Good morning everyone and welcome to Discovery Labs’ First Quarter 2014 Financial Results and Business Update Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please also note that today’s event is being recorded.

I would now like to turn the conference call over to Mr. Will Roberts of Discovery Labs. Mr. Roberts, please go ahead..

Thanks, Jamie, and good morning to everybody joining us on today’s call. Today’s call is to discuss the 2014’s first quarter financial results as well as recent business update. Before we begin, I will remind you that today’s conference call will contain forward-looking statements.

These statements relate to future events or the company’s future financial performance.

Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from any future results expressed or implied by such statements especially those inherent in the process of discovering, developing and commercializing our products.

Actual results could differ materially from those described in our forward-looking statements and as a result of a number of factors including those set forth in our 2013 Annual Report on Form 10-K and any subsequent SEC filings. With that I’ll turn the call over to John Cooper, our Chief Executive Officer. John..

Thanks, Will. Good morning everyone. Thank you so much for taken the time to spend with us today and to get updated on Discovery Labs. We have with us and besides myself we have with us today Dr. Rusty Clayton, our Head of R&D, we have Dr. Tom Miller, our Chief Operating Officer and we have John Tattory, our Chief Financial Officer.

And we will all be available for questions. We hope we have a considerable question-and-answer session. So I’m going to be moving through our prepared remarks to move towards that session as fast as possible. But I want to make sure that before we get to Q&A and before we get to the prepared remarks.

We put which is what we like to do for our employees, for our investors, for ourselves, we put into perspective again what we’re working on, because what this quarter represented to us was the first full quarter of where SURFAXIN is now being launched into the neonatal community and where AEROSURF is in the clinic for the neonatal community.

This is really important. We view the world of respiratory distress syndrome almost in three eras. The first era was when surfactants were not available.

The second era is the era of predominantly animal drive surfactants and what we believe 2014 represents is the beginning of a new era, an era of surfactant technology that’s based on science, surfactant technology that is based on a synthetic composition that can mimic what is in our lungs, and technology that potentially could deliver surfactants in an aerosol form to babies who would benefit from an aerosolized surfactant and avoid intubation.

We think this is a major and we take it very seriously. So with that said again we’re proud in terms of what we’re doing and we take a long-term approach. So we’ll be moving forward towards our Q&A session to cover those themes. First with respect to SURFAXIN.

Our last call was approximately six or seven weeks ago and we covered quite a bit on SURFAXIN in terms of the process that we’re managing through in terms of getting SURFAXIN on hospital formularies. And we’ve discussed of course about the fact that, that takes time.

But we also said many times in the past as well as in our last call that we’re taking a very measured, very deliberate approach to SURFAXIN ultimately being a successful product. Again as I said in my opening remarks, we think we’re at the beginning of a new era. We take it seriously.

We want to make sure that the world takes that seriously and the hospital community does as well. So I won’t be covering a lot of detail in my prepared remarks on SURFAXIN, I’ll be bringing some updates, instead what we’d like to do is to spend a considerable amount of time in our prepared remarks on AEROSURF.

But in the meantime what I do want to do is provide you with some updates on SURFAXIN. The last time we talked we indicated that we were in five hospitals in terms of on formulary, where we are today is that’s basically doubled. So we’re making progress, we’re making good progress. We also mentioned that we’re focused on centers of influence.

These are key hospitals where satellite hospitals also watch what these key hospitals do in terms of making changes in practice, and changes in science. And that’s what our team is focused, we’re focused on that group.

And last but not least with respect to the hospital community and the neonatal community we’re doing – we’re building relationships with this community. This is a group that as I mentioned earlier have been working with a group of surfactants, a series of products for the last really 10 to 20 years with not much change and we represent that change.

It’s a change that we think is going to improve ultimately the standard-of-care in (medicine) and the people that we’re working with SURFAXIN as well as with AEROSURF, we believe are beginning to feel that, that adopting is starting to happen.

Most importantly we recently this past week and as a matter of fact attended and played an important role at the Pediatric Academic Society Meeting. And at that meeting there were – it’s interesting how things change. Three major programs were presented at that meeting.

One of those programs has to talk about the volume of surfactants that should be delivered from a scientific basis to a baby to help that baby. In the past I don’t think that, that science was really assessed, today it is. The world is changing in terms of the application of surfactant and the science around it.

And remember SURFAXIN was designed scientifically so that ideally the amount of volume of surfactant that a baby is receiving is meant to ultimately help and possibly that’s what we’re seeing in our clinical trials and why we were. So we had such robust results in our clinical trials.

