BioMimetic Therapeutics, Inc. Q4 2008 Earnings Call Transcript

BioMimetic Therapeutics, Inc. (NASDAQ:BMTI)

Q4 2008 Earnings Call Transcript

March 13, 2009 8:30 am ET

Executives

Kearstin Patterson – Director, Corporate Communications

Sam Lynch – CEO & President

Larry Bullock – CFO

Steve Hirsch – EVP & COO

Analysts

Imran Zafar – Deutsche Bank

Michael Matson – Wachovia Capital Markets

Debjit Chattopadhyay – Boenning

Anup – Canaccord Adams

Franz Tudor [ph] – Incremental Capital [ph]

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 BioMimetic Therapeutics Earnings Conference Call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Kearstin Patterson, Director of Corporate Communications for BioMimetic. Please proceed.

Kearstin Patterson

Thanks, Erica. Before we begin, I would like to remind you that any statements made during this call can be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current intents and expectations of the management of BioMimetic Therapeutics. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. There are many important factors that could cause actual results to differ materially from those indicated in the forward-looking statements.

BioMimetic's actual results and the timing and outcome of events may differ materially from those expressed in or implied by the forward-looking statements because of risks associated with the marketing of BioMimetic's products, unproven pre-clinical and clinical development activity, regulatory oversight and other risks detailed in the Company's filings with the Securities and Exchange Commission. Except as required by law, BioMimetic undertakes no responsibility for updating the statements made during this call.

Please note that for your convenience, this conference call webcast will be archived on the Investor Information section of our Web site for at least 30 days.

Now I'd like to hand the call over to Dr. Sam Lynch, President and CEO of BioMimetic Therapeutics.

Sam Lynch

Great. Thank you, Kearstin, and good morning, everyone. And thank you for joining us bright and early on this Friday, the 13th. Welcome to BioMimetic Therapeutics 2008 fourth quarter and year end earnings conference call. I have with me on the call today, Larry Bullock, our CFO and Stephen Hirsch, our COO and EVP for Orthopedics.

The first part of the call will address our product development programs and business activities, which will then be followed up with Larry reviewing our financial results for the fourth quarter and yearend December 31 '08, which were released yesterday evening. We will also be happy to answer any questions that you may have during the Q&A portion of the call.

We saw many of you at our analyst and investor meeting at the end of February just a few weeks ago and we appreciate your continued support and interest in the BioMimetic story. We hope that that meeting provided you greater insight into our upcoming corporate milestones and allowed you to get a feel for the immediate and longer-term market potential of our product candidates. In case you weren't able to attend that meeting, the webcast is located on our Web site.

The past year was a challenging but very productive one for BMTI. Some of the highlights for 2008 included the completion of enrollment in both our North American and EU pivotal clinical trials for Augment Bone Graft; reporting of encouraging data in our pilot clinical trials for Augment Injectable Bone Graft, our second generation orthobiologics product in our pipeline; the sale of our orofacial therapeutics business; and the issuance of a patent that will provide protection for our Augment product line and certain other PDGF product formulations until at least 2025.

Finally, we were able to achieve liquidity for some of our assets that were tied up in auction rate securities by arranging a $39 million loan secured by those bonds. We are proud of our record of accomplishments during 2008 and the strong reputation that we believe that we are building within the orthopedic community.

Let me take a few minutes to give you some more details on the significant product development milestones that we've accomplished throughout '08.

I will start with our lead orthopedic product candidate, Augment Bone Graft, which is being developed as a preferred alternative to the use of autologous bone graft.

The enrollment in our North American pivotal trial has been one of the Company's most visible milestones, for those of you who have been following BMTI's progress, due largely to a strong acceleration of enrollment in the fourth quarter, we successfully completed enrollment in December. Therefore, we expect to be able to file the clinical data with the FDA in the fourth quarter of this year.

We have previously discussed with you our plan to do a modular filing of our PMA. The first two sections of the PMA, the pre-clinical and the manufacturing and quality sections are on schedule to be filed this spring, very shortly, allowing time for the agency to review these data well in advance of the clinical module.

So, when our clinical data package is sent to the FDA in the fall, we hope that we will have already been able to address all the questions the agency may have on these first two modules. We believe this strategy will allow the most efficient and timely review and ultimate FDA approval. Since we know there will be a good deal of interest in the results of the clinical trial, we will work to determine the most appropriate venue to release the data later this year.

We are working diligently with our investigators and their staff to ensure that we will have high quality data to report at the conclusion of the study later this year. I want to once again acknowledge the ongoing efforts of our clinical investigators and the dedicated BMTI staff for their incredible amount of work and diligence on the study.

Our lead clinical investigator for the North American pivotal trial, Dr. Chris DiGiovanni spoke at our analyst and investor meeting last month about potential applications for our product candidates. He commented that if approved by the FDA, he expected to use Augment in the majority of his fusion patients. He also suggested that in the future, Augment Bone Graft could have applications in a variety of indications, including fractures, osteotomies, joint replacement, and the treatment of bone cysts. These comments suggest that the potential for our products candidates may extend well beyond the foot and ankle fusion market.

