Capstone Holding Corp (CAPS) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the OrthoLogic Corporation first quarter 2003 earnings conference call. At this time all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. I would now like to turn the floor over on to your host, Mr. Larry Delaney of the Berlin Group. Sir, the floor is yours.

Good day, and thank you for joining us to discuss first quarter 2003 financial and operational results with management of OrthoLogic Corporation. OrthoLogic management will provide an overview of the results and then we'll open up the call to your questions. But first this call contains forward-looking statements that are made pursuant to the safe harbor provisions of the private securities litigation reform act of 1995. These forwarding statements involve risks and uncertainties that could cause actual results to differ materially. Factors that could cause or contribute to such differences can be found in the statement accompanying this morning's press release, as well as the company’s annual report on form 10-K for the fiscal year ended December 31, 2002 and other documents filed by the company with the Securities and Exchange Commission. With that I'll turn it over to Tom Trotter, OrthoLogic's President and CEO.

Good morning. Thank you all for joining us today for our first quarter 2003 earnings conference call. Joining me this morning are Sherry Sturman;, Senior Vice President and Chief Financial Officer, and Dr. Jim Ryabi, Senior Vice President and Chief Technology Officer. I will begin with a brief review of the quarter. Sherry will follow with additional financial information. And Jim will conclude with an update on the Chrysalin Ortho-biologic program. I will then provide guidance on the outlook for the remainder of 2003 before we open the call up for your questions.

We are very pleased with the financial and operational results for the first quarter of 2003. The posted record quarterly sales for our bone growth stimulation business, quarterly net income, and another quarter of positive cash flow from operations. Taking a closer look at the first quarter results, total bone growth stimulation sales set a quarterly record at $10.4m, up approximately 19% ahead of the same quarter prior year. Both the OL1000 and SpinaLogic contributed to this excellent performance with a particularly strong contribution from the OL1000. We believe that we continue to gain market share since the sales for our products grew significantly faster than recent estimates of the growth rate for the overall bone growth stimulation market. In addition to the excellent sales results for the first quarter , we continue to make very good progress with our Chrysalin OrthoLogic Ortho-biologic program. In a moment Jim will provide more details. Finally, in early April, we settled a legal dispute with OrthoRehab, Inc., the purchaser of the assets of the continuous passive motion business. Under the terms of the settlement agreement, OrthoRehab will pay OrthoLogic $1.2m to settle all outstanding claims between the two companies. An initial payment of $257,000 has already been received. The balance of the $1.2m, or $943,000 plus interest, is scheduled to be paid over a 36-month period beginning in May 2003. The initial payment and all subsequent payments will be reflected when received, beginning in the second quarter of 2003. I will now turn the call over to Sherry who will provide you with additional details regarding our financial results. Sherry?

Thank you, Tom. Good morning. We are pleased to report the company's financial performance for the first quarter of 2003. Sales have continued to increase and as anticipated, net income is close to break even. I will give a brief financial overview starting with the income statement.

Total revenues for the first quarter of 2003 were $10.4m, compared to $9.6m in the comparable quarter the prior year. The prior year total of $9.6m includes $904,000 of HiAllagone (ph) royalties which ended in December of 2002. The combined bone growth stimulation revenues were $10.4m in the first quarter of 2003 compared to 8.7m in the first quarter of 2002, showing an increase of approximately 19% over the prior year. Growth profit as a percent of sales for this quarter was 86%. SG&A expenses were $7.4m for the first quarter at 71% of sales.

Normalizing the 2002 revenues to include just bone stem revenues, the SG&A expense of 6.7m on 8.7m of bone stem sales during the first quarter of 2002 reflected an SG&A percentage of 77% of sales. The comparative improvement of SG&A as a percent of sales can be attributed to continued strong collections for the bone stem billing, lower legal costs and overall economies of scale as administrative expenses have been kept relatively flat while the sales base continues to increase. R & D expenses were $1.5m during the first quarter of 2003 compared to $920,000 during the first quarter of 2002. The increase in R & D spending is directly related to the progress made on the Chrysalin development program. In the first quarter of 2002, the company adjusted total operating expenses by $600,000 for the additional collection of CPM receivables.

