Capstone Holding Corp (CAPS) 2007 Q3 法說會逐字稿

Good day, everyone. Welcome to today's OrthoLogic conference call. As a reminder, today's call is being recorded.

(OPERATOR INSTRUCTIONS)

At this time I would like to turn the call over to Dana Shinbaum, Vice President, Business Development for OrthoLogic. Please go ahead.

Good morning, and thank you for listening in today.

Joining me on the call are Jock Holliman, Executive Chairman; Les Taeger, Chief Financial Officer; and Dr. Roger Crowther, Senior Director, Pharmaceutical Development.

Before we begin, a reminder with respect to any forward-looking statements made during the call. These statements are made based on management's current beliefs and expectations of how the future will look given the information available 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. Please also see our updated website, OrthoLogic.com, for additional information.

I will now turn the call over to Jock Holliman.

Good morning, everyone. Thanks for dialing in today and for your continued interest. We hope you've had a chance to review today's press release, in which we announced financial results for the third quarter ended September 30, 2007.

As many of you know, we are focused on three major project areas -- number one, advancing the basic science and mechanism of action work supporting the rediscovery of TP508 in vascular applications; two, preparing a year-end IND filing for AZX100 in the dermal scarring indication; and, three, planning and executing proof of concept models for both molecules in several critical care large market indications.

Some comments on the TP508 program. Management has renewed confidence in the science behind TP508 and its potential value in modulating endothelial dysfunction. Endothelial cells line the body's blood vessels and are a significant contributor to vascular health. We devote energy and resources to TP508 mechanism activities because we believe there's promise in the molecule beyond orthopedics and diabetic foot ulcer healing. You will remember that TP508 has shown a robust signal in human clinical trials in multiple types of compromised tissue. The TP508 program is being guided and informed by our scientific advisory board, which held a meeting in Boston on October 24, and we continue to make meaningful progress.

The mechanistic signal we are seeing definitely occurs in vascular endothelial cells. We have two independent scientific teams working to define and verify TP508 mechanism of action. With a well-characterized mechanism of action, there is potential for OrthoLogic to move rapidly through proof of concept preclinical studies in vascular endothelial dysfunction indications and creating value through partnering initiatives with companies interested in this space. Vascular applications may potentially include underserved critical care indications such as peripheral vascular disease, myocardial ischemia and myocardial infarction. Each of these represents patient populations in the millions and drug costs -- direct drug costs in the billions of dollars.

We anticipate near-term publication of results from certain in vivo proof of concept work that has been completed in parallel to the MOA initiative. We believe now more than ever that TP508 has realizable commercial potential. Gaining an understanding of the biological and molecular mechanism, in concert with proof of concept and a critical care indication, should help OrthoLogic to realize the value of TP508.

On to the AZX100 platform, our scientific team is on schedule for an IND filing by year-end 2007 in support of AZX100 in a dermal scarring indication. This involves hypertrophic and keloid scars. Pending regulatory acceptance of the IND, we forecast initiating a Phase 1 clinical trial during second quarter 2008. Dermal scarring is an area with which the Company is familiar and has a clearly defined regulatory pathway. As we have previously stated, OrthoLogic has the resources to advance this program to meaningful value and flexion points.

Our preclinical models supporting AZX100 are also designed to provide evidence of safety and efficacy in high-value critical care indications. These include pulmonary applications, such as asthma and pulmonary fibrosis; vascular applications, including prevention of intimal hyperplasia, the universal response of a blood vessel to injury and an important reason for late bypass graft failure, particularly in vein and synthetic vascular grafts; additionally, maintenance of vascular access, a particularly challenged -- a particular challenge associated with dialysis patients. For example, in endstage renal disease, there are 300,000 persons affected each year with collapsed veins. The cost of insertions and associated complications for these patients can run into the billions of dollars.

In selecting centers at which to conduct these preclinical studies, we have scoured the country to specifically identify expert investigators who invented and perfected the relevant proof of concept models. Some of these models are already underway. Others are in protocol design. Assuming successful preclinical results in these critical care proof of concept areas, we expect to present data at conferences during 2008.

On to the financial side, the Company's Q3 2007 results are as follows.

For the quarter ending September 30, 2007 net loss was $2.4 million, or $0.06 per share, versus a net loss of $5.8 million, or $0.14 per share, for the same period a year ago. For the nine months ended September 30, 2007 the net loss was $7.7 million, or $0.18 per share, versus a net loss of $28.8 million, or $0.71 per share, for the same period in 2006.

The $21.1 million decrease in net loss for the nine months ended September 30, 2007 compared to the same period in 2006 resulted primarily from the $8.5 million purchased in-process research and development costs in 2006, associated with the acquisition in 2006 for the rights to AZX100; a decrease of $1.7 million in noncash stock compensation expense; reduced costs in 2007 reflecting management changes and staff reductions which occurred in the first half of 2006; a decline in clinical costs related to our fracture repair Phase 3 and Phase 2b clinical trials, which were substantially completed as of 12/31/06; and a Chrysalin product development patent impairment loss of $2.1 million recorded in 2006; also, recognition in 2006 of income tax expense related to the recording of a valuation allowance of $1.1 million for a deferred tax asset associated with an Alternative Minimum Tax credit carryover.