Switching to the ongoing EU trial with Augment Bone Graft for foot and ankle fusion, we previously announced that the study was completely enrolled with a total of 108 patients in November. The nine month follow up will continue then through August approximately of this year, and given our focus at that time on the completion of the North American pivotal trial. We would expect to have our first look at the EU data around the end of this year or early next year. We anticipate that the data from the EU study will support the approval of Augment in Europe as well as other worldwide filings.

Regarding the approval of Augment Bone Graft in Canada, as you recall, we submitted a Device License Application or a DLA, to help Canada in the second quarter of last year and it is currently under review. We received some initial questions on the filing that we responded to in September of last year.

And we have now received a letter from Health Canada setting forth what we believe are the remaining open issues concerning the DLA filing. We are optimistic that we can address these questions. We anticipate a final decision on the DLA around the middle of this year. We have a launch plan and a distributor in Canada in place and we would be ready to launch the product shortly after approval.

Now to review the status of Augment Injectable Bone Graft or what we call AIBG, the second orthopedic product candidate in our pipeline. As you may recall, we have assessed the safety and effectiveness of this product candidate in two pilot clinical trials so far, one in Canada for the treatment of foot and ankle fusions, and the other in Sweden for the treatment of distal radius fractures.

In August, after six month follow up of all the patients, we released initial data from the Canadian study for foot and ankle fusions. In this open label pilot study, all 10 of the patients and a total of 20 joints were treated with Augment Injectable Bone Graft to enhance healing of the fusions.

The results of the study demonstrated that all patients achieved clinical healing at the six month time point resulting in 100% successful clinical outcome. In addition, analysis of the CT scan show that 90% of the patients had achieved radiographic fusion at three months to four months after surgery.

Consistent with our previous study, there were no serious adverse events related to the study device to the Augment Injectable Bone Graft. Also, let me reiterate that the study entry criteria allowed for high risk patients who typically heal less effectively, such as smokers and obese patients in total, seven patients of the 10 patients fell into these categories.

In addition to those data, last year we also released the results of the Swedish pilot study investigating the use of AIBG in the healing of distal radius or wrist fractures. In the 21 patient randomized controlled study evaluating distal radius fractures treated with external fixation versus external fixation combined with AIBG, the patients treated with AIBG demonstrated earlier bone formation at the three weeks and six weeks as measured on CT scans. The six month evaluation of complete bone fill was 100% for the AIBG patients compared to 82% for the control patients.

These results represent the second study in fractures demonstrating a positive response to BioMimetic's rhPDGF platform technology. The earlier study on distal radius fractures evaluated the safety and clinical utility of Augment in the same indication, utilizing a more open surgical approach. In both these studies, the product candidates were demonstrated to be safe with no reported adverse events related to the study devices.

However, in this indication, the improved speed of bone healing did not lead to detectably faster improvement in grip strength, which appears to be a limitation of this indication as a model to study fracture healing. Taken as a whole, we believe that these Augment Injectable data are very promising and further support the unique properties of rhPDGF as a biologic for use in orthopedic indications.

At present, we feel that we have sufficiently shown safety and clinical utility for this product candidate and are prepared to move forward into a pivotal clinical trial. The decisions to be made now are related to the timing and the specific indication that we choose to pursue whether or not we want to initiate this pivotal study in advance of receiving the data from the Augment pivotal trial or wait until we have that data in hand.

We are looking at this very carefully versus our cash flow position as Larry will talk to you more about in just a few minutes. And I would expect to announce more information on our development plans for AIBG very soon.

Switching now to GEM 21S for periodontal applications. Approval of our Marketing Authorization Application or what's term the MAA, submission to the EMEA, which is the European Medicines Authority is required for distribution and commercialization of GEM 21S as a medicinal or drug combination product in the EU. We previously announced that the MAA for GEM 21S was validated and was under review by the EMEA.

We have received a preliminary report from the EMEA in which they raise a number of issues that must be addressed before our Marketing Authorization Application can be approved.

In the report, the EMEA questions the sufficiency of our six month, 180 patient pivotal study to prove efficacy of a medicinal or drug product, given that drug products in Europe typically require two large, well controlled clinical trials for approval. In addition, the EMEA raised questions regarding the specifications of the PDGF drug substance.

Based on the issues raised by the EMEA's preliminary report, the timing of the receipt of the $10 million milestone payment from Luitpold is uncertain. And therefore, the Company's financial guidance for 2009 excludes this payment. This should not be confused however, with the other time-based milestone payments from Luitpold also totaling $10 million that are due and are expected to be paid this year.

Now, moving on to the corporate highlights. Late last year, we announced what I believe is one of BMTI's most important achievements since our IPO, the issuance of a U.S. patent which covers the compositions of PDGF combined with various matrix materials having certain defined characteristics, including BMTI's novel recombinant protein device combination product candidates, Augment Bone Graft, Augment Injectable Bone Graft and GEM 21S.

