Good morning. And welcome to the Discovery Labs' Second Quarter 2015 Financial and Business Update. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Tattory. Please go ahead..

Thank you, Allison. Good morning everyone. Thank you for joining our call. During today's call we will discuss the 2015 second quarter financial results, as well as provide you key business updates. Before we begin, I want to remind you that today's conference call will contain forward-looking statements.

These statements relate to future events for 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 and/or implied by such statements, especially those inherent in the process of discovering, developing and commercializing our products.

The listener is cautioned not to rely on these forward-looking statements, as actual results could vary materially from those described as a result of a number of factors, including those set forth in our 2014 annual report on Form 10-K and any subsequent SEC filings.

Joining me on the call today are John Cooper, our Chief Executive Officer and Steve Simonson, our Chief Development Officer. With that, I'd like to turn the call over to John Cooper..

Good morning everyone. Thank you, John. We issued a press release at the close of business yesterday. We also filed our 10-Q. All of our comments today of course are tied into the disclosures that are included in those documents and I please refer all to review those.

I think there are quite substantial and informative and appreciate you taking a look at those. With that said, the way we're organizing our call today I'll give brief introduction and I’m going to pass discussion on to Dr. Simonson to discuss our AEROSURF program, and to John Tattory, our Chief Financial Officer to discuss our financial situation.

The overview that I like to give to me and I know to our team is important fleet. The setting that we are in today is the results of a transformation that we made in the second quarter.

And that transformation is to focus our resources, on the development of our technology platform, our KL4 surfactant, which is the synthetic surfactant that mimics what you have and I in our lungs, as well as delivery capability to aerosolize that surfactant and deliver that surfactant to patients that our surfactant deficient or where surfactant is dysfunctional.

As we all know, our lead program is AEROSURF to ultimately deliver an aerosolized surfactant to a premature infant that has respiratory distress syndrome, which in essence means they are surfactant deficient. And to do so was out the need for invasive intervention and mechanical ventilation.

Should we be able to achieve that? That has the opportunity to truly transform the management of neonates with RDS. But as we said in the past, our vision goes beyond that. The technology that we have has and represents the opportunity to build a respiratory franchise.

Again the underlying fundamental belief in the role of surfactant and then the goal of surfactant is to help us breathe and there are number of diseases associated with surfactant deficiency or dysfunction that would benefit from aerosolized surfactant going to the lungs.

Recently we received a Grant from the NIH where we're looking at aerosolized surfactant associated with improving patients who have acute lung injury after being exposed to radiation. That is very common associated with patients that are receiving radiation treatment for lung cancer.

We also have Grant associated with the use of aerosolized surfactants for influenza - acute lung injury associated with influenza. We’ve looked at in the past, the use of surfactant for mucociliary clearance properties associated with cystic fibrosis and COPD.

In essence what I’m saying is, we truly believe there is an opportunity with our technology platform to build a respiratory franchise. But with that said, our lead program is AEROSURF and we are 100% focused on the clinical program for AEROSURF. We’re excited about it.

As I mentioned earlier, it represents an opportunity to truly transform the management of neonates, with respiratory distress syndrome. We received encouraging data from our initial Phase 2a program. We're running a very comprehensive Phase 2 program.

So that by the time we ultimately complete that program, we want to make sure we are doing all of the right things and removing as much risk as possible going into potential Phase 3 program for AEROSURF. Dr. Simonson, will take us through the program and provide some details in terms of where we stand.

But we are very excited about this program and it is the focus of our attention today. Additionally, what the transformation of our strategy in the second quarter we knew we had to adjust and improve our balance sheet. And we made moves to do exactly that.

One of the things we knew we have to do is we put a debt arrangement in place back in 2013 with Deerfield and that debt arrangement – was the $30 million debt arrangement with principal payments of $10 million each in February of 17, 18, and 19.

And the goal that we needed to do with this transformation of strategic change was to make sure we have capital and remove financing overhangs so that the number of milestones that we are anticipating with AEROSURF in 2015 and especially 2016 could be looked at clearly without any or limited financial overhang whatsoever.

