Hythiam, Inc. Q1 2008 Earnings Call Transcript

Title Hythiam, Inc. (HYTM)

Q1 2008 Earnings Call

May 12, 2008 at 4:30 pm ET

Executives

Lisa Wilson - Investor Relations, In-Site Communications

Terren Peizer - Chairman and Chief Executive Officer

Chuck Timpe - Chief Financial Officer

Rick Anderson - Senior Executive Vice President

Chris Hassan - Senior Executive Vice President

Sanjay Sabnani - Senior Vice President, Strategic Development

Analysts

Jonathan Aschoff - Brean Murray Carret

Kevin Ellich - RBC Capital Markets

Ryan Daniels - William Blair

Donald Hooker - UBS

Raymond Myers - Emerging Growth Equities

Ram Selvaraju - Rodman and Renshaw

Robert Cohen - Weston International Securities

[Merry Vanderbilt] - UBS

Presentation

Operator

Greetings and welcome to the Hythiam Incorporated's First Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Lisa Wilson from In-Site Communications. Thank you. You may begin.

Lisa Wilson - Investor Relation, In-Site Communications

Good afternoon everyone. My name is Lisa Wilson, Investor Relations for Hythiam. Thank you for participating in the Q1 earnings conference call. In a moment, I will turn the call over to Hythiam's CEO, Terren Peizer, who will introduce the other participants.

Before that, I would like to call your attention to the following Safe Harbor statement. The 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 herein 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 made in this call are as of May 12, 2008. The company expects that subsequent events or developments will cause its view to change. Hythiam undertakes no obligation to update any of the forward-looking statements made herein 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 of any date subsequent to May 12, 2008.

With that, I would like to turn the call over to Hythiam's CEO, Terren Peizer. Terren?

Terren Peizer – Chairman and Chief Executive Officer

Thank you, Lisa. Welcome everyone and thank you for joining Hythiam's 2008 first quarter conference call. Presenting with me on the call today is Chuck Timpe, our Chief Financial Officer; Rick Anderson and Chris Hassan, both Senior Executive Vice-President. Also available on the call for management is Sanjay Sabnani.

Before turning the call over to Chuck, I will provide a brief overview of the financials and then to other members of management team to discuss our business model highlights and a summary of our clinical study progress. I want to emphasize that we continue to make substantial progress towards our goal of standardizing and institutionalizing substance dependence treatment and are excited by recent developments with CIGNA. Although, we have multiple opportunities pending, the agreement with CIGNA is extremely valuable to us. And as you will hear later in the call from Rick, we are focused on dedicating our resources to operationalizing this opportunity.

We also continue to carefully monitor costs and control our cash burn. Due to dramatic cost reductions implemented in January and again in April, we have successfully streamlined our operations around the managed care opportunity resulting in the preservation of capital and accelerating the pathway to profitability. We believe that based on the 2008 expected revenues, our existing cash and marketable securities and reduced cash operating expenses that the company will be able to operate well into 2009 or until profitability.

In addition, we are evaluating a number of strategic initiatives that capitalize on our strong asset base to create additional value and capital, and importantly actions that will be non-dilutive to share holders.

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

Chuck Timpe – Chief Financial Officer

Thanks Terren. For the first quarter, we reported consolidated revenues of $11.3 million, which included 2 million in revenues from our healthcare services business and 9.3 million in revenues from CompCare's operations, compared to consolidated revenues of 8.9 million in the first quarter of 2007, which included 1.25 million in healthcare services revenues. The net loss in the first quarter of 2008 was $10.7 million or $0.20 per share compared to a net loss of $10.7 million or $0.25 per share in the same period last year. Included in the 2008 first quarter net loss was a net loss of 1.7 million from CompCare's operations compared to a $577,000 net loss for CompCare in the same period in 2007.

The consolidated net loss included non-cash charges of $3.2 million for depreciation, amortization and stock-based compensation expenses for the first quarter of 2008, compared to 1.2 million for similar expenses in the 2007 period. The 2008 first quarter net loss also included a non-cash gain of $2.3 million from the change in fair value of our warrant liability and $1.1 million in expenses relating to severance payments and other one-time costs incurred relating to actions taken in January to streamline our healthcare services operations.

As of March 31, 2008, the company had consolidated cash, cash equivalents and marketable securities of approximately $35 million including $4 million held by CompCare. In January of this year, we streamlined our healthcare services operations to focus on managed care opportunities, reducing cash operating expenses by 25 to 30% for the remainder of the year.

In April, we took further action to streamline our operations by reducing costs an additional 20 to 25%. We had approximately $10.7 million of cash operating expenses in the first quarter of 2008 including $2.4 million for severance payments and clinical study expenses that will decline significantly throughout the remainder of 2008.

We anticipate that new agreements from health plans, self-insured employers, unions and other third-party payers will add to the current private pay revenue base and result in higher revenues for 2008 over 2007.

We expect to spend cash of 7.7 million, 6.6 million and 5.6 million in each of the consecutive remaining quarters in fiscal year 2008, compared to an average of $11.5 million per quarter in 2007 in our healthcare services operations.

Projected cash operating expenses at the end of fiscal year 2008 will be at a level sustainable in 2009. Assuming revenues of approximately $2 million per quarter for the remainder of 2008 from our private-pay business and without considering any additional revenues from managed care opportunities, we project the net cash burned down to $3.6 million in the fourth quarter of fiscal year 2008.

There were a total of 230 patients treated with the PROMETA treatment program in the first quarter of 2008 compared to 155 patients in the first quarter of 2007. During the first quarter of 2008, there were 40 licensed sites contributing to revenues versus 30 in the same period last year. For the quarter, the company's average revenue per PROMETA patient treated was $6,851 compared to $6,915 per patient in the first quarter of fiscal 2007.

I will now turn the call over to Rick to discuss our CIGNA opportunity in greater detail.

Rick Anderson – Senior Executive Vice President

Thanks Chuck. We recently announced that the company entered into an agreement with CIGNA to be reimbursed for providing its PROMETA based substance dependence treatment program in Texas. The program will be initially offered through a Hythiam managed treatment center in Dallas and will not require any significant infrastructure investment by the company to support the agreement. This arrangement provides lower burden and a quicker timeframe to make the program operational.

CIGNA has already expressed an interest in expanding the program to Houston and we will be looking to do that after Dallas is launched. Members will receive medical treatment, psychosocial treatment and care coaching, and although we anticipate expansion beyond Texas, the clinical and financial impact of the program will be assessed as they proceed.

In order to operationalize this opportunity, we will begin by training CIGNA case managers on the program and providing them with inclusion criteria for our treatment programs that will target high utilizers of medical services. CIGNA case managers will identify members in their population that meet these criteria affecting these members we will transfer them to our trained psychosis who will help the members engage and enroll in the program and schedule visits to the treatment center in Dallas.

