Capstone Holding Corp (CAPS) 2003 Q4 法說會逐字稿

Welcome to the OrthoLogic Corporation fourth quarter earnings 2003 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. It is now my pleasure to turn the floor over to your host, Larry Delaney.

Thank you, and good morning, and thanks for joining us to discuss fourth quarter and full year 2003 financial and operational results with the management of OrthoLogic Corporation. Management will provide an overview of the results and then we will open up the call to your questions.

But first, statements in this conference call that and otherwise attributable to OrthoLogic regarding our business that are not historical facts are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted results. These risks are discussed in the proxy statement for our special stockholders meeting held on November 26, 2003, and in our Form 10-K for the fiscal year ended December 31st, 2002, as well as other documents we file with the Securities and Exchange Commission.

With that, I will turn the call over to Tom Trotter, President and CEO.

Good morning. Thank you for joining us for our fourth quarter and full year 2003 earnings conference call. Joining me on the call this morning are Sherry Sturman, our Senior Vice President and Chief Financial Officer, and Dr. Jim Ryaby, our Senior Vice President and Chief Technology Officer.

Following my opening remarks, Sherry will provide additional financial information, and Jim will provide an update on the Chrysalin product platform. Then, prior to moving on to your questions, I will issue financial guidance for 2004.

We had an excellent fourth quarter in 2003, highlighted by the closing of the sale of the bone growth stimulation device business and the transformation of OrthoLogic into a pure-play drug development company focused on orthobiologics. This event capped a year of outstanding overall progress for our company, particularly concerning the continued development of our Chrysalin product platform.

Chrysalin Product Platform includes a series of potential orthobiologic products targeted at several of the most rapidly growing markets in the worldwide orthopedic business. By way of background, the worldwide orthopedic business, which for the last 50 years has been a device-based replacement business, is in transition. While the business today is still focused on surgical implants and replacement products, a new era has begun which will bring exciting changes.

In 2002, bone morphogenic protein, or BMP, was introduced as the world's first true orthobiologic product. We believe that this event marked the beginning of the regeneration era in orthopedic medicine. The regeneration era will be characterized by the introduction of other new, bioactive molecular products that have the potential to change the practice of orthopedic medicine. We collectively refer to these new bioactive agents as orthobiologics.

Orthobiologics have the ability to stimulate the body's own natural healing mechanisms to heal both orthopedic soft tissue and bone. OrthoLogic, as one of the only pure-play public companies focused in the orthobiologic business, is uniquely positioned to play a leading role in this new era of orthopedic medicine. Our Chrysalin products platform includes five potential orthobiologic products.

From a strategic standpoint, we have now clarified for our shareholders and the financial community the future direction of our company. We believe that orthobiologics will play a key role in the development of the orthopedic business. Consequently, we are now focusing all of our time and resources on achieving success in orthobiologics with our Chrysalin product platform.

During the fourth quarter, we continued to make excellent progress with the ongoing human clinical trials for both fracture repair and spinal fusion. In addition, data generated from a pre-clinical study of Chrysalin in a GMP-manufactured formulation for cartilage defect repair showed very positive results. Finally, we began outlining the steps necessary to begin our pre-clinical evaluation of potential Chrysalin-based products for tendon and ligament repair.

During the fourth quarter we also completed the transition of our employee base, following the closing of the sale of the bone growth stimulation device business. Our new senior management team includes myself, Sherry Sturman, and Dr. Jim Ryaby. In addition, at this time, we have approximately 30 employees in the Company, most of whom work in the research and clinical departments, as well as a small administrative staff. We begin 2004 in a very strong financial position, with more than $120 million in cash and investments, and have hit the ground running with a dedicated team of experienced and highly motivated employees.

Finally, as all of you know, we recently made a significant addition to the OrthoLogic Board of Directors; Michael Casey, a very seasoned and skilled pharmaceutical and biotech industry executive, has joined our Board. And we are looking forward to having an opportunity to work closely with Mike as we develop the Chrysalin product platform.

I will now turn the call over to Sherry, who will provide you with additional financial information.