The new patent will remain in force until 2025 during which time it will prohibit the marketing of similar or generic versions of our products. The issuance of this patent solidifies our IP position and significantly extends the Company's period of exclusivity. We also have other patent applications pending and are confident they will lead to additional protection of our technologies.

Last year, we also announced that we reached an agreement with Deutsche Bank AG to provide a loan facility enabling the Company to borrow up to 70% of the par value of our FELP guaranteed student loan backed auction rate securities that Deutsche Bank had purchased on behalf of the company in which the auction rate securities which will serve as collateral for that credit facility. Through the credit facility, BMTI has realized liquidity of $39 million of its $60 million auction rate securities portfolio. We are currently working diligently towards achieving full liquidity for these securities.

To that end, in February of this year, just a month or so ago, we filed an arbitration claim with the financial industry's regulatory authority against Deutsche Bank Securities Incorporated asserting various claims relating to investments in auction rate securities made on our behalf, including, among others, claims for violation of federal and state securities laws, breach of contracts, fraud and breach of fiduciary and other duties.

Deutsche Bank Securities has yet to respond to the filing, but their answer to the claim is scheduled to be filed by April 15th. The date for the arbitration hearing has not yet been set and the arbitrators have not yet been selected.

I would now like to pass the call over to Larry Bullock, our Chief Financial Officer to briefly discuss our fourth quarter financial results. Larry?

Larry Bullock

Thanks, Sam. Our 2008 financial results for the fourth quarter and yearend reflect the ongoing progress in our orthopedic product development programs that you just heard about. We continue to strive to be financially prudent in managing our business as we make the important investments to advance our product candidates through clinical development.

Our net loss for the fourth quarter of 2008 was $12.2 million compared to $6.9 million for the fourth quarter of 2007. Total revenue for the quarter was $1.8 million, which includes $1.6 million of royalty income and approximately $240,000 in sublicense fee income. This compares to total revenues of $4.5 million recorded in the fourth quarter of 2007, which included $3.6 million of product sales revenue for GEM 21S. We did not have any product sales revenue from GEM 21S in 2008 because we sold our remaining artificial therapeutic business to Luitpold in January of 2008.

Research and development expenses were $5.9 million for the quarter compared to $6 million for the fourth quarter of 2007. The 2008 fourth quarter R&D expenses were flat in comparison to prior year. The R&D expenses primarily relate to clinical trials in the United States, Canada, and European Union for our orthopedic product candidates as well as continuing expenses for new and ongoing pre-clinical studies and regulatory filings.

General and administrative expenses were $4.2 million for the quarter compared to $2.8 million for the fourth quarter 2007. The 2008 G&A expenses included increases of approximately $880,000 in royalty expense, $200,000 of employee salaries, payroll taxes, benefits and stock-based compensation expense, $300,000 in the cost of doing business as a public company, including professional services and facilities expansion to accommodate our increasing product development activities.

Our net loss for the year ended December 31, 2008 was $8 million compared to $24.6 million for the same period in 2007. Total revenue for the year was $3.1 million, which includes $2.1 million of royalty income and $1 million in sublicense fee income. This compares to total revenues of $7 million recorded in the yearend December 31, 2007.

The 2007 revenue included $5 million of product revenue from sales of GEM 21S to Luitpold in addition to $1.2 million of royalty income and approximately $740,000 of sublicense fee income. Again, we did not have any product revenue from sales of GEM 21S in 2008.

Research and development expenses were $24.6 million for the year compared to $19.2 million for the same period in 2007, which was an increase of $5.4 million. $2.2 million of the increase is attributable to the clinical trials of Augment, the Company's orthopedic product candidate in the United States, Canada and European Union as well as continuing expenses associated with new and ongoing pre-clinical studies and regulatory filings relating to Augment.

Our salaries, benefits, payroll taxes and stock compensation expenses and research and development functions increased by $2.7 million in 2008. As of December 31, 2008, we had 64 employees involved in research and development functions, which reflects the hiring of four new employees to fill various research and development functions during the year. In comparison, we hired 23 new employees in 2007. Many of the 2007 hires occurred during the latter part of 2007, so a full year of salaries, payroll, benefits, and stock compensation expense was not recognized until 2008.

Also, travel expenses for employees increased by approximately $200,000 as these employees traveled to the clinical sites. Finally, milestone expenses increased by approximately $200,000 as certain milestones were met during 2008.

General and administrative expenses totaled $11.3 million for the year compared to $8.8 million for the same period in 2007, an increase of $2.5 million. The increase in G&A expenses is attributed to an increase of approximately $930,000 in royalty expense due to contractual requirements as well as an increase of $1.6 million consisting of higher stock compensation expense, cost of doing business as a public company, facilities costs and salaries, benefits and supplies and other administrative costs.

