Capstone Holding Corp (CAPS) 2006 Q1 法說會逐字稿

Welcome to today's OrthoLogic first-quarter 2006 results conference call. As a reminder, today's call is being recorded. Currently, the call is in a listen-only mode. There will be question-and-answer session to follow. At this time for opening remarks, I would like to turn the call over to Lilian Stern, of Stern Investor Relations.

Good morning. On the call today are Jock Holliman, Executive Chairman of OrthoLogic; Dr. Randy Steer, President; and Dr. Jim Ryaby, Senior Vice President and Chief Scientific Officer.

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 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 Jock Holliman.

Thank you, Lilian, and good morning. We hope you have had a chance to review this morning's press release in which we announced financial results for the quarter ended March 31, 2006. On today's conference call, we will review financial results for the first quarter of 2006, provide an update on the ongoing planned analysis of the Chrysalin Phase III and Phase IIb clinical trial data in fracture repair, speak about our focus moving forward, and open the call to questions.

We plan to provide updated guidance regarding our cash burn rate during the quarterly conference call for the second quarter, which we anticipate will take place in late July. At that time, we also expect to provide greater detail on our clinical development pathways.

The OrthoLogic management team is fully committed to asset value optimization. We were disappointed with the clinical trial results from the Chrysalin Phase III in fracture repair, driven as they were by a challenging FDA-mandated endpoint. The fact remains, however, that we have demonstrated radiographic evidence in two consecutive clinical trials that TP508 has a positive effect on bone healing, and it's our intent to optimize Chrysalin's asset value in the fracture repair indication. We look forward to providing additional updates as they become available.

We're continuing to explore a program for TP508 in diabetic foot ulcer healing. A recently announced collaboration with Quintiles affords us the ability to bring additional resources to bear on this project. In addition, the recently acquired AZX100 product platform affords OrthoLogic future opportunities in multiple potential indications.

As always, we're paying close attention to our resource position, aligning and managing cash consistent with the size and scope of our development and clinical programs.

On the management side, as you know, we recently appointed Randolph C. Steer, M.D., Ph.D., as President of OrthoLogic, directing the Company's strategy and operations in all clinical development and regulatory areas. Dr. Steer has been an independent pharmaceutical biotechnology and medical devices consultant since 1989 and has provided consulting services to OrthoLogic since 2002.

He has a broad scientific, medical, and business background including extensive experience in preclinical, clinical, and regulatory affairs. He has served as medical director at Ciba Consumer Pharmaceuticals, a division of Ciba-Geigy Corporation, and Chairman, President, and Chief Executive Officer of Advanced Therapeutics Communications International, a global drug regulatory group. He is a member of the Board of Directors of several companies including Techne Corporation and BioCryst Pharmaceuticals.

Dr. Steer received his M.D. degree from the Mayo Medical School and his Ph.D. from the University of Minnesota, where he also completed a residency and subspecialty fellowship in clinical and chemical pathology. He is a fellow of the American College of Clinical Pharmacology. We're pleased to welcome Randy as a full-time member of the OrthoLogic management team.

On the financial side, the Company's Q1 results are as follows. Net loss for the first quarter of 2006 was $16.5 million or $0.42 per share, compared to the prior-year net loss of $5.5 million and $0.14 per share. Comparability between periods is impacted by the inclusion in 2006 of $8.4 million of purchased in-process research and development costs related to the AzERx acquisition; $1 million in noncash stock compensation costs associated with our adoption of SFAS 123(R), effective January 1, 2006; and increased R&D costs resulting from a greater number of active subjects in our Phase III and Phase IIb fracture repair human clinical trials in the first quarter of 2006 compared to first-quarter 2005.

We began the quarter with $83.6 million in cash and investments, and ended with $80.8 million in cash and investments. Our cash and investment position was favorably affected by receipt of $2 million from the sale of stock to Quintiles and receipt of $3 million in net proceeds from the exercise of stock options by a former executive.

OrthoLogic continued to implement its biopharmaceutical strategy in the first quarter of 2006. This included advancing the current clinical development programs based on the Chrysalin product platform; conducting a thorough review of the Company's existing portfolio; and improving our opportunities through strategic acquisitions and collaborations. I will now turn the call over to Dr. Jim Ryaby, Senior Vice President and Chief Scientific Officer of OrthoLogic, for a discussion of our Chrysalin development programs.