As Tom just discussed, the anticipated payments for the settlement agreement will be reflected as a purchase price adjustment on the CPM divestiture and related charges line and statement of operations beginning in the second quarter. Net income for the first quarter of 2003 was $142,000, or 0 cents per share. For the same period in the prior year, net income was $1.4m, or 4 cents per share. The comparison of net income between the first quarter of 2003 and the first quarter of 2002 is directly affected by three primary variances.

First, 2002 first quarter revenues included the $904,000 in HiAllagone royalties. Second, 2002 first quarter operating expenses were decreased $600,000 for the over collection of CPM receivables. And third, R & D spending increased in 2003 by $540,000 for the Chrysalin progress. Turning to the balance sheet, the company ended the first quarter of 2003 with cash and investments totaling $36.4m compared to $35.6m at the end of 2002, an increase of approximately $800,000. Positive cash flows generated from operations was approximately $600,000 in this quarter.

For the remainder of 2003, the company expects the increased

R & D spending for the Chrysalin program to offset the positive cash flows and net income provided by the bone stem operation. The accounts receivable balance decreased from 9.6m at December 2002 to 9.2m at the end of the first quarter for 2003. The $400,000 decrease in AR during the quarter is a result of the good collection experience on the bone stem billing. The DSO at March 31 was less than 90 days. The inventory balances increased from 2.6m at the end of the fiscal year 2002 to 2.7m at the end of the first quarter. DSI for the quarter ended at 137 days compared to 127 days at the end of 2002. That concludes my review of the financial statement. Tom?

Thank you, Sherry. Dr. Jim Ryabi by will now provide you with an update on the Chrysalin Ortho-biologic program. Jim?

Thank you, Tom. During the first quarter of 2003 the company made significant progress regarding the Chrysalin product platform. We continue to make progress on our two current clinical trials, the Phase III trial for fracture repair and a phase I-II trial for spine fusion. We are encouraged that a number of prominent physicians are very interested in the Chrysalin program and are participating in these clinical trials.

As an overview of the Chrysalin program, there are four orthopedic indications currently envisioned in the product pipeline for Chrysalin. Three of these indications are being actively pursued. These are fracture repair, spine fusion and cartilage defect repair. The fourth indication, ligament and tendon healing, is in the preclinical planning stage. Our most advanced clinical program is for the fracture repair indication. The results of the phase I-II fracture study were presented this month at the combined meeting of the British society for hand surgery and the American Society for surgery of the hand. We received strong interest following this presentation, and this speaks well for the potential clinical benefit that a drug like Chrysalin would provide in orthopedics. As we have stated before, the results showed that there were no safety issues related to the use of Chrysalin as compared to the placebo sale in controls. Based on radiographic assessment the Chrysalin treated fracture group healed approximately 25% faster than placebo patients.

Our Phase III clinical trial is currently underway with expected enrollment of approximately 500 patients in 25 to 30 centers. As in our phase I -II clinical trial, patients with unstable distal radius fractures will be enrolled in this study. Patients will be randomized to receive either Chrysalin or placebo by a single injection into the fracture site. We are currently enrolling patients at approximately 1/3 of our sites with most of the remaining sites already identified for participation in this study. It is expected that patient enrollment will take 18 to 24 months.

Regarding the use of Chrysalin in spine fusion, we are currently conducting a combined phase I-II human clinical trial. This study will enroll approximately 330 patients at 15 to 20 centers. Patients will be randomized to a combination of Chrysalin with aloe graph at two doses of Chrysalin and compared to patients randomized to autograph and spine fusion surgery. We have identified approximately 1/2 of the sites that will participate in the study, and several sites are currently enrolling patients. We have recently expanded the inclusion criteria in this trial to include two level fusions, and we believe this will positively impact the enrollment rate. The patient enrollment process for the spinal fusion trial is expected to take approximately 24 months.

