Capstone Holding Corp (CAPS) 2004 Q1 法說會逐字稿

Good morning and welcome to the OrthoLogic Corp. first quarter 2004 earnings conference call. At this time, all participants have been placed in 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 of The Berlin Group. Sir, you may begin.

Thank you and good morning. Thanks for joining us to discuss with management of OrthoLogic the first-quarter 2004 results as well as the company's definitive agreement to acquire Chrysalis Biotechnology Incorporated. OrthoLogic management will provide an overview of the results and then we'll open up the call to your questions. But, first, statements in this conference call or otherwise attributable to OrthoLogic regarding the 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 our Form 10-K for fiscal year ended December 31st, 2003 and other documents we filed with the SEC. With that, I'll turn the call over to Tom Trotter, President and CEO.

Thank you, Larry. Good morning. Thank you for joining us for our first quarter 2004 earnings conference call. Joining me on the call this morning are Sherry Sturman, Senior Vice President and Chief Financial Officer; and Dr. Jim Ryaby, Senior Vice President and Chief Technology Officer. Following my opening remarks, Sherry will provide additional financial information and Jim will offer an update on the Chrysalin product platform. Then prior to moving on to your questions, I will reissue financial guidance for 2004.

Before addressing the first quarter results, I would like to make several comments regarding the announcement this morning of our signing a definitive agreement to acquire the assets of Chrysalis Biotechnology Inc., CBI. This acquisition represents a major achievement and a critical milestone in the overall strategic repositioning of OrthoLogic as a late-stage drug development company. We see numerous important benefits that will come with the acquisition of CBI and I'd like to list several of them now.

First, transaction will significantly expand the Chrysalin product platform to include all potential worldwide medical indications for Chrysalin, or TP508. OrthoLogic will also gain the manufacturing rights as well as the manufacturing margin associated with all potential future Chrysalin products. Our royalty rates will be reduced and all future milestone payments are eliminated. OrthoLogic will have the ability to sublicense any Chrysalin indication for any Chrysalin product in any geographic region worldwide. We will have the ability to form partnerships or joint ventures for any Chrysalin potential product in any geographic region worldwide. We will control all Chrysalin TP508 intellectual property rights for patent filings and other legal purposes. OrthoLogic will gain important additional preclinical and clinical data developed by CBI for several new potential indications beyond orthopedics. Finally, the acquisition will give OrthoLogic significant additional technical and scientific expertise.

During the next several months, we will evaluate all of the CBI Chrysalin-based programs and determine how best to proceed regarding potential commercialization. We will be in a better position to comment on the status of each of these programs later this summer. However, we believe that several programs already underway have outstanding potential for future commercialization, most notably those for oral maxillofacial, myocardial revascularization and wound-healing indications. From a financial perspective, as outlined in the press release this morning, the planned acquisition includes: $2.5 million in cash at closing for CBI shareholders; $25 million in OrthoLogic common stock for CBI shareholders, with a number of the shares to be determined prior to the closing subject to a caller; $7 million in additional OrthoLogic common stock depending upon the occurrence of certain future events. I will also mention that these numbers will be reduced by approximately 5% to account for OrthoLogic's existing ownership in CBI, which came as a result of our 1998 equity investment in the company.

In a moment, Sherry will provide you with additional financial details regarding the definitive agreement. Turning to the results for the first quarter of 2004, we continued to make notable progress in our development efforts for the Chrysalin Product Platform. In a moment, Jim will update the status of the human clinical trials for fracture repair and spinal fusion as well as comment on the continuing preclinical activities for cartilage, ligament and tendon repair. OrthoLogic's net loss for the first quarter was $3.2 million, or 9 cents per share, which was somewhat lower than we had initially anticipated. In addition, we ended the first quarter with approximately $120 million in cash and cash investments and no long-term debt. I will now turn the call over to Sherry, who will provide you with additional financial information. Sherry?

