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OrthoLogic Corp. (OLGC)
The Wall Street Analyst Forum
September 20, 2007 12:40 pm ET

Executives

Dana Shinbaum - Vice President, Business Development

Presentation

(Starts abruptly)

Our ongoing intent to adhere to the public schedule, and some companies really do a good job of communicating to investors that they are doing a webcast, and on this day and at this time the webcast will begin and I think this company delivered a press release today, and so I think there’s going to be some investors from this company. So, to keep them in tune, and because they have their schedules not just us here in New York, I would like to introduce the next company in this afternoon's program.

OrthoLogic is a biotechnology company committed to developing a pipeline of novel therapeutic peptides -- we have heard the term peptides a few times today -- and other molecules aimed at helping patients with under-served medical conditions. The company is focused on the development and commercialization of two product platforms; Chrysalin TP508 and AZX100.

Chrysalin, the company's novel synthetic 23-amino acid peptide, is being studied in several indications including fracture repair, diabetic foot ulcer healing, and other disorders that may involve vascular endothelial dysfunction. The company owns exclusive rights to Chrysalin.

AZX100 is a novel, synthetic pre-clinical 24-amino acid peptide, one of the new class of compounds, in the field of smooth muscle relaxation and fibrosis. AZX100 is currently being evaluated for commercially significant medical applications such as the treatment of pulmonary disease, prevention of hypertrophic and keloid scarring and intimal hyperplasia. OrthoLogic has an exclusive worldwide license to AZX100. Without any further introduction, I would like to introduce to Mr. Dana Shinbaum, Vice President Business Development. We have to ask you to just repeat the questions during the Q&A session from the analysts in the room for the benefit of the webcast.

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Dana Shinbaum

Thank you and good afternoon. I want to thank the organizers who are including OrthoLogic on today's agenda. OrthoLogic is a peptide development company, a development stage biopharmaceutical company, focused on two unique and exciting peptide molecules. Unique because as you will see, and as we believe there is nothing quite like them out there on the marketplace, and they are exciting because they address potentially large unmet medical needs, which we are going to talk about in just a second.

I'll draw your attention to our Safe Harbor statement. I will be making forward-looking statements today. I'll remind the audience that there are risks associated with our business, that are described fully in the filings we provide periodically to the Securities and Exchange Commission, and are available on our website at orthologic.com.

OrthoLogic has a clean registration on the NASDAQ. We have a significant cash position, which we are managing with the utmost care. We have no debt, and we have these two novel peptide platforms TP508 and AZX100. We have a very capable drug development team in-house including 10 M.D., PhD types among our 25 fulltime equivalent and consultants.

The history of OrthoLogic is actually in the orthopedic device space, and the company grew up in that space. They had established a class leading position in both non-union fracture and continuous passive motion devices, and revenues peaked around seven years ago at $90 million. It monetized those businesses in two transactions, having made a determination, a strategic commitment to moving to orthobiologic and drug development, where the perception was and remains higher margin and higher growth potential.

They embarked on a very aggressive, drug development programs specifically, for Chrysalin, or TP508 in fracture repair, which is again an orthopedic indication and a natural progression from where they have been.

So based on the early clinical work, there has been Phase 1/2a data that we had conducted about five years ago that demonstrated based on X-ray evidence, significant acceleration of healing in distal radius fractures, and again this work built on earlier pre-clinical work that demonstrated again significant acceleration of hard tissue healing.

So based on all of the pre-clinical and clinical work that have been done, the company undertook the largest distal radius Phase 3 trial ever undertaken in history of civilization since the dawn of recorded time. This was a 503 patient trial with -- unfortunately in this trial the X-ray or radiographic endpoints were relegated to secondary endpoints status. And FDA mandated a primary endpoint, which was a challenging endpoint frankly of time to removal of immobilization, or time to removal of the pin fixation or capping, and essentially forced the study to examine the behavior, and to change the behavior of orthopedic surgeons since time immemorial.

Well again TP508 demonstrated significant healings based on radiographic evidence, but the cast basically didn't come off any sooner. The designers of the trial were foresightful enough to build into to the pre-specified patient stratification scheme DEXA scanning, so patients were able to be stratified A priority, based on their bone mineral density. So, we had patients stratified by normal osteopenic or osteoporotic BMD.