Thank you, Tom. I am pleased to share with you the Company's financial statements after successfully completing the sale of the bone stimulation device business during the fourth quarter 2003. For presentation purposes, the bone device business is required to be recognized on the financial statement as discontinued operations for the Company. The statements of operations have been restated for prior periods to reflect the elimination of the historical revenues and expenses related to the device business within current operations. The net income from the device business is consolidated onto one line that represents the discontinued operations. This presentation provides a year-over-year comparison for the Company's ongoing financial activity.

First, I will give a high-level description of the accounting for the sale. As disclosed in our previous SEC filings, OrthoLogic sold the device business for 93 million in cash and transferred 1.1 million in liabilities to the buyer. The assets sold totaled 10 million and were predominantly comprised of Accounts Receivable and inventory.

The cost of the sale incurred by the Company was 5.1 million. 7 million was deducted from the cash received to fund an interest-bearing escrow account. There are no claims -- if there are no claims incurred against the escrow, the 7 million plus interest earned will be released to OrthoLogic on the second anniversary of the closing date. Prior to any reduction in the escrow, the purchaser agreed to absorb the first 250,000 of claims otherwise eligible for indemnity.

After allocating a purchase price to the assets sold and deducting the cost of the sale and related taxes, the net gain on the sale was 72.5 million. The Company has some non-recurring costs associated with the sale that did not qualify to be classified as a cost of sale entry. These costs were proximally 500,000, and are reflected in the continuing operations expense during the fourth quarter.

The Company was able to apply approximately 50 million in tax loss carryforwards against the taxable gain from the sale of the business. However, due to the limitation of the NOLs at both the federal and the state level, the Company recognized a tax expense of 5.4 million. The previous deferred tax assets were adjusted to the current balance of 1.2 million.

Turning to the Company's balance sheet, OrthoLogic's ending cash and investments totaled 121 million at December 31st of 2003. The Accounts Receivable balance of 792,000 represents the governmental receivables that were not sold as part of the bone stimulation business. Additional collections received during January have lowered the net receivable to currently be approximately 350,000.

The 7 million escrow account is carried as a net balance of 5.1 million in the non-current assets. The implied value of the consideration given for the (indiscernible) and warranties made by the Company present a fair market value of 2 million, which lowered the value recognized for the escrow receivable. In accordance to FIN 45, the 2 million valuation will be recognized over the 24 month life of the escrow. The Company anticipates it will collect the full 7 million escrow receivable, with interest, on the second anniversary of the closing. The liabilities of 6.3 million include various liabilities that were related to the sale, including 2.8 million for income taxes payable during the first quarter. In the future, the total liability balance should be approximately 3 to 4 million.

Turning to the statement of operations. Net income for fourth quarter was 71.1 million, or $2.06 per diluted share. Because the fourth quarter was heavily influenced by the divestiture results, I'm going to focus my comments on the 12 month statement of operations.

The general and administrative costs related to the continuing business totaled 4.4 million for the 12 months ending 2003. The year end total for R&D spending was 9 million, which reflects the increased costs associate with the clinical and pre-clinical work with the Chrysalin program. The amount received from the judgment on the CPM divestiture and some related collection activity totaled 743,000 during 2003. The discontinued operations presented consolidated the operations of the device business and related gain on the sale to be carried below current operations.

The total net profit reported by the Company for the 12 months ending December 31st, 2003 was 72.3 million, or $2.16 per diluted share.

That concludes my review of the financial statement. Back to you, Tom.

Thank you, Sherry. Now Dr. Jim Ryaby will provide you with an update on our Chrysalin product platform.

Thank you, Tom. Good morning everyone. During the fourth quarter of 2003, the Company made significant progress in the development of our product platform. To provide an overview of the Chrysalin program, we envision five orthopedic indications in the product pipeline. Two of these indications, fracture repair and spine fusion, are being investigated in human clinical trials. Cartilage defect repair is in advanced pre-clinical development, and I will comment on its status in a minute. The fourth and fifth indications, ligament and tendon repair, are in the pre-clinical planning stage, with studies expected to initiate this year.

Our most advanced clinical program is for the fracture repair indication. A Phase III fracture clinical trial is well underway, with anticipated enrollment of approximately 500 patients in 25 to 30 centers. Enrollment is continuing and is expected to be completed this summer. To date, no adverse events related to Chrysalin have been reported and patient compliance with follow-up requirements has been excellent.

