Capstone Holding Corp (CAPS) 2005 Q4 法說會逐字稿

Good day, everyone, thank you very much for holding, and welcome to this OrthoLogic fourth quarter end, year-end conference call.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to Melanie Friedman of Stern Investor Relations.

Please go ahead.

Good afternoon.

Today, on this call from OrthoLogic are James Pusey, President and Chief Executive Officer, Les Taeger, Othrologic's new Senior Vice President and Chief Financial Officer, Jim Ryaby, Senior Vice President and Chief Scientific Officer, and Dana Shinbaum, Vice President of Business Development. Also available for Q-&-A are Deborah [Conamen] , Senior Director of Regulatory Affairs, [and Claudia] Insurance, and Roger Crowther, Senior Director of Pharmaceutical Development.

During today's call, James will begin with an overview of our accomplishments for 2005, and outline our goals for 2006. Les will review our financials for the fourth quarter and our 2006 financial guidance. Jim will follow with a review of our late-stage clinical programs. Dana will discuss our collaboration strategy, and then, we will take your questions.

Before we begin, we would like to remind you that when we discuss our future expectations, plans, and prospects, our point-of-reference is how we, as a Company think, expect, or believe the future will look based on the information available today. No one can predict the future, and there are risks that could cause the Company's actual results to differ materially from these statements. You may review a list and description of these risks in the reports we file periodically with the Securities and Exchange Commission.

I will now turn the call over to James.

Thank you, Melanie.

During 2005, OrthoLogic developed and initiated a three-year strategic plan that encompasses a significantly more targeted development program for Chrysalin and includes a collaboration strategy designed to increase the effectiveness of drug development at the Company and broaden our portfolio.

Consequently, it was a transformational year for OrthoLogic. We became a biopharmaceutical drug development company, and we focused our efforts on our lead programs on fracture repair and diabetic foot ulcer healing. Following a full strategic review by our team and the OrthoLogic board, we decided to de-emphasize the importance of our early-stage programs in spinal fusion and cartilage defect repair.

In terms of our specific accomplishments, we completed enrollment our phase-three fracture repair trial and accelerated enrollment in the concurrent phase 2B, fracture repair study. We also submitted our phase 1/2 trial results of Chrysalin to a peer review journal, and we completed the process of choosing a competitive gel formulation of Chrysalin for this indication. We are preparing the protocol for a phase 2B study and, dependent successful manufacturing process, this study in diabolic foot ulcers is expected to start enrolling in 2006.

We have developed a strategic plan built around Chrysalin in our two core indications with an additional focus on business development. Over the next few years, you can expect us to further develop Chrysalin in fracture repair and diabetic foot ulcers. Dana will shortly talk about implementing strategic collaborations and pursuing -- and licensing opportunities to expand our portfolio.

An important part of our execution strategy is gathering the right people to get the job done. Recently, we brought on two key individuals to our management team. In fourth quarter we appointed Dana Shinbaum as Vice President of Business Development, whose experience will pave the way for strategic collaborations, through which, we intend to increase the value and debt of the Company.

In addition, we recently appointed a new Chief Financial Officer, Les Taeger, who you will be hearing from next. Les is dedicated to ensuring the strength of our financial position so we that can implement our growth and development strategy for the Company.

It's an exciting time to be at OrthoLogic, with a productive year planned in 2006. Specifically, we look forward to announcing the following this year -- top-line, phase 3 results of Chrysalin in fracture repair by April 30, 2006, which is a revised and earlier timeline from our previous guidance of the first half of the year; completion of enrollment in the phase 2B fracture repair trial by year-end; and initiation of a phase 2B trial of Chrysalin in diabetic foot ulcers in the second half of the year.

Jim will talk more about these indications, but first, I will hand it over to our new CFO, Les Taeger, to review our financial results for 2005.

Thank you, James.

It is my pleasure to be here as part of the management team committed to bringing OrthoLogic to success. I will start with a high-level overview of the financial condition of the Company and results of operations for the three and 12 months ended December 31, 2005.