And lo and behold within that compromised tissue [sounds] specifically in the osteopenic female population, TP508 hit the primary endpoint of times removal of mobilization, and two out of three secondary radiographic endpoints. Concurrently the company was conducting a dose ranging Phase 2b trial, which one we saw that we were not going to hit the primary endpoint in the Phase 3, we interrupted that trial, and took an interim look. The results were essentially equivocal we didn’t really learn much from that trial.

Also, there was some earlier work done in the clinic in diabetic foot ulcer Phase 1/2a trial that demonstrated again significant acceleration of soft tissue healing, this time in a topical application. I’ll talk about that in just a second.

So to give you a sense of the order of magnitude that we were speaking about, the blue line on the next slide is the Placebo group among these 157 osteopenic female subjects, the red line shows the significant shift to the left in terms of radiographic healing, in terms of number of days. And this -- what's printed on the bottom is not a type of graphical error. This was statistically significant to the point of a key value of less than 0.003. And again I want to remind you this was a single injection, in saline during wrist reduction surgery under fluoroscopic guidance, and we were still able, to achieve these kinds of significant results. So, a potent efficacy.

Regarding diabetic foot ulcers, again some of the earlier Phase 1/2a work had suggested in a dose dependant fashion that TP508 has a significant healing efficacy as demonstrated here in this slide, specifically in the 10 microgram group, Placebo didn't achieve the closure that would have been required, 1 microgram trending, and of course 10 microgram less than 0.5 p value and I apologize for the next slide. Being so close to lunch, but I want to give you a sense of what some of these ulcers look like. The top row, are Placebo patients who receive basically saline and standard of care and good off loading. And then the 1 microgram and 10 microgram group you can see, these data show a 16 to 20 week period. The kind of efficacies specifically in the 10 microgram group that FDA is looking for, complete reepithelialization of these very, very difficult to heal wounds, and these wounds were wounds that had been around for at least two months if not longer in this trial, so these are really tough to heal.

So what happened to the stock? Well, when we announced that we had not met the primary endpoint in the Phase 2 trial, that's basically all the marketplace saw and heard with that headline. So, we have been run out to right around $6 just prior to the announcement, and then we were promptly voted off the island. We have been trading net cash ever since and the question is where do we go from here.

Well, back in late first quarter of 2006, a new management team was brought in, Jock Holliman, our long time Chairman of the Board, who was one of the founding investors in OrthoLogic in the late 80s, was asked by the rest of the Board members to step in as Executive Chairman. His first official act was to bring on Dr. Randy Steer, MD, PhD, who's got no less than three decades of biopharmaceutical drug development, IND and NDA experience under his belt to serve as President.

And there has been a renewed focus in the organization on filling in some of the basic science behind TP508, and understanding its mechanism of action. As a result of that work, we have rediscovered TP508 for potential vascular indications, which we will talk about in just a minute.

During the first quarter of 2006, we had also executed an acquisition of a worldwide license for AZX100, which is another very interesting peptide molecule, also in potential vascular and pulmonary space, as well as potential anti-fibrotic indications. There has been a renewed discipline and focus. Internally we have brought our cash burn rate down as many of our investors know. We also recently established a world-class Scientific Advisory Board to help get us through this next very important period of discovery with these molecules.

So, Chrysalin or TP508 is a 23-amino acid synthetic, biomimetic peptide and it represents putative, non-proteolytic receptor binding domain of human thrombin acceleration of healing. It has application potentially in this group -- under this group Vascular Endothelial Dysfunction or VED, which includes such diseases as coronary artery disease and myocardial infarction, peripheral artery disease and tissue healing as we have demonstrated clinically.

I’ll talk about AZX100 in just a minute, but it has shown at least on the preclinical level, a smooth muscle relaxation anti-fibrotic activity that leads us to believe it has very, very strong applications in the future. So, as I mentioned this is our pipeline, we have taken TP508 through a fracture repair Phase 3 and we are working on the basic science now. We have data in diabetic foot ulcers, and we are developing the pre-clinical data required to bring it forward in VED.

AZX100, specifically in Dermal Scarring because it has potent anti-fibrotic activity. We will be filing an IND by the end of 2007 in a Dermal Scarring indication for the AZX100. And that's a development program that we have the internal force power to take forward ourselves.

Pulmonary and Vascular applications are very exciting potential applications for this molecule, and we will be looking to partner those once we get them to the point where we have value inflection point and good pre-clinical data.

As I mentioned, we have established recently a Scientific Advisory Board consisting of Drs. Michael Mendelsohn, and Charles Dinarello, two world class vascular and molecular biologists, these are folks that consult regularly to large biotech and large pharma and have looked at our science and have chosen to align themselves with our portfolio, so we are very excited to have them on board and we anticipate moving and accelerating our scientific knowledge as a result.

