Oculus Innovative Sciences, Inc. (NASDAQ:OCLS)
Q4 2008 Earnings Call
June 11, 2008 4:45 pm ET
Dan McFadden – Director Public and IR
Hoji Alimi – President & CEO
Robert Miller – CFO
Dan Stall – Private Investor
Richard Griffith – Private Investor
Jim Martin – Private Investor
Unidentified Analyst – Rodman & Renshaw
Greg Gust – Roth Capital Partners
Greetings and welcome to the Oculus Innovative Sciences, Inc. fiscal fourth quarter and year end 2008 financial results and corporate update conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Dan McFadden, Director of Public and Investor Relations.
Good afternoon everyone and thank you for joining us. With me on the call today are Hoji Alimi, our Founder and CEO along with Robert Miller, our Chief Financial Officer. We will open today’s call with Hoji’s discussion of corporate highlights from the most recent fiscal quarter as well as an update on our United States clinical program based on the Microcyn Technology. Following Hoji, Robert will review our financial results and then we will open up the call for questions.
This afternoon Oculus issued a press release detailing fiscal fourth quarter financial results along with a review of recent corporate developments. A copy of this press release can be downloaded from our website at www.ir.oculusis.com/releases.cfm or you can phone Investor Relations at 646-536-7002 and we’ll be happy to assist you.
Before we get started we would like to remind listeners that this conference call contains forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words such as will be, intends, will enroll, and the initiation, among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially including risk inherent in the development and commercialization of potential products, the risk that current clinical studies or trials will not proceed as anticipated or may not be successful or sufficient to meet regulatory standards, or receive the regulatory clearances or approvals, the company’s future capital needs and its ability to obtain additional funding and other risks detailed from time to time in the company’s filings with the Securities and Exchange Commission including the Quarterly Report on Form 10-Q, the Annual Report on Form 10-K and Oculus Innovative Sciences disclaims any obligation to update these forward-looking statements.
I will now turn the call over to Hoji Alimi, Founder and CEO of Oculus Innovative Sciences.
Thanks Dan and welcome everyone to our quarterly conference call today. As always I will talk about on this call, about our potential challenges, good and bad as well as the exciting opportunities that lie ahead for our business. However we have significant positive things to talk about and opportunities and no bad news on any fronts including our regulatory and other business functions.
In the first part of the call I will talk to you about the fiscal year 2008 ending March 31st and in the second part of the call I would like to cover the goals and objectives that as a team at Oculus we will focus on in fiscal year 2009.
Last year we focused on delivering two major milestones to the market. First and foremost completing our Phase II trials in mildly infected diabetic ulcers and then delivering positive results. And secondly reducing our overall expenses in the international markets and focusing our resources and funds on the US clinical programs, as Robert and I have consistently been giving that guidance to the market.
We have successfully delivered on both of these milestones and in March, 2008 we announced positive Phase II data. Let me remind everyone on this call the importance of the data from this trial. We challenged Microcyn Technology against one of the most potent antibiotics in the world used in treatment of mildly infected diabetic ulcers. Levofloxacin is a potent broader spectrum antibiotic with nearly about $2.4 billion in annual sales last year. It is also referenced in the IDSA guidelines for treatment of mildly infected diabetic ulcers. We thought this would be an appropriate antibiotic to be used and challenged Microcyn Technology in the Phase II trial.
In this trial on May 24, Microcyn showed a 93% cure and improvement rate versus a 56% cure and improvement rate in the levofloxacin arm. More importantly Microcyn did not demonstrate any systemic side effects as we had observed the levofloxacin in the Phase II trial which included amnesia and upset stomach. This data is extremely important since it provides significant creditability regarding Microcyn’s efficacy.
Today unlike a year ago, we have more then 25 clinical trials spanning around the globe from China, India, Mexico, and Italy and now in the United States. There is no doubt that Microcyn Technology works and delivers very promising results. In other words, we have one of the few if not the only Phase stable wound care solution which one, cures the infection and secondly independently accelerates the wound healing via improved vasodilatation and [geogenesis] and reduction of inflammation.
Now the question is where do we go from here? What we will focus our attention on for fiscal year 2009? I am sure you have been following our press releases, the company’s attention and foremost goal is to continue our clinical program in the United States. We requested a face-to-face meeting with an agency and we hope to initiate our next stage of clinical program as soon as we get the blessing from the FDA and the post-Phase II meeting has been scheduled with agencies in the late summer of this year.
