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Executives

Bill Newbould – VP, IR

Gearoid Faherty – CEO

Mario Crovetto – CFO

Analysts

Rich Silver – Lehman Brothers Incorporated

David Steinberg – Deutsche Bank

Donald Ellis – Thomas Weisel Partners

Bob Yedid – Principled Capital Management

Eurand N.V. (EURX) Q2 2008 Earnings Call Transcript August 7, 2008 8:30 AM ET

Operator

Greetings and welcome to the Eurand second quarter financial results conference call. At this time, all participants are in a listen-only mode and 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, Mr. Bill Newbould, Vice President of Investor Relations at Eurand. Thank you, Mr. Newbould, you may now begin.

Bill Newbould

Thank you, Jackie, and good morning everyone. Joining us on the call today are Gearoid Faherty, Chief Executive Officer; and Mario Crovetto, Chief Financial Officer. Before we begin I would like to remind everybody that his conference call may contain forward-looking statements within the meaning of the Federal Securities Laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to be materially different from the results, performance, or achievement expressed or implied by such forward-looking statements.

Factors that could cause our actual results or actual outcomes to differ materially from those expressed in or implied by such forward-looking statements include but are not limited to the expected timing, progress, or success of our preclinical and clinical development programs, timing, cost and other limitations involved in obtaining regulatory approval for any of our product candidates, delays in obtaining or failure to obtain and maintain regulatory approval for our product candidates including our lead product candidate EUR-1008, developing market demand for an acceptance of such products, the impact of competitive products and pricing, the impact of the policies and payment rates of third-party payers relating to our products, the successful execution of sales, marketing, and distribution strategies, our ability to protect our intellectual property and know-how and operate our business without infringing the intellectual property rights or regulatory exclusivity of others. Our ability to maintain sales of our existing products, our ability to maintain relationships with marketing collaborators, suppliers, and customers, our ability to maintain existing co-development and licensing agreements and establish new co-development and licensing arrangements, exposure of our products to potential product liability claims, our ability to obtain additional financing to support the company’s operations and fluctuations in currency exchange rates.

Many of the foregoing factors and other risks are discussed in greater detail in our annual report on Form 20-F that was filed in March 2008 with the SEC. Given that forward-looking statements are subject to risks and uncertainties you should not place undue reliance on them. Forward-looking statements are based on various assumptions and represent our estimates and assumptions only as of the date they are made. We assume no obligation to update forward-looking statements except as required by law.

I would now like to turn the call over to Chief Executive Officer, Gearoid Faherty.

Gearoid Faherty

Thanks, Bill, and good morning everyone. Today’s call will follow the four-part format we have used in previous quarterly calls. First I will review our recent highlights and accomplishments before turning the call over to Mario for a detailed discussion of our second quarter and first half 2008 financial results. I will then follow that with an update on our pipeline products and some upcoming milestones we hope to achieve. Then we will open the call for your questions.

So with that I would like to begin by discussing the key achievements of the second quarter and other recent developments.

I am pleased to report another outstanding quarter across all the major areas of our business, highlighted of course by our announcement on June 18 that the FDA had issued an approvable letter in response to our NDA for our lead product candidate, EUR-1008 or Zentase. We were also pleased that the two pre-approval inspections connected with this NDA were successful.

As noted in today’s press release in the coming weeks we plan to submit our responses to the questions posed by the agency. We recently had a conference call with the FDA in which we discussed our proposed answers to their questions and will take account of their feedback in preparing our final responses.

Separately our raw material supplier has advised us that they also received a number of questions from the FDA regarding their DMF or Drug Master File for EUR-1008 and they have the conference call with the FDA prior to submitting their final response to the agency. They have advised us that they will be in a position to submit their responses soon.

Under the current guidelines, the agency could respond as early as 45 days from the date the responses are filed but I should point out that these guide lines are nonbinding and the FDA has no formal obligation to meet that timeline. In addition to the timing of the final FDA approval of our NDA the launch date is also dependent upon the timing and approval of the brand name which would allow us to begin labeling and distribution processes that we estimate will take approximately 30 to 60 days. In anticipation of product approval we have been busy building the sales and marketing infrastructure, preparing launch stocks, and finalizing the development of our sales and marketing program.