Turning to the balance sheet, we ended the year with cash and investments of $97.4 million as of December 31st, which includes $46 million of auction rate securities that are currently not liquid. We significantly strengthened our balance sheet in 2008 by completing the sale of our remaining orofacial therapeutic business to Luitpold in January and by executing a time promissory note with Deutsche Bank in October.

The transaction to sell our orofacial therapeutic business to Luitpold, including the rights to the downstream formulation, fill, finish manufacturing and kitting of GEM 21S along with all rights to the GEM family trademark name. As of December 31, 2008, we received $30 million in cash from the sale of transaction and $3.4 million in cash from the sale of existing inventory. Under terms of the sale agreement, we expect to receive an additional $10 million in time based payments due in cash by the end of 2009.

In addition, we expect to receive ongoing royalty payments based on our net sales of GEM 21S and other products that are based on adapting our technology to future products in the orofacial therapeutics field.

The transaction to execute a time-based promissory note with Deutsche Bank enabled us to borrow $39.1 million with certain of our auction rate securities having combined par value of $55.9 million serving as collateral.

As we have previously reported, the auctions for our auction rate securities have failed since February 2008 and we have not been able to sell them. The current economic downturn and the related uncertainty in the markets have negatively impacted our ability to resolve these issues in the short term.

However, given the liquidity provided by the $39.1 million borrowed against these auction rate securities as well as other prospects that we have we are following up on, including the arbitration claim that we have filed against DB Securities that Sam mentioned earlier, we remain encouraged about the prospects for a resolution.

Further, we have responded to the current economic crisis by investing our cash and cash equivalents and our short-term investments very conservatively, securing a short-term credit facility to provide some liquidity for our auction-rate securities investments and initiating cost reduction measures such as scaling back growth and staff to conserve cash and manage expenses.

In addition to the extent possible given contractual commitments, in order to postpone major expenses, we have postponed certain major equipment purchases, delivery and validation efforts for our manufacturing equipment intended for our new manufacturing facility that is being built in the same complex at our headquarters here in Franklin. We have leased a portion of this facility and we intend to move certain of our manufacturing operations into it once completed.

Finally, I will provide our financial outlook for 2009. Please note that these projections are based on our current expectations and assumptions related to the costs and timing of our ongoing and anticipated activities, such as clinical trials, pre-clinical studies and regulatory filings. As noted a moment ago, we ended 2008 with approximately $97 million in cash and investments, which includes the $46 million in auction rate securities that are not currently liquid.

For 2009, we expect our yearend cash and investments balance to range between $71 million and $78 million. We expect our net cash used to be between $19 million and $26 million. This includes the $10 million in time-based payments we anticipate receiving in 2009 from Luitpold from the sale of our orofacial therapeutics business.

And finally, our net loss before income taxes for the year is forecast to be between $32 million and $39 million. We believe these resources position the company very well to complete the development of our initial orthopedic product candidate.

With that, I would like to thank you for your interest in BioMimetic, and at this time, I will turn the call back over to Dr. Lynch.

Sam Lynch

Thanks, Larry. So in closing, let me briefly review our progress over the last few months and summarize our upcoming goal. We completed enrollment in our North American pivotal trial and expect to file the preclinical and manufacturing modules of our modular PMA application this spring and the clinical data module in the fourth quarter with the data to be released in conjunction with the filing of the final clinical module.

We completed enrollment in our EU foot and ankle trial with Augment Bone Graft and expect to receive the results from this trial also around the end of this year or early next year. We reported that in the Canadian pilot trial to evaluate foot and ankle fusions, Augment Injectable Bone Graft achieved 100% clinical success and 90% fusion rates on CT scans at three months to four months.

We reported that in the Swedish pilot trial to evaluate the healing of distal radius fractures, patients treated with Augment Injectable demonstrated earlier bone formation at three weeks and six weeks as measured by CT scans. We reported that the U.S. patents office issued a patent that will provide patent protection for our Augment product line until at least 2025 and we reached an agreement with Deutsche Bank to provide a loan facility enabling the Company to realize $39 million of liquidity from our $60 million auction rate security portfolio.

Key upcoming activities include, filing of the three modules of our modular PMA for Augment and releasing the clinical data for our North American pivotal trial later this year. Second, Health Canada's final decision on the approval of Augment Bone Graft in Canada around the middle of this year and the potential product launch of Augment in Canada. Third, EMEA's final decision regarding the approval of GEM 21S in the EU. And last, our final decision regarding the timing of the initiation of a pivotal clinical trial on Augment Injectable Bone Graft, our second product candidate that we would take into pivotal trial and the possible initiation of this study this year.

2009 will clearly be a critical year for BioMimetic. Based on the milestones achieved in 2008, our goals for the coming year and our financial position, we believe that it will be a year in which we further elevate BioMimetic towards becoming the premier regenerative biologics company in the orthopedics field.

We continue to remain confident in our belief that BioMimetic has great potential in the orthobiologics market and we remain very focused on achieving the goals in front of us.

We would now be happy to answer any questions that you may have. I will turn the call back over to Erica for further instructions on the Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator instructions). And our first question comes from the line of Imran Zafar with Deutsche Bank. Please proceed.