Thank you, Tom. Good morning. We are very excited about the pending acquisition of CBI. Prior to discussing the financial effects of the acquisition, I will first provide a brief overview of OrthoLogic's financial results from the first quarter. The net loss on the statement of operations is $3.2 million for the first quarter. With the sale of the Bone Device Business in the fourth quarter of 2003, the company no longer has sales or gross profit from sales to report. The prior-year sales and expenses from the Bone Device Business are consolidated in the discontinued operations line. The administrative costs for the first quarter of 2004 were $555,000, compared to the $1.3 million attributed to the continuing operations from the first quarter of 2003. In 2003, prior to the sale of the Bone Device Business, the company had more administrative overhead that was not directly attributable to the research and clinical programs. This year all administrative functions are focused on our research and clinical programs with more of these costs directly allocated to R & D.

In the research & development areas, the company spent $3.4 million in the first quarter of 2004 compared to $1.4 million in the same period of the prior year. The increase is due to significantly more of the company's resources being spent on our development programs and clinical trials during this quarter as opposed to the prior period. We collected an additional $111,000 during the quarter for the payments related to the settlement of the CPM divestiture in 2001. Our cash and investments earned a net $306,000 in interest during the quarter. The company recognized a tax benefit of $294,000 this quarter. The tax benefit represents a refund we are receiving from the Ontario tax department from our previously held Canadian subsidiary prior to the divestiture of the CPM business. The net loss per share for the first quarter is 9 cents, compared to a net loss of 5 cents during the same period of the prior year for the continuing operations.

Turning to the balance sheet, our total cash and investments as of March 31st was $120 million, the decrease in our cash flows from operations was offset this quarter by both stock option exercises from the terminated employees as a result of the sale of the Bone Device Business and the collection of the remaining medicare receivables after the sale. We collected approximately $750,000 in Q1 from the receivables with approximately $200,000 yet to collect in the future quarters. The closing of the acquisition of CBI is expected to occur during the the third quarter of this year. Orthologic's financial position will not change significantly with the acquisition. The initial payment of $25 million in common stock and $2.5 million in cash will be allocated to the value of some tangible assets, but primarily the purchase price will be allocated to the value of the intellectual property rights, the Chrysalin trademark and the in-process R & D; with some amount allocated to goodwill. CBI has several ongoing R & D programs with emphasis in oral maxillofacial, myocardial revascularization and wound healing. The valuation applied to the in process R & D will be expensed at the time of the purchase.

The company currently estimates up to one-fifth of the asset purchase price will be expensed at the time of the acquisition related to the work connected with these programs. The contingent payment of $7 million in common stock will not be recognized at the time of the acquisition, since the payment is contingent upon certain events occurring in the future. OrthoLogic currently has diluted shares outstanding of 35.3 million. The dilution effect of the acquisition of CBI is expected to be in the range of an additional 3 to 3.7 million shares resulting in the diluted shares outstanding being approximately 38.3 to 39 million shares after the close. The costs related to the ongoing CBI development programs are not expected to significantly change our anticipated cash burn rate for the current year. The $2.5 million upfront payment and initial costs related to the sale are anticipated to total approximately $3.5 million. We currently project that our year ending cash balance should be in the range of $98 to $100 million. That concludes my summary. Back to you, Tom.

Thank you, Sherry. Dr. Ryaby will now provide you with an update on the Chrysalin Product Platform.

Thank you, Tom. Good morning. We made significant progress on our Chrysalin Product Platform this past quarter. As an overview of the Chrysalin program, we envisioned five orthopedic indications in the product pipeline for Chrysalin. These are fracture repair, spine fusion, cartilage defect repair, ligament repair and tendon repair. Our most-advanced clinical program is for the fracture repair indication with a phase 3 clinical trial well underway. We expect to enroll approximately 500 patients in this trial. More than half the patients have been enrolled in the study and our expectation is to complete enrollment in the late summer, early fall time frame. To date, no adverse events related to Chrysalin have been reported in the study and patient compliance with follow-up requirements has been excellent. In addition, we expect to have a protocol completed for a second randomized multi-center clinical trial in factor repair before the end of the second quarter, and plan to begin enrolment in this study in the second half of this year.

