Good morning. And welcome to the Discovery Labs’ Fourth Quarter 2015 Earnings and Business Update Conference Call. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to John Tattory, Chief Financial Officer. Please go ahead sir..

Thank you Carey. Good morning everyone and thanks for joining us. During this morning’s call we will provide an update on the 2015 fourth quarter financial results, as well as provide you key business updates. Please note that this webcast and slide presentation will available for replay on our website shortly after the call is completed.

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 SEC filings and particularly in our annual report on Form 10-K for the year ended December 31, 2015, which is expected to be file with the Securities and Exchange Commission on or before March 30, 2016.

Joining me today is Craig Fraser, who joint Discovery Labs as our new Chief Executive Officer on February 1, and was also appointed to the Board of Directors. Also joining us is Dr. Steve Simonson, Chief Development Officer. And with that, I’d turn the call over to Craig..

Thanks, John. I know I had the opportunity to talk with many of you in my short time here. And I’m happy to now be joining all of you on my first earnings call with the team. This morning we will be providing you with a clinical and financial update and I’ll be sharing with you a brief snapshot in my early assessment and focus.

Q4 2015 was a productive quarter with completing and delivering encouraging Phase 2a results and the 29-week to 34-week old premature babies, which Steve will discuss further.

Additionally the AEROSURF program advanced with the initiation of the 2a trail in the younger 26-week to 28-week old premature babies, as well as the initiation of the Phase 2b trail.

I’m happy to report we are on track with these trails and expect the 2a trail to complete mid-year and the 2b to complete enrollment by the year-end with topline results in the first quarter of 2017. For further details on our clinical program and updates I’ll hand this over to Steve..

Thanks, Craig and good morning everyone. Discovery Labs has constructed a comprehensive Phase 2 development plan design to provide the required information to contribute to Phase 3 readiness for AEROSURF. The program is assessing a wide range of doses as a foundation of safety and tolerability upon which the rest of the program will build.

We are also assessing physiological changes after dosing and clinical outcomes even in our early safety and tolerability studies. Our safety and tolerability trial started in older babies 29 weeks to 34 weeks gestational age. The study is making up the first half of our AEROSURF Phase 2 program as shown here.

The results of these studies were presented in the fourth quarter last year. We studied 80 babies, 40 received AEROSURF and escalating doses and 40 received nasal CPAP alone, the current standard of care. The safety profile of AEROSURF was similar to the control group across the range of doses studied from 15 minutes to 90 minutes.

Adverse events did not increase as the dose of AEROSURF increased complications of prematurity were similar between controls in AEROSURF.

Physiological changes around gas exchange as reflected by FiO2 or the oxygen requirement of the babies and carbon dioxide values suggested that AEROSURF is getting into the lungs to act and produce the changes expected for a surfactant. Assessment of safety and physiological changes were the main objective with first part of our Phase 2 program.

However, these trials provided additional information beyond the primary objectives. We measured nasal CPAP failure rates in these studies also. CPAP failure means that babies cannot be adequately supported by non-invasive ventilation with CPAP and they require intubation, mechanical ventilation and delayed rescues surfactant therapy.

More than half of the controlled babies, 53% failed nasal CPAP, however in doses of 45 minutes and greater, we saw signals suggesting AEROSURF maybe reducing CPAP failure and preventing the need for invasive intubation and mechanical ventilation. The profile of CPAP failures raised the possibility that repeat dosing could further reduce CPAP failure.

Repeat dosing is a part of our studies going forward. When we look at doses that bracket our top dose in the Phase 2B study, we saw that CPAP failure was reduced by 49% in babies getting AEROSURF. This is a very encouraging result for the program.

If this result is reproduced in the remainder of the AEROSURF program, this would potentially be an extraordinarily valuable therapy for neonatology. Here is a patient from our trial program.

In respiratory distress syndrome, the classic chest x-ray findings consist of lungs that are not aerated well and that have bilateral fine granular opacities in the lung fields. These show up as a white haze in the chest x-ray. X-ray changes in RDS can range from mild to severe and generally correlate with the severity of the clinical findings.

A lung that can expand normally should appear black on x-ray. The appearance of white opacities in RDS is the result of collapsed alveoli or air sacs, resulting from the lack of surfactant. Chest x-ray changes are not the efficacy endpoint in our trial. Seeing changes as we have in this AEROSURF treated patients are encouraging.

Here we see the chest x-ray evolution of RDS over two days in a treated patient. For lung areas become darker in subsequent films indicating better aeration of lung. The central white area in these chest x-rays represents the heart and associated structures that are surrounded by the lungs.

X-rays are just part of the picture but these kinds of changes, along with physiological changes and oxygenation and carbon dioxide elimination, are pieces of information that we like to see as a baby is treated for RDS.

