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Edited Transcript of CNJ.TO^B14 earnings conference call or presentation 19-Oct-07 3:00pm GMT

WINNIPEG May 18, 2020 (Thomson StreetEvents) — Edited Transcript of Cangene Corp (Pre-Reincorporation) earnings conference call or presentation Friday, October 19, 2007 at 3:00:00pm GMT

* Dr. John Langstaff

Good morning, ladies and gentlemen, and welcome to Cangene Corporation’s fourth-quarter and year-end fiscal 2007 results conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being webcast and recorded today, Friday, October 19, 2007 at 11 a.m. Eastern Time.

I will now turn the conference over to Dr. John Langstaff, President and Chief Executive Officer of Cangene. Dr. Langstaff, please go ahead.

Dr. John Langstaff, Cangene Corporation – President, CEO [2]

Thank you very much, Operator. I’d just like to offer a bit of an apology. I have a bit of a sore throat, so hopefully this all comes through okay. I guess the good news is that everyone on the conference call is safe except for Mike, who no doubt will get the sore throat tomorrow.

Good morning, ladies and gentlemen, and thank you for joining us for Cangene’s fourth-quarter and year-end fiscal 2007 results conference call. With me today, as usual, is Mike Graham, our Chief Financial Officer.

In terms of an agenda for today’s call, I will begin by providing an operational review. Mike will then take a few moments to talk about the financial results. And finally, I will return to provide you with some closing comments before we open up the call to questions.

Before I begin, I will remind you that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to Cangene’s future business or business performance. Actual results could differ materially from those anticipated in these forward-looking statements.

Certain factors and/or assumptions are applied in arriving at any forward-looking information, and additional detail about the material factors and/or assumptions employed to arrive at forward-looking information as well as the material risk factors that may affect actual results are contained in the MD&A section of our most recent Annual Report and Annual Information Form, both of which are available on our website or on SEDAR at www.SEDAR.com.

Please note that Cangene is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements.

In the last 12 months, we have enjoyed success on a number of fronts, both operationally and corporately, achieving five regulatory milestones, launching new products, starting delivery on two multi-million-dollar contracts, improving our capital structure and furthering our commitment to sound corporate governance by adding two new directors including one independent director. Each of these events plays a role in our ongoing strategy to build long-term shareholder value.

While our financial results for the year trended near recent historical levels, subsequent to year-end, we passed our largest ever contract milestones, which will generate a significant improvement in our financial performance over the next few years. In mid-August, we were informed that we had met all regulatory and manufacturing requirements that allowed us to deliver usable product to the US strategic national stockpile for both our botulism antitoxin and our anthrax immune globulin contracts with the US Department of Health and Human Services.

The subsequent delivery of product and its acceptance into the stockpile allows us to bill all reimbursable development costs incurred to date, as well as for the initial product delivery. We anticipate that this first payment will be in the range of US$18 million to US$22 million, and will be recognized in the first quarter of fiscal 2008.

This is the first revenue in a stream that should top US$500 million over the next four years, and if HHS elects to exercise certain contractual options, could grow by up to a further US$234 million. Supporting our ability to supply these products is our newly-completed plasma fractionation facility. We are currently completing the process validation and compliance requirements so that commercial manufacturing, beginning with our botulism antitoxin product, can begin there.

People often ask me how we intend to grow outside of these initial large but finite contracts. Part of the equation is extending the length and therefore value of each of these contracts. In fiscal 2007, we had our original VIG contract, the first of our large biodefense contracts, extended for another five years. This extension will generate revenue from support of licensing requirements, ongoing stability studies, further clinical testing and development products, and should also provide for future orders.

Since the original contract award, we have had orders from other national governments and in the most recent quarter received Health Canada approval for the product. We fully intend to seek out similar opportunities for both the anthrax and the botulism products.

Beyond this, there are a number of potential targets that have been identified as either bioterrorism threats or infectious agents that our technology may allow us to address. On this basis, we will continue to seek out new opportunities for stockpiling contracts, and a portion of the cash flow that comes in from the current contracts will be directed at these development efforts.

