your ability to meet demand?

Robert Taub

No, let me again explain how capacity is managed. We're looking at three types of raw materials. The first one, which is the one that all plasma companies uses source plasma as defined by the Code of Federal Regulations, it is a plasma which is collected in the United States by plasma [services] and then its sold on the world market. We are very, very small purchaser of source plasma because that’s a raw material that's used in millions of liters by others but that is our base product, that’s where there is a scarcity and so for OMRIX because we are in this business of small volume products and we do not use a lot of plasma, its always possible to obtain the kind of quantities that we want to have. On the other hand of course being a small player, we don’t have too much say and we may have to pay spot prices.

The second is Cryoprecipitate which is a sub-fraction, which we use and we have this long-term agreement with Talecris, North Carolina company, and that gives us in fact enough raw material to manufacture the major component of all of our biosurgical product been Evicel, Quixil and Fibrin Patch. And that’s all been going and that’s an industrial type kind of agreement. They have a lot of Cryoprecipitate because they are fractionating a lot of plasma and they don’t have a need or use for all of that Cryo.

And thirdly you have recovered plasma which comes from community blood banks in the United States so it's a different source. Because plasma is also scarce, because it's used a lot by every other fractionator to make Intravenous Immune Globulin therefore it's scare than it is expensive. But we have long-term contracts and we extract some recovered plasma we extract or can extract from them and [IVG] and rebuy the recovered plasma for thrombin and thrombin yields are extremely high. So again we do not need large quantities of recovered plasma and that is also why we do not anticipate having any problem here in the availability of raw materials.

Vivian Cervantes - Rodman & Renshaw

Thank you, that's helpful. And then just a follow up. If we think a little about the fibrin sealant market and you compare that with the Thrombin market, would that say that one is more competitive versus the other. In which case, do you see the need for more marketing push may be in the Thrombin versus the fibrin sealant market?

Robert Taub

No doubt. I mean, first of all, there are more players, right. I mean four players with flow (inaudible) that's four players on the market on the Thrombin side and two players only on the Fibrin sealant side. The second [anemone] is that they seem to be very low awareness of any risk related to bovine Thrombin and the manufacturer of bovine Thrombin has been sitting on their market position for a long time and the ramp up is slow because of the P&T committees and these contracts that has to be done. So definitely, it is more competitive.

There is also less way to innovate and less to develop which are planning and doing with J&J. Unless you develop other kinds of Hemostats that may eventually lead to a paradigm shift in the use of these products. So as I said before these (inaudible) over night that I do, predict a reduction of the from thrombin standalone market in favor of more complex thrombin based hemostat with the higher value proposition, but also better ease of use.

Vivian Cervantes - Rodman & Renshaw

And now just as a final question. How do you, if we take a look at biosurgical product sales this quarter is there a 60-40 split between thrombin and sealant? Exceed may be sealant in 40 for Evithrom?

Robert Taub

You are asking the split of the, we have given that split and kind of the level of detail that we don't really share and our partners is not too keen on us giving that kind of a detail.

Vivian Cervantes - Rodman & Renshaw

Okay, great. Thanks I will get bank into queue thank you.

Sophie Hobbs

Thank you Vivian.

Robert Taub

Thank you Vivian.

Operator

And our next question will come from the line of Eli Kammerman with Cowen. Please proceed

Eli Kammerman - Cowen

Thank you very much I am glad I was able to working some questions here

Robert Taub

Thank you, Eli Kammerman.

Eli Kammerman - Cowen

First question is how would you characterize your market share for thrombin versus competitors including both King and Zymo Genetics?

Robert Taub

I think we should put it this way. Obviously our market share of thrombin is lower than King and it is higher than Zymo.

Eli Kammerman - Cowen

Okay. Is that the most detail you can give?

Robert Taub

I think so yes. I know that you guys that also have direct contacts with our marketer and if you want to obtain more detail information, we do not have direct access to all the details and we would feel much more comfortable if they would give that to you.

Eli Kammerman - Cowen

Okay. My next question is with R&D spending more than doubling in the quarter, should we now expect R&D for the year to be somewhere between $8 million and $9 million instead of $6 million to $7 million?

Sophie Hobbs

Yes. Like we previously said these are for products from non-partnered development projects. And we want to look forward to future growth. So, your numbers are correct.

Eli Kammerman - Cowen

All right. And finally, can you just tell us exactly what your reasoning is and not immediately pursuing a separate Phase III trial for the Fibrin Patch that would start in parallel with the Phase II. Why have you chosen to wait to begin that trial rather than start it sooner?