But at the same time, we have additional established business goals and objectives that I would like to share with you on this call. One more important thing before I dive into fiscal 2009 objectives, is that its really important to mention that the second thing that we had promised to the market in regards to the reduction of our expenses in the international market, we have reduced our international operating expenses in fiscal 2008 by $4 million and more importantly our operation in Mexico has reached breakeven. We have not sent cash to Mexico for almost a year. What that means is that Mexico is now positioned for growth. Every dollar generated there reduces our need to raise cash in the US and this type of revenue is non-dilutive funding which is really important to our shareholders.
The main message I want to deliver as I dive into the 2009 objectives on this call is that we would like to position Oculus as we move forward in the next 24 months so that it gains and picks up momentum in revenue while avoiding significant costs and we continue to focus our attention on the India approval in the United States. We know that the drug approval is needed to market the product in the US for its anti infective capabilities that will give us the optimal label indication for marketing Microcyn Technology.
However outside of the United States the answer is to establish partnerships in each region as we have done in China, as we have done in India, and support those partners to penetrate those markets. In other words we are not making significant in sales and marketing but we are taking advantage of potential ramp in revenue in those areas. Many of you remember when we entered into the market in Mexico primarily to test-market and figure out where our product fits best in the medical practice. This was back in 2004. Today our product is sold through distribution channels such as Wal-Mart and others where we sell nearly 25,000 units per month.
So in other words, if you travel in Mexico you will most likely find our product on shelf in pharmacy market. But these sales that I’m referring to only accounts for 6% of the market share in Mexico for the antiseptic market. As a result we have plenty of room to grow--for continued growth in that market. How are we going to do that? Again, also Robert is going to refer to that as we will seek additional partnerships and distribution channels without investing significant money and so we can penetrate those markets further.
Since our IPO our objective has been to collaborate the company that have a very strong regional presence in selected markets and then they are also positioned to successfully commercialize our product in those regions. This strategy I believe allows us to take benefits from the product sales without really distracting the team in the United States when we focus on the India approval in the United States. We have been especially successful in both India and China. In March, China State Food and Drug Administration, SFDA, granted marketing authorization for Microcyn as a treatment for various acute and chronic wounds. Most of you are probably aware that China is one of the fastest growing pharmaceutical markets in the world. And this is the very first time that China actually has approved a Microcyn-based product in that market which will be launched and commercialized by our partner, China Bao Tai, who they also use Sinopharm, one of the largest pharmaceutical groups in China. And they also have additional sub-distributors in supermarket and pharmacies.
Now we are on a schedule to ship initial product to China in fall of this year and we’ll talk about Chinese market in a bit. Our development team had also the opportunity to visit Beijing in April to meet with the Chinese partners and review the multi-tier strategy proposed for launching Microcyn in China. The product launch is designed for success. Key medical opinion leaders will be targeted and trials at multiple medical centers and clinics conducted for the purpose of securing both post-market clinical data which is going to be used for marketing as well as reimbursement.
The partners will focus first on the hospital market and after successful coverage of the hospital market, and then they will focus on the pharmacy market or OTC. Let’s just break this down because I know a lot of people are looking for numbers but just to give you the tip of the iceberg what does this mean in dollars for Oculus? In Mexico where the population is almost one-tenth of China’s overall population and with a strong pharmaceutical partner such as Sinopharm in Mexico we have now reached approximately about 6% market penetration in the topical and septic market.
That same market penetration in China which I believe is very doable, could account for nearly $20 million in revenue for Oculus per year. So that’s why China is so significant for us and that’s why the team is spending so much time making sure that we are providing all the assistance we can to Sinopharm and our distributors there making sure the product is positioned correctly for a launch.
Additionally the fiscal 2009 will be the year for commercialization and innovation. The main message here is that Oculus is no longer a single product based company. You may have noticed our recent news releases regarding an advanced wound care device. I can tell you that we have now several products in R&D pipeline that you will begin to hear about over this coming year. These products range from non-Microcyn-based drugs, devices, as well as next generation drug delivery systems and Microcyn formulations aimed at not only wound care but also respiratory, ophthalmology, oral care, dermatology, amongst others.
These new innovations positions Oculus number one for better partnerships, but more importantly this is the key by taking these new products that are coming out of R&D to our partners in China, in India and in Mexico, which short regulatory approval processes as compared to US regulatory timelines, and in using these existing distribution channels we can help accelerate revenue growth and improve margins. In essence it prepares the company to become a financial engine that will perform at even greater levels once we secure India approval in the United States which will further definitely enhance our label claims and market opportunities.