So we needed to restructure the debt with Deerfield and we did that especially as it related to the principal payments that's due in 2017. And in addition to that we wanted to make sure that we have capital to take us through 2016 into 2017 allowing the Phase 2 program that I mentioned earlier to be executed properly and according to plan.

And to do so in a way we’re after all data is released, we have financial cushion by which to have that data be properly valued so that we can move forward thereafter.

And so therefore we embarked on a financing plan and we implemented a financing in July that brought in gross proceeds of $40 million, net proceeds of approximately $37 million, $38 million. John Tattory, our Chief Financial Officer will take us through those details. So with that as an overview, I’m happy to pass the discussion onto Dr.

Simonson, who will now take us through the AEROSURF program..

Thanks John, and good morning everyone. AEROSURF development continues to make good progress through our Phase 2 program of studies. I'd like to begin by reminding everyone that we reported the results of our first Phase 2a study in 48 premature infants in May. At that time we went through the three main objectives with that study.

Briefly the safety profile of AEROSURF through 15, 30 and 45 minutes of dosing was comparable to that seen in babies receiving nasal CPAP alone. Second, the device work is designed and it was well accepted in the NICU setting.

And third we shared physiological that suggest that KL4 surfactant is being effectively delivered into the lungs of these premature babies and is producing the changes we would expect to see consistent with the surfactant effect.

Specifically there were decreases in oxygen requirements and improved carbon dioxide levels in AEROSURF treated babies compared to babies receiving CPAP alone. We also discussed the pattern of CPAP failure that we were seeing. CPAP failure refers to those babies who need to be incubated, mechanical ventilated and given rescue surfactant therapy.

Our preliminary data from this first study suggested that AEROSURF maybe prolonging the time to CPAP failure in those babies who ultimately fail and at higher doses we saw signs that CPAP failure maybe decreased with AEROSURF treatment.

All of these changes were observed in relatively small group of patients, so we need to obtain more data to continue to evaluate these early signals. The encouraging results of this first study of AEROSURF enabled the program to progress in a couple of dimensions.

First we are evaluating higher doses and repeat doses in a 2a expansion study in the same gestational age group that we initially studied, specifically 29 to 34 weeks. This study is exploring 60 and 90 minutes of dosing and allowing repeat or surf dosing in babies who meet criteria to do so.

The group size is similar to the initial study in AEROSURF and eight controlled babies at each dose level 32 patients overall. I'm pleased to report that we have completed the 60 minute dose group and it had a successful data review by our independent safety review committee and we’re well underway into the final dose group in this expansion study.

The second part of our program that’s underway is taking AEROSURF into younger gestational age babies in the 26 to 28 week gestational age group. These babies are even more surfactant efficient than the older babies and we’re looking forward to the evaluation of AEROSURF in these younger babies.

As we described in May, we will begin our studies in these babies with the 30 minute dose allowing repeat dosing in babies who meet criteria and then move to the 45 minute dose. We will look at eight AEROSURF babies and eight controlled babies in each dose group, 32 patients overall.

If we feel it’s necessary to go to higher doses in this age group we will do so. This study will begin enrollment this month. These two studies that 2a expansion study looking at higher doses and the 2a study in 26 to 28 lead gestational babies, our target is to complete in the fourth quarter of this year.

The other piece of our Phase 2 program is the Phase 2b trial. In this study we will work to confirm our clinical effect and have a good estimate of the treatment benefit. We will also identify the dosing regimens to take forward towards the Phase 3 study.

This study will include 200 to 250 premature infants, 26 to 32 weeks gestational age and is on-schedule to initiate in the fourth quarter of this year and complete by mid-2016. We are also progressing on-schedule with our device development in partnership with Battelle.

This project is to transition our current capillary aerosol generated device to that for use in Phase 3 and commercially if approved. We’re well into the second stage of this project and are on track to complete this before Phase 3. Now I’ll turn the call over John Tattory our Chief Financial Officer..

Thanks, Steve. I’d like to begin with providing additional details to you regarding the steps we have recently took. And John had mentioned earlier to strengthen the company’s financial position.

