Capstone Holding Corp (CAPS) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Orthologic's 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, I would like to turn the call over to Mr. Dana Shinbaum, Vice President, Business Development to Orthologic. Please go ahead, sir.

Good afternoon, and thank you for participating in today's interactive webcast. Joining me on the call today are Jock Holliman, Executive Chairman, Dr. Randy Steer, President and Les Taeger, Chief Financial Officer of Orthologic. We have prepared a slide set today to accompany our remarks. It can be found at www.orthologic.com. Click on either the investor section or the calendar of events section and you should find a file entitled OLGC YE 2007 operating results 05, March 2008.PDF.

If you would, please turn to slide 2. Before we begin, a reminder that today's discussion may contain forward-looking statements about the business prospects of Orthologic Corporation. These statements are based on management's current beliefs and expectations of how the future will look given the information presently available. They may include expectations regarding Orthologic's financial performance and potential future products in several areas of therapeutic research and development. There are risks that could cause the company's actual results to differ materially from these statements, including but not limited to progress of Orthologic's product programs, actions of regulatory authorities, availability of capital, future actions in the biotechnology and pharmaceutical markets and developments by competitors. You may review a list and description of these and other risks which are detailed in Orthologic's 10-K reports filed with the U.S. Securities and Exchange Commission. Please also see our website, www.orthologic.com for additional information. Once again, if you're looking for today's slide set, please click on either the investors section or the calendar of events section at Orthologic.com and you should see a file entitled OLGC year-end 2007 operating results 05, March '08.PDF.

If you would, turn to slide three, I would call your attention to the financial statements incorporated into today's press release discussing results for the year-ended December 31, 2007. From these, you can see the significant reduction in net operating loss resulting from the refocusing efforts undertaken by our new management team since April, 2006. Orthologic closed 2007 with $60.6 million in cash and investments having managed to control the burn rate to $9.6 million for the year while significantly advancing our programs. You will also notice in today's press release that our board of directors has approved a stock repurchase program for up to 5% of the company's currently outstanding common shares. The shares may be repurchased from time to time in open market transactions or privately negotiated transactions at the company's discretion. Subject to market conditions and other factors. As of February 29th, 2008, there were approximately $41.8 million shares of common stock outstanding. We can take specific financial questions at the end of today's call. Now I will turn the call over to Mr. Jock Holliman, Executive Chairman.

Thanks for listening in, everybody. We have 12 slides in total which we will review with comments. Our goal for today's call will be to highlight the opportunities, milestones and decisions we have before us in 2008. Please turn to slide four. You will remember from our last conference call that throughout 2007, Orthologic was focused on three major project areas. Number one, preparing for a year-end 2007 IND filing for AZX100 and a dermal scarring indication which was completed in December and accepted by FDA at the end of January, 2008. Number Two, advancing the mechanism of action, work, supporting the repurposing of TP508 and vascular applications. And 3, planning and executing preclinical proof of concept models for both molecules and critical care large market indications currently in process. The goal of this work has been and continues to be to bring each element of the Orthologic portfolio forward to go, no go decision points as rapidly and cost efficiently as possible. We are generating preclinical data for internal analysis that will enable management to decide in the near term whether and how much to invest in further development of either molecule. In each and every case, we are conducting preclinical experiments with world class scientists and top institutions. We take this approach across all projects to ensure that the studies and reported results carry the highest level of Independence and objectivity while ensuring that our drug candidates are afforded every possible chance of success. Please turn to slide five.

As discussed most recently during the third quarter 2007 conference call, we originally forecast a cash burn for 2007 of $18 to $19 million, revised that figure in August, 2007 to $12 million and we brought in the year at $9.6 million while achieving all major milestones and internal goals for 2007. We are very proud of this performance. Cash burn in 2008 is anticipated to be $16 to $18 million. The full year budget is predicated upon the success of the preclinical and clinical programs being performed during the first half of the year. Please turn to slide six.