Imran Zafar – Deutsche Bank

Hey, good morning. Thanks for taking the questions. I wanted to focus my first couple questions on commercialization. With the U.S. and EU data expected around yearend, I wanted to ask about your latest thinking in terms of sales and marketing. When do you start hiring sales reps? What size of sales force are you thinking about at this point? And then on the pricing side, you could have a product approved in the next few months in Canada. What's your latest thinking with the pricing? Thanks.

Sam Lynch

Okay, I will start and then Steve, I will also ask you to comment on those as well. I think, Imran, at this point, we really haven't changed essentially our thought process on any of those three issues, i.e. timing of hiring a sales force, the size and structure of the sales force or the pricing. Regarding the timing, I think we have been saying and I think our thoughts are continuing to be that we would start potentially hiring sales management later this year. Should we get approval in Canada over the next few months, we have a distributor already in place there. We might need to hire one or two people to help manage that relationship, but for terms of the U.S, we would expect obviously to wait until after we see the data of course before we would hire any of the key sales management there. And then we would obviously build that sales force out over the course of next year primarily.

In terms of the size of the U.S. sales force, we are continuing to look at that, but what we said so far is that, that will be a hybrid sales force with somewhere around 15 or so direct BMTI employees as sales management and product specialists, supplemented with roughly 75 or so independent reps. That's our current thinking at least and Steve may provide additional color on that.

And then pricing wise, again, we continue to look at that. We think it's still a little premature to set any pricing at this point. Understand your comment is very accurate, Imran, in that, should we get approval here shortly in Canada, we will have to set that price fairly soon. But I don't think we're prepared to comment yet on that this morning beyond what we've always said, which is we look at this marketplace as on the top end of the pricing we have products such as InFuse and OP-1 roughly $4500 or so an application.

And on the other end of the spectrum, some of the synthetics and Allograft materials at 1,500 we would expect to be somewhere in between that range. So I think we will leave it at that. We probably, again, would be I would think closer to the upper end of the range than the lower end of the range obviously. But again, we will refine those numbers as we move forward here shortly. Steve, would you like to add to those comments?

Steve Hirsch

No, well, I think you covered it very well, Sam. Maybe just one additional comment regarding Canada. We have been engaged with our distributor in Canada, Joint Solutions, for some time. And as a consequence, when Canadian approval happens, whether it happens this year or whether it happens at some point in the future, we are very much prepared to get going. We know where the key accounts are in Canada. We have established relationships already. Some of the Canadian members of our clinical trials have been some of the top, the leading opinion leaders within the Canadian foot and ankle area. So, we feel very good about being able to hit the ground running in Canada.

Imran Zafar – Deutsche Bank

Okay. And then based on the nature of the questions you got back from in the latest letter from Canada, it sounds like, is it fair to say that you are pretty confident that they're not going to require the randomized data from the U.S. and/or European studies to make a decision on approval? Is that fair to say?

Sam Lynch

Well, Imran, I think as you know, it's our policy not to comment specifically on correspondence from regulatory authorities. And so I don't really want to go much beyond the comments that we've shed this morning. I think it's safe to say had that been a major concern, we would have provided some comments on that in our remarks but beyond that, I don't think we will comment further. We are, as we said, optimistic about our opportunities to get approval in Canada but as we all know, regulatory authorities, until you actually have the approval in hand, you don't have it. So we are working our way through the process and we will have more information to share with you over the next few months.

Imran Zafar – Deutsche Bank

Okay. And then one last question. In terms of the U.S. and European pivotal studies, are there any scheduled interim looks at the data or DSMB reviews of the safety or anything like that between now and when you get the full results?

Sam Lynch

Nothing formal. Obviously, we always continue to monitor safety and adverse events. That's of course, an ongoing obligation throughout any clinical trial. But there is no sort of interim analysis or anything like that scheduled between now and the completion of the study.

Imran Zafar – Deutsche Bank

Great. Thank you very much.

Sam Lynch

Thank you.

Operator

Next question comes from the line of Michael Matson with Wachovia Capital Markets.

Michael Matson – Wachovia Capital Markets

Hi. I guess I just wanted to get a refresher on the milestone payments from Luitpold. I guess I'm a little bit confused. So you have two more $10 million payments and one is for the EU approval of GEM 21S and I think you said that that's not in your guidance for this year, but the other one is? Is that correct?

Larry Bullock

Yes, Michael. This is Larry Bullock and that's exactly correct. So based on the sale transaction of the GEM 21S product to Luitpold, we have $10 million in additional payments that are due during 2009, sort of split between mid year and end of the year. And then there is this $10 million milestone based on European approval that will happen once we get European approval. And the first $10 million that's time-based payments is included in our guidance. The second $10 million for European approval is not.

Michael Matson – Wachovia Capital Markets

Okay. And on each of those payments, are those going to be shown in your income statement? In other words, are they going to be recorded as a gain or other income? Or are they just going to go through the balance sheet?