Cangene’s biopharmaceutical business, which has demonstrated modest growth over the long term, remains an important part of our strategy. These approved products supply stable revenues and modest growth without the volatility of the larger biodefense contracts. For more than 25 years, WinRho SDF has been our primary revenue-generating product, although recent strength in the Canadian dollar has affected US dollar-denominated sales performance. Increased sales volume of the higher-margin liquid version has helped partially offset the foreign exchange impact.

The European market continues to represent an important opportunity. And our marketing partner, Baxter Healthcare, has now launched a product for the ITP indication in the UK, Ireland, Italy, Portugal and Greece. Launches are planned for the Netherlands, Belgium and Luxembourg in January 2008 and Finland and Norway shortly thereafter. We continue also to work towards registration in the other European countries through the mutual recognition procedure.

New products will also drive growth in our biopharmaceutical segment. In January, Health Canada issued a notice of compliance with conditions for HepaGam B, our hepatitis B immune globulin product. This notice allows us to market the drug in Canada for the prevention of hepatitis B reoccurrence following liver transplantation in adult patients. In April, the US FDA granted us licensure for the same indication. These approvals allow us to address a significant medical need in both countries, as there is no other hyperimmune licensed for this indication.

Our clinical trial data showed that HepaGam B is highly effective in preventing hepatitis B reoccurrence, and consistently yields antibody levels that exceed our target. We estimate that the US market for the HepaGam B product ranges from US$40 million to US$50 million per year, and represents a significant growth opportunity for Cangene.

HepaGam B does face competition for the liver transplant indication from an established but an unlicensed product. However, we believe that sales will grow as physicians and transplant centers grow more familiar with our product, now that it is approved for this indication.

HepaGam B is marketed in the US by Apotex Corp., which is expanding its sales force in order to better penetrate the market. During the year, Apotex secured a five-year agreement with Novation LLC, a leading healthcare services GPO in the US, for the distribution of the product under the NOVAPLUS private label program, which we expect will generate further exposure of the product.

The recombinant products we are developing will also play a role in our long-term growth. During the year, we received an approvable letter for the FDA for Accretropin, our human growth hormone, making it the most advanced of our recombinant products in our pipeline. This letter requested additional support data on our manufacturing processes, but no further clinical trials or data.

We provided the supporting information to the FDA in July, and are awaiting their response. The human growth hormone market is a competitive one, with a number of products already approved. However, it is also a very large market, with the already-approved products generated in excess of C$2 billion in sales globally. Securing even a small portion of this market would provide us with another significant revenue stream.

One of our strategies for the years ahead is to channel cash flow from our stockpiling contracts with the US government into our independent R&D programs. Often working with thought-leading experts, we develop new product ideas and technologies through these programs. On this basis, we have formulated a process for product and technology innovation. And recently, we organized our R&D operation to better align our research and development, clinical and commercial activities, which should in turn enhance our R&D efforts.

One R&D project that we hope to advance in the year ahead is a Pep 35 peptide product, which appears to provide resistance to Staphylococcus aureus bacteria, and may help prevent post-surgical wound infections. Antibiotic resistance in bacteria is a very serious concern in healthcare settings, with methicillin-resistant infections going from 2% in 1974 to 64% in 2004. Our peptide appears to have a novel mechanism of action, and continues to produce interesting results in pre-clinical testing.

A second R&D program under development is our modified Leucotropin product for treating acute radiation exposure. In addition to these disclosed research projects, we have a number of early-stage research projects and clinical investigations underway that may result in new products or technologies or expand in utility for the existing products. An example of the latter would be the use of WinRho SDF in treating patients who have low platelet counts due to dengue hemorrhagic fever, where we have already seen some promising results.

With that, I will now turn the call over to Mike Graham for the financial review. Mike?