AZX100 is a unique peptide due to its novel construction, it bypasses cell surface receptors and directly affects, [react] inside the skeleton, relaxing smooth muscle and reducing or inhibiting fibrosis. In addition to the dermal scarring indication about what we will speak momentarily, the preclinical models supporting AZX100 are designed to provide evidence of safety and effectiveness in other high value critical care indications. These include pulmonary applications such as asthma and pulmonary fibrosis and vascular applications such as intimal hyperplasia. Please turn to slide seven.

Asthma affects over 22 million Americans and remains an underserved disease. Estimates suggest that at least one in ten asthma sufferers is not well controlled on beta receptor agonists such as albuterol. Pulmonary fibrosis involves scarring of the lung and affect at least 2,000 persons in the U.S. It is currently untreatable and is fatal in 40,000 cases annually. Gradually, the air sacks of the lungs are replaced by fibrotic tissue that severely hinders oxygen transfer in the bloodstream. Because of its unique mechanism of action, AZX100 may offer an entirely novel treatment option in pulmonary disease. Intimal hyperplasia is 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. Maintenance of vascular access is a particular challenge associated with dialysis patients. For example, in end-stage 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 billions of dollars. Slide eight, please.

The acceptance by FDA or IND filing for AZX100 in dermal scarring was especially gratifying given the enormous amount of preclinical and CMC work that is required to receive FDA authorization for a new chemical entity. We have promised investors that we would initiate during the first half of 2008, the Phase I human clinical trial, to evaluate the safety and tolerability of AZX100 under our dermal scarring IND. This trial has now begun as we announced last Friday, February 29th. Assuming success, we plan to conduct the next Phase I clinical trial beginning on third quarter 2008. This trial will examine AZX100's safety in pharmacokinetics in an adult human scarring model with preliminary data expected by year-end 2008. Dermal scarring is an area with which the company is familiar. It has a clearly defined regulatory pathway and upside potential. And in the U.S. alone, there are nearly 21 million surgical procedures performed annually that can produce a scar. We expect to have preclinical results in-house during the latter portion of 2008 that will be sufficiently robust to help management determine whether to move forward with AZX100 and the other pulmonary and vascular indications. Over the past several months, we've made substantial progress in developing the preclinical and CMC support for use of AZX100 in pulmonary disease. We are encouraged by the data generated thus far with respect to safety and effectiveness in the standard preclinical models for these diseases including potential identification of a wide therapeutic window. Turn to slide nine, please.

Management has stated previously our belief that the future clinical benefit of TP508 may be in one or more vascular applications. The foundation for this is the mechanism of action work we have completed to date which is focused on three fundamental characteristics of the molecule. Number one, we have demonstrated that TP508 modulation of the nitric oxide enzyme contributes to the smooth muscle relaxing effects of the molecule. This means TP508 may have potential to increase blood flow to an ischemic heart. Number two, we have gained a better understanding of the protective effect of TP508 at cellular level. These data were recently published. TP508 has been shown to prevent apoptosis or programmed cell death, meaning it may help limit myocardial tissue damage resulting from a heart attack. Number three, we have demonstrated the TP508 restores or up regulates VEGF, Vascular Endothelial Growth Factor in human endothelial cells which helps to explain it's angiogenic revascularization effects. This translates into a potentially beneficial effect in damaged myocardial tissue. These findings are consistent with and supported by preclinical data we have on file in two standard models of chronic ischemia. The data raise our confidence in the commercial value of TP508 and its potential and in modulating endothelial dysfunction. Please turn to slide ten.

Vascular applications for TP508 may potentially include underserved critical care conditions such as myocardial infarction, myocardial ischemia and peripheral vascular disease. Each of these represents patient populations in the millions and direct drug costs in the billions of dollars. Please turn to slide 11.

Our next step is to complete the preclinical proof of concept studies in acute myocardial ischemia being conducted at Beth Israel Deaconess in Boston in vascular disease models. If successful, these studies will provide additional support for partnering TP508 with companies interested in this space. We expect to have results in-house for internal decision making beginning in third quarter 2008. Slide 12, please.

