UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
| x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2008
or
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from to
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
94-3171943
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
2600
Kelly Road, Suite 100
|
|
|
|
Warrington,
Pennsylvania 18976-3622
|
|
|
|
(Address
of principal executive offices)
|
(215)
488-9300
(Registrant’s
telephone number, including area code)
__________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES x NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
|
o |
Accelerated
filer
|
x | |
|
Non-accelerated
filer
|
o |
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO
x
As
of
August 1, 2008, 98,848,390 shares of the registrant’s common stock, par value
$0.001 per share, were outstanding.
|
Item
1.
|
Financial
Statements
|
1
|
|
|
CONSOLIDATED BALANCE SHEETS | |
|
As
of June 30, 2008 (unaudited) and December 31, 2007
|
1
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) | |
|
For
the Three Months Ended June 30, 2008 and 2007
|
2 | |
|
|
For
the Six Months Ended June 30, 2008 and 2007
|
2
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | ||
|
For
the Six Months Ended June 30, 2008 and 2007
|
3
|
|
|
Notes
to Consolidated Financial Statements
|
4 | |
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
26
|
|
Item
4.
|
Controls
and Procedures
|
27
|
|
PART
II - OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
27
|
|
Item
1A.
|
Risk
Factors
|
28
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
30
|
|
Item
5.
|
Other
Information
|
30
|
|
Item
6.
|
Exhibits
|
30
|
|
Signatures
|
31 | |
ii
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery
Laboratories,
Inc., and its wholly-owned, presently inactive subsidiary, Acute Therapeutics,
Inc.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (Exchange Act). The forward-looking statements
are only predictions and provide our current expectations or forecasts of future
events and financial performance and may be identified by the use of
forward-looking terminology, including the terms “believes,” “estimates,”
“anticipates,” “expects,” “plans,” “intends,” “may,” “will” or “should” or, in
each case, their negative, or other variations or comparable terminology, though
the absence of these words does not necessarily mean that a statement is not
forward-looking. Forward-looking statements include all matters that are not
historical facts and include, without limitation statements concerning: our
business strategy, outlook, objectives, future milestones, plans, intentions,
goals, and future financial condition; plans regarding the May 2008 Approvable
Letter that we received from the Food and Drug Administration (FDA) for
Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome in premature
infants; our research and development programs and planning for and timing
of
any clinical trials; the possibility, timing and outcome of submitting
regulatory filings for our products under development; plans regarding strategic
alliances and collaboration arrangements with pharmaceutical companies and
others to develop, manufacture and market our drug products; research and
development of particular drug products, technologies and aerosolization
systems; the development of financial, clinical, manufacturing and marketing
plans related to the potential approval and commercialization of our drug
products, and the period of time for which our existing resources will enable
us
to fund our operations.
We
intend
that all forward-looking statements be subject to the safe-harbor provisions
of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are subject to many risks and uncertainties that could cause our actual results
to differ materially from any future results expressed or implied by the
forward-looking statements. Examples of the risks and uncertainties include,
but
are not limited to:
|
·
|
the
risk that we may not be able to timely respond, if at all, to the
May 2008
Approvable Letter that we recently received for Surfaxin and that
any
response that we do file will not satisfy the FDA;
|
|
·
|
the
risk that the FDA or other regulatory authorities may not accept,
or may
withhold or delay consideration of, any applications that we may
file,
including our New Drug Application (NDA) for Surfaxin, or may not
approve
our applications or may limit approval of our products to particular
indications or impose unanticipated label limitations;
|
|
·
|
risks
relating to the rigorous regulatory approval processes, including
pre-NDA
activities, required for approval of any drug or medical device products
that we may develop, independently, with development partners or
pursuant
to collaboration arrangements;
|
|
·
|
the
risk that changes in the national or international political and
regulatory environment may make it more difficult to gain FDA or
other
regulatory approval of our drug product
candidates;
|
|
·
|
risks
relating to our research and development activities, which involve
time-consuming and expensive pre-clinical studies, multi-phase clinical
trials and other studies and other efforts, and which may be subject
to
potentially significant delays or regulatory holds, or
fail;
|
|
·
|
the
risk that we, our contract manufacturers or any of our materials
suppliers
encounter problems manufacturing our products or drug substances
on a
timely basis or in an amount sufficient to meet
demand;
|
|
·
|
risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers;
|
|
·
|
risks
relating to our ability to develop and manufacture drug product and
aerosolization systems, including systems based on our novel capillary
aerosolization technology, for initiation and completion of our clinical
studies, and, if approved, commercialization of our drug and combination
drug-device products, and the ability of our third-party suppliers
of
materials, drug substances and aerosol devices and related components
to
timely produce adequate supplies and expertise to support our development
efforts;
|
|
·
|
the
risk that we may not successfully and profitably market our
products;
|
|
·
|
the
risk that, if approved, we may be unable, for reasons related to
market
conditions, the competitive landscape or otherwise, to successfully
launch
and market our products;
|
|
·
|
risks
relating to our ability to develop a successful sales and marketing
organization to market Surfaxin, if approved, and our other product
candidates, in a timely manner, if at all, and that we or our marketing
and advertising consultants will not succeed in developing market
awareness of our products;
|
iii
|
·
|
the
risk that we or our development partners, collaborators or marketing
partners will not be able to attract or maintain qualified
personnel;
|
|
·
|
the
risk that our product candidates will not gain market acceptance
by
physicians, patients, healthcare payers and others in the medical
community;
|
|
·
|
the
risk that we may not be able to raise additional capital or enter
into
additional collaboration agreements (including strategic alliances
for
development or commercialization of our Surfactant Replacement Therapies
(SRT));
|
|
·
|
the
risk that recurring losses, negative cash flows and the inability
to raise
additional capital could threaten our ability to continue as a going
concern;
|
|
·
|
risks
relating to reimbursement and health care
reform;
|
|
·
|
risks
that financial market conditions may change, additional financings
could
result in equity dilution, or that we will be unable to maintain
The
Nasdaq Global Market listing requirements, causing the price of our
shares
of common stock to decline;
|
|
·
|
the
risks that we may be unable to maintain and protect the patents and
licenses related to our SRT; other companies may develop competing
therapies and/or technologies or health care reform may adversely
affect
us;
|
|
·
|
the
risk that we may become involved in securities, product liability
and
other litigation;
|
|
·
|
other
risks and uncertainties detailed in “Risk Factors” and in the documents
incorporated by reference in this
report.
|
Pharmaceutical
and biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising earlier trial results. Data
obtained from such clinical trials are susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval. After gaining approval
of a drug product, pharmaceutical companies face considerable challenges in
marketing and distributing their products, and may never become
profitable.
Except
to
the extent required by applicable laws, rules or regulations, we do not
undertake any obligation to update any forward-looking statements or to publicly
announce revisions to any of the forward-looking statements, whether as a result
of new information, future events or otherwise.
iv
PART
I - FINANCIAL INFORMATION
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
June
30,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
27,343
|
$
|
36,929
|
|||
|
Available-for-sale
marketable securities
|
6,021
|
16,078
|
|||||
|
Receivable
from collaborative arrangement
|
2,500
|
--
|
|||||
|
Prepaid
expenses and other current assets
|
357
|
611
|
|||||
|
Total
Current Assets
|
36,221
|
53,618
|
|||||
|
Property
and equipment, net
|
6,616
|
7,069
|
|||||
|
Restricted
cash
|
600
|
600
|
|||||
|
Deferred
financing costs and other assets
|
1,182
|
1,457
|
|||||
|
Total
Assets
|
$
|
44,619
|
$
|
62,744
|
|||
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$
|
3,001
|
$
|
757
|
|||
|
Accrued
expenses
|
5,079
|
7,087
|
|||||
|
Equipment
loan, current portion
|
2,875
|
2,625
|
|||||
|
Total
Current Liabilities
|
10,955
|
10,469
|
|||||
|
Loan
payable, including accrued interest
|
9,903
|
9,633
|
|||||
|
Equipment
loan, non-current portion
|
1,570
|
2,991
|
|||||
|
Other
liabilities
|
872
|
870
|
|||||
|
Total
Liabilities
|
23,300
|
23,963
|
|||||
|
Stockholders’
Equity:
|
|||||||
|
Common
stock, $0.001 par value; 180,000 shares authorized;
97,065
and 96,953 shares issued; and 96,752 and 96,640 shares
outstanding
at June 30, 2008 and December 31, 2007,
respectively.