As members participate in the program, they will continue to work with our care coaches and during the program's progression we will provide CIGNA with operational reporting that covers metric such as training, treatment participation, treatment retention, and others. Financial metrics based on pre-imposed claims data will be evaluated for the financial impact. Because there is a lag in claims data, clinical indicators will be the first metric that CIGNA will have regarding the success of this program.

The agreement with CIGNA provides us with validation from a national health plan and will greatly enhance our marketing efforts as we pursue other opportunities with third party payers through the United States.

Now, I would like to discuss our business model and opportunities in further detail. As a result of our recent streamlining of our organization, our primary focus is to deliver our disease treatment management offering, newly named Catasys for managed care that over time we expect to also benefit our private pay and government efforts. We have set the bar high and we continue to strive towards becoming a standard of care for substance dependence treatment for our Catasys model based on offering progressive medically and behaviorally integrated treatment program to payers in an effort to improve quality of care, produce better clinical outcome and reduce medical and behavioral cost.

Approaching payers and helping them quantify and understand the magnitude of the problem they face with their substance dependence population and providing them with a solution is of considerable value to our prospective customers and represents an unexploited area for cost reduction and cost of win in the healthcare industry. No one else in the industry is offering a complete solution and the cost of addiction to payers is not typically the cost of treating substance dependence due to years of utilization management on the behavioral side. Instead the cost drivers are medical costs and emergency revisits caused by untreated and under-treated addiction. In addition, substance dependence complicates the treatment of other chronic coexisting medical and behavorial condition making these already expensive conditions even more costly.

Our Catasys programs are designed for increased enrollment, longer retention and better outcome so we can help payers achieve lower cost in the form of fewer emergency room visits, reduce in-patient utilization and hospital readmission rate and help employers an organized labor, improve presenteeism and reduce medical cost, absenteeism and job related injury from the work place thereby improving productivity.

We are currently speaking with multiple customers that have an interest in solutions that improve patient care and control costs by addressing their substance dependence population. Payers have confirmed with us that they are seeking lower cost and improved clinical metric such as reduced cravings and use, treatment retention and improve patient care.

Beyond the CIGNA opportunity, I would like to take a moment to describe what a typical care would experience from the delivery of our complete Catasys offering. Ideally, while entering into an agreement, we would obtain a payer’s population data and perform analysis to identify the Chemical Dependence or CD diagnosis for it and then stratify this population between high utilizers and low utilizers based on historical claims cost incurred. Conversely, the payer can also view this data mining.

Concurrent with the data mining, we will ensure that a trained provider network is available to deliver the necessary medical and behavioral components of our treatment programs and algorithm, designed to take advantage of reduced cravings and better retention. The development of our provider network will start with existing licensees from a private-pay business segment and as necessary expand by licensing the payer's existing network. Network development is a process with years of experience with at this point and depending on member geographic distribution, we anticipate that only 2 to 3 medical providers are required for 100,000 planned lives covered by our program.

After completing both the population identification and network development processes, we will work closely with the payers to make use of a blend of outreach meaning Hythiam contacting the members and inreach meaning payer contacting the members, efforts to enroll identified members into the program. We have assembled the team with substantial experience in the engagement and treatment of substance dependence population and we will leverage this expertise to engage members with the prospect of receiving a valuable, complete treatment program with no significant out-of-pocket cost if any.

High utilizing members will receive the medical and psychosocial intervention and care coaching integrated through our proprietary IT system. The low utilizing group will be dynamically screened and monitored by care coaches, provided education for [inaudible] materials and for appropriate group, care coaches will seek to engage the members and enhance their activation and involvement in their treatment. The screening and stratification will be a dynamic ongoing process and if any low utilizing member progresses the meet threshold of a high utilizer, they would be reclassified as a high utilizer and receive a greater level of intervention.

From identification to enrollment, the care coaching treatment and ongoing monitoring and throughout all the facets of our comprehensive Catasys approach, our IT platform will help from both information sharing and treatment integration to deliver the best possible patient care. We will also ensure that the payer receives timely and accurate reporting metrics including clinical outcomes and return on investment. Our revenue from the payer will be based on a case rate for the high utilizers and a per member per month or PMPM rare for low utilizers. Although there is flexibility in whether or not a payer wants to address only the high utilizers or both the high and low utilizers, the payer will likely experience the greatest benefit by addressing its entire CD diagnosed population in one program.

While the cost savings benefits of addressing high utilizers is obvious to the payers, the data collection, screening and monitoring of the low utilizing population is useful to the plan as well especially with respect to cost of wins by identifying coaching low risk utilizers before they begin incurring the significant claims and become a defined high utilizer.

I would now like to share with you the details of our revenue model. To demonstrate the impact of substance dependence on healthcare cost and the overall opportunity for our Catasys offering, we have data mine commercial health plan records over a three year period using our software model. Based upon the database of 400,000 commercialized and 28 million records representing a composite of commercial health plans throughout the US, we identify the population CD diagnosis incidents and also stratify the population between high and low utilizers based on historical claim costs.

It is important to note here as well that this analysis is being expanded into a database spanning several million lives. We then developed an economic model based on these and other assumptions from our historical treatment experience and projected that for every 10 million lives covered and addressed by our substance dependence Catasys offering, we would generate approximately $175 million in revenue. Incidentally, 10 million lives is an opportunity besides the CIGNA's national membership or the combination of multiple regional health plan.

More specifically, this modeling assume based on the analysis above that the average of 1.6 of the population would have a CD diagnosis in any given year and that approximately 30% of that group would be high utilizers, of which only 30% of that number would enroll in Catasys, leaving the rest to be included with a low utilizing group for monitoring impossible enrollment into a high utilizing treatment program at a later date.

This model also assumes that we would be charging a case rate of $10,000 for enrolled high utilizers and $25 PMPM for the remainder of the payers' population with a CD diagnosis. Many of these assumptions are consistent with the experience of other disease management program approaches and concept. It is also important to note that the revenue figures does not include the opportunity related to undiagnosed CD population. And as part of our delivery model, we will also use our predictive modeling to help identify undiagnosed high utilizing patients for intervention and well maneuvered program. This creates a sizable opportunity if we consider there are approximately 185 million managed care lives throughout the US.

Our calculation of return on investments for the health plan is also derived from the analysis of commercial data as well as from our historical treatment experience. Based on our analysis, we believe that the projected return on investment for a high utilizing population is approximately 3 to $4 for every dollar spent. However, a payer specific return on investment and value proposition experience may be higher or lower based on their population demographic, claims experience and CD incidence rates for their population. Due to a lack of competition and the compelling value proposition we offer health plans and their employer and organized labor customers, all of whom are focused on reducing healthcare cost, we expect significant penetration throughout the managed care industry.

I will now turn the call over the Chris to discuss upcoming events related to our completed and ongoing clinical study.