This baby required 28% oxygen at base line and before this second x-ray was done the baby was already down to room air or 21% oxygen. This slide shows the second half of our AEROSURF program, the 2a study in 26-week to 28-week gestational age babies and the 2b study. Both of these studies are underway.

Our 2a trial in the younger babies is evaluating 30-minute and 45-minute doses of AEROSURF, compared to the control group of nasal CPAP alone. This study is similar in design to the 2a study we reported previously in the older gestational age babies.

The primary objectives are safety and tolerability in the younger babies, but we are also measuring other parameters as we did in the older babies. There are eight AEROSURF and eight controls in each dose group and AEROSURF patients can receive a repeat dose.

This trial with enroll 32 patients and higher doses can be studied in this trial if needed based on the way they are generated. As Craig mentioned we are targeting last patient enrolled by mid-year. The 2b trial we’re studying in 26-week to 32-week gestational age babies.

Enrollment is beginning with the older 29-week to 32-week babies until we finish the 2a safety study in the younger age group once that occurs the 2b trial will open enrollment for the full age range being study. We are studying in two doses versus the nasal CPAP control group with 80 babies per group, 240 total patients.

Babies can also receive repeat doses. The primary objectives of this study are to provide evidence of efficiency on an acceptable clinical endpoint and identify the dose regimen to take into Phase 3. We are using approximately 50 sites for this study and we are expanding the program outside of the U.S.

We are targeting last patient in this study by the end of the year. To summarize the clinical program, our Phase 2 study in 26-week to 28-week gestational age babies is on track to complete enrollment by mid-year. Our aerosol device development for Phase 3 being done in partnership with Battelle is on track.

Our 2b trial is off to a good start and we are beginning to expand outside the United States, this will be a significant activity for the program. These three items have our focused attention in priority but there are some other activities that are also progressing nicely.

First, we are running non-interventional, observational study, where we are collecting data on the treatment and outcomes of the babies in the gestational ages we are interested in for our program. There are subgroups of RDS patients that have not well-characterized in the literature.

To help us fill this void, we started this project last year and have enrolled over 1,000 babies into this observational study to date. This will provide us with valuable insights into our patient population and it is correlating with what we saw in the control group of our 2a AEROSURF study.

We are really encouraged by the data that is coming in and it will better inform our assessment of the market opportunity and the unmet medical need in RDS, as well as helping us with design of our Phase 3 trial. We are targeting completion of this project in the second quarter.

Another activity that is progressing well is our lung deposition study in non-human primates. In this project, we have radiolabeled aerosolized surfactant administered to animals with similar anatomy to human neonates.

This project consists of a series of experiments to assess the distribution and deposition of aerosolized surfactant in the lung, when using or when inhaled using our technology. We are very encouraged by the preliminary data and look forward to completing these dosing experiments in the third quarter and reporting the data.

I finished there and turn the call over to John Tattory..

Thanks, Steve. We ended 2015 with $38.7 million in cash and cash equivalents which we anticipate is sufficient to fund our operations to the first quarter of 2017, which will include the completion of AEROSURF 2B trial. In addition, we reported accounts payable and accrued expenses of $10.8 million and long-term debt with Deerfield of $25 million.

As you may recall that Deerfield debt is payable in two $12.5 million installments, one in February 2018 and other in February 2019, but the 2018 payment is subject to potential deferral if we achieve a certain market cap milestone.

For operating perspective, we reported a fourth quarter 2015 operating loss of $9.8 million, compared to $11.2 million in the fourth quarter of 2014.

The reduction in the operating loss was a result of an increase in R&D expenses due to the ongoing AEROSURF Phase 2 program, which was more than offset by a decrease in commercial, medical affairs and manufacturing development expenses as a result of a decision made in the first quarter of 2015 to voluntarily cease commercialization of SURFAXIN.

Interest expense for the fourth quarter of 2015 was $600,000, compared to $1.2 million for the fourth quarter of 2014.

The decrease in interest expense was due to the July 2015 restructuring of our long-term debt with Deerfield, which resulted in the write-off of capitalized debt discount costs, which were previously being amortized to interest expense.

Overall, the company reported a net loss of $10.1 million or $1.26 per share on 8.1 million weighted-average common shares outstanding for the quarter of 2015, compared to a net loss of $10.6 million or $1.74 per basic share on 6.1 million weighted common shares outstanding for the comparable period in 2014.

Net cash burned for the fourth quarter of 2015 was $7.6 million.

Looking forward, while we are expecting current cash resources or sufficient to the fund the company through the first quarter of 2017, a key objective for 2016 is to identify and implement actions to conserve existing cash and further extend our resources without impacting our ability to execute our AEROSURF Phase 2 trial.

And with that I will turn the call back over to Craig..

Thanks for the update, John. As the new CEO one of the questions I commonly received is, why did you join Discovery Labs? Over the past 25 years I have had the opportunity to be involved with a number of small pre-commercial startups and launches, as well as being in very large companies leading business and development.

This gave me a good understanding what to assess and what’s important when doing deep diligence. For me the assessments started with a company mission that’s very meaningful, helping premature babies. And then into assessment of the operation, challenges and opportunities.

In the past seven weeks I have now dug deep into the business with complete assessment. While we have implemented somethings which strengthen the rigger of our plans, execution and oversight, I am pleased that my finding strength in my belief that we have the key ingredients for high value creating potential.

KL4 surfactant is a well characterized asset with exposure in over a 1,000 premature infants and is already been approved in a previous dosage form. The AEROSURF program is directed to RDS, a condition which is characterized predominantly by a lack of surfactant itself.

It seems too many developmental companies at this stage talk of transformative therapy. However, this market is a well-characterized market and one where the clinicians describe the possibility of an innovative, non-invasive aerosolized KL4 surfactant as being transformative.

As you heard we have encouraging Phase 2a data and we are busy building a database of clinical effect and potential benefit. This includes our safety profile, physiological changes and impact to nasal CPAP failure rates.

Another key area that becomes more critical to success with each passing day is the ability to demonstrate a positive help in pharmacoeconomic impact. This seems especially true with hospital based launches.

This year, we will take strides to begin building the data to support such a position and I believe with the factor of morbidity and mortality in babies if we demonstrate meaningful clinical effect, we will have the ingredients to potentially build a good support for access.

The broad exclusivity portfolio, including composition of matter out to 2033 and the potential for other applications of aerosolize KL4 surfactant and/or device give us the opportunity in the future to build a pipe beyond RDS.

For us, the most important focus is to just execute really well and we have a very good, experienced leadership team focused on program execution and cash management. This leads me to my focus. My number one focus, by far this year is to drive accountability and performance to deliver the Phase 2 results in a rigorous and timely manner.

John and I are focused to improve the financial position by conserving and potentially adding to our cash, with the key being conserved.

I will be working to maneuver the company into the strongest value creating position for our shareholders with hopefully solid Phase 2 data, corporate development activity along the way and into next year, commercial needs integration into development and achieving a true state of Phase 3 readiness.

And last but not least, ensure a high-performing culture focused to make a difference for premature infants, and their families and caregivers, executing with the highest level of integrity. So with that let’s turn it over to the operator for any questions that we might have..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tom Shrader of Stifel. Please go ahead..

Good morning..

Good morning..

Good morning, Tom..

Congratulations, Craig. Hopefully you been handed the baton overtime somewhere near the finish line. If I could, I like to acknowledge your predecessor for his tireless willing to educate – tireless willingness to educate the financial community on this story. So….

Absolutely..

You’ve done. So I have a couple of questions about the ongoing trials. Can you explain a little bit why the dosing and redosing rules are slightly different in the last part of the 2a trial versus the 2b trial? They’re similar but they are little different.

What drives the differences?.

Hi, Tom this is Steve Simonson. Our dosing strategy in the 2a study in younger babies as well as – well in the younger babies was to match the dosing that we did in the 2a study in the older baby. So that we have a solid database of experience over a wide range of doses as the foundation for what we’re going to do.

Now based on what we found in the 2a study and based upon what we’ve assembled preclinically, we’ve selected the doses to be studied in the Phase 2b study from that data. We selected 50 minutes as our top dose in the 2b study for several reasons.

It appears to be a dose that provides close to a maximal benefit as we can assess from our 2a study, where doses greater than 45 minutes seem to result in the maximum reduction in nasal CPAP failure. We wanted to give a dose or select a dose that we could repeat and repeat dosing as a major part of program going forward.

We wanted that dose to be above the shoulder of the dose response curve and 50 minutes appears to be, to fit that build. Obviously we want a dose that is safe. We were fortunate that our safety profile was very consistent across all of our doses in the 2a study.

And then importantly we wanted doses – a dose that was going to be efficient for our customers to use and efficient with respect to the amount of drug administered. And those were the five major factors that went into our dose selection going into Phase 2b.

Now our lower dose was set as an amount half of that and what we expect to see as we go through the 2b study is a distribution of doses from 25 minutes probably up to 150 minutes with repeat dosing. And we will be able to assess the dosing regimen based on those exposures..

I guess specifically, if in the 2a trial, the younger babies do much better on a single-dose, how would that impact the 2b trial?.

You mean if we see a greater response in the younger babies with....

That’s right..