Larry Bullock

Those will mostly go through the balance sheet. They end up in the income statement obviously, over time as the license passes through time they get amortized into the P&L.

Michael Matson – Wachovia Capital Markets

Okay. Alright. So the net loss guidance that you gave doesn't that's just really a reflection of your operating costs and interest for the most part?

Larry Bullock

Primarily, that's correct. As those milestones are earned, they will have a modest impact on our P&L, but very modest.

Michael Matson – Wachovia Capital Markets

Okay. I just want to understand how model it. And then on the – I know that there is uncertainty as to when you start the AIBG trial, but I was wondering if you had decided on the size and the design of that trial, what indication would be that you would be seeking because I know you did two pilot trials, one on wrist fractures and one on foot and ankle fusions. And just any thoughts there in terms of where that trial would be heading, I guess.

Sam Lynch

Sure. We've looked at the data from both of those indications that you have mentioned, Michael, and we also have talked to regulatory bodies about the most appropriate pivotal clinical trial design and indication. Obviously, there are advantages and disadvantages to pursuing each of the indications. From one standpoint, we are and continue to be very excited about the opportunity to develop the first product for the closed treatment of fractures, the first injectable product, orthobiologic product for treatment of closed fractures. And we just believe that's an enormous opportunity for us and one that AIBG could potentially satisfy. And in that regard, obviously, continuing through distal radius fracture indication would be very appealing.

On the other hand, we have seen some high profile failures of pivotal clinical trials in distal radius fractures in the past and we have also seen some of the challenges in looking at functional outcomes in that indication in our own study. So those are sort of the cons, if you will, for pursuing that indication.

On the other hand, foot and ankle fusions, the clinical results – as with distal radius fractures are really compelling, tremendous enthusiasm by the surgeon who did that initial pilot work with AIBG in foot and ankle fusions. Obviously, further advantages there are we have those investigators already lined up. We have received ethics committee approvals and those institutions for the Augment study, of course, we're very familiar with the processes, the study coordinators, the infrastructure, the contracts, all of that. And so that's a big plus for that indication.

So, what I would say is that as we're balancing those considerations versus our cash position, one of the clear and most compelling considerations that we have is of course, making sure that we can manage our business and our cash flows appropriately. By that, I think you can infer that we would be reticent to initiate another 400 patient, 37 center randomized controlled pivotal trial throughout North America right at the moment. But if there were a strategy that would allow us a somewhat more efficient path forward through a pivotal trial, that would be very appealing to us. And those are the discussions we're having with the regulatory bodies and we will see what the final outcomes of those discussions are.

Michael Matson – Wachovia Capital Markets

Okay. And then can you just clarify your comments on the feedback that you got from the EMEA on the GEM 21S approval? I'm not sure I got all that. And I was wondering if that has any implications for Augment approval in Europe.

Sam Lynch

The response that we got back from EMEA focused, we believe, primarily on, and the biggest issues are on the sufficiency of the clinical data from one randomized controlled pivotal trial, obviously the periodontal study, compared to what is usually required in Europe and in the U.S, frankly for approval of a drug product, which is two large randomized controlled pivotal studies. We think those are the biggest issues. Those are obviously just specific to the dental product, the GEM 21S.

And we would hope that by being able to provide the large randomized controlled trial for Augment from North America as well as then the additional EU data from our 108 patient trial, that that would address the EMEA's concerns regarding the sufficiency of the clinical data. And our hope would be – and I think this is again something that is under further discussions, is that the additional data would satisfy the EMEA's request not only for GEM 21S, but obviously also for Augment and the orthopedic indications. Now, we do have other questions from them. Of course, again as you can imagine, manufacturing related questions, quality systems related questions and so forth. But we believe that the really critical questions are related to the clinical data.

Michael Matson – Wachovia Capital Markets

Okay, so you basically be able to sort of pull all the data from the different trials and use that both for GEM 21S and potentially for Augment as well, is what you're saying?

Sam Lynch

That's our strategy. That's our hope. Yes.

Michael Matson – Wachovia Capital Markets

Alright. That's all my questions. Thanks.

Sam Lynch

Thank you, Mike.

Operator

Our next question comes from the line of Debjit Chattopadhyay with Boenning.

Debjit Chattopadhyay – Boenning

Hey, good morning. Actually most of my questions have been answered. Just one follow-up here. What is the feedback from the thought leaders regarding fusion rates for autogenous bone graft at six months using CT scans?

Sam Lynch

Debjit, could you repeat the first part of that question?

Debjit Chattopadhyay – Boenning

I was just wondering what the feedback is from thought leaders regarding the fusion rates that they see in the clinic right now with autogenous bone grafts using a CT scan at six months? I'm just trying to kind of validate the 85% fusion rate number that the pivotal trial is based on.