During the first quarter, we announced an alternative strategy for our potential Chrysalin product for spinal fusion that may enable us to optimize the development program for this indication. Following a meeting with the FDA earlier this year, we decided to limit enrolment in our current phase I/II human clinical trial to patients already enrolled in the study. Data from this initial trial will be available next summer after the 12-month follow-up is completed. We are also now proceeding with plans for additional preclinical studies to support a new human clinical trial evaluating Chrysalin for an interbody fusion indication. We plan to begin this trial before the end of 2005. The third potential indication in the Chrysalin Product Platform is the use of Chrysalin for cartilage defect repair. We will be presenting additional preclinical results for this indication at the upcoming International Cartilage Repair Society meeting to be held in Gent, Belgium next month. Our goal remains to submit an IND application an Investigational New Drug application, for a cartilage defect repair indication before the end of this year and to begin a human clinical trial in 2005. The fourth and fifth indications for ligament and tendon repair present major opportunities for OrthoLogic in the orthopedic soft tissue repair arena. We plan to initiate the preclinical studies for both of these indications this summer.

In conclusion, we continue to make excellent progress in our orthopedic focused pre-clinical and clinical studies of Chrysalin, and are very excited about the significant potential of the Chrysalin product pipeline. Our research and clinical work to date indicates that Chrysalin has a novel and compelling mechanism of action, is effective in multiple relevant orthopedic animal models, Chrysalin has an excellent safety profile, and Chrysalin has demonstrated preliminary efficacy in an initial human clinical trial for acceleration of fracture repair. Before turning the call back over to Tom, I would also like to offer a few comments about the announcement regarding CBI this morning.

We have been working closely with the scientific and technical team at CBI since 1998 and I am impressed with their capability and expertise. This acquisition will bring to OrthoLogic added expertise in critical areas such as: biomaterials, chemistry, pharmacokinetics, and toxicology, which will significantly complement and enhance the capabilities of our basic research, pre-clinical development, and clinical teams. I believe that this acquisition will allow us to optimize the potential commercialization of the Chrysalin Product Platform. Tom, back to you.

Thank you, Jim. Before moving on to your questions I'll now provide you with financial guidance for the balance of 2004. We are reiterating our projection of a net loss of $22 to $23 million for this year resulting in an annual net loss of approximately 65 to 68 cents per share, exclusive of the CBI acquisition costs. At this time, operator, we will now open the call up for questions.

Thank you. The floor is now open for questions. [Caller Instructions] Questions will be taken in the order they are received. Please hold while we poll for questions. Thank you. Our first question is coming from Eric Miller of Heartland Advisors. Please pose your question.

Yeah, congratulations on the move there, Tom.

Thank you.

How does the -- the broadening of the platform now change sort of the dynamics as you -- you know, sort of look at partnering opportunities sometimes down the road.

Thank you, Eric. Well, it obviously broadens them significantly. We have clearly been involved in discussions on partnering opportunities for the orthopedic side of the business and the indications that we have been working on and, as we've indicated in past conference calls, those conversations have included discussions with both pharma companies and large orthopedic players. Chrysalis, on the other hand, has been concentrating in the areas of wound healing, particularly diabetic ulcer, in cardiovascular indications, myocardial revascularization as well as oral maxillofacial indications and their discussions have been with a different set of potential partners who are interested in those areas, although there may be some overlap.

What we are going to do now as we evaluate this over the next several months is have the benefit, once the closing occurs, of understanding exactly where their discussions are and at what level they're at; and we will then combine that information with the knowledge we have and then through our board, we will make a strategic decision relative to which of the indications we feel are the ones we want to pursue ourselves, which ones we may feel would be most advantageous pursuing in either partnerships or joint ventures. So to answer your question, we need a little more time, Eric, really to understand that, but basically this is a significant broadening of the potential for those type of arrangements.

Okay. Thanks.

Thank you. Our next question is coming from Chris Shibutani of JP Morgan. Please pose your question.

Thank you very much. Congratulations Tom, many accomplishments over several years.

Thank you, Chris.

I apologize if I missed some of the discussion from the call, I joined a bit late. Could you remind me a little bit about manufacturing issues, particularly as you begin to broaden your clinical trial plans, what is -- what should we understand about manufacturing of the different formulations of Chrysalin and perhaps plans that you have as we approach now the latter parts of phase 3?