We expect to have our protocol completed for our second pivotal study in fracture repair by midyear and begin enrollment in this study before the end of 2004.

Regarding the spine fusion clinical trial, enrollment is proceeding and no adverse events related to Chrysalin have been reported to date. Patient compliance with follow-up requirements has also been excellent in this study. In addition, we have developed an alternative strategy for the potential Chrysalin product for spine fusion that may enable us to optimize the development program. We will be meeting with the FDA regarding this alternative strategy during the current quarter.

The third indication in the Chrysalin product platform is the use of the peptide for cartilage defect repair. We recently completed additional pre-clinical studies with GMP-manufactured PLGA microspheres containing Chrysalin, and the results of these studies are very encouraging. We submitted an abstract describing these results to the upcoming International Cartilage Repair Society meeting to be held in Belgium this May, 2004. Our goal is to begin a human clinical trial for cartilage defect repair this year.

The fourth and fifth indications, for ligament and tendon repair, present significant opportunities for OrthoLogic in the orthopedic soft tissue repair arena. We have developed plans to initiate pre-clinical studies for these indications in the first half of this year.

Finally, the research team here at OrthoLogic, with academic collaborators, will be presenting our studies of Chrysalin effects on gene expression and fracture repair at the upcoming Orthopedic Research Society meeting to be held in San Francisco this March.

In conclusion, we continue to make progress on our pre-clinical and clinical studies, and are very excited about the potential Chrysalin product pipeline. Our research thus far indicates that Chrysalin has a novel and compelling mechanisms action, that Chrysalin is effective in many orthopedic animal models, and that Chrysalin exhibits an excellent safety profile and potential efficacy in numerous orthopedic indications.

Tom, back to you.

Thank you, Jim. Before moving on to your questions, I will now provide you with financial guidance for 2004.

We expect to have a net burn rate of 22 to 23 million this year, resulting in a net loss of between 65 and 68 cents per share. This will be made up of approximately 20 million in Chrysalin related costs, approximately 4 million in SG&A expenses, offset by approximately 1 to 1.5 million in interest income. We expect a gradual ramp up in the expenses over the fourth quarter of the year. This guidance is unchanged from our previous projections.

At this time, operator, we will now open the call up for questions.

(OPERATOR INSTRUCTIONS). Chris Shibutani, J.P. Morgan.

Thank you very much. Tom, on the fracture repair, you described a second pivotal study that you're hoping to commence by the beginning -- by the end of the year. Could you elaborate a 0little bit more about why you're doing this study, what that's about and what that will look like in relation to the pivotal trial that has been enrolling?

Sure. The FDA guidelines regarding a New Drug Application, or NDA, suggest that safety and efficacy data be provided from clinical trials -- plural -- not a single clinical trial. This is also our goal to have this second pivotal (indiscernible). It is also consistent with our key major goal, which is to submit, data permitting, a high-quality NDA. So that is the reason why we're doing the second trial, and we believe that this trial could begin this fall, that is our goal. And we will be meeting with the FDA to discuss this with them. And I think as we've said previously, and we can reconfirm now, that it is our anticipation that this second pivotal trial will be completed in time to meet our previously projected guidance, which was a potential fileable NDA in 2006.

The structure of the trial itself, can you tell us a little bit more about how it will differ from the other one? Specifically, will there be different endpoints, patient groups?

That is a good question, Chris. The answer to that, though, we need to postpone a little bit the information you're looking for, because we're going to be discussing with the FDA our plans. And until we have an opportunity to reach agreement with them, it's difficult for us, and pure conjecture as to what that would be. However, we do intend to do it as a -- in a fracture site, likely the distal radius site. But more than that, we really can't say now. We would hope, though, that before the middle of the year, certainly, we'll have an opportunity to have the meeting and have discussion and get clarity around that. And as Jim stated in his comments, our goal is to begin that second pivotal trial before the end of this year.

And the only thing I will add, Chris, is just that this will be a double blind, placebo-controlled, randomized trial, also.