To give you a better focus on this in regards to our near-term commercialization strategy, we are in process of identifying the strongest candidate for our VP of Sales and Marketing position. I think this is a very timely hire as recently we announced that we are also evaluating the near-term commercialization potential for our 510k product, our US product that was cleared for wound cleansing and debridement under the FDA 510k clearance. We are currently conducting a test market analysis for this product based on positive feedback that we’ve been getting over the last year since we initiated our Phase II trials and had multiple clinical sites in the United States and other numerous physicians, hospitals, clinics, they’ve been using our products.
What really we have today that really distinguishes our position from a year ago and the reason we are talking about this potential “market commercialization opportunity” is that over the last year there have been a lot of studies done showing the pharmacoeconomics comparing the use of our product, comparing it to saline; something that was not available to us a year ago. Just let me take a moment and go back to about a month ago and I flew up to Oregon and visited a physician’s clinic there that they were treating patients. And it was very nice to go see real people, real names, and real faces behind every patient number. And these are real human beings that they were treated with our product and these are the patients that they are referred to as “throw-away” patients. These are patients that unfortunately other technologies they are not successful in treating them whether it was [vac], it was skin graph, it was growth factors, and you can name all the technologies.
And when I left that clinic our thinking was how can we help get our product in the hands of more patients, more doctors, in compliance with the existing label claims in the United States so that we can actually create a larger awareness around our technology. So again as I said while you are doing this now since the 510k cleared label really doesn’t allow us to market the product to its fullest potential label claims, that includes anti infective and wound healing benefits, but in spite of that limitation during the US test marketing initiative over the last year, we have received over and over again very, very significant data and positive data I should add, regarding again cost savings associated with the use of our product as compared to use of saline.
There are 45 million surgeries and six million chronic wounds in the United States alone. Most of these wounds if not all of them are being treated and cleaned with saline in one way or another on a daily basis here in the United States. And these are new market data with this cost savings that can potentially can turn into compelling marketing and sales information where we can market our product to again based on our limited label claim in the United States but yet emphasize as a potential pharmacoeconomics benefits of our product against saline. We think we have a great potential advantage here that we should really pay attention to.
What it is important to say that our India clinical path remains extremely important to the company. We believe that the India approval will provide us with the advantages that are not provided by the limited 510k claims. For example, number one, we can’t talk about anti infective claims with our 510k and we do not have that better reimbursement that potentially we can get once we get the India approval. So our goal of our current market assessment initiative is to confirm the US commercialization potential of Microcyn wound care. This will clarify how we can best discuss the current product label with physicians in the context of our 510k cleared label claims and our goal is to establish an effective near-term commercialization plan that can allow us to target an increased number of US physicians and users and then build greater market awareness around Microcyn Technology in the US while continuing our India program to obtain a much stronger label claim.
But before I turn the call to Robert to discuss financials, I would like to thank again all of you and our shareholders for your support and at this time I’m going to turn everything to Robert.
Thank you Hoji. Before I get into more detail on the financials, I’d like to reiterate some of the comments that Hoji made that our strategy is first and foremost to focus on the clinical program in the United States since the US is the largest addressable market in the world for Microcyn. Last year as Hoji mentioned, we made a strategic decision to focus our resources on the US clinical process and to dramatically reduce international expenses. We achieved both objectives by completing the Phase II trial with good results, as Hoji discussed, and reducing our international expenses by $4 million compared to last year.
This year while the primary focus is on the execution of the clinical process in the US we are now pursuing near-term commercial opportunities both inside and outside the US and business development deals to expand Microcyn’s geographic foothold and introduce new innovative products with the objective of growing our revenue and cash inflow. The growth of this revenue generates non-dilutive funding for our clinical programs and provides validation and additional clinical evidence of efficacy and safety of Microcyn.
Furthermore it is consistent with our vision to be the topical standard of care in the treatment and irrigation of chronic, acute and trauma wounds in the world. Let’s first talk about Mexico. The objectives in Mexico for the fiscal year 2008 were first to break even by the end of the year and secondly reduce operating expenses. We achieved both objectives. Mexico broke even in the last month of the year and reduced operating expenses by $2.6 million for the year. As a result of paring down the Mexican sales force from over 70 to about 30, we decided to focus our sales effort on growing the more profitable pharmacy sector and de-emphasizing the sales coverage in the less profitable public hospital sector. To provide a sense of relative profitability, the revenue per liter in the pharmacy sector is about seven times that of the public hospitals in Mexico.
As a result of this shift in focus and a smaller sales force, Mexico had lower sales for the quarter and year due to lower sales to the hospital sector. But overall the Mexican operation improved its cash flow, the primary objective for Mexico in fiscal year 2008, enabling it to break even as we mentioned. Sales to the pharmacies grew 37% for the full fiscal year compared to last year and 29% for the fourth quarter. As Hoji mentioned we now have 6% market share in the pharmacy topical antiseptic segment in Mexico and sold an average of 25,000 240 ml units per month in the fourth quarter. Based on these sales results we will use this distribution channel which includes Wal-Mart, Casa Saba, NADRO, all large pharmacy distributors in Mexico, as a platform for growth in Mexico.