Sam Lynch

Well, Debjit, the only data that I can refer you to – maybe ask Steve if he has any further thoughts on it, is the one paper by the Coughlin Research Group [ph] that was published a couple of years ago now, that looked at CT scans in foot and ankle fusions and I know you're very familiar with that paper. And then they did have a follow up paper as well here in the last several months or so that you could also look at that looked further at what is the percent of bridging on CT scans that sufficient for clinical union. And there, they found that they had a 30% or greater bound bridging on CT scans provided for 100% successful clinical outcomes. So, in other words, patients that had less than 30% bone bridging on the CTs were clinically deemed to be either delayed or non-unions and patients that had 30% or greater bridging on the CT scans were deemed to be clinically successful in all cases.

Debjit Chattopadhyay – Boenning

But in the pivotal trials, you need to go – are you going to use the 30% number or does it have to be the 50% osseous bridging?

Sam Lynch

No, we're – our protocol was written before that latter publication came out. So our cut point is 50% or greater bridging is defined as fusion.

Debjit Chattopadhyay – Boenning

And the yearend cash guidance –

Sam Lynch

I'm sorry. Debjit, just – but I think the recent publication does certainly provide us good – additional good data in the literature to support that threshold.

Debjit Chattopadhyay – Boenning

And the cash guidance that's – for the year, for 2009, that does not include starting the second pivotal trial. Am I right?

Larry Bullock

Actually, Debjit, we do have what I would characterize as placeholders in our projections or financial projections. But obviously, those numbers are based on some assumptions that we have not yet validated in terms of the size and timing of that trial. So I'm not going to go into specifics in terms of how much money we included in our financial guidance for that AIBG pivotal trial, but we do include monies that we believe would be sufficient to get that trial started this year.

Debjit Chattopadhyay – Boenning

And the assumption on your part would be the FDA kind of agreeing to using the controls in the current pivotal trial as controls for that. And would that necessarily indicate AIBG trial in the foot and ankle setting as opposed to the distal radius fracture setting?

Sam Lynch

Debjit, I don't think we can comment further than what we have already. I think you certainly made some reasonable assumptions, but we certainly cannot comment right now on those, because we are still in discussions with the regulatory authorities on the design of the study.

Debjit Chattopadhyay – Boenning

Thank you and good luck.

Sam Lynch

Thank you.

Operator

Our next question comes from the line of Bill Plovanic with Canaccord Adams. Please proceed.

Anup – Canaccord Adams

Good morning, Sam. This is Anup for Bill. Few questions, one, if the EMEA comes back and says that the Augment data is not sufficient, would you guys continue and try and run another clinical trial to get GEM 21S in Europe? Or is that something that you're not willing that you wouldn't pursue cost?

Sam Lynch

Anup, I think we would have to cross that bridge when we come to it. We are not there yet and I think to speculate at this point would be premature. Good question. Very reasonable question. I just don't think we are prepared to go there yet.

Anup – Canaccord Adams

Okay. And then with the pivotal trial enrolled in the U.S., are you redeploying any resources in your R&D group? Are you starting to look at – have any one still working on the cartilage LT products? Or is that still kind of the back burner?

Sam Lynch

We haven't talked much about it, but we actually have built out a small dedicated group for sports medicine applications over the past year or so. And that group is dedicated towards doing R&D for sports medicine applications. We believe that they are making very good progress; we're very happy with the progress that they are making there so that continues to be an area of focus for the Company and it's still early, still preclinical research, but going well for that particular stage. So we expect and have in the budget to continue that work obviously throughout the year.

Anup – Canaccord Adams

Okay. Thank you for taking the questions.

Sam Lynch

Thank you.

Operator

(Operator instructions). We have a question comes from the line of Franz Tudor [ph] with Incremental Capital [ph]. Please proceed.

Franz Tudor – Incremental Capital

Hi, Sam. Quick question. With what's going on right now in marketing of a lot of orthopedic products, the issues InFuse is having and what we've seen at Stryker and OP-1, what do you perceive as the potential for off label usage of GEM OS once this gets approved? And how do you foresee sort of your marketing strategy with some of the new regulations that are sort of being imposed out there?

Sam Lynch

Yes, Franz, Good questions. I would just say and then I turn it over to Steve. Clearly, we are going to be very careful about any marketing of off label uses. It's not something, not somewhere where we want to go. And with that caveat, Steve, I will let you kind of address maybe what Dr. DiGiovanni's comments were at the investigator meeting and any other thoughts.

Steve Hirsch

Yes, just amen to what Sam said. We are not going to market this product for off label use. We believe that we've got – we're going to have a very good indication with foot and ankle fusions. It's a market in itself that's probably in the U.S., has the potential of a couple hundred million dollars. The foot and ankle surgeons are an up and coming group. I think you can appreciate that, that group, the extremities is a very hot area in orthopedics right now. We have a target group of about 2,000 surgeons in the United States that we will – that our sales organization is going to focus on.

