Capstone Holding Corp (CAPS) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the OrthoLogic Corp. second quarter 2006 earnings conference call. My name is Carlo and I'll be your coordinator for today's presentation. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's conference, Melanie Friedman of Stern Investor Relations

Good afternoon. On the call today representing OrthoLogic are Jock Holliman, Executive Chairman, Dr. Randy Steer, President, Dr. Jim Ryaby, Chief Scientific Officer, Les Taeger, Chief Financial Officer , and Dana Shinbaum, VP of business development. Before we begin we would like to remind you that when we discuss our future expectations, plans, and processes, 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 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.

Thanks, Melanie, and greetings from Phoenix. We hope you have had a chance to review today's press release recently out, in which we announced financial results for the quarter ended June 30, 2006. On today's conference call we will review those results, provide an update on our clinical development pathways for Chrysalin® and fracture repair and diabetic foot ulcer healing, touch briefly on our programs supporting AZX100, speak about our corporate focus moving forward, and then open to questions. OrthoLogic continued to implement its biopharmaceutical business model in the second 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 prospects by exploiting strategic collaborations.

The OrthoLogic management team is operating with an intense focus on asset value optimization, recognizing the critical need to balance our current resources with the opportunities and challenges we face. The clinical trial results from the Chrysalin® Phase 3 and fracture repair were driven by a challenging FDA mandated endpoint. As you know, we didn't meet that endpoint, yet we have demonstrated radiographic evidence in two consecutive clinical trials that Chrysalin® has a significant positive effect on bone healing. We have made substantial progress toward completing the planned interim analysis of the Phase 2B dose ranging human clinical trial and unstable displaced distal radius fractures. We look forward to providing investors with findings from this analysis later during the third quarter.

The regulatory approach for Chrysalin® and fracture repair includes evaluating both the U.S. and European approach and we will be requesting meetings with these agencies shortly. We intend to continue pursuit of a primary endpoint focused on radiographic healing for Chrysalin®, and we will provide additional details as they emerge. In addition, we continue to pull alternative programs for examining safety and efficacy of Chrysalin® and diabetic foot ulcer healing. Also our efforts continue regarding development of the basic science supporting Chrysalin® . Dr. Steer will address this issue in a few moments. The AZX technology platform acquired during the first quarter of 2006 affords OrthoLogic future opportunities and multiple potential smooth muscle relaxation applications, including pulmonary and related indications. We continue to advance our preclinical work toward IND applications in multiple areas.

As always, we are paying close attention to our resource position, aligning and managing cash consistent with the skies and so -- size and scope of our development and clinical programs. On the financial side, the Company's second quarter results are as follows: Net loss for the second quarter 2006 was $6.5 million or $0.16 per share compared to a second quarter 2005 net loss of $6.6 million and $0.17 per share. For the six months ending June 30, 2006, net loss was $23 million or $0.58 per share versus a net loss of $12.1 million or $0.32 per share for the same period a year ago. The increase in let loss resulted in part from $8.4 million of in-process research and development costs related to the AzERx acquisition, the inclusion in 2006 of $1.7 million in noncash stock compensation expense related to the January 1, 2006 adoption of SFAS 123, as revised, and a $1.1 million noncash deferred tax expense. To the important part, our original guidance for 2006 was for a cash spend of $35 million. With careful adjustments to our resource allocation, and the interruption of the fracture repair development program, we now forecast a cash burn for 2006 between $15 million and $17.5 million. That is less than half of the original guidance.

The decrease in cash burn is a function of the interruption in the fracture repair trial, the Phase 2B, a reduction in headcount, and stringent cost control. OrthoLogic's full-time employee count is now 28, down from a projected 50 in the original 2006 plan. We are judiciously spending to advance the asset optimization of Chrysalin® from both a scientific and clinical standpoint. To meet our required clinical follow-up for the patients enrolled in our clinical trials and to move forward with our preclinical work supporting an IND for AZX and multiple indications. We expect that our cash burn rate will ramp up again when we elect to enter new clinical trials. Again, we ended the second quarter of 2006 with $75.6 million in cash and investments.

I would now like to turn the call over to Dr. Randy Steer. Thank you.