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Michael Graham, Cangene Corporation – CFO [3]

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Thanks, John. Good morning, ladies and gentlemen. Total revenues for the year ended July 31, 2007 were C$92.4 million, compared with C$109.3 million in the prior year. Revenues are lower in the current year, because the prior year included a C$16 million sale of VIG to the UK government. In addition, Cangene had lower R&D service revenues in fiscal 2007, due to reduced revenue from the joint development agreement with Apotex and earlier US government R&D contracts, combined with the fact that revenue was not yet being recognized on the new botulinum and anthrax stockpiling contracts awarded in 2006 by HHS. Partially offsetting these reduced revenues were higher sales of WinRho, particularly in the US, where sales were up 24% over 2006 levels.

Turning to the segmented information, product sales revenue in the biopharmaceutical operations segment consists of sales of licensed products. R&D services revenues in this segment include revenue from joint development agreements with Apotex, while royalty revenues are received from Apotex based on their sales of a drug called Ferriprox.

Biopharmaceutical product sales were C$41.7 million for the year, compared with C$52.2 million in the prior year. The significantly lower sales revenue in this segment in the current year is primarily due to a sale of VIG to the UK government in the prior year that accounted for C$16 million in the prior year’s revenue.

In the current year, sales of WinRho in the US were significantly stronger than in the prior year, and HepaGam B sales have commenced. The increased WinRho sales in the US result from both higher prices on the liquid formulation and increased sales volume. In the prior year, the majority of WinRho sales were the freeze-dried product. These factors have helped to partially offset the absence of the large VIG sale in the prior year.

Gross profit on biopharmaceutical product sales for the year were C$27.1 million or approximately 65% of sales. In fiscal 2006, gross profit was C$30.9 million or approximately 59% of sales. The gross profit on product sales decreased in absolute dollar terms, but increased on a percentage basis during the current year. This change resulted primarily from the inclusion of the relatively low-margin UK VIG sale in the prior year’s numbers. Increased WinRho sales volumes in the US, as well as an introduction of the higher-margin liquid formulation in the US, also contributed to the increase in gross margin over the prior year.

R&D service revenues in this segment were C$11.6 million this year, compared with C$15.6 million a year ago. R&D service revenues are lower in the current year, due to reduced revenue from the joint development agreement with Apotex, reflecting reduced activity as two of these products, Accretropin and Leucotropin, have been submitted for regulatory review.

Gross profit on R&D services in this segment for the year was C$4.2 million or 36% of revenue, compared with C$5.6 million or 36% of revenue in the prior year. Gross profit on R&D service activities in this segment varies with the level of development activities on these joint research projects with Apotex and with the eligibility of these research expenditures to generate investment tax credits.

Revenue from royalties increased to C$8.3 million in fiscal 2007 from C$6.5 million in the prior year. The increase in royalty revenue for the year is due to the higher sales of Ferriprox, a drug manufactured and marketed by Apotex, for which Cangene receives 50% of the net profits.

Product service revenues in the contract services segment comprises third-party contract manufacturing revenues at Cangene’s Winnipeg facilities, as well as at Chesapeake Biological. R&D service revenues in this segment are derived from contract research and development activities for third parties, including government contracts and non-government third-party customers.

Contract manufacturing revenue was C$17.1 million for the year, compared with C$16.7 million a year earlier. The higher contract manufacturing revenue in 2007 resulted from the increased volume of contract fill finishing at the Chesapeake subsidiary, combined with some new third-party contract work in Canada. These increases were partially offset by reduced VIG revenues in the prior year, including additional contract manufacturing revenue under the VIG contract with the US government relating to work initiated prior to licensure.

Gross profit on contract manufacturing revenues was C$4.7 million or 27% of revenue in the current year. In comparison, during the prior year, negative gross profits were recorded. The improved gross profit is due to increased fill finishing volume at Chesapeake, combined with a growing level of contract manufacturing activity at our Canadian operations.

