CN.ORTH: Clinical Hold Lifted in Time for 3Q:22 Results

By John Vandermosten, CFA

CNSX:ORTH.CN | OTC:ORTIF

READ THE FULL ORTH.CN RESEARCH REPORT

Clinical Hold Letter Lifted

Following the April 2021 Investigational New Drug (IND) submission for Ortho-R, Ortho Regenerative Technologies Inc. ORTH ORTIF notified the public on December 13^th that the FDA had lifted its Clinical Hold on the application. Two months after its IND submission, Ortho announced that a clinical hold had been placed on the trial launch pending the collection of additional chemistry, manufacturing and control (CMC) related data and characterization of the chitosan product. On July 20^th, Ortho announced that it had formally responded to the FDA's information requests, and on August 20^th, it announced that the FDA had extended the hold. This was related to additional requests by the agency for supplemental clarifications on two advanced methods of impurity characterization. The FDA accepted the sterility and endotoxin level testing protocols as well as identification of drug substance following reconstitution in water but recommended higher resolution small molecule impurity testing. On September 2, Ortho responded to the second Clinical Hold Letter, related to elemental impurities identification and quantification of testing methods. On October 1^st, Ortho received a letter from the FDA clearing the small-molecule impurity testing issue, with Ortho committing to using a GC-LC-MS¹ testing method. Ortho-R passed the agreed-upon testing, measuring impurity levels far below the tolerated threshold, and in line with the original testing methods that Ortho had used.

On December 13, 2021, Ortho informed investors that the FDA had lifted its Clinical Hold, allowing Ortho-R to proceed with the clinical trial, with site identification, respective ethical review board approval, site training, and first patient enrollment identified as next steps. First patient enrollment is expected in the first calendar quarter of 2022 with targeted total enrollment of 78 patients across 10 sites. Under guidance from the FDA, the first three patients will be treated in the same center with 48 hour separation to ensure safety.

Site Preparation

Ortho is currently in budget negotiations with the clinical sites participating in the Ortho-R trial. Eight sites are confirmed with two more expected to be confirmed soon. Some sites can receive approval at the national level, from the National Ethical Review Board. According to management, approval at the national level takes about three weeks, compared to 1-4 months for Institutional Review Boards that are more common to academic trial sites. Management estimates that 70% of the sites will be approved via the more expedited national route.

Management anticipates that the 10 sites will be sufficient to support enrollment targets with smaller sites enrolling 2-4 patients per month and larger sites enrolling up to 5-6 patients per month. Approximately 60% of sites will be considered in the larger category; however, the larger sites are predominantly academic, requiring local Institutional Review Board (IRB) approval which may take longer. Management believes that enrollment can be completed in 6-8 months with final results for the trial expected in 1H:23.

To help drive enrollment, Ortho may engage a national marketing firm that will assist in location targeting and the added logistical burden associated with the higher demand from patients to undergo the procedure. Ortho will also be providing compensation to patients for travel costs and other incidental expenses. When the trial is underway, Ortho will need to continue sterility and endotoxin testing. The sterility testing will be on samples sourced from patients, to ensure that the Ortho-R-PRP admixture has maintained sterility after preparation by providers.

Ortho will provide site initiation visit training, which takes about one day, where all stakeholders in the clinical trial will be present. The training will review the protocol, procedures, instructions for product use, how to conduct sterility and endotoxin testing, blood cell count testing, cytokine testing and PRP-specific training with the providers for preparing the product.

Trial Timing

The Phase I/II trial will enroll 78 patients starting in 1Q:22. Enrollment is expected to be complete before the end of the first half of 2022. Following the surgery, patients will provide follow up at 10 days, 6 weeks, then at 3, 6 and 12 months. This suggests that data from the trial should be available around mid-year 2023.

Third Quarter Fiscal Year 2022 Operational and Financial Results

On December 21, 2021, Ortho issued its 3Q:22 press release and filed its fiscal year third quarter SEDAR documents for the three month period ending October 31, 2021.

Highlights for the fiscal year 2022 to-date include:

➢ Submitted Investigational New Drug (IND) application - April 2021

➢ Received Clinical Hold Letter from the U.S. FDA - June 2021

➢ Appointed two new members to its Board - June 2021

➢ Amended and extended unsecured convertible debentures and warrants - July 2021

➢ Received formal response to FDA Clinical Hold - July 2021

➢ Extension of Clinical Hold - August 2021

➢ Response to second Clinical Hold Letter - September 2021

➢ Extension of collaboration agreement with Ecole Polytechnique - September 2021

➢ Type A meeting with FDA - October 2021

➢ Response to Type A meeting with FDA - November 2021

➢ Clinical Hold lifted, clearance to proceed with US clinical trial - December 2021

➢ $1.05 million private placement - December 2021

No revenues were reported for the third quarter. For the three months ended October 31, 2021, compared to the three months ended October 31, 2020:³

➢ Research & Development expense increased 209% to $591,000 from $191,000, primarily driven by development costs, offset partially by increase in investment tax credit and government grants;

➢ General & Administrative expense increased 4.4% to $357,000 from $342,000, driven by increase in consulting fees which were offset largely by decrease in professional and IR fees;

➢ Share-based compensation decreased 57% to $43,000 from $101,000;

➢ Financial expenses grew 421% to $932,000 from $179,000, driven by increases in both interest and effective interest on debentures and a fair value adjustment of the embedded derivative; and

➢ Net loss was ($1.9) million vs ($813,000), or ($0.06) and ($0.03) per share respectively.