Secondly another area of emphasis at the meeting was the topic of reintubation. And third another topic that is now new as a result of SURFAXIN is an ethnic issue.

Now that synthetic is available should hospitals carry and be responsible for carrying a synthetic on their formulary and should parents be aware of the choices that are available including religious considerations. So the world is changing. We believe we represent the catalytic technology to help that change move forward.

So we will get into SURFAXIN further during the Q&A session and Dr. Miller will be able to address some of the commercial questions that you may have. Before I turn the call over to Dr.

Clayton to speak specifically to AEROSURF, one thing I want to mention, we issued a press release yesterday around receiving what we believe to be very, very important intellectual property for our platform.

Again step back for a second, think about what we have, the synthetic surfactant delivery technology predominantly focused on aerosol delivery and the ability for the patients to receive that aerosol.

We really believe that not only can this be applied in the neonatal community but we believe once success is shown in the neonatal community we could move forward in pediatric applications and adult applications.

And we’re really proud and I’m proud of the team who engineered this, that we received two patents around our lyophilized formulation of our SURFAXIN or surfactant. Those two patents have to deal with methods of manufacturing, but most importantly composition of matter and the composition of matter patents take us to 1 in 33.

So between these patents or other patents and the regulatory protections that we have, we feel that we’re putting a very good support around our technology for the long-term. So, with that said I’ll pass the call over to Dr. Clayton and Dr. Clayton can take us through a really, really important program which is AEROSURF.

And I’ll make it clear right from the very beginning we’re on track with AEROSURF, we’re on track to deliver data in the third quarter, very important program, very exciting program and Dr. Clayton will take us through..

Thanks, John, and good morning to everybody on the call. It’s really my pleasure to say that after a very meticulous development program of both our lyophilized lucinactant’s dosage form and our capillary aerosol generator, that we’re currently enrolling patients in the first study of our AEROSURF clinical development program.

We have three sites that are actively recruiting patients and we initiated a fourth site or started to do the initiation of a fourth site yesterday so they will be activated this week.

I’m also happy to say that there is widespread enthusiasm regarding this technology not only in these sites that are very enthusiastic about beginning this study and recruiting but also throughout the entire neonatal community.

I had the opportunity to attend the Pediatric Academic Societies Meeting this past week and every discussion I had with every neonatologist are focused around AEROSURF.

So there is very widespread enthusiasm for this program and particularly for the results of this study which as John said we will be reporting the results on in the third quarter of this year. John and his remarks had mentioned that we’ve seen a couple of eras in neonatology.

I began my career in pre-surfactants era that is my clinical career in the pre-surfactant era, we’re typically a 27-week gestation infant would need to be intubated, mechanically ventilated and would be literally fighting for his or her life.

Unfortunately, most of the time unsuccessfully, in the 1990s, it’s 1990 specifically surfactant was introduced and that revolutionized neonatal care. Literally overnight and that 27-week gestation infant now had a better than even chance of surviving.

In the pre-surfactant era the leading cause of death among premature infants was respiratory distress syndrome or RDS. And RDS is – occurs because of the lack of pre-term infant’s ability to make their own surfactant. Surfactant is a fluid that lined with the inside of our lungs and facilitates our breathing.

Without the surfactant these babies would require very aggressive mechanical ventilation and with surfactant they are less needy in terms of mechanical ventilation and ventilatory support and they generally do well. And so in the surfactant era that John described in the 1990s mortality from RDS dropped significantly.

Unfortunately we also learned that the mere placement of that endotracheal tube in the airway while life-saving would potentially cause damage to this pre-term baby’s fragile lungs.

And this put the neonatologist in somewhat of a dilemma, intubate the baby, and ventilate them that way and deliver surfactant and maybe save their life but also cause lung damage.

So as neonatology and respiratory intensive care continue to evolve neonatologist develop the ability to support these babies through an alternate ventilatory support means. This means was nasal continuous positive airway pressure.

This is a mode of ventilatory support where a tube in the throat is not required and instead the support is delivered through nasal prongs positioned in the baby’s nose. This mode of therapy has become extremely popular with neonatologist and almost all babies born pre-term are initially tried on this type of therapy.

Unfortunately anywhere from a third to as many of two-thirds of these infants are ultimately will require endotracheal intubation and surfactant administration. Mostly we believe because surfactant was not delivered early in their course of therapy.

We also know from very well-designed studies that early surfactant therapy is superior in improving the baby’s outcome as opposed to later surfactant therapy.

So when a baby is placed on a nasal CPAP without the benefit of surfactant therapy and then subsequent required intubation mechanical ventilation not only is the active intubation and mechanical ventilation potentially causing damage to the baby’s lungs but also the lateness of the surfactant therapy is further disadvantaging these babies.

And this dilemma that is created for the neonatologist is the essence for why Discovery Lab has developed AEROSURF. AEROSURF is a combination of our lyophilized lucinactant dosage form delivered through a highly specialized aerosol generator. An aerosol generator built specifically to deliver surfactant.

They are – the aerosol generators that have been on the market for over 50 years now, but these aerosol generators were designed to deliver (indiscernible) products. These are products think of them as like water. Surfactant is not one of those products. Surfactant is a suspension of lipids and acts very differently when you try to aerosolize it.

When you take the current leading aerosol generator that’s on the market for example the vibrating mesh nebulizer. The vibrating mesh nebulizer is able to aerosolize the small amount of surfactant with a very low output for a short period of time before clogging up.

So a different technology and advanced technology is necessary to deliver an aerosolized surfactant. And that’s what our capillary aerosol generator is and its advanced technology that has been very scrupulously developed and very rigorously tested specifically to develop our product and to aerosolize our AEROSURF product.

The AEROSURF delivery system is also designed to integrate into the CPAP system, so that – so it’s specifically designed for this need to deliver aerosolized CPAP delivery I am sorry aerosolized lucinactant to the baby’s receiving nasal CPAP.

And it’s also designed in this system to make sure that we take into consideration the baby’s pattern of breathing and their shallow (title) breath. These are very important considerations that you have to factor in, in order to optimize the delivery of the aerosolized surfactant into the lungs of these newborns.

And we’re very excited after all of this development work to finally put enter into our clinical development program which we’ve done earlier this year. The AEROSURF clinical program initiates with something it’s called safety and tolerability study and that’s what we’re doing right now.

We’re recruiting infants from 29 to 32 week gestation who are receiving nasal continuous positive airway pressure or nasal CPAP. And we’re studying the AEROSURF in three escalating doses. What that means is we begin with one dosing group that is receiving a set dose.

We compare how that group tolerates, the aerosolized lucinactant compared to a group of infants that are randomized to a control group that is receiving nasal CPAP alone.

Once that first dosing group is completed there is a pause in the trial and an independent Safety Review Committee reviews the safety and tolerability information collected on those treated babies relative to the controlled babies that are receiving nasal CPAP alone.

Once the Safety Review Committee gives us the green light we then move on to the second dosing group and then eventually on to the third dosing group. I should point out that as we increase the dose we’re increasing the dose by increasing the duration of the aerosol.

We’re not manipulating the concentration of the drug, we’re not manipulating the flow of the drug through this system. And the reason that we’re doing that is again we have to keep in mind the pattern of the baby’s breathing and the total breath of the baby’s breathing.

And increase the dose by increasing the duration of the exposure to the aerosol rather than the concentration of the flow of the result. We’re performing this trial in a total of four sites as I mentioned three sites have already initiated recruitment and we’re initiating a fourth site this week that initiation began yesterday.

And all four of these sites are very important in terms of their ability to recruit patients, their collaboration in our multi-center clinical trial and we were extremely pleased to add this fourth site because we had this opportunity, there was a great deal of interest in this site and this site has been a very critical contributor in previous clinical trial.

So we’re happy to include this site in the trial as well. As John alluded to earlier we expect that this trial will report out the results in the third quarter of this year.

As I said before these sites themselves are very enthusiastic with regard to their participation in the trial, there is a fair amount I have to say of jealousy because there were a number of other sites that would want to participate in this trial and we’re at this point now looking forward to starting to plan the next phase of this trial or the next phase of the program which is we refer to as our Phase 2b.

And we’re already in fact bringing one internally personnel at all levels to help manage this increasingly complex clinical program. We’re also increasing our number of sites evaluations; we’re currently looking at many male academic and important medical sites to add on to our roster of sites for our upcoming trials.

We recently during our Pediatric Academic Societies Meeting we held a meeting of our Steering Committee and our Safety Review Committee to talk about those – the present developments with our trial and as well as the future of this trial. Let me tell – talk just a little bit in closing about the expected results of this trial.

As I said before this is a safety and tolerability study. This is an important first step in a clinical development program.

We already understand the safety and tolerability of our products when it is and still down in endotracheal tube, but since the method of delivery is different we have to first establish that delivering an aerosol to this population is safe and well tolerated.

Therefore we expect that a successful outcome of this trial is in fact the demonstration of safety and tolerability in this population. And that demonstration alone allows us to go forward in our clinical development program.

Now in the past several of you have asked me well is there any chance that we’ll see some sign of efficacy and that answer remains yes. We can see some – we can potentially see some sign of efficacy.

The same things that we’re measuring to demonstrate the safety and tolerability of the AEROSURF product are also signs that might lead us to believe that there is a sign of efficacy in the product.

But one should not expect that this trial is designed to demonstrate efficacy and it’s a very important win for us to just get through this first study and demonstrate that we have safety and tolerability because it advances us – it allows us to advance into – further into our clinical program.

So in summary let me just say that we are in fact on track to see results in the third quarter of this year.

There is a lot of excitement about this product AEROSURF which integrates with the CPAP system and allows us to deliver an aerosolized surfactant in a way that we believe will optimize delivery taken into account the baby’s breathing pattern and that we’re actively recruiting for this trial and we’re very excited to go forward with this.

So with those comments I’ll now turn the call over to John Tattory, our Chief Financial Officer who will go through the financial highlights for the last quarter..

Thanks, Rusty and good morning everyone. I’m going to briefly cover some of the key financial items including an earnings release we issued earlier today. As John mentioned in his opening comments we’re underway in our efforts to fundamentally change the practice of neonatology and specifically the management of patients it already has.

And for us it all begins with SURFAXIN. As we discussed on the last call we’re only into product introduction and proceeding in a deliberate and measured way focusing on gaining hospital formulary hospital by hospital. Having said that we did recognize revenue in the first quarter albeit a small contribution.

For the quarter we reported $28,000 in SURFAXIN revenue. As a reminder we use the sell-through method for revenue recognition which means sales to our specialty distributor are deferred until the distributor sells products through to the hospital and all other revenue recognition criteria have been met.

From an operating standpoint we reported an operating loss of $10.8 million compared to $12.6 million in the first quarter of 2013. The operating loss in 2013 included investments in key projects supporting the initiation of our AEROSURF Phase 2 program.

First, the design and development of a clinic-ready capillary aerosol generator and secondly technology transfer of our lyophilized KL4 surfactant manufacturing process to a CMO. As Rusty mentioned both the capillary aerosol generator and lyophilized KL4 surfactant are currently being used in the AEROSURF Phase 2 program.

Operating cash burn before financing activity for the quarter was $10.8 million. Regarding our financial resources we ended the first quarter of 2014 with $76 million compared to $86 million as of the end of 2013. The planning purposes we’re managing our cash resources to ensure we have a capital to take us to the end of the AEROSURF Phase 2b trial.

The second quarter of 2014 we’re forecasting an operating cash burn before financing activity were approximately $11 million which was consistent with what we saw in the first quarter. In addition to our cash balances we currently have $23 million remaining available under our ATM program.

Regarding long-term debt we have $30 million due to Deerfield which is payable in three $10 million installment beginning in February 2017. However as a reminder we tend to further 2017 and 2018 installments if we need certain financial milestones.

For example to differ the payment during 2017 into 2018 the milestones are either $20 million in annual sales where the market capitalization of $200 million. Finally a couple of points on our capital structure. As of the end of the first quarter we had approximately 85 million shares outstanding as well as 14.5 million outstanding warrants.

Included in the outstanding warrants were 4.6 million with an exercise price of $1.50 and an expiration date of February 2016. With that I’ll turn the call back over to John for closing comments..

Thank you, John, and thank you Dr. Clayton for your review of AEROSURF. Before we go to Q&A I just like to summarize the key points. So we’re making progress with SURFAXIN.

We recognized it’s slow, we recognized that the revenues right now are de minimis but nevertheless it’s an important product that represents change, change takes time and we’re committed to it. With that said the last time we did speak we were on five formularies as of today that’s doubled. There will be more on that in our second quarter call.

So when we take a look at the middle of the year we’ll have a much better sense of how SURFAXIN is finding its way throughout the United States, the centers of influence that are accepting the product, so there will be more on that later. Also we’re really getting the message out about how SURFAXIN is differentiated from the animal-derived products.

We played an important role we believe at the Pediatric Academic Societies Meeting and we were happy to see these new scientifically based topics on the agenda. So we’re developing our footprint, very key centers of influence and we’re making progress. But SURFAXIN is the beginning. SURFAXIN is just the first step of the change.

We see AEROSURF as the paradigm shift and with respect to AEROSURF we remain on track for our results, the first clinical results of our program in the third quarter of this year. With that said we’re pleased to take any of your questions and I’ll turn the call over to the operator for Q&A please..

Ladies and gentlemen at this time we’ll begin the question-and-answer session (Operator Instructions) And our first question today comes from David Amsellem from Piper Jaffray. Please go ahead with your question..

