OrthoLogic Reports the First Quarter Without Bone Stimulation Revenues
BY JOHN CHOPACK, FEBRUARY 2, 2004
It's official. Tom Trotter, CEO of OrthoLogic (OLGC), has completed his transition of OLGC from a medical device company to a pure play orthobiologics organization. The feat took Trotter approximately three years beginning in 2001. During that time he divested his Continuous Passive Motion business, exited a Hyalgan distribution agreement, sold his Bone Stimulation business and most importantly licensed all the orthopedic rights to a synthetic peptide called Chrysalin.
Prior to the massive restructuring by Trotter, OrthoLogic had reported revenues of $90 million in 2000. During its year-end 2003 conference call this week, OLGC reported continuing revenues of $0. Some would argue that OLGC's business development activities were extreme – taking a company from $90 million in revenues to $0 over a three year period. However, we believe that it is one of the most visionary strategic maneuvers in recent years in the orthopedic market. The market has agreed. In fact, OLGC stock closed on January 2, 2001 at $2.84 a share and on Thursday of this week closed at $7.71 – a 171% return. Why do we and the market believe in Trotter's strategic activities? The answer is premised on the transition occurring in the orthopedic market place combined with the potential impact of Chrysalin.
Trotter recognized that biotechnology and orthopedics were proceeding toward a head-on collision and believed OrthoLogic had the opportunity to be a front runner in the transition. Therefore, OLGC licensed the orthopedic rights to Chrysalin from Chrysalis Biotechnology. Chrysalin is a synthetic 23 amino acid peptide which has shown to accelerate certain healing cascades. During its 2003 year-end conference call an update on the development of Chrysalin was provided:
Fresh Fracture Trial: Patient enrollment in the first of two Phase III pivotal trials is on track and likely to conclude during the summer. To date, no adverse events have been reported. The second pivotal trial is likely to begin before year-end 2004. Management believes that a New Drug Application will be filed in 2006 with potential FDA approval during 2007. The double-blind placebo trial is hoping to show that Chrysalin speeds the healing process of fresh fractures compared to a placebo.
Spinal Fusion Trial: Patient enrollment continues in the Phase I/II clinical trial. No adverse events have been reported to date. The purpose of the trial is to show safety and efficacy of the Chrysalin peptide combined with allograft compared to autograft. Management stated it is meeting with the FDA shortly and are strategizing ways in which to optimize the clinical approval process which could mean a shorter path to approval.
Cartilage Repair: OLGC has completed additional pre-clinical studies utilizing Chrysalin in a controlled release PLGA matrix for cartilage defect repair. The Company intends to file an Investigational New Drug Application (IND) and expects to begin a clinical trial before the end of 2004.
Ligament and Tendon Repair: Pre-clinical trials are expected to begin in the first half of this year.
We estimate that the combined market potential of the five clinical and pre-clinical programs above is between $5 billion and $10 billion.
Management stated that it expects a net burn of $22-23 million during 2004 of which $20 million will be directly invested in Chrysalin development. This will result in a net loss of $0.65-0.68 per share. Although a net burn in excess of $20 million seems extreme, OLGC currently has approximately $117 million in cash and short-term investments as a consequence of its sale of its bone stimulation business to fund Chrysalin development.