In summary, our AZX100 Phase I human clinical trial program is underway and barring any unforseen safety issues, we expect to be initiating a second Phase I human clinical trial by third quarter 2008. We anticipate we will have preliminary data in-house by approximately midyear 2008 in our AZX100 preclinical pulmonary and vascular programs. We are spending a modest amount to confirm the potential of TP508 as a vascular therapeutic and should have access to the data internally beginning in third quarter 2008. We are firmly committed to creating shareholder value by focusing exclusively on moving the existing peptide portfolio to value in flexion points as rapidly as possible. We believe that our current timelines for internal data receipt, analysis and forward action are appropriate. Six proof of concept studies are either planned or already underway for AZX100 and TP508. Each of which serves large critical care indications. Data from these programs will become available internally to Orthologic through the first three quarters of 2008. We believe that if any one of these initiatives is successful, we can become a highly valued company. We look forward to sharing significant developments just as soon as we can release them. It should now be clear to our shareholders that we are a new company, with a new management team and a new flagship molecule, a cost controlled culture and a focus on strategic commercial drug development. Thank you for tuning in today. We hope the slide presentation helped your understanding of our company. We will now open the floor to questions.

Thank you, Mr. Shinbaum. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). And we'll take our first question from Mike Dwyer with Robert Baird.

Hi. Good afternoon, gentlemen. Jock, thank you for that informative slide presentation. Assuming that TP508 is successful in the studies that we are anticipating in Q3, what would the plan look like for that particular drug going forward? Could you be a little more specific?

Mike, thank you for tuning in. Yes. I think we best deal with the myocardial ischemia study that we're conducting at Harvard. It could be a significant and even a historic study in acute myocardial ischemia. If TP508 performs on all three mechanism levels as we hope it will, we think it could be a drug that would be very, very interesting to Big Pharma. It would certainly be our intention to partner that drug development with Big Pharma because the studies are longitudinal and quite expensive. But we would hope to enter on very attractive economic terms, a licensing agreement with Big Pharma for those vascular indications.

Thank you.

Thank you. And we'll take our next question from Michael Heaberg with Axiom Asset Management.

Hi, Jock. Thank you for the very well organized presentation. It's very helpful.

Thank you, Mike.

I just want to confirm something that you mentioned earlier. You mentioned a burn rate for full year '08 of $16 to $18 million and that would assume success in all the trials. In other words, I assume that would assume that you went all the way out through gathering data in each of the ongoing trials that you'll have?

Good question. Thank you. We plan to accumulate knowledge in our proof of concept studies for the first six, eight months of the year. The full stint for the year indicated at $16 to $18 million is very much back end loaded as we may choose to step on the gas and try to pursue preclinical studies necessary to file an IND in one or more indications.

Okay.

So, we would only spend the money in the second half of the year on good news.

Okay. Thank you.

You bet.

Thank you. And as a quick reminder it is star 1 to ask a question. And next we'll take James Snevily with Sems Capital.

Hi. How are you guys doing today?

Good, James.

Good to talk to you again. Have I a quick question. On TP508 in fracture repair, where do you stand with that indication at this point?

We have an MTA in place with a large orthopedic company. They are experimenting with the molecule. I would say that is it not their highest priority, but a priority. And I would hope that their experiments would give us some response by the second half of 2008.

Okay.

So TP508 in bone is only available for partnering at this point. The regulatory clinical path for us in bone is a very long tailed one and would chew up all of our resources.

And do they have like the right of first refusal for that?

Not at this time.

Okay, okay, great. That's it. Thank you very much.

Super. Thank you.

Thank you. And we'll take our next question from Bob Poole with Bricoleur Capital.

Hi, Jock. So let's talk about this scenario where there's disappointment in all of these studies and we figured that out over the next six to eight months probably spend what, on the order of $10 million between now and then, if that were the case?

Somewhere in that neighborhood, Bob, yes.