Our plan is to leverage the sales organization we gained as part of the Source CF acquisition initially targeting care teams [ph] within the 120 cystic fibrosis treatment centers with which this sales team has established strong relationship over a number of years. In addition our marketing plans include, physician education and patient support programs and we are also working closely with managed care providers to support broad patient access and reimbursement for 1008.

We believe that we have built a first rate commercial organization in the US to help ensure that 1008 reaches it full potential. Our commercial team of 25 people include national account managers, medical science liaison officers, directors of sales and marketing, back office support, and 10 sales representatives, and we intend to hire 14 more reps upon approval of the product.

Our commercialization strategy outside the US remains to out license 1008 in Europe and Asia and we continue to have discussions with a number of potential partners in both territories.

As we noted on our first quarter earnings call, the European Medicines Evaluation Agency or EMEA confirmed that our marketing application for 1008 is eligible for review under the centralized procedure in the European Union. The EMEA awarded eligibility for centralized review has stated that it is difficult to attain based on 1008 technical innovation. Approval would allow simultaneous market access to 27 EU member states and provide 10 years of market exclusivity. We plan to file a marketing application for the product by mid-2009 to meet the EMEA 18-month timeline for filing one centralized review has been granted.

During the second quarter, we submitted a pediatric investigation plan for 1008 as required under the EU new pediatric medicine legislation and we were advised last week that this plan has been accepted for review.

In summary, we believe the approvable letter and successful pre-approval inspections are all significant steps towards approval and launch and we expect to submit our complete response to the FDA in the coming weeks. Depending on the timing of the FDA’s response and completion of our labeling and distribution timeframe we remain hopeful that we will launch the product late in the fourth quarter of this year.

Another noteworthy milestone in the second quarter was the granting by the US Patent and Trademark Office of our patent covering Amrix, the first and only FDA approved once-daily formulation of the muscle relaxant cyclobenzaprine that Cephalon launched in November 2007. We believe this patent which is now listed in the FDA launch book provides coverage for Amrix until 2025.We also have additional patents on file with the US PTO that if granted would strengthen the IP around this product.

We supply Amrix exclusively to Cephalon in the United Sates and receive royalty revenues on sales of this product in addition to manufacturing revenues. Amrix continues to show strong growth thanks to Cephalon and the detailed efforts of their combined internal and contract sales force of 600 plus representatives. Cephalon reported second quarter 2008 sales of $17.1 million up 75% from first quarter sales of 9.8. Scrips are currently running at approximately 5400 per week.

Cephalon stated on their quarterly conference call last week that they have just completed a speaker training program for more than 200 physicians and are increasing their marketing and public relations activity for Amrix to further penetrate the large US market for skeletal muscle relaxants. Given Cephalon’s performance to date and their stated intention to fully support and expand the sales and marketing efforts behind the product we are very optimistic about the future of Amrix.

We hold the worldwide rights to Amrix outside the US and are currently seeking marketing partners for the product in Europe and Asia. As we announced last week, we signed a licensing and supply agreement with Daewoong Pharmaceutical, a leading South Korean pharmaceutical company. Under the terms of the agreement Daewoong will commercialize our once-a-day cyclobenzaprine in South Korea subject to regulatory review and approval. We will continue to seek additional partners for the product in other territories.

Moving to other developments, as announced yesterday Eurand and UCB agreed to settle litigation concerning a 1999 development, license, and supply agreement between the two companies for a sustained-release formulation of methylphenidate that Eurand co-developed with (inaudible). UCB currently markets the product under the brand names Metadate CD and Equasym XL for the treatment of attention deficit hyperactivity disorder. The settlement will close by September 5, and UCB will pay Eurand $35 million as follows, $25 million at closing; $5 million, plus interest, on the first anniversary of the closing; and a further $5 million, plus interest, on the second anniversary of the closing.

Upon closing all claims and counterclaims in the litigation will be dismissed and we are pleased that we have reached this agreement with UCB and that we can now put this matter behind us.

I would like now to take a few moments to review with you several late stage pipeline products that we have in development.

As we have stated previously, we expect FDA approval of two other products in 2008 in addition to EUR-1008, these are 1048 and 1025. Both are partnered with GlaxoSmithKline and the files are currently under review at the FDA.