Sure. Well, let me make a comment there and then I'll ask Jim to comment as well. Under the current agreement that we have with CBI under the sublicense, we have the right to do final formulation manufacturing beyond the basic peptide itself. Chrysalis had the responsibilities for and manufacturing of the initial peptide itself. And then we could change formulations and then modify that going forward. And that has been -- that work has been done in conjunction between us and Chrysalis Biotechnology over this last several years for the formulations that are currently in the clinical trials and preclinical work. And those would be Chrysalin in saline and then Chrysalin in -- in a sustained release format of a couple of different varieties. So that has been the posture to date.

Going forward, of course, once the acquisition's accomplished, we would have control of the entire manufacturing process from the development of the -- the peptide itself all the way through any final formulation that -- that we might have. Now, clearly as a small company we do not anticipate doing all of the manufacturing ourselves. We have been working with large contract manufacturers who do these volumes in large quantities and are able to leverage their technology. So that's kind of generally it, Chris. It's been a partnership with Chrysalis in kind of a split responsibility for orthopedics that would now change after the acquisition and we would be fully integrated, if you will, from the start of the peptide all the way to the final formulation and it would simply be a question of how much of that we intend to do ourselves versus how much of that we intend to do through contract manufacturing. Jim, do you have anything else to add to that?

Chris? Yeah, I think just to reiterate what Tom said, which is that we've been doing this in partnership with Chrysalis and we see the same key personnel at Chrysalis that complement our in-house personnel continuing to -- to basically direct all the development and formulation of the peptide and we don't really see anything except for maybe some economies of scale moving forward.

But of course, Chris, we would be capturing OrthoLogic would be capturing all of whatever manufacturing margin would ensue in any potential products here rather than just the piece on final formulation, which could be significant in the years ahead. We also have -- through the last several years, developed some excellent working relationships with large contract parental plant aseptic fill operations, for example, as well as people working on particular formulations that -- that specialize formulations we've been developing. So there's a pretty -- pretty extensive network we've developed there, and that has all been working well. This just gives us an opportunity, I think, to get more control of that process and capture the profit that may be associated with it.

That's very helpful. On the intellectual property side, if you think about these other potential clinical applications and as you consider what to do with them, how to possibly partner, etc. Are there any particular timelines that people should be aware of in terms of key intellectual property and dates on a go-forward basis that might influence the kinds of discussions you would have with partners, etc.

Sure. I think typical of -- of any biotech company, you have certain patents and then you're always in the process of filing additional patent applications on formulations and so forth. Because it's public information, we can certainly disclose that. The underlying composition patents of TP508 have expiration dates in the U.S. of 2011 and 2013; and outside the United States, it's earlier than that, it's in the 2007 range. Those are on the composition patents. However, we filed a number of our -- through Chrysalis have filed a number of formulation patents which we believe could very well have the opportunity to extend that coverage out into the time frame beyond 2020.

Beyond that, there is also, through the Waxman Act, there is a caveat that as long as you get FDA approval for at least one NDA relative to the underlying technology prior to the expiration of the patent in the U.S., you would get a minimum of a five-year extension on the patents and it could be longer; it depends upon how much time you spent in the regulatory process. So, for example, if you spent six or seven years from your initial IND until you got NDA approval, you could potentially get that time added to the underlying composition patents. So we feel very comfortable, we think that in our current projection, anyway, that we will have -- would have an NDA potential approval by 2011, which would effectively extend the underlying composition patents out into the time frame of potentially 2016, 2018 and then if the formulation patents, which we've -- have submitted and have hopes for are indeed granted, we would go on beyond 2020. So I think as -- as we have been working with some biotechnology consultants, experts in the area, and they've told us that they believe the patent portfolio here is certainly a good one and probably as strong as what you might expect in a company of our size.

Great. Thank you for all the additional information. Congratulations.

Thanks.

Thank you. Our next question is coming from Bill Plovanic of First Albany Capital. Please pose your question.

Great. Thank you. Good morning, Tom.

Hi, Bill, how are you?