And then lastly, you did mention a statement about the spinal fusion trial -- a discussion you're hoping to have this quarter with the FDA to, I believe you said, optimize in some way what that path will look like. Any more color about what you mean there?

Sure. Our goal here, as we have stated previously, is to complete the enrollment in the Phase I, Phase II -- current Phase I, Phase II spinal fusion trial this year. In our original projections, we had anticipated that ending this year, and then it had a nine month follow-up attached to it. And we probably were looking at moving into a pivotal trial for testing it in interbody fusion probably in the 2006 timeframe, sometime like that. I'm sorry, 2005 timeframe. Now, we think there is an opportunity that we may be able to optimize that strategy, and we are looking at a couple of things we can do to do that. But until we've had an opportunity to talk to the FDA and get clarity around that, there is not a whole lot more we can tell you right now. I would anticipate, though, that certainly by our next conference call we ought to be in a position to give you an update on that. You want to offer anything else?

I'll look forward to that.

Justin Cable, B. Riley & Co.

Just a couple of quick questions here. We talked about fracture and spinal repair. On the cartilage repair side, maybe just kind of go over again the pre-clinical results that you guys have seen in that study?

Okay. That's no problem, Justin. We run numerous rapid studies where basically you make a critical size defect in the knee, and then we implant these microspheres that are PLGA -- polylactic/glycolic acid -- that provide a controlled release delivery of the Chrysalin peptide for various periods of time. And what we do then is a blinded scoring, where basically it is a scale of 24. And the results we have seen, including with the recently GMP scale-up manufactured microspheres, is we see scores on average between 18 and 20, or about 75 to 80 percent repair. 24 being a perfect articular cartilage surface. So these results are certainly comparable to anything else published in the literature, and we are very encouraged by these results. And basically, we plan on meeting with the FDA sometime -- although we can't make a commitment on exactly when this year. But as we said, we believe we have the data which would allow us to have this pre IND meeting and reach agreement as to the design of a clinical trial protocol which would support our first study and clinical evaluation for cartilage defects repair. That's a good (indiscernible) --

Justin, this is Tom. Let me just add another point here, and that is that if we are successful here -- and we hope we will be -- in terms of initiating or gaining authorization to begin a human clinical trial in cartilage defect repair, this would be a major accomplishment, since to our knowledge, no other potential product has yet received FDA authorization to begin a human clinical trial for a cartilage defect repair indication. So this would be a major accomplishment for OrthoLogic, and I think would position us in a good spot in the race to develop potential products for cartilage defect repair.

When you say that, are you kind of inferring that to get to a human clinical trial would be tougher because it is cartilage repair, or do you kind of see basically the same time frame, same -- I guess you can call it pipeline -- that you see with (indiscernible) with spinal and fracture?

There is no question, Justin, that gaining FDA authorization to begin a human clinical trial for cartilage defect repair is more complicated and more challenging than doing a human clinical human clinical trial for fracture repair or for spinal fusion. And I think the clear evidence of that is as I stated, the fact that to our knowledge, no one has been able to get a product into human clinical trial evaluation for cartilage defect repair. And there are probably 100 companies that have been working on this, so it is significant to get into human clinical trials for cartilage repair. I think, importantly, I would emphasize also, that it is important to get there with a product that has the potential to work and has a very good safety profile attached to it. And I think that was what Jim was alluding to in is comments when he mentioned that the safety profile continues to be excellent, even in the Chrysalin in the PGLA matrix microspheres. And in addition, we were very pleased that we now have some confirming results in our pre-clinical studies that mirror what Jim originally presented in Toronto about 18 months ago, which was some -- as good a data or some of the best data people have seen in that particular model. So we're very encouraged by what we have in pre-clinical. We think we have got a pretty robust program to date. We have an excellent relationship with the endocrin (ph) metabolic group at the FDA, and we are hopeful that we will have a pre-clinical meeting here hopefully before midyear. And that by year end, we may have an opportunity to gain authorization to start in humans. So this would be a major development for the Company.

Okay. Two last questions. Anything new on pursuing a strategic partner? Is that still kind of on hold? Have there been developments there?