Robert Taub

No, we haven't chosen -- Eli we haven't chosen to wait. I mean you remember that we originally filed an IND which encompass severe bleeding and then when we had discussions with the FDA, we understood that they may take longer and therefore we decided to resubmit just be mild to moderate so that we can start and continue the discussions around the severe bleeding and so its not a choice of our own, these discussions are still ongoing and we believe that when more data will be made available, we have also appointed a independent safety Board, its called the VSM I believe. And there would be a Data Safety Monitoring Board or something like that, and they will be looking at safety data out so after 45 patients.

So all of that we don’t have and we are putting together a package and we are in rather constant discussions with the FDA on that and also hard to standardize a severe bleeding so that the surgeon down in Alabama or the one in Florida when he will be filling up the case report form etcetera that everybody knows what is this severe bleeding and how you -. So we are still progressing with, we are not -- it's not a decision that we would like to start it tomorrow if we had everything put together.

Eli Kammerman - Cowen

Okay, great. Thank you for that clarification.

Robert Taub

Thank you.

Sophie Hobbs

Bye Eli.

Operator

And our next question will come from the line of Erik Schneider with UBS. Please proceed.

Erik Schneider - UBS

Hi Good morning all.

Robert Taub

Good morning Erik.

Erik Schneider - UBS

Just quickly wanted to make sure that I heard correctly CapEx, your looking at there was $5 million in the quarter?

Sophie Hobbs

Investment? Yes.

Erik Schneider - UBS

And that’s all in the plant in Israel?

Sophie Hobbs

Mostly the plant in Jerusalem, the new plant in Jerusalem that we are building, yes.

Erik Schneider - UBS

Okay. And then on the SG&A side, that’s running a little bit ahead of where we expected or a little bit higher than what we expected? What is the infrastructure you said additional people in rents. So what are the facilities that are driving that, and is there any reason to think that you need to have then more facilities to support growth or is that the total footprint that you require or you already own?

Sophie Hobbs

We actually believe we have reached the right level for future growth, and we do expect SG&A in 2008 to remain relatively static now as a percentage of total revenues compared to the 2007 percentage of total revenues. If you remember it was 22%. So that's the number we expect for this year excluding non-recurring expenses.

Erik Schneider - UBS

Okay and then just --

Robert Taub

On your second question we would have reached more or less a pretty good math. Meaning that in the years to come, it should moderately be reduced as a percentage of total revenues.

Erik Schneider - UBS

Okay. And then with respect to both Thrombin and Adhexil just what is the measurement of effectiveness for Adhexil?

Robert Taub

Yes hold on that. I have to look at the presentation that has been given. So the study of objective is to evaluate the safety and initial efficacy of Adhexil in preventing annual reducing cost of (inaudible) in patients undergoing surgery involving the ovaries. The safety parameters will be obviously adverse events, and also clinically abnormal laboratory and coagulation assessment. And the efficacy evaluation will be incidence of a vision, how much to the extent and the severity of the post operative additions.

And remember that we are taking pictures of every patient, before and after, and independent surgeon, who is actually not on the studies, not an investigator, will be scoring these pictures. Blindly, not knowing which patient, when, whatever. So that's the way this is going to be done. The primary endpoint, obviously is the incidents of ovaries with adhesions and then you have secondary and tertiary endpoints. The secondary endpoint is the incidents of ovaries with adhesions, the extent of the adhesions, the severity of the adhesions, and then the stratification by reformed versus de novo adhesions. And then you have further tertiary endpoints and the number of patients is 25 patients, three sides and then that's it.

Erik Schneider - UBS

Okay. And then just conceptually on the thrombin side, what's the sales process or what do you think it is that is driving sales, so that the share is better than Zymo's given, if users get convinced about the risk of bovine thrombin, why would they expect the theoretical risk of human derived thrombin versus going a recombinant and avoiding that risk altogether?

Robert Taub

Again, I'm not the direct marketer, but my understanding is that the perceived risk is very low. Bovine thrombin has been around for so many years, and the arguments about this antibody formation, it's not very convincing and you have to be careful. I heard that the FDA gave a warning just two or three days ago to some very aggressive promotional literature by ZymoGenetics on that. So, the need, if you want to change, is not very high. So, I think what's really driving it, is contracts, introduction in the hospitals, bundling and salesmanship and service at this stage. There will be other differentiation as we go along, with all the different delivery devices, the tips, the way the thrombin will be delivered, which form, etcetera. But right now, its more what I described.