Revenue from contract R&D services in this segment was C$13.7 million this fiscal year, compared with C$18.3 million last year. The 2003 US government R&D contract to develop the anthrax product contributed to the reduced revenues and costs in the current year. The comparative year, however, included significant revenues related to both anthrax and botulinum antitoxin R&D contracts that were awarded in 2003. The decrease in these contract revenues was partially offset by new third-party contract R&D work in the Canadian operations. Contract R&D services revenues relate to a product for which Apotex holds the license remain consistent with the prior year. This Apotex contract was concluded subsequent to the year end.

In the current year, significant development work occurred in both the botulinum and anthrax stockpiling contracts awarded in 2006, and development costs were recorded in work-in-process inventory. These costs can be expensed in the related revenue recognized following delivery of usable product, as defined by the contracts. Subsequent to year end, Cangene met all regulatory and manufacturing usable product requirements, and delivered both products to the strategic national stockpile. Delivery of the products and their acceptance into the stockpile permits Cangene to begin invoicing and recording revenue on these contracts in the first quarter of 2008. The initial payment is expected to be in the range of US$18 million to US$22 million.

The Company anticipates that contract service revenues will continue to fluctuate in the future, depending on varying levels of activity related to existing contracts and whether significant new R&D or manufacturing contracts with the US government or other parties are awarded. Independent R&D expenditures, for which no related revenue is derived, were C$6.7 million in fiscal 2007 compared with C$4.7 million in the prior year. Expenditures increased significantly due to activity related to the HepaGam B approval in 2007. Other significant independent R&D expenditures in 2007 were related to the development of VariZIG, the PEG Leucotropin product and the Pep 35 project.

Cangene continues to conduct independent research in several related biopharmaceutical fields, ranging from expanding applications of hyperimmunes to innovative research into entirely new therapies. In 2008, Cangene intends to focus efforts on a number of initiatives, including hyperimmune process improvements, HepaGam B studies, PEG Leucotropin development and the Pep 35 project.

Total selling, general and administrative expense in 2007 increased marginally to C$13 million from C$12.8 million in the prior year. Increased SG&A expense includes higher compensation costs as well as increased directors’ fees. Increased compensation costs are largely as a result of increased staffing to support work on the US government stockpiling contracts. These increases were partially offset by decreases in Phantom-Stock Incentive Plan liability, bad debt expense and legal fees.

Net income for the year ended July 31, 2007 was C$10.1 million or $0.15 per share, compared with C$13.1 million or C$0.20 per share for the prior year. Net income for the current year was lower than the prior year, primarily due to the significant sale of VIG to the UK that occurred in the prior year and reduced revenues on US government contracts in the current year, as earlier R&D contracts are complete and the company is not yet invoicing or recognizing revenue for their stockpiling contracts awarded in 2006. These factors were partially offset by improved sales of the higher-margin liquid WinRho in the US.

Turning to the balance sheet, cash at July 31, 2007 was nil, compared to C$7.7 million at the end of 2006. Cash was used in operating activities during 2007, compared with cash provided by operating activities during the prior year. The change was primarily due to an increase in net non-cash working capital from operations. Non-cash working capital from operations, excluding bank debt, has increased by C$21.6 million since July 31, 2006. Higher working capital levels at July 31, 2007 primarily resulted from an increase in inventory that reflects plasma collection activities and capitalized development costs for the US government stockpiling contracts.

At July 31, 2007, the Company had recorded total costs of 38 million relating to the botulinum and anthrax stockpiling contracts, including raw material and work-in-process inventories, prepaid expenses and other assets. Offsetting the impact of the increase in inventory, Accounts Receivable is down due to lower amounts due from Apotex and from US government contracts, while Accounts Payable has increased due to the costs associated with the ongoing US government stockpiling contracts.

In 2007, cash was provided by financing activities as the proceeds on issuance of common shares exceeded the repayment of long term debt associated with the fractionation facility expansion. In the prior year, financing cash flow was also positive as the issuance of long-term debt for the plant expansion exceeded the repayment of bank indebtedness and other long-term debt.