I would tell you that we continue to have discussions covering a wide range of strategic options, partnerships among those, with both orthopedic and pharmaceutical companies. And as I have stated before, I think, on calls, I don't want to ever characterize these discussions as on hold. I would tell you that the discussions, as I mentioned, they are ongoing. And so I would tell you this also, that orthobiologics have become a pretty hot area within not only orthopedics, but in the entire area of biotech. There's a lot of interest here. We've seen companies both on the pharma side and the orthopedics side, showing interest. I would tell you that every major orthopedic company has an orthobiologic program, in some form. And I would tell you that a number of pharmaceutical companies in the last year or two have shown active interest in this area, as well. So we think it is a great spot to be. There's certainly a whole lot of opportunity there for different kinds of discussions, and I would characterize them as I said, as ongoing.

Last question, Tom. Don't mean to put you on the spot here, but I am curious to know -- you've gone through a lot with this company in divesting the CPM business, and now the bone growth stimulation business. What is your end-game here? Are you going to be sticking around through the commercialization of Chrysalin? What are your goals -- your personal goals for (indiscernible)?

Well, thanks for the question. What I can tell at this point is I have agreed with our Board of Directors to remain with OrthoLogic until at least the end of this year, 2004. So I will be around for a while. And I think longer-term, of course, the goal of the Company is to gain a fileable NDA and to eventually commercialize the product. That is our overall goal. So my intention is to remain a key part of the management team here with Sherry and Jim, at least through the end of this year, at a minimum.

Okay. I guess prior to the end of the year, assuming that you might consider leaving, I guess you would -- I guess you would allow the Company enough time to find a permanent CEO?

Of course. And I think -- we want to be very clear on this; as a public company, if the time comes -- if and when the time comes that I decide to move on, or there is a change in my status, we will make an appropriate public announcement at that time. And the goal of course is always to have a smooth transition should that occur. But again, I want to emphasize, I have no immediate plans to leave.

Thank you.

(OPERATOR INSTRUCTIONS). Eric Miller, Heartland Advisors.

Congratulations, guys, on the '03 accomplishments. Tom, can you just sort of review the competitive landscape as you see it right now?

Sure, thanks for the question. It is dynamic and developing, of course, as we speak, and it's kind of different for each one of the products, if you will. To our knowledge as of this date, we still do not believe there is any other product other than our Chrysalin based product in a human clinical trial, certainly in the United States, for acceleration of fracture repair. No one has advanced that far. We do understand some other people have been working in this area, and there have been -- in fact, there was a -- I think I may have mentioned on the last call that Pfizer has a program in which I think they have presented some pre-clinical data regarding their fracture acceleration product. But I don't know that it has advanced beyond that. But I think the key here, Eric, is to keep an eye on other companies that may get into human clinical trials, whether it is a Phase I or any other human clinical try for acceleration of fracture repair. But I think the great news for OrthoLogic is to date, we seem to have a substantial lead in that arena, and have no yet defined competitor that we are aware of. In the spinal fusion marketplace, it is, again, a different picture altogether. The only product out there today that is a viable, complete and acceptable alternative -- I think, at least from the orthopedics community -- to auto-graft, harvested from the patient's hip is born morphogenic protein; most notably Infuse from Medtronic. There are other products out there that people might use for interbody fusion, but I think as we mentioned before, the key is, do they have a bioactive component to their product? And to our knowledge, bone morphogenic protein is really the only one that is there. So that would be the only competitor that we would really see for a Chrysalin product, combined with commercially available allograft, which is what we are testing in our human clinical trial. So -- and I guess if you compared us to that, the issue -- the question has always been, what is the cost? If we are capable of showing that Chrysalin and commercially available allograft is comparable to auto-graft, then we would -- and to get approval for that indication, we would enter the market with a decided advantage in terms of price for the product. Because bone morphogenic protein is a very expensive product to manufacture; it is made with recombinant DNA technology; very expensive. I think it is currently being priced in the marketplace at 4 to $5000 a dose, and you need on average 1.5 to 2 doses for patient. So it is a very expensive addition to the procedure. We believe that if we were successful, and turn out to be successful in our clinical trials of Chrysalin with commercially available allograft, that we could bring a product to the market that could be potentially 1/5 the cost of bone morphogenic protein. That is not to say others aren't trying things as well, Eric, but again, who is in human clinical trials and what have the shown? And I think to date, that is the only product. Jim, do you have another thought on spinal fusion, if anything else would be considered competitive?