So focusing just for a minute on TP508, as I mentioned we built the clinical data around osteopenic bone and diabetic foot ulcer, but we believe that the holy grail is in understanding how TP508 interacts from the perspective of Vascular Endothelial Dysfunction larger potential applications, and what we really need to nail currently is mechanism of action and that's priority number one.

We believe that there is a common pathway that explains why TP508 works in compromised tissue. So, this drawing -- it's cartooned -- it will demonstrate what we believe to be currently the science behind TP508. This is investigative, and it's early, but this is what we believe to be the story, this is TP508 binding to a receptor or multiple receptors on the surface of endothelial cells. That activity activates an enzyme known as endothelial nitric oxide synthase, which becomes phosphorylated and, participates in the arginine and citrulline cycles within the cell, producing gaseous nitric oxide. This is a very well characterized biological, biochemical mechanism. Nitric oxide has potent, smooth muscle relaxation effect. Besides, implications for potential control of blood pressure and vascular tone as well as protection of endothelium from disease.

So our recent work has focused on the following: Demonstrating the phosphorylation of eNOS, and that phenomena leading to the increase in nitric oxide as a result of application of TP508. We have shown smooth muscle relaxation as a result. We also have early data that suggest that TP508 may in fact up-regulate vascular endothelial growth factor and one of its receptors, which we believe explains why TP508 has an impact on revascularization in angiogenesis in damaged tissue.

The last piece of the puzzle of course is knowing receptor interaction and binding, for which we have two parallel programs running in Texas and in Arizona currently. So a normal healthy tissue -- nitric oxide is a potent smooth muscle relaxant and vasodilative. It has the benefit of decreased thrombogenicity, increased and improved blood flow in oxygen delivery to tissue and regulation of blood pressure. But in VED, in Vascular Endothelial Dysfunction impaired nitric oxide production is the culprit here.

So we believe and it has been shown in the literature that VED is implicated in very, very critical disease categories that are the result of some of our Western lifestyle, coronary artery disease and myocardial infarction and peripheral artery disease.

So what is our business strategy as a result of these learning's? We want to confirm the mode and mechanism of action of TP508. We will complete our pre-clinical program, proof-of-concept in VED in CAD, MI and PAD to leverage our pre-clinical and clinical results to partner or joint develop these very exciting indications.

Moving briefly to AZX100, this is a 24-amino acid synthetic peptide and it's an interesting molecule, it was invented by two professors of Arizona State University Alyssa Panitch, who is a PhD Biochemical Engineer, and Colleen Brophy, MD, who is also a vascular surgeon. And the way Dr. Brophy explained her notion of AZX100 to me is as follows: She said Dana, as a Vascular Surgeon I never want the cell to stand between me and the disease. So I want to find a way around that. So, she came up with this notion of coupling a small Heat Shock Protein, HSP20, a potent smooth muscle relaxing agent to a protein transduction domain that's modeled on a pep protein that allows the molecule to get across the cell membrane. It looks like this, this next slide actually defines the word busy, but I will take you through it very briefly.

Four key agents that you are hopefully familiar with on the slide, Natrecor indicated for congestive heart failure, Pletal for intermediate claudication, peripheral artery disease related indication, Serevent for asthma and Viagra for erectile dysfunction. All of these agents are cell surface mediated, smooth muscle relaxing type agents. And they all require these rather complex pathways in order to exert their ultimate activity on Actin inside of skeleton of the cell.

Interestingly, AZX100 bypasses all of that because of it's construct of this protein transduction domain coupled to this cargo. So, it's the carrier and the cargo getting across the cell membrane and acting directly on the Actin inside of skeleton of the cell. Interesting.

So, our summary business strategy here is to complete our IND by the end of 2007 in a Dermal Scarring indication, and take that forward as an internal program. We will complete our proof-of-concept model in asthma, intimal hyperplasia and vein graft patency, and leverage again those results to partner in Pulmonary and Vascular applications, and interestingly we have had preliminary talks with a number of potential partners and we basically ask them the question, if this molecule were in your shop what would you do, what will it take to get you interested in. They have all said, well we are not going to give you any free consulting help here, but if this were in our shop, these are the types of programs we would design, we said thank you very much, we will get back to you. So we are currently conducting exactly the type of programs and creating that package, that large pharma partners are looking for in this space.

