Qui tam litigation seeks damages that if awarded could exceed the financial resources of the company.

Capstone Therapeutics has decided to stop developing Phase II stage AZX100, its lead drug candidate, in dermal scarring to preserve cash since the firm is involved in a whistle-blower litigation. Certain preclinical, manufacturing, and regulatory projects related to AZX100 that are either required from a statutory perspective or are under contract will continue to their completion.

The company has decided to also cease all activities related to its other drug candidate, TP508, and return the patent and other intellectual property it owns related to the original licensor, the University of Texas Medical Branch at Galveston. In addition, the firm has reduced the size of its board of directors from six to three members.

The decision comes as a result of a pending qui tam, or whistle-blower, litigation that was reported in March 2011 and subsequently prompted a restructuring last year. The company has said that the qui tam litigation seeks potentially significant damages that, if awarded, could exceed the financial resources of Capstone Therapeutics.

“Until the resolution of the ongoing qui tam litigation, Capstone is limited in its ability to execute a strategic corporate transaction and restricted in its ability to return remaining cash to stockholders,” comments Jock Holliman, executive chairman.

On October 14, 2011, Capstone said it would move into what it called “hibernation mode.” It reduced its staff from 18 full-time employees to four individuals covering required regulatory and financial functions at substantially reduced compensation. Capstone felt the move would allow it to preserve cash as it reviewed potential partners for AZX100.

“The AZX100 program in dermal scarring has, in fact, generated genuine interest in the marketplace,” Holliman said last October. “However, there remains uncertainty regarding the timing of such an alliance, and there are no guarantees that a partnering deal can be consummated in what we consider to be a timely manner. This cash-preservation plan will allow the company to reduce costs, operate virtually, and continue partnering discussions and negotiations in an efficient fashion.”

Remarking on today’s decision to nix drug development activites, Holliman says, “because we have not yet secured a development partner for AZX100 in dermal scarring, we are now further reducing our operations to preserve cash. We presently have four employees and several part-time consultants, most of whom will terminate as their wind down projects are completed in coming months.

“Capstone remains a publicly traded company, subject to the regulations and reporting requirements of the Securities and Exchange Commission,” Holliman adds. “Accordingly, we must maintain a financial reporting and securities compliance capability and will incur costs associated with these obligations. During the near term, we intend to continue our efforts to create shareholder value through a development partnership or other strategic transaction,” states Holliman.

AZX100 is a synthetic 24-amino acid peptide with potential in smooth muscle relaxation and fibrosis. TP508 is a synthetic 23-amino acid peptide that reportedly stimulates cellular events leading to angiogenesis, revascularization, and repair of dermal and musculoskeletal tissues. It was being evaluated in disorders that involve vascular endothelial dysfunction.

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