Cangene has available a C$20 million operating line of credit with a Canadian-chartered bank. On July 31, 2007, there was C$2.1 million outstanding on this operating line compared to nil at the end of the prior year. On December 15, 2006, the Company repaid C$24 million of a non-revolving term loan used to fund plant expansion using proceeds of the share offering, and repaid an additional C$5 million in monthly installments during 2007.

Cash used in investing activities decreased in 2007, reflecting the slowdown in expenditures on plant and equipment, as the new plasma fractionation plant is complete and ready for use. At July 31, 2007, excluding the impact of investment tax credits, C$36.9 million has been spent on the fractionation plant expansion, compared with C$33.1 million at the end of July 31, 2006. The Company’s ability to generate funds from operating activities, including product sales and contract services, as well as its ability to obtain debt financing from its bank, are expected to provide sufficient liquidity to meet the anticipated needs of existing projects, including the US government stockpiling contracts absent the occurrence of any unforeseen events. The Company also anticipates that it could raise further new equity or obtain debt financing if and when new capital is required to fund growth or when a market opportunity exists.

That concludes our financial review. I would like to turn the call back to John for some closing remarks.

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Dr. John Langstaff, Cangene Corporation – President, CEO [4]

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Thanks a lot, Mike. Earlier in the call, I alluded to a number of steps we are taking to support the creation of long-term shareholder value and smooth out the fluctuations in revenue due to the nature of our contract business. This is a four-part strategy that emphasizes expanding the sales of our approved products through our marketing partners by accessing new markets globally and identifying new indications, seeking new partners for our completed biodefense products and using revenue from existing contracts to drive development of new pipeline products for both infectious disease and biodefense applications and also identifying possible complementary product and technologies or business acquisitions.

These steps will help us better manage our financial performance while we continue to access the large contract opportunities that may allow us to generate significant positive upside, in some cases, prior to receiving full FDA approval. We remain committed to delivering positive growth and look forward to fiscal 2008 with great anticipation.

That concludes my remarks for this morning. We would now be pleased to answer any questions that you might have. Operator?

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Questions and Answers

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Operator [1]

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(OPERATOR INSTRUCTIONS). Philippa Flint, RBC Capital Markets.

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Philippa Flint, RBC Capital Markets – Analyst [2]

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A few questions. First, on the bioterrorism, can you comment at all in terms of after you get the first payment, the US$18 million to US$22 million for the anthrax/botulism, in future quarters, do you expect to receive some money in each quarter, or just how lumpy? Can you provide any guidance on just how lumpy you expect those revenues to be?

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Dr. John Langstaff, Cangene Corporation – President, CEO [3]

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Sure I can. First of all, there are really two primary components to these contracts — the licensure component, as I would call it, and the development component and the actual product delivery component. The development component will continue, and we’re continuing to conduct clinical studies on both of these products. My expectation is that that revenue is going to be relatively steady through the next four or five quarters anyway. That’s really a function of the level of activity on those various clinical studies. But frankly, it is, as I say, relatively smooth.

The product delivery, on the other hand, is not quite as smooth, and is different with respect to the two different products. On the botulinum product, we are just completing, as we mentioned in the call, the validation and the startup of the new fractionation facility. That facility is going to be dedicated to the botulinum product, at least during the life of this first botulinum contract. As a result, we won’t start delivering that product until sometime near the end of this fiscal year. As a result, we’re not expecting to see a large amount of product revenue in 2008.

On the anthrax product, we are in manufacturing now. And the rate at which we are going to be able to deliver product is dictated by the rate at which we can collect plasma. So again, we are expecting some ramp-up there, and not expecting a huge amount of revenue to flow in from that in this initial going. In fact, what we are expecting to see is a ramp-up in the collection of plasma followed by a ramp-up in the level of production. Again, that is going to be — take some time to get through that in the next two to three quarters.

So it is our expectation that we are going to see a fair — kind of a big lump of revenue in this first quarter, followed by quarters that I think are going to be tempered a bit with respect to these contract revenues but then continuing to kind of gradually build thereafter. That’s, I guess, the clearest picture I can give you now of what we expect.

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Philippa Flint, RBC Capital Markets – Analyst [4]

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No, that’s great; thank you. What you’ve seen so far — and I know it’s still very early — but do you think that yields that I think you will get — I know you can’t obviously say what they are — but be in line with your expectations in terms of what you’ve bid on the contract?

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Dr. John Langstaff, Cangene Corporation – President, CEO [5]

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I think they will. It’s still too early to say exactly if they will or not. The bot ones are pretty consistent right now. Anthrax — still a little bit of variability in there. And part of the variability is not only driven by the vaccinations that we do of both the horses and the people, but also by the — there’s a huge variability in the assays. So that’s one of the ongoing research projects. But I think they’re basically in line with what we expect.

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Philippa Flint, RBC Capital Markets – Analyst [6]

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Then, if I just ask you a couple of questions on the Accretropin. Can you talk about, I guess, future marketing once you’ve got — assuming you do get the approval from the FDA? What are your plans in terms of trying to penetrate and how to penetrate that human growth hormone market in the US?

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Dr. John Langstaff, Cangene Corporation – President, CEO [7]

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Well, I mean, we are also assuming — we haven’t heard from the FDA in quite a while on that, so we are expecting — we are hoping and expecting a positive view. But that really — our agreement is with Apotex to launch this product in — or to market this product in Canada and the United States. In actual fact, their experiences with HepaGam B in the United States, I think, are setting the stage and it’s really been a bit of a slow ramp-up for us with that product. But I think they are sort of learning their ropes on the branded type products of this — like Accretropin and the like by doing that.

So really, it will take the establishment of a sales force, which we have not yet established — or they have not yet established to the best of my knowledge. So I hesitate to really give you any guidance in that regard. If you look at some of the other companies that have launched the hGH in the United States, other than the two major players in there, it is usually a pretty slow ramp-up of sales if you look at the Teva product or the Sandoz product. So I think that’s what we’re expecting will likely occur with our human growth hormone.

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Operator [8]

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Tricia Connolly, GMP Securities.

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Tricia Connolly, GMP Securities – Analyst [9]

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I was just wondering if you can follow up and give us some insight about the progress of your other biodefense project, specifically Leucotropin. Also, a breakdown of sales would be good for WinRho and HepaGam.

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Dr. John Langstaff, Cangene Corporation – President, CEO [10]

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We are expecting a request for proposal to come from the US government for Leucotropin, which will be the next real milestone for that product, and that’s for the acute radiation syndrome. We think we have a good shot at competing in the — accessing the funding for that. And it will be — the stockpiling contracts, since the RFP has not come out, we don’t actually know the value of it, but that will be the next stage for it. We are speculating that it will be somewhere between $30 million and $200 million, somewhere in that range, can’t narrow it down much more than that.

We have a CRTI program, which is a Canadian government-funded program, where we are actually testing the product in a model system for acute radiation syndrome. So that will be, basically, the next biodefense project that we work on.

I think a breakdown of sales —

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Michael Graham, Cangene Corporation – CFO [11]

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Well, we don’t disclose that. All I can tell you is that WinRho is still by far the majority of our — or it was during 2007, the majority of our commercial product revenue. HepaGam is growing, as John said, at a fairly slow pace. But I guess the good news is that a) Apotex has signed this deal with Novation. And Novation is beginning to distribute the product. And b) Apotex is building their sales force very slowly here, but are building it towards increasing the penetration in the market with respect to the transplant indication. So there are good signs that we’re going to continue to see those HepaGam sales grow.

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Operator [12]

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(OPERATOR INSTRUCTIONS). Dr. Langstaff, there are no further questions at this time. Please continue.

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Dr. John Langstaff, Cangene Corporation – President, CEO [13]

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Thank you very much, Operator. I would once again like to thank everyone for joining us today. We look forward to speaking with you again soon and updating you on our recent progress. Thanks again.

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Operator [14]

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Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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