Chris Hassan - Senior Executive Vice President

Thanks Rick. The results of our completed and ongoing clinical studies and pilot programs continue to be an important part of achieving our objectives and will not only aid in our marketing efforts but more importantly will help provide substantial scientific validation to the PROMETA treatment program that underlies our Catasys offering.

In March, based on the commercial pilot results of treating a community bridges medicaid eligible population in Arizona, we received further validation that our treatment program reduces cravings, improves retention, and allows the recipients to engage more actively in psychosocial counseling, thereby improving treatment outcomes. These results will also help us as we move into addressing substance dependence medicaid populations in the future.

And we’d also like to reiterate that we expect the upcoming publication of Dr. Harold Urschel's double blind placebo controlled study in a peer reviewed journal. You will recall that Dr. Urschel's study show that the pharmacologic component of the PROMETA treatment program versus placebo had a statistically significant reduction of cravings for methamphetamine and further substantiated that our program reduced cravings and improved retention in the treatment. We also anticipate that Dr. Urschel will present the results of this study at a prominent conference this June.

Lastly, we are very excited about the upcoming completion of Dr. Raymond Anton's study out of the Medical University of South Carolina on alcohol dependent individuals and Dr. Walter Ling's study out of UCLA on methamphetamine dependent individuals. The study being conducted by Dr. Anton will likely be completed and presented at a major industry conference this summer and Dr. Ling's study will likely be completed in July or August and top line results will be made available at that time. We believe that the release of data from these and other studies will continue to drive increased adoption of commercial managed care entities and have a positive impact on our private-pay business lines as well.

I’ll now turn the call back over to Terren.

Terren Peizer – Chairman and Chief Executing Officer

Thanks Chris. As you've heard from the senior management team, we are moving towards operationalizing our comprehensive disease management offering on a broader scale and continue to cultivate opportunities with multiple regional and national payers throughout the United States.

On the financial side, we continue to drive down our operating expenses and now have a business model predominantly focused on increasing revenue through managed care opportunities while realizing value and capital from our strong asset base without the issuance of shares. We also continue to receive scientific validation from our clinical studies, which demonstrate that PROMETA is a powerful tool to minimize cravings and increase patient retention thereby enabling the psychosocial therapy to work more effectively.

Because of our strong value propositions of health plan, employers and organized labor and the breath of population coverage in the managed care plans, Hythiam is strongly positioned to institutionalize and standardize substance dependence treatment. We are excited about our current positioning of all our opportunities and we look forward to sharing more success with you in the future.

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

Question-and-Answer Session

Opeator

Thank you. (Operator Instructions). Our first question is from the line of Jonathan Aschoff with Brean Murray Carret. Please go ahead with the question.

Jonathan Aschoff

Hi. Thank you. Hi Terren.

Terren Peizer

Hi.

Jonathan Aschoff

I was wondering, can you just be anyway specific as to what CIGNA most used in their selection process and may be if you can help us a little more on what triggers going from Dallas towards a Houston as you suggested or the rest of Texas and outside of Texas and national, can you be a little more clear on those triggers?

Terren Peizer

Sure. Firstly, the relationship with CIGNA goes back pretty much to the fourth quarter of ’07 and I would say the tipping point clearly was the Urschel's double-blind placebo controlled data not so much by what the data said specifically but by the very fact that it scientifically validated that there was a scientific basis beyond the mechanisms of actions of the preclinical data and beyond the many pilots and clinical experience of the doctors or providers around the country and the patients, but the scientific validation gave them the comfort of moving forward and then looking beyond and how it can impact their own patient population. They did exhaustive due diligence. They spoke to every possible or I should say they pickup every stone unturned that they came to the conclusion that they believe that this would benefit their patient population. They intuitively knew it would drive down medical cost as well. But obviously before they could roll it out throughout the country, they need to see it in their patient population and then see what the ROI or at least project the return on investment would be in terms of the cost savings relative to the payment of the Catasys offering.

As far as the expansion, I think it's safe to say they would like us to be in Houston tomorrow. We are going methodically to operationalize Dallas. We don’t think it will be too long until we are fully launched in Dallas and then we will begin our launch in Houston. And again it was CIGNA’s intention that we would expand throughout Texas and then in the process, evaluate the data both clinically and financially and to determine the mechanism for rolling it out throughout the country.

Jonathan Aschoff

So it's accurate then to say the Texas is purely executional and ex-Texas is success based.

Terren Peizer

I would say that’s accurate. And I think, I don’t think there is a question, when you look at the treatment success of a little under 3,000 patients that have been treated, when they talk to the providers, when they look at the data both whether it be something like the Arizona data or whether it be something like some of the pilot studies, I don’t think there is any question in their mind of the clinical outcomes and I don’t think there is a question remain about the cost reduction. They just have to create if you will the right pricing mechanisms rolled out throughout the country.

Jonathan Aschoff

Okay. Thank you.

Operator

The next question is from Kevin Ellich with RBC Capital Markets. Please go ahead with your question.

Kevin Ellich

Good afternoon guys.

Terren Peizer

Hey Kevin.

Kevin Ellich

I just had a couple of questions to start of with. Maybe Rick could come back on and explain. He went through his assumptions on the Catasys model with the PMPM basis and I really wanted to go back over the, you know, he mentioned for every 10 million lives you guys could generate about 175 million in revenues based off of the diagnosis and 30% of the high utilizers, 30% would be enrolled in the Catasys I believe. So does that equate to 900,000 lives or how should we think about that?

Terren Peizer

Kevin because I understand that something slip me a note during the call and I apologize that when Rick was speaking the mic might have been a little far away from, so I am not sure if you have heard it.

Kevin Ellich

Okay.

Terren Peizer

Were you able to hear it clearly?

Kevin Ellich

Kind of no, but at the same time, if you could just address those points that will be fabulous?

Rick Anderson

Sure. The assumptions I was referring to only 10 million member lives is that the diagnosis rate for CD within that population would be about 1.6% and that was based on the analysis of claims data that we had done, which we are also continuing to expand and that 30% of that CD diagnosed population would be a high utilizer and then that 30% of that high utilizing population would be our enrollment rate.

Kevin Ellich

Okay. So it's actually 6.1% of the 10 million first and then 30%?

Rick Anderson

Correct.

Kevin Ellich

Okay. And then the case rate basis you said would be $10,000?

Rick Anderson

For the high utilizing population, $10,000 case rate, for the low utilizing population if you will at $25 per member per month.

Kevin Ellich

Per member per month. Got it. Okay.

Terren Peizer

Of the CD population.

Rick Anderson

Yeah, the CD diagnosed population

Kevin Ellich

Sure. That’s helpful. Thank you. Just looking at the Q1 results, volumes in the various buckets that you guys reported in the Q were a little bit lower than expected. Is that seasonal or are you guys seeing any impact coming from the economy or anything like that?