Thank you, Jock. We will first address the Chrysalin development program in fracture repair. The Phase III study was a prospective, randomized, double-blind, placebo-controlled clinical trial that enrolled 503 subjects in 27 active centers in the U.S. We reported in March 2006 the top-line Phase III clinical trial results in distal radius fracture that showed treatment with 10 micrograms of Chrysalin did not demonstrate a statistically significant benefit compared to placebo in the FDA-mandated primary efficacy endpoint of time to removal of immobilization.

There were several prespecified secondary endpoints in this trial. Also, study subjects were stratified at enrollment based on whether or not the fracture extended into the joint. Those that do are known as intra-articular fractures; and those that do not are termed extra-articular fractures. As we reported in March, a secondary efficacy endpoint, radiographic evidence of time to radial-cortical bridging, showed a statistically significant benefit for Chrysalin-treated patients in the overall evaluable subject population, with a P-value of 0.046. The benefit observed was consistent with findings from the Phase I/II clinical trial that provided part of the foundation for the Phase III study.

In addition, in subjects with extra-articular fractures, there was a statistically significant decrease in healing time with Chrysalin treatment based on overall radiographic healing. The P-value was 0.027. These differences were observed in study subjects as early as three and four weeks post-treatment with Chrysalin.

From the safety perspective, the trial met the prespecified safety endpoint, as they were no adverse events related to Chrysalin in this Phase III trial, nor were there any difference in adverse event rates observed between the Chrysalin and placebo-treated subjects.

We're currently conducting a Phase IIb human clinical trial in distal radius fractures which is a double-blind, randomized, placebo-controlled trial that explores a wider dose range of Chrysalin, including 1, 3, 10, and 30 microgram doses.

On March 15, 2006, we interrupted enrollment in this clinical trial in order to perform in interim analysis of the 273 subjects enrolled up to that date. The Company plans to communicate results of this interim analysis during the third quarter of 2006.

Turning now to Chrysalin development in wound healing, we also have an ongoing program assessing the use of Chrysalin in diabetic foot ulcers based on the successful, multiple-dose, Phase I/II clinical trial that showed statistically significant reduction in the median time to wound closure. Chrysalin was multidosed in this indication, with application twice weekly for up to 20 weeks. Based on the significant body of preclinical and early clinical evidence, we are optimistic about the potential of Chrysalin in soft tissue healing.

I will now turn the call over to Dr. Randy Steer, President of OrthoLogic, to review the additional events of the first quarter.

Thank you, Jim. During the first quarter of this year, OrthoLogic executed on its business development strategy when we signed significant deals with AzERx and Quintiles. We expanded our pipeline in February 2006 with the acquisition of an exclusive license for the core intellectual property relating to AzERx's lead compound, AZX100, which is a synthetic 24 amino acid peptide. Together with the scientist founders, we will continue to develop this product as part of a new class of compounds called Intracellular Actin Relaxing Molecules, or ICARMs, which relax smooth muscle.

AZX100 is currently being evaluated for medically and commercially significant applications, such as the treatment of vasospasm associated with subarachnoid hemorrhage, the prevention of cheloid scarring, pulmonary fibrosis, and the treatment asthma. Preclinical animal and human in vitro studies have shown that this novel compound has the ability to relax smooth muscle in multiple tissue types.

OrthoLogic also announced in February 2006 the formation of a strategic alliance with Quintiles, one of the world's leading pharmaceutical services organizations. Quintiles will be OrthoLogic's exclusive provider of clinical research services within its range of capabilities for the development of Chrysalin.

Quintiles' PharmaBio Development, a strategic partnering group of Quintiles Transnational Corporation, has committed to an equity investment in OrthoLogic totaling $5 million. The financial and resource commitment from Quintiles is significant OrthoLogic, and we're looking forward to reaping the benefits of this collaboration.

Jock Holliman will now comment on our Board of Directors and make some closing remarks.

Thanks, Randy. In February 2006 we announced the appointment of William M. Wardell, M.D., Ph.D., to our Board. Dr. Wardell owns and operates the consulting firm Wardell Associates International in Princeton, where he specializes in drug development, regulatory approval, and safety for a range of pharmaceutical and biotechnology companies.

Dr. Wardell has published over 100 scientific papers and four books, and has testified as an expert in drug development during several congressional hearings. Dr. Wardell has served as senior vice president of drug development for Parke-Davis and as senior scientific officer of Covance, executive director of the Covance Institute for Drug Development Sciences, and as VP and medical director at Boehringer Ingelheim.

Dr. Wardell earned his M.A., Ph.D. in pharmacology, and M.D. at the University of Oxford, UK. He currently serves on the Board of Directors of PhytoCeutica, the Scientific Advisory Board of Eleos, Inc., and the American Board of Clinical Pharmacology. We're pleased to welcome Bill to the Board. He brings tremendous experience and insights that will help us moving forward.

In conclusion, we are committed to our goal of building a successful Company based on our product platforms and developing therapeutic solutions that satisfy significant unmet medical needs. Again, we will update our clinical pathway and provide more specific financial guidance for the remainder of 2006 during the Q2 conference call.

We thank you for your continued support and patience as we move forward with our initiatives. We open the floor to questions at this time.

(OPERATOR INSTRUCTIONS) William Plovanic with First Albany.

Just two questions. First, for -- I think most importantly, I will start there. In terms -- we have seen the radiographic evidence, and if this was a PMA trial we would not be having discussions we're having right now. We would be talking about marketing launches at this point.

Thank you very much for noticing.

So the question I have is to you have an example of a product that was switched to a PMA from an NDA? Is it as simple as adding a scaffold to this Chrysalin product, (indiscernible) that you could actually kind of switch over at the FDA to a different division? Is that a possibility? Do you have examples of that?

This is Randy. Let me try to give a stab at that. We're very carefully exploring the history -- that is, available precedents -- as well as the strategy with respect to how best to approach the potential repositioning of such a product. Now at the present time I will tell you that I am not familiar with a precedent specifically in this area. But we're taking a very close look at it and have engaged individuals who are close to the process who should be able to help us considerably there.

Okay, great.

We think it is a great idea, and we are burning the oil on that subject.

Okay, I would expect that. Just secondly, in regards to the diabetic wound healing, and this is not as important obviously, but you have talked in the past about the gel formulation and the saline formulation and some challenges in manufacturing the gel. I was just wondering if you have done any work on this, or is everything just focused on the fresh fracture indication at this point?

Bill, this is Jim. Good morning. We are definitely moving forward with the gel formulation. Things look very good right now. As we said, hopefully, in the late July, early August time frame on the next conference call you will hear an update of what the status is of the diabetic ulcer program.

Great, that's all I have. Thank you.

Bill, I think we can expound on that just a little bit. We have made some strides with the gel formulation. We are pleased with the progress, and again, we will update more fully our direction in DFU in the second quarter call.

Great, thank you very much.

Tom Shrader with Harris Nesbitt.

I have a question, probably for Jim, but it is back to the Phase III trial. I don't expect you to have the data yet. But I am wondering how much osteoporosis data did you have on the patients as they entered the trial? Are we eventually going to see some sort of correlation between time to removal of immobilization and patients who started with poor bone density, things like that?

Yes, Tom, clearly we are extensively studying that data now with some people who are truly osteoporosis experts in the U.S. That is why I didn't comment on that data. So clearly we will provide further guidance.

What we are really trying to do is obviously present that data at an orthopedically relevant conference as a public disclosure, rather than really discussing this data simply on a conference call.

No, no, I don't want the answer today. But you do in fact have the ability to glean that data?

Yes. I mean, basically, we did one DEXA scan on the patient so that we could in fact confirm whether or not they had normal bone density; whether they were osteopenic, which as you know is on the way to being osteoporotic; or whether they were truly osteoporotic.

We will certainly have that data analyzed. It is just a question of where is it best to present that data, and we really believe that it is best presented at a medical forum, rather than on a conference call. So we will certainly keep you informed as to where we will present that data.

I fully agree. Any obvious candidates? Where would data like that best be, or play to the most people? Sort of the obvious meetings?

The Hand Surgery conference, the Orthopedic Trauma Association conference, places like that. Certainly, the big orthopedic meeting is not until next February. That is too long a time frame for us in terms of communicating these results.

Okay, thanks a lot.

Eric Miller with Heartland Advisors.

Jock, have you set up an independent committee within the Board to -- ? You talk about optimizing value of Chrysalin in fracture repair; but obviously, as you have discussed, there is the diabetic foot ulcer, and then there's the items put on the back burner, the spine, cartilage repair, cardiac revascularization that you guys have spent money over time and one can argue still have some value.

Who makes the decision on how to maximize the value of the Chrysalin franchise, and not just in fracture repair?

Eric, thanks for the question. It is a good one. We have a lot of talent within the management team and on the Board. It is a small Board, as you know, a very active and involved Board. I will also mention Mike Casey on our Board who was former president of J&J McNeil.

We constantly access clinical indications and opportunities. We respond to preclinical knowledge that we gain and regulatory thoughts and positions that develop over time. So yes, we continue to vet the asset thoroughly, and we are turning over every rock to find value in Chrysalin right now.

The obvious places include repositioning a regulatory path in fresh fracture and, obviously, exploring our path completely in the DFU indication. So I can tell you we are committed to wringing every dollar of value out of Chrysalin.

You might have mentioned this, but I might have missed it. On the sort of unblinding or really peeling the onion back on the Phase IIb dosing, is that still going to be sometime this summer, June or July time frame?

I will defer to Jim on that.

Yes, Eric, we certainly plan on during the third quarter communicating the update on that Phase IIb trial. You know that we have to follow those patients. Really the delay, if you want to think of that as the delay from March forward, really has to do with the fact that we were committed to following those patients for 26 weeks for efficacy and safety evaluation; and then an additional 52-week time-point for safety evaluation. So that is really what why we are saying the third quarter.

Okay. How many, Jim? 120, how many patients were there?

There were 273 patients enrolled in that study.

Okay, thanks a lot.

[Mitchell Welch] with UBS.

You may have discussed this and I may have missed it, but what is your anticipation for the burn rate of your cash over the next year?

We have purposely deferred any revised guidance until the second-quarter call.

Okay.

We are in the process of refining our clinical pathway; and until we have done that essential exercise, we won't tell what our revisited cash burn rate will be.

All right. Have you given any -- ? Is there any indication out there how long it would take and how much money it would take in order to get the diabetic foot ulcer product to the next phase?

That is speculative, based upon which regulatory and clinical path we follow. It would be imprudent for me to hang a number out for you. But it is in the tens of millions, I will say that, if we prosecute that indication through NDA.

And the time frame that it would typically take to get to that next phase?

Again, it depends on the path that the agency gives us. But it is probably a four to five to six-year kind of time frame, depending upon how many trials we have to run from a pivotal standpoint.

Okay. The last is can you give us some kind of indication of the specs that would be necessary for Chrysalin to be a success in the IIb trial? So that -- is just the x-rays? Is it still the x-ray, the time to removal, and the comfort of the doctor to remove the product? Or is there some different qualification that is being put on that study?

This is Jim. You know, I think where we are focused right now, obviously, is the secondary endpoints that have shown now efficacy in two consecutive clinical trials, are clearly where we will be focused. However, so, the question that we will be addressing primarily in the Phase IIb is -- is there another dose which shows an effect as good as 10 micrograms or better than 10 micrograms?

As you know, an interim analysis is not necessarily powered, and this interim analysis is not powered to show statistical significance. So it may be a more trend data than statistical significance, unless in fact one other dosage group is truly superior to the 10 microgram group.

But we will obviously also look at the primary endpoint because it could in fact show more sensitivity at a different dose of the drug. So that is really all I can say right now without having the data.

I will add on one thing. Clearly, we remain with the same primary clinical endpoint of time to removal of immobilization, which was certainly a challenging endpoint for us in the Phase III trial.

So said in -- I'm not as technical as some of the other people on this call and clearly you all. What would it take to make that a success, so that the market or the people that are investing in the Company that are technical would feel that the future is that much brighter for Chrysalin?

I think the building of value in the Chrysalin molecule can come from a variety of directions. Clearly if we were to show any effect in the primary endpoint we would be delighted. Knowledge of trend data or, in a very fortunate circumstance, statistical significance from a relatively small patient population in the various dose ranges would give us a lot more confidence.

We have shown, already, statistical significance in radiographic, radial-cortical bridging in two studies. If we were to show that in a third study, I think it would be very good news for us and for the value of the molecule.

Great, I appreciate it very much. Thank you.

Thanks for all your interest, we sure appreciate it.

This concludes the question-and-answer portion of the conference call and also the presentation. We wish you a great day and you may now disconnect.

Thank you.