|
97
|
97
|
|||||
|
Additional
paid-in capital
|
332,501
|
329,999
|
|||||
|
Accumulated
deficit
|
(308,232
|
)
|
(288,303
|
)
|
|||
|
Treasury
stock (at cost); 313 shares
|
(3,054
|
)
|
(3,054
|
)
|
|||
|
Other
comprehensive income
|
7
|
42
|
|||||
|
Total
Stockholders’ Equity
|
21,319
|
38,781
|
|||||
|
Total
Liabilities & Stockholders’ Equity
|
$
|
44,619
|
$
|
62,744
|
|||
See
notes to consolidated financial
statements
1
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
|
June
30,
|
June
30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Revenue
from collaborative arrangement
and
grants
|
$
|
2,500
|
$
|
-
|
$
|
4,550
|
$
|
-
|
|||||
|
Expenses:
|
|||||||||||||
|
Research
and development
|
7,439
|
6,794
|
14,670
|
12,216
|
|||||||||
|
General
and administrative
|
5,076
|
3,465
|
9,582
|
6,219
|
|||||||||
|
Total
expenses
|
12,515
|
10,259
|
24,252
|
18,435
|
|||||||||
|
Operating
loss
|
(10,015
|
)
|
(10,259
|
)
|
(19,702
|
)
|
(18,435
|
)
|
|||||
|
Other
income / (expense):
|
|||||||||||||
|
Interest
and other income
|
217
|
559
|
658
|
865
|
|||||||||
|
Interest
and other expense
|
(417
|
)
|
(684
|
)
|
(885
|
)
|
(1,124
|
)
|
|||||
|
Other
income / (expense), net
|
(200
|
)
|
(125
|
)
|
(227
|
)
|
(259
|
)
|
|||||
|
Net
loss
|
$
|
(10,215
|
)
|
$
|
(10,384
|
)
|
$
|
(19,929
|
)
|
$
|
(18,694
|
)
|
|
|
Net
loss per common share -
Basic
and diluted
|
$
|
(0.11
|
)
|
$
|
(0.12
|
)
|
$
|
(0.21
|
)
|
$
|
(0.24
|
)
|
|
|
Weighted
average number of common
shares
outstanding - basic and diluted
|
96,691
|
83,825
|
96,670
|
76,907
|
|||||||||
See
notes to consolidated financial
statements
2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
Six
Months Ended
|
|||||||
|
June
30,
|
|||||||
|
2008
|
2007
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net loss
|
$
|
(19,929
|
)
|
$
|
(18,694
|
)
|
|
|
Adjustments to reconcile net loss to net cash used
in
operating activities:
|
|||||||
|
Depreciation
and amortization
|
1,140
|
781
|
|||||
|
Stock-based
compensation and 401(k) match
|
2,494
|
2,589
|
|||||
|
Loss
on disposal of property and equipment
|
98
|
3
|
|||||
|
Changes
in:
|
|||||||
|
Receivable
from collaborative arrangement
|
(2,500
|
)
|
--
|
||||
|
Prepaid
expenses and other assets
|
212
|
(222
|
)
|
||||
|
Accounts
payable and accrued expenses
|
236
|
231
|
|||||
|
Other
Assets
|
2
|
(159
|
)
|
||||
|
Other
liabilities and accrued interest on loan payable
|
272
|
811
|
|||||
|
Net
cash used in operating activities
|
(17,975
|
)
|
(14,660
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase of property and equipment
|
(470
|
)
|
(1,326
|
)
|
|||
|
Restricted cash
|
--
|
182
|
|||||
|
Purchases of marketable securities
|
(17,773
|
)
|
(20,483
|
)
|
|||
|
Proceeds from sales or maturity of marketable securities
|
27,795
|
1,883
|
|||||
|
Net
cash (used in)/provided by investing activities
|
9,552
|
(19,744
|
)
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds from issuance of securities, net of expenses
|
8
|
30,183
|
|||||
|
Proceeds from equipment loan
|
251
|
4,245
|
|||||
|
Principal payments under equipment loan obligations
|
(1,422
|
)
|
(4,702
|
)
|
|||
|
Net cash (used in)/provided by financing activities
|
(1,163
|
)
|
29,726
|
||||
|
Net
decrease in cash and cash equivalents
|
(9,586
|
)
|
(4,678
|
)
|
|||
|
Cash
and cash equivalents - beginning of period
|
36,929
|
26,173
|
|||||
|
Cash
and cash equivalents - end of period
|
$
|
27,343
|
$
|
21,495
|
|||
|
Supplementary
disclosure of cash flows information:
|
|||||||
|
Interest
paid
|
$
|
299
|
$
|
344
|
|||
|
Non-cash
transactions:
|
|||||||
|
Unrealized
gain/(loss) on marketable securities
|
(35
|
)
|
11
|
||||
See
notes to consolidated financial
statements
3
Notes
to Consolidated Financial Statements (unaudited)
Note
1 - The Company and Basis of Presentation
The
Company
Discovery
Laboratories, Inc. (referred to in these notes as “we”, “us” and “our”) is a
biotechnology company developing Surfactant Replacement Therapies (SRT) for
respiratory disorders and diseases. Our proprietary technology produces a
peptide-containing synthetic surfactant that is structurally similar to
pulmonary surfactant, a substance produced naturally in the lung and essential
for survival and normal respiratory function. We believe that our proprietary
technology makes it possible, for the first time, to develop a series of SRT
to
treat conditions for which there are few or no approved therapies available
for
patients in the Neonatal Intensive Care Unit (NICU), Pediatric Intensive Care
Unit (PICU), Intensive Care Unit (ICU) and other hospital settings.
Our
SRT
pipeline is focused initially on the most significant respiratory conditions
prevalent in the NICU and PICU. We
have
filed with the U.S. Food and Drug Administration (FDA) a New Drug Application
(NDA) for our initial product, Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome (RDS) in
premature infants and, on May 1, 2008, the FDA issued a third Approvable Letter
(May 2008 Approvable Letter) with respect to this NDA. (See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations.”) We are also developing Surfaxin for other neonatal and
pediatric respiratory conditions and disorders, such as Acute
Respiratory Failure (ARF), for which we are conducting a Phase 2 clinical trial
in children up to two years of age, and Bronchopulmonary Dysplasia (BPD), a
debilitating and chronic lung disease typically affecting premature infants
who
have suffered RDS, Aerosurf™ is our proprietary SRT in aerosolized form and is
being developed for the treatment of RDS in premature infants. Aerosurf has
the
potential to obviate the need for endotracheal intubation and conventional
mechanical ventilation and holds the promise to significantly expand the use
of
SRT in respiratory medicine.
We
also
believe that our SRT will potentially address a variety of debilitating
respiratory conditions such as Acute Lung Injury (ALI), cystic fibrosis (CF),
chronic obstructive pulmonary disease (COPD), and asthma, that affect pediatric,
young adult and adult patients in the ICU and other hospital settings.
We
have
implemented a business strategy that includes focusing primarily on our
Complete
Response to the May 2008 Approvable Letter to potentially gain regulatory
approval in 2008 for Surfaxin for the prevention of RDS in premature infants
in
the United States and, as we work towards this milestone, conserving our
financial resources. Our strategy also includes (i) selective investment in
our SRT pipeline programs, including life-cycle development of Surfaxin for
other respiratory conditions prevalent in the NICU and PICU, new SRT formulation
development, and Aerosurf for neonatal and pediatric conditions;
(ii) preparing for the potential commercial launch of Surfaxin in the
United States; (iii) seeking collaboration agreements and strategic
partnerships in the international and domestic markets for the development
and
potential commercialization of our SRT pipeline, including Surfaxin and
Aerosurf; (iv) continued investment in our quality systems and
manufacturing capabilities to meet the anticipated pre-clinical, clinical and
potential future commercial requirements of Surfaxin, Aerosurf and our other
SRT
products; and (v) seeking investments of additional capital, including
potentially from business alliances, commercial and development partnerships,
equity financings and other similar opportunities, although there can be no
assurance that we will identify or enter into any specific actions or
transactions.