With the 6% market share coupled with a superior product we believe the historical growth of this pharmacy sector can be accelerated by partnering with pharmaceutical companies in Mexico who have significant sales forces. Based on our experience in Mexico and Europe our strategy for expanding internationally is to align ourselves with a strong partnership and control specific marketing and sales tactics customized for their particular market, as we’ve done in Mexico and India and China. In this way we can grow our revenues without using our cash for sales and marketing efforts.
In India sales to Alkem were down for the full fiscal year compared to last year which included large initial stocking orders of $606,000 used one, to distribute many samples during the product launch in the fiscal year 2007 and two, for sales of the product from Alkem to their customers for the fiscal year 2008. The actual sales of Microcyn by Alkem Labs to their customers on the other hand showed steady unit growth from zero at the time of the product launch in September of 2007 to a monthly sales level of 33,000 100 ml units during the fourth quarter.
Total revenues for the fiscal year ended March 31, 2008 were $3.8 million compared to $4.5 million in the prior year primarily due to the lower bulk sales to Alkem Labs as I previously explained. This 2008 revenue does not include $615,000 of deferred revenue related to up-front cash payments from the partnership transaction with China Bao Tai and Union Springs Pharmaceutical, formerly known as DECA. Service revenues for the full fiscal year were up 10% due to the higher testing volume. Total revenues for the fourth fiscal quarter of 2008 were $926,000 compared to $1.2 million in the fourth fiscal quarter last year mainly resulting from the international sales force reductions and cost reductions that allowed us to breakeven in Mexico as mentioned earlier.
Service revenues were down 16% due to lower testing volume. Gross profit margins in the fourth fiscal quarter of 2008 were 34% compared to 45% in the year-ago period caused mostly by lower sales in Mexico. Operating expenses for the fiscal year 2008 were $23.5 million, up from $21 million during the fiscal year 2007. This was primarily the result of a $3.1 million increase in clinical cost over the prior year mostly associated with conducting the Phase II clinical trial and higher research expenses relating to building our R&D team.
A 17% or $2.8 million decrease in SG&A expenses during fiscal 2008 partially offset the increase in clinical expenses. In Mexico and Europe as previously mentioned, SG&A expenses declined $4 million year-over-year and were partially offset by higher accounting, legal and insurance costs associated with being a public company. Operating expenses for the fourth fiscal quarter were $6 million, down from $6.2 million in the prior year period. A reduction in operating expenses were related to significant cost cutting in Mexico and Europe partially offset by the expansion of our R&D teams and a higher SG&A cost associated with being a public company.
Net loss for the fiscal year 2008 was $20.3 million compared to a net loss of $20.2 million in the fiscal year 2007. Net loss for the fourth fiscal quarter of 2008 was $4.5 million compared to a net loss of $6.3 million in the same period last year. Net loss adjusted for non-cash expenses, a non-GAAP measure in this most recent quarter was $5.4 million which included $646,000 related to outside clinical activities. Thus the net loss adjusted for non-cash expenses, a non-GAAP measure minus the outside clinical costs for the fourth fiscal quarter was about $4.7 million.
Looking at this fiscal year we expect the net loss adjusted for non-cash expenses minus the outside clinical cost to be in the $4.5 million to $5 million range in our first and second quarters ending June and September of this year. At March 31, 2008 cash and cash equivalents totaled $18.8 million compared to $19.1 million at March 31, 2007. During the fiscal year 2008 we reduced our net debt by $5.9 million to $2.2 million, down from $8.1 million at March 31, 2007.
This concludes our update on the financials, so I’ll turn the call back to Hoji.
Thank you Robert. At this time we can turn the session over for question and answers.
(Operator Instructions) Your first question comes from the line of Dan Stall – Private Investor
Dan Stall – Private Investor
I just wondered if you could address the investors who were at a cost basis of $18.00 a share looking at the stock trading today at $3.35 a share, what can we expect to see over the next couple of years or regain the money we put in back when it was a private placement?