The important part -- the Company began the year $70.2 million in cash and investments and ended the third quarter with $62.6 million in cash and investments. As discussed most recently during the annual stockholders meeting in May 2007, we originally forecast a cash burn for 2007 of $18 million to $19 million. We now anticipate the cash burn for the year to be in the range of $12 million. We continue to rigorously control our costs and manage cash, while advancing the important science and clinical programs.

In summary, we are running a middle distance race. It is not a sprint, nor is it a marathon. With our low cash burn rate, we have the resources to create value. Currently, six proof of concept studies are underway in TP508 and AZX100, serving large critical care indications. Data from these programs will become available to OrthoLogic through the first three quarters of 2008. We believe that if any one of these initiatives is successful we can build a highly valued company. Our science team is working towards clear milestones and is executing with a keen sense of urgency. We look forward to sharing meaningful developments just as soon as we can release them.

Thank you for your ongoing support as we move forward in our efforts to create value for our shareholders.

We're now open for questions.

Thank you.

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We'll go first to Bill Plovanic, with Canaccord Adams.

Good morning.

Good morning.

Two questions for you. First of all, what specifically can you tell us that you learned about the mechanism of action for TP508? And then secondly just any update you may have on partnering with one of the larger drug companies.

Okay, fine. Thank you. I'll defer to Dr. Roger Crowther on the mechanism question and ask him also to elaborate a little bit on AZX100's mechanism, too. Doctor?

Good morning, Bill. As far as TP508's concerned, we've got pretty compelling studies that indicate that TP508 can modulate the phosphorylation of endothelial nitric oxide synthase, the principal enzyme that produces nitric oxide, and we see a concomitant regulation of NO in endothelial cells. And we have some early tissue data that indicates that this can lead to a relaxation of smooth muscle by TP508.

As far as AZX is concerned, obviously we know fairly well that this depolymerizes actin by a very well-established mechanism, leading to smooth muscle relaxation, and also has some anti-fibrotic properties, but the MOA for that is less well fleshed out at this time.

Okay.

Very good, Roger. Thanks. We have ongoing initiatives on the partnering front in orthopedic and diabetic foot ulcer indications. We don't have anything to announce at this point in time, but I will say that we are in discussions with various parties.

Great. Thank you.

Thanks very much.

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We'll go next to [Michael Dwyer], with Robert W. Baird.

Good morning, Jock. You said that sometime in the first three quarters of 2008 -- could you be a little more granular about that and give us some color in terms of what it is that you're looking for before you have to announce some of your new science discoveries?

Mike, you always ask the tough questions. Thank you, and thanks for being up early with us in Arizona. The mechanism for releasing information to the public and the Street in the science realm is challenging, and particularly challenging for us on the business side. The proven pathway is to validate the science projects in several different ways and then write a manuscript or a poster and present it to a conference or have it published in one of the industry journals. I would say that that is a pathway that we will observe, because it tends to offer the greatest credibility from a science peer review standpoint. It's the greatest bang for the announcement, but you have to wait a few months to get those announcements.

I mentioned in the talk that we're working on six proof of concept studies in high-value indications. We are blessed to already have several of the AZX100 projects up and running, and we're starting to see some data on a couple of those indications. We are very encouraged by what we are seeing. The TP508 projects in the myocardial ischemia and peripheral artery disease areas are still in protocol design, and we won't expect to have data on those projects until sometime at least the end of the second quarter, possibly the third quarter of '08. We're looking for ways to encourage the market and to try to find some acceptable academic science research mechanism to release our data a little bit earlier, but for the moment we're going to stick with conferences and industry journal publications. We would anticipate that throughout the course of '08 we will have multiple events in those two media formats.

Thank you.

Thank you very much. That's very important we get the word out, and we'll do it just as soon as we can.

And we'll take our next question from [Aran Greshkin], with NanoCapital Growth Funds.

Hi, guys. I just wanted to make a comment. When you put out the press release, you just put out numbers, and it kind of gives you a sense, or makes you feel like nothing is going on within the Company, especially with the very low cash burn, which I love, by the way. So maybe next time, I don't know, six proof of concepts, throw something in there that lets us know what's -- what you guys are working on, or lay out a timeline for the future, like Pain Therapeutics back in the old days used to write magnificent press releases, where they laid out the future for you, exactly what their timelines were and targets were. And I think that would help.

Okay. That's a fair comment. We're obviously rebuilding the Street's confidence, so we don't want to overpromise. We just want to deliver. And so we have been very conservative in terms of our press releases to date. But a little bit more color on where we're going, the projects we're working on, I think that's a very, very fair comment. We'll do it.

Thank you so much.

Okay. Thanks for being so supportive, and stay tuned.

We will.

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And it appears we have no further questions. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thank you, everybody, for continuing to believe in OrthoLogic. Our science and management team here is deeply committed. We're excited about the projects we're working on, and we hope to be able to deliver some exciting news in the relative near term. We believe we are a value play today and hope that you see us the same way.

Thanks very much. That concludes the call today.

And once again that does conclude today's call. We do appreciate your participation. You may disconnect at this time.