On October 31, 2021, cash on the balance sheet totaled $210,000. Cash burn for the last nine months was ($2.3) million and financing cashflows totaled $134,000. This compares to nine months ended last year cash burn of ($2.0) million and net cash provided by financing of $2.5 million, fueled by issuance of units. Following the end of the quarter, Ortho announced it had closed a $1.05 million private placement on December 13^th.

$1.05 Million Private Placement

On December 13, 2021, Ortho closed a non-brokered $1.05 million private placement offering of unsecured convertible note units, which included $380,250 in contributions from insiders. The placement issued 1,075 note units at a price of $975 per unit for total gross proceeds of $1,048,125. Each note unit comprised one unsecured convertible note and 1,000 Class A share purchase warrants. The notes yield 10% annually with maturity on the earlier of either 12 months following the closing date placement or 20 days following the closing of a capital raise in the form of an equity or debt financing of at least $5 million. Any unpaid interest will accrue and be added to the principal amount of the notes. Upon accelerated maturity due to an at least $5 million raise, the holder of a note will have the option to convert the outstanding value of the note, including any accrued and unpaid Interest, into the equity securities and/or debt instrument to be issued pursuant to the said raise, subject to the same terms and conditions. Each warrant enables the purchase of one Class A share at an exercise price of $0.50 at any time up to 24 months after December 13, 2021.

Extension of Convertible Debentures

In July 2021, Ortho amended three series of debentures and warrants to extend their respective maturity dates. The original maturity dates of the 10% unsecured convertible debentures and share purchase warrants were extended from 24 months after their respective dates of issuance to May 1, 2023. Other parameters of the debentures and warrants remain the same.

Candidates

Ortho's lead candidate, Ortho-R, has received IND clearance and we expect the first patient to be enrolled in 1Q:22. The product is built on the company's RESTORE platform and is applied to rotator cuff tear (RCT) repair. The company is also developing Ortho-M for meniscus repair. We anticipate that further work on Ortho-M will begin after the start of the rotator cuff trial and after additional capital is raised. The meniscus work will also partially rely on a $600,000 grant that will fund the majority of this preclinical work. When the Ortho-M program restarts, a six-month study in 36 sheep will begin. Interim data will be provided at the three month mark and study results may be available within a year of the beginning of the work. Further updates will be provided when available.

Corporate Milestones

➢ Proof of concept study for Ortho-M in animal model – 2019

➢ IND Filing – April 2021

➢ Clinical Hold Letter – June 2021

➢ Type A meeting with FDA – October 2021

➢ IND clearance – November 2021

➢ Development & testing of Ortho-M protocol in animal model – 2021

➢ Launch of Phase I/II trial – 1Q:22

➢ Complete patient enrollment – 3Q:22

➢ Phase I/II Clinical Results – 1H:23

Summary

Ortho received the green light for its RCT trial on December 13^th as the FDA lifted its clinical hold on Ortho-R's IND. From here, Ortho will on-board additional clinical sites, obtain study approval and train providers on the surgical procedure and product preparation. When the sites are ready, it will proceed to first patient enrollment, which is expected in 1Q:22. Enrollment completion is expected within 6-8 months of the start of the trial, and final results are expected in 2023, which reflects patient follow-up out to 12 months.

Ortho reported FY22 third quarter financial results. Overall expenses were up, reflecting preparation for the upcoming rotator cuff trial and FDA interaction. On October 31, 2021, cash on the balance sheet totaled $210,000, which was augmented by a $1.05 million private placement in December that will support the initiation of Ortho-R's Phase I/II trial. Cash burn for the last nine months was ($2.3) million and financing cashflows totaled $134,000. We anticipate a near term capital raise to support the estimated $5 million in FY:23 expenditures for the rotator cuff trial.

The unmet need in RCT and meniscus tear (MT) repair is clear and sizable, which should provide substantial demand following approval. The MT program is expected to begin once the RCT program has begun and additional capital is available. Our valuation work assumes addressable markets in RCT and MT in the US, EU and Canada with an anticipated 12% probability of success due to Ortho-R's preclinical status.

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1. GC: Gas Chromatography, LC: Liquid Chromatography, MS: Mass Spectrometry

2. Source: April 2021 Ortho RTI Corporate Presentation.

3. Financial statement items and all other monetary amounts in ($) are denominated in Canadian Dollars.

4. Source: Third Quarter Financial Report - Fiscal Year 2022, for the period ending October 31, 2021

5. Source: April 2021 Ortho RTI Corporate Presentation