We ended the second quarter with $26 million in cash and cash equivalents and $30 million outstanding under our Deerfield loan, which is payable in three annual installments of $10 million each beginning in February 2017.

Our goal coming out of the second quarter with the strength in the financial position of the company by bringing an additional capital to fund us through our upcoming AEROSURF Phase 2a milestones with some cushion and to remove any near-term financial overhang associated with the Deerfield loan.

The first component of strengthening our financial position was our recently completed public offering in a way just John mentioned we raised $40 million in gross proceeds for approximately $38 million in debt.

With regards to the investors are participating in the financing one well known in respect to biotechnology investor and existing shareholder entered the transaction and represented approximately 40% of the total offering.

Another well known in respect to biotechnology investor and existing shareholder participate at approximately 20% of the total yield. Overall the top three investors accounted for approximately 75% of the total offering and the top six investors represented approximately 90% of the total.

The second component of strengthening our financial position was the restructuring of our loan at Deerfield. As I mentioned previously we entered the third quarter with $30 million due to Deerfield and $10 million installment beginning of February 2017.

We amended the agreement in July by prepaying $5 million of outstanding principal and adjusting the principal installments to eliminate any amounts due in 2017 and adjust the amounts due in each of February 2018 and February 2019 to $12.5 million each.

So as a result of this restructuring of the debt we no longer have any amounts owe to Deerfield until February 2018. As a reminder 2018 installment may be deferred if we have any market cap of 2015 million or greater at that time.

We believe that if we executive our plan and the AEROSURF development program shows positive results we could potentially be in a position to defer the $12.5 million during February 2018 giving the opportunity for product such as AEROSURF, which potentially could transform the treatment of RDS.

With respect to Deerfield’s participation in the recent financing, the $40 million in gross proceed includes $5 million in non-cash considerations from Deerfield as prepayment of future cash interest due under the loan agreement.

Overall at the end of the second quarter we’ve taken the steps necessary to strengthen the financial position of the company and we now have sufficient capital on our operations to anticipated AEROSURF Phase 2 development milestones in 2015 and 2016.

And we have eliminated any overhang related to the $10 million previously owed to Deerfield in February 2017. Now transitioning through second quarter results. We reported a net loss of $11.3 million, which includes $1.3 million of interest on our debt.

It should be noted that $600,000 of the $1.3 million in interest represents cash interest expense, which for the next year will be reported entirely as non-cash interest due to the prepayment Deerfield through the financing.

The operating loss for the second quarter was $10.4 million and included a $2 million onetime charge in connection with the company’s decision to receive commercialization of SURFAXIN. Net cash outflows to the second quarter were $9.5 million. On a pro forma basis including the net cash proceeds from the recently completed public offering.

We began the third quarter with cash and cash equivalents of approximately $59 million. Again that is on a pro forma basis $59 million. For the third quarter we are forecasting approximately $9 million in net cash outflows before any financing activities that is the debt repayment to Deerfield and proceeds from the public offering.

And with that I’ll turn the call back to John for further remarks..

Thank you Steve, and thank you John for the overview. Before we get to Q&A just to summarize we believe where we sit today is with the technology platform that represent an opportunity to build the very valuable respiratory franchise.

The lead program from that is with that question AEROSURF and the involvement as Steve indicated earlier - the enrollment from AEROSURF for the two way extension program has really, really significantly improved versus where we were in managing and running our initial Phase 2a program.

Sites are up and running well, the buzz is around the community with respect to what this potential opportunity looks like, and the medical community is harmonizing very well with us operationally to hopefully make AEROSURF a solid product. With that said and importantly we then funded our company. We structure the balance sheet.

Importantly so we can look at the potential milestones that we have for AEROSURF coming up in the fourth quarter of '15 and milestones for AEROSURF throughout 2016. And the goal is so that when those milestones hopefully show something that is positive that the value of AEROSURF and the value of our company can be appropriately applied.

So with that said, I'll turn it over to the operator please for Q&A..