Okay. And, what are you comfortable saying today about what would happen in that scenario? I've rarely seen a company in the biotech space sort of say okay, we surrender. We're going to just distribute the cash, what's left of it? What's your thinking about what you do in six to eight months if you don't really have anything at that point that you really feel comfortable sinking your teeth into?

Sure, good, good question. First of all, we are spending money on projects that we think are high potential projects and have very reasonable probabilities of producing statistically significant data. So, we obviously hope for good news and that good news could build into partnering or internal development and really help us recover value. We're very pragmatic. We will not develop marginal drugs, period. I'll repeat that. We will not develop marginal drugs. If for some reason we stubbed our toe and the safety issue with AZX100 and dermal scarring, if our proof of concept studies showed us equivocal results, then we would embrace the strategic action of some kind. It could be distribution of the stock -- excuse me, distribution of the cash. It could be another strategic option merger acquisition. I am very familiar with strategic transactions of these nature. We are not in business to develop marginal drugs. We've spent very, very little money turning this company around and we truly are positioned if we have good data from these proof of concept studies to bring Orthologic back onto the radar screen.

Just for some clarity on that, Jock, I mean maybe you were pretty clear, but just to make it a little clearer because I think clarity on this matter can be really helpful to you at this point from a share value perspective to say to be able to say to investors that look, we got a few more shots on goal here. We've taken the last couple of years or last year or so to get the burn rate down, to figure out what we have and to try and work with our sort of IP portfolio in a value maximizing way and we've sort of gone through that process now and oh, by the way, Jock's been buying stock all the way along which I'm sure people appreciate.

Yes, thank you.

And, okay, so now you're at the point where you're sort of taking the sort of final shots on goal with the portfolio of IP that you have. And I think an investor who says okay, we take these shots and we either score something or we get a cash distribution that seems like at least a mathematically interesting proposition for people, especially since the cash they'd get back would probably be greater than where the stock price is today. So -- but then when you sort of -- but you talked a little -- when you talk about your strategic alternatives, a person might say well, okay, maybe these guys are going to go buy another AZX100 type situation and the investor then is maybe less certain of what the down side outcome is and that lack of certainty creates risk that many people seem in this market very, very unwilling to take those kinds of risks. So --

Understandable.

Can you be any clearer about sort of that downside scenario?

Not with perfect clarity, Bob. The options are pretty well defined. We don't have any debt. We don't have any litigation at this moment. We are regulatory responsibilities in terms of filing of clinical study reports are all completed with FDA. So there is nothing that stands in the way unless liquidating the company should we encounter a series of bad news events.

Jock, I think what people need is from you because I think people will -- because of the way you've acted over the last -- since you've been in charge, I think you deserve some credibility. The slip side of that is some kind of sense of intent. What is not known is what your intent would be under such a scenario and we'll all have to price the risk of you changing your view.

Sure.

But can you speak to your -- what your intent would be as the leader of this company if it we were to get into that situation? Obviously it's nonbinding. It's just talk here, but -- and again I think the problem is that so few people historically have actually thrown in the towel and distributed cash the way we're talking about that it's hard for people to believe. But I have a sense that you are actually would consider that and we should take you seriously.

It's a fact. We would consider it that our board only operates in the interest of the shareholders. And any option that the board would recommend be it liquidation, mergers, sale of assets, whatever and believe me, we've mapped the whole spectrum, would ultimately come to vote of the shareholders. So you guys would ultimately decide. We'll make the best recommendation we can that we think is the right value optimization pathway. I thank you for your comments. In this very difficult biotech equity market, it's hard to hold your head up and we're doing our best to show the market that we are creating value and I think this call today is hopefully a step in that direction. We really and truly appreciate the shareholders support right now and our stock repurchase program is intended to tell the common shareholders that we are interested in them and listening to them.

Great. Thanks, Jock.

Okay, Bob, sure appreciate it. Any other questions?

And thank you, gentlemen. There appears to be in no further questions at this time and, Mr. Holliman, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you all for listening in and stay tuned for hopefully some good news. That's all from Phoenix. Thank you.

And this concludes our presentation for today. We thank you for your participation, and have a great afternoon.