From a cash flow perspective, we had originally issued guidance for 2006 of $35 million and we had revised that guidance to between $15 million and $17.5 million. Of course, with the interruption of our Phase 3 and Phase 2 or the completion of our Phase 3 and interruption of the Phase 2b, we were able to in a very, disciplined way bring our cash burn in line and bring it down to around $13.4 million.

We had issued guidance in 2007 of between $18 million and $19 million we are not revising that guidance currently and I can point to the fact that by mid-year we had spent right around $6 million.

Next slide is again forward-looking, and I will take you through it very briefly. This makes some assumptions that we extend our current burn rate through let's say for example, the middle of 2008. So in the middle of 2007 we were here at around $64.3 million. We were trading right of cash about $1.54, if we extend this line and continue to spend at our current rate, say between $13 million, $14 million, $15 million of shareholder money over the next -- well this period would be 12 months -- that will bring us to a little bit north of $51 million by the middle of 2008, and we will be trading if we continued to trade in cash right around a $1.22, so the downside here is defined by our cash value. We believe very strongly that the scientific evidence behind these two peptides is worth turning over a couple of more cars, spending some of our cash, and finding out whether these products can deliver on the promise.

Why do we think it's important because the potential applications are very, very big? Coronary artery disease is 13.2 million folks walk around the United States alone with CAD, of which a subset of 1.2 million have new or recurrent vascular events every year, a multi-billion dollar opportunity upside.

Also peripheral artery disease, 36 million folks in the US alone, again a multi-billion dollar opportunity.

In distal radius fracture, this is one of the leading causes of emergency room visits among adults $0.5 billion opportunity.

In diabetic foot ulcer just the cost of care alone can exceed $31,000 a year for a patient with a diabetic foot ulcer. So we did the math.

Likewise, with AZX100 in asthma there are north of 22 million asthma patients in the US, direct drug costs totaling in excess of $5 billion. There is also an estimate that about a sixth of them are not well served and there have been some recent reports of folks taking a rise in medications and not having the efficacy that they are looking for.

In anti-fibrotic indications including Dermal Scarring, there are 1.25 million eligible dermal procedures based on surgery and other intervention that folks would like to avoid some of these hypertrophic scars that can occur, so again potential application north of $1 billion dollars.

In pulmonary fibrosis, there is a couple of 100,000 patients with no available treatment, and an estimate of a little bit about of $4 billion there. In intimal hyperplasia, 300,000 end-stage renal disease patients, and this is just the cost of the intervention, the insertions and the complications from insertions for these patients, yielding greater than a $4 billion opportunity and no available treatment.

So again, OrthoLogic value proposition is a low burn rate, multi-year runway on our current burn rate and even if we ramp it up a bit, a very strong Intellectual Property portfolio. The downside is essentially defined by cash as I mentioned a couple of slides ago. Two, novel and exciting vascular drug platforms TP508 with a safety profile, very strong in 600 -- more than 600 humans, and proven efficacy in multiple tissue types both as a saline injection and as a topical application

AZX100, a very potent agent with a unique delivery mechanism, nothing quite like it out there on the market or in development. We have multiple "shots on goal" is very high value indications. So, I leave it to the marketplace and ask the question, are we really a fallen angel or are we in fact a value play? And I’ll let you decide.

And I will take some questions. Yes sir.

Question-and-Answer Session

Unidentified Audience Member

Of the very separate indications that you have shown, which ones do you think you will carry to the commercialization first?

Dana Shinbaum

The question was, of the indications that we showed, which would we carry to commercialization first. It's difficult to say at this juncture, but a lot of it will depend on the pathway that we choose, we have a fair amount of work to do to get there and given that we are currently in the preclinical phase right now, we need to see what type of efficacy we achieve in which model. So, we have a number of possibilities there as you can see.

Unidentified Audience Member

(Question Inaudible)

Dana Shinbaum

We will allow the pre-clinical --

Unidentified Audience Member

(Question Inaudible)

Dana Shinbaum

Right.

Unidentified Audience Member

(Question Inaudible)

Dana Shinbaum

We are placing multiple bets at this juncture.

Unidentified Audience Member

Are they pre-clinical and when do you intend to go with the Phase 1?

Dana Shinbaum

With AZX100 we will be in Phase 1 in the first half of 2008, in the Dermal Scarring indication. The other pathways will depend on the partnering discussions that will be on going at the time.

Thank you for you attentions and I will be available in the breakout room.

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