Good as usual. Um, I have a question and then Brian's going to ask a couple questions. Can you hear us okay?

Sure.

Okay. First, um, with the acquisition, would you expect to consolidate all the employees into one location, or would you keep running two separate facilities?

Okay. First of all, let me give a little background there. We have our facility here for those who are new to the story here in Tempe, we have approximately 30 employees in our facility here. Chrysalis's facility is in a leased facility in Galveston, Texas; they have around 10 employees in that facility. Our initial plan would be to maintain the lease. It's not a significant expense to us, to maintain the lease in Galveston, certainly through the end of this year, uh, to give us a real opportunity to understand better the technologies and the opportunities that are there. And it's possible that we may continue that for some extended period of time. We'd have to see some real benefit in moving or asking folks to move here to Tempe. As I've said, since 1998 we've been working with these folks, Bill, and they've been in Galveston, we've been in Tempe and we've done a lot of great work together. We would have to be convinced that it made sense to consolidate into one location .

Hi, guys, how's it going?

Okay, hi, Brian.

A quick two questions. First of all, can you remind me what the follow-up time for the cartilage trial and then with the ligament and tendon trials would be?

The follow-up period?

Brian, I think it's premature to really predict what the follow-up time -- you know, seeing that we have not even yet -- we don't plan until later this year to in fact have a pre-IND meeting with the FDA on the cartilage repair indication. I think it's premature to really talk about follow-up times. And as I said in my comments, really, the preclinical studies just -- will just be beginning this summer, in terms of the preclinical animal studies for ligament and tendon repair; and so I really can't predict now what a clinical trial in those indications would look like.

Okay. And going -- switching gears to CBI for a second. You know, the other indications like of maxillofacial and cardiovascular and wound healing. I know they are currently doing a dental trial, what other trials are they engaged in.

Well, we can comment a little bit on that. And, again, we would like to have the opportunity to do a thorough evaluation of that and do a better job for you with a question like that, Brian, on our next conference call. But I think what we can tell you to date is, they've done some -- a couple of preclinical trials at a very prestigious heart center in Texas-- world renowned heart center in Texas in which they've done a couple of preclinical trials with very exciting results and this was for--really for ischemic heart and revascularization, really quite some exciting results. Now, that is preclinical work. My understanding is a couple of trials have been done, the work is ongoing, but that would -- certainly not yet at the stage of getting an IND to begin a human clinical trial for that indication, just some very exciting preclinical work. Obviously, that's a very important area, as heart disease and coronary artery disease continues to be a major focus of most major medical companies in cardiovascular.

In the wound-healing arena, that is the area they've spent the most amount of time with and have -- and advanced the furthest with. They've done ex-tensive preclinical work in diabetic ulcers. They have completed successfully a phase I/II human clinical trial for diabetic ulcer and those results -- I'll ask Jim in a minute to give a little more clarity on that -- were presented and they were very good results. They have spent the time -- I think that was in 2002 and Jim will comment on that, but since that time, they've been working on a gel formulation for that potential product and hopefully moving on to potentially a phase II B trial to evaluate Chrysalin in a gel formation for diabetic ulcers. And then finally, most recently, I think they had a press release out on this a couple months back, they had some very exciting initial work being done in the area of dental-bone restoration. But let me really turn this over to Jim. I think he can comment. Those are the three-most advanced programs that I am aware of, but Jim, maybe you want to comment here.

Good morning, Brian. Yeah, I think the important thing really in terms of their clinical trial is they -- Chrysalis conducted a clinical trial on diabetic ulcers which was a placebo-controlled randomized double-blind clinical trial which compared two doses of Chrysalin to placebo in the care of diabetic wounds and this was a 20-week study. And the results showed that, in fact, there was an effective Chrysalin that looked very promising, but we need to underscore that this was a pre -- preliminary clinical trial that was a small combined phase I, phase II study but the results are certainly very promising, as Tom said, the plans that Chrysalis would be to in fact move forward with the phase II B study looking at the peptide formulated in this gel, which would just be more amenable to treating diabetic ulcers over time. So that's the current status of that.