The third indication in the Chrysalin product platform is the use of Chrysalin for cartilage defect repair. As we have reported previously, initial preclinical studies of Chrysalin for repair of cartilage defects showed encouraging results. We remain hopeful regarding initiation of a human clinical trial before the end of 2003.

In conclusion, we continue to make progress in our Chrysalin product development program. We believe that peptide-based therapeutic approaches such as Chrysalin provide many advantages and are one of the most innovative tasks for Ortho-biologic product development. Tom, back to you.

Thank you, Jim. Before moving on to your questions, I'll now provide you with guidance for the balance of the 2003. We are currently on track to achieve our goal of a double-digit increase in sales for our bone growth stimulation products this year. We anticipate that the profits generated from our ongoing business will be sufficient to cover the cost of the Chrysalin program for 2003 and that we will finish this year at about break even on net income. This concludes our formal remarks. At this time we will open the call up for your questions. Operator?

Thank you. The floor is now open for questions. If you have a question, you may press the number 1 followed by 4 on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. One moment while we poll for questions. Thank you. Your first question is coming from Steve Hamill of RBC Capital. Please state your question.

Good morning to you all.

Hi, Steve.

I was wondering, in terms of the SpinaLogic business, if you could talk a little about what you've seen here over the course of this quarter with the transition that you talked about on the fourth quarter conference call in the selling strategy that the J & J reps were using of really trying to sell for scheduled surgeries. Can you talk about that impact?

Yes, Steve. Thanks for the question. We believe that we've done a good job of kind of tightening up the process there between the receipt of the scrip by the patient and the placement of the device on the patients. And we believe that this is kind of gotten us back to what I would call a steady state situation. We did see growth in the spinal business year over year. And we believe that the spinal business is kind of back on track, if you will. I don't know that we've seen any significant change in terms of the change over the fourth quarter in terms of when the scripts were received relative to when they had been received previous to that. So I guess the answer to your question is, the business seems to have normalized here.

We've kind of moved through that quarter, and I think we now have our model going forward on spine. So we had growth in the spine business, as I mentioned earlier we had a double-digit growth in prescriptions for the spine business over the prior year. We kind of believe the spine business is back on track.

Okay. But it sounds like, just because I'm not quite sure I'm following exactly what you mean when you say you had growth in the spine business, but double-digit growth in scripts. That kind of sounds like what we heard in the fourth quarter where revenue growth didn't seem to be as brisk as scrip growth was.

Well, no, I think it was the same thing that we've had. As I mentioned, I don't see a significant change over the fourth quarter revenue growth and scrip growth. Revenue growth generally trails scrip growth a bit because you've got an offset by the time you receive the prescription from when you turn that into revenue. What I was pointing out was we did not see a change in that this quarter versus the prior quarter. And we believe that's the -- we are now moving into that as sort of a steady state with the business. We would expect the scrip growth to exceed the revenue growth here, just because of the time differential between when you turn a scrip into revenue. But we did see revenue growth year over year.

Now, I would also say that there has been a slowing of the spine business over the last year. This has been reported by a number of analysts. The spine business, in general, spinal fusion business, had been growing at plus 30%. Most of the numbers that we have seen recently from the analysts are talking about it being now in the low 20s. So there has been a change in the growth rate of the overall spine business. And, of course, our SpinaLogic business, to some extent, follows the growth rate of the spine business. So I don't know if I can answer it any other way other than to tell you that I don't think there's a significant change over what we saw in the fourth quarter. It did not get any longer or any shorter. It's running about the same period of time. But we believe that's the new normalized operation.

And in terms of the color we got from at least one of your competitors recently, they felt like they did feel an impact from MedTronics infuse BMP on their spinal stimulation sales here in recent months. I'm curious if you feel like you've had a negative impact as well.

Well , I'm not sure which one you're referring to. If you’re referring to BioMed, I believe what I read or heard was that they saw some impact of infuse on their internal spinal stimulation business. In other words, the surgically implanted spinal stimulation business. Yet at the same time they did report, I think, still a 10% increase in their overall spine stimulation business. So I think to the extent that infuse has had any impact, it may have impacted the sub segment of the spinal stimulation business, which is BioMed's internal stimulation device. But that represents a dwindling portion of the spine stimulation business.