[Operator Instructions] And our first question comes from Tom Shrader from Stifel. Please go ahead..

Good morning.

It looks to me like this first expansion cohort has enrolled very quickly, is that correct and what is changed?.

Hi Tom, this is John, and then I’ll pass it over to Steve, that is correct. It has enrolled at a rate that is accelerated versus where we were in the past.

When we think about the initial Phase 2a study, remember we started with three to four sites, the sites are not used to delivering an AEROSURF or SURFAXIN to baby, this is innovative, this is first time and so the sites have to get used to things and then we expanded that.

And the community is beginning to share information and excitement regarding the program. So, we now have the significant number of sites up and running in the program. Those sites will be ultimately rolled over into the Phase 2b. Sites are not only screening but also enrollment is picking up and it's coming from multiple sites. So that is true.

The enrollment did pick up. Steve, would you like to add to that..

I think you covered the highlights John. Enrollment rates can wax and wane and I think in that context, we have seen that some of the learning that we've taken in over the first study operationally and otherwise have allowed us to implement some activities with our sites that has improved enrollment and as John said we have added sites.

So I think we’re pleased with the direction that our program is going and the way that it improving now..

And is this - fact that our sites are sort of all open and looking to get, is this why the enrollments for the second Phase 2a, 3 has projected it so quickly.

It just happened so quickly and is it an easier population to enroll with slightly younger babies?.

You raised a good point. One of the challenges that we have had in the program to-date is, when the babies that we have been studying we have acquired a certain level of oxygen support for babies to be enrolled in the trial and the older babies, bothers more of the older gestational age babies.

Fewer of them maintain this need for the degree of oxygen support that we required. As we go to the younger babies, there are fewer of them, but more of those babies will meet our inclusion criteria. So, we need to get into that study to prove it, but our hope is that we will have a ramp in enrollment in that younger gestational age group..

And is the younger group's at some level the more natural market for this product?.

Well, it's certainly an age group where there is more need, a greater need for surfactant replacement therapy. AEROSURF is going to be a treatment that will be appropriate for any baby with respiratory distress who is breathing on their own. But these younger babies are certainly going to be a target spot, because they are more surfactant efficient.

You're exactly right..

And just to be -- to make sure I’m clear there, the Phase 2b trial is only in these younger babies or is it all of the groups or?.

The Phase 2b trial will be in babies who are 26 to 32 weeks gestational age. We have trimmed off some of the older gestational age babies from our Phase 2a program. But it is essentially a combination of the two gestational age programs we have in place right now..

And Tom, and maybe in anticipation to your next question, when we begin our Phase 2b program we will first start in children that are 29 to 32 weeks and then eventually move into the 26 to 28 week gestational age children..

Okay. And could you just briefly describe the difference between the trial dosing, where one is listed as one dose with a chance of repetition, and the other is listed as two doses.

What’s the difference there?.

Maybe I wasn’t clear on that. We are studying in the expansion study, two dose levels. A dose administered over 60 minutes, and a dose administered over 90 minutes. Babies in both of those dose groups, if they meet severity criteria can receive another dose of AEROSURF similarly in the 26 to 28 week Phase 2a study.

We'll be starting the 30 in adults and if babies quality and meet the criteria they can also receive a second dose. So we’re studying different dose levels in our studies going forward, but also babies who are incompletely treated with one dose will have shot of getting a second does in these studies as well..

But the Phase 2b trial is two doses?.

That is correct. We’re looking at two doses and babies will have the opportunity for repeat dosing and that stuff as well..

Okay. Very good, thanks a lot..

So there would be two doses and a control group just to be clear on that..

Yes..

[Operator Instructions] Our next question comes from Larry Smith from SmithOnStocks.com. Please go ahead..

Hi John. Just a couple of follow-ups to Tom’s question.

In the 29 to 34 weeks gestational age group, I presume that eight AEROSURF babies and eight nasal CPAP babies have been treated, and the eight AEROSURF babies are for 60 minutes dosage, is that correct?.

That’s correct..

Okay.

Now within the eight AEROSURF babies, were there any who had repeat dosing?.