Thank you, Jock. I will first address the Chrysalin® development program in fracture repair. As discussed, the Phase 3 study was prospective randomized double-blind placebo-controlled clinical trial that enrolled 503 subjects in 27 active centers in the United States. And we reported in March of 2006 top-line Phase 3 clinical trial results in distal radius fracture that showed treatment with ten micrograms Chrysalin® did not demonstrate a statistically significant benefit as compared to placebo in the FDA-mandated primary efficacy endpoint of time to removal of immobilization. There were several prespecified secondary endpoints in the 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. Those that do not are termed extra articular. As the Company reported in March 2006, the secondary efficacy endpoint, radiographic evidence of time to radial cortical bridging, showed a statistically significant benefit for Chrysalin®-treated subjects and the overall evaluable patient population with a P value of 0.046. Now, the benefit observed was consistent with findings from the Phase 1/2 clinical trial that provided part of the foundation for the Phase 3 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, and in that case, the P value obtained 0.027. These differences were observed in study subjects as early as three and four weeks post-treatment with Chrysalin® . Now, from a safety perspective, the trial met the prespecified safety endpoint, as there were no adverse events related to Chrysalin® reported in this Phase 3 trial, nor were there any differences in adverse event rates observed between the Chrysalin® and placebo-treated subjects. As previously mentioned, at the time that we announced the Phase 3 results, we were also conducting a concurrent Phase 2B human clinical trial on distal radius fracture. This is a double-blind, randomized placebo-controlled trial that examined doses of Chrysalin® at one, three, ten and 30 micrograms, using the same trial design and endpoints as the Phase 3 study.

On March 15 of this year we interrupted enrollment in this clinical trial in order to perform an interim analysis of the 273 subjects enrolled to that time. Of course, the Phase 2B trial was not powered at the interim analysis stage to detect statistically significant differences among those cohorts regarding the efficacy of Chrysalin® . Basically, the number of patients treated to that point is not expected to be large enough to show statistically significant endpoint performance. However, it may be possible to see some trends in the data based on dose level, and we're approaching the interim analysis with the mindset of learning additional clinical characteristics of Chrysalin® . We made the decision to perform the interim analysis based on the Phase 3 results, burdened as they were by a challenging primary endpoint, and on our conclusion that spending an additional $10 million to complete the study with the same endpoint would not be prudent. The Company plans to communicate results of this interim analysis later in the third quarter of this year. Also of note, the Phase 3 results are being prepared for submission for presentation at a major scientific forum. We look forward to providing an update on our progress.

Now, with respect to diabetic foot ulcer, as earlier discussed we're examining the utility of Chrysalin® in diabetic foot ulcer healing, based on a successful multiple dose Phase 1/2 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. We believe that we have overcome the engineering challenges associated with manufacturing a suitable gel-based formulation, and plans for the DFU program may include dose-ranging safety and efficacy studies, and may involve one or more partners. Our ongoing collaboration with Quintiles affords us the ability to bring additional resources to bear on the project. Based on the significant body of preclinical and early clinical evidence, we remain optimistic about the potential of Chrysalin® in soft tissue healing. As Jock mentioned, the basic science efforts supporting Chrysalin® continues to make progress and we are encouraged with respect to these projects, specifically in receptor cloning.

Now with respect to AZX100, regarding our first quarter 2006 acquisition of the preclinical peptide AZX100, we have begun toxicology, pharmacology, and GNP manufacturing efforts to advance the program toward an IND. We've selected pulmonary indications to export partnering opportunities and are continuing to develop strategies for other indications that will help maximize the economic benefit to the Company of the AZX100 molecule.

I'd like now to turn the call back to Jock Holliman for some closing remarks.

Thanks, Randy. We have many programs in progress to create value for the Company and our shareholders. We will selectively pursue internal development of chosen indications and we will partner indications as appropriate for financial or market reasons. Rest assured we are carefully managing the Company's resources and we are working hard to optimize the value of this portfolio for its shareholders. We thank you for your continued support. We welcome your questions. The floor is open.

Thank you, sir. [OPERATOR INSTRUCTIONS] And, sir, our first question is from the line of William Plovanic with First Albany Corporation.

Hi, this is actually [Anute] speaking on behalf of Bill. How are you guys?

Hi, Anute. How are you?

Good. Thanks for taking the question. Just one quick question regarding the cash burn expectations for the next couple of years. You guys mentioned in the Q that you have enough cash for two years out. Is that just a conservative estimate or are you expecting cash burn to rise significantly in the next couple of years?

We will let you draw your own conclusions from an extension standpoint of burn rate. Again, we are not wise enough at this point to be able to clearly project what clinical trials we will enter and how much they will cost and what the duration will be. So, suffice it to say that our CFO, Les Taeger, has a very, very cold heart and a very sharp pencil. And we have addressed things internally. We have control of our costs. We know where we're spending our money and we're spending it very, very careful -- carefully in preclinical, in basic science, and in anticipation of running some new, larger clinical trials. I'm sorry I can't be more specific there, but I think you know that that's a dynamic question.

Okay, thank you.

And our next question is from the line of Mitchell Welsh with UBS.

We've been following your Company for quite some time and gotten indications of things, like everyone else, that these products were going to be getting to market faster than they obviously have had an opportunity to. Your statements about the products seem very positive, but I'm not quite sure how that plays out to an actual product-to-market on any product-to-market. Can you give us some kind of indication of the time that it would take to deliver that?

I'll take a stab and also let Randy offer some follow up thoughts here. But our primary clinical for us has been in fracture repair, obviously, and we've advanced into pivotal trials in that indication. If -- indeed our original plan was to show efficacy and ongoing safety in the Phase 3 trial to gain some additional knowledge and validation in the Phase 2B trial through completion, and hopefully armed with thos two pivotal trials move to NDA. Those plans are on hold right now, obviously, until we can redefine a regulatory endpoint that we feel is appropriate, that obviously will be targeted towards radiographic healing where we have shown performance. Randy, do you want to add to that?

Well, I think you stole my thundered there, thank you, Jock. That's exactly right. We are looking very, very closely into crafting the best regulatory approach to selection of endpoints and we intend to meet with both the Drug Administration and European authorities sometime during the autumn to come to a better understanding of what would be an acceptable endpoint, an achievable endpoint. So I think Jock summarized it well. It's very difficult, as you know, in the absence of that information to suggest a very accurate timeline or very accurate cost. I wish I could provide that, but can't.

We do anticipate a good reception at these agencies. We are realistic about the direction that we will be given. We do not think that there will be any retrospective relief necessarily, but we are hopeful that a prospective set of guidance might include a radiographic endpoint and that would likely require us to perform a new clinical trial. And again, the size of the trial and the duration of the trial are unknowns at this time.

Just so that I can clarify, what I think I heard you say was that you're not throwing the concept of fracture repair out for the Chrysalin® product, and you're -- from what you've seen, you believe there's still to be a market and a value for the product, and reason for the FDA or any of these agencies to encourage or support you bring that product to market?

That's accurate. We believe we have shown that Chrysalin® heals bone, and we believe this product should be commercialized. And as our shareholders have asked us to do, we are pursuing asset value optimization and Chrysalin® as hard as we can.

Thank you very much.

[OPERATOR INSTRUCTIONS] And our next question is from the line of [Charles Schleshiero] with Prime.

Welcome, Charles.

Yes, hi. How are you all doing today? I just want to give you some positive indications. What I feel is that you guys are doing a great job in light of everything going on, you know, obviously with the FDA and everything. But the question I have for you is you gave a guidance of two years for cash and everything. Are you guys looking to raise any more kind of cash in the middle of all this or is it just basically you feel that that should take you into the FDA and through what you need to do?

Raising cash at $1.48 a share we don't believe is a good thing for our shareholders. I say that tongue-in-cheek. We need to show some milestone clinical progress in one of our indications to be able to consider an external financing of that, and right now, with $75 million in cash, we have plenty of money to get the answers to questions that we're pursuing, so a financing event is not on our radar screen at the present time. I will say that we hope to engage some good strategic partners in the development of some of our indications and create some value in that fashion. So I honestly think we're -- despite the bad news we brought to you guys back in March, we have recovered as nicely as we can, our cash position is one of our greatest strength, obviously, and we're going to exercise great care in where we spend it.

Well I think you are going the right direction and do I think you're doing a great job and everything.

We sure appreciate that. The team here appreciates your remarks pressed.

Okay. One more quick question is I know that you had a little insider buying in the past. I mean obviously I believe you all must believe firmly in the Company itself. Is that something that you guys just bought on a wind or is it you believe in the Company fully yourself 100%?

I'm at 100%. I've been involved with this Company for many, many years, as most of you know, and I think our window will open again in three or four business days from this call. So, you know, I think this team and this board are very signed up, and stay tuned.

Yes, well I appreciate it and like I said, I'm a firm believer and I've been a buyer of your stock, and I think at these levels it's a great deal, and especially with the market's going and all the biotechs, I think you're just apart with everybody else, so I think it's a matter of time before it all pays off.

Thank you.

Thank you. You take care now.

And ladies and gentlemen, this concludes the question and answer portion of today's conference. I'd like to turn it back over to management for any further comments.

In closing, thank you all for plugging in late talk on an August summer afternoon. We know it's a busy period for the analysts and we appreciate your interest and support. We hope to give you guys some things to get excited about in the future and some reasons to pick up coverage on us. Unless there are any further questions, we wish you guys a good rest of August and we'll be in touch as soon as we have something else to share with you.

Thank you.

And with that, ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.