Net loss for the three months and year ended December 31, 2005, was 7.5 million and 27.2 million respectively, as compared to 5 million and 41.8 million in 2004. Net loss for basic and diluted shares outstanding for the three months and year ended December 31, 2005, was $0.20 and $0.72 respectively, as compared to $0.13 and $1.16 in 2004.

As a reminder, 2004 results included 25.8 million of in-process research and development costs related to the purchase of Chrysalis Biotechnology, Inc. on August 5, 2004.

General and administrative costs for this quarter were higher than 2004, due, in part, with the increased costs of closing the Galveston site and other severance costs. In addition, the CBI costs are included for 12 months of operations during 2005, but are included only for five months in 2004.

Research and development expenses for this quarter and year were higher than 2004, as a result of the effect of CBI, as well as the increased cost related to greater activity in 2005 than 2004, in the fracture repair phrase 2B clinical trial.

As previously reported, the net gain from discontinued operations for both fiscal years is the result of the contingency reversal initially reserved against the 7 million escrow for the sale of the bone device business. The total escrow amount was received in December of 2005.

Moving to the balance sheet, we had total cash, cash equivalents, and marketable securities of 83.6 million as of December 31, 2005. We utilized 27 million of our cash resources during 2005, offset by the 7 million in cash and escrow collected during the fourth quarter.

In total, OrthoLogic ended 2005 with a very strong balance sheet. We have minimum liabilities, no long-term debt, and approximately 40 million fully diluted shares outstanding.

Our original guidance for fiscal year 2005 was for our cash utilization to be between 30 and 35 million, with the actual cash spent ultimately dependent on the timing and progress of our clinical and preclinical studies. Due to the timing of our programs, actual cash utilization in 2005 was less than our original guidance.

As previously discussed, we have several milestones that we expect to achieve in 2006, to achieve those milestones, the Company expects to utilize cash resources of approximately 35 million in 2006, again, with the actual cash spent ultimately dependent on the timing and progress of our clinical and pre-clinical studies.

The 2006 net loss is projected to be approximately 37 million. As we advance development of our clinical programs and collaboration efforts, we'll update the expected effect on the Company's forecast.

I will now turn the call over to Jim who will provide an update on our late-stage clinical programs.

Thanks, Les, and good afternoon, everyone.

Our late-stage Chrysalin development programs in fracture repair and diabetic ulcer healing continue to progress, and I will provide an update on these programs today.

Our lead indication for Chrysalin in the acceleration of fracture repair addresses a large under-served market. There are 6 million fractures in the U.S. per year.

The ability to heal fractures more quickly has implications for hospitals, physicians, and patients alike. We are diligently working to advance Chrysalin in fracture repair with late-stage trials in distal radius, or wrist fractures. As we stated on our last conference call, we continued to collect data through the reminder of 2005 and into 2006. Data collection, cleaning, and quality assurance is going better than expected, and the clinical team had a very busy holiday period. Our new target date to announce the top-line results of the phase 3 study is by the end of April, significantly ahead of schedule.

We're also conducting a phase 2B trial in distal radius fractures that explores the lower dose range of Chrysalin compared to placebo. Enrollment is ongoing in the study with a target of approximately 500 subjects in 60 sites in the US and Canada, and to date, we are actively enrolling at 55 sites.

Patients are receiving a single injection of Chrysalin at 1, 3, 10 or 30 micrograms versus placebo control, and are being followed at the same time points previously described for patients in the phase 3 study with the same follow-up. As James stated earlier, we expect to complete enrollment in this study by the end of 2006.

Now, I will move on to our next program in diabetic foot ulcers.

Diabetes has an enormous prevalence in the United States with upwards of 18 million patients. Despite advances in wound care, diabetic foot ulcers remain an area of critical unmet medical need. Diabetic foot ulcers affect 850,000 patients per year with various consequences, and the cost of diabetic foot ulcer therapy in the United States is estimated at $6 billion per year.