We will not give any of the data and the details on that trial until it’s completed. So we’re waiting for them, the next cohort to be completed. We’ll have another data review by the safety committee. And then at that time we will come out and give the overall view of how that trial was handled and managed..

Could you tell me, in enrolling those 16 babies, when was the first baby enrolled and when was the last baby enrolled?.

First baby was enrolled in late May, I believe -- I don’t know the exact date, but I know we issued a press release on that. And the last baby was enrolled, I don’t know the exact date, but it was just - it was maybe a couple of weeks ago when our DSMB met and gave the goal ahead to keep moving forward.

So you’re saying that 16 patients enrolled in approximately a little under two months..

Okay.

And what kind of criteria did the safety board used - I presume that in order because of the 90 minute dose, the safety committee had to look at certain parameters and say go ahead is that correct?.

Yes, that is correct. And maybe in answering that question and I’ll pass that off to Steve of course is we need to put in perspective why we're going to 60 and 90 minutes, because we’re testing various safety parameters and dosing parameters. So with that said, Steve..

Right, Larry. The safety committee reviewed the same kind of data that we presented earlier this year in May as they do after every dose group. We look at the adverse events that have occurred in any other reports that we get from the sites. Again the Phase 2a program is system number one for safety and tolerability assessment.

And number two, to assess device performance and integration into the intensive care unit. And number three, the third priority is then to get this physiological data and clinical outcome data acknowledging that this kind of study is generally small to get clinical outcome data.

But they have - safety review committee has reviewed the same kind of adverse event they had - they have done in the previous 2a study..

Were any new more therapies and either the AEROSURF or the control group?.

We’re not releasing the specifics of the data on this one dose group. I think it will be inappropriate for us to provide piece on data until we get the entire trial segment on. We’ll be reporting that in due course..

Should we think that it will take about two months to enroll the 90 minute dosage group in the 29 to 34 week gestational age group?.

That's a ballpark figure. I think it's - if looking into crystal ball, but I think with some of the changes that John and I have mentioned that we’ve implemented operationally, we’re hopeful that our recruitment rates will going forward will be predicted by what we’ve seen in the past..

And we’ve indicated we would complete this in the fourth quarter and as you could imagine based upon the arithmetic you’re doing, we are on track..

Your recently topline data on those the 29 to 34 and 26 to 28 gestational age group by the end of the year?.

Well remember there are two trials. Our goal is in each of those trials our goal is to complete the enrollment and not stop the enrollments when completed, then allow for the proper amount of time for the data to be collected, audited and reported.

And for each of those programs should that appear within the timeframe by the end of the year, than the answer would be yes. I would say right now that should the enrollment continue at the rates we see for the extension study in the 29 to 34 weeks gestational age patient group. I think the answer to your question would be yes.

With respect to the 26 to 28, until gestational age group, until we see what the enrollment looks like there I’ll hold my comment on that until we can support it..

Just a question on the Phase 2b there seem to be an open ended here – you've ended the Phase 2b and 26 to 34 week gestational age.

What you need more is safety data in the 26 to 28 gestational age babies to include them in the Phase 2b trial? So you’re presuming that the trial will be - will show safety as opposed to having demonstrated it at this point..

We're planning for success, but the design of our program as John mentioned earlier with respect to the 2b study is to have a staggered start, where babies between 29 to 32 weeks gestational age will be enrolled probably earlier and then as we complete the 2a study in 26 to 28 week old babies, and have the appropriate review there they will be rolled into that Phase 2b study at that time..

Okay.

And just the final question, the NIH Grant and radiation-induced lung injury is that going to be a some kind of trial on human beings?.

No, it's in animal model..

Okay. all right. Thank you..

You are very welcome. Thank you, Larry..

[Operator Instructions] This will conclude our question and answer session. I'd like to turn the conference back over to Mr. Cooper for any closing remarks..

Thank you everybody for your participation in our conference call. We always appreciate the time and as usual you can always call with any further questions, and we will be happy to take them and answer them to the best of our capabilities. So, thank you very much. Appreciate your time..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..