Last estimates I've seen out of $175 million market, their internal stimulation business is in the range of $20 million. So it's a small part of the spinal stimulation business. I would also go on to say, regarding the impact of infuse, we believe it's had little or no impact on our spinal fusion, our spinal stimulation business. And the reason I say that is looking at the numbers which have been presented by the analysts that infuse may be a $100m product for MedTronic here in the next 12 months or so. If you do the math on that and the cost of that product at 4- to $5,000, you come out with a number of something in the neighborhood of maybe 20,000 patients being utilized with infuse and with 275,000 lumbar spinal fusions in the marketplace, that represents less than a 10% impact on the overall spinal fusion business. So my answer to you is, we haven't seen any impact -- we haven't had anything informed to us by J & J that we're aware of that infuse had any significant impact on our business. I believe you are correct, it has impacted one of our competitors, as I've said, on their internal piece of the business.

And then my last question, before I hop in the queue, can you give us a better sense as to what the timing is for the filing of an NDA for the cartilage application? It sounds like that -- excuse me, not NDA, an IND, it sounds like that process is still taking a little longer than expected.

Well, I don't know that we've changed from our previous guidance to that. I believe we've been saying all along that we were going to complete the preclinical work that we felt was necessary to support an IND filing, that we would expect that to probably happen this fall and that we would hope that by year end, we would have authorization from the FDA to begin a cartilage trial for Chrysalin. So I don't know that that's any change from the previous guidance that we've given.

Okay. Thanks.

Thank you. Your next question is coming from Bill Plovanic of First Albany. Please state your question.

Thank you. Good quarter.

Hi, Bill. You how doing? Thank you.

Doing pretty good. Couple of questions here. First, on the IND for cartilage, was that by year end? I'm sorry, I missed that.

Yes. But what we have said is we are hopeful of filing an IND during the fall of this year for that indication, data permitting and assuming the preclinical trials move along as scheduled and get completed and it could potentially result in authorization from the FDA to begin a human clinical trial for a cartilage indication for Chrysalin by year end 2003.

Okay. And then just for some clarification on the spine revenue growth, the revenue growth, was that double digits year over year or just the scripts ?

The script growth was double digit year over year. The revenue growth on the spine business was a little bit less than that.

Okay. So that was really in line with what we were looking for.

Right.

And I was wondering if you could give us clarity on the spine long bone mix in the quarter, just a ballpark?

Well, yeah. We can kind of give you a ballpark on that. I think you're looking at somewhere around about 52% or so of the business belong to the long bone side and 48% or so belong to the spine side.

Okay. Great. And then I was wondering if you could give us a little more color on -- I think we had talked about last call, that DePuy (ph) is going to be adding a significant number of direct reps and we're looking at to help boost growth in spine going forward. I was wondering if you have any clarity on where that is in the process right now?

Yes. We continue to, of course, work with them, and they communicate with us regarding their scale up. They had committed, at the end of last year, to significantly increasing the number of sales specialists who have in their product group, the SpinaLogic product. They have completed some of that. They have not completed, as I understood the last numbers we've heard for them at the end of the first quarter, they still had not completed the hiring of all of those specialists.

But I think our original guidance had been that it was going to be during the first six months of 2003. So they really had targeted to have that completed by the end of the second quarter. So we have no reason to believe they're not on schedule. For the adding of those specialists and would complete the adding of those specialists by the end of the second quarter. Then the process, of course, has to be completed of training those people and having them become effective. So we're hopeful that during the second half of 2003 that we'll see continued improvement in SpinaLogic sales.

Great. And then lastly, was -- I think you mentioned you're bringing back the risk fixater (ph) onto the market. I was wondering how that's going and if we should expect anything out of that this year?