We are exploring the potential of Chrysalin as a treatment for diabetic foot ulcers, and have found excellent proof-of-principle results in our phase 2 clinical trial. This randomized double-blind, placebo-controlled study enrolled 50 subjects in four centers. Patients were given twice weekly topical treatment of either placebo saline, one microgram Chrysalin, or 10 microgram Chrysalin, and all patients received standard of care, including offloading. From a safety perspective, there were no adverse events related to the study agent in this trial.

We found significant effects in the foot ulcer sub-population of 35 patients. Total construction base revenues declined 1% amid slowing in demand for some Wilsonart products. The median time-to-closure was significantly decreased by 50%, with a P-value of 0.03. The linear rate of wound closure nearly doubled, showing a statistically significant increase of 82% in the Chrysalin-treated group. We have recently submitted these results to a peer review journal for publication.

Given the statistical significance in dose respond trend, these study results are promising, and our next step in the program will be the finalization of the phase 2B dosing and efficacy protocol. Implementation will depend on the continued successful manufacturing of our gel formulation and the submission of an amendment to our active IND for this indication.

On the CMC and pre-clinical side, during the 4th quarter, we closed our formulation and R&D facility in Galveston. We have already moved the CMC to Tempe, where they are working in close cooperation with clinical regulatory and quality assurance, and we expect to gain significant efficiencies from this move.

Now I would like to turn the call over to Dana.

Thank you, Jim.

I'm pleased to be a part of the OrthoLogic team. The past several months have been devoted to an examination of our assets, and we have designed a business development strategy to increase the value of the Company. This strategy is focused on three types of potential collaborations -- functional, therapeutic, and IND-based.

Functional collaborations could involve arrangements with partners that would be in a position to accelerate registration of Chrysalin in the fracture repair or wound healing indications. This could entail clinical, geographic, or regulatory assistance with the program.

Therapeutic collaborations would be more comprehensive and may include more fully integrated arrangements for development and world-wide commercialization with larger biopharmaceutical organizations.

IND-based collaborations are aimed at expanding the OrthoLogic portfolio. Specifically, these efforts are aimed at securing investigational compounds that are being studied to treat significant unmet medical needs, have well-defined target patient populations and audiences, and are consistent with OrthoLogic's overall strategy as a development-stage biopharmaceutical company. A transaction of this nature would need to meet several other criteria, including timing. Based on our core competencies, we believe we could add significant value with compounds that are within approximately 12 months of an an IND filing.

While all types of collaborations are strategically important, OrthoLogic is currently most actively pursuing collaborations within the functional and IND-based categories.

Chrysalin is well advanced in the fracture repair in diabetic foot ulcer indications. To ensure portfolio balance, we have currently de-emphasized the pre-IND cartilage defect repair program.

Our financial position affords us the opportunity to aggressively pursue our end licensing strategy. We will keep you updated as these efforts progress.

I'll now turn the call back to James.

Thank you, Dana.

As you can see, during the past year, we have put into place a strategy to become a fully fledged biopharmaceutical drug development company, and in 2006, we look forward to making even more progress with key clinical events, including the announcement of the top-line phase 3 results of Chrysalin in fracture repair by April 30, 2006, completion of enrollment in the phase 2B fracture repair trial by year end, and initiation of a phase 2B trial of Chrysalin in diabetic foot ulcers in the second half of the year.

Thank you very much.

We will now take your questions.

[OPERATOR INSTRUCTIONS]

We will go first to Bill Plovanic at First Albany.

Great. Thank you.

Good afternoon.

Hi, Bill.

Just a couple of questions -- is there -- for the phase 3 data, is there a medical meeting that you would expect to present that data at?

Right now, we are not planning to present the data at a medical meeting. As you know, we have accelerated the timing of the communication of the data, and it's always very difficult when you do that, to actually make sure you're in a slot unless the meeting has late-breaking news. Rest assured, we will be communicating the data as widely as we need to, as soon as we have it.

Okay.

And then, in regards to the phase 2B study for stress fracture, you gave us the data on the number of sites you're actively enrolling. How far through patient enrollment are you at this point?