Erik Schneider - UBS

And then just finally on the CapEx side, I should have asked this before, its about $5 million in the quarter, what do you think the amount is for the year?

Sophie Hobbs

The total investment is approximately $24 million and we expect about $16 million to be done this year.

Erik Schneider - UBS

Okay. And the remainder next?

Sophie Hobbs

Right.

Erik Schneider - UBS

Alright. Thank you.

Operator

And our next question will come from the line of Junaid Husain with Soleil Securities. Please proceed.

Junaid Husain - Soleil Securities

Good morning everyone.

Sophie Hobbs

Hi.

Junaid Husain - Soleil Securities

A few things with regards to Evithrom. Could you give us a sense for your formulary conversations with your hospital customers, just given how the thrombin market is evolving with the recombinant and with King defending its franchise. What are your hospital customers telling you in terms of what three or four reasons will swing their decisions, put Evithrom on formulary versus a competing product? Is it price, is it safety or is it both?

Marc Droppert

Junaid this is Marc Droppert. As you know we aren’t the direct marketer of Evithrom, ETHICON is. And so they are really the first, the SD that's best positioned to answer that kind of a question. We are really not in that position and really can't provide that level of detailed perspective.

Junaid Husain - Soleil Securities

Okay, fair enough. And then could you remind us again about the average selling price, other profile or per international units?

Robert Taub

Yeah, I mean the ballpark with all the discounting and all the bundling and all everything, so very difficult, but roughly --

Junaid Husain - Soleil Securities

Good price?

Robert Taub

It's per 5 ml. I mean if you are [spending] thrombin standalone again. So it doesn't capture everything. But it's probably roughly in $60 for JMI and $70 for Evithrom and $80 for RECOTHROM.

Junaid Husain - Soleil Securities

And then relative to your IVIG clinical trial. Robert could you remind us, I believed you had announced the collaboration with FFF Enterprises. On the clinical trial in August of 2006, if you are saying that the enrolment in the trial will be completed in third quarter of this year, so I guess the question is why the delay?

Robert Taub

Hold on, just a second. Yes, why the delay? We are not running the trial. They are running the trials, and there were some delays, I think, related to the exclusion criteria of the patient, remember, these are PID patients, primary immunodeficiency patients, and so I think its like right at the beginning, quite few numbers of patients had to be then excluded from the study and that's why -- but now the study is going on, everything is under control and quarter three '08, we are expecting the completion of the enrollment and everything is under control now. But there were some problems 18 months, two years ago that put us in somewhat in delays, yes.

Junaid Husain - Soleil Securities

So should we assume one year for the trial, about one year for the FDA review and then may be 2011 for a launch?

Robert Taub

Yeah. We're going to file, I mean, lets say, the quarter four of 2008. And what happens afterwards, its going to be in the hands of the FDA. And that we're going to be filing after the study is over, so we're talking of filing still in this year.

Sophie Hobbs

Junaid, we are biosurgery driven company, not IVIG.

Junaid Husain - Soleil Securities

Sure and then actually, Sophie, last question for you. With regards to operating expenses, help me understand how should we be thinking about SG&A expense, just given the ramp-up you're expecting in biosurgery and selling and marketing costs associated with that. Moving forward, should we expect SG&A on an absolute basis to be about the same as this quarter?

Sophie Hobbs

As a percent of total revenue, we expect SG&A to remain steady to 2007. So approximately 22%, excluding the non-recurring expense.

Junaid Husain - Soleil Securities

Got you, thanks so much.

Sophie Hobbs

And a modest reduction in 2009, as a percentage of total revenue.

Operator

And the next question will come from the line of Gregory Hertz with Citi. Please proceed.

Gregory Hertz - Citi

Hi guys. Thanks for taking my questions.

Robert Taub

Hi Greg

Gregory Hertz - Citi

Just wanted to focus in a little bit more on development service revenues for the year. Certainly its been helping your margins out, calculating and that basically in line with your total corporate margins. I am just wondering, as you look at that line item throughout the remainder of the year, as you just mentioned Robert, filing for the Fibrin patch. And then from the second half of the year potentially, looking for a partner, where you detailed that may be interested, and may as part of the contract, be picking up certain of those expenses. How should that play out throughout the year?

Sophie Hobbs

While the revenues from services and grants were higher in quarter one, we feel that the Street consensus of about $8 million for the year is a safe number. You have to bear in mind that these revenues are dependent on the advancement of the product candidates through the development of the regulatory pathway.

