Capstone Holding Corp (CAPS) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to today's OrthoLogic conference call. As a reminder, today's call is being recorded. Currently the call is in a listen only mode. There will be a Q&A session to follow. At this time for opening remarks, I would like to turn the call over to Melanie Friedman of Stern Investor Relations. Please proceed ma'am.

Good afternoon. On the call today representing OrthoLogic are John Holliman, Executive Chairman; Dr. Randy Steer, President; Les Taeger, Chief Financial Officer; and Dana Shinbaum, Vice President of Business Development.

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 John Holliman.

Thanks Melanie, good afternoon everyone. We appreciate you tuning in. We hope you've had a chance to review today's press release in which we announced financial results for the quarter ended September 30, 2006. On today's conference call we'll review the results for the third quarter of 2006, provide an update for our Chrysalin product platform, provide an update on our preclinical development of AZX100, speak about our focus moving forward, and then open the call to questions.

The OrthoLogic management team continues to operate with an intense focus on creating shareholder value from all our product platforms, especially Chrysalin and AZX100. We also recognize the critical need to balance our current resources with the opportunities and challenges we face.

Regarding the Chrysalin product platform, over the last several months we've worked in close consultation with domestic and international regulatory experts and thought leaders in orthopedics and bone repair. We have again looked with a critical eye at results from each of the placebo controlled studies of TP508 and bone repair, two of which demonstrated statistically significant affect on fracture healing based on radiographic evidence.

After careful reevaluation of our clinical data today and in conjunction with our advisors, we've reached the conclusion that the results achieved thus far in fracture repair, while yielding statistically significant radiographic evidence of bone formation, do not yet provide a compelling enough basis upon which to advance an argument to the regulatory authorities for a sole radiographic primary end point. There also remain dosing and formulation challenges that need to be addressed.

We believe, and our advisors agree, that the proper path is to build our argument more thoroughly from a scientific perspective prior to approaching FDA or the European authorities.

Concurrently we are examining potentially attractive alternate applications for TP508 such as developing the product as a component of a combination product for bone and tissue healing. For the balance of 2006 and continuing in 2007, our Chrysalin platform efforts will focus on certain basic science initiatives, completion of our ongoing regulatory obligations for our Phase II-B clinical trial, and development work to support partnering our licensing activities. These projects will consume only an approximate 20% of our total 2007 R&D budget.

The AZX100 technology platform, acquired during the first quarter of 2006, affords OrthoLogic future opportunities in multiple potential smooth muscle relaxation applications, including pulmonary and related indications. Regarding preclinical development, we have begun toxicology, pharmacology and GMT manufacturing efforts to advance this program toward a year end 2007 INB filing. We have selected pulmonary indications to explore partnering activities, and are continuing to develop strategies for other indications that will help maximize the economic benefit of AZX100 to OrthoLogic.

As always, we are paying close attention to our resource position, aligning and managing cash consistent with the size and scope of our development and clinical programs, and carving our burn rate to the lowest level appropriate, while maintaining core disciplines.

On the financial side, the company's third quarter 2006 results were as follows; net loss for the third quarter of 2006 was $5.8 million or $0.14 per share, compared to a third quarter 2005 net loss of $7.6 million and $0.20 per share. For the nine months ending September 30, 2006, net loss was $28.8 million or $0.71 per share versus a net loss of $19.7 million or $0.52 per share for the nine months ended September 30, 2005.

The results for the three months ended September 30, 2006 include stock based compensation expense of $.6 million and recognition of a Chrysalin product platform patent impairment loss of $2.1 million. The results for the nine months ended September 30, 2006 include stock based compensation expense of $2.2 million, recognition of a Chrysalin product platform patent impairment loss of $2.1 million, previously mentioned, $8.4 million in process research and development costs related to the acquisition of the AZX100 technology platform, and recognition of income tax expense relating to the recording of evaluation allowance of $1.1 million for a deferred tax asset related to an alternative minimum tax credit carry over.

When these factors are considered, the three and nine months periods ended September 30, 2006 would both show a significant decline in expenditure levels compared to similar periods in 2005, related primarily to the reduction in clinical activity and infrastructure expenses between 2006 and 2005.

As previously announced, our original guidance for 2006 was for cash spend of $35 million. We now forecast a cash burn for 2006 of $15 million, less than half of original guidance. The decrease in cash burn is a function of the interruption and termination of the Phase II-B fracture repair clinical trail, 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 plan. Our focus on expense control and product development spending remains key.

We ended the third quarter of 2006 $74.1 million in cash and investments. We thank you for your continued support as we move forward with our initiatives. We will now take your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of William Plovanic with First Albany Capital. Please proceed.

Good evening.

Hi Bill.

Just a couple of questions. So the plan here is to move forward with the AZX, try to get that into the clinic by the end of next year, and on hold on the TP508. Any prospects of end licensing or buying other technologies that are further along than the AZX at this point?

Thank you for a very fair and probing question. We have a clear gap in our clinical pipeline and as you might suspect, sitting with a very clean public registration and $74 million in cash we have received a few inquiries. I would say that our focus is on AZX100 and continued optimization of the Chrysalin platform. And once again we still see some good things in Chrysalin, but we're not in a position to move it directly back into the clinic yet.

If we see a compelling opportunity that meets our strategy and matches our expertise and technology, a truly compelling opportunity, a platform, an end licensing, anything of that nature, then it is something we will consider.

And with the programs you're currently working on, can you give us a feel for what the burn would be next year as well, in '07?

Yes, I'll be pleased to give guidance of $18 million to $19 million in net cash burn for 2007. Once again I want to caution that if we do have an opportunity to restart a clinical program sooner than we think then we would certainly be adding some expense dollars to that guidance.

And then lastly, any hint in terms of what indication you'll be going after with the AZX100?

We're in very early discussions, as indicated, to partner the pulmonary indications. That would include asthma and pulmonary fibrosis. We have some interesting animal data in those areas. Those are very, very large indications. We do not necessarily have the expertise in house, nor the cash resources to develop those.

We have looked very, very hard at keloid scarring and hypertrophic scarring. We have approached our preclinical and tox studies on a broad enough basis to give us some working room in terms of the ultimate indications that we decide to pursue internally.

So the scarring indication is not alone, there are a couple of others that we're looking at, and our tox and safety program will give us maximum flexibility.

Okay and then I think you said next year that the Phase II-B on TP508 would burn up about 20% of R&D expenses. What are you projecting in R&D expenditure for next year?

We are not being specific in terms of breaking out R&D in our respective platforms, and let me correct you ever so slightly. The clinical follow up costs for the II-B plus our work in receptor cloning, plus some additional work we're doing on TP508 and exploring some other indications, those numbers combined will add up to approximately 20% of our R&D budget for 2007. So you can see that the bulk of the money we're spending is on AZX100.

Great, thanks John.

Okay Bill, sure appreciate your comments.

Your next question comes from the line of Robert Hoffman with Candlewood Capital; please proceed.

Maybe I missed an announcement somewhere along the way, but what happened to diabetic wound repair?

We are continuing our efforts to partner DFU, that has, that was previously announced in our August call.

But you're not continuing to work on the gel formulation?

We actually have completed the gel formulation, and we think it's in pretty good shape. And we think that's an asset that could lend itself to our partnering effort. The DFU indication, Robert, as we study it very, very closely, first of all it's a remarkably challenging clinical path, and there have been many good drugs that have failed along this clinical path, because when standard of care is applied to the DFU wound placebos tend to heal very, very rapidly. And there is often not enough separation between the placebo and the active drug.

You couple that risk, clinical risk, with the fact that as we evaluate it, it's probably a $40 million clinical program for us to get to NDA and we think that our shareholders would be better served with a more diversified approach to value creation instead of putting all our eggs in that basket.

So the plan is to not expend any more money, but try and find someone who's willing to affectively buy the product, kind of partner it with you?

Yes, partner it in the broad context. We have a lot of data there, we have some good assets, we're open to a partnering format with some flexibility.

Thank you.

Okay, thanks for plugging in.

[OPERATOR INSTRUCTIONS]

There are no more questions in queue at this time. I would now like to turn the call over to Mr. John Holliman for closing remarks.

Thank you very much again for your participation today. It doesn't sound like we have a lot to announce right now. Please understand that we're working enormously hard to get the story right, and to find the strategy for all of us that's going to make some money. So as soon as we have that story to tell you, we will do it. Until then, thanks for your support and patience.

Thank you for your attendance in today's conference. This concludes the presentation. You may now disconnect. Good day.