Trial results put Capstone in a precarious position

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It might have been the understatement of the year when Capstone Therapeutics’ chairman last week described a “disconnect” between investors and the company over the findings of a mid-stage programme on anti-scarring candidate AZX100. With time ticking toward a deadline that in theory cashes out the Arizona group if the lead candidate continues to disappoint, investors sliced Capstone’s value in half last week when phase IIa studies failed to meet their primary endpoints (Capstone attempts to 'put' shareholders first, March 25, 2010).

Executives highlighted a trend towards efficacy in secondary endpoints in the keloid scarring proof-of-concept trials and tried to assure investors they would be able to partner the drug for the next round of testing. However, with no life returning to the shares, which sit at just 48 cents today and lower than cash-per-share of 66 cents, the market is expressing little faith that any partner will emerge, raising the intriguing prospect that a “put-right option” to liquidate the company’s $27m cash pile will be exercised in June. Even more, investors may be wondering if Capstone's leadership can even live up to its side of the bargain.

Eye of the beholder

The trials in keloid scarring, which is a tough overgrowth that extends past the site of an original wound-related scar, tested AZX100 against placebo in 118 patients at four dosing levels. Following surgical removal of the scars, intradermal injections took place at 21 and 42 days, and scars were judged at 12 months on the patient and observer scar assessment scales (POSAS) as a primary endpoint.

Patients in the AZX100 arm failed to show statistically significant improvement in the POSAS scale at the 12-month endpoint. Secondary endpoints included objective measurements of scar dimensions, photographic evidence and blinded independent assessment of scars. Without providing details, Capstone executive chairman Jock Holliman said the secondary endpoints provided signals of efficacy at the 1mg per linear cm dosing level, the second-lowest level.

Capstone is working on a second phase IIa programme in surgical scarring following arthroscopic shoulder surgery, with similar outcome measures. Scar total volume after three months and scar length after five months are statistically superior in patients injected with 3 mg per linear cm, the company also announced. Final results in those trials are due in the first quarter of 2011.

“This was a meaningful step forward for our programme,” Mr Holliman said in a call with investors. “Regrettably the market has not seen the value.”

Deadline looming

The group’s executive team made clear that they intend to find a partner for the next round of trials, aimed at optimising dosing and administration strategies, and say they have some meetings in early 2011 with potential partners.

With the put-right option looming, it is questionable whether the pressure will allow the company to reach the best deal it can with partners; the temptation to take an otherwise unattractive deal to achieve a milestone that invalidates the option would be strong. Certainly, the company did leave itself some leeway in establishing that certain events, including partnerships and other corporate activity, would invalidate the put-right when it put the proposal to shareholders earlier this year.

The list of corporate events, which includes fundraising, that allows the company to opt out of its side of the put right must have investors wondering if management and the board of directors will live up to their side of the bargain in light of the challenges AZX100 is facing.

With Capstone's shares currently trading below cash, investors appear to be betting against any partnership or positive trial outcome occuring before the June 30 deadline that would boost the stock.

As its remaining chances to change the picture have dwindled to precious few, Mr Holliman described the company’s attitude as “all hands on deck” for inking a partnership pact.

“We’ve established that as a performance timeline,” he said of the put-right option deadline. “Give us a little bit of time and we’re trying to create value for the shareholder. We’re going to do our very best.”

Of course, should the interim news in surgical scarring be borne out in the final results, it could all change for Capstone once more. But should those trials turn out as inconclusive as the work in keloid scarring, shareholders will question whether continued partnership talks is enough to stay their trigger fingers from exercising the put option.

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