Basis
of Presentation
The
accompanying interim unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information in accordance with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normally recurring accruals)
considered for fair presentation have been included. Operating results for
the
three and six months ended June 30, 2008 are not necessarily indicative of
the
results that may be expected for the year ending December 31, 2008. Certain
prior period balances have been reclassified to conform to the current period
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K
for
the year ended December 31, 2007.
4
Note
2 -
Accounting Policies and Recent Accounting Pronouncements
Accounting
Policies
There
have been no changes to our critical accounting policies since December 31,
2007. For more information on critical accounting policies, refer to our
Annual Report on Form 10-K for the year ended December 31, 2007. Readers
are encouraged to review these disclosures in conjunction with the review of
this Form 10-Q.
Recent
Accounting Pronouncements
In
December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements.”
EITF 07-1
requires certain income statement presentation of transactions with third
parties and of payments between parties to the collaborative arrangement, along
with disclosure about the nature and purpose of the arrangement. EITF 07-1
is effective for fiscal years beginning after December 15, 2008. We
are
currently evaluating the impact of the pending adoption of EITF 07-1 on our
consolidated financial statements.
In
June
2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research
and
Development Activities.” EITF 07-3 requires that nonrefundable advance
payments for goods or services that will be used or rendered for future research
and development activities be deferred and capitalized and recognized as an
expense as the goods are delivered or the related services are performed.
EITF 07-3 is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. EITF Issue
No.
07-3
was
effective for our fiscal year beginning January 1, 2008
and
does
not
have
a
material
impact
on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which is effective for financial
statements issued for fiscal years beginning after November 15, 2007.
SFAS 159 provides companies with an option to report selected financial
assets and liabilities at fair value. The Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types
of assets and liabilities. SFAS 159 requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of a company's choice to use
fair value on its earnings. It also requires entities to display the fair value
of those assets and liabilities for which a company has chosen to use fair
value
on the face of the balance sheet. SFAS
159
was
effective for
our
fiscal
year beginning January 1, 2008
and
does
not
have
a
material
impact on our financial statements.
In
September 2006, the FASB issued SFAS No.157, “Fair Value Measurements” (SFAS
157). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. SFAS 157 requires expanded information about the extent to which
a
company measures assets and liabilities at fair value, the information used
to
measure fair value, and the effect of fair value measurements on earnings.
SFAS
157 was effective for our fiscal year beginning January 1, 2008 and does not
have a material impact on our financial statements. See
Note 7,
Fair Value Measurements.
Note
3 -
Net Loss Per Share
Net
loss
per share is computed based on the weighted average number of common shares
outstanding for the periods. Common shares issuable upon the exercise of options
and warrants are not included in the calculation of the net loss per share
as
their effect would be anti-dilutive.
5
Note
4 -
Comprehensive Loss
Total
comprehensive loss was $10.2 million and $19.9 million for the three and six
months ended June 30, 2008, respectively, and $10.4 million and $18.7 million
for the three and six months ended June 30, 2007. Total comprehensive loss
consists of the net loss and unrealized gains and losses on marketable
securities.
Note
5 -
Receivable from Collaborative Arrangements
The
receivable from collaborative arrangements is associated with the March 2008
restructuring of our strategic collaboration agreement with Philip Morris USA
Inc. d/b/a Chrysalis Technologies (Chrysalis”). Under the modified agreement,
Chrysalis agreed to pay us $4.5 million to support further development of our
capillary aerosolization technology, of which $2.0 million became payable upon
execution of the modified agreement and was received in April 2008 and $2.5
million became payable became payable upon completion of a technology transfer
to us in June 2008 and is expected to be paid in August 2008.
Note
6 -
Working Capital
We
have
incurred substantial losses since inception and expect to continue to make
significant investments in continued product research, development,
manufacturing and commercialization activities. Historically, we have funded
our
operations primarily through the issuance of equity securities, debt and our
equipment financing facility.
We
are
subject to risks customarily associated with the biotechnology industry, which
requires significant investment in research and development. There can be no
assurance that our research and development projects will be successful, that
our developed products, including Surfaxin for the prevention of RDS in
premature infants, will obtain necessary regulatory approval, or that any
approved product will be commercially viable.
We
plan
to fund our research, development, manufacturing and potential commercialization
activities through:
|
·
|
the
issuance of equity and debt financings;
|
|
·
|
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
|
·
|
sales
of Surfaxin and our other SRT, if
approved;
|
|
·
|
equipment
financings; and
|
|
·
|
interest
earned on invested capital.
|
Our
capital requirements will depend on many factors, including the success of
our
product development and, if approved, our commercialization plans. Even if
we
succeed in developing and subsequently commercializing product candidates,
we
may never generate sufficient sales revenue to achieve or maintain
profitability.
We
have
Committed Equity Financing Facilities (CEFFs) that we entered into May 22,
2008
(2008 CEFF) and in April 2006 (2006 CEFF). Each of the 2008 CEFF and the 2006
CEFF allows us to raise capital for a period of three years ending June 19,
2011
and May 12, 2009, respectively, at the time and in amounts deemed suitable
to
us. Our shares of common stock are issued at a predefined discount based on
the
volume weighted average price of our common stock (VWAP) on each trading day.
Use of each CEFF is subject to certain conditions, including aggregated share
and dollar limitations, draw down limitations and minimum price restrictions.
As
of June 30, 2008, under the 2008 CEFF approximately 19.3 million shares were
potentially available for issuance (see“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Working Capital - Committed Equity Financing
Facility”). As of June 30, 2008, under the 2006 CEFF, approximately 5.2 million
shares were potentially available for issuance (provided that the closing price
of our common stock on the trading day immediately preceding the draw down
period is at least $2.00) (see
our most
recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Committed Equity Financing Facility”). We anticipate using our CEFFs, when
available, to support our working capital needs in 2008.
6
We
continue to evaluate a variety of strategic transactions, including, but not
limited to, potential business alliances, commercial and development
partnerships, financings and other similar opportunities, although there can
be
no assurance that we will be able to obtain additional capital when needed
with
acceptable terms, if at all.
Note
7 - Fair Value Measurements
Effective
January 1, 2008, we adopted SFAS No. 157 (Fair
Value Measurements).
SFAS 157
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements.
Under
SFAS 157, fair value is defined as the exchange price that would be received
for
an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.
Valuation
techniques used to measure fair value under SFAS 157 must maximize the use
of
observable inputs and minimize the use of unobservable inputs. The standard
describes the fair value hierarchy based on three levels of inputs, of which
the
first two are considered observable and the last unobservable, that may be
used
to measure fair value which are the following:
|
·
|
Level
1 - Quoted prices in active markets for identical assets and
liabilities.
|
|
·
|
Level
2 - Inputs other than Level 1 that are observable, either directly
or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that
are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 - Unobservable inputs that are supported by little or no market
activity
and that are significant to the fair value of the assets or
liabilities.
|
The
adoption of this statement did not have a material effect on our results of
operations and financial condition.
Fair
Value on a Recurring Basis
Assets
measured at fair value on a recurring basis are categorized in the tables below
based upon the lowest level of significant input to the valuations as of June
30, 2008.
|
Fair
Value
|
Fair
value measurement using
|
||||||||||||
|
Assets
|
June
30, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|||
|
Money
Markets and Certificates of Deposit
|
$
|
26,996
|
$
|
26,996
|
$
|
-
|
$
|
-
|
|||||
|
Commercial
Paper
|
5,985
|
-
|
5,985
|
-
|
|||||||||
|
Restricted
Cash
|
600
|
600
|
-
|
-
|
|||||||||
|
Total
|
$
|
33,581
|
$
|
27,596
|
$
|
5,985
|
$
|
-
|
|||||
In
addition to the amounts reported in the table above, we also held $383,000
in
operating cash as of June 30, 2008.
Note
8 - Stock-Based Employee Compensation
We
use
the Black-Scholes option pricing model to determine the fair value of stock
options and amortize the stock-based compensation expense over the requisite
service periods of the stock options. The fair value of the stock options is
determined on the date of grant using the Black-Scholes option-pricing model.
The fair value of stock options is affected by our stock price and several
subjective variables, including the expected stock price volatility over the
term of the option, actual and projected employee stock option exercise
behaviors, risk-free interest rate and expected dividends.
