Capstone Holding Corp (CAPS) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the OrthoLogic Corporation third-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 your questions following the presentation. It is now my pleasure to turn the floor over to Larry Delaney of the Berlin Group. Sir, the floor is yours.

Thank you and good morning. Thanks for joining us to discuss third-quarter and the year-to-date 2004 financial 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 or 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 our Form 10K for the fiscal year ended December 31st, 2003, and our Form 10-Q for the quarter ended September 30, 2004 as well as other documents we file with the SEC.

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

Good morning. Thank you for joining us for our third-quarter 2004 conference call. Joining me on the call this morning are Sherry Sturman, Senior Vice President and Chief Financial Officer; Dr. Jim Ryaby, 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 before moving on to your questions, I will provide financial guidance for the balance of 2004 and the outlook for 2005.

During the third quarter we continued to make excellent progress with our development plans for the Chrysalin Product Platform. For our lead product candidate an injectable Chrysalin-based therapeutic for acceleration of fracture repair, we now have three-quarters of the 500 patients enrolled in a Phase III trial and following completion of enrollment and allowing for patient follow-up, expect to have trial results before the end of 2005.

In addition, we are now beginning another human clinical trial for acceleration of fracture repair which will provide additional dosing information to support an NDA filing for this indication, data permitting before the end of 2006. We continue to believe that a single injection product that could accelerate fracture repair would present a sizable market opportunity addressing an estimated 100 million annual fractures worldwide.

Our second and third Chrysalin product candidates which are targeted at the spinal fusion and diabetic wound healing markets continued to make excellent progress as well during the third quarter. In spine fusion we completed the enrollment of a Phase I-2 human clinical trial earlier this year and that trial is currently in patient follow-up. The results of that trial are expected to be available next summer.

In diabetic ulcer, work continues on optimizing a gel formation for a potential Chrysalin product. We plan to begin another human clinical trial for that indication in 2006. The market opportunity for a potential Chrysalin product for diabetic ulcers has been estimated at well over $1 billion a year.

Preclinical activities continued as well on potential Chrysalin products for cartilage defect repair, tendon repair and cardiovascular repair. In a moment Jim will provide more details on the ongoing activities for all of the potential product candidates in the Chrysalin Product platform.

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

Thank you, Tom. Good morning. I'd first like to point out that OrthoLogic's financial results for the third quarter of 2004 are reported in accordance with FAS 7 guidelines applicable to development stage companies. As we described in today's press release after divesting our revenue producing operations in November of 2003, and focusing the Company's efforts on R&D program, we began reporting our financial data as a development stage company effective upon the closing of OrthoLogic's acquisition of CBI on August 5. This change is reflected in the far right column of the statement of operations.

General and administrative costs for the third quarter of 2004 were 1.2 million, compared to 1.1 million for the third quarter of 2003. The increase in G&A spending was primarily due to a charge of approximately 600,000 recorded as a reserve for the cost if excess space within our corporate office building in Tempe, Arizona. We expect to sublease the portions of the building unused by OrthoLogic within the next 12 months. Excluding the reserve for excess space, the 2004 G&A expenses were substantially less than the 2003 expenses for the comparable period. Year-to-date, G&A expenses totaled 2.4 million.

R&D cost were 4.8 million in the third quarter of 2004 compared to 2.4 million in the same period as the prior year. The increase is due to additional spending for OrthoLogic's ongoing clinical and preclinical programs as well as R&D costs for additional Chrysalin indications acquired with the CBI transaction. Year-to-date, R&D spending totaled 12.2 million compared to 6.1 million for the same period in 2003.

Total expenses were offset by the collection of 79,000 during the quarter, and 132,000 year-to-date under the terms of the settlement agreement resulting from the CPM divestiture in 2001. CBI in-process R&D totaled 25.8 million during the quarter.

Cash and investments earned a net 344,000 of interest in the third quarter of 2004 and 950,000 year-to-date. We recognized a tax benefit of 411,000 in Q3 of 2004 for the anticipated refund of estimated state income taxes paid in 2003. Included in net income from discontinued operations was the recognition of 1.7 million for the reduction of the value placed on certain representation and warranties previously recorded in connection with the sale of the Bone Device Business.

In accordance with FASB 45, we reserved 1.9 million for the reps and warranties made in the asset purchase agreement for the Bone Device Business. At this time we believe removing the 1.7 million of the initial 1.9 million reserve against the escrow is appropriate.

The net loss for the quarter was 29.4 million, or 80 cents per share, and 36.8 million, or $1.04 per share year-to-date. The 2 large nonrecurring entries of 25.8 million for IPR&D and the offsetting 1.7 million gain from discontinued operations account for 24.1 million or 66 cents per share of OrthoLogic's net loss for the third quarter.

Turning to the balance sheet, total cash in investments at September 30, 2004, was 109.4 million, the decrease of approximately 6.6 million in our cash in investment last quarter as attributable to the 2.5 million cash payment to CBI and approximately 4.1 million in operating expenses. We anticipate the cash utilized in operations will be approximately 6 to 7 million in Q4 and cash and investments will total approximately 102 million at year ended 2004.

Our estimated net loss for 2004 of approximately 20 million will be increased by the CBI IPR&D expense of 25.8 million resulting in a projected net loss of approximately 46 million or $1.24 per share for 2004.

OrthoLogic issued 3.5 million shares of common stock to CBI at the time of closing. Of the 25 million purchase price paid in OrthoLogic stock, approximately 18 percent valued at 4.5 million was deposited into an escrow account for a period of 18 months. Although these shares will be held in escrow they are included in OrthoLogic's total shares outstanding. As of September 30, 2004, the shares of common stock outstanding totaled approximately 38 million.

That concludes my summary. Back to you, Tom.

Thank you, Sherry. Dr. Ryaby will now provide additional information on the development of the Chrysalin Product Platform. Jim?

Thank you, Tom. Good morning. We made significant progress on our Chrysalin product platform this pass quarter. Currently we are focused on 3 major indication areas for the Chrysalin peptide. These are orthopedic tissue repair, dermal wound repair and cardiovascular repair.

First, I would like to provide an overview of our program focused on orthopedic implication. We envision 5 potential 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 as for the fracture repair indication with a Phase III clinical trial currently under way. We expect to enroll approximately 500 patients in this trial, with approximately three-quarters of the patients enrolled in the study to date. No adverse events related to Chrysalin have been reported in this study and patient compliance with follow-up requirements has been excellent.

In addition, we expect to initiate an additional randomized multicenter clinical trial and fracture repair and plans have begun enrollment in this study later this year. The primary purpose of this study is to provide additional dosing information to support a potential MDA filing, data permitting, for the acceleration up fracture repair indication before the end of 2006. In addition, the pre-clinical research on fracture repair has also been progressing well and we presented recent data at the International Society for Fracture Repair meeting in Bologna, Italy last week.

Regarding the spine fusion indication, patient enrollment has been completed in the Phase I-2 human clinical trial for spine fusion. Data from this initial trial is expected to be available by the end of the second quarter of 2005 after the 12-month follow-up is completed. Our preclinical research on spine fusion is also progressing well. Pre-clinical studies of Chrysalin on spine fusion were presented two weeks ago at the North American Spine Society meeting in Chicago. This work was conducted by Dr. Joseph Lane and collaborators at Hospital for Special Surgery in New York and the presentation was well-received and drew wide interest.

The third potential indication in the Chrysalin product platform is the use of Chrysalin for cartilage defect repair. We made a presentation at the Combined Orthopedic Research meeting in Banff, Canada in October and we received positive feedback from many attending the conference. This preclinical presentation focused on advanced formulation studies that we performed with our long-time collaborator, Dr. Daniel Grande of North Shore Research Institute on Long Island. Our goal remains to submit an investigational new drug, IND application for a cartilage defect repair indication 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 have initiated our first preclinical study of Chrysalin in tendon repair with another research team from Hospital for Special Surgery in New York and results from this study should be available early in 2005.

Regarding the non-orthopedic indications for Chrysalin, there are 3 major areas of focus where the peptide has shown promising results. These are dermal wound repair, cardiovascular repair in dental bone repair. The most advanced area is the application of Chrysalin in wound healing. Chrysalin has been studied both preclinically and clinically in wound healing.

Preclinical studies have been published showing that Chrysalin can accelerate the rate of wound healing. Our Galveston team has completed a Phase I-2 human clinical trial evaluating the use of Chrysalin on diabetic ulcer healing, and promising results were observed with Chrysalin treatment. In addition, no drug-related adverse events were reported in that study. Current efforts in this area are focused on optimizing the gel formulation for a potential commercial product.

In the cardiovascular area, preclinical studies have been conducted evaluating the effect of Chrysalin on myocardial revascularization. The results from 2 different preclinical models show promising results with Chrysalin treatment increasing vascularization in ischemic cardiac tissue and restoring cardiac function. This work was conducted by our Galveston team led by Dr. Chris Coleman (ph) in collaboration with the research group from Debatie (ph) Institute at Texas A&M.

Additional preclinical studies are being planned as well as the valuation of potential delivery and formulation approaches in support of initial human clinical trial.

In conclusion we continue to make excellent progress in our preclinical 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 actions, is effective in multiple relevant preclinical models; has an excellent safety profile to date; and Chrysalin has demonstrated preliminary efficacy in initial human clinical trials for acceleration of fracture repair and healing of diabetic ulcers. Tom, back to you.

Thank you, Jim. Before moving on to your questions, I will now provide financial guidance for the balance of 2004 and 2005. For 2004 we are maintaining our previous projection of a net cash burn of approximately 20 million for the year, and an ending balance of cash and investments of approximately 100 million by year end 2004.

For 2005 we expect to have the addition to our cash position of approximately 7 million from the receipt of proceeds from the escrow associated with the sale of the bone stem business in 2003. In 2005 we plan to complete activities associated with both the Phase III fracture repair trial and the Phase I-2 spine fusion trial. In addition we will have another human clinical trial under way for fracture repair and expect to begin a human clinical trial of Chrysalin for cartilage defect repair.

Our 2005 projected net cash burn is expected to be in the range of approximately 35 million.

Operator, with that we will now open your call up to questions.

(OPERATOR INSTRUCTIONS) William Plovanic of First Albany Capital.

It's actually Brian Wong for Bill Plovanic. Question about when we could see the next studies presented, when do you think those -- next summer I think for spine, is there anything before then?

I'll let Jim answer this. Between now and next summer we don't have any human clinical data results which we might talk about. However, there are several preclinical things that have been done, important things, and we will be presenting probably at the Orthopedic Research Society in conjunction with the American Association of Orthopedic Surgery and that is in February, in the last week in February.

And then perhaps during the fourth quarter call or the first quarter call in the Spring Jim may have follow-up from the tendon study that was done at the Hospital for Special Surgery. The human clinical trial data which we expect to have next summer in spine fusion and by the end of next year, end of 2005, for the Phase III fracture trial, as far as those results go we will be able to talk about those results but we first will need, as we always do, to speak with the FDA and give them an opportunity to review the data and once we have their input, we will make a public statement relative to that data.

Jim, did you want to offer any specifics on what might be coming up at (indiscernible) or other preclinical?

Well, Brian I think we traditionally always present at the Orthopedic Research meeting as Tom said as well as the American Society for Bone and Mineral Research and also at specialty meetings that happen to be held more on a biannual basis like just now the interest National Society for Fracture Repair meeting which was held last week in Italy as well as you know we presented at the Cartilage Repair meeting in Ghent, Belgium which is again a meeting which is held every other year.

We also present at the NAPS (ph) meeting. And there may be an opportunity for us to present more preclinical data for example at next year's NAPS meeting. Traditionally that's the type of presentation that Tom was pretty clear about where we are what any clinical data presentation.

So Brian, just to follow up, in order to present the human clinical data from either the spine fusion trial or the Phase III fracture repair trial it's necessary to get into the queue once that data has been generated and we've had an opportunity to review that with the FDA. We will find appropriate forums to present that data having of investigators present that data at meetings as soon as we can following any conversations we've had with the FDA to give us an opportunity to get that information out into the public domain as quickly as we can.

Great. I'll have to convince Bill to send me over to Belgium and Bologna next year. Secondly, talking about the second Phase III clinical trial that you are embarking for fracture repair, could you tell us a little bit more about how many sites and the number of patience you intend to enroll in that study?

I'll let Jim to give you the details, so that we are clear, the second fracture trial that we're doing is basically a dosing study. And we're using that trial to generate additional dosing information to support a potential NDA filing, data permitting, as we've said by the end of 2006. Between now over the next 2 years we will be completing that trial in follow-up. And as far as the specifics go, Jim can give you information relative to our plan.

Brian, the trial is approximately 500 patients and 50 to 60 centers here in the U.S. and Canada. As Tom said, this will be -- the design of the trial really is to provide additional dosing information. And as I said, we plan on initiating this study before the end of this year.

What is the follow-up on that?

The six-month formal clinical evaluation as in the current Phase III study and then there's a twelve-month follow-up period which can actually be either a phone interview or a full clinical follow-up based on the investigator's discretion.

Great. And then I just have 2 more questions. Traditionally you've been focused on the ortho market, obviously you are the furthest along on that and now with the CBI, it would seem to me that the market opportunities for cardio and wound healing might be even greater than ortho, is that correct? If so maybe you could give us a little bit more information on what you see the market opportunities for those areas as being?

A couple of points there, Brian. With the acquisition of CBI clearly we've expanded the base and potential of the Chrysalin product platform for OrthoLogic. As Jim said, we have 5 potential indications in orthopedics. We're looking at at least 3 in non-orthopedic indications. In terms of market sizes and opportunities, we continue to believe, however, that the acceleration of fracture repair market opportunity is the largest market opportunities we're looking at amongst all the potential products. The reason for that is the latest Frost & Sullivan data that we've gotten indicates more than 100 million fractures annually worldwide with somewhere in the neighborhood of 30 million in just the westernized countries, U.S., let's say Western Europe and Japan.

So a huge opportunity there and an unmet need because there is no product today in the world, drug product in the world that can accelerate the healing of fractures. We continue to believe that is our major market opportunity. It's why we focused our resources there and it is why we are doing -- moving through that process as quickly as we can but making sure that we're doing all the necessary things to support a potential NDA filing, data permitting, by the end of 2006.

Having said that, of the other indications beyond fracture healing and orthopedics, if we look we believe at our second most likely indication our largest opportunity is probably in the wound healing arena. The diabetic ulcer market is a huge market opportunity; most estimates suggest it's a $2 billion market opportunity if there was a product on the market that could successfully address it. Today there is only 1 product that has been FDA-approved specifically for that market, and it is Regranex from Johnson & Johnson. While that product has offered some help to the diabetic ulcer patients in that the success rate with Regranex is higher than the rate of simply taking care of a diabetic ulcer wound with good medical treatment, the preclinical results and as well as the initial Phase I, Phase II human clinical trial results of the diabetic ulcer study that Chrysalis did with Chrysalin showed a significantly better rate in terms of the healing of the diabetic ulcers and the time to heal.

So we believe we've got a significant opportunity in the diabetic ulcer arena and that's why we're focusing a lot of our attention over the next year on the development of the gel formation, the (indiscernible) formulation -- sorry -- which we believe we can then move into a human clinical trial, hopefully in 2006.

If I lined up the opportunities I'd say clearly fracture repair is a huge opportunity and then number 2 would be diabetic ulcer. I would also add that recently on the competitive front we have seen Pfizer gain FDA authorization for an IND to begin a Phase I, Phase II for a peptide type product for acceleration of fracture repair. While they are several years behind, if you look at the way drugs are developed, nevertheless we view this as a major validation in our minds of the market opportunity in acceleration of fracture repair. Pfizer simply does not look into the market opportunities and begin human clinical trials unless there is a major market opportunity there.

With that, Jim, did you have anything else you wanted to add?

No, I think, Brian, as I said in my comments, I think the key thing for us for the rest of this year and next year is certainly to make sure that the gel formulation really provides an adequate delivery as well as good stability of the peptide so that we could proceed and in fact starting another trial in diabetic ulcer healing.

In the cardiovascular area, this is an area that we are certainly enthusiastic about and interested in. But there certainly will need to be additional cellular as well as animal safety and efficacy studies that we will have to complete prior to making plans to meet with the FDA about an initial human clinical trial. We believe certainly that that will take us minimally all of 2005 to complete. I think that's why we're thinking more 2006 timeframe for any potential human clinical trial in cardiovascular.

Okay and that's clinical trial for the wound healing, the diabetic ulcer, would that be a Phase III or --

I think we don't know that yet, Brian. I think that our plan would be certainly to meet with the FDA and really to review all of the safety data as well as the current or the previously completed human clinical trial data and really discuss with the FDA what the best strategy would be moving forward in terms of a clinical development program. That's all I can tell you now.

One other thing I would add to that is this is a critical unmet need as far as the FDA is concerned. This is something that they are very interested in, these patients, unfortunately, with these diabetic ulcers, almost 50 percent end up with an amputation. Of those, a large percentage die within a very short period of time. This is a very serious unmet critical need in the United States. And we're excited about our opportunity there but as Jim said, until we have an opportunity to talk to the FDA and discuss the overall strategy with them for the development of a product and approval, we don't have any further things -- any further guidance.

Lastly, my last question is regarding the Galveston facility, do you have any plans on moving that to Tempe or do you just continued to operate at both Tempe and Galveston?

A couple of points there. The Galveston facility is relatively small. It's only a couple thousand square feet. There are about 10 individuals working there. Those individuals are very qualified key people and key members of our new team. We frankly at this stage do not see any great value in moving that to Tempe. We've had a six-year partnership arrangement with those folks. We communicate with them regularly. We meet with them regularly and frankly we've seen the programs move along quite well with them situated there in Galveston.

So in other words, unless there was a significant benefit that we believe existed to move that operation to Tempe, I think at least here in the foreseeable future we see no benefit in doing that.

Thanks very much.

(OPERATOR INSTRUCTIONS) Aaron Bretter (ph) of Burke Investment Research (ph).

I just had a follow I guess on the last one a little bit. Can you talk about some of the -- how you prioritize these different programs after fracture repair and spinal fusion, which indications are getting the priority and what are the relative expenses you are putting towards those, can you talk about that?

We can give you some ballpark numbers there, Aaron. From a priority standpoint it's always from our perspective guided by what are the best and the largest market opportunities. What do we believe is the best bang for the dollar invested. As I said we clearly believe from Frost & Sullivan data and from frankly now the interest of big pharma that the fracture repair acceleration fracture pair indication is a great place to be. We have potential to be first to market there in the world which always carries with it a significant premium so we are very excited about that.

Looking as we mentioned, diabetic ulcer would be number 2, significant opportunity and if we look at the spine fusion arena, clearly there we're hoping that Chrysalin in some format either as a adjunct combined with commercially available allograph or perhaps in one of our controlled release matrixes will provide a low-cost alternative to autograph for spine fusion. There is a very successful alternative to autograph out there today. Bone morphogenic protein sold by both Medtronic as Infuse and Stryker as OP-1; however, at $5000 a dose we believe it's priced off the charts for long-term acceptance. And we believe that if Chrysalin is successful either in a time release formulation or as an adjunct autograph, we could come to market with potentially a significantly lower price alternative. We believe spine fusion is a significant market opportunity.

If we go beyond that and think about the opportunities, there are opportunities in ligament repair and tendon repair. There are potential opportunities also in cardiovascular as Jim said earlier, we're still way out on the front end of the curve of those, we really don't have enough data to quantify as we do in the other markets what the market opportunity is other than there appears to be a significant unmet need.

In terms of how we're spending our money for next year, we can tell you that the preponderance of the funding and I gave guided a little earlier, that we'd be in the range of 35 million, the majority of that, the significant majority of that is in support of the fracture programs. That is because we have the ongoing Phase III trial. We have another trial starting up -- the dosing study Jim mentioned. So the majority of our funding next year in human clinical trials and of the 35 million will be in support of the fracture product.

Beyond that the spine product has costs associated with the spine fusion and the wrap up of the Phase I, Phase II trial and additional preclinical work that we're doing in that area. If we go beyond that we're going to be spending several million dollars in the other indications, gel formulation for diabetic ulcer as well as separate some preclinical studies in cardiovascular and then smaller amounts of money in tendon repair, ligament repair, etc. That is kind of your priority and ballpark there. Does that help you?

Very much. Thank you. One other thing. Has your headcount changed at all, are your adding more people to do these studies?

Well, we've actually fortunately run a pretty lean operation here. We have approximately 40 employees. We had approximately 30 before the CBI deal, now we have about 40. We believe we have the core group that we pretty much need for next year. We'll probably be adding just a couple of people in the clinical area, perhaps in the research area, just a very minor addition to our headcount we believe for 2005.

Terrific. Thanks very much.

There are no further questions at this time. I would like to turn the floor over to Tom Trotter for any further closing comments.

Thank you, operator. To summarize then for you and thanks again for listening. Our 3 key projected milestones for OrthoLogic in 2005 are completion of enrollment and patient follow-up for the Phase III human clinical trial for acceleration fracture repair, with results from that trial expected to be available by the end of 2005.

Second, is the completion of patients follow-up requirements in the Phase I-2 human clinical trial for spine fusion with results from that trial expected to be available next summer.

And finally initiation of a first human clinical trial for cartilage defect repair.

Thank you all for joining us on today's conference call. We continue to be very optimistic about the future of the Chrysalin Product Platform. Have a good day.

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