That might not impact to 2B trial in any significant way because going into the 2B trial, repeat dosing is dictated by the baby’s clinical condition. So a baby would be randomized to one of the three treatment groups. And if a single dose is all they need, that’s what they would receive.

If they meet criteria for repeat dose, then they would have access to that repeat dose, as well..

Got it. So the second dose is triggered that was baby mind..

Correct, triggered by the baby’s clinical condition..

Okay. And then, what would have to happen for the 2b trial to be a pivotal trial, is it a fair bit of finish should be and then have an end of Phase 2 meeting or have you talked about Phase 3 plans with the FDA already or just where does that stand to be huge, I'm just curious the chances that it would be a pivotal trial..

Well, we do have plans to discuss our program with the FDA and certainly that will be a topic. But I think it's premature for us to be discussing right now utilizing the 2b study as a pivotal trial. There are many factors that we need to look at in being ready for such a situation..

Okay, great. And then one quick question for John. John it looks like guidance for net cash burn won't change much this year.

Is that possible going forward as well or is it 2b trial expected to be significantly more expensive per quarter than what you’re doing now?.

No, I think Tom what you’ll see is early on as enrollment kicks in and we have the 2a in the younger babies and 2b going on simultaneously, you'll see somewhat of an increase in quarterly cash burn but as the phase 2a in the younger babies completes mid-year and the 2b winds down towards the end of the year you’ll see it, it come back down.

So that’s a kind of spike in the first half and then decreases by quarter in the second half and in the first quarter of 2017, as those programs are completed..

Okay, thank you, very much..

Sure, thanks Tom..

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

Hi Craig, good luck in your new CEO position..

Thanks, Larry..

I got quick questions. One of them is assuming that the results in Phase 2b are positive I presume that you’ll have an end of Phase 2 meeting with the FDA and then proceed into Phase 3.

Could you give us an idea under that particular scenario, when we might see completion of enrollment in Phase 3 trial and topline results?.

Yes Steve feel free to comment, we – what you said with regard complete the Phase 2b obtain the answers that we’re looking for has an end of Phase 2b meeting with the regulatory authorities that is the plan.

Right now it will be little bit premature to be able to accurately forecast all the way out to the end of Phase 3 because there’s still a lot of design answers to be gained and therefore designs to be constructed around what the Phase 3 program was made.

So we really wouldn’t want to talk so early about it so specific until we have a few more answers.

Steve you have any?.

I think that’s spot on and one of the main things that we need to find out in the 2b study is what kind of effect size we have and that will determine in large degree the size of our Phase 3 program. And so we are dependent on getting that data going forward..

Second question I have is that one of the difference that’s in this trial that I see is in terms of dosing. In terms of a pill, you just – you [indiscernible] amount of particular milligram dosage that were times per day. Its looks green light coming out of the Phase 2b trial you’re going to have a wide range of dosing that was used in the trial.

Some docs there will be a difference in clinical practice and how often they choose to give a second, first give a second dose or even third.

So it’s going to be a little bit difficult to determine what your optimum dose is and indeed, I think, what you are asking physicians to do is to use other clinical practice to titrate the dose to most effective level.

If what I’ve said is correct, what kind of regulatory issues does that give rise to?.

I think you are correct. That there will be a range of number of doses administered and it may vary by what dose group babies are randomize to. I think again it maybe premature for us to speculate on what we might see as results until we have the data in hand.

But related to what you said, repeat dosing will be dictated by the baby’s clinical condition. And something that did come out of the Phase 2a study was in contrast to our control group where over half the babies fail CPAP, only about a quarter of AEROSURF babies in the dose range that we’re talking about had experienced nasal CPAP failure.

And so we will be targeting a dose regimen to try and further impact that reduction and again that will be dictated by the baby’s clinical condition within the window of repeat dosing that’s allowed.

So to specifically what issues have to be dealt with and what the regimen might look like coming out of the Phase 2b study I think, will need to be discussed after we have that data in hand.

I think hopefully it gives us additional information and knowledge that as we design the Phase 3 program and a pivotal study that ultimately will be the cornerstone of what’s reviewed and shaping off a label that we were being able to zero in a bit more with what a optimal dosing regimen would look like.

Setting aside that there maybe repeat dosing based on clinical condition. But we should probably zero in a bit more on the dosing as we progress the program..

Okay. Thank you..

And this concludes our question-and-answer session. I would now like to turn the conference back over to Craig Fraser for any closing remarks..

Yes, thank you. Well, right now we’re in the sake of executing, I think as everybody can appreciate. And we believe that we have a great opportunity that both requires and surely does have our best execution effort. We look forward to keeping you updated along the way and ultimately the sharing of the program results.

So thank you very much for joining us this morning and we will continue to keep you updated. Thanks..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day..