Well, yes. We did reintroduce or bring the OrthoFrame back to the market. Sales of that product have been running something less than 50,000 in the first quarter of the year. We had been a little more optimistic on that product, I think, than what has turned out to be the case. Some of that, though, Bill, was due to the fact that our reps are having such significant success with the OL1000. Obviously, we want them moving the OL1000 as much as possible. And our growth in the OL1000 year over year sales for the first quarter were plus 25%. And when any time we can get our reps really driving and making things happen on the long bone side, we want them to be doing that. So we have had probably less focus on the risk fixater than we had originally thought when we started the year. But it's been more an effect of having the reps spending and having a lot more success with the time spent on the OL1000 where we believe we're growing three times or four times faster than our competitors.

Well, considering that stim (ph) is more profitable, I'll take stim any day. Last question is, on the revenue guidance, you had mentioned double digits. I think last quarter you were looking, saying we're probably going to be 46 to $47m. Is this a change in expectations or are we still at that 46 to $47m again with a lot of growth being back end loaded due to the change area?

I think we're still maintaining our guidance in the range $46m or in that range. But, again, we only have the first quarter. We were 19% ahead of sales. And if we stayed on that track, we'd probably end up the year in about the $46m range. So I don't know that we've seen any significant change in the revenue guidance.

Okay. Great. Thanks. And again, good quarter.

Thank you.

Thank you your next question is coming from Justin Cable of B. Riley & Company. Please state your question.

Hey. Good morning, guys.

Hi, Justin.

Now I only have one question. Just what was the net operating loss carried forward at the end of the quarter?

The NOL at the end of the quarter? Sherry, do you have an answer to that?

Right. We still are right around $64m, Justin.

Okay. Thank you.

Okay.

Thank you. Your next question is coming from Chris Shibutani of JP Morgan. Please state your question.

Hi, Tom. I apologize for the background noise. I'm in an airport. Most of the questions have been answered. Perhaps you've been updating us on the number of direct reps you had. I think you were describing picking up that number during the year. Could you tell us what the number was at the end of first quarter and are you still thinking about adding to that through the balance of the year?

Actually, thanks, Chris, for the question. Actually, we had intended to take our reps up from about 36 reps to 42 reps on the direct side. We actually got all of those hired in the first quarter. They're on board. And so we've pretty much got ourselves set at least for this year as far as we can tell. They're on board, trained and ready to go.

Great. And then I think you had announced a hire of someone who was going to manage the clinical trial process. Can you describe whether that person has come on board and what the priorities are there?

Yes. I can answer the first question, and I'll let Jim answer the second question. We were very fortunate to have Maria Walker, (ph) who has 15 years experience in managing clinical trials for drug programs, who had run our phase I-phase II human clinical trial for fracture. She rejoined the company in February. She had been with the genomics project for the last year and a half, came back to us in February, and has really hit the ground running. She's an extremely capable individual, and she definitely has a clear game plan, and perhaps I'll let Jim talk about kind of what the priorities are there.

Well , Chris, I think, as we've stated before, you know, the key priorities for us are to get all 25 to 30 sites in the fracture trial up and enrolling patients and then also to get the 15 to 20 sites in the spine fusion trial up and enrolling patients. So I think the priorities for Maria, her group, and me, are clear. And as Tom mentioned, obviously we also are putting quite a bit of focus on finishing the necessary preclinical work for the cartilage defect indications so that we can submit an IND. And as we said, hopefully by the end of the year, start a human clinical trial for cartilage repair. So I would say that the priorities are focused, clear, and we believe achievable.

Jim, it sounds as though there was a recent presentation once again of hand data. Are there on any other points looking out over the next perhaps even 18, 24 months where you're anticipating any more clinical data will be presented or made available? Incrementally, other than what you've already reported?

Not any clinical data. Basically the presentation made this month in the U.K. was really the same basic data set that we presented at the hand surgery meeting here in October.

Last October, right. Great.

We also plan on presenting this at the academy meeting this year. Again, it's really the purpose is to make sure that the orthopedic surgery community is aware of the work we're doing on Chrysalin. So that's really the sole purpose of --- .

Great. Lastly, Sherry, the gross margin pretty tremendous this quarter. Guidance for the full year, still, I believe it was at 84% range, or what's the guidance on gross margin for the balance of the year?

Right. And I think that goes to what Tom had spoke regarding the Mayo sales and the OrthoFrame sales. They do not have as high a margin, but we've certainly made good progress on the OL1000 so that's why I think you're seeing higher margins and we should see that through the rest of the year in the 85% to 86% range.

Terrific. Thanks very much.

Thank you, Chris.

Thank you. Your next question is coming from Eric Miller of Heartland Advisers. Please state your question.

Yeah. Congratulations on a good quarter.

Thank you, Eric.

Could you, Tom, maybe just characterize your current thinking on the strategy of potentially looking at partners on the Chrysalin program? It doesn't seem like from a cash standpoint that's a high priority for 2003. But maybe just where you stand on that.

Sure. Thanks, Eric. Well, I think we've made pretty clear last October that our plans for certainly 2003 were to go it alone, if you will. We believe that the bone stem business would grow sufficiently to cover the costs of the Chrysalin program this year and at least through the first quarter. That certainly turns out to be the case. So we're pretty confident that we can manage the program successfully over the balance of this year without any negative impact on our cash position or our earnings.

And, of course, we do now have, due to the excellent continued work in Sherry's area for cash collections, we've got over $36m sitting in the bank. We are reviewing that question, Eric, as we go forward here and look at 2004, say, on out for the next couple of years. There will be escalating costs associated with the Chrysalin program. We have two clinical trials which are getting really started up this year and cranked up. They'll be in full force in 2004. We anticipate, as we've said earlier, the potential of a cartilage human clinical trial in '04 beginning. And so expenses will be going up. We're going to be making that assessment here probably over the next several months. As to how we see '04 and beyond relative to the Chrysalin program, its costs and what does that mean for the company? Are we still prepared to take this thing on our own, or are we going to consider a partnership to potentially share that cost burden going forward? So I can tell you that it is under review at the present time. And at this point in time we have not made a decision to go ahead and partner. However, we are reviewing that and giving consideration to that. I would also tell you that we've continued to get interest from the community. It seems that small peptide therapies for OrthoBioLogics are something of a rising star. There's been some recent data -- I don't know whether you saw the

gray sheet article. It was published on March 31, talking about the potential and some of the larger players beginning to look at synthetic peptides as the way to go in OrthoBioLogics.

And certainly, with our products being the only ones we're aware of in the United States that are in human clinical trials, I think it does position us in a way that we could certainly find ourselves in a favorable position, should we decide to move forward with the partnership. So I would look to answer that question a little more completely certainly toward the summer and the fall when we'll need to have some decision regarding an announcement on guidance for 2004. But it's a consideration at this time.

Okay. Sounds good. Hey, could somebody send me out that article you just referred to?

I believe we can. I'll have Larry send that to you.

Great.

It was March 31 issue of "the gray sheet."

Okay. Thanks a lot, Tom.

Thank you. Once again, ladies and gentlemen if you do have a question, you may press the number 1 followed by 4 on your touch-tone phone at this time. Thank you. Your next question is a follow-up question from Bill Plovanic of First Albany. Please state your question.

Great. Thanks. Just some clarity, if we could, on what the R & D costs on an absolute dollar basis might be in the second quarter of this year.

Okay. Well, we believe we're looking at something that's going to be in the range of $1.5mm to $2m. It has to be a little flexible, Bill, because it depends on the enrollment, as always but probably something in the middle of that range. You know, I would guess something in the 1.7, 1.8 range is probably a good estimate.

Okay. And at that level and increasing thereafter, as you continue to enroll?

I believe so, yeah. You'll probably see, I would think, some movement up above $2m, certainly, in the third quarter and fourth quarter on the Chrysalin costs. The reason being that we're every day, including more centers that begin enrolling patients. And as Jim stated earlier, by the fall, we're anticipating having all of the sites enrolling patients. So by the fourth quarter, we would have, you know, in that range 25 to 30 sites potentially enrolling patients. So I would look, certainly the fourth quarter is going to be probably could be close to $2.5m. But I think all of this is still within the larger context of what we said earlier. We estimated the Chrysalin costs this year would be somewhere in the range of $7m. And that's still the guidance we have at this point.

