Capstone Holding Corp (CAPS) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to today's OrthoLogic second quarter 2008 financial results 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 Mr. Dana Shinbaum, Vice President, Business Development for OrthoLogic. Please go ahead, sir.

Thank you, and good afternoon, everyone.

Before we begin, a reminder that today's discussion may contain forward-looking statements about the business prospect of OrthoLogic Corp. These statements are based on management's current beliefs and expectations of how the future will look given the information presently available, and they include expectations regarding OrthoLogic's financial performance and potential future product 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 US Securities and Exchange Commission. Please also see our website, OrthoLogic.com, for more information.

I will now turn the call over to Mr. John Holliman, Executive Chairman of OrthoLogic.

Good afternoon, and thanks for joining.

We're on Slide 3, please. We trust that you have gone to our website to the Investor section and opened our slide deck that will accompany today's comments.

OrthoLogic is a development-stage biopharmaceutical company with two novel therapeutic peptide products in various stages of development. We have a strong patent portfolio and a small but experienced team that is skilled in all facets of product development and commercialization.

Please turn to Slide 4. As of June 30, 2008, we report $54 million in cash and investments, which represents a $3.3 million cash usage for the quarter. The Company has no long-term debt and a market capitalization of approximately $33 million as of the end of July 2008.

While discussing market cap and stock price, you're certainly aware that our stock has been trading under $1 per share for several weeks. Under NASDAQ Marketplace Rules, a company's stock trading under $1 for 30 consecutive business days triggers a notice of potential delisting. If that were to occur, there would be no immediate effect of receiving such a notice. A company has a window of six months to a year to regain listing compliance, during which time the stock continues to trade on NASDAQ.

OrthoLogic is currently trading at a substantial discount to the value of cash and investments on the balance sheet, which currently approximates $1.30 per share. As we will discuss today, we believe the goals and milestones we have targeted for AZX100 and Chrysalin in 2008-2009 will afford multiple opportunities to create value events within the NASDAQ compliance periods.

Please turn to Slide 5. Slide 5 is our June 30, 2008 balance sheet released today, showing $54 million in cash and investments.

Please turn to Slide 6. This slide shows our income statement for the quarter ended June 30, 2008, also released today, showing a $0.07 per share net loss.

Please turn to Slide 7. You will remember from our last conference call the discussion of the OrthoLogic report card. As you can see from this slide, for year to date 2008 we continue to make progress on multiple fronts.

For AZX100, we completed the dermal scarring IND and Phase 1a human clinical trials with a positive safety profile. We initiated our Phase 1b safety trial on July 9, 2008, consistent with announced timelines.

Concurrently, we've been pursuing multiple proof-of-concept studies in both AZX100 and Chrysalin, all on very limited cash usage. The team has hit every milestone set by the Board of Directors in the past 24 months of our turnaround effort.

Turn to Slide 8. This slide is the July 9, 2008 announcement of initiation of dosing in the AZX Phase 1b dermal scarring clinical trial. This week we are dosing the fifth and final cohort of this 40-patient study, and we are performing the protocol follow-up and analysis, with results expected by year-end 2008.

Please turn to Slide 9. We manage our cash with discipline. Guidance regarding cash burn in 2008 is $16 million to $18 million. With a net $5.7 million cash burn for the first half of 2008, excluding stock repurchase expenditures, we are running well favorable to plan on a year-to-date basis.

Please turn to Slide 10. This slide offers a more detailed look at our two peptide platforms. AZX100 and Chrysalin are both potent smooth muscle relaxing agents that work via a unique and different mechanism of action.

Turn to Slide 11. In addition to the dermal scarring indication, the ongoing 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 beta refractory asthma and pulmonary fibrosis.

Slide 12, please. This is our report card slide on AZX100. First, our Phase 1 human dermal scar reduction program is on track and has shown no serious adverse events over the targeted dose range. We will report the 1b study in the fourth quarter of this year, and with acceptable safety results plan to initiate Phase 2 efficacy studies in early 2009. Phase 2 data will represent a major valuation milestone for the Company.

The other line item in this report card shows the status of several proof-of-concept studies. To summarize, intimal hyperplasia, specifically in vein graft patency, is not showing promise, and we will likely discontinue work in this indication. Beta refractory asthma showed effect and dose response in one model but has not performed in other models. We are evaluating next steps. Study of AZX100 in a pulmonary fibrosis model is now underway, and we look forward to results later in the third quarter of 2008.

Slide 13, please. You've seen this slide before, depicting the science discoveries on Chrysalin's mechanism that encouraged us to explore the drug's effect in vascular systems.

Slide 14. More specifically, our goal remains to prove multiple cardiovascular benefits, as depicted in the right-hand column of this table. I'll review them in order.

We believe there is a biologic effect of smooth muscle relaxation which could increase blood flow through occluded arteries and veins. Chrysalin appears to have an anti-inflammatory effect, which could delay damaging healing response and reperfusion. We believe the drug is anti-apoptotic and could minimize program cell death. Angiogenesis also could contribute to revascularizing injured tissue.

