AUG 12, 1997 CCSI CONFERENCE CALL (Part 1 of 2 - PRINT 10 Pages)
Investor Packet: (212)717-6544
DARBY MACFARLANE: Good afternoon everyone and thank you for joining us today. For those of you whom I have not spoken to before, let me introduce myself. I am Darby MacFarlane, the CEO of CCSI and for all of you whom I have gotten to know so well over the past year or so, Hello. Congratulations to us all, and thank you for being such loyal supporters of the Company through the long and arduous process we've been through in finally achieving the FDA commercial marketing clearance for our non-invasive bilirubin infant jaundice medical technology and monitoring instrumentation. This is an important milestone for our Company and the reason for this, our first conference call with the investor community.
Before I launch into the content of our discussion on the Company, I would like very much to talk to you about the investor relations aspect of our Company and inform you of what I consider to be another milestone for the Company in that area. Most of you know I have been personally handling all of our investor relations up to now but literally overnight that changed.
We received hundreds of investor phone calls after we announced FDA marketing clearance. So as we enter into this next important phase it's clear that this area will require substantial time and attention that would divert me from the areas I need to focus on to achieve shareholder value. Over the past year in anticipation of this event, I have given great thought and spent a lot of time looking for the right person to take over the leadership of investor relations and public relations for the Company.
The day we got FDA clearance, Mr. Robert Connor joined us in charge of Investor Relations and Public Relations. Bob has been with Smith Barney for 25 years as head of Public Relations. he is a seasoned veteran of the Securities Industry and able to bring all of the wisdom and skill of his extensive experience to our young Company and assist us in bringing our message to the financial and business community.
I know many of you over the past years have advised me to get our public relations, press, etc. into professional hands to create increased public awareness and provide for the investment community, and I feel that Bob is the right person to guide this process. So I would like to introduce you to him and for him to say a few words at this time.
BOB CONNOR: "Thank you, Darby. I would agree with you this is a celebration of a milestone - and certainly that milestone ain't me but it's a tribute to the technology, to your dedication - and to the dedication of everybody associated with Chromatics - but especially to you. I think without your courage, the intensity of your efforts and those long, long hours, Chromatics would not be in the position it is today.
I'll be brief. One joy of my new relationship with Chromatics is the opportunity, once again, to have a role in building something ... something valuable. As I've said to some of you whom I've been in touch with, when I began at Smith Barney in 1972 - it had 1,1000 employees, 18 offices and maybe 30 million in capital. Today Smith Barney has 28,000 employees, billions in capital - so big that I wasn't having that much fun - which of course does not detract from how fine and professional a firm it is.
At this stage of my one week of initiation here I will only say this. My plan is to help create value for the owners and that's you. I want to go about this in a sound fashion and so perhaps investor relations is a misnomer - perhaps I should say investor information at this point. We have a long educational process ahead of us with the investment community and the press.
It will take time to get our message and our mission out there. And sometimes by the way, the message may not be as dramatic as the FDA announcement but it will be straightforward and it will be accurate. So along with the very able assistance of a bright young lady, Jennifer Marlar of Chromatics, I am here to help and to be responsive.
DARBY MACFARLANE: Thanks Bob. Also with us today is the Company's SEC counsel, Eric Lerner. from Rosenman & Cohn LLP, and at counsel's request, I need to make the following formal statement. The statement is: Certain of the matters we will be discussing today constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "believe," "anticipate," "think," "intend," "plan," "will be," "expect," "strategy," and other similar expressions identify such forward-looking statements. Such statements regarding future events and/or performance by the Company are subject to material risks and uncertainties which may cause actual results to differ materially from those anticipated by such statements. Such risks and uncertainties include, among other things, the availability of any needed financing, the Company's ability to implement its long range business plan for various applications of the technologies, including medical and industrial applications, the obtaining of and compliance with regulatory approvals applicable to proposed applications of the Company's technology, the impact of competition, the management of growth, and other risks and uncertainties that may be detailed from time to time in the Company's reports filed with the Securities and Exchange Commission, including those set forth in its Form l0-KSB for the year ended December 31, 1996.