And of course there's literally 10 to 12 years of preclinical safety as well as efficacy studies done and various animal models that support that application. And then as far as in -- I think Tom did a great job of summarizing the cardiovascular studies to date, there have been both rabbit and pig studies looking at the effect of the peptide on myocardial revascularization and the results are certainly very encouraging, but I believe that more work would need -- need to be done preclinically to really support moving forward into an initial human evaluation. And the dental-bone regeneration was actually a rabbit study that showed great promise much like we've shown actually in collaboration with the Chrysalis group on healing of segmental defects. So the same sort of experiment where you're really asking to regenerate bone over a large area and we've -- we have a publication coming out now in Journal of Orthopedic research on the rabbit long-bone segmental defect model and this basically complements that same work that we've done.

Is it safe to assume that the dosing is going to be similar between ortho and then, you know, dental bone and the diabetic ulcers.

Well, I think that certainly what we can tell you is is that in the -- in the initial diabetic ulcer trial as well as in our initial distal radius fracture trial, the doses are in the same range of essentially one to 10 micrograms as being effective. But clearly we don't know in dental-bone regeneration or any of the cardiac studies really enough yet about dosing to predict what it would actually be in a human clinical trial.

Okay. Thanks. I will get back to you in the second quarter.

Thank you.

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

Hi, good morning, guys.

Hi, Justin.

Can you remind me what the timing of this deal is expected to be?

The timing of the close?

Yeah.

Okay. Well, this deal -- because Chrysalis is a privately held company it requires an S-4 registration and our anticipation is that that is probably a 30 to 60- day process that's typically the situation, as -- but that depends, Justin, on whether the SEC chooses to review the documents and what process they may take. So I think it's a potential close here, within probably 60 days is a fair time frame, what we said in the press release was the third quarter. That could be potentially early in the third quarter. So I would imagine it's probably -- if things go as planned in the July time frame.

Okay. And you made comments that the incremental costs of CBI will be pretty minimal.

Yeah. Well you have to understand that the majority of the effort--a large part of the effort that has been going on in Galveston has been in support of the OrthoLogic programs, particularly in the manufacturing area and formulation areas and so forth. So the costs that they've been bearing down there have really been on a contracted basis for us. So within our spending, uh, of our R & D, we have included those costs. So the incremental additional costs that they bring really centers in the additional indications that they're working on but, our at least initial, look at it will be that it will have a minimal impact on this year, from -- from an ongoing standpoint.

Now, once we've had an opportunity to evaluate the programs down there over the next several months, we think we'll be in a better position, as we said in the summer, perhaps on the second-quarter conference call to give more clarity around the plans for investment there going forward. So initially we don't see any significant or real impact on us this year. We needed the opportunity, though, to evaluate where they are in the programs. The only cash out-of-pocket costs initially here, which Sherry alluded to, is about $3.5 million, $2.5 would be the cash payment to Chrysalis and about $1 million in associated costs of the acquisition, less the 5% OrthoLogic already owns of the company. Do you have anything you want to add, Sherry, to that?

No, no. I think you covered it.

Okay.

That help you?

Yeah. How many employees do they have?

They have about ten.

Okay. I guess in terms of looking at the overall long-term opportunity with CBI's products, what -- how does that change, I guess, OrthoLogic's long-term opportunities? Does it -- I know you can't really go into too many specifics, but maybe you can just kind of say, you know, what -- does it -- does this transaction double your -- your long-term, you know, revenue opportunities or -- I guess how do you -- what's your thoughts on that?

Well, let me state clearly here, for everyone, that we are primarily focused, as we are today, in the orthopedic segment and orthobiologics. That is at the forefront of what OrthoLogic is involved in, that's what we've got the most experience with; and are driving those programs forward and we intend to stay very focused on those programs because we believe orthobiologics in itself is an enormous market opportunity, in the billions of dollars, and we believe we've got leading candidates and, as we've alluded on many conference calls, we believe we have a low-cost manufacturing position and some tremendous opportunities on the orthobiologics arena.