7
The
fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing formula and the assumptions noted in the following
table:
|
June
30,
|
June
30,
|
||||||
|
2008
|
2007
|
||||||
|
Expected
volatility
|
77
|
%
|
95
|
%
|
|||
|
Expected
term
|
4
and 5 years
|
4
and 5 years
|
|||||
|
Risk-free
rate
|
3.5
|
%
|
4.6
|
%
|
|||
|
Expected
dividends
|
--
|
--
|
|||||
The
total
employee stock-based compensation for the three and six months ended June 30,
2008 and 2007 was as follows:
|
(in
thousands)
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
|
|
|
June
30,
|
June
30,
|
||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Research
& Development
|
$
|
359
|
$
|
555
|
$
|
691
|
$
|
789
|
|||||
|
General
& Administrative
|
824
|
1,182
|
1,547
|
1,607
|
|||||||||
|
Total
|
$
|
1,183
|
$
|
1,737
|
$
|
2,238
|
$
|
2,396
|
|||||
As
of
June 30, 2008, there was $6.7 million of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Amended and Restated 1998 Stock Incentive Plan (1998 Plan) and the 2007
Long-Term Incentive Plan. That cost is expected to be recognized over a
weighted-average vesting period of 1.83 years.
As
of
June 30, 2008, 55,913 restricted stock awards were issued and outstanding under
the 1998 Plan.
Note
9 - Litigation
On
April
29, 2008, the Third Circuit Court of Appeals affirmed the dismissal by the
United States District Court for the Eastern District of Pennsylvania of a
securities class action brought against us and certain of our executive
officers. On March 15, 2007, the District Court had granted defendants’ motion
to dismiss the Second Consolidated Amended Complaint filed by the Mizla Group,
individually and on behalf of a class of investors who purchased our publicly
traded securities between March 15, 2004 and June 6, 2006, alleging securities
laws-related violations in connection with various public statements made by
our
Company. The amended complaint had been filed on November 30, 2006 against
us,
our Chief Executive Officer, Robert J. Capetola, and our former Chief Operating
Officer, Christopher J. Schaber, under the caption “In re: Discovery
Laboratories Securities Litigation” and sought an order that the action proceed
as a class action and an award of compensatory damages in favor of the
plaintiffs and the other class members in an unspecified amount, together with
interest and reimbursement of costs and expenses of the litigation and other
equitable or injunctive relief.
Note
10 - Subsequent Event
In
July
2008, we completed a financing pursuant to the 2008 CEFF resulting in gross
proceeds of $1.6 million from the issuance of 1,104,850 shares of our common
stock at an average price per share, after the applicable discount, of $1.41.
For a discussion of the 2008 CEFF, see
Note
6.
8
In
July
2008, we completed a financing pursuant to the 2008 CEFF resulting in gross
proceeds of $1.5 million from the issuance of 991,537 shares of our common
stock
at an average price per share, after the applicable discount, of
$1.51.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” should
be read in connection with our accompanying Consolidated Financial Statements
(including the notes thereto) appearing elsewhere herein.
OVERVIEW
We
are a
biotechnology company developing Surfactant Replacement Therapies (SRT) for
respiratory disorders and diseases. Our proprietary technology produces a
peptide-containing synthetic surfactant that is structurally similar to
pulmonary surfactant, a substance produced naturally in the lung and essential
for survival and normal respiratory function. We believe that our proprietary
technology makes it possible, for the first time, to develop a series of SRT
to
treat conditions for which there are few or no approved therapies available
for
patients in the Neonatal Intensive Care Unit (NICU), Pediatric Intensive Care
Unit (PICU), Intensive Care Unit (ICU) and other hospital settings.
Our
SRT
pipeline is focused initially on the most significant respiratory conditions
prevalent in the NICU and PICU. We have filed with the U.S. Food and Drug
Administration (FDA) a New Drug Application (NDA) for our initial product,
Surfaxin®
(lucinactant) for the prevention of Respiratory Distress Syndrome (RDS) in
premature infants and, on May 1, 2008, the FDA issued a third Approvable Letter
(May 2008 Approvable Letter) with respect to this NDA. (See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations.”) We are also developing Surfaxin for other neonatal and
pediatric respiratory conditions and disorders, such as Acute Respiratory
Failure (ARF), for which we are conducting a Phase 2 clinical trial in children
up to two years of age, and Bronchopulmonary Dysplasia (BPD), a debilitating
and
chronic lung disease typically affecting premature infants who have suffered
RDS. Aerosurf™ is our proprietary SRT in aerosolized form and is being developed
for the treatment of RDS in premature infants. Aerosurf has the potential to
obviate the need for endotracheal intubation and conventional mechanical
ventilation and holds the promise to significantly expand the use of SRT in
respiratory medicine.
We
also
believe that our SRT will potentially address a variety of debilitating
respiratory conditions such as Acute Lung Injury (ALI), cystic fibrosis (CF),
chronic obstructive pulmonary disease (COPD), and asthma, that affect pediatric,
young adult and adult patients in the ICU and other hospital settings.
We
have
implemented a business strategy that includes:
|
·
|
focusing
primarily on our Complete Response to the May 2008 Approvable Letter
to
potentially gain U.S. regulatory approval in 2008 for Surfaxin for
the
prevention of RDS in premature infants and, as we work towards this
milestone, conserving our financial resources;
|
|
·
|
selective
investment in our SRT pipeline programs, including life-cycle development
of Surfaxin for other respiratory conditions prevalent in the NICU
and
PICU, new SRT formulation development, and Aerosurf for neonatal
and
pediatric conditions;
|
|
·
|
preparing
for the potential commercial launch of Surfaxin in the United States,
including taking actions to establish our own commercial organization
specialized in neonatal and pediatric indications to execute the
launch of
Surfaxin in the United States;
|
|
·
|
seeking
collaboration agreements and strategic partnerships in the international
and domestic markets for the development and potential commercialization
of our SRT pipeline, including Surfaxin and Aerosurf, although there
can
be no assurance that we will succeed in entering into such an
arrangement;
|
9
|
·
|
continued
investment in our quality systems and manufacturing capabilities,
including our manufacturing operations in Totowa, New Jersey and
our
recently-completed analytical laboratories in Warrington, Pennsylvania.
We
plan to manufacture sufficient drug product to meet the anticipated
pre-clinical, clinical, formulation development and potential future
commercial requirements of Surfaxin, Aerosurf and our other SRT product
candidates. For our aerosolized SRT, we
plan to collaborate with engineering device experts and use contract
manufacturers to produce aerosol devices and related components to
meet
our development and potential future commercial requirements. Our
long-term manufacturing strategy includes potentially entering into
arrangements with contract manufacturing organizations, expanding
our
existing facilities or building or acquiring additional manufacturing
capabilities for the production and development of our proprietary
peptide-containing synthetic SRT drug products;
and
|
|
·
|
seeking
investments of additional capital, including potentially from business
alliances, commercial and development partnerships, equity financings
and
other similar opportunities, although there can be no assurance that
we
will identify or enter into any specific actions or transactions.
|
Since
our
inception, we have incurred significant losses and, as of June 30, 2008, we
had
an accumulated deficit of $308.2 million (including historical results of
predecessor companies). The majority of our expenditures to date have been
for
research and development activities. (See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations.”)
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings, debt arrangements and strategic
collaborations. As of June 30, 2008, we had: (i) cash and marketable
securities of $33.4 million; (ii) approximately 19.3 million shares potentially
available for issuance, not to exceed an aggregate of $60.0 million under a
May
22, 2008 Committed Equity Financing Facility (2008 CEFF) with Kingsbridge
Capital Limited (Kingsbridge), subject to certain conditions, including that
the
volume weighted average price of our common stock (VWAP) on each trading day
must be at least equal to the greater of $1.15 or 90% of the closing price
of
our common stock on the trading day immediately preceding the draw down period
(see
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Working Capital - Committed Equity Financing
Facility”); (iii) approximately 5.2 million shares potentially available
for issuance, not to exceed an aggregate of approximately $35.5 million under
an
April 2006 Committed Equity Financing Facility with Kingsbridge (2006 CEFF),
subject to certain conditions, including that the VWAP on each trading day
must
be at least equal to the greater of $2.00 or 85% of the closing price of our
common stock on the trading day immediately preceding the draw down period;
(iv) $9.9 million outstanding ($8.5 million principal and $1.4 million
of accrued interest as of June 30, 2008) on a loan from PharmaBio Development
Inc. d/b/a NovaQuest (PharmaBio), the strategic investment group of Quintiles
Transnational Corp., which is due and payable, together with all accrued
interest on April 30, 2010; and (v) $4.4 million outstanding under our
equipment financing facility with GE Business Financial Services Inc.
See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.”
RESEARCH
AND DEVELOPMENT
Research
and development expenses for the three and six months ended June 30, 2008 were
$7.4 million and $14.7 million, respectively. Research and development
expenses for the three and six months ended June 30, 2007 were $6.8 million
and
$12.2 million, respectively. These costs are charged to operations as incurred
and are tracked by category rather than by project. Research and development
costs consist primarily of expenses associated with our manufacturing
operations, formulation development, development of aerosolized SRT, and
research, clinical, regulatory and other direct preclinical and clinical
projects.
These
cost categories typically include the following expenses:
Manufacturing
Development
Manufacturing
development primarily reflects costs to: (i) maintain our manufacturing
operations in Totowa, New Jersey and our quality assurance and analytical
chemistry capabilities in Totowa and at our recently completed analytical and
development laboratories at our headquarters in Warrington, Pennsylvania, to
assure adequate production of clinical and anticipated commercial drug supply
for our SRT programs, including Surfaxin, in conformance with current good
manufacturing practices (cGMP) (these costs include employee expenses,
depreciation, costs of drug substances, quality control and assurance activities
and analytical services); (ii) design, develop, manufacture and assemble
aerosolization systems necessary to administer Aerosurf, including the initial
prototype version and the next-generation version of our novel capillary
aerosolization system, and (iii) develop new formulations of our
SRT.
10
Development
Operations (unallocated)
Development
operations include (i) clinical, regulatory and biostatistics activities for
the
management of our clinical trial programs in accordance with current good
clinical practices (cGCP) and (ii) medical affairs capabilities, including
medical science liaisons, to provide scientific and medical education support
in
connection with the potential commercial launch of Surfaxin and other products
in our SRT pipeline. These costs include personnel, supplies, facilities, fees
to consultants, other related costs of clinical trials and management, clinical
quality control and regulatory compliance activities, data management and
biostatistics. The 2007 costs also include activities associated with obtaining
data and other information included in our Complete Response to the April 2006
Approvable Letter.
Direct
Pre-Clinical and Clinical Program Expenses
Direct
pre-clinical and clinical program expenses include (i) pre-clinical activities
prior to initiation of any potential human clinical trials and (ii) activities
associated with conducting human clinical trials, including patient enrollment
costs, external site costs, costs of clinical drug supply and related external
costs such as contract research consultant fees and expenses, and (iii)
pre-clinical activities associated with obtaining data and other information
included in our Complete Response to the April 2006 Approvable
Letter.
The
following summarizes our research and development expenses by each of the
foregoing categories for the three and six months ended June 30, 2008 and 2007:
|
(
in thousands)
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||
|
Research
and Development Expenses:
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|||
|
Manufacturing
development
|
$
|
5,004
|
$
|
3,517
|
$
|
9,370
|
$
|
6,382
|
|||||
|
Development
operations (unallocated)
|
1,876
|
1,916
|
3,991
|
3,527
|
|||||||||
|
Direct
pre-clinical and clinical program expenses
|
559
|
1,361
|
1,309
|
2,307
|
|||||||||
|
Total
Research & Development Expenses
|
$
|
7,439
|
$
|
6,794
|
$
|
14,670
|
$
|
12,216
|
|||||
Due
to
the significant risks and uncertainties inherent in the clinical development
and
regulatory approval processes, the nature, timing of completion, and ultimate
cost of development of any of our product candidates is highly uncertain and
cannot be estimated with any degree of certainty. Results from clinical trials
may not be favorable and data from clinical trials are subject to varying
interpretation and may be deemed insufficient by the regulatory bodies reviewing
applications for marketing approvals. As such, clinical development and
regulatory programs are subject to risks and changes that may significantly
impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All
of
our potential products are in regulatory review or clinical or pre-clinical
development. The status and anticipated completion date of each of our lead
SRT
programs are discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations.” Successful completion
of development of any of our SRT is contingent on numerous risks, uncertainties
and other factors, some of which are described in detail in the “Risk Factors”
section contained in our most recent Annual Report on Form 10-K.
11
CORPORATE
PARTNERSHIP AGREEMENTS
Chrysalis
Technologies, a Division of Philip Morris USA Inc.
In
March
2008, we agreed to restructure our December 9, 2005 Strategic Alliance Agreement
(Original Alliance Agreement) with Philip Morris USA Inc., d/b/a Chrysalis
Technologies (Chrysalis), which had been created to unite two complementary
respiratory technologies - our peptide-containing synthetic surfactant
technology with Chrysalis’ novel capillary aerosolization technology - to
deliver therapeutics to the deep lung.
Under
the
Original Alliance Agreement, Chrysalis was primarily responsible for development
activities related to its proprietary capillary aerosolization technology (the
Chrysalis Technology) and we were responsible for aerosolized drug formulations,
clinical and regulatory activities, and the manufacturing and commercialization
of the combination drug-device products using the Chrysalis Technology (Licensed
Products). Under the restructuring, we entered into an Amended and Restated
License Agreement dated March 28, 2008 (U.S. License Agreement) with Chrysalis
to amend and restate the Original Alliance Agreement in the United States.
As
Chrysalis has assigned to Philip Morris Products S.A. (PMPSA) all rights in
and
to the Chrysalis Technology outside of the United States (International Rights),
effective March 28, 2008, we also entered into a License Agreement with PMPSA
with respect to the International Rights (International License Agreement,
and
together with the U.S. License Agreement, the License Agreements) on
substantially the same terms and conditions as the U.S. License
Agreement.
We
hold
an exclusive license in the United States under the U.S. License Agreement
and
an exclusive license to the International Rights under the PMPSA License
Agreement in and to the Chrysalis Technology for use with pulmonary surfactants
(alone or in combination with any other pharmaceutical compound(s)) for all
respiratory diseases and conditions (the foregoing uses in each territory,
Exclusive Field). In addition, under the U.S. License Agreement, we hold a
license to use the Chrysalis Technology with other drugs to treat specified
target indications in specified target populations. Our exclusive license under
each License Agreement now includes, in addition to the rights we previously
had, the right to develop and have developed Licensed Products in the Exclusive
Field in the respective territory.
In
accordance with the terms of the U.S. License Agreement, Chrysalis agreed to
provide continuing development support to us through June 30, 2008 and also
agreed to provide financial support for our future development activities in
the
amount of $4.5 million, of which $2.0 million became payable upon execution
of the modification agreements and $2.5 million became payable upon completion
of a technology transfer to us in June 2008 of the Chrysalis Technology in
scope
sufficient to permit us to practice the Chrysalis Technology. This amount is
expected to be received in August 2008.
Under
the
Original Alliance Agreement, we were obligated to pay Chrysalis royalties based
on a multi-tiered royalty structure (that escalated upon attaining collaboration
product revenues greater than $500 million and $1 billion). Under the License
Agreements, we are now obligated to pay royalties at a rate equal to a low
single-digit percent of sales of products sold in the Exclusive Field in the
respective territory. In connection with the exclusive undertakings of Chrysalis
and PMPSA not to exploit the Chrysalis Technology in the Exclusive Field, we
are
obligated to pay royalties on all product sales, including sales of any aerosol
devices and related components sold by us in the Exclusive Field that are based
on aerosolization technology other than the Chrysalis Technology. In addition,
we have agreed in the future to pay minimum royalties, but are entitled to
a
future reduction of royalties in an amount equal to the excess of any minimum
royalty paid over royalties actually earned under the License
Agreements.
Under
the
License Agreements, we generally own the intellectual property that we create
or
reduce to practice in the performance of the License Agreements or exercise
of
the licenses granted thereunder, except such inventions that relate primarily,
in each instance, to the Chrysalis Technology (Chrysalis Technology
Improvements). We are obligated to assign to Chrysalis and PMPSA all such
Chrysalis Technology Improvements and all such inventions are then made subject
to our rights under each License Agreement. The License Agreements also contain
provisions related to the calculation and payment of royalties, record-keeping
and audit rights, and prosecution of patents, and include customary
representations, warranties and indemnities. Each License Agreement, unless
terminated earlier will expire as follows as to each Licensed Product in each
country in the respective territory, on a country-by-country basis, upon the
latest of: (a) the tenth anniversary of the date of the first commercial sale
of
the Licensed Product; (b) the date on which the sale of such Licensed Product
ceases to be covered by a claim of an issued and unexpired patent in such
country, or (c) the date a generic form of the product is introduced in such
country. The License Agreements may be terminated, by Chrysalis or PMPSA, as
appropriate, in the event that we fail to make the payment of the minimum
royalties, as provided therein, or by us, in whole or in part, in the early
years following the effective date, upon payment of a termination fee. In
addition, either party to each License Agreement may terminate upon a material
breach by the other party (subject to a specified cure period).
12
PLAN
OF OPERATIONS
We
have
incurred substantial losses since inception and expect to continue to make
significant investments for product research, development, manufacturing, sales
and marketing and general administrative activities. We will need to generate
significant revenues from product sales, related royalties and transfer prices
to achieve and maintain profitability.
Through
June 30, 2008, we had no revenues from any product sales, and had not achieved
profitability on a quarterly or annual basis. Our ability to achieve
profitability depends upon, among other things, our ability to develop products,
obtain regulatory approval for products under development and enter into
collaboration and other agreements for product development, manufacturing and
commercialization. In addition, our results are dependent upon the performance
of our strategic partners and suppliers. Moreover, we may never achieve
significant revenues or profitable operations from the sale of any of our
products or technologies.
Through
June 30, 2008, we had not generated taxable income. At December 31, 2007, net
operating losses available to offset future taxable income for Federal tax
purposes were approximately $258.7 million. The future utilization of such
loss
carryforward may be limited pursuant to regulations promulgated under Section
382 of the Internal Revenue Code. In addition, we had a research and development
tax credit carryforward of $6.1 million at December 31, 2007. The Federal net
operating loss and research and development tax credit carryforwards expire
beginning in 2008 through 2026.
Over
the
next 12 to 24 months, we plan to undertake a variety of initiatives that are
discussed below.
Research
and Development
We
will
continue to focus our research, development and regulatory activities to advance
our pipeline of potential SRT for respiratory diseases. The drug development,
clinical trial and regulatory process is lengthy, expensive and uncertain and
subject to numerous risks including, without limitation, the applicable risks
discussed herein and those contained in the “Risk Factors” section in our most
recent Annual Report on Form 10-K. Also see“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Research and Development.”
Our
major
research and development projects include:
SRT
for Neonatal and Pediatric Indications
In
order
to address the most prevalent respiratory disorders affecting infants in the
NICU and PICU, we are conducting several therapeutic programs that target
respiratory conditions that have been cited as some of the most significant
unmet medical needs in the neonatal and pediatric community.
Surfaxin
for the Prevention of RDS in Premature Infants
In
October 2007, we submitted to the FDA our Complete Response to the April 2006
Approvable Letter. The FDA thereafter established May 1, 2008, as its target
date to complete its review of our NDA. On May 1, 2008, we received a third
Approvable Letter for this NDA. Importantly, this Approvable Letter contains
no
requirement for additional clinical trials to gain FDA approval for
Surfaxin.
13
Prior
to
receiving the May 2008 Approvable Letter and after we filed our Complete
Response in October 2007, the following important events occurred:
| · | As of March 2008, we submitted to the FDA 12-month stability data on our Surfaxin process validation batches. |
|
·
|
In
March 2008, the FDA completed a pre-approval inspection (PAI) of
our
manufacturing operations at Totowa, New Jersey, and thereafter
issued an
Establishment Inspection Report (EIR) indicating an approval
recommendation. We believe that our manufacturing operations are
prepared
to produce sufficient drug product to meet the commercial requirements
of
Surfaxin, if approved.
|
|
·
|
On
April 30, 2008, as part of our NDA review, we completed labeling
discussions with the FDA and agreed to a proposed Surfaxin package
insert
setting forth prescribing information, although the package insert
will
not be considered final until the FDA approves our
NDA.
|
The
May
2008 Approvable Letter includes,
among other things, requests (i) to further tighten an acceptance criterion
for
our release and stability biological activity test, (ii) to further tighten
acceptance criteria for lipid drug substance impurities, (iii) to further
tighten 2 of the 21 physical and chemical drug product acceptance criteria
that
we proposed in our October 2007 Complete Response, and (iv) to submit (for
inclusion in the NDA) summary information from certain equipment-related
qualification reports. To gain clarification of certain items identified in
this
Approvable Letter, on May 14, we submitted a pre-meeting information package
to
the FDA and requested a meeting, which occurred by teleconference on June 18,
2008.
Based
on
our assessment of this Approvable Letter and the results of our June 2008
meeting with the FDA, we believe that, with the exception of two items, we
can
prepare our responses to this Approvable Letter using readily available data.
With respect to the two remaining items, the FDA has requested that we provide
additional preclinical data and related information as follows:
(i)
Surfaxin Biological Activity Test
Based
on
discussions we had with the FDA several years ago, we qualified and validated
a
biological activity test (Biological Activity Test ) in accordance with current
Good Manufacturing Practices (cGMP) and successfully implemented this test
for
Surfaxin release and stability testing. In addition, as agreed to at a December
2006 Clarification Meeting with the FDA, we generated data in a
well-characterized RDS animal model at a Surfaxin dose of 5.8 mL/kg (the 2007
Preclinical Study), which is the same dose that was used in the Surfaxin Phase
3
clinical trials.
The
2007
Preclinical Study results, together with data generated from the Biological
Activity Test, support the comparability of Surfaxin drug product used in our
Surfaxin Phase 3 clinical trials to the Surfaxin drug product to be manufactured
for commercial use. In addition, these data were intended to establish final
acceptance criteria for the Biological Activity Test. The data from the
Biological Activity Test and the 2007 Preclinical Study were provided to, and
reviewed by, the FDA during the Surfaxin review cycle that concluded with the
May 1, 2008 Approvable Letter.
At
the
June 18, 2008 meeting, the FDA asked us to augment our previously-generated
data
by conducting additional tests using the Biological Activity Test at a dose
of
5.8 mL/kg, rather than the dose of 8.0 mL/kg that we have historically employed
for Surfaxin release and stability testing. In addition, we are
contemporaneously conducting an additional preclinical study using the same
RDS
animal model and dose (5.8 mL/kg) as that used in the 2007 Preclinical Study.
The additional data that we are generating from these studies will be used
to
determine the final acceptance criteria for the Biological Activity Test and
to
further confirm the comparability of Surfaxin drug product used in our Surfaxin
Phase 3 clinical trials to the Surfaxin drug product to be manufactured for
commercial use. These additional studies are ongoing and are being conducted
at
the same laboratories that we have previously used. Although these activities
must be successfully concluded, the preliminary results achieved to date are
encouraging and we believe will support our gaining approval for Surfaxin.
14
(ii)
Specifications for Lipid-Related Impurities in Surfaxin Active Pharmaceutical
Ingredients
Surfaxin
is comprised of four active pharmaceutical ingredients (APIs); a novel peptide,
a fatty acid and two phospholipids. To gain final marketing authorization by
the
FDA, our proposed specifications for certain lipid-related impurities in the
two
phospholipids must satisfy guidance issued by the International Conference
of
Harmonization (ICH). As a general matter, the ICH sets threshold limits for
impurities present in an API and also provides guidance for justifying
specifications that exceed the designated threshold limits.
At
the
June 18 meeting with the FDA, we discussed our approach to justify impurity
levels for certain of the lipid-related impurities based upon their being
present in the human lung at levels equal to or greater than those that exist
in
Surfaxin. The FDA agreed to consider our approach and requested additional
information about the levels of these lipid-related impurities specific to
the
neonatal lung. In addition to reviewing the scientific literature to satisfy
the
FDA’s request, we have also consulted with lipid-experts and have been working
closely with our phospholipids suppliers to determine whether the lipid-related
impurities in question can be reduced to the ICH threshold limit. Based on
our
recent analyses, we believe that we will be able to satisfy the FDA requirements
for these lipid-related impurities by accepting the ICH threshold limits and/or
working with our phospholipids suppliers to further reduce impurity levels
to
the ICH threshold limits.
We
currently believe that we can be in a position to complete the activities
related to finalizing the two remaining items and prepare and submit our
Complete Response to this Approvable Letter in the September 2008 timeframe.
Based
on
our understanding of FDA guidelines, and in consultation with outside experts,
we believe that the FDA may designate our Complete Response to the May 1, 2008
Approvable Letter as a Class 1 resubmission, which would result in a target
review period of 60 days (whereas a Class 2 resubmission would result in a
6-month target review period). If our understanding of the timeline is correct,
the potential approval of Surfaxin is anticipated in 2008.
In
October 2004, we filed a Marketing Authorization Application (MAA) with the
European Medicines Agency (EMEA) for clearance to market in Europe Surfaxin
for
the prevention and rescue treatment of RDS in premature infants. In June 2006,
following the April 2006 Surfaxin process validation stability failure, we
determined that we could not resolve our manufacturing issues within the
regulatory time frames mandated by the EMEA procedure. Consequently, in June
2006, we voluntarily withdrew the MAA without resolving with the EMEA certain
outstanding clinical issues related to the Surfaxin Phase 3 clinical trials.
We
have also consulted with regulatory experts in Europe and, if we receive
approval for Surfaxin in the United States, plan to have further discussions
with the EMEA and potentially develop a strategy to gain approval for Surfaxin
in Europe.
Surfaxin
for BPD in Premature Infants
In
October 2006, we announced preliminary results of our Phase 2 clinical trial
for
Surfaxin for the prevention and treatment of BPD, which was designed as an
estimation study to evaluate the safety and potential efficacy of Surfaxin
in
infants at risk for BPD. We believe that these results suggest that Surfaxin
may
potentially represent a novel therapeutic option for infants at risk for BPD.
We
plan to seek scientific advice from the FDA and other regulatory agencies with
respect to potential clinical trial designs to support the further development
of Surfaxin for the prevention of BPD. At this time, we expect to pursue these
discussions only after we have successfully gained FDA approval of Surfaxin
for
the prevention of RDS in premature infants.
15
Surfaxin
for Acute Respiratory Failure
In
June
2007, we initiated a clinical trial to determine if restoration of surfactant
with Surfaxin will improve lung function and result in a shorter duration of
mechanical ventilation and NICU/PICU stay for children up to two years of age
suffering with ARF. The Phase 2 clinical trial is a multicenter, randomized,
masked, placebo-controlled trial that will compare Surfaxin to standard of
care
masked by a sham air control. Approximately 180 children (subject to sample
size
adjustment per protocol) under the age of two with ARF will receive standard
of
care and be randomized to receive either Surfaxin at 5.8 mL/kg of body weight
(expected weight range up to 15 kg) or sham air control. The trial will be
conducted at approximately 35-40 sites in both the Northern and Southern
Hemispheres. The objective of the study is to evaluate the safety and
tolerability of Surfaxin administration and to assess whether such treatment
can
decrease the duration of mechanical ventilation in young children with ARF.
Patient enrollment is dependent upon the virulence of the viral seasons.
Following conclusion of the upcoming viral season in the Southern Hemisphere
in
the fourth quarter 2008, we plan to assess the status of patient enrollment
in
this trial and determine at that time whether adjustments to our timeline are
required. Currently, we believe that data from this trial may be available
in
the first half of 2009, although this timeline may be extended as we conserve
our resources to focus on seeking approval of Surfaxin for the prevention of
RDS
in premature infants.
Aerosurf,
Aerosolized SRT
Aerosurf
is our first aerosolized SRT that is administered through less-invasive means
and is being developed to potentially obviate the need for intubation and
conventional mechanical ventilation. Aerosurf holds the promise to significantly
expand the use of surfactants in respiratory medicine. We have demonstrated,
through both research and feasibility studies that we can aerosolize our
SRT and
have completed a small Phase 2 clinical study of Aerosurf that concluded
that it
is feasible to administer Aerosurf through nasal continuous positive airway
pressure (nCPAP) and that the treatment was generally safe and well tolerated.
We are currently developing Aerosurf using the Chrysalis
Technology.
Under
our
restructured strategic alliance with Chrysalis, we have assumed full
responsibility for development of the initial prototype version of the novel
capillary aerosolization system (see“Corporate
Partnerships and Agreements”). Our design engineers, together with our
contract manufacturers and third-party medical device experts and consultants,
are working to optimize the initial prototype version of this novel capillary
aerosolization system. Once development milestones have been achieved, we
plan to file our regulatory package in support of our Phase 2 clinical program
and manufacture capillary aerosolization systems and related components.
In
anticipation of Phase 2 clinical trials using the initial version of the
novel
capillary aerosolization technology, we are executing a series of supportive
pre-clinical studies that will support our regulatory package. In that regard,
we have also met with and received guidance from the FDA with respect to
the
design of our proposed Phase 2 clinical program.
We
originally expected to initiate our Phase 2 clinical program utilizing this
novel capillary aerosolization technology in 2008. However, as these activities
require significant investments in research, engineering, device development
and
device manufacturing capabilities, we have found it necessary to delay certain
of our planned activities as we focus our resources on potentially gaining
approval of Surfaxin. As resources permit, we expect to make judicious
investments in the development of our capillary aerosolization technology,
with
a view to potentially initiating our Phase 2 clinical program in the first
half
of 2009.
Based
on
the knowledge gained to date, we have also been engaged in activities to
develop
the next-generation aerosolization system based on this technology for use
in
potential Phase 2 and Phase 3 clinical trials for Aerosurf and, if approved,
future commercial activities. For this development phase, we have been
working with a leading engineering and design firm that has a successful
track
record of developing innovative devices for major companies in the medical
and
pharmaceutical industries, both in the United States and other international
markets. As we have recently refocused our resources on responding to the
May 2008 Approvable Letter and potentially gaining FDA approval for Surfaxin,
we
have temporarily put this effort on hold.
16
We
believe that Aerosurf is a highly promising program because it may significantly
expand the use of surfactants in respiratory medicine. However, we are currently
conserving our resources to focus on seeking approval of Surfaxin for the
prevention of RDS in premature infants. Once we have filed our Complete Response
to the May 2008 Approvable Letter and gained an understanding of the timing
of
the potential marketing approval for Surfaxin, we will revise our plans and
develop a new timeline for this development program.
SRT
for Critical Care and Hospital Indications
We
are
also evaluating the potential development of our proprietary synthetic
peptide-containing SRT to address respiratory disorders such as CF, ALI, COPD,
asthma, and other debilitating respiratory conditions.
Manufacturing
Our
SRT,
including Surfaxin, must be manufactured in compliance with cGMP established
by
the FDA and other international regulatory authorities. Surfaxin is a complex
drug and, unlike many drugs, contains four active ingredients. It must be
aseptically manufactured at our facility as a sterile, liquid suspension and
requires ongoing monitoring of drug product stability and conformance to
specifications.
We
plan
to invest in and support our manufacturing capabilities to produce sufficient
quantities of our proprietary peptide-containing synthetic SRT to meet
anticipated clinical needs and, if approved, commercial needs in the United
States, Europe and other markets:
Current
Manufacturing Capabilities
We
have
operated our own manufacturing operations at a leased facility in Totowa, New
Jersey, since December 2005. We believe that this has provided us with improved
control and economics for the production of clinical and commercial supply
of
our lead product, Surfaxin, if approved, and our SRT pipeline
products.
In
April
2006, to respond to Surfaxin process validation stability failures, we initiated
a comprehensive investigation that focused on analysis of our manufacturing
processes, analytical methods and method validation, and active pharmaceutical
ingredient suppliers. We thereafter identified a most probable root cause and
implemented a corrective action and preventative action (CAPA) plan. In February
2007, we completed manufacture of three new Surfaxin process validation batches
and as of March 2008, we submitted to the FDA 12-month stability data on our
Surfaxin process validation batches. In March 2008, the FDA completed an
inspection of this facility as part of its review of our Surfaxin NDA and
thereafter issued an Establishment Inspection Report (EIR) indicating an
approval recommendation for our Surfaxin NDA. (See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations - Research and Development - SRT for Neonatal Intensive Care
Unit
- Surfaxin
for the Prevention of RDS in Premature Infants.”)
Our
manufacturing strategy includes investing in our analytical and quality systems.
In October 2007, we completed construction of a new analytical and development
laboratory in our headquarters in Warrington, Pennsylvania and have now
consolidated at this location the analytical, quality and development activities
previously located in Doylestown, Pennsylvania and Mountain View, California.