In light of the risks and uncertainties inherent in these forward-looking statements, such statements should not be regarded as a representation by the Company or any other person that the Company's objectives and plans will be achieved. I'm sure you all understand the requirement for this formal statement.
HISTORY/SUMMARY OF OPERATIONS
But now to get on with the exciting news for our Company - But first, since there are many joining us today who are new to the Company, and in the spirit of Bob's message on investor education, let me give you a very brief summary of CCSI and then I'll invite you all to call our offices for Investor Packs for more details - or call Mr. Connor or myself for any clarifications. In essence, Chromatics Color Sciences is a Color Science Technology Company.
Throughout our history at different points in time we have been perceived to be a cosmetics company, or an equipment manufacturing company or more recently, a medical company. But we are none of these. We are a Color Science Technology Company and we are seeking to mass-market commercial applications for our proprietary color science technology and instrumentation.
I'll draw a lofty parallel to try and explain this. We are dealing with an Industry, the Industry is called "Color Science", which is similar in many ways to the Computer Science Industry 20 years ago -- certainly not insofar as size or world impact, but insofar as Computer Science had the two main tasks of miniaturizing hardware and developing software products for many different mass market applications. Our Company's charter is to help commercialize the field of Color Science.
The Color Science Industry has existed for 25 years, often as divisions of camera companies. They have "Industrial Meter Divisions" and they make color measurement instruments called spectrophotometers, colorimeters, photometers, etc., for the paint, textile, automotive, printing and the food industries . (For example Swanson's peas, Arnold's biscuits, etc. all have to be a uniform color.)
Much of this equipment is big and expensive and as I explained, marketed mainly in industrial applications, (similar to the big expensive computer equipment of 20 years ago, used then mainly in industrial applications).
The founders of Chromatics came upon this industry in 1978, and found what we believed to be potentially large commercial markets available for color science such as in the beauty industry for cosmetics and hair color, including custom blended foundation makeup and hair color systems for selecting the correct hair dye for a customer's particular shade.
Then in dentistry for matching the exact color of teeth, for caps, bonding, dentures etc., for both dentists' offices and dental laboratories.
Other markets exist for detection of soil and grain contamination - (our instruments have been used experimentally to document by scientific color measurement the degree of soil contamination in oil or gas spills).
There are many applications for the printing industry and cross-medium color science applications like getting a particular shade of color like Donald Duck blue to be the same in film and on a T- shirt.
There are also consumer applications we are working on where a person has a pocket size color-computer like a calculator they can take shopping and use to flash on a shirt, sweater or dress and it will select correctly coordinated colors for that person's wardrobe. Or the consumer can use it for interior design purposes to match paint to carpet, towels to sheets, etc.
The list for potential commercial markets goes on and on, but to accomplish commercializing this huge industry, we faced the same two basic problems as Computer Science did - First, to miniaturize big expensive equipment down to hand-held cost effective instruments and second, to develop software for all the applications. We have worked for 10 years to achieve the miniaturization of an inexpensive color measurement instrument and got our prototype 6 months ago. We plan to have our mass manufacturing prototype ready by 2nd quarter, 1998.
Also, over the past 10 years, while being a struggling young Company with all of the usual (and some unusual) problems, we developed many diverse applications of color science technology and instrumentation, much of it financed by joint collaboration agreements with larger companies but for which we retain the Intellectual Property Rights, including a number of U.S. and foreign patents. Some of these technologies were for the beauty field including cosmetic applications with Avon products, hair coloring with Clairol and L'Oreal, then dental applications with Denstply - the soil contamination systems, the hand-held instrument software, etc. - and of course last but not least, the medical applications for monitoring bilirubin infant disease.
The clinical trials for the bilirubin technology were conducted in collaboration with Mt. Sinai Hospital in NYC with Dr. Ian Holzman, neonatalogist, and pediatricians Dr. Donald Gribetz and Dr. Irwin Gribetz, as the principal investigators of the clinical studies. Which brings me at last to the main subject of our call today - the medical technology and the recent FDA clearance.
In 1987, in the middle of doing much of our color science research, we identified what we came to call "chromogenic diseases". While technically this is not a defined medical term, it describes diseases which currently are or the Company believes can be diagnosed or monitored by the coloration of human skin, tissue or fluids. There are many of these diseases such as anemia, hepatitis, tuberculosis, forms of malignancy evaluated through biopsy tissue and different fluid laboratory analyses.
To develop monitoring instruments for these medical applications it would require extensive clinical trials to obtain separate FDA clearances for each monitoring system. So we focused initially on one particular disease - which was probably influenced by a personal experience - which is that I had a premature child. And in my child's infancy, I lived through the nightmare of this particular disease which is called Bilirubin Infant Jaundice.
This disease affects over half of all babies born and nearly 100% of all premature children. Every infant born is monitored for it. It is a liver-related disease and fundamentally occurs in varying degrees within the first two weeks of a child's life when the liver is trying to work on its own independent of the mother. If the liver doesn't take over quickly enough and the disease is not caught in time and then treated by phototherapy or exchange transfusion, the results can be varying degrees of nervous system damage/or brain damage, called Kernicterus. If left untreated, it is ultimately fatal. Scientists learned a long time ago that the disease causes a yellow staining of any affected cells. If an autopsy is performed on a child who dies from kernicterus the brain cells will be stained a yellow color. The medical community also very early on observed that the disease affected the yellow color of the baby's skin.
However, the only method accurate enough to monitor it was a blood test, often taken many times a day, where a laboratory spectrophotometer would measure the stained color of the blood serum to determine in mg/dl the amount of bilirubin present.
Now, with Chromatics' technology, it is possible for the health care professional to decrease blood tests and monitor the disease by using a light sensor which measures the skin of the baby's body and the incremental yellow content within this skin, painlessly and non-invasively. This is a tremendous advantage as the extensive blood drawing from infants is a truly savage procedure. Many newborns, especially preemies, don't have fully formed veins, so to obtain the blood samples the doctors or nurses have to incise and squeeze the blood out which is a brutal process, leaving scars and moreover, is labor intensive, especially when this procedure occurs in a good size nursery with an average of 30 babies needing multiple tests per day.
In 1987 we began our first feasibility study at Mt. Sinai Hospital in New York City, which is one of the leading medical centers in the United States, and in 1988 proceeded to go through many years of clinical testing on thousands of babies of different races, different pathologies and different demographics. Through our extensive clinical work we were able to establish a non-invasive test for infants of all races and linearly tracked in all cases to the laboratory blood test, with a high correlation coefficient to the mg/dl results of the blood serum analysis.
We went through all phases of FDA clinical trials and filed our 510(k) application on November 14, 1996. We were notified of FDA clearance for commercial marketing in the U.S. on July 30, 1997.
This means we are now allowed to commercially market our Colormate
System for non-invasive monitoring of bilirubin infant jaundice to the
medical community in the United States.
This was a mammoth victory for the field of Color Science and great tribute is due to Dr. Fred W. Billmeyer, one of the world's leading color scientists who has been with our Company for 13 years. He is nicknamed the grandaddy of Color Science as he pioneered the Science at Rensselaer Polytechnic Institute and has written most of the existing textbooks on the Science.
Like Computer Science again in its infancy, with few computer scientists, there were only a few recognized Color Scientists 10 years ago and today remains a small community. Dr. Billmeyer spearheaded our research and development and documented our patent filings for all of the color science intellectual property we have accumulated over the past 13 years since our incorporation in April of 1984. He is still with us today and sharing this victory and all that we believe it means. And I know you want to know what it all means.
I think the most important thing it means is that all these babies born will benefit. They won't have to go through so much pain. The second most important meaning is that there is now what we believe to be a hallmark for establishing the credibility of color science in the eyes of the public.
If Color Science can be used by the health care professionals to non-invasively and painlessly monitor a life and death threatening disease for newborn infants, then I believe this goes a long way toward bringing up public acceptance of Color Science as a leading edge technology for mass market consumer applications. Obviously that really helps our Company as we have spent many years developing color science technology for many mass market applications.
So obtaining FDA clearance helps the Company in marketing its other applications. It additionally helps the Company in its R & D efforts for monitoring the many other chromogenic diseases I mentioned earlier as much of the same technology is utilized.
The third obvious benefit is it is newsworthy. Everyone is interested in babies and new medical technology. Chromatics has been virtually invisible to the public up until now and at this point, with the expert help of Mr. Connor, we can begin to bring our story to the world, as it so well deserves to be told.
Now back to the more detailed issues.
MANUFACTURING
I'll take the manufacturing area first. Initially, we have over 1000 units of the briefcase model submitted to the FDA that can get us through the first stages of marketing. We then anticipate using OEM manufacturing of interim equipment until we get our newly designed instruments ready to manufacture.
MARKETING CHANNELS
The next important issue is how we plan on opening up the Marketing Distribution channels. We've previously stated that we would look to acquire a medical distribution company or form a joint venture or some form of strategic alliance (probably with one of the mid-size distribution companies, because we learned that major companies often tended to treat technology companies like vendors and were unwilling to offer significant percentages of financial return in their contractual agreements with Licensors).
However a few things have happened that we believe are to our advantage in the medical distribution environment over the past year. First let me explain that we originally thought we had 2 potential markets in 4 geographic locations - the Hospital Market and the Pediatricians Office Market - in the U.S., Europe, South America and Asia locations.
However, in the past year a new and we believe a very large third potential market opened up - the Home Health Care Market. This is due to the early discharge of babies and mothers from the hospital and has changed many factors in our potential marketing opportunities, in a positive way.
The Home Health Care Distributors have been providing for the increasing need for bilirubin monitoring by the visiting nurse or techician sent to the home but the Home Health Care Distributors are experiencing an even greater need to provide the parents with a screening device for bilirubin at home.
As there are over 4,000,000 babies born annually in the U.S., this is in essence a consumer market (and it is perhaps relevant to note here that our instrument requires a disposable for each use. A "disposable" in the medical device marketing vocabulary is like the proverbial razor blade to the razor).
Currently the instructions to parents as they leave the hospital are "watch and see if your baby gets an increased yellow cast to the skin" - well you can imagine the obvious problems - especially for the Hispanic, Black or Asian children.
So two problems have emerged - either the parents have been constantly calling and a visiting nurse must go to the home, only to discover no problem in the first place, which is a very expensive trip for the Home Health Care Medical Distribution Company. Or in the case of parents' uncertainty or inadequate care, the baby is being brought in days later - very yellow and in danger of potential central nervous system damage.
The #1 reason for babies being readmitted to hospitals after discharge today is bilirubin infant jaundice. It's a big problem for the medical community. And of course this market is only a new and incremental one to the well established market existing in the hospitals, clinics and the traditional medical community, where non-invasive monitoring would be of great value to physicians in management of patient care.
So, Chromatics has been in business discussions with a number of large International Medical Companies very interested in obtaining the marketing and distribution rights for the Colormate bilirubin monitoring device and for the first time they are offering more equally shared financial opportunities.
We are in various stages of discussion, negotiations or due diligence ith these Companies while still continuing to examine our first concepts of acquisition or joint ventures in some markets, (or in some areas of the world, as this is a giant jigsaw puzzle and we want to put it together in the very best and most lucrative structure for the Company. I know most of you would love me to announce a signed distribution or medical partnership deal tomorrow, but please understand the scope of world-wide distribution we are structuring here (and I think you will understand when we can release the size of market we are dealing with once our analysis is complete).
The potential contracts we are dealing with may be a once in a corporate lifetime opportunity and the process of evaluating which company or companies to structure agreements with involves many principals and professionals working and meeting in many locations in the world.
The due diligence process alone is time consuming and very necessary to ensure the fundamental issues are fully understood by all concerned and surprises won't surface during the next step involving the tedious legal process of drawing contracts. But we do not intend for this to be a drawn out process. We have proceeded to the point where we have identified a number of candidates who would make excellent medical partners and hope to decide which of these we will proceed with as rapidly as possible, but we can't accomplish this overnight.
This is a very important process, however while it is ongoing no time will be wasted because we also expect to be working on any remaining regulatory requirements during the same time, such as getting our operations and training manuals, promotional materials for commercial systems and software programs for different markets prepared and submitted, complying with any applicable federal, state and local regulatory guidelines, obtaining all foreign and any remaining U.S. regulatory clearances for commercial marketing and preparing the warehoused instruments ready to ship under GMP quality systems.
As far as these further regulatory requirements are concerned, we will now be dealing with the FDA and other domestic and international regulatory compliances on an ongoing basis for our medical applications from here on out. We will probably have some more requirements on the Home Health Care and Pediatrician office market clearances which we have requested our regulatory counsel to research and on which we will keep you updated but fundamentally, we don't expect more than would be the required regulatory compliances for any company with FDA clearance for commercially marketing medical equipment.
As far as definitive size of market for all these three markets, the Hospitals, Pediatrician's Offices and Home-Health Care Markets and then in the 4 geographic locations of U.S., Europe, South America and Asia - the related definitive costs, pricing including projections - the Company has to establish credible sources for any assumptions used to define these. Initially, we have commissioned Frost & Sullivan, (a large market research organization) and an additional Medical Distributor in the Northeast, to conduct studies for the Company. And recently, as a side benefit to the ongoing discussions and negotiations with many of the International Medical Companies, we have access to their research on market size and their research on marketing strategies including pricing, costs, projections, etc. which we feel is invaluable in assisting us to define these issues credibly for public release.
We have been working on putting this together as rapidly as possible and have received a number of studies on various market segments but we have not fully completed this process. So anything I could tell you now would be based on an incomplete analysis, and since it has obvious impact on shareholder evaluation it has to be as right as we can diligently state (but from what we are learning so far I don't believe anyone will be disappointed with the result.)
As far as marketing our other non-medical applications, I am focused almost entirely on consummating one or more contracts for opening up our medical distribution domestically and internationally. However, in parallel we are working on completing the smaller less expensive
Colormate because this is the unit that most of our potential licensees in other markets want to see prior to further business discussions, especially in the cosmetics, hair color and dentistry areas.
Perhaps when I turn over the selected negotiated proposed medical contracts to our lawyers to begin the legal drafting process I can begin to pick this up in between. But certainly whenever the device is complete, I will be resuming the next steps in our business plans for the beauty and dental industry marketing. It will also be during this next phase that we intend to start bringing in the much needed management to implement our strategy for a whole new era of expanding operations.
In summary, I have known for about a year there were three things I had to accomplish to attract the caliber of upper-echelon management we want.
First, get FDA clearances. Second, sign one or more international medical distribution contracts, and, Third, finish the small hand-held instrument. Then the Company would be credible in its goals, operational, and have the tools necessary to expand its many applications, hopefully very profitably.
Well, Number one is done, Number two and three are well in progress. Number four will be to bring in additional management at a point where the Company has the necessary elements to take us into this new era, and I think I can finally at least take a vacation. That's where we are and that's our plan.
Questions from Floor in Part 2 |