Having said that, the markets that -- that Chrysalis is looking at, the diabetic wound-healing market is a very significant market opportunity, given the fact that there's no real product that has been extremely successful over there. I think Regranex is the only product, Jim, if I'm correct, that's on the market and I think the results are mixed on that product. So there is a critical need here in the wound-healing arena, and, as Jim alluded to, and I think you can actually go and -- and probably see, since it was published, the results of their phase I, phase II diabetic ulcer trial, they had some very exciting results there. Albeit, preliminary results, but should we be as successful in taking that forward either ourselves or in partnership with another company, a large one that's focused in the wound-healing arena, I think the opportunity there is very significant.

In addition in the cardiovascular area, to my knowledge this would be a unique product. If you had a product which had the opportunity to actually go into ischemic heart and actually recreate vessel growth or enhance vessel growth and improve blood flow, totally unique to my knowledge; potentially delivered through a catheter. So I think that opportunity in the cardiovascular arena given the -- the huge market for cardiovascular and heart disease just in the United States alone, let alone worldwide, is quite significant. And then, finally, in the -- in the bone-restoration -- dental-bone restoration area, the numbers are interesting. They are not small. I believe the number's 200,000 to 300,000 reconstructions occurred last year in the United States. These are -- these are dental-bone reconstructions where you're doing implants, or you have various other deterioration of the bone that needs repair. And have a unique product there that could significantly enhance the healing for those patients. It's not an insignificant market by any means.

And, again, what they're talking about here, at least in the preclinical trial, which I thought was very compelling, was to take Chrysalin in basically a fairly simplified formulation and add it to commercially available grafting material and generate significant improvement for the patients in terms of acceleration of healing. I found the data to be quite interesting. So these are not small markets. They are easily probably as large as the orthopedic markets are worldwide. Now, will that double OrthoLogic's potential market opportunity in revenue potential down the road? I don't know that we know enough to answer that question, but they are very significant.

Well, that's certainly of great value, I mean you basically give away about 13, 13.5% of the company to get huge incremental opportunities for the company overall. So it sounds like a great investment. Does CBI have any existing partners on the research side?

Yes, they do. They have several that they've been involved with, as we do as well. However, none of them are equity owners in Chrysalis, nor are they -- do they have any rights to the product. They simply have some collaborations that they're working on, we alluded to one -- one at -- at a major Texas heart center. There's another on the oral maxillofacial, I believe it's in Louisiana, and then on the wound healing they've had several collaborations, so there are a number of them there. But none of them are in any way an encumbrance on the rights.

This -- and I would just like to reemphasize again and use your question to do this, the -- as great as the market opportunities are potentially here and significant expansion for OrthoLogic, the primary reasons that we -- that drove us on this acquisition beyond the significant expansion of the platform I alluded to in my earlier comments; that this gives us control of the technology--effective control of the technology for all indications, for all geographic areas worldwide. And that is a significant change for OrthoLogic. You alluded to a percentage of the ownership in the company, I think you said 13% for a potential doubling of our market opportunities. It is more than that, Justin. It is more an issue beyond that of control, having the control of the technology and its future applications.

Okay. Great. Thank you.

Our next question is coming from Brian Meltser of Candlewood. Please pose your question.

Hi, this is Rob Hoffman also from Candlewood. I'm trying to find it in our notes, but is the University of Texas one of the primary shareholders of CBI.

The University of Texas is a shareholder of CBI. I don't know their exact percentage, but it's a little larger than our percentage ownership in the company. Recognize that Dr. Carney, who is a tenured professor at the University of Texas in Galveston, UTMB I guess they call it, and as such when he spun the company out and formed CBI, the University of Texas took an equity position in the company as well as provided them with the license opportunity that they had. So, yes, University of Texas is a shareholder, although the -- their ownership in the -- in the company is not a majority by any means, it's somewhat -- a little larger than ours.

Okay. I guess, then, it's Dr. -- Dr. Carney, is there a lockup on him in terms of when he can -- he -- obviously, then, is the primary shareholder of CBI? Is there a lockup on those shares, or can they float as soon as the deal is closed?

Actually, there's -- there is a lockup on the -- on the shares. Let me give a little more detail to this. It will take, as we said, something in the neighborhood of 60 to 90 days to close the transaction. Following the close of the transaction, for a 60-day period following the close of the transaction, any shareholder who owns more than 5% of the shares that would be transferred has a limitation on them, a daily limitation on the percentage of their ownership that they can sell on any given day. And it's -- in -- and in the range of 5%. So we effectively believe we have mitigated the potential effect of that.

Let me just get that clear. So they are locked up hard for 60 days and then after that they can only sell 5% of their then shares on a daily basis.

No. That's not correct. I said they are essentially locked up for the next 60 days until the transaction closes. Once the transaction closes for the 60 days following the closing of the transaction they are locked up to a maximum of 5% of their ownership on any trading day in that 60-day period.

And then 60 days after the transaction closes, then they are free to do whatever they want.

That's correct.

Okay. Thank you.

Thank you. Our next question is coming from John Petro, an independent investor, please pose your question.

Hi, Tom. Good job, I've been around a long time, you keep doing the right things. Tom, can you comment on what was characterized in the press release, as well as earlier in your comments, a benefit being the reduction of royalties? My question would be why not an elimination of royalties rather than a reduction?

Okay. Well, we -- we had a royalty rate in our sublicense agreement with Chrysalis, uh, and that rate was something less than 10%. The royalty rate, which we would be paying to the University of Texas since this will be a license, uh, exclusive worldwide license from the University of Texas with OrthoLogic, the effective holder of that, those royalty rates are something less than 5%. We'd rather not comment on exactly what they are, John, for competitive reasons.

Okay.

But I can tell you it's in -- you never want to refer to these things as -- as a low number, but given the margin potential of the Chrysalin products, you know, less than a 5% royalty did not seem like a significant number to us.

Okay. And lastly, Tom, I know it would be purely hypothetical, but is there some -- are you comfortable offering to the audience what a calculable figure might have been looking out on the milestone payments?

Oh. Well, that depends on -- on how many of the --

I realize.

But I can just tell you that there was -- there were escalating. There's an initial $500,000 that was due on the filing of any IND.

Right.

And then beyond that, I think on the filing of a -- an acceptance for filing of an NDA, I believe it was $2 million. And on an FD -- on an NDA approval it was $4 million. For each indication. So potentially, if we were to get all five of the orthopedic indications alone through that process, it comes up pretty quickly to the -- to the acquisition price.

At minimum, at least $6 million we hope in the next 16 months or so on --

Right.

Our current phase 3. All right. Very good. That's it. Thanks.

Thank you, John.

Thank you. Our next question is coming from Bill Plovanic of First Albany Capital.

Been answered, thank you.

Once again, the floor is open for questions. If you do have any further questions, please press star one on your touch-tone phone at this time. We now have a follow-up coming from John Petro, an independent investor.

Tom?

Yes, John.

You spoke clearly to the lockup with the stock. Did we enter into some type of employment agreement with Dr. Carney.

Yes. As a condition of signing the definitive agreement, Dr. Carney has entered into a two-year consulting agreement with OrthoLogic. He is a tenured professor at the University of Texas in Galveston. However, he will be a full-time consultant for us for the two-year period of time, just as an initial starting point. And he will also chair our scientific advisory panel and we believe he'll make a lot of great contributions to the company going forward and he was a key individual as we looked at this deal.

Is that the case with any of the other 10 employees in Galveston, were any of those people considered key and asked to enter into some similar agreement?

Yes. There are several employees in that group, very talented folks. I would tell you I believe all the folks there are talented. But there are several individuals there who are PHDs and who have very significant skill sets that are important to us and we have -- we have included them in more of a plan to have them by the time of the closing with employment agreements it's not a requirement, but we have every reason to believe that they will join in and be part of it going forward. But there are several.

Okay. Thanks.

At this time, there appear to be no further questions. I'd like to turn the floor back over to Mr. Trotter.

Thank you, operator. Let me conclude this call by thanking you all for your time and interest. I am very excited about the prospects for OrthoLogic and with the anticipated addition of CBI expect the remainder of this year to be very busy and productive. This concludes our conference call. Have a good day. Thank you.

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