Chuck Timpe

Let me just address that. I am not sure lower…

Kevin Ellich

Then my assumptions?

Terren Peizer

Okay. Keep in mind, I’ll tell you three things. One is keep in mind we reduced our cost structure by 45%. Yet, we are not really reducing our revenues; it's to the extent that you want to consider we are reducing our revenues. We are not really reducing our revenues definitely in low single digits. So, it’s difficult to take that much capacity for example out of the system and even if you recall exit certain areas to focus on the managed care and disease management opportunity that yields at CIGNA that hopefully will yield a lot more in the not too distant future. So, from that basis, we would -- I mean the fact that we can maintain in the private pay segment $2 million a quarter this year, although I suspect that we will see a pick up as a result of the clinical data plus the peer review publication then Anton and Ling's data et cetera, we will see a pick up in that I would imagine. But to maintain $2 million quarterly in private pay by retaking so much out of the cost structure is I think a testament to still the successful PROMETA in the field and physicians and patients our experienced with it.

With respect to the economy and impact and with respect that it is a private pay, it’s a relatively high cost product, generically speaking $12,000 for the alcohol treatment and $15,000 for the stimulant treatment. Undoubted any newspaper articles in the Wall Street Journal as I have that talked about elective medical procedures, high cost elective medical procedures being down significantly in the first quarter and it was down significantly in the fourth quarter. So despite that headwind to still maintain 2 million in revenue base private pay despite the cost take out and then finally in the substance dependence field in general, there has been as we reported I believe last call, there have been a number of closures due to again the lack of high priced elective medical procedures.

I will say one more thing on that. I think a lot of times and I know personally a lot of times when families, individuals and families seek on a private pay basis to get treatment, they look for all ways, they might not be able to afford it, they might not have the cash for it, they look for all ways to pay for it including borrowing against their homes, which is obviously more difficult to do and borrowing against their already maxed out credit cards, which is increasingly more difficult to do. So I think despite that backdrop, I actually believe we are doing quite well by maintaining that $2 million rate, but we will look to expand it.

Please keep in mind as well that the private pay segment is still only 8% of the overall substance dependence treatment market. Again as Rick pointed out, given the value proposition, we are highly confident that we can have significant penetration across the 185 million lives of managed care and then doing the math that you have inquired about in the beginning, we create a very big revenue opportunity but that's just a grow-stop revenue opportunity, it’s what we expect again going through that 30% being high utilizers and then 30% of that number being those that are actually enrolled, you get down the numbers that are pretty consistent with the industry.

Kevin Ellich

I got it. Thanks. That’s helpful. And then one more quick question on the licensee revenue build. The ASP came in at like 56.78 I think, which is down year-over-year and sequentially, is there anything going on the pricing that you could talk about?

Chuck Timpe

Late last year we implemented a patient of systems program to help us financing some of the patients that just could not afford the full price. So together with our licensees, we’ve offered a, as I just said, a discounted program to some of those patients to qualify for it and that’s why our overall price per patient is lower in the private pay licensee section.

Kevin Ellich

It still should have stay at these levels do you think or I guess is this a good run rate going forward?

Chuck Timpe

I think it is, yes.

Kevin Ellich

Okay, thank you.

Terren Peizer

I will say we should definitely point out that we still are not making claims to grow the revenue base. We are waiting for the peer review publication of Urschel to start making claims and that will be the first time we could actually grow revenue. And again, as I said over and over publicly is I believe our 2 million in revenues is much of the response by osmosis than it is by anything, by marketing or selling.

Kevin Ellich

Sure. And then I just have two quick ones for you Chuck. Cash and equivalents look pretty good. Of the 23 million in short term, how much is invested in auction rate securities and have you seen additional auction sale?

Chuck Timpe

We still have the 11.5 million in auction rate securities that we reported last time and as you know there -- right now those are still fairly illiquid in the marketplace.

Kevin Ellich

Okay. Do you think that those will have to be transferred over to long term investments or impairment charges coming down?

Chuck Timpe

We’re watching it. We don’t know yet. I think it’s a question of how the markets play out. As of moment, as of this point in time, we believe that the liquidity markets will free up within a 12 months period, so we've kept them in short term.

Kevin Ellich

Okay, thanks.

Terren Peizer

I will elaborate a little further on that since I am internally involved. We have the -- although we do not anticipate accessing that money this year and we are really more focused on it for next year, the reality is that there are loans taken place throughout the street now against those securities. Obviously, since we don't need the cash now, we are not going to borrow against it because the cash flow is positive right now for us. So, it doesn’t make sense to borrow the money at this time, but there are loans available throughout the streets and there actually are some trades starting to take place, I am sure you will read about more in the future. There is a second albeit slowly. The problem with the secondary market is that people really don’t want to let go off these securities at any significant discount. The pricing of them to-date -- the lowest pricing to-date is what we’ve seen out of UBS, which has been approximately $0.95 on the $1 at the lowest and John Thain of Merrill Lynch was out last week saying that he expect all of them to be refinanced within the year and he believes that and Merrill Lynch has believed that they should be carried at par, a number of firms on Wall Street have taken similar position.

Kevin Ellich

Excellent. Thanks guys

Operator

The next question is from Ryan Daniels with William Blair. Please go ahead with your question.

Ryan Daniels

Yeah guys, good afternoon. Couple of quick questions and I appreciate all of the detail on the revenue build and the details about the CIGNA contract. I guess the first is, are there any portion off add risk fees going forward that you either contemplate with CIGNA or the broader business model? I know that something we’ve seen in the DM space in the past kind of provider putting their fees at risk to improve their ROI. So anything in the future with the CIGNA contract in that regard?

Terren Peizer

There’s nothing currently that risk in that relationship. I would anticipate that as we go forward that some of the fees may be at risk in different arrangements as you said, it’s certainly something that's been common in the industry in terms of people looking at the ROIs.

Ryan Daniels

Okay. And then on CIGNA contract, it sounds like the CIGNA case managers are going to mining their internal claims data to identify the high utilizer and then try to encourage them to give PROMETA and pass it along to you versus Hythiam actually running through the predictive modeling. Can you kind of address that why in the situation that they decide to do that portion of it internally before turning over patients and with the flow of Catasys that you think you might be able to identify more patients to enroll?

Rick Anderson

Well, I think that just to go back to something that was said earlier, the CIGNA relationship developed prior to when we had the full Catasys offering. So we came at that originally with PROMETA as a standalone solution and have added components of the Catasys offering to that to demonstrate what we can do with that program. So I think that what you are going to have over time with Catasys in total would be that we would do some of that externally or internally to Hythiam either way in terms of analyzing the data to understand what the high utilizers are, I don’t know that that matters. We decided and CIGNA decided with us that in this significant program they are going start by transferring the people to us but we have left the door open on a go-forward basis to be able to do outreach like I discussed later on in terms of other programs that we would be doing. So I would anticipate that there is possibility that we could be doing both inreach and outreach in the future. We’ll see how that develops over time in terms of the program and what we both think adds the most value to that.