Hi guys, this is Traver Davis on for David. Thanks for taking the question. So I was just wondering if you can go through any specific early feedback, positive feedback that you’ve gotten from certain major hospitals and also how should we start thinking about hospital (indiscernible) access going forward from today.

Is there anything to report on that front that was positive? Thanks..

Good morning. This is Tom Miller, maybe taking your questions one at a time. So as John indicated now we now have access with product in 10 facilities. Just this past week two very large facilities that we’ve had stops and starts with rescheduling of formulary and therapeutic committee meeting in the first quarter but now we finally have that access.

For institutions that are actively using products but we don’t have the ability to get an update for each (tile) that is dosed with the product. In general I would say the experience with SURFAXIN is consistent with that from a workflow perspective with other products that they’re used to.

We take painstaking efforts to ensure that as our product comes into the facility, we do our best to make sure that the product works in our – into their workflow to assure that the product utilization is as seamless as possible. We just had a – we convened our strategic Scientific Advisory Board at the corporate level.

These guys represent almost senior advisors here at Discovery. So we have account level feedback but when we think about major thought-leading individuals providing feedback everyone recognizes how important this SURFAXIN product will be in this evolution.

To John’s point earlier this concept of new era although added a (gate) hospital product launches take their time, this really truly represents an opportunity to move beyond the animal-derived surfactants and we’re very confident that we will get there.

As it relates to your second question and forward-looking guidance we indicated in our last call that we would provide our next quantitative update after we got through June and the rest of the second quarter.

But I will qualitatively indicate that we have a very busy formulary committee meeting schedule throughout the rest of the quarter and we expect to see a significant escalation in institutions coming on board with interest in utilization of the product..

Great. That’s very helpful. Thank you..

Sure..

(Operator Instructions) Our next question comes from Joel Sendek from Stifel. Please go ahead with your question..

Hi, thanks a lot. John, I was just wondering the doubling of the formulary to 10 that as of April I suppose not in the first quarter. And would that indicate that you’re on trajectory to increase the revenues from where they are now, that’s my first question? Thanks..

Joel, hey this is John. The last time we had our conference call was early the mid March and where we are now in early May that as of right now, so that’s clear.

With respect to revenues look formulary acceptance is absolutely no guarantee of revenue recognition, but we know one thing we’re not going to see revenues unless the hospital accesses the product on formulary.

So with that said that’s why we’re mentioning earlier that looking at where we stand in June continuing acceptance of the product with the increasing number of hospitals who accept SURFAXIN on formulary.

One could hypothesize of course that would lead to increasing revenues, so we’ll see where we are when we’re looking at June, but we’re making progress..

Okay.

And then I’m just curious with regard to AEROSURF whether you’re going to the same sites that you have formulary acceptance for SURFAXIN or is that not one of the objectives?.

Yes, hi, Joel. It’s Rusty. When we started planning our AEROSURF clinical program we put a premium on sites that demonstrated clinical excellence with their ability to maintain babies on nasal CPAP because it’s important to test our AEROSURF product under these circumstances.

We also look for sites that we’ve had demonstrated to be very good recruiters and to be good collaborators in a multi-center trial. We really turned a blind eye to whether or not these hospitals may or may not be SURFAXIN early adopters on formulary.

We’re just putting a premium on the clinical development program and selecting the sites to optimize our chance of success for the clinical program..

Got it..

But I’ll tell you with that said though Joel we do have certain sites that are also adopting SURFAXIN..

Understood..

I mean – these are sites that are thinking about the future..

Right, right..

Right. Back to the points we made earlier it may seem like it takes a while but the end result is what counts. I don’t want to put a time period on it but just see this as an example.

If you think 10 years from now where the world is going to be we firmly believe the world is going to be completely shifted away from the era of animal-derived products to an era of high science and synthetically based surfactants most importantly whether you deliver via aerosol of whether the baby is so severe that unfortunately needs an endotracheal tube and you have to intubate and deliver that surfactant then, that era, that the future should be one technology platform that allows that.

So the sites that we’re using are very cognizant of this change..

Thank you..

And everyone at this time I’m showing no additional questions. I’d like to turn the conference call back over to Mr. Cooper for any closing remarks..

Well thank you very much. Thank you for participating. We appreciate your efforts. We appreciate your support. As I’ve said earlier and I know I’m being a little repetitive, but I think its key. We’re building something for the future. We’re very committed. We’ve advanced this company considerably, over the last few years we plan on continuing to do so.

And the rest of this year we expect it to be exciting with AEROSURF data and with the advancement of SURFAXIN. So thank you very much and we look forward to talking soon..

Ladies and gentlemen that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines..