Capstone Holding Corp (CAPS) 2006 Q4 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 question and answer session to follow. At this time for opening remarks I would like to turn the call over to Dana Shinbaum, Vice President of Business Development for OrthoLogic. Please proceed.

Good afternoon and thank you for listening in today. Joining me on today's call are Jock Holliman, Executive Chairman; Dr. Randy Steer, President and Les Taeger, Senior Vice President and Chief Financial Officer of OrthoLogic.

Before we begin a reminder with respect to forward-looking statements. These statements are based on management's current beliefs and expectations of how the future will look given the available information today. 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 our Form 10-K for the fiscal year ended December 31, 2006, and other documents we file periodically with the Securities and Exchange Commission.

I will now turn the call over to Mr. Jock Holliman.

Thank you, Dana. Good afternoon, everyone. We hope you've had a chance to review today's press release in which we announce financial results for the year ended December 31, 2006.

Well it's been a year almost to the day, March 15th, 2006, since we announced topline results of the Chrysalin Phase III clinical trial in distal radius fracture. Our stock price fell precipitously and Chrysalin was summarily classified as a failed drug.

While the study showed that Chrysalin did not meet its primary endpoint in the overall evaluable patient population, it did demonstrate that Chrysalin has biologic activity as evidenced by the statistically significant results along key radiographic secondary endpoints. These findings led management to believe the product has potential value in accelerating fracture repair and we accordingly developed a plan to optimize that value.

Looking back over the past year, I will now list the actions we have taken. First we interrupted enrollment in the concurrent Chrysalin Phase IIB dose ranging study in mid-March 2006 in order to perform an interim analysis of subjects enrolled to that date. We did not learn anything new from that study and curtailing it proved to be a prudent decision saving the Company $10 to $12 million of additional clinical expense.

Next, we had a change in management. At the request of the Board of Directors I stepped in as Executive Chairman and my first action was to recruit Randy Steer, M.D. Ph.D. as President. Dr. Steer's extensive background and pharmaceutical and biotechnology drug development, along with his many years of senior management experience, have made him an invaluable addition to OrthoLogic.

Together with key members of the management team we undertook a comprehensive review of our human resources and infrastructure, making hard decisions with respect to the proper size and scope of the organization going forward. We trimmed staff from planned full-time equivalents of 52 to our current FTE count of 28. The M.D. Ph.D. inventors of both Chrysalin and AZX100 remain active contributors to our team.

Also, through rigorous and disciplined cost containment we have successfully managed the burn rate as we will discuss in a few minutes. We continued our efforts throughout the year to gain a thorough understanding of the data in the Chrysalin Phase III clinical trials in distal radius fractures. As we announced on February 16, 2007, during the annual meeting of the American Academy of Orthopedic Surgeons the findings of a post hoc subgroup analysis of data from the Phase III trial showed that within the subset of 157 female osteopenic subjects as determined by Dexascan treatment with 10mg of Chrysalin demonstrated a statistically significant benefit compared to placebo in the primary efficacy endpoint of time to removal of immobilization.

Secondary endpoints including clinical assessment of fracture healing, time to radial cortical bridging and time to overall radiographic healing also showed a significant effect of Chrysalin treatment. We recognize these data are part of the post hoc subgroup analysis and therefore provide only supporting rather than pivotal evidence of safety and efficacy. That said, the data are potentially compelling and have opened new and important partnering possibilities for Chrysalin.

During previous teleconferences, we have stated our intent to continue to focus on advancing the basic science supporting TP508. In December 2006 we announced presentations at the American Society for Cell Biology, by Dr. Darrell Carney, describing results of two sets of experiments supporting this goal. One study demonstrated binding and chemical crosslinking a TP508 to specific molecules on the surface of [endophilial] cells which was the first indication of what may be a specific TP508 receptor.

This may represent a significant step in understanding how TP508 activates cells.

The second study showed that TP508 increases the ability of endophilial cells to produce nitrous oxide and that TP508s prevents negative effects caused by oxygen deprivation, a condition found in myopcardial aschemia and in chronic wounds. These discoveries may provide a unifying hypothesis to explain how TP508 stimulates tissue repair and raise the possibility that TP508 could be useful in treating a number of vascular diseases.

In January 2007, we announced publication in the journal "Wound Repair and Regeneration" the results of a randomized, doubleblind placebo-controlled 60 subject Phase I/II study of Chrysalin and diabetic foot ulcers. The article describes statistically and clinically significant results achieved with twice weekly topical application of Chrysalin combined with good wound care and standard offloading in subjects with chronic diabetic foot ulcers.

The study was conducted by Chrysalis Biotechnology prior to its acquisition by OrthoLogic in 2004.

Summarizing TPA the OrthoLogic team is highly energized. The four components of our program include one, demonstration of statistically significant healing in the primary endpoint and multiple secondary endpoints within the osteopenic female cohort from the Phase III distal radius fracture study. This is a patient population where the bone tissue was physiologically compromised. Two, demonstration of statistically significant healing with respect to wound closure endpoints in the Phase I to diabetic foot ulcer trial, an example of Chrysalin's biologic activity again in compromised dermal tissue. Three, laboratory experiments tying Chrysalin to potential modulation of the health of endothelial tissue in blood vessels where confirmatory work is ongoing. And four, mechanism of action studies ongoing with Dr. Carney (indiscernible) of TP508 at University of Texas Medical branch in Galveston.

Armed with real evidence of biological activity in these three tissue groups, with compromised physiology, and based upon gaining a clear understanding of receptor mediated mechanism of action, we are optimistic that we could have a commercially viable drug and multiple potential applications. The OrthoLogic team has performed against every objective of its Chrysalin value optimization plan in the last 12 months.

Moving now to the AZX100 technology platform acquired during the first quarter of 2006, OrthoLogic sees opportunities in multiple potential smooth muscle relaxation and antifibrotic applications including pulmonary and related indications. We are executing an aggressive development plan for AZX100 with the goal of filing an IND by year-end 2007.

Regarding preclinical development we continue to make progress with respect to toxicology, pharmacology and GNP manufacturing efforts. We are encouraged by the preclinical results to date. We have chosen to explore partnering opportunities for pulmonary and vascular indications and we continue to pursue in-house development of other selected indications.

I will turn now to the financial report for 2006. The Company's year-end 2006 results are as follows. For the year ending December 31, 2006, net loss was $31.9 million or $0.78 per share versus a net loss of $27.2 million or $0.72 per share for the year ended December 31, 2005. The $4.7 million increase in net loss for 2006 compared to the same period in 2005 results primarily from $2.8 million of stock compensation expense, recognition of a $2.1 million Chrysalin product platform patent impairment loss, $8.4 million of in process research and development cost related to the acquisition of the AZX100 technology platform, and recognition of income tax expense related to the recording of a valuation allowance of $1.1 million for a tax-deferred asset related to AMT credit carryover.

These items were partially offset by the decrease in fracture repair clinical activity compared to the same period in 2005, and a general reduction of expenses due to cost-containment efforts.

Cash used in operations in 2006 was $18.9 million. Our cash position was favorably impacted by the receipt of $3 million from the exercise of stock options and the Nova Quest transactions wherein we sold a total of 1,262,531 shares of our common stock for gross proceeds of $3.5 million.

This is the important part. We began 2006 with $83.6 million in cash and investments, and ended the fourth quarter of 2006 with $70.2 million in cash and investments, a net change of $13.4 million versus original guidance of $35 million.

As discussed during the third quarter 2006 conference call, we have forecast a cash burn for 2007 in the range of $18 to $19 million. Separately the Company will be investing approximately $4 million to $4.5 million in connection with the pending purchase of a new 34,440 square foot single story office and laboratory facility in Phoenix. This estimate is not included in the forecasted cash burn.

Management believes the facility purchase is a sound financial decision. Owning affords us strategic flexibility that entering a five to seven year lease does not and it will be substantially more cost-effective. The decision was necessitated by the expiration at the end of 2007 of the lease on our 100,000 square foot Tempe facility.

Going forward, we will continue our aggressive programs to create value from our TP508 and AZX100 peptide platforms. We will continue our ongoing discussions with a wide range of potential partners on both the drug and device sides of the business.

On the strategic side we continued to evaluate potential complementary technologies, leaving open the possibilities for licensing, joint development or acquisition. We thank you for your continued support as we move forward in our efforts to create shareholder value. We will now open to questions.

(OPERATOR INSTRUCTIONS) Mike Dwyer. Robert W. Baird.

Jock, I don't know if this call is for you or for Randy but could you tell of more about why the osteopenic female data is so important to you right now?

Thank you, Mike, and thanks for listening in. Randy, would you like to handle that?

Sure. Thanks for the question. It is certainly a very relevant one. Osteopenia in females is a very widespread problem. It is a significant issue among many males too. From a demographic standpoint bone loss occurs with aging in both genders after the peak bone mass or bone density has been achieved. Now beginning at about the middle of the third decade although it can occur significantly earlier in selective patients, women lose about 35% or so of their cortical bone and oftentimes as much as 50% of trabecular bone.

I don't know the exact numbers today cited in the most recent literature but in the United States I believe around 33 or 34, 35 million people have low bone mass. Low bone mineral density or osteopenia and they are at potential risk for osteoporosis and the complications. That is, very troublesome fractures. Now among these, about 20 million I think are women.

So essentially as Jock cited earlier osteopenic bone is essentially a compromised tissue. And we want to do whatever is possible to try to lessen the impact when a fracture might occur in an osteopenic patient if we have a medicinal agent that in fact can benefit that tissue that provides a solution to what is truly an unmet medical need.

So just to quickly review, it is a very widespread disorder. It is a widespread disorder not just in North America or the Western Hemisphere but worldwide. And it is a consequence of aging. And essentially it is one for which we now have very exciting information that is propelling us to take a very close look at what the opportunities are that might exist for the Company.

Will there be any other follow-up studies done in this area?

We are evaluating that right now. Obviously we are looking at the size of potential studies. We are evaluating the regulatory pathway. The primary endpoint time to removal of the mobilization was reached in this subpopulation. So that is a very interesting development, a very positive development for it.

So I would be premature to announce clinical direction here, but we are taking a very, very hard look. It definitely gives us a leg up in terms of partnering and bone. And we are looking at some partnering opportunities, hopefully to get back in the clinic sooner rather than later.

Thank you. I'll get back in queue.

[Brian Wall]. First Albany Capital.

I just was wondering, you've got two drugs, you've got TP508 and AZX100. Obviously you have got positive data on TP508. Could you maybe help us out in trying to figure out perhaps which of these is more important to you right now or that you might direct more resources to?

Thanks for your question and that's a good one. A year ago we were very disappointed with Chrysalin, but it's continuing to show us things that are compelling. We are not spending a lot of money on Chrysalin right now. Most of our expense is designed towards some laboratory work and vascular endothelial dysfunction, another compromised tissue set and also improving optimechanism of action and Dr. Carney in Galveston is hard work with his team on that.

To handicap each molecule is tough. We are preclinical with AZX100. We like what we're seeing. We're pleased with the results we've seen so far in both safety and we are seeing what we expected to see in terms of the action of the drug in animals. But we still are preclinical in AZX100 and in terms of what the market is interested in, in commercializing molecules I would have to say TP508 is back in the running for the more likely near-term events in terms of partnering and value creation.

And you've mentioned partnering a couple of times now for both molecules. Does this mean that you are looking away from developing in-house products and more towards looking for someone else to help you out or are you still committed to (inaudible) ?

I will be specific. In bone, we can go either way with TP508. In diabetic foot ulcer, it is definitely a partnering initiative. We have stated that in the past because of the size and timeline and capital resource of the studies.

Endothelial dysfunction is a new very broad heading under which there are numerous specific indications as you guys well know. These are blockbuster indications and if we show excellent effect in the laboratory and perhaps in some animal models, then we think that will also be a partnering opportunity.

In AZX100, we are actively trying to partner the pulmonary asthma indication, smooth muscle relaxation. That is what the molecule does. It also shows an antifibrotic characteristic and we are developing in-house keloid and hypertrophic scarring. We are looking at some other indications including subarachnoid hemorrhage and Reynauds disease and will -- Reynauds is a possible in-house development. Subarachnoid hemorrhage would be partnered.

So that is where we sit in a very specific response to your question.

And now that you are starting to understand a little bit better what (inaudible) TP508 is, would it be possible that you could -- I mean look into different direction than fracture healing?

The answer is very much yes and Randy will elaborate on that.

Thanks for these questions. I would say that I think Jock cited earlier in his overview when he summarized TP508 and cited that (indiscernible) as highly energized which was certainly the case. He cited multiple components. I won't repeat them here but I guess the punchline I would say is that it is certainly conceivable that there is a common thread that explains the beneficial effects of TP508 in a variety of compromised tissues. And as was mentioned, you are talking about diabetic foot ulcers where we have in animal models certainly seen an impressive revascularization effect and clinical efficacy, frankly, in the clinical study.

And in bone we certainly have reason to believe that the beneficial effect of TP508 might in fact have to do with certain positive effects on vascular endothelial biology. And we are doing a variety of other studies as Jock said and so I think there may be a commonality here in terms of the -- at least the first level of mechanism of action of the TP508 molecule. And I don't think from a biologic or pharmacologic perspective that that's at all a surprising issue to me. It does not surprise me.

I would say though to answer as to where we might be going, I think that will be more convincingly or credibly disclosed as we continue to do some of these mechanism studies on appropriate animal models. We expect to have significantly more direct relevant animal model results over the next matter of months. I think that is what is going to direct us to the optimal type of clinical therapeutic target and I would just add another comment.

Again, I think Jock mentioned about the vascular market if you will or the vascular targets being very considerable. I would comment that spending an awful lot of time on the development of vascular drugs over the last dozen years in my experience, and certainly in that of my colleagues and counterparts big pharma has a pretty frantic search under way to find particularly endogenous molecular mediators to improve the health of endothelial sales. Our preliminary findings at this point are very compelling to us from a scientific standpoint and we are receiving outside confirmation of the significance of these findings.

It very well may be that TP508 has very meaningful effects on maintaining and or restoring endothelial health. And that might itself produce a shower of positive effects, whether it is a healing of an osteopenic patient's fracture or an ulcer or variety of different effects.

Now the potential application in cardiovascular disease is definitely on our minds. Yet that is a what we call a longitudinal study likely, whether it is focused on (indiscernible) hyperplasia or myocardial repair. We are not sure at this time but it is a partnerable type of event.

So in any case the set of possibilities is very broad and we are not trying to become, I would say, a research boutique, so to speak. Because I know we've mentioned a few very specific scientific facts to date. What we're doing is, we are trying to get the core basic information that gives us a strong jomt of what the pharmacologic action of TP508 is with great accuracy and where it is best positioned for meaningful clinical targets. Thanks very much for your question.

Thanks.

All right, Brian, thanks for your interest. We have another question up?

William Plovanic. Canaccord Adams.

Thank you. This is actually [Knut] for Bill. Thank you for taking my question. Just one -- it seems like everything else has been asked, but it sounds like there's still a lot of opportunity with Chrysalin and with all of the opportunity that you are facing, as Brian kind of tried to -- he's asking the same question of is there one particular area that you think is farthest along in terms of commercialization, considering a year ago you weren't very happy with the product at this point? Do you think anyone is currently standing out as the most viable in terms of commercialization?

It's a challenging question Bill and I will pronounce your last name appropriately, Plovanic, for everybody on the line. I think everyone knows your name.

The osteopenic female data in bone is really compelling and once again we are looking at and considering the steps necessary to get back in the clinic in bone. It is not an easy decision and we are not ready to make any kind of an announcement there. But obviously we run Phase III trial; we've had 650 or so patients treated with the drug and bone and so you'd have to say that bone is the place where the commercial play is most advanced.

That being said, these -- the revascularization effect and modulation effect in damaged tissue across different tissue types is really the thing that is calling out to us. And we are going to find some validations from some very inexpensive research projects.

Our total budget for commercializing Chrysalin this year is roughly $1 million. We are not spending a lot of money there and we are continuing to learn a heck of a lot. So keep your eye on endothelial dysfunction. We will find the best and brightest use for this molecule in terms of indication; and we will support that either with direct clinical effort or with a partnering initiative.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I would now like to turn the call back over to Mr. Jock Holliman for closing remarks.

We appreciate your interest in OrthoLogic. We are a company that is making great progress. Please stay tuned and we will talk to you again for our first quarter '07 call, probably sometime in early May. Thank you.

Thank you for your participation on today's conference. This concludes the presentation and you may now disconnect. Have a good day.