Actually we do have four members on our Board that they are also at the same cost basis and when we talk about building value for our shareholders we have to build the company for success. And that success can turn into value for our shareholders not only getting you your cost basis but we are hoping to exceed that. And in order to do that is we need to fire at all cylinders. Last year when we went public and as you said, you are on a cost basis of $18.00 and we went up at $8.00 there were two major I would say [inaudible]. One literally there were, we had people saying in the market that there is no way that these guys can execute on Phase II trial and there is no way their product is going to beat levofloxacin. That was a huge risk to the company and to our investors. We had to focus on that. We had to execute. We did overcome that and we came out actually very good. So the Phase II is done, the data is out and then the second thing was we needed to make sure that we control our spending outside the US and we did that as Robert mentioned so I don’t want to sound redundant.
But moving forward in order to increase value for our shareholders and again the value is going to be determined by numerous factors in the market that I don’t think anyone can predict and just to give you an example, we were at $11.00 a share last year without Phase II, without breaking even, without a lot of things that we have today and today with a very strong Phase II, we beat levofloxacin one of the greatest antibiotics in the market and all these trials that we have under our belt and we opened up China, we are trading at $3.00 and something. So there are things that can control the value of the company that is out of our control and there are things that we can control. Things that we can control I think we have to, is very important for management and The Board to focus on not only getting our NDA through the FDA and make sure that we are on track on the drug approval but candidly in the eyes of a lot of investors, they’re going to say okay great, long-term story, you’re not going to generate the revenue, what are you going to deliver in the near-term?
So in the near-term what we have been doing is we are pushing [gas out to the metal] literally behind closed doors in R&D and we have come up with significant number of products without any significant investment and now our strategy is, okay how can we turn these products in near-term revenue because in my opinion from everything that I, I’m walking through New York and talking to investors and private investors, institutional, near-term revenue is going to be key. And this market is not that tolerable of long-term kind of a drug history so the short answer to your question is we’ve got to focus on near-term opportunities while we make sure we don’t lose sight of our NDA approval with the FDA.
Your next question comes from the line of Richard Griffith – Private Investor
Richard Griffith – Private Investor
I’m not sure that I understand the next process as far as what I would call Phase III. I attended the Shareholders Meeting last September, October, and at that time it was felt that rapid progress could be made on the next phase really taking less time because of the nature of how the clinical trials would take place as opposed to how they had to be conducted for Phase II. So I’d just like to have you run down where are you and timeframes and so forth on getting what I would call the full approval of the product as a, for treatment rather then cleansing?
So let take you back to end of September and fall of last year, at that time we were enrolling patients and our patient enrollment was completed based on the announcement we were sending to the market. I think the last announcement came out at the end of December of last year, that last patient, last evaluation was done. But that means that all patients were enrolled, all patients were evaluated, very similar to a financial audit then now you will have an outside audit firm, which in this case is a CRO, they come in and audit all your test results to make sure what you’re about to send to the agency is actually completely cleaned out. There are no errors. The last thing you want is to send something prematurely to the agency and you have some errors in there. It will completely muddy the water with the agency. That was done and then we announced the data or what we refer to as top line data, at the DFCon in Southern California. And all these events we’ve been sending our news releases and I’m hoping that you’ve been receiving them.
Where we go from there, is the company has the choice of immediately jumping into a trial for Phase III trial and you can push ahead and you will take the risk of going into a trial that FDA has not reviewed, they are not comfortable with, and they may come back and question you. So in this case it is best to sit down with the agency. You set up a meeting face-to-face and that’s what we are planning to do. We made that request with the agency and that meeting really is not up to the company, it’s up to how many other companies are in queue. How busy is that reviewer at FDA. So the timing that they have given to us is end of summer in August, so we have made our submission. All the data is at the agency and we will be showing up at the agency on that date to go through our data.
In that meeting what we will cover is not only the data from Phase II but here is our proposal to enter our next stage of clinical program. So then we did the very similar thing with our Phase II. Before we started the Phase II we sent our trial design to the agency, we asked them please comment if you have any concerns. They could have put us on hold and they have only I believe two or three minor comments we corrected and moved ahead. In this case we are asking the same thing. Here is our proposal. We do not want to take $30 million from investors, invest into a trial and then you come back six months, eight months later and say, whoa I have some concerns on the trial design. You should have enrolled more patients or less patients.
So our strategy is to get that through the agency and as soon as they give us a blessing we’re going to start going to clinical sites, hospitals, clinics to enroll patients. Now there are things that we can do in advance to that trial. So there are things that at the same time we can do so that we are not just sitting here waiting for the agency. So things that we can do is pick a CRO firm; that we have done. Look at clinical sites because in Phase II we had 15 clinical sites, for the next stage of pivotal trials you’re looking at almost over 80 clinical sites in the United States. So we have gone through that, we are picking all of those clinical sites and what I mean by that is we want to make sure the sites we are picking are the sites that you can actually enroll patients. Because there are a lot of hospitals that they would love to take your money and say, well we can enroll patients really fast as we saw with Phase II. They may not deliver so we are going diligently through the CRO’s databank where they have done trials with other drug companies and see which hospitals, clinics enroll patients faster, which ones don’t and that’s why we are picking those.
So if you’re targeting all of the ethics committee or IRBs as soon as the protocol is blessed by the agency then everything is identified. We just want the IRBs make the submission. If you are asking them to sign off on the protocol which is part of the requirement by regulatory environment and then we will be enrolling patients. That’s the current timing that we are looking at.
Richard Griffith – Private Investor
What timeframe let’s say minimum and maximum timeframe do you anticipate for Phase III to get all the way through to approvals? What would be the outside timeframe?
I would like to give you very candid answers and I know you’re looking for a certain number, but I’m trying to communicate here and I will give you a standard time, there are timeframes where analysts are expecting anywhere around two years to complete the pivotal trials. However, I want to caveat that with the fact that there are patient enrollment, you want to make sure that enrollment of the patients are happening fast enough. You want to make sure that the agency can give you a blessing. If they come back and say, no we want to take another four months, what I’m trying to get at is we don’t control the agency and we need to make sure we get through the agency the green light and then we can push ahead. But the expectations generally from the analysts I have been talking to, what they’re communicating to the market is about three year.
But one thing I do want to again go back and mention is the drug trial, I hope this, I’ve been very clear on this call, if not I’m trying to clarify; the drug trial remains a critical path for our company. We are going to focus, we are going to execute and we want to be very conservative, don’t cut corners, provide quality data to the agency and get that approval. Not that that approval not only is important for commercialization but potentially for partnership is very critical. At the same time our focus is going to be looking at other way to also increase value for our shareholders. So for example, again generating revenue outside of US which it was not a priority on purpose for last year because again as a response to the market we did cut back, we transferred a lot of funds to manage the trials in the US but now we are going back and want to make sure that we grow that revenue.
I think those things will add value near-term for our shareholders as well as getting additional product out to the market. We have a great technology, yes we’ve been saying that, but we are looked as and I’m being very candid on this call, in this environment a lot of market looks at a story like Oculus and they say, hey single product and you have high risk getting through the agency and so they have the appetite of investment in a story like that. And that’s what I hear from other CEOs and even talking with analysts. So what we wanted to do is to be proactive, to be innovative and what we know to do best is engineer new products. We know the science so we came back, now we made an announcement for example, that we have filed a patent on a breakthrough advance wound care device.
What that is, is a device that actually delivers a drug to the wound site and induces wound healing. That device does not require two years of clinical trials with the agency. It does not require to go through Phase I, Phase II, Phase III. Those are 510k devices. They are three months approval. And then you get your approval then it becomes a matter of clinicals, to do clinicals against competition and market that. So taking that device even outside of the United States, make it available in China, make it available in India, in Mexico and then also we have new formulations that is coming out, out of R&D. Some are complete and we will make announcements when it is appropriate. We don’t want to give heads-up top our competition. But what we need to do is fire at all cylinders making sure that it’s not just the regulatory path. We need to make sure that we are track to delivering, there is no negative news coming out of our clinical program. And so far that has been and all the credit to our clinical team.
But near-term value for our shareholders, in my opinion is going to come from the fact that we don’t ignore revenue growth. We make sure that we penetrate the markets and make sure that we have better, other products that is coming out. So this device for example, in the eyes of the market Microcyn is looking as replacing antibiotics or reducing them, the use of antibiotics in the market. But this new device now is adding a whole new market to Oculus that we did not have and that’s the back therapy that is [inaudible], KCI has, we were not competitor of KCI or [inaudible] but with this new device we are. So by adding these new markets, but making sure we are fiscally responsible, we are not investing significant amounts of money and partner these very quickly with other companies that they can either buy from us or they can actually take it into commercialization channels. Those are the areas that we’re going to focus heavily to execute.
Richard Griffith – Private Investor
And when do you anticipate that this new device will actually be in the marketplace?
The reason I don’t want to answer that is the day that we made that announcement, again to be very candid is we have had competitors for three four hours looking through our website and everything. We don’t want to give timelines and we would like to surprise the market. We are diligently working on those and what you can expect as an investor is over this year, there will be announcements as new products are coming out timed with the new VP of Sales and Marketing that is going to come in and then we’re going to tie R&D to sales and say, okay we got this product out to the market, not long trials to get approval, or outside of the United States you can get approval very quickly, how can we commercialize this, how can we generate more revenue. And more revenue has to translate into more value hopefully for the company. So those are the areas we’re going to push extremely hard. We did not do this on purpose last year because candidly we did not want to lose credibility with a lot of analysts, a lot of investors that they came in and they even had allergic reaction if they would see that we are focusing anything outside of our clinical program.