And we feel very good about the fact if we can penetrate that foot and ankle fusion market well that the future will take care of itself. Dr. DiGiovanni made some comments at our investor meeting about where else the product could potentially go. And we certainly are not going to sit still once we get our first indication approved. We're going to look at further follow-on studies in order to get some of these other indications approved and on label. But we think we're going to have quite a bit of work and quite a bit of success, certainly, within the first several years, penetrating the market of foot and ankle fusions.

Franz Tudor – Incremental Capital

Okay. And then also what I wanted to ask you, vertebral fractures, where does that stand?

Sam Lynch

Franz, as you know, we put the VCF studies on hold last summer to focus on the pivotal clinical trial and completing that. I think that strategy paid off in spades with the really ramp up and successful completion of enrollment in the pivotal trial in the latter half of last year. And frankly, given now that AIBG, the injectable putty product is ready to go into the clinic. And we have pilot data in both the foot and ankle area as well as in the distal radius fractures already. We are sort of, I think our next area of focus will be on that, and getting pivotal trials ramped up for that second orthobiologics product candidate. So I guess that being said, the spinal fractures is kind of at least third on the list. So we just kind of going to take these things one at a time more or less and we will come back and maybe revisit that indication in the future.

Franz Tudor – Incremental Capital

Okay. And then last two quick questions. One, how are you thinking about pricing relative to InFuse? And then second, if you could comment on the ramp and the enrollment of the clinical trial; how much of that was a function of you guys just getting out there and hustling and working with the centers to get the patients enrolled versus the doctors actually seeing results in some of the early patients they treated and I guess getting a little more excited about the product?

Sam Lynch

I will take your second question first and then we will go back to the pricing one. I think clearly the enrollment ramp was clearly a result of a combination of things. One is, again, the incredible diligence and hard work by the clinical team here, the monitors and the clinical specialists being on site for really the vast majority, almost every surgery that was performed by our investigators starting in August on. So that just helped build those relationships, keep the study (inaudible) mind, work with the study coordinators on site, and all of those sort of nuts and bolts, blocking, tackling of clinical trials. So I think that certainly help. I think it's probably safe to say, fair to say that if the results that the surgeons were seeing from their early patients were concerning to them, that they wouldn't have been enthusiastic about enrolling or over-enrolling in the study so you can make of that what you will.

And in terms of the pricing question, ultimately, frankly, we're going to look at the data. And we're going to see how the data stacks up versus the data from InFuse. We're going to look at the various nuances of the foot and ankle procedures versus where some – where InFuse is used and try to come out with a very cost effective alternative to autograft. And we believe that if we provide a product that's of great value and that is fairly priced, both for us and the hospitals and the payers, that will be a huge benefit for everyone. And that's sort of how we're thinking about that now. I know that's not a very specific answer and I kind of had provided ranges in response to a previous question of somewhere between $4,500 and $1,500. But we will really have to look carefully at that range given all the data we have available right before we price.

Franz Tudor – Incremental Capital

Okay. I'm sorry, one last quick question. You had mentioned that you're looking for the appropriate format by which to release the data when it becomes available. Is this – are there any conferences sort of later this year that you already have in mind that we should potentially be looking toward?

Sam Lynch

Before we go there, Franz, Larry, I think wanted to add a further comment on your last question.

Larry Bullock

Yes, the only thing that I would add on pricing is that we're also doing an economic analysis of sort of the costs of autograft of foot and ankle procedures. And certainly, we will weigh that into the formula that we use to price the product and certainly want to make sure that there are good economic arguments for using our product.

Sam Lynch

Okay. And then in terms of a venue for data release, we have not yet identified any specific meeting or conference that we think would be really appropriate this fall for release of that data. So I think again, good question and one that we know we need to provide some insight to as soon as we can for scheduling purposes for everyone and we will continue to look into seeing at what the venues might be. But if we can't find what we think is an appropriate conference – professional orthopedic conference this Fall, we will release at least the top line data in a press release.

Franz Tudor – Incremental Capital

Okay. Thank you guys and congrats on the quarter.

Operator

(Operator instructions). Our next question is a follow-up question from the line of Debjit Chattopadhyay with Boenning. Please proceed.

Debjit Chattopadhyay – Boenning

Hey, Sam, in an answer from the last caller, you mentioned that once the data comes out, you're going to compare it with the existing InFuse data. I'm just wondering if you have in a pre-clinical setting comparative data and efficacy data versus InFuse – rhPD versus InFuse?

Sam Lynch

No. I was referring to the published data with InFuse as well as some of the anecdotal reports that we get when we talk to our surgeons.

Debjit Chattopadhyay – Boenning

Okay, thank you so much.

Sam Lynch

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back over to Dr. Sam Lynch for closing remarks.

Sam Lynch

Okay, thank you, Erica. Well, we appreciate the support and the feedback that we have received from all of our investors and the analysts over the last quarter. And I would just like to say, again we remain very focused and committed to our vision of becoming the premier orthobiologics company. We think there is an enormous market opportunity here in orthopedics for regenerative protein therapeutics and we are building a franchise and an infrastructure to capitalize broadly on those opportunities. And with that we thank you very much and we will conclude the call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.

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