Okay. Great. Thanks.

Sure.

Thank you. Your final question is coming from Lyman Heard of Investment Advisor. Please state your question.

Yeah, ditto on the good quarter. I have a question for Jim, looking at that October 7 news bulletin where you mentioned the -- in relation to the Chrysalin safety profile that there was notable effectiveness in accelerating the fracture healing. Jim, what does your -- you've been in contact with some 90 patients now for some time, is that true?

The phase I-phase II.

In terms of being in contact, I mean, you know that we stopped that clinical trial. Really we stopped following those patients in that initial phase I-phase II clinical trial at six months. And so these are really the results we've reported in October at the hand surgery meeting here in Phoenix really were our clinical data on those 90 patients. So we have not continued to follow up with those patients. I think the important thing, Lyman, is that all of those patients fractures were, in fact, healed, and they all returned to function. So I think that was encouraging data that we presented again at the hand surgery meeting as well as at the meeting this month in the U.K.

Is that a first, then, in terms healing? Is that something that has not --

No, I think this was to be expected. Remember, these trials are looking to accelerate fracture healing. So the fracture -- the distal radius fractures, we really do expect that all patients will have successful fracture healing in these trials. And what, you know, our goal is to show actually that we can accelerate the healing process, therefore, getting these patients back to function earlier, perhaps back to work earlier than those control patients that are not treated with Chrysalin.

Thank you. Your next question is coming from John Showpack of HealthPoint. Please state your question.

Hey, guys. Good quarter.

Thank you, John.

Dr. Ryabi, just a follow-up, I'm looking for some clarity at the end point in the fresh fracture study. What exactly is acceleration for the Phase III study? How is it defined with the FDA?

The primary efficacy end point is time to immobilization removal. As you know, the key thing in any Phase III study is to show clinical benefit to the patient. So we will measure secondary end points such as radiographic analysis as we did in the first study as well as functional measurements and outcome measurements. But the primary efficacy variable is time to immobilization removal.

Okay. So is there any strong conclusions we can draw from the first -- the recent publication of the phase I-phase II, what's the strong conclusion we can draw of that and from an efficacy standpoint for the Phase III? Or can we even conclude that at this point?

Let me just make a comment before Jim follows up and say that the end points we were measuring were similar in the phase I-phase II trial. However, what was referred to in the paper was radiographic healing of cortical bridging. That's what we showed in the data 25% average acceleration in healing. So it's a little different than the end point, primary end point for the Phase III trial, which, as Jim says, is removal of immobilization. We're still looking at radiographic assessment as a secondary parameter. But Jim, do you want to have another thought on that? Okay.

I think that answered the question.

Okay. And then just one following housekeeping. The OrthoRehab payment, how is that going to be broken out over the next 36 months?

Well, as I mentioned in my comments, John, the initial $257,000 has been received and would be reflected in the second quarter here of 2003. And it would be essentially appear on the P & L in that CPM divestiture line that Sherry referred to, which has been on the P & L. Last year, we were doing it with over collection of CPM receivables. This year you'll see numbers appear on that as the year goes forward here, depending upon what the actual receipt of payments is from ORI. But it's $257,000 already for the second quarter. Assuming that payments get made for May and June, it would be another $50,000. So we're anticipating something around $300,000, 3 to 400 potentially in the second quarter. Sherry, is that --

That's correct, that's correct.

And then with that, is it safe to assume another $300,000 in the third and fourth quarter?

No, it's not that high. About half that number. Something along the $75,000 per quarter thereafter.

75 per quarter. Okay. Thanks a lot, guys.

Thanks.

Thank you. Our final question is a follow-up question from Chris Shibutani of JP Morgan. Please state your question.

Chris, are you there? Chris, are you there?

Gentlemen, I'm showing no further questions for today. I would like to turn the floor over to you for any further comments.

Thank you, operator. Well, let me conclude this call by, again, thanking all of you for your time and interest. We're very appreciative, and we're pleased to have gotten our company off to a strong start here in the first quarter of 2003. We look forward to speaking with you again soon. Have a good day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.