We haven't actually given patient numbers on any of the studies, and it's not our policy to do that, Bill. What we have communicated is that the number of sites is more than double the number of sites that we had in the phase 3 study, and we're also providing a hard end-point to full enrollment of the study, which is by the end of this year -- by the end of 2006.

Okay.

And then, just last question, what gives you confidence that you'll be able to go straight into that phase 2B with the gel formulation for diabetic foot ulcers and not have to go back and do a phase 1?

As far as safety is concerned, there's clearly no issue that we see at the moment. We haven't had any safety issues either in any of the animal studies, we haven't had any safety issues with gel formulation so far in the animal studies. From a phase one point of view, we're confident.

We also have a good statistically significant result at the higher dose in the phase 1/2 study with Chrysalin, and we indeed, have a dose response trend in that study. So we think that the logical thing to do is to go into a phase 2B dosing and efficacy study, and that's what we're planning to do.

Great.

Thank you very much.

Thank you, Bill.

Next up is a question from Eric Miller, Heartland Advisors.

Yes, hello, guys.

Hi, Eric.

Could you -- maybe, James -- talk a little bit more about the decision on the cartilage -- to put that on the back burner -- how that evolved?

Yes, I mean I think we've got to look at this in perspective, this is a pre-IND program. I think that's the first thing. We have two fully pledged clinical programs that are in-man with Chrysalin, one in diabetic foot ulcers, and one in fracture repair. It's clear that we have an asset in the results that we have for cartilage defect repair, that asset is in the form of a prepared IND.

So we have a prepared IND, but the value of that asset is, I think as everybody on this call knows, going to change significantly, whichever way the phase 3 result goes in fracture repair. That will have a direct effect on the value of our cartilage defect repair asset, so we feel that the prudent thing to do is to wait until we have those results before we decide what to do with that asset.

So I -- that would -- ?

Not that we're not ignoring it all together, we're just waiting and -- until we have the phase 3 results in fracture repair.

Okay. That makes sense.

So, I guess on the collaboration side, as Dana talked about for the IND's and, I would imagine, cardiovascular would be something you would be looking at, you'll probably again just wait until you get the fracture data out I assume?

Exactly.

These are assets that are sitting there and their value will change dependent upon that data.

Okay.

Thanks.

This is a question now from Tom Schrader at Harris Nesbitt.

Hi. Good afternoon. Thanks for holding the call.

As we get so close to the big data, can you run through manufacturing a little bit, specifically, what material was used in which trials?

I believe in the phase 3 trial, there's a change in manufacturing. Do you anticipate a bridging study? Would the phase 2B data count as a bridging study? Could you sort of walk us through?

I'll start answering that -- it's good to hear your voice -- I'll start answering that, and then, actually, I'm going to hand over to Jim.

Okay.

-- To cover the details of the different lots.

In general, as you know, when you start a clinical program, especially one that is a program with either a peptide or protein, lots do change as your clinical development program progresses. That's the nature. You need more than one lot.

Yes.

We -- in the phase 3 study, we essentially have used one lot through the study, and it's been the same lot throughout the study. In the phase 2B study, and, obviously, that phase 3 study now is as far as Administration of Drug, it's all well and truly over because we're collecting the -- all the results.

In the phase 2B study, you will remember that there was a supply interruption, and we actually switched back to the lot that we used originally in the phase 3. And then, because we have several lots, with support this study, with several lots to ensure continuity of supply, we have introduced the latest lot into that phase 2B study.

So, we are ensuring we have continuity of supply so that there's less risk, if you like. You can never the risk all together, but so there is less risk of there being a supply interruption in 2B because it's clear accelerating the recruitment of that 2B study is a very important thing for us.

I'm going to hand over to Jim for any further details on it.

Okay.

Hi, Tom.

Hi, Jim.

I think the only thing to add -- James really gave a complete answer -- is the same excipiants and anti-oxidants are used in both the clinical trial supply for the phase 3 trial, as well as the new lot that James mentioned. So I think -- and we certainly have the supportive ox studies that support the use of those excipiants and anti-oxidants. So I don't think that we necessarily envision having to do any bridging studies having to do with formulation changes.

Okay. Good.

I just wanted to hear it from -- .

Yes, and clearly, I think this would be what we would discuss with the FDA at a meeting, which we plan on scheduling based on the results from the phase 3 study.

Okay.

And if I can switch from manufacturing to philosophy for you, Jim -- is fracture repair mechanistically linked to diabetes -- diabetes wound healing? Do you see the same ability to cause blood vessel formation? Do you draw confidence or lack of confidence in the second program from the first, or in your mind, are they independent?

No, I think they're very closely linked.

I mean, I think what the belief is clearly, and what we've shown in published studies, is that we can certainly stimulate earlier neovascularization with the peptide, for example, in bone healing or in fracture repair models. Clearly, if you look at the literature, particularly, Bill Lee, from the Angiogenesis Foundation, has made the statement that in diabetic ulcer healing, one of the underlying mechanistic deficiencies is the fact that you have a deficit in peripheral vascularization.

Right. Sure.

And so that I think there's a lot of biological commonalities that -- there's a lot of biological commonalities that underlie both the acceleration of fracture healing, also all of those studies we've shown on just stimulation of bone repair, and then, the effect we see in diabetic ulcers. So I think there is that commonality.

Okay.

Thanks a lot. Good luck.

Thanks a lot, Tom.

[OPERATOR INSTRUCTIONS]

We'll go to Robert Hoffman, Candlewood Capital.

Good afternoon.

Maybe it was a misunderstanding, on the one hand, you talked about putting the cartilage repair on the side burner, and your explanation of the value of that asset was very helpful, but then, did you also talk about personally using your balance sheet to acquire inlicensing product? I guess I'm -- one, is that the case? And two I guess I'm confused because I thought one of the reasons to put it on the side burner was to keep your powder dry.

Yes, I -- it's not so much to keep the powder dry, Robert. It is, in fact, that we can't value that asset, dependent upon the phase 3 results. If we have a trend, or -- as we all hope, statistical significance in that study, it will significantly affect the value of the cartilage defect repair asset. Now, if you look at the overall assets, as Dana was saying, in the Company, we have three separate formulations of Chrysalin, which are all separate products, per say, so they're separate shots on goal, and we have three separate indications that we're going after, but strategically, people would still say that's still one technology platform.

Right.

And what we are saying is, because we have such a strong balance sheet, it is our duty to shareholders to look for other technology platforms that will increase the breadth of the portfolio, and the long-term value of the Company. So that's essentially where we're at strategically.

Although, I guess one could argue that it strategically changes your focus as well.

Well -- .

And you're not the only people out looking for inlicensing product. That's the thing I have difficulty with.

Fully understand, we are an experienced team in relation to that, and some of us have track records, which are solid in that regard, and I think shareholders also need to know that we are absolutely not planning to significantly dent our cash mountain. We will ensure that we can deliver the programs that we've currently committed to, and we're also very cognizant of shareholder dilution. So the sort of deals that we are going to be doing, are going to be deals that will be viewed positively.

Okay.

Two more for the diabetic foot ulcer trial -- I would imagine that that process would be a lot easier than the fracture repair -- you can't tell me today who's going to break their arm or wrist next week, but you can say with pretty good certainty who has a diabetic foot ulcer next week, and given that there really aren't any options, do you expect the diabetic foot ulcer enrollment should be a lot faster and larger?

Yes, Robert. This is Jim Ryaby.

I think the key thing that we plan in the diabetic ulcer program is clearly to use a CRL that has a lot of experience, specifically in the diabetic ulcer healing area, and then the other advantage in the diabetic ulcer area is that advertising is certainly a viable option with IRB approvals, and so, we would certainly want to advertise locally where we have sites for patients. And, of course, as you know, in a traumatic injury study, that's not possible.

So I think that those -- specifically, the CRL -- was really our best tool to ensure efficient enrollment and streamline the process as much, but then, also the fact that we could, in fact, advertise for patients.

I think -- if I could just add here, James -- this indication area is an area of huge unmet need, and as you know, there have been some unsuccessful attempts at developing products in this area. There's two ways to look at that -- you can either look at that negatively, or you can look at it very positively, as we do, which is that there is a huge experience curve that CRO's have gone down, and there's a lot of experience in knowing what not to do in these studies, which actually puts us at a competitive advantage.

Great.

The final question -- you put a shelf offering out a number of -- it was months ago, can you update us on where you stand there?

Yes.

We put a -- we had a shelf offering out there, and, in fact, we made it very clear that, at that time, when that shelf offering was active, we made it clear that we were not going to draw down on that shelf. But I'll be very open with everyone, it didn't seem to matter what I said or how I said that, it still raised a lot of questions. It was a significant shelf.

So we, at OrthoLogic, took a very bold step and said, we're going to withdraw that shelf and make it absolutely clear that at that time and at that share price, we were not going to go out to the market and raise money. And that's exactly what our thinking was in the Company.

Great.

Thank you.

Okay.

We'll move back to Tom Schrader.

Hi, just another preparative question about April 30 -- So, top line data would be statistical significance in times to removal of immobilization? Are there secondary end-points? Do you think we get all of them? Can you run through what they are, and any ones that might be hard to have in the top line data?

I'll deal with the linked secondary end-point to the primary end-point, and then, I'll get Jim to deal with the others.

Okay.

There is a linked secondary end-point, which is evidence of x-ray healing, and as you remember -- as I'm sure you remember, within the protocol, evidence of x-ray healing dictates removal of the cost. So, those two are linked, and if we have a statistically significant result with one, it would be highly unlikely that we would not have a statistically significant result with the other.

The other secondary end-points I'm going to hand over to Jim.

Yes, Tom, the other end-points we have are two functional end-points, which are actually range-of-motion and grip-strength, and those are, of course, critically important for hand function.

Right.

There's also one outcome measure, which is called the PRWE, which is literally the patient-rated wrist evaluation, and this is an outcome specific for distal radius fractures in wrist injuries.

So we hope, of course, that several of those secondary end-points would also follow a positive effect seen with the primary.

There's no reason to believe that any of it -- any of those data would be ready later?

No, it is not.

I think the data ready later are those post-hock analysis you always do at the end of a large clinical trial, which are just more academic type of questions that you are trying to answer based on looking at all of the results atriory results that were in the statistical analysis plan.

So, for example, one of them would be looking in osteo-product patients. Is there a difference in the effectiveness of the drug in those patients that our osteo-product has determined by Dexascanning compared to those patients that are, in fact, normal. Those are the sort of later-stage analyses that would be done.

Okay. Very good.

Thanks again.

[OPERATOR INSTRUCTIONS]

And we'll move on to [David Cohen] at Pinnacle Advisors.

Hi, guys.

Hi, David.

How are you, James?

We're good.

Could you estimate the cost of the cartilage repair trials, James? What -- assuming your words, go ahead with that, partner or otherwise, what would you anticipate the cost would be?

We're not -- David, you know that we're not going to share the specific costs of each trial. I think what one can say is that this is a trial that is slightly complicated by the need for surgical procedure. It is a one -- it would be a trial where there was one application of the formulation. We would be doing scans of one kind or another, specifically, MRI scans are required. So it's not -- it would not be an insignificant cost to go into a major clinical program, and this is another reason why we want to wait and see the value of this asset, which, of course, is going to change once we have the face results of the fracture repair studies.

Fantastic.

Thank you.

Thank you.

There are no other questions holding in the roster at this time.

Mr. Pusey, I'll turn things back over to you.

Well, thank you very much, ladies and gentlemen.

I think that's it from Tempe in Arizona, and have a nice day to all of you. Thanks very much.

Bye-bye.

Thanks again for joining us, everyone, that will conclude the conference call. Again, have a good day.