Gregory Hertz - Citi

It sounds like we should expect to see the taper off throughout the year, then from the 2.4 level?

Robert Taub

We will give you the consensus later in ’08.

Gregory Hertz - Citi

Okay. And then just moving on to operating margins. I mean, its pretty low, it was in single digits. Are you comfortable that by the end of this year, can you give a good rate that you are comfortable with, Q4 of ’08?

Robert Taub

I didn’t get that question.

Gregory Hertz - Citi

An exit rate for operating margins for 2008?

Sophie Hobbs

Well on the gross margin line, like we have said, we feel confident with the consensus number of approximately 42% and then on the SG&A, 22% excluding non-recurring expenses and R&D should continue at more or less the same levels with some ups and downs, but more or less the same levels throughout the year. So, if you run that through, you'll get to the operating margin.

Gregory Hertz - Citi

So, 9% then for the year?

Robert Taub

Well we're not giving --

Gregory Hertz - Citi

All right, that's fine. And then just moving on quickly, because I just want to make sure that you guys get all your questions in. You said that you are comfortable about your market share, I know, Robert, you won't enjoy this question. You said you are ahead of ZymoGenetics. They reported $1 million in their two months of sales for the quarter, would you put them at 1.5 I guess if you could rise the sales. So, would that mean that you are comfortable that end market sales of Evithrom, I know they are expecting some pricing premium at Zymo, but would you say that's a reasonable level to assume for the quarter? Is there fault in my logic there.

Marc Droppert

Yeah there might be Greg. This Marc Droppert.

Gregory Hertz - Citi

Okay.

Marc Droppert

I think the Street has said between 4 and 5.5, and we're comfortable with that range at this time and whether Zymo's number has some inventory buildup in it, will they be able to sustain that, we're all see overtime.

Gregory Hertz - Citi

Okay. Alright thank you.

Operator

Then our next question will come from the line of Debjit Chattopadhyay with Boenning & Scattergood. Please proceed.

Debjit Chattopadhyay - Boenning & Scattergood

Good morning and thank you for taking my question. Actually most of them have been answered already, but would you speculate on the current market share for EVICEL versus Quixil?

Robert Taub

Well, I think it's difficult to know exactly until we see the IMS figures on an ongoing basis. But I think what's happening in the market is that, ETHICON during 2008 is following a dual strategy. One, which is still grabbing additional market share from Baxter, which was the only supplier of Fibrin sealant. And then in the same time they are growing the market. Also, so they are growing the market by innovating new procedures and going to different kind of surgeons. Like I said, you know, orthopedic surgery, plastic surgery etcetera.

Now, at the same time their pricing is also slightly above the price of Quixil, or Evicel is slightly more expensive. So all in all that leads to an increase of the global market. So it could very well be that the IMS sales report of Baxter we will remain, I don't know I haven't looked at to them and we don't have them obviously for the last months or so but it may well be that Baxter to sales will remain constant. While J&J and OMRIX sales would continue to increase, if you understand what I mean.

Debjit Chattopadhyay - Boenning & Scattergood

That's helpful. And is there a possibility that you could give us a break down in terms of gross margins for the two divisions?

Robert Taub

No, I don't think so. But maybe Sophie will answer those questions. Question is whether we have willing to give gross margins for each side of the business and why not. I already said that --

Sophie Hobbs

Well we feel that we've provided you with a level of guidance which we feel is appropriate at this point.

Debjit Chattopadhyay - Boenning & Scattergood

During the analyst day, you kind of had visibility into the first quarter and second quarter, came -- you roughly guided to $8 million in the second quarter. So at this point you are pretty much half way through the second quarter. Do you think you have any visibility into the third quarter for biosurgery sales?

Robert Taub

Well I mean, you look you can just do your arithmetic. And you also know that we received firm orders from ETHICON. We've explained that obviously etcetera so --

Sophie Hobbs

75% growth on biosurgery sales for 2008.

Marc Droppert

Our guidance really hasn't changed on that at all.

Debjit Chattopadhyay - Boenning & Scattergood

Okay. Thank you so much.

Sophie Hobbs

Bye-bye.

Operator

And this concludes our conference call. I would now like to turn the conference call back to Robert Taub for closing remarks.

Robert Taub

Thanks to everyone and, I'm thrilled to see now the company getting back to be able to answer all of the questions that you have and look forward to the next quarter call in the summer and to a, I believe, a good solid year. Thanks everyone. Bye-bye

Sophie Hobbs

Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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