Of course, Striker Biotech is continuing their spine fusion studies with (technical difficulty), which is bone morphogenic protein 7. So those trials are ongoing, and 2 year results were presented at the (indiscernible) meeting in October that showed promising results. So, certainly, that is another competitive product on the horizon.

But that would be, again, a second bone morphogenic protein. And while it might well be a competitor, I think it suffers from (indiscernible) -- I shouldn't say that -- it has the same disadvantages as, potentially, Infuse, in that it is very expensive to manufacture. And I think that does make it vulnerable as time goes along to potential much lower-cost alternatives, whether it is our product or someone else's. Then -- excuse me -- moving on to the cartilage indication. As we said earlier in my comments to Justin, right now the only product that is being utilized to our knowledge might be Carticel from Genzyme. And that product, basically -- Jim can describe it -- but it is basically taking cells out of your body and simply growing them, and then giving them back to you. And while it has had some success, the results are, I think, kind of spotty, in terms of the performance in humans. And it is an extremely expensive procedure. I think it is in the neighborhood of $20,000 or something -- Jim? Would that be a fair guess? So Chrysalin -- if we can use Chrysalin in these PGLA microspheres, and we do get approval -- and that's, of course, a potential at this stage -- we would have an enormous cost advantage over a product such Carticel. But to my knowledge, unless Jim knows otherwise, we do not know of anything else that is available.

So that's a long answer, Eric, but I would summarize by saying that all three of our primary products moving forward are either leading candidates or have the potential to be first to market with that indication, or they offer a significant and decided cost advantage should we be successful in getting them to market.

Bill Plovanic, First Albany Capital.

We would be very sad to see you go, that is for sure.

As I told Justin, and I hope I can reiterate that without too much overplay here; I have no intention to go anywhere at this stage, and will certainly be staying through this year.

We'll make sure we don't get that rumor started. A couple of questions here. First of all, as we look at the fracture market, the studies that are (technical difficulty) are in the distal radius. And I guess my question is, what would the labeling look like because this is a drug? Would this be able to be used in any non-union or in any fracture? So basically, would it be -- because if you look at the market itself, distal radius is a small percent -- a good size of the market -- but you know, you're looking at the hip, face, lower extremity, other areas. So what type of labeling would you expect, narrow or wide?

Of course, you always hope for the widest possible label you can get. There is a distinct difference, though, generally at the FDA between products that go through ODE -- which is the device section of the FDA, where you generally come out with an indication-specific label; i.e., distal radius or something like that. The drug side of the FDA has tended to have broader labels. The example I have used in the past, and I think it is the best one, is the comparison between Cindisk (ph) -- which is a therapeutic injectable approved as a device for osteoarthritis of the knee -- and Celebrex -- which of course, is an anti-inflammatory that is very effective in osteoarthritis of the knee, but is approved for arthritis, relief of pain from arthritis. So potentially, a much broader label going through with a drug than a device.

The other significant advantage in the drug side is you can talk about method of action when you get an approval for a drug; you cannot do that with a device. With a device you can simply say, here's the clinical trial and here's how my device worked compared to the placebo. In the case of drugs, they do allow you -- the FDA allows you in your advertising promotion to talk about method of action. And we think that is going to be very important going forward in orthobiologics, because these will be new products to some extent to a lot of the physician community. And being able to talk to them about that will be helpful. But more specifically to your question on labeling, we are going through in a distal radius model. We have not had a label discussion per se with the FDA, but I think the range of options there go from, obviously, all fractures -- acceleration of fracture repair anywhere in the body, acceleration of fracture repair for non-weight bearing fractures, and then a range in between that. So I think it is a little early to know that, Bill. But we're looking -- generally, we would hope to certainly have an indication statement that is broader than distal radius. Jim, do you want to --?

The other thing is is that as part of our clinical development plan, which is actually a long-term clinical development plan, we do have other fracture indications that we can basically start studies in which would then in fact expand that label, should we need to do that. But certainly, we would want to be assured that the current study, as well as the other study we mentioned today, actually did show the safety and efficacy necessary to justify the cost of effort in running additional fracture locations -- additional anatomic locations of fracture.