1048 which was developed for an undisclosed indication holds the potential to generate significant royalty and manufacturing revenues for us in addition to a total of $42 million in potential payments if certain milestones are met. We continue to work with and support GSK to help bring both these products through the review process.

Turning to EUR-1025, our proprietary once-a-day formulation of Ondansetron. We have been actively preparing to meet with the FDA later this quarter to review with them our clinical development plan for this product. Earlier this year, we reported positive results from our pharmacokinetic study. Subject to our discussion with the FDA, our intention is to enter late stage clinical development by the end of this year.

I would also like to discuss another proprietary product we are very excited about and that is the EUR-1073, which we licensed from Chiesi in April. Chiesi markets this product in Europe where it is approved under the brand name Clipper. It is a controlled-release formulation of beclomethasone and it is a corticosteroid intended for use in the treatment of ulcerative colitis, one of the most prevalent forms of inflammatory bowel disease or IBD. 1073 targets the lower gastrointestinal tract using a drug delivery mechanism that offers patients with IBD the benefits of corticosteroid therapy but at a reduced level of side effects. We plan to work with the FDA to establish a clinical development and reg [ph] pathway for this product in the US.

1073 is a perfect example of the kind of product that you can expect us to pursue going forward. The specialty GI space is an area where we would like to become a major player. Our intention is to combine our internal development efforts as we did with 1008 with in-licensing products such as 1073 that we can sell ourselves and create a strong commercial franchise in the United States in GI, a large therapeutic area that we believe has excellent growth potential.

Another noteworthy achievement in the second quarter was the launch of Unisom SleepMelts, a new orally disintegrating tablet formulation of diphenhydramine by our partner Chattem. This product is now available in leading US drug and food retailers. We will exclusively manufacture the product and supply it to Chattem. The launch of Unisom SleepMelts represents the first product to be commercialized using our AdvaTab ODT or oral dissolving tablet technology and is further evidence of the strength of our drug formulation technology and development capabilities.

In closing, the second quarter was an extremely busy and productive period for Eurand. We made significant progress towards bringing our lead product candidate to market and we look forward to keeping you apprised of further development. In addition, we strengthened the patented [ph] around Amrix, extended our late stage pipeline with the addition of 1073, advanced other pipeline products through development process while continuing to grow our base business.

Now, I will ask Mario to review our financial results for the second quarter and first half.

Mario Crovetto

Thank you, Gearoid. Our second quarter and first half financial performance was very positive.

Starting with comments on second quarter 2008 compared with second quarter 2007, revenues totaled EUR23 million or $37 million and rose 16% in constant currency. Revenues from Source CF, which we acquired in December of last year accounted for approximately 3 percentage points of this revenue growth. For the sake of clarity revenues from Source CF products are booked partly as product sales and partly as royalties. The rest of our second quarter growth of 13% came from the existing business.

Turning to the various revenue components, product sales rose 16% in constant currency. Source CF accounted for 2 percentage points of this growth and the two other most significant contributors were sales of Amrix to Cephalon and sales of Ultrase to Axcan.

Royalties more than doubled in constant currency. Note that in second quarter 2007 we had not acquired Source CF yet and Amrix was launched at the end of last year.

Development fees decreased 21% in constant currency compared to second quarter 2007. This is by no means a trend and does not indicate that this part of our business deteriorated in the second quarter. This revenue line includes in addition to fees for services, success milestones on projects in progress. These are booked when milestones are reached. Therefore, our development fees can fluctuate significantly from quarter-to-quarter.

For example, in first quarter 2008 development fees increased 47% in constant currency compared with first quarter 2007. And for the first half of this year development fees increased by 14%.

Moving now to gross margin, during the last call I noticed that in second quarter 2008 we expected our margin on product sales to realign with historical trends. Our second quarter gross margin on product sales was 33%. This is in line with the average of the previous two quarters and more generally in line with our historical track record.

Moving to operating expenses, as in previous quarters the increase in SG&A was primarily due to higher selling expenses. As Gearoid said, we are (inaudible) in the US. In particular the acquisition of Source CF at the end of last year brought 15 experienced sales and sales support people into our organization. We also expanded our internal commercial infrastructure which (inaudible).

In addition to these factors we now have higher general and administrative expenses primarily due to the factors we became a public company.

Compared with the year ago financial expenses turned into financial income. In June 2007 we repaid essentially all debt with proceeds from our IPO. At the end of second quarter 2008 we had a positive cash balance of $15 million and debt of $6.5 million.

Our net loss in the second quarter was approximately EUR2.8 million or $4.4 million on our shares outstanding of approximately 45 million. This means a net loss of $0.10 per share in dollars in second quarter.

I will move now to first half 2008 compared with first half 2007. The reasons behind our growth of revenues and of SG&A expenses are essentially the same that I described in connection with our second quarter performance.

Revenue growth was 20% in constant currency. Source CF accounted for approximately 4 percentage points of this growth. The rest derived mainly from product sales and royalties from Amrix of Cephalon and Ultrase of Axcan. In constant currency product sales rose 17% and royalties more than doubled.

Development fees rose 14% in constant currency. Gross margin on product sales was 37%, which is better than last year. SG&A expenses rose as expected primarily because we expanded our commercial infrastructure.

Net loss per share was $0.13 in US dollars.

Gearoid will now tell you more about what we expect from the business in the rest of the year.

Gearoid Faherty

Thank you, Mario. As you have just heard Eurand’s financial performance in the second quarter and first half was excellent and we look forward to the second half of the year. Before we take your questions, I would like to briefly review some of the projects we are working on in the coming months.

We expect to file our response to the EUR-1008 approvable letter with the FDA in the coming weeks. We also look forward to updating you on our out licensing efforts for this product in Europe and in Asia. Meanwhile, we will continue to prepare for the launch of the product in the United States.

We expect to meet with the FDA soon to define the development program for our once-daily formulation of Ondansetron and begin clinical studies before year-end.

For our newly in-license product 1073, we will file an IND and will work with the FDA to determine a clinical development and regulatory pathway. We will continue to support GSK in preparation for potential FDA approval and launch of 1048 and 1000 later this year. And finally we will continue to leverage our drug formulation technology to sign new co-development agreements with a range of biopharmaceutical and pharmaceutical companies. We have signed three deals so far in the first half and are on track to meet our guidance of 5 deals signed by the end of this year.

Before I conclude my prepared remarks, I’d like to mention that I am truly excited about the prospects for Eurand. We have 3 products under review at the FDA, which for a company of our size is a significant achievement. We are anticipating the launch of our first proprietary product, our base business is strong and growing, and we have an impressive portfolio of development products. We continue to pursue additional product opportunities that we believe can enhance our position as a leading specialty pharmaceutical company.

Thank you for your time and attention this morning. I will now ask the operator to open the call for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from Rich Silver of Lehman Brothers Incorporated.

Rich Silver – Lehman Brothers Incorporated

Gearoid, good morning.

Gearoid Faherty

Good morning Rich.

Rich Silver – Lehman Brothers Incorporated

Perhaps you already addressed this question I was off the call for a short while. Just regarding agreements for Zentase ex-US, can you provide an update on where you are in terms of discussions and what the time frame would be both in Europe as well as in Japan?

Gearoid Faherty

Okay. Rich, we are now down to about 3 people we are talking to in Europe seriously. And we would hope to conclude a deal relatively soon and there is a lead partner that we are progressing but there are 2 other people. We are still continuing to receive interest from other parties regarding the product and obviously we take all of these seriously, but will not delay discussions with the existing partners unnecessarily. So, Europe is moving along very, very well. With regard to a deal in Japan, I think the scope of the deal has changed there. The partners that we have been talking to for the last while are much more interested in an Asian deal for a broader range of countries rather than Japan by itself. This is complicating the discussions a little bit more because reg requirements in different countries differ greatly though I think it will be more challenging to get that deal done soon. I think it is more likely to run towards the end of the year.

Rich Silver – Lehman Brothers Incorporated

Okay, and then just and you may have addressed this in your prepared remarks, but on Zentase as you outlined the timetable of 45 days which is not a mandate for the FDA to respond to your response as well as approximately 60 days on year-end for preparing to the launch once you have the approval. So, should we then assume that maybe the launch is more likely to move into the very latter part of the fourth quarter at the earliest?

Gearoid Faherty

It is totally dependent Rich on the FDA. You know, they tell us – they have told us on calls in the past that they are short staffed, they are overworked. It is taking time to get at things and in organizing, certainly our experience in organizing conference calls to clarify issues with them, our raw material suppliers had to wait more than 6 weeks to get a call. So, obviously they are going through a challenging time right now. So, I think we will meet our guidance in getting them on through soon and then it is very much up to them. It is very hard for us to call it because everyone is working with defined time and with an obligation to respect you could give more detailed guidance, but as this 45 day guidance is not binding, obviously it becomes more challenging for us to give guidance.

Rich Silver – Lehman Brothers Incorporated

I guess to ask the question a different way, which is the supplier side of the process, and now that it sounds like you have bit more insight on that side than you did maybe a month or two ago. Do you think that you know, that that could be more of a gating item then you originally thought?

Gearoid Faherty

We are a little bit disappointed that it is taken them this long to get a meeting with the agency, but you know that is not their fault since the agency has the work load that it has. So, – and they have the call now scheduled, it would have been nicer if it happened sooner but I sincerely hope and don’t have reason to expect that they are going to become a gating step, because if they can reply soon, we can still meet our target of being out before the end of the year, but I have to keep repeating this is all dependent on what the FDA do. These are not defined time lines. There is little we can do to push them and as I said, this has taken up to 6 weeks to get a conference call to discuss questions. So, that gives you a sense of timeline.

Rich Silver – Lehman Brothers Incorporated

And you will – and you said that this supplier does have something on the calendar now, you are just not disclosing when that might be?

Gearoid Faherty

Exactly, because obviously this is supplier’s call rather than ours. It is their DMF rather than our NDA and they have now got a date. The issue was it took a number of weeks to get a date.

Rich Silver – Lehman Brothers Incorporated

And is your sense that that is a fairly routine typical sort of part of the process that is –

Gearoid Faherty

I think it is very common for people to get questions on DMF. I think it is much the same way as we do with the file. The FDA will ask for clarifications on issues. We are not (inaudible) to this Rich, so it is difficult for me to comment specific as this is an independent company that obviously has other clients also. So, they are very guarded about they are prepared to share with us. So, we don’t have – obviously we know the content exactly of our letters but we don’t know the exact comments and content of theirs and so from what they have lead us to believe they – and what hey are telling us, they had a successful pre-approval inspection and they have got their questions and they expect to reply soon. And just as we did they will verify their responses with the agency before they file them, which I think is a very good practice.

Rich Silver – Lehman Brothers Incorporated

Thanks very much.

Operator

Thank you. Our next question is coming from David Steinberg of Deutsche Bank.

David Steinberg – Deutsche Bank

Yes, hi thanks. Gearoid, I was wondering if you could give us some insight into Axcan’s (inaudible) product since you are a supplier to them of the base product. I think they have PDUFA date before yours and there has been little or no information in the market place about what the FDA response is, could you share any insight into where that stands at the FDA?

Gearoid Faherty

Good morning, David. No, sorry I can’t. We have been instructed by Axcan that issues related to their products are confidential to Axcan and that should have – people who have questions regarding their filings or their products that they should direct the questions to Axcan directly and that we should not comment.

David Steinberg – Deutsche Bank

And are they still ordering products from you – you know, raw materials as usual. Any change in their patterns of order?

David Steinberg – Deutsche Bank

I would really prefer not to comment David. I think people who have questions for Axcan they should direct the question to Axcan.

David Steinberg – Deutsche Bank

Okay, thanks.

Operator

(Operator instructions) Our next question is coming from Donald Ellis of Thomas Weisel Partners.

Donald Ellis – Thomas Weisel Partners

Hi, good morning everyone. Can you hear me okay.

Gearoid Faherty

I can hear you fine, Don. How are you?

Donald Ellis – Thomas Weisel Partners

Great fine thank you. I had a few competitive questions and I will ask one at a time, first of all recently a privately held company filed a stage 3 trial in the US for pancreatic enzymes the first of maybe of 4 or 5 modules. If they had your resources, roughly how long do you think it would take from this point to submit a complete filing?

Gearoid Faherty

I know the company you are talking about Don, but what I didn’t get clarity on was what the module they filed. I understood they filed one module and a typical NDA is made up of more than 5, but again no insight into the company. So, I don’t know. It is very much dependent on what level of clinical work they have already done. Our timeline, it took us approximately 6 to 9 months to get our protocol agreed and approved at the FDA and the Cystic Fibrosis Foundation. It then took us another 6 months to get IRB approval to get the trial set up and then over a year to execute them, followed by another period of time to do statistical analysis and put a file together. So you are certainly talking to get through this program 2 to 3 years, at least that is our experience on it. So, without knowing what these people have filed, what module went in it is very hard to comment.

Donald Ellis – Thomas Weisel Partners

Okay thanks. The next question is regarding, is it likely that if anyone were enrolling patients in human clinical trials in Europe, is it likely that you guys would know about it?

Gearoid Faherty

No guarantee, but yes I would expect we would. Obviously having done trials in CF, it is a relatively small community. We have been aware of other people who have done things here in the past. We would expect to hear. Obviously no guarantee. Our medical team would be in contact with various specialists who work in this space. So, I would be surprised if we didn’t hear something.

Donald Ellis – Thomas Weisel Partners

And so can you say to your knowledge is anyone enrolling patients in clinical trials in Europe?

Gearoid Faherty

In pancreatic enzymes like ours, not that I am aware of.

Donald Ellis – Thomas Weisel Partners

Okay great. Last question, Impax this morning apparently reported some Phase III data on the extended release Baclofen, first have you had a chance to look at that data and do you have any opinions as how that would stack up competitively versus Amrix?

Gearoid Faherty

Haven’t seen the data yet. Heard about it, but haven’t seen it yet. So, I can’t comment on it.

Donald Ellis – Thomas Weisel Partners

Great thank you very much.

Gearoid Faherty

No problem.

Operator

(Operator instructions) Thank you. Our next question is coming from Bob Yedid of Principled Capital Management.

Bob Yedid – Principled Capital Management

Gearoid, good morning and congratulations to your team on a good quarter.

Gearoid Faherty

Thank you.

Bob Yedid – Principled Capital Management

I just wanted to ask with regards to the UCB settlement, this is again $25 million will come in did you say at the end of the third quarter?

Gearoid Faherty

It will come in on the 5th of September, Bob.

Bob Yedid – Principled Capital Management

Okay great and so that basically will take your cash I think to approximately $40 million US, so that would really – is it correct to conclude that it makes it much less likely that you would have any sort of financing needs prior to or concurrent with the launch of your pancreatic enzyme product?

Gearoid Faherty

That is correct Bob. I think even before we did the settlement our projection showed that we did not need any finance to get to the end of the year and launch the product and then obviously once we launch we wouldn’t expect the need. So, even before this we didn’t expect to and obviously now this totally confirms that.

Bob Yedid – Principled Capital Management

Great, and then the second question I had was you mentioned as part of the EU centralized review marketing application that you are going to make in 2009, I think you said mid-year, is there separately a pediatric plan that you mentioned that you finalized now with them, and maybe talk a little bit about how that works and what that means?

Gearoid Faherty

Sure, what happened in Europe some time ago some new legislation was imposed related to the need for pediatric testing for (inaudible) authorizations and the process is you put together some details of the work you have already done in the pediatric population and the work you propose to do if you feel you need to do additional work. You submit this plan to the EMEA and they review it prior to you filing and the actual marketing application. They take about approximately 6 months to do it. And what they do is very similar to the FDA, they take the file in, they take about 60 days to look at it and tell you that the file is complete and they are happy with this, and if they do then they compile an advisory committee of pediatricians and experts in the space to review the data that you have submitted or the plan that you propose to execute and then they come back and give you guidance. They turned around our file very, very quickly. We were told last week that it has been accepted for review and we would expect to get guidance from them as to whether they want additional work or happy with what we have towards the end of the third quarter, start of fourth quarter this year.

Bob Yedid – Principled Capital Management

Great, thanks very much for that information.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Gearoid Faherty

At this time we have no additional comments to make. We just like to thank people for their attention and time this morning and we look to reporting on our progress on the next call. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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