The net effect of these benefits are the decrease in the amount of damaged tissue from heart attack and revascularizing damaged tissue after a heart attack. If Chrysalin can be proven to deliver these results, it is possible that heart attack patients would experience greater survival and an improved quality of life.

Slide 15. Today we are reporting two preclinical cardiovascular studies in porcine models of chronic and acute myocardial ischemia and infarction.

The first study, previously referenced by OrthoLogic, was performed at Texas A&M University. We expect publication shortly of compelling preclinical data from this study showing that Chrysalin reverses endothelial dysfunction and increases perfusion and myocardial function in hearts with chronic ischemia. These data clearly demonstrate a novel cardiovascular effect of Chrysalin and suggest potential therapeutic benefit in myocardial revascularization.

The second study, referenced in our press release this morning, is the good news we as a company and you as shareholders have been waiting to hear. At Harvard Beth Israel Deaconess Medical Center in Boston, Dr. Frank Sellke runs the acknowledged gold standard model for simulating human heart attacks in a large animal model of heart disease. While the study is ongoing, Chrysalin has already produced statistically significant results in both normal and hypercholesteremic pigs compared to control groups. The endpoint is to decrease the mass of damaged or infarcted tissue from this simulated heart attack model. Many drugs have been tested in this hypercholesteremic model, and to our knowledge all have failed to show benefit. Chrysalin has the potential to be a history-making drug in cardiovascular care.

I will now ask our President, Dr. Randy Steer, to elaborate on the study.

Randy?

Jock, yes, can you hear me clearly?

Yes.

Good. I had actually written down a few notes, but I have a computer problem here, so they're not accessible to me. But I will mention the following.

I think this is a landmark study, and it's very exciting from the standpoint of the potential value of TP508 in cardiovascular medicine. The laboratory where the study is ongoing is that of Frank Sellke, who is undeniably one of the leading cardiovascular researchers in the world, and the model that is used, this hypercholesteremic pig, is a very challenging model, because the disease process, if you will, number one, is extremely robust, and, number two, it approximates the disease that you see in the human clinical situation.

By that I mean these pigs are sick. They are put on what we could basically say, perhaps whimsically, is a cheese pizza with everything on it kind of diet for a period of time, and they develop frank endothelial vascular dysfunction. So from a cardiovascular medicine standpoint, they are really sick. And many people in the past have tried to develop agents that could address the issue of the endothelial dysfunction in animals, and no study really, until this one, has revealed this kind of a remarkable effect in this very challenging animal model.

TP508 in a dose-dependent manner very dramatically reduced the infarction area, that is, the area of tissue that is injured due to the lack of blood flow, or the ischemia. And, again, as I said, it's in a dose-dependent fashion. So this is the first time we've seen that. And, you know, we've taken a very close look at the literature over almost 30 years now, and we've spoken to our experts on a confidential basis in cardiovascular medicine and in cardiovascular drug development. And, frankly, the response so far has been very consistent, and that's that they're all very, very favorably impressed by the nature of the product.

So, again, I'm very enthused about how TP508 is doing in this model, and we're continuing to do this study and will be looking at additional aspects, including biochemical features of the effect of TP508, some pathologic features and dosage and administration.

That's great. Randy, thank you.

You're welcome.

We expect publication of this study in a leading peer review journal in coming months.

Please turn to Slide 16. We now believe that Chrysalin has potential as first-line therapy for acute cardiovascular events. It could be administered in an ambulance, emergency room or other setting where cardiac distress is treated. There are 500,000 deaths annually in the US from coronary heart disease, which is the single leading cause of death in America. The current standard of care for emergency therapy is TPA, which is a thrombolytic or clot-busting drug. You can appreciate that this is a large market with premium pricing, consistent with most critical care therapeutic indications.

Slide 17, please. In summary, our Chrysalin strategy is to move into a corporate partnering process in the fourth quarter of this year. We will continue to perform core toxicology and other preclinical studies to support a high-value partnering outcome. The strategy to partner Chrysalin is consistent with our previously announced intent regarding asset value optimization of this platform.

Regarding AZX100, it is full speed ahead with the dermal scarring program. We're also awaiting news on the pulmonary fibrosis study and will proceed in that indication according to the results.

Slide 18. So, our value drivers are Chrysalin in cardiovascular, with a targeted partnering or licensing event in 2009, and AZX100 in dermal scarring, with Phase 2 results by year end 2009. We also have a potential program in pulmonary fibrosis with AZX100.

We are addressing large underserved markets and have adequate cash to achieve our stated value milestones. Page 19. This is our milestone chart updated. As you can see, we are completing our projected milestones on schedule and have delivered quite good results to date.

Page 20, please. It's time for our company to create a new identity. The OrthoLogic name and its association with orthopedics and bone is no longer relevant. We are truly a new company today.