It also mentioned, Bill -- you mentioned numbers of distal radius fractures. The best numbers we have is it out of a potential 6 million fractures in the U.S. every year, the number is somewhere between 1 and 1.5 million of those are distal radius fractures. So it is a pretty sizable group. Now, a lot of those may be fractures -- certainly a portion of those are fractures, which would be kind of your simplest distal radius fractures, which might not necessarily be candidates for the product, because they healed quickly and they were rather simple. But there are more complex fractures that don't necessarily require surgery, and then there are surgically repaired fractures. And that's kind of what we are targeting toward.

I was talking, or referring more to fractures in which fixation was necessary. The next question is, when you talk about the pricing potential in the long-term, you mentioned a price of about 1/5 of what Infuse goes for today. I think that is a little higher than some of your statements in the past. I was wondering are just -- is that just off the cuff, or is it your thoughts are maybe that the pricing would be higher than originally expected?

I think maybe the confusion comes in as to what would the Chrysalin portion of that be versus what would the final product in combination with commercially available allograft would be? What I was referring to at 1/5 that cost -- and if you use the number of $5000, and you were talking about $1000 -- that is what I'm talking about for not only the cost of the Chrysalin peptide, but the commercially available allograft that would go with it. In the past, we may have been making reference to this and talking only about the Chrysalin portion of that product, cost perhaps being 1/10 of the cost of bone morphogenic protein. So maybe that is where the confusion comes from.

Mitch Welsh, UBS.

My question was asked already.

Brian Wong, First Albany Capital.

Just had a question about pre-clinical. I saw the press release about a month ago on their dental study. I was wondering if there was any update on any further studies or any other progress from Chrysalis?

I think, Brian, you would have to direct that question to the folks down at Chrysalis BioTechnology. They did put out a press release which discussed some preliminary results in pre-clinical for, as you mentioned, the cranial maxial (ph) facial indication -- or basically, dental applications. I think they are enthusiastic, certainly, in speaking to them about the results of that study and their potential. But again, we did not do that study and I think it would be best probably to contact them and speak directly with them regarding that study and its potential long-term applications.

One last question. This might be jumping the gun a little bit, but do you foresee -- do you have any projections as to what your penetration rates might be in both the fracture market and the spine market?

I think that is getting a bit ahead of the game, because that is several years away for sure. But I think if we look at -- as we have said in conferences in the past -- roughly an estimate of 25 million fractures worldwide, and we believe that Chrysalin as a therapeutic injectable -- which we are talking by here and saline (ph) -- had the potential to perhaps address as many as 10 to 12 million of those fractures. And you can use any penetration rate you would like to, but if you are first to market, and you have, certainly, the horsepower behind it in the way of sales and marketing capability, it would not be unreasonable to see a pretty good penetration of that.

On the spine side, it is a different story. The spine side to date -- and again, I don't have recent numbers, maybe you or others have better ones than I do -- but what I have seen on bone morphogenic protein was a number in the range of 140 to 150 million at an annualized run rate for that product. Which if you do the math and figure out the number of doses on average per patient and so forth and the cost of those, probably equates to something around a 10 percent market penetration of the lumbar spinal fusion market. And that is simply in its first full year, or first year and a half after launch. That is a pretty good entry point. And I would think -- we are talking about a product which of course is at best a couple of years away at a minimum. And so, what the market might be at that time for orthobiologic product as an alternative in spinal fusion, could be fairly sizable. I've seen projections as much as 500 million. And if that is the existing market, and you come to market with a product which -- and again, this is conjecture -- but if you came to market with a product that had the potential to be equivalent to auto-graft, and we had the price advantage, one could imagine you could have some fairly quick uptake.

(OPERATOR INSTRUCTIONS). Gentlemen, it appears we have no further questions.

Thank you. Let me just say thank you all for joining us today. We are very excited about the future of OrthoLogic. We think orthobiologics is the place to be. There's certainly a lot of buzz in the marketplace about orthobiologics, and we're looking forward to a great year in 2004. And we hope you will join us on our next call. Thank you and have a good day.

Thank you very much, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines.