Capstone Holding Corp (CAPS) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to OrthoLogic Corporation fourth quarter 2004 results conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Mr. Larry Delaney of the Berlin Group. Sir, the floor is yours.

Good morning, and thanks everyone for joining us to discuss fourth quarter and full-year 2004 financial and operational results with management of OrthoLogic. 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 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 Form 10-K for the fiscal year ended December 31, 2003, and Form 10-Q for the quarter ended September 30, 2004, as well as other documents we file with the SEC.

With that I'll turn the call over to Tom Trotter, OrthoLogic's President and CEO.

Thank you Larry, and good morning. Thank you for joining us for our fourth quarter 2004 conference call. Joining me 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 provide an update on the Chrysalin product platform, then before moving on to your questions, I'll provide financial guidance for 2005.

During the fourth quarter, we expanded our ongoing clinical trial activities to include the startup of a IIB dose ranging study, for our Chrysalin fracture repair product candidate, and accelerated our development plans for the other non-orthopedic Chrysalin based product candidates as well. There are now six Chrysalin based product candidates at various stages of the commercialization process. All of these potential products address large worldwide market opportunities and are targeted at unmet medical needs.

Our lead product candidate is an injectable therapeutic for acceleration of fracture repair, and I'm pleased to report that we now have well over 400 of the approximately 500 patients enrolled in a Phase III human clinical trial, and expect to have data from that trial by the end of this year.

In addition, during the fourth quarter, we received FDA authorization to begin an additional human clinical trial for acceleration of fracture repair. This study will provide additional dosing information to support an NDA filing for this indication, data permitting, before the end of 2006.

Finally, during the fourth quarter we completed the integration of Chrysalis Biotechnology which we acquired in August of last year, and are now fully operational in both our Tempe Arizona and Galveston Texas facilities. In a moment Dr. Ryaby will provide a detailed update on the preclinical and clinical activities underway for all of the product candidates in the Chrysalin product platform.

Turning to the financials, our expenses for the fourth quarter were lower than anticipated, and we ended 2004 with more than $100 million in cash and investments and no debt. I will now turn the call over to Sherry who will provide you with additional financial information. Sherry?

Thank you Tom. Good morning. I will start with a high level overview of the statement of operations. My primary focus will be on the 3 and 12 months ended December 31, 2004.

The G&A costs for the fourth quarter of 2004 were $883,000 compared to the $648,000 during the fourth quarter of 2003. The increase in expenses over prior year is a combined effect of the first full quarter after the CBI acquisition expenses in 2004 and the offset in 2003 for the costs that were allocated to discontinued operations for the sale of the bone device business. Overall, the full 12 months G&A expenses were $3.3 million in 2004 compared to $4.3 million in 2003. The company spent $4.9 million on our R&D programs during the fourth quarter of 2004, compared to $2.9 million in the same period of the prior year.

Full year 2004 R&D expenses totaled $17.1 million, compared to $9 million in 2003. The quarter and year-to-date increase are due to additional patient enrolment costs in the Phase III fracture trial, and startup costs of our Phase IIB dose ranging trial, and our spending for our preclinical and research programs for the other Chrysalin product candidates. Our total operating expenses were offset by the collection of $75,000 during the quarter, and $347,000 for the year on the settlement agreement resulting from the CPM divestiture in 2001. The full-year expense for the acquisition of a CBI in process R&D totaled $25.8 million, which was recognized during the third quarter of 2004. The net loss for continuing operations is $4.9 million for the fourth quarter, and $43.8 million for the year.

Our operating statement also reflects a gain from the discontinued operations of the bone device business, sold during the fourth quarter of 2003. During the 12 months ended December 31, 2004, the company recognized the reduction of the value placed on the reps and warranties previously recorded in connection with the sale of the bone device business. In accordance with FASB 45, we reserved an amount for the reps and warranties made in the agreement. Continued monitoring of the business processes following the divestiture date, we have removed $1.7 million of the initial $1.9 million reserved against the [escrow] during the third quarter. In addition, the company recognized a related tax benefit of $363,000 on the gain related to the sale. The 2003 comparison of discontinued operations results directly from the gain on the sale and the related operations of the business.

During fiscal year 2004 there were no income related to the operations of that business since it was divested in November of 2003. The total net loss for the fourth quarter and the year ended December 31, 2004, was $4.9 million or $0.13 per share, and $41.7 million or $1.16 per share respectively. The company's tax NOL and general business credit carry forward is currently estimated to be approximately $30 million.

The three large non-recurring entries of $25.8 million for the in-process R&D development acquired from CBI, the tax benefit of $642,000 in continuing operations and the offsetting tax affect of $2 million gain from the discontinued operations, accounted for a net $23.1 million of the loss or $0.64 per share. The column to the far right of the statement of operations relates to our expenses starting from August 5, 2004 through December 31, 2004 as a development stage company. The losses will be presented in this format until the company is able to begin operations with a revenue producing product or a license agreement prior to commercialization.

Turning to the balance sheet, our total cash and investments at December 31, 2004 was $103.6 million. The company started 2004 with $121 million. The cash investments decreased by approximately $17.4 million during the 12 month period. In 2005, our anticipated spending of $30 to $35 million will be partially offset by the anticipated collection of a $7 million escrow balance from the sale of the bone device business.

We issued 3.5 million shares of commons stock to CBI at the time of closing. Of the $25 million purchase price paid in OrthoLogic stock, approximately 18% valued at $4.5 million was deposited in an escrow fund for a period of 18 months. Although these shares are held in escrow, they are included in the OrthoLogic total shares outstanding. As of December 31, 2004, the shares of common stock outstanding totaled 38 million.

That concludes my summary, back to you Tom.

Thank you Sherry. Dr. Ryaby will now provide you with additional information on the overall development program for the Chrysalin product platform. Jim?

Thank you Tom. Good morning everyone and thank you for being on our call today. As Tom indicated, in 2004, the Chrysalin product platform was significantly broadened by the acquisition of a CBI. We now have development programs underway for both orthopedic as well as non-orthopedic indications. I will now provide an update for each of the product candidates currently in development.

The overall Chrysalin product platform is focused on three major indication areas for the 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 indications where we were actively pursuing five potential product candidates. These indications are for fracture repair, spine fusion, cartilage defect repair, ligament repair and tendon repair. Our most advanced clinical program in orthopedics is for the fracture repair indication. And this product is currently being tested as a percutaneous injectable product for acceleration of fracture healing. In the Phase III clinical trial currently underway, we expect to enroll approximately 500 patients with well over 400 hundred patients enrolled in this study to date. No adverse events related to Chrysalin have been reported in this study, and patient compliance with follow-up requirements have been excellent.

As mentioned by Tom, during the fourth quarter enrollment began in an additional randomized multi-center clinical trial in fracture repair. The primary purpose of this study is to provide additional dosing information to support a potential MDA filing, data permitting, for the acceleration of fracture repair indication.

Finally, preclinical studies on bone repair have recently been published in the Journal of Orthopedic Research. Overall we are very pleased with the progress in the fracture repair program. The second Chrysalin orthopedic program is in spine fusion. We completed enrolment in a pilot Phase I/II human clinical trial for this indication last spring. Following the completion of the 12-month follow-up, data from that trial is expected to be available this summer. No adverse events related to Chrysalin have been reported in this study.

The third potential indication for orthopedics is the use of Chrysalin for cartilage defect repair. Many prominent investigators have expressed interest in participating in our first human clinical trial for a cartilage repair indication. We intend to submit an investigational new drug, IND application for a cartilage defect repair indication, and to begin a human clinical trial in late 2005.

Our fourth and fifth orthopedic Chrysalin product candidates are for ligament and tendon repair. We have initiated our first preclinical study of Chrysalin in tendon repair, with a research team from Hospital for Special Surgery in New York, and the results from the study should be available in mid 2005. A preclinical ligament repair study is currently being initiated.

Turning now to the non-orthopedic indications for Chrysalin, there are three major areas of focus where the peptide has shown promising results. These are dermal wound repair, cardiovascular repair, and dental bone repair. The most advanced area is dermal wound repair, where Chrysalin has been studied both pre-clinically and clinically. Preclinical studies have been published showing that Chrysalin can accelerate the rate of wound healing in normal and diabetic wound healing models. The team in Galveston has also completed a Phase I/II human clinical trial, evaluating the use of Chrysalin on diabetic ulcers and promising results were observed with Chrysalin treatment.

In Addition, no drug related adverse events were reported in this study. Current efforts in this area are focused on optimizing the gel formulation for additional human clinical trials with the goal of initiating a new clinical trial in early 2006.

In the cardiovascular area, preclinical studies have been conducted evaluating the effect of Chrysalin on myocardial revascularization. The results from two different preclinical models show promising results. In our eschemic rabbit model, Chrysalin treatment increased neovascularization in the eschemic cardiac tissue. And in an eschemic pig model, partial restoration of cardiac function was observed. This work was conducted by our Galveston team led by Dr. Chris Coleman (ph) in collaboration with the research group of Dr. Terry Folsom (ph) from the DeBakey Institute at Texas A&M. During 2005, additional preclinical studies are being planned as well as evaluation of potential delivery and formulation approaches to support a potential initially human clinical trial for this indication.

In conclusion we continue to make excellent progress with our preclinical and clinical studies of Chrysalin. Our efforts to date indicate that Chrysalin has a novel and compelling mechanism [action], is effective in multiple relevant preclinical models, that Chrysalin has an excellent safety profile in preclinical, and an encouraging safety profile in human clinical studies to date. And that 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 onto your questions, I'll now provide financial guidance for 2005. As previously mentioned we begin 2005 with more than $100 million in cash and investments. We expect to receive an additional $7 million before the end of 2005, in accordance with the terms of the escrow in the sale of the bone device business in 2003. Therefore, including interest income, we expect to have $110 to $115 million in available funds this year. Expect net cash expenses for 2005 to be $30 to $35 million, depending on the timing and progress of our clinical and preclinical studies. Operator, with that we will now open the call up for questions.

[OPERATOR INSTRUCTIONS]. Your first question is from Bill Klavanauk (ph) from First Albany Capital.

A couple of questions. First, let's start out with fresh fracture. You're a little behind schedule. When do you think that this will be enrolled by-when will you complete enrolment and what's been the reason that enrolment is going a little slower than expected.

A couple of points. As we've said, we expect a complete enrolment and the follow-up period for the fracture repair trial, and have data from that trial by the end of this year. There is a 6-month follow-up period, and depending upon when enrolment figures-if you so the math-probably this spring. We can't give an exact date, but we do expect it to wrap up this spring. We'll have, with the follow-up period, expect to have data from that trial by the end of this year. Addressing your question on the pace of enrolment, I think a couple of points are important. Number one, this is a traumatic event trial, not something which is an elective procedure. So enrolment is more challenging that it would be for a trial in which you could just come into town for example, and just advertise for patients, and away you'd go. So that's an issue. Second issue is, this is a first in the orthopedic world. And I think we have to keep that in mind. There is no drug product in the world today that can accelerate the healing of fractures. And by our estimates we are still at this juncture, at least three years ahead of any potential competitor for this market opportunity. And so while it's taken perhaps a little longer than certainly we had hoped, or expected, I think we maintain a significant lead for what could be a product which could change the practice of medicine. So I think patients will be rewarded here, Bill.

And then on the Phase IIB study, the dose ranging study, two questions. One, why do you have to go back and do that, I thought we already had some dosing data? And secondly, did Jim say that, or was it you that said you expect to file the NDA by year-end '06 in your opening comments?

Let me address two pieces and I'll turn it over to Jim. First of all, on the latter part of your question, we have said for, oh gosh, quite some time, Bill, that our anticipated filing date, data permitting, for the fracture repair product would be by the end of 2006. We would have data, we expect, from, as we've said, from the Phase III trial by the end of this year, 2005. But we want to have the additional dosing information on the IIB trial which is ongoing here, as well as all the other supplemental information required to have a robust potential filing here, and so I think that date has been out there for some time. Regarding the IIB trial and why we've done it, and I'll turn it over to Jim here in a second, I would just comment and say that, as we got into this program, we did an initial Phase I Phase II trial where we did test 10 micrograms and a much, much higher does, 100 micrograms, 10 times the 10 microgram dose in our initial Phase I Phase II trial. Based on that data, and the very promising data we saw with the 10 microgram study, we embarked on the Phase III trial as you know, comparing the 10 microgram to placebo. As we continued through that trial, and the success of that trial to date, at least from adverse events and so forth, in conjunction with our consultants, we concluded that it would be very helpful to a potential NDA filing for us to have some additional dose range information, relative to Chrysalin. We did not want to potentially end up at the NDA with someone asking for additional dosing information and not have that. So that is why we've initiated the additional trial. Jim, I would turn it over to you if you have any further comments to add.

Yes, Bill, I think you know that both at the FDA as well as any one who might serve on an advisory committee reviewing a potential NDA application, could simply have the opinion that they require a large amount of human dose ranging information, even though we have that dose ranging information obviously in animal preclinical models, certainly we believe that this will give us the most rigorous and robust NDA package that hopefully would support a new drug application, data permitting, as Tom said. So that's really where we are today, and we believe that additional dosing information will also help us in other clinical programs that we're doing, both on orthopedics as well as in the dermal and cardiovascular, because it's important to have that human dosing information.

Bill, let me add one other point, and that is that in preparing the NDA, potential NDA filing, there's obviously some thought behind how many patients do you believe you need to effectively meet a limit down, or a level down at the FDA in terms of patients exposed to Chrysalin, and we believe this trial will certainly help us adding a significant number of patients to those who have had Chrysalin as a treatment. So that was an additional factor in the decision.

And how many patients will be enrolled in the IIB? And then, would there also, there's not going to be a Phase III post that IIB again, you're not going to run a second Phase III are you?

That is not our current plan, correct. And there's about, right now, approximately 500 patients will be in the second trial.

Is there any reason that you believe the enrollment in the Phase IIB will go quicker than we saw in the Phase III?

I'm going to let Jim take that, but let me make one comment here Bill, let's give, and for those who aren't, and you are, but perhaps others aren't, our historical perspective. When we had our end of Phase I Phase II meeting, in the fracture repair program, again, recognizing the FDA had never seen a product for acceleration-a drug product for acceleration of fracture repair, in our discussions we actually got authorization to move to a Phase III trial considerably faster than we thought we might, and as such, it took us probably 9 months to line up the IRB approvals to really get that trial underway. So that has been a factor in terms of the length of time for the enrolment in the Phase III trial. This time, however, as we went and sought authorization from the FDA for the IIB trial, we already had a large number of centers indicating interest, many of whom had already gotten, or were ready to go with IRB approval. And as we noted in the press release this morning, we already have 27 centers with IRB approval for this IIB trial. So I would say we've definitely hit the ground running here, with the IIB trial as opposed to having to kind of started from a standstill back a couple of years ago, with the original Phase III trial. Jim, any thoughts there that you'd like to add?

Yes, Bill, I think the other thing is just that, when we started the Phase III trial, clearly we were at the building stage of our clinical department in terms of personnel and infrastructure, and now we have a very talented team led by Maria Walker, and so we believe that we're basically hitting the ground running in this trial, rather than starting in a very slow fashion, which is what happened with the Phase III trial. So we're confident that we'll be able to have a better enrolment rate overall in this trial.

Okay, I'll ask one more question, then I'll jump back into queue. On the dermal wound you talk about the gel reformulation. Would I expect the next study in there to be a Phase II, or a Phase I, or can you move right to a Phase III?

Well, let's back up for a little perspective for a second, Bill and then we'll give it to Jim. Again, the original Phase I, Phase II diabetic study was done with Chrysalin and saline. And while the results were promising, I think we have said repeatedly that we did not believe that that was a commercially viable product that we needed to go to a gel formulation. We have contracted and are working with one of the largest gel formulators in the country, and going through a library they have of gel formulations, as we try and find the one which we think will optimize best the release kinetics of Chrysalin so that we have a very viable and robust material to move into a next phased clinical trial. Now as to what that trial will be and how that trial will be viewed by the FDA, we obviously need to sit down and talk to the FDA and lay out with them a clinical plan for the program. They're aware of what the results were from the Phase I Phase II trial, although we do need to go back and visit with them. Jim, you may want to offer any other thoughts relative to timing, or whatever on that.

Bill, I think, our plan is that a formulation effort this year and any additional preclinical testing will take the remainder of 2005, and then hopefully as Tom said, it's hard to give any guidance without having had that meeting with the FDA, really to discuss with them what we would envision as a viable clinical development plan. Obviously our goal would be to do the most streamlined, focused, cost effective clinical development program that the FDA would be comfortable with, and that's really all we can say, I think now.

One thing I would add to that, Bill, and this is I think a fact, that diabetic ulcers, particularly foot ulcers are a terrific unmet need at the FDA. The interest level is very high. There is only one approved product on the market today, Regranex from J&J, that can address these very, very serious medical problems. And that product has shown in clinical trials about a 50% success rate. So the FDA remains keenly interested in products which can come forward that might offer an improved situation for that. So obviously we're hopeful and optimistic that we're going to find a very open and willing atmosphere at the FDA when it comes to when should the next trial be and what should the overall-how should the program be viewed. But it would be pure speculation at this point to guess what that trial might be, because we have to go down there and meet with them.

Your next question is from Eric Miller (ph) from Heartland.

A couple of questions, first, as far as Tom [inaudible] the Phase III, as Bill mentioned, is slightly behind perhaps on the, where that is going, but could you comment on the qualitative-how satisfied you are as far as the level of follow-ups from the physicians on that?

Sure, I think actually, I'm going to give that one to Jim. I think he's probably in the best position to do that. We can just share with you what we know. You realize, of course, that the double-blind placebo-controlled trial, so no matter what anecdotal information is out there, or what rumors people have that they think they know what the result is, they simply don't know. And we don't know, and won't know until we lock the database and do the analysis. Nevertheless we have been obviously doing really good follow up in the trial, and it's been excellent. And I'll let Jim share with you at least what we have learned.

Hi, Eric. We're very satisfied currently with the efforts put forth by all the clinical sites. I think you know that we do a lot of monitoring of this trial and all of our trials with a CRO based in California. And so we have to date a very low attrition in this clinical trial, and very good patient follow up.

The general study design is that after treatment, patients are followed weekly for the first 8 weeks, then 10 weeks, 12 weeks, 26 weeks with an additional phone interview at 52 weeks. So the fact is that without quoting an inaccurate number it's certainly over 95% of follow up visits have been achieved, and our goal would be to improve that over the next couple of months, and we have a lot of focus on this trial and obviously on the quality of data.

Okay, great. As far as my understanding is the closest competitor to you might be Pfizer was trying to, I guess, get a Phase I/II. Do you have any views, or any insights as where that trial is standing with them?

Well, we have to be a little careful here, Bill, because what we may know or it may just be rumor or speculation, we do obviously know some of the investigators who have been approached about participating in that trial. What we can tell you about the trial because the information is out there, is that product has some requirements in the clinical trial which certainly do not exist in our clinical trial.

Now there are some things about that trial which are identical to our trial. Since we were the first ones to the FDA to come with a product like this, the Pfizer product is essentially moving along similar guidelines in evaluation as ours is from the clinical standpoint. For example, removal of the mobilization; timed removal of the mobilization is the same end point that they have that we have. And I think they're doing a different study; I think it's tibia, isn't it? It's a tibia study rather than a distal radius study, but I think the most significant issue, I think and question would be, and again we have no data, and we just have this information via third parties, is that multiple EKGs are required for patients who are participating in that study, both before the injection is made, and for a week following the injection, and we certainly have none of that in our protocol. And I think today given the sensitivity of the FDA relative to safety that would certainly be something that's worth noting.

Okay, that's interesting. Tom, again I think you said you're still comfortable; you're about 3 years ahead of anybody else on the fracture side. On the cartilage side you're hopeful I guess of getting an IND Phase I this year or by sometime this year. As far as you know, you still think you might be the first one to get an FDA IND in cartilage repair?

Well, this one is a little more convoluted and then let me try and answer the question this way. To our knowledge the FDA has never authorized an IND for a drug trial for cartilage defect repair. However, there's a lot of ways that companies are approaching this issue. Some of the big orthopedic device companies, for example, are using matrixes, for example, which may and in most cases do not have a bioactive component in them, and are attempting to address cartilage defect repair in that manner. So we have to be careful about saying who is number one or who is number two. But I would tell you that we believe that for a company to have a product with a bioactive component in it, it is very likely that they're either going to be in either biologics or drugs to take that product forward.

Now we know we're in the drug side of the FDA and to our knowledge, Bill, no one has yet gotten an IND authorized by the FDA for a drug to address that indication. So Jim, is there anything?

No, I think that's correct.

Okay, just a last question then and sort of curious now on sort of a real-world application for your fracture repair, and obviously this is all theoretical but let's say you get a positive Phase III review from the FDA on this, and you actually get this in the market, would the fracture repair product be used, and take the example you see out there on Terrell Owens for the Eagles who broke his ankle and had a couple of screws and plates put in, his orthopedic surgeon is saying no, he couldn't clear him to play for at least 8 to 10 weeks. That's sort of the normal I guess for this type of injury. In theory is Chrysalin something that could be used in that situation, and in theory possibly have speeded up that orthopedic surgeon's view?

Oh, sure. I think that in theory we can talk that Chrysalin, and we've always represented that we believe Chrysalin has the ability and pre-clinical studies we showed it has the ability to accelerate fracture healing in a variety of models, not just simple fractures, but in more complicated fractures. Jim's shown slides in past presentations where we've actually done large defects in rabbit models and been able to show regeneration of the bone in those models. So yes. the answer is it could very well be an application.

Now we have to be careful and make sure that folks understand what we are taking our product for is, forward for is acceleration of fracture repair and the model we're using in our study is distal radius fractures with either X FIX or X FIX with pins and we're not doing a study per se which is a surgically repaired fracture which is the description of what you did. But I think certainly in our Phase IV planning trials and perhaps even sooner, if the data is positive out of the Phase III trial, we intend to move to at least another fracture site potentially to look at what's Chrysalin's effect on accelerating fractures that may be surgically repaired.

So I think the answer overall is yes. In terms of his particular case since the injury occurred, I think it was only last week, and he wants to play in 2 weeks I think that's something where he's making a judgment relative to what he can do, and I'm not sure that in a 2-week period of time Chrysalin would do much for that kind of fracture. But Jim is the bone expert, what would be your take?

No, I think I agree with Tom, Eric, which is a 2 week--I don't believe anyone is going to be able to heal their fracture in 2 weeks especially not that type of injury no matter how potent the stimulatory agent. But obviously if he wants to play in the Super Bowl he's going to do anything to play in the Super Bowl.

Yes, actually it was probably about 4 or 5 weeks ago, so it would have fit in right into your third(ph) group.

So I certainly I think that there--that this could be, this or the Pfizer product for example, would be things that doctors would potentially want to try if they were FDA approved and available in the market place.

Okay great, thanks gentlemen.

Okay.

Thank you, your next question is coming from Justin Cable from B. Reilly and Company.

Hi, just a couple of questions here. On the IIB trial for fracture repair how many clinical sites are you targeting?

We have said that we are hoping to do something around 50 sites perhaps even more, maybe as many as 60. We've already been working fairly closely with 45 or more, 27 of which as we've mentioned, have already gotten IRB approval. So basically, Justin, about twice the number of sites that we were working with in our Phase III trial, and of course as Jim alluded to earlier, a much faster start.

Okay, and on the spinal fusion data and the tendon repair data what form will you be presenting this data this summer?

Well, I think the tendon model is a pre-clinical model and I think Jim would find an appropriate forum to have that information presented. It would have to be accepted and so forth so I'm not sure you could it get accepted for anything this summer. I think what we're talking about is Jim would be in a position to comment on at least preliminarily what have we seen relative to Chrysalin's effect in the pre-clinical tendon model.

I think the same is true really for the spine fusion data. We have to recognize that the spine fusion trial was a small trial. This was less than 50 patients. I would say a pilot study really that is primarily being viewed by the FDA as a safety study. And our goal in that trial was really to see what, if any effect, Chrysalin might have with crushed cancellous bone in terms of post-lateral fusion. So we hope this summer to have some preliminary information that Jim could talk about relative to trials but I think that those things have to then to then be submitted, Justin, to an appropriate forum which we'll look for to try and get the results out there more completely.

So if you're asking what would come out this summer, I think you might get from Jim, and I don't want to speak for Jim, but you might get from Jim some preliminary indication of what we've seen in the trial. You know, were there any safety issues? Was there any indication that there was some effectiveness?

Okay, so would that be more qualitative data rather than like percentages on healing rates or--?

Well, I think it's obviously, it's hard to know. I mean I think that what we would target for the tendon repair would be the Orthopedic Research maybe. And typically the abstracts are due normally around July 1st for the meeting which you know, Justin, is always held in either February or March of the following year. So our goal would be to have the data analysis completed and then to make some general comments as Tom said about whether the data is encouraging and what we saw, for example, you know it looked like there was an acceleration of repair or something, and then the real presentation of the data would obviously be at the Scientific Forum and in the case of tendons I think clearly the Orthopedic Research Society and I think in terms of the spine fusion data that would be again more global comments from us on what the data showed us, but clearly that would be more appropriate for a spine meeting.

So I think, you know what you're looking for there, and just keep in mind and bear in mind on both those studies, Justin, these were small trial. These are not trials where you would expect to see clinically significant data. I mean that would be very rare. And so particularly with the size of the patient population, these are primarily safety studies with some indication, as Jim said, that he'll be able to give relative to what kind of trend, if we saw anything with Chrysalin in these two models. And that's what I would be looking for this summer.

Got it, okay. And the last question, I know you gave us a little bit of an update on ligament, but just I guess a more in-depth update on these are more early-stage programs for ligament and as well as your dental?

Okay, Jim, you want to talk about where we are with ligaments and kind of what we're doing with dental?

In terms of ligament, I mean basically we are looking at a rabbit ligament repair model. It's actually a medial collateral ligament model; very well studied with one of the leading ligament research groups in the world. So that's really all I can tell you right now because this literally has just started this month and next month.

In terms of dental repair I think you know that we have run a set of rabbit experiments using this--it's basically called the sinus lip model but it's basically a [maxoral], maxillofacial site where you can see whether you can stimulate bone formation much as we've shown in the rabbits on fusion data presented at the NASS meeting in October of 2004 this, the peptide was added to basically a bone graft substitute. In this case it was actually this material called Bio-Oss which is a German material and this is--what we showed was, in fact, a dose-dependent increase in bone formation with the peptide. So much like that rabbit spine fusion data where we are able to add the peptide directly to crushed cortico-cancellous bone graft, this was basically the same type of experiment and the goal there is to submit a publication to maybe the Journal of Dental Research. This was actually presented a few months ago at an oral surgery meeting and I think future plans we'll evaluate where we want to go with potential dental applications over the next few years.

Justin I just might add that of the two products, as we look at ligament repair, again this is looking at critical unmet needs here or certainly unmet medical needs there's nothing that works particularly well in ligament and tendon repair. There are ways to do it, surgical procedures you can use, but there is clearly a need for a product like Chrysalin in ligament and tendon repair and we think the market opportunity could be very significant there.

In the area of dental repair while we do have a pre-clinical study as Jim mentioned showing positive results and we've assessed the market opportunity on the dental product, it is not nearly as large as the market opportunities for the other five or six indications that we're pursuing and giving the issue of our focus and how much time can we spend, which bets should we make, we're certainly placing most of our thought and process and efforts on the much, much larger opportunities.

Okay, thank you.

Thank you your next question is coming from Robert Hoffman of Candlewood Capital.

All right, thank you. Two quick questions, I just wanted to clarify your comments on cash. You first said that you're going to get $7 million that were in escrow from I guess that's dj Orthopedics, right?

Yes.

And then you said a net cash of $30 million to $35 million. I just want to make sure does that include--that does not include the $7 million? Correct me here.

No, no let me run the math for you this way. As Sherry indicated we finished the year with a little over $103 million. We anticipate getting $7 million in the escrow. We'll additionally earn some interest income off that money this year, so I used the number of usable cash this year, call it $110 million to $115 million. It depends on what happens with interest rates and so forth. So that's the usable cash.

The projection of $30 million to $35 million is what we would spend this year on the various programs and for the company in total, and the range is $30 million to $35 million because it will depend on rates of enrollment. We've got several clinical trials going on. It also depends on the start up of potential cartilage trial this year, so that's why the range is $30 million to $35 million. So I think the working number you want to use of $110 million to $115 million in available, and $30 million to $35 million in the projected net cash out.

Great, thank you. A follow up question on the IIB trial. If I were go into the first trial today, go into an emergency room, broke my arm or wrist or whatever it is, they would tell me that I'm going to be in a double-placebo trial, correct? I'd either get a--or I'd get a placebo correct?

Correct, though let's back up for a sec. If you broke your arm and you wanted to go in to get into the trial you'd obviously need to go to one of the centers which is in our study, and you'd have to meet the entrance criteria for it. So let's assume you made it that far. Your question would be, what would you receive?

Well, if you ended up in a site that was participating in the IIB trial you would end up with one of several different potential doses.

Or a placebo.

Or a placebo.

No, I guess that's my question. What do I as a potential patient, will I hear? What will they tell me? If I'm in the IIB trial will they definitely tell me I'm getting product or will they tell me that I might be getting placebo because you're mixing and matching?

Right, right. Now so this is the IIB trial is also a prospective double-blind placebo-controlled trial. So I think the main feature of the trial period, in terms of clinical benefit is that the investigators emphasize that because they will be paying a lot of attention to you as a patient, and they are going to be seeing you weekly and they're going to be requiring that you go through a minimum number of hand therapy rehab sessions etcetera, that even if you were a placebo patient, you will do very well on this trial because there will be a lot of focus on how you are healing and how you are rehabbing your distal radius fracture.

And then obviously should you be treated with the drug and should the drug in fact work to accelerate healing, this would enable you to enter hand therapy earlier, potentially get your function back earlier, and then potentially get you back to full work earlier, and that's sort of the benefit.

And we have had about a 50% screening success rate overall for patients that meet the entry criteria. I think the biggest challenge, as you can imagine, is just asking any busy professional to commit to going back to seeing their orthopedic surgeon on a weekly basis for 8 weeks. I think all of us know that many people have family schedules, business travel schedules and things and that, I think, has been our biggest challenge and that's why some of the patients decide not to participate.

All right, so the answer to your question is it's double-blind placebo-controlled. The patient doesn't know whether they got Chrysalin or they got a placebo saline.

Even in the IIB trial?

It's the same in both trials.

Okay.

And in fact just to help you a little bit and to make sure you understand why this truly is a double-blind placebo-controlled trial, when the patient presents in the operating room after they've signed the consent and they're ready to go into the trial, the physician gets the product sent to him from the pharmacy downstairs in the hospital and he doesn't know whether it's Chrysalin or whether it's saline. Now both syringes are clear. You can look at both syringes. You can't tell a color differentiation nor is there any injection differentiation where you would feel a difference to the injection for a Chrysalin versus a non-Chrysalin placement. So this is truly a double-blind placebo-controlled trial. Nobody other than that pharmacist with his randomization table downstairs has any idea which patients got what--Chrysalin or not, and those are numbered, not named. So this is truly a double-blind placebo-controlled trial.

But I just wanted to clarify in the IIB trial is there placebo going on there as well?

Yes, there is. There's definitely placebo.

Okay, thank you.

Thank you, your next question is coming from Bill Plovanic from First Albany Capital.

Great, thank you. My follow up is on the spine fusion. Once the data from the Phase I/II is out what is the next step? Is it a Phase III or will you have to go back into another Phase II? And if it is, and how many patients, assuming obviously success in the Phase I/II, how many patients would you expect in the next study?

All right, let me back up and offer a little perspective and then Jim can follow through here. The Phase I/II trial for spine fusion is a small pilot study, Bill. It was less than 50 patients. The FDA is viewing it as primarily a safety trial. We hope to see some indication in that trial that Chrysalin with crushed cancellous bone has an affect, and we hope to see some affect from that.

However we also, as you know, because I believe you were there at the North American Spine Society meeting last Fall in Chicago, Dr. Joe Lane presented his pre-clinical results using Chrysalin not only with allograft crushed cancellous bone, but also in a couple of other modalities including in PLGA microspheres. And his data, his pre-clinical data, showed that Chrysalin was actually superior in PLGA microspheres to allograft alone. And so we want to be careful before we just jump right into a human clinic--our next human clinical trial in spine fusion, that we have the optimum matrix to use with it. And so I think what we'll be planning to do here is probably do a sheep study, hopefully this year, and complete it this year in which we'll be able to further evaluate some of the results that Dr. Lane found to make sure when we revisit with the FDA and we want to move on to the next clinical trial in spine fusion which would be potentially an interbody body test of Chrysalin, that we've got the right matrix with it, and would optimize the performance of the peptide. Jim, other thoughts there?

No, I think Tom answered that very well, Bill.

So you're saying basically, more than likely the Phase II that it will be the next?

Well, again we can't say until we have a chance to go down and meet with the FDA. Recognize that the Phase I/II trial was done in post-lateral fusion and we believe that the big market opportunity in spine fusion will be, with these types of products has said, the alternative for autograph and interbody body fusion. And in order to move on to the interbody body fusion site we would need to show the FDA that we had a safe Phase I/Phase II trial but there was some indication of efficacy or some trend at least some positive bone formation, and that we would have a successful sheep study which was does a good job and well-documented model of convincing the FDA that we're ready to move into interbody body fusion with a formulation of Chrysalin.

And then just for clarification, I think I understand this now in regards to fresh fracture, but when you started enrollment of the initial Phase III for fresh fracture, how many starts did you start with? When did you hit the peak number of sites? I mean in looking at the Phase IIB, what you're telling us is you're starting faster out of the box with 50 to 60 sites, but just for comparative purposes considering that we're a little over 2 years in the Phase III?

Okay, we'll back up and offer a little perspective here again. We did a Phase I/Phase II. That trial had I believe seven sites, Jim, in the original Phase I/Phase II? I think five of those were good enough enrollers or had had enough success that we decided to move them into the Phase III and had to get IRB approval that those five to get started, and we had to start from scratch at that time to get the other sites.

We ended up with, over a period of time, up to 30 sites. We've said 25 to 30 sites that participated in the Phase III trial, and it probably took us a full year at least to get up to that number. I think it was in the summer and then I think it was the fall of the following year before we actually hit the peak. So we've actually only been operating with the peak sites for now probably a little less than a year and a half. And that was with 25 to 30 sites, so here we're starting out; we have identified we believe close to 50 sites, 40 to 50 sites already. We've got 27 IRB approvals. We've got more than a dozen sites that are already up and running, and able to enroll patients so we're probably--I think we've shortened probably 9 months at least off of where we were for the Phase III trial. But clearly the key is going to be continuing to get the IRBs approved and getting the patient enrollment going.

Now one other thing we're doing here, Bill, is Jim has looked at and we've already met with essentially the Canadian FDA authority there, and we are planning on potentially having as many as a half a dozen sites in Canada in this trial as well. We had a very successful meeting with the Canadian FDA. They're very interested in the product, and we're hoping I believe, Jim, to sometime in the first half of this year potentially get something going in Canada to supplement. Now that would be in the 50 to 60 sites, Bill, that we're talking about.

And then just not to beat a dead horse, but on these sites how many of them would have been involved in the Phase III or the Phase II?

Probably 15 to 20, overall I mean if our current projections hold, about 15 to 20 of the current Phase III sites will also participate in the Phase IIB trials.

So they would roll over. The answer to your question is as soon as the Phase III trial enrollment ends, we've got an IRB approvals lined up so these people would immediately begin in the Phase IIB dosing study.

Okay, great. Thank you very much.

Okay.

Thank you. I'll now turn the floor over to Mr. Trotter for any closing remarks.

Thank you, operator. In conclusion then we're very pleased with the overall progress we made in 2004 which is really OrthoLogic's first year as a drug development company. Certainly last year's headline was the acquisition and successful integration of Chrysalis BioTechnology which significantly broadened the Chrysalin product platform. We now have at least 6 unique Chrysalin product candidates in development for both orthopedic and non-orthopedic indications, and we're very optimistic about the future of OrthoLogic. We expect 2005 will be another very productive year for the company. With that we'll conclude the call. We thank you for your time and attention. Have a good day.

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