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Review
2/14/07- Reported Q4 results midday. Revenue for the quarter was $4.54M (-5% Y/Y). Manufacturing costs rose incrementally Y/Y, reducing the gross margin on wound care products to 39.4% from 42.7%. R&D expense was $1.86M (-31% Y/Y), declining due to the discontinuation of the Phase II clinical trial. This decrease was more-than offset by higher G&A expense of $1.81M (+52% Y/Y) and a $1.05M charge for asset write-down. While the operating loss rose to $3.02M from $1.91M Y/Y, the net loss declined by virtue of a $1.11M gain on currency translation and higher interest income. The net loss was $1.60M, or $0.09 per share, improved from a net loss of $2.84M, or $0.29 per share in Q4/05. The company ended the period with $18.9M in cash.

In light of the discontinuation of the clinical trial following disappointing efficacy results, NCST said that it will implement restructuring measures in Q1/07 to reduce cash burn. These actions will include a shift in focus from clinical to preclinical research and exploring near-term revenue opportunities. The first of these near-term opportunities is the application of nanocrystalline silver to a moisturizing cream to prevent infection. The company filed a 510(k) application with the FDA for this use in December, and plans to seek a marketing partner in the cosmetics industry pending approval.

Commentary
NCST was bouncing off all-time lows around $3.10 in mid-March before rallying to end the period at $4.06, trimming its loss to 14% for the quarter. Following the failed clinical trial on atopic dermatitis, rather than initiate a new clinical program focused on another indication, the company has shifted its attention to preclinical work and near-term revenue opportunities in order to better manage its cash position. The first of those potential opportunities is the use of nano-silver in moisturizing cream, which depends on FDA approval and then finding a partner interested in licensing. The Y/Y improvement in net loss was purely cosmetic, as the operating loss widened by 58% Y/Y in Q4. Without the benefit of any milestone payments from Smith & Nephew in 2006, cash burn exploded to $12.6M from $2.1M in 2005. NCST feels that its year-end cash balance of $18.9M will support it for at least 18 months. But with wound care revenue growth expected to abate as inventory is absorbed, it seems that cash burn improvement will have to be driven by further expense management.