Ryan Daniels

Okay, that’s helpful. And then if we think of the CIGNA contract, is there any exclusivity i.e. they have the rights to that market and obviously you can't sign other payers or is it still open for you if other opportunities open up in the state of Texas in the future?

Rick Anderson

There is no exclusivity.

Ryan Daniels

Okay. And then last question I had. I don’t want to beat this to death, but should we assume that the fees are somewhat similar to the CIGNA contract? I don’t know if you can discuss that in particular about to those fee structures you laid out in discussing the revenue build, the 10K and $25 PMPM, is that fair to assume CIGNA similar to that?

Chuck Timpe

Let me take that question. The bottom line answer is yes, but let me explain. The CIGNA relationship precedes the completion of our Catasys product and originally when we were discussing with CIGNA in the fourth quarter, end of the third quarter, beginning of the fourth quarter of '07, the discussion centered around reimbursement because we didn’t know when, what will come first and we didn’t know when the Catasys offering would be complete. Sine and subsequent to Catasys being complete, we have gone back and drawn in more of the services out of the Catasys offering working backwards from reimbursement rate. So it's commensurate with the pricing of the Catasys offering but it's structured a little different. If you notice in the press release, it's structured as a provider being reimbursed. And then as you noticed that it still ties back the services of psychosocial care management and coaching. So we kind of -- we reverse integrated back to Catasys if you will. So it's a little different. The subsequent relationships that you are going to see and subsequent agreements both regional and national are going to be the Catasys offering working from there.

Ryan Daniels

Okay, perfect. That’s exactly what I was looking for. Thanks guys.

Operator

The next question is from Donald Hooker with UBS. Please go ahead with your question.

Donald Hooker

Hey, good afternoon. In terms of the kind of thinking about your income statement over the next few quarters, I mean what is a reasonable ramp rate for the CIGNA contract, it's sort of the big unknown here? Obviously a big win for you. Is kind of a trickle trickle, I mean can you kind of give us a sense of the patient volumes you might think coming out of that?

Terren Peizer

Well, first of all, I just want to clarify because I think when Kevin Ellich was asking question, something might have gotten confused. When Kevin was asking that we have two obvious sections in our balance sheet, the cash and cash equivalents section which was 11 million and change and then the marketable securities which was 23.7 million and change, Kevin was asking out of the marketable securities portion and that our total cash and marketable securities portion. So if you are trying to figure out how we were so sure that we won’t need to access that money or et cetera that I just want to clarify it. Obviously the total cash position was approximately 35 million and subtract that's a little bit from CompCare got you to 31 million in total. So I just want to clarify that. Then obviously it's new product as well. I think that’s fair to say.

Donald Hooker

I understand.

Terren Peizer

There are several ways that we are going to go about it to -- it's obviously going to start out slowly as we make sure that all of the eyes are dotted and tees are crossed to make sure what's important to CIGNA as well is that this is executed smoothly that their members go through the process as seamlessly as possible that it's a good experience for obviously the patients and the provider. So we are going not focused on the ramp of revenue per se initially, we are focused on execution and delivering the best possible product to CIGNA and their members.

That said, once we got it smoothed out, we are going to go as quickly as possible, run it quickly as possible. But I think if you still want to use the backdrop of a mix model that he outlined, the revenue model, and you assume that -- I don’t know, I would assume somewhere in the neighborhood of maybe 10 plus percent of CIGNA's overall population might be in Texas and then you could kind of work backwards and figure out how much the high utilizers would be and then figure out a ramp of that. Your guess would be as good as ours. That’s why we are not going to give you any kind of forecast right now because as a lot of people said, I just would be lying to you if I give you a number because we don’t know yet. But I think that's the basis to get a gross number and then if you kind of figure out at what point we are hitting on our cylinders. That said, relative to the company as a whole, I caution everyone or actually I shouldn't caution, I should welcome to offer to everyone that it’s quite possible and particularly in our regional plan that we started off with the Catasys offering and we started having more predictable revenue stream as a result of the Catasys offering.

Donald Hooker

Okay.

Terren Peizer

And hopefully those will be agreements that we could solidify obviously the sooner the better we can have contracted revenue streams.

Donald Hooker

Okay. And then I guess following an earlier question, I mean, the number of active sites in down. I know this is purposeful for you guys. Can you just elaborate on that, is there certain regions you are focusing on now?

Terren Peizer

Chris, you want to take that?

Chris Hassan

Yes. In January, we announced that we are refocusing and tooling and Terren has kind of discussed some of the magnitude of that, but that is really what's driving this. We are focusing deeper into fewer markets and we are seeing that that strategy is paying off and that’s why even in fewer markets the number of patients that were treated and the revenue that we saw, the market was marginally increased. And so that’s really what’s driving that.

Donald Hooker

Okay, that’s fair enough. And I guess, I know again the focus is managed care, but in terms of the drug course, there are a couple of pilots. I mean are you just kind of scrapping them or like I think Fulton County and there are couple of other ones in the past we've talked about I think, you know, I know that's not a focus for you now strategically, is that kind of scrapped?

Chris Hassan

It's not a focus for us as much strategically now, I mean that's true. However, those counties that are still engaged, we continue to work with them and work through the process to help them be able to see how they can best utilize the PROMETA treatment program to treat their clients.

Donald Hooker

Okay.

Terren Peizer

I think also as more -- because of managed care, you are going to get a lot more providers and a lot more patients being treated. You are also, I don’t want to beleaver the fact, but you are also real close to double blind placebo controlled peer review journal article on the Urschel study that will go a long way to validating PROMETA'S raging uncertainty about PROMETA et cetera. I think the rest of the country is getting there and I think the justice has been low as well. And I think over time the managed care, those 185 million lives will push or pull along both the private pay and the justice system and other government programs and we suspect that as data comes at peer review publication of these important aspects, I think we’ll start having more and more of those conversation.

Donald Hooker

Okay, great. Well, I will jump off. Thanks for your comments.

Terren Peizer

There is also the Washington study that's being done.

Donald Hooker

Yeah, that's true.

Chris Hassan

We were very encouraged that the $395,000 stay within the state budget to continue to treat the patients that were in that program and then to finish that pilot and then of course to do the University of Washington review of the results. I mean that’s very encouraging as well.

Donald Hooker

All right. Thanks again.

Operator

The next question is from Raymond Myers with Emerging Growth Equities. Please go ahead with your question.

Raymond Myers

Thank you. Terren, something you could describe the CompCare business strategy, there was $1.7 million loss in the first quarter, can you explain what they are tracking to do this year?

Terren Piezer

Strategically what they are tracking to do the $1.7 million loss also included a couple of events including the termination of the CEO and the severance payment related to that. The new CEO came on beginning of this year, and then also some of the plans that they had discontinued membership and they were paying out claims related to those that had already terminated. Their strategy is around expanding their business. They are looking more and more at ASO type arrangements and things that don’t have risk and then they also have plans to expand into other products that would have higher margins.

Raymond Myers

So I guess the bottom line for you is will they -- when will they return to breakeven?

Terren Piezer

Well, I think that they are looking in terms of what they have said in their Q and other places is that they believe based on these new agreements that they have in place and some rate increases coming online that they have sufficient cash resources to move through this and into their new strategic direction. So we don’t have any plans at this point in terms of providing them any funding. I guess if that's what you are getting at, they are continuing to provide us with the services that we need from our strategic standpoint.

Raymond Myers

Okay, good. SG&A expense in the second quarter, looks like it would go down again based on your cost reductions in April. Can you give us a sense of what special charges we should expect in Q2 and then what kind of run rate SG&A and R&D would we look for after all this cost reductions are through?

Chuck Timpe

There won’t be a significant one time charges in Q2 as much as we had in the first quarter, but we were just cost throughout so, through salaries and benefits as well as other operating cost, that's pretty much across the Board reduction of, as we said 20 to 25% from what we have been running at.

Raymond Myers

Okay. Can you give me a number? It's tough to estimate because there is so many one-time charges in Q1 that to say it's 20 to 25% off, it's off of what base. So can you just give us that what run rate SG&A do you expect to have after the April cost reductions?

Chuck Timpe

We are looking at -- again, I didn’t break it down this way when we looked at our projections, but we have got -- we are looking at total operating cost of about $7.5 million in Q2 and then down to 6.5 million in Q3. But I haven't worked through the details of breaking out between SG&A and the other operating costs. When we said in our on the call that our total cost expenses -- total cost expenditures are going down to 5.5 million by the fourth quarter. So we are taking costs out in all areas.

Terren Peizer

That said, let me interject. I mean the clinical study expenditures winding down. You all intend some purposes, it goes down significantly in the second quarter and down dramatically from there. So I think that was one of your question?

Raymond Myers

Yeah, that will be the R&D side?

Terren Peizer

Correct. And from an SG&A standpoint, it's commensurate. We can work with you and give you like theoretical constructs, but we can't obviously give you specifics.

Raymond Myers

Okay. So that’s not including the CompCare or the behavorial health side of it?

Terren Peizer

No, no.

Raymond Myers

Okay. So that would include cost of healthcare services, the SG&A, the R&D and the depreciation?

Terren Peizer

Yeah, the depreciation will be consistent. The clinical R&D expense going down dramatically. The severance, the bulk of the severance is in the first quarter won't be seen in the second quarter. We also because it's a time again it was before we had signed CIGNA and before we had visibility in other managed care relationships and as well as we were at the throws obviously when we initiated the first week in April that was something we were focused on in March. And if you recall in March, particularly around mid March, the world looked very bleak and we just didn’t want to take any chances. So we initiated. Of course in the January months, we certainly didn’t even have an auction rate security fail, an auction failure. So there were circumstances that given the outlook and the environment in mid to late March that we initiated in April, the good news is what we feel now that we have traction on the managed care side, now we feel we have a model that we can work with our [inaudible] and now we are going to refocus on ramping revenue.

Raymond Myers

It certainly seem that your cost would be down drastically if you are talking about 7.5 million through operating expense?

Chuck Timpe

Right, and then going down to 5.5 million or 5.6 million in the fourth quarter. Now the good news is that those are things we can’t control. We can’t control revenue yet, particularly if we are not making claims, but we can’t control our expenses.

Raymond Myers

Well, and just to make sure I am thinking of this correctly, G&A, R&D and depreciation totaled roughly $14 million in the first quarter and you are saying that's going to be cut in roughly half to 7.5 million and then 6.5 million?

Terren Peizer

I think you are looking at the…

Chuck Timpe

You are looking at CompCare in that number. We had 13.5 million in the quarter in those categories in our healthcare segment and that includes, what you have to remember, that includes stock-based compensation of $2.3 million in the first quarter. So we have to look get down to the cash operating expenses is how you want to look at it.

Raymond Myers

So these numbers 7.5 and 6.5 are nearly cash operating expense?

Chuck Timpe

That’s correct. That’s what we said, right.

Raymond Myers

Okay. That’s why the total is confused. Okay, I will sharpen my pencil. Thank you.

Operator

The next question is from Ram Selvaraju with Rodman and Renshaw. Please go ahead with your question.

Ram Selvaraju

Thank you very much for taking my question. I just wanted to ask about the eventuality of off-label usage of one or more components of the Catasys pharmaco therapy regimen by external parties and how specifically the mechanism that Hythiam has in place to prevent such activities from occurring, works and how that represents an effective competitive barrier to entry? For example, if we think about once the Anton and Ling studies are published and once the Urschel data is out in a peer reviewed form, whether or not that might reduce companies that supply the agents utilized in the Catasys program to begin encouraging the off-label use of that?

Terren Peizer

Okay, I will start it off. The unique nature of our disease, we call it comprehensive treatment and management model is that at the services based model, not a pharmaceutical based model #1. #2 and to our knowledge people in delivering healthcare services that would include insurance companies, providers et cetera, to my knowledge there has never been someone who has violated intellectual property knowingly as a provider or as a service provider because it’s obviously the liability associated with it would be -- it's pretty clear if they are violating our intellectual property, they pretty much their lawyer would tell them they would lose on the infringing side pretty immediately and that will be trouble damages, of course I’m not sure what their revenue would be, what they could possibly charge without being in the construct of our model and without having the use of pharmacologics. And again I want to point out that the pharmacological aspect is one component of our disease management model and it’s a lot besides the psychosocial, the case management, the care coaching, the quantification of the cost, their calculation of the return on investment, the predictive modeling, all of this combined is really what Catasys is and we believe and it was always envisioned this way is really what to your point offers the greatest protection of our franchise because of a) it's protected by the intellectual property, b) it's protected by liability insurance and c) there is not an economic basis for someone to copy it because I’m not sure how they are going to get paid for it.

Ram Selvaraju

Okay. And it's not your opinion at this point that medical practitioners who routinely see patients suffering from addiction would take the Urschel, Anton and Ling study data and use that as a basis for essentially going out and utilizing components of pharmacological part of the Catasys program off-label without using the actual program itself?

Terren Peizer

Right, and here is an important distinction, and frankly when we first started several years ago, it was a certainly a novel idea let's say today. And in fact, if you look at it in a pharmaceutical model, for example, a physician uses anything he wants off-label to treat a patient as he feels is warranted in the practice of medicine. The difference is that so that would be -- they would be utilizing someone’s used patent presumably. The difference is is the pharmaceutical company, that the uses their patent because the more they sell of the particular underlying pharmacologic that more they benefit by. In our case, we are not that's not what we are selling. We are selling our comprehensive disease management program #1. #2, we do care very much that someone uses any aspect of our intellectual property that infringes on our intellectual property.

But more importantly, I am still struggling to find the cost benefit to that provider in doing so. And I would also say liability is a powerful because you have to – if a treatment worked a 100% of the time period, it will be more of a concern, but it doesn't, so there is liability. So the fact is that you need the right intake and assessment criteria, the right exclusion criteria, the right dosing algorithms, the right education and training, at somewhere down the road you are not going to be practicing best practices. And that’s a liability that not only providers don’t want to take on, the insurance companies don’t want to take on, and even more to the point I’m still not sure what the reward is. Can there a road run? Yes, there could be a road out there that does it. Are there people at Microsoft, Windows? You bet. Do they build a successful business without that? In context of that, you bet.

I think from our standpoint you have to understand that the anchored drug flumazenil is only used in two places. It's used in the emergency room to wake someone if someone try to commit suicide and he swallowed a bottle of Valium. It's an anecdote to a benzodiazepine, it's a benzodiazepine antagonist and if someone was getting surgery and to wake him out of anesthesia, so it's only used in a hospital. So, a physician would be hard pressed to explain why a patient made a scheduled appointment for next Tuesday at 10.30 because they neither are going to overdose on Valium and be rushed to the physician's office for care. So and then alternatively a physician will be hard pressed to explain why they are performing surgery in their office. So I think as if I don’t mean to beleaver the point but there is obviously so many obstacles. And more to the point I think interestingly is that the third party payers that we are working with, the managed care segment that we are working with, it’s not even a low level hurdle, low level to high level hurdle for them. If anyone we try to get around that angle it would be the insurance company will say, why shall I pay for this. But in fact, the insurance companies and managed care segments are making a different claim. What they are saying is we want this comprehensive management program and that’s the role value, it’s not the pharmacologics.

Ram Selvaraju

Right. And just to further discuss from flumazenil. Clearly there is going to be in the course of this year significant body of clinical data indicating what the impact of the therapy is going to be. But could you talk a little bit about sort of the ongoing efforts out there in the scientific field to clarify the mechanism of action of flumazenil specifically and effect that may have on GABAA receptor subunit composition?

Sanjay Sabnani

Yeah Ron, this is Sanjay. While it’s exciting what’s happening in literature and I know that you have been aware of it, some of the understandings of the effect of flumazenil on the GABAA receptors both on a translational and transcriptional basis. The issue is the field of addiction treatment is so far removed from hard science that there really is a wide gap there. And I think we as a company are taking a leadership role and actually basically trying to correlate real life human results with preclinical both animal as well as cellular and I think you are correct in your understanding that this will be a very seminal year in terms of all of those pieces fitting together nicely. Every time I do a literature search, just over ensuring to see what keeps coming out of their independent labs all over the world.

Chris Hassan

But the amazing thing is just interjecting to that, we’ve seen cell line data, we have seen animal data, all substantiate in the mechanism of action. What's interesting that and I don’t know when the functional MRI data of Dr. Anton's study will actually be available, but that might be the first time we ever see validation in a human model on our mechanism of action or at least some correlation. One of the benefits of the Anton study was it was such a slow study was the -- it's largest functional MRI study to-date. So, that will be very interesting. If that comes through and show something, we would have the first time where we’ve been able -- some of the data validate on all three levels.

Ram Selvaraju

Okay, thank you. That’s very helpful.

Operator

The next question is from Robert Cohen with Weston International Securities. Please go ahead with your question.

Robert Cohen

Hi guys. Can you guys talk a little bit about the CIGNA deal? In reference to the treatment on alcoholism meth and cocaine, which one do you believe you will be treating mostly percentage wise and give a breakdown also of where CIGNA might I think most of the treatment will be in that area?

Terren Peizer

Actually a good question. As you know since the Urschel has done two clinical studies on meth, you would think there are only methamphetamine addicts in Dallas, but I would say like all populations alcohol is still going to be the biggest segment of the patient population that we treat. Commensurate with that is the fact that when you are talking about high utilizing population, high utilize our medical services, you are talking about severe alcoholics as the target market. The lesser severe or functional type alcoholics might be more cost effective depending, might be more effective to use kind of like a low touch more psychosocial model versus the more severe alcoholic. And of course we look forward to Dr. Anton's data to see if we can validate in a severe alcoholic population if we’ve had an impact relative to the high utilizing model of our disease management model. So, we expect most to be consistent with the industry, we expect the biggest concentration to be alcoholic and then cocaine then meth.

Robert Cohen

Can you talk about CIGNA, it looks like it took about six months to get and I believe Terren on the last conference call, earnings you stated you were talking to about 10 different managed care providers? Can you tell us how many of these you actually start talking to prior to CIGNA and since you landed CIGNA have you gotten any close from any of these now wanting to move on a more faster pace because of the CIGNA deal?

Terren Peizer

Obviously the CIGNA deal, they always say the longest is referred and we are hopeful that that’s in fact the case. I clearly believe that CIGNA is a very powerful name in the market. They are known to be an innovator. They are known to be also the toughest to get something with. So, we are very confident that there will be catalyst for many more agreements as well as the 10 that you are referencing from the fourth quarter call that was about 45 days ago, those are obviously going to feel more comfortable moving forward because we get asked all of the time who else is using this. And as we know in any commercial operation, the first is the most difficult because there is no reference and people love comfort in numbers.

If you would have asked me a while ago, I would have said CIGNA was going to be even first, but so we obviously feel that we will be having more agreements. We obviously believe that the value proposition that we’ve outlined today is so compelling, it's hard press to find any healthcare plan that if their customer benefits, their customer being the employer and labor union benefits by not only lowering medical and behavioral healthcare costs, but also enhancing productivity, there is an another medical treatment that I know of that does as much as an effective treatment program for substance dependence. So if your customers wants the product and it lowers your cost, I really believe we are going to see traction throughout the country and I do believe CIGNA was a powerful catalyst to getting us there.

Robert Cohen

I just got one other question. There seems to be a feeling out there that your procedure you use, protocol whatever you want to call it, get significant results with helping these people with this addiction and I happen to been lucky enough for us able to talk to Dr. Urschel about three weeks ago and he made it real clear to me that he plans on using your product along with other therapies that is yours because with treating meth I asked him what his rate of getting people better were I think he said it was less than 10% and he believes very strongly that if you used Hythiam along with the other therapies that he has used, he actually stated at that he thought he could get a 90% success rate. Is it my understanding that you guys welcome to work with these other therapies, you don’t want to be singled out and say these other therapies you can't use with it, can you give us your philosophy or policy on that?