Please turn to Slide 21. As of September 2, 2008, we will be known as Capstone Therapeutics. We will trade on NASDAQ under the symbol CAPS.

This is an exciting time for our employees and our loyal shareholders. Thanks for supporting our turnaround strategy. It is working, and we look forward to bright days ahead.

Please turn to Slide 22, and we will open the call to questions.

(OPERATOR INSTRUCTIONS)

And we'll take our first question from Mike Dwyer, of Robert W. Baird.

Jock, good afternoon, and the rest of your team, good afternoon to you, as well.

Thank you.

It appears like you're generating a lot of value, delivering a lot of value for a little less than $6 million for the previous two quarters, especially vis-a-vis some of the other development drugs that we see in the marketplace. Could you take us through kind of the roadmap going forward, maybe on how you see the new cardiovascular developments with Chrysalin unfolding? Give us sort of a runway, if you will.

Thank you, Mike. We appreciate your comment about our low burn rate and value delivery. We will undertake a formalized process managed by Randy Steer and Dana Shinbaum. We already have a target list of companies to approach as potential corporate partners for Chrysalin in cardiovascular. We will initiate this process pretty quickly. We have a very well-developed corporate partnering presentation, and with Dr. Sellke's assistance and the assistance of our scientific advisory board, Dr. Mike Mendelsohn and Dr. Charles Dinarello, we believe we'll be able to open the appropriate doors at high levels.

Here's how the process will work. We will contact. We will go in and make presentations. If there is interest, the companies will probably first want to enter a material transfer agreement. We will provide some material to them and they'll analyze it and work with it for a few months. At that point in time, they'll get back together with us and tell us their level of interest in proceeding.

Concurrently, we will be working on some of the associated toxicology and dose administration studies that will help check the boxes in all of their checklists. The more boxes we check, the higher value we create. Typically, from square one, these processes take nine to 12 months to complete. We believe we have significant value here, and we are not going to truncate our efforts until we reach what we consider to be a reasonable financial deal.

So we could partner earlier for less money or we can continue to support the process and hopefully partner for higher value. I hope that answers your question, and we will be able to provide feedback in each of our quarterly calls. Perhaps the third quarter call will have some additional light to shine on this subject.

Thank you.

Thank you.

And we'll go next to Michael Heaberg, of Axiom Asset Management.

Hi, Jock. Thank you for the excellent presentation, and it's also helpful that it's very well organized. Quick question for you. Can you update the progress of the share repurchase program, and do these results that you're starting to see in the preclinical studies change your plans in that vein? Will you have adequate cash to both support development of these products as well as continue to repurchase shares?

Very good, Mike. You always ask the tough questions. Our share repurchase program we believe has been successful, despite the fact that we're below $1. We know we have supported the stock. To date, as of August 7, 2008, we have expended $1,025,000 and repurchased 1,082,796 shares at an average price of $0.94.

We are not prepared to give guidance into 2009 on this call, but our clinical program, human program in AZX100 dermal scarring will pick up pace hopefully based upon successful 1b results, which we'll discuss in late fourth quarter of this year. There will be a slightly increased burn rate as we go into the Phase 2 studies, because there will be more patients involved.

Our infrastructure burn rate we do not envision changing at all. In fact, quarter to quarter and year to year, year to year to date, we have shown a decrease in general and administrative expense, and we continue to drive the costs.

So I think our guidance of $16 million to $18 million for '08 is a generous number. We've only spent $5.7 million year to date on operating. And I'll be happy, probably, in the -- it'll probably be in our -- at the end of the third quarter we'll give you guys a glimpse of what we plan to expend in 2009. But we have plenty of cash. We view 2009 as a value realization year, 2008 as a value creation year. I hope that answers your question.

It does. Thank you.

(OPERATOR INSTRUCTIONS)

We'll go next to Barbara Bagley, of Lewis Capital Management.

Actually, my question's been answered. Thanks.

Barbara, thank you.

(OPERATOR INSTRUCTIONS)

And we'll take a follow-up question from Mike Dwyer, of Robert W. Baird.

Could you give us any more color on the peer review journal that you mentioned earlier in the call? Can you give us any details about that?

We are, Mike, regrettably constrained about getting specific regarding publications because you'll note we stayed away from any quantitative comments regarding the Sellke study today, and we don't want to bias any publications. Suffice it to say that the Texas A&M study we envision coming to publication very shortly, and we'll have a specific press release on that. We anticipate some other announcements through the course of the fall on other studies that we have moving to publication. So I'm sorry I can't be more specific.

Thanks.

And it appears we have no further questions.

I'd like to turn the call back over to Mr. Shinbaum for any additional or closing remarks.

Thank you, [Jeff], and thanks, everybody, for tuning in today. This is an exiting day for Capstone Therapeutics, and we look forward to our value creation pathway and future interaction with you. Thanks very much.

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