But now we delivered, Phase II is done, beautiful results. There is no questions on our technology, now I think we need to go back and address near-term commercialization and market opportunity for us.
Richard Griffith – Private Investor
Just one more question on the new, the vac product was that manufactured by our company or will it be manufactured by a third party company?
Let me make one very clear because these are public records and I want to make one thing very, very clear so there is no misrepresentation. This is not a vacuum assisted therapy device out there. It’s actually very different then KCI and [inaudible] however it will compete with there’s. Answering your question is this is contracted to the outside but we are trying to, again to be fiscally responsible we are balancing whether we need to hire engineers to do this or can we contract this for less then $50,000 or $100,000, whatever it is to get prototypes done. So most likely a lot of this is going to be as much as we can contract out we will making sure we don’t lose IP and protect our patents but then we don’t take the cost of ongoing internal resources.
Your next question comes from the line of Jim Martin – Private Investor
Jim Martin – Private Investor
How soon do you anticipate revenue will start flowing in China and from say $20 million of revenue what percent of that would be profit?
Okay so let’s go back and answer your first portion of your question. I want to make sure again we are managing expectations very correctly. When I referred to the $20 million revenue, what I’m saying is when you penetrate the market and you reach the same market penetration rate as we did in Mexico that can potentially turn into $20 million in revenue from China. How fast that is going to happen it depends on the execution, on Sinopharm and our distributor in China. We are not in control of sales and marketing but we are providing full assistance and why, because we do want to make sure that they are positioning it correctly.
Generally our margins down in Mexico and they’re be fairly similar to that, tend to be in the 70% to 75% level on the gross margin basis. And we would expect margins like that when the volumes get to be a reasonable level.
And we are selling final finished product to China and avoid any manufacturing in China to avoid any potential black market issues there.
Jim Martin – Private Investor
How many shares are outstanding right now and do you anticipate having to issue more shares any time soon?
In terms of the funding let me answer that. In terms of the funding what my job is to keep a finger on the pulse of the market and have options available to The Board. The last thing you want for your shareholders is that management wasn’t paying attention and they were not creating options to fundraise and we need to build the company for success in long-term and that’s I believe how you can create value and become attractive whether its an [inaudible] strategy you’re going to get acquired, or you’re going to commercialize. So we’re going to push hard on partnerships, we’re going to push really hard on [phase] that is non-dilutive for example increasing revenue, that’s one area that we are pushing hard and the other one is at the same time looking at the market. All those options, its going to be evaluated by The Board, at the time, in advance and figure out when would be appropriate for any potential fundraising. So again selling equities is not the first choice. But again we will have all those options available at all times to make sure that we are being fiscally responsible and you don’t want to drive the company onto the edge of the cliff financially and that would be irresponsible.
The primary shares outstanding are about 16 million; 15.9 million.
Your next question comes from the line of Unidentified Analyst – Rodman & Renshaw
Unidentified Analyst – Rodman & Renshaw
Some brief clarifications, you did say that you were going to ship initial product to China in the fall of this calendar year, is that correct?
Unidentified Analyst – Rodman & Renshaw
And when would you expect to begin seeing revenue from sales in China?
That’s something that we are still discussing with our partners in China. The initial shipment of the product is going to be used for sampling there and getting more hospitals to do more trials. They want to do significant amount of marketing to these hospitals making sure everybody understands what Microcyn is and how it should be used. And one of the major challenges with Microcyn, as simple as that sounds, you pour it on the wound, you treat it, you moisten it, you get rid of the infection, the most critical questions we get back from physicians is how much do you use? How often do you use it? Do you [spay] once, do you [spay] four times a day? So in order to get it incorporated into their standard of care in those hospitals you have to do either trials or do trials at reputable hospitals that you can go back and say, okay based on all this data, this is how you do it and that’s how you reduce the use of [systemic] antibiotic.
That’s the first step that you’re doing so I think the majority of their focus for the remainder of this year I would say partially for the beginning of next year is heavy marketing, sampling and trials. And they are doing trials not only in wound care, but they are even extending it to outside of wound care which we will send announcements out once those trails are done. But I fully understand, I’m going to sit back for a second and put my investor’s hat on, as an investor I want to hear next quarter you’re going to ship this much, this much profitability and this much revenue is coming in. But then we put our management hat on and CEO hat on, we all want to make sure that I’m not just pacifying the market and shipping product to China and then a year from now realize, oh my God, they didn’t take their time to do the right marketing, they didn’t position it, now the product is not taking off really well. I have seen a lot of those kinds of products that failed in the markets.
So that’s why it’s really important to just build the foundation correctly and then launch it and I’m very definite that penetration in China is not going to be a challenge for them. If they get these trials done correctly.
Unidentified Analyst – Rodman & Renshaw
Then with respect to the pivotal trial program, how quickly following the end of Phase II meeting with the FDA would you expect to initiate that program?
We would like to initiate it right away so what I mean by initiation, and some maybe already have initiated, so in other words we picked a CRO firm, we’ve been talking about sites, a lot of leg work has been done. So in other words we are not just waiting for the FDA and then go back and take time to do this. So we are doing all our homework so what we are looking for for the agency to say, this proposed trial design is appropriate for your next stage of trail. Yes, levofloxacin can be used or they’re going to come back and say, no use a different antibiotic in your control group. Once they bless that our strategy is to run to the sites and start getting IRB approval. And again, for a lot of private individuals we have on the call, those are the ethical committees that each site, each hospital, that they have to approve your protocol before you’re allowed to start enrolling patients. That IRB approval process is, it varies from site to site. There are hospitals that they have approval in a month and there are some that literally have taken three, four months. But from initiation, we will initiate it immediately but right after we get blessing from the agency.
Unidentified Analyst – Rodman & Renshaw
Just to revisit the guidance for the remainder of fiscal 2009, in terms of R&D spend, what would you project for the next three, four quarters in fiscal 2009?
We have not really provided guidance specifically on that, but I’ll give you some general thoughts. The real guidance that we’ve been providing is modified net loss, minus non-cash expenses, minus outside clinical costs and those we feel for the first two quarters of fiscal year, that’s the quarter ending June and the quarter ending September, will be in the $4.5 million to $5 million range. But what we do see is that our, we are going to continue to build slightly our R&D teams as we’ve done over the last year, and we’re of course going to have as Hoji mentioned increasing outside clinical costs as we get closer to the pivotal trial as we get closer to that, toward the end of the year. So that we will expect to see that increase over the first couple of quarters. So that’s the guidance that we are providing at this point in time for the cost side.
Our SG&A expenses we don’t see that that’s going to increase that much. In general terms we think that’s going to be fairly steady. We did pass the SOX or we will be passing the SOX this year and we’ve spend money on SOX. We expect that to be fairly constant as well as our legal and accounting fees compared to last year.
Your next question comes from the line of Greg Gust – Roth Capital Partners
Greg Gust – Roth Capital Partners
Could you give us a breakdown of the $1.4 million in other non-operating?
Most of that is foreign exchange relating to our inter company loans with Mexico our subsidiaries, Mexico and Europe. And those are non-cash expenses and that represents about almost 80% of that number.
What we are trying to do is when we make an investment for example in Mexico, and we used to send money to them or [inaudible] operation, what you are looking at that, if you are taking this as a loan to that subsidiary so when for example Netherlands is up and ready and they are shipping product and they become profitable, instead of taxes they owe significant amounts of money to the US, and for those are the kind of tax things that we have to manage.
Those are in denominated and US dollars so that we have a, there’s a foreign exchange currency transaction that occurs at the end of each month where we translate it between pesos and dollars and euros and dollars. And as a result of the change in the dollar, the decline in the dollar over the year, we’ve had in effect we’ve had a gain that gets translated in that other income number and that relates to FAS 52 which is the current method of accounting for that treatment.
Greg Gust – Roth Capital Partners
So going back to the Phase III trials then, so we really should see the R&D really escalating most likely in the third quarter of this fiscal year, is that correct?
So as we get close to, as soon as we hear blessing from the FDA that we are good to go, obviously you will see increasing costs for, because we are initiating the next stage of the trials.
I’m sorry, no further questions in queue.
And one last thing I do want to mention since the question came up about China’s revenue, one thing that we will do is as we make progress with our partners officially in India as well as in China and we haven’t talked about [Mycleanse] the spray that we launched in the US and actually we are getting very excellent response back from EMT especially in certain areas in certain states and the meeting there, there is actually several expectations. We will provide revenue forecast to the market and to our shareholders and but I want to make sure that we are managing expectations and what we are telling the market right now, is we are building the foundation for that kind of revenue growth even before the India approval. So as we get there and we are putting that as a priority for us and we are hiring a VP of Sales and Marketing I think we will get there pretty quickly and provide additional information to the market when we are ready.
With that I’d like to thank everyone for being on the call, should you have any additional questions and it was not addressed on this call, please feel free to contact Robert and I at the office, 707-782-0792. We’ll be more then happy to speak to you. Thanks so much.
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