Terren Peizer

Actually that speaks right to the heart of our comprehensive treatment and management program. We are frankly at the end of the day PROMETA we can’t deny got it here. PROMETA is a powerful tool and it will be continually used throughout the behavioral health field in our opinion. There might be variations of PROMETA, but in reality we are agnostic. We’re about disease management, taking a problem throughout the country and created the first integrated solution that incorporates all of the finest innovations in disease management and comprehensive treatment, synthesize it into one product offering to obviously provide the solution to one of the [inaudible] of medical problems. And so, yeah, we’ve -- remember everything is on a cost benefit analysis. We start with the benefit and how do we improve the benefit and also lower the costs and I think that’s basis the backdrop. I don’t -- what PROMETA does and it's not even appreciated in the clinical study data that you will see. But those are scientific study, where PROMETA really does strongly is in a context of comprehensive management with a strong psychosocial program with support groups, with any other pharmacologic effective treatment. What the Catasys is platform does is it takes whatever percentage you want to apply on a pure pharmacologic basis and takes it close to 100 percentage you can possibly get and that’s how you are going to drive medical cost down and treatment success up and get adoption across those 185 million managed care lives and then pull in all of the government and private pay programs.

Robert Cohen

Okay. And just one other quick. The gentlemen from Rodman & Renshaw asked you a question about could a doctor basically go out and do what you are doing. Can I assume with what you guys have had to go through to get this deal with CIGNA that CIGNA isn’t just going to reimburse that doctor for doing a procedure based off of what you guys were doing without having a deal with them or could he?

Terren Peizer

Yeah, understand anyone in the chain that contributes to an infringement, there is parting to that infringement. That’s why in healthcare services, you don’t see infringement of intellectual property. Again, our model is a services model based on comprehensive disease treatment of substance dependence.

Robert Cohen

Okay, thank you.

Operator

The next question is from [Merry Vanderbilt] with UBS. Please go ahead with your question.

Merry Vanderbilt

Good afternoon gentlemen. Long call, so I am trying to be quick.

Terren Peizer

I thought you got a question.

Merry Vanderbilt

First of all, for the PROMETA treatment as a Catasys this is -- that's the wrong name so I am sorry, but that’s a complete treatment, so to simplify the PROMETA, you had originally thought on the third party basis would be around maybe 2,500. Is that still sort of the target with CIGNA for that portion of the treatment?

Terren Peizer

No, no, let me clarify. If you go back in time, PROMETA was a three-legged store. It was the pharmacologic which are three FDA approved drugs used off-label within the treatment protocol. With flumazenil, hydroxyzine and GABAA patent, that's the pharmacologic portion. The other portion was the psychosocial treatment and the third leg of the stool, it was a nutritional recognizing that all substance individual are well nursed. So those three forms PROMETA that was being sold on a private pay basis today for $15,000 against for CIGNA $12,000 for alcohol. We imagine that pricing will come down commensurate with the adoption managed care et cetera. We then went off into the justice system where we were looking in the justice system given the, again not a commercial enterprise but in the justice system and given the stretch budgets of states, counties and municipalities, we initially before there is even any data out, we had a $2,500 licensing fee on that.

What has evolved to now is Catasys to clarify for you, Catasys is our comprehensive disease management and treatment program that provides not only the three legs of stool, but also provides things like care management and coaching and different algorithms within that and all the software like I said we’ve quietly over the last several years have spent millions of dollars on the software platform that has provided a very valuable tool not only to create the value proposition to our health plan of their own data, but further to provide the predictive modeling to be able to keep patients out of the high utilizing population from the low utilizing population and then as well to provide the financial and clinical data to further expand our business. So, it's a definitely much more comprehensive than what we knew as PROMETA.

Merry Vanderbilt

Okay. So it's PROMETA plus basically?

Terren Peizer

It's PROMETA plus a lot of things that insurance companies' need and frankly one day we expect state programs, justice system county programs to adopt a similar disease management platform from us. The reality is that there is no magic bullet pharmacologically for substance dependence treatment and all of these pharmaceutical models you see for substance dependence treatment are I think that's in for failure without a comprehensive management program in place and we are not the only ones that recognize it, it's the whole healthcare system that recognizes it.

Merry Vanderbilt

That’s what I heard back from the doc. So, the last thing in this I don’t ado do but to make it simple for those of us who are little smarter than the others, if you would have think of it in terms of the sales to-date of PROMETA on a same store basis. In other words, I have got a doc that's been prescribing let's say for a year. Have you been able to track whether there is an increase or decrease as to his using the regimen? In other words hopefully you see an increasing trend, but I am just wondering if there is anyway you can track it from that level rather than any a number of service centers and the fact that the patients have gone from 150 to 230?

Rick Anderson

No, we’ve looked at different angles in different ways to look at markets. There tends to be that the people that have been in with us the longest have seen growth in their utilization of PROMETA. Now, one other things that's really important that Terren brought up multiple times this afternoon is that to-date we have tried to take a very ethical and high standard with how we marketed this and we really haven’t even started marketing it per se. So without any claims, without any lot of activity to drive patients into that market, what tends to happen is the physicians are utilizing this as another tool, in fact Urschel had mentioned in their armamentarium or the regimens that are available to patients and then their clinical presentation of these patients coming in that they make a diagnosis clinically as what's the best treatment regimen for them.

We also track our activity within the call center and see how that measures out and what the activity you see there, but typically what we are seeing is that it tends to be cyclical. It tends to be seasonal. It tends to also have other impact as Terren brought up with the economy, but for those healthcare providers who have been using this for some period of time, you see people who have embraced it and you have seen that they either stay steady or there is an increase in the utilization especially based upon the percentage of the patients that are appropriate that they see in the practice.

Merry Vanderbilt

In other words, anecdotally forget that you are not marketing it. If I am a doc and it's working and somebody comes in and I think they quantify, I am going to jump to try and push them to uses? Thanks.

Rick Andersen

Yeah, based on their clinical presentation, if they set the right profile, if they look right to that physician and their experience has been that's what we find. And so and we’ve seen that a number of our healthcare partners that the licensees have actually engaged in spending their own money to market their practices because they see how this is such an important additional therapy they have in their practice and they want to do it as much as possible to help patients and their communities get better that clearly are suffering and are not getting the treatment they deserve.

Merry Vanderbilt

Okay, thanks. And last is a very simple question, weighted number of shares and year-over-year I presume that through the stock-based compensation because I don’t remember a financing taken place over the last 12 months?

Chuck Timpe

Weighted average number of shares.

Merry Vanderbilt

43 million up to 54?

Chuck Timpe

Right. We did have a financing. We issued 9 million shares.

Merry Vanderbilt

Terrific. That’s what I wanted to hear. Thank you very much.

Terren Peizer

Okay. Well, thank you again for joining us today. As usual, we appreciate your support and look forward discussing our company with you at our next quarterly call. Everyone have a nice night. Thank you.

Operator

Ladies and gentlemen, this does conclude the teleconference. You may disconnect your lines at this time. Thank you for your participation.

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