The activities conducted in our new laboratory include release and stability
testing of raw materials as well clinical and, if approved, commercial drug
product supply. We also expect to perform development work with respect to
our
aerosolized SRT and novel formulations of our SRT technology. The laboratory
has
expanded our capabilities by providing additional capacity to conduct analytical
testing as well as opportunities to leverage our newly-consolidated professional
expertise across a broad range of projects, improving both operational
efficiency and financial economics.
17
Long-Term
Manufacturing Capabilities
We
are
planning to have manufacturing capabilities, primarily through our manufacturing
operations in Totowa, New Jersey, that should allow for sufficient production
of
drug product to supply (i) the potential worldwide commercial demand for
Surfaxin for our RDS program, if approved, (ii) the preclinical and clinical
and, if approved, potential worldwide commercial demand for Surfaxin for our
ARF
and BPD programs, and (iii) the anticipated preclinical and clinical and, if
approved, potential worldwide commercial demand for Aerosurf.
Owning
our own manufacturing operations in Totowa is an initial step in our
manufacturing strategy to support the continued development of our SRT
portfolio, including life cycle management of Surfaxin for new indications,
potential new formulations and formulation enhancements, and expansion of our
aerosol SRT products, beginning with Aerosurf. The lease for our Totowa facility
expires in December 2014. In addition to customary terms and conditions, the
lease is subject to a right of the landlord, first after December 2007 and
upon
two years’ prior notice, to terminate the lease early. This termination right is
subject to certain conditions, including that the master tenant, a related
party
of the landlord, must have ceased all activities at the premises, and, in the
earlier years, if we satisfy certain financial conditions, the landlord must
make payments to us of significant early termination amounts. Currently, our
manufacturing strategy includes (i) potentially renegotiating our current lease
to amend the termination and other provisions, (ii) building or acquiring
additional manufacturing capabilities for the production of our SRT drug
products, and (iii) potentially using contract manufacturers, for the production
of our SRT drug products.
Aerosol
Devices and Related Componentry
To
manufacture capillary aerosolization devices and related components for our
planned Phase 2 Aerosurf clinical trials, we expect to utilize third-party
contract manufacturers, suppliers and integrators. The manufacturing process
involves assembly of key device sub-components that comprise the aerosolization
systems, including the aerosol-generating device, disposable dose delivery
packets, which must be assembled in a clean room environment, and patient
interface systems necessary to administer our aerosolized SRT. Under our
manufacturing plan, third-party vendors will manufacture customized parts for
us
and assemble the key device sub-components and ship them to one central location
for final assembly and integration into the aerosolization system. Once
assembled, the critical drug product-contact components and patient interface
systems will be packaged and sterilized. The assembled aerosolization systems
will be quality-control tested prior to release for use in our clinical trials.
We have entered into a Master Services Agreement with Kloehn, Inc. to act as
integrator of the prototype aerosol generating device sub-components and
disposable dose delivery packets that we plan to use in our planned Phase 2
clinical trials.
See
also,
the
applicable risks discussed herein and in the “Risk Factors” section contained in
our most recent Annual Report on Form 10-K.
Sales
and Marketing
To
prepare for the potential U.S. launch of Surfaxin for the prevention of RDS
in
premature infants, we plan to establish our own specialty pulmonary commercial
organization that will initially specialize in neonatal and pediatric
indications and, as products are developed, may potentially expand to adult
critical care and other hospital settings. This strategy is intended to allow
us
to manage our own sales and marketing activities, establish a strong presence
in
the NICU, and optimize the economics of our business.
18
We
expect
to incur significant expenses to develop a complete U.S. commercial capability.
Our pre-approval preparations have included the hiring of experienced management
personnel and investment in our medical affairs capabilities to provide for
increased scientific and medical education activities. We plan to hire our
sales
representatives only after we have received approval to market Surfaxin. We
also
intend to pursue potential collaboration arrangements with international
partners to co-develop and/or co-commercialize our neonatal and pediatric
pipeline for Surfaxin and Aerosurf.
General
and Administrative
We
intend
to continue investing in general and administrative resources primarily to
support our legal requirements, intellectual property portfolios (including
building and enforcing our patent and trademark positions), our business
development initiatives, financial systems and controls, management information
technologies, and general management capabilities.
Potential
Collaboration Agreements and Strategic Partnerships
We
intend
to seek investments of additional capital and potentially enter into
collaboration agreements and strategic partnerships for the development and
commercialization of our SRT product candidates. We continue to evaluate a
variety of strategic transactions, including, but not limited to, potential
business alliances, commercial and development partnerships, financings and
other similar opportunities, although there can be no assurance that we will
enter into any specific actions or transactions.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
There
have been no changes to our critical accounting policies since December 31,
2007. For more information on critical accounting policies, refer to our
Annual Report on Form 10-K for the year ended December 31, 2007. Readers
are encouraged to review these disclosures in conjunction with the review of
this Form 10-Q.
RESULTS
OF OPERATIONS
The
net
loss for the three and six months ended June 30, 2008 were $10.2 million (or
$0.11 per share) and $19.9 million (or $0.21 per share), respectively. The
net
loss for the three and six months ended June 30, 2007 were $10.4 million (or
$0.12 per share) and $18.7 million (or $0.24 per share), respectively
Revenue
from Collaborative Arrangements and Grants
The
revenue from collaborative arrangements is associated with the March 2008
restructuring of our strategic collaboration agreement with Chrysalis. Chrysalis
agreed to pay us $4.5 million to support further development of our capillary
aerosolization technology, of which $2.0 million became payable upon execution
of the modified agreement and was received in April 2008 and $2.5 million became
payable upon completion of a technology transfer to us in June 2008 of a
technology transfer under the restructured agreement and is expected to be
paid
in August 2008. For further discussion, see“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Corporate Partnership Arrangements.”
Research
and Development Expenses
Research
and development expenses for the three and six months ended June 30, 2008 were
$7.4 million and $14.7 million, respectively. Research and development expenses
for the three and six months ended June 30, 2007 were $6.8 million and $12.2
million, respectively. For a description of expenses and research and
development activities, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Research and Development.” For a
description of the clinical programs included in research and development,
see“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations.”
19
The
increase in research and development expenses for the three and six months
ended
June 30, 2008 compared to the same periods in 2007 primarily
reflects:
|
(i)
|
Manufacturing
development activities (included in research and development expenses)
to
support the production of clinical and anticipated commercial drug
supply
for our SRT programs, including Surfaxin, in conformance with cGMP.
Expenses associated with manufacturing development activities for
the
three and six months ended June 30, 2008 were $5.0 million and $9.4
million, respectively. Expenses associated with manufacturing development
activities for the three and six months ended June 30, 2007 were
$3.5
million and $6.4 million, respectively. Manufacturing development
expenses
primarily consist of costs to: (a) enhance and support our manufacturing
operations and our quality assurance and analytical chemistry capabilities
to assure adequate production of clinical and anticipated commercial
drug
supply for our SRT programs, in conformance with cGMP; (b) design,
develop, manufacture and assemble aerosolization systems necessary
to
administer Aerosurf, including the initial prototype version and
the
next-generation version of our novel capillary aerosolization system,
and
(c) develop new formulations of our SRT. Included in the expenses for
the three and six months ended June 30, 2007 were activities associated
with obtaining data and other information included in our Complete
Response to the April 2006 Approvable Letter. The increase in
manufacturing development activities for the three and six months
ended
June 30, 2008, as compared to the same periods in 2007, is primarily
due
to: (x) investments in our quality assurance and analytical chemistry
capabilities to support the production of clinical and anticipated
commercial drug supply for our SRT programs in accordance with cGMP;
and
(y) activities related to the development and optimization of the
initial
version of the capillary aerosolization technology system necessary
to
administer Aerosurf.
|
|
(ii)
|
Research
and development operations to manage the development and advancement
of
our SRT pipeline. Expenses related to these activities for the three
and
six months ended June 30, 2008 were $1.9 million and $4.0 million,
respectively. Expenses related to these activities for the three
and six
months ended June 30, 2007 were $1.9 and $3.5 million, respectively.
These
costs are primarily associated with: (a) scientific and clinical
management; (b) clinical quality control and regulatory compliance
activities, data management and biostatistics; (c) and medical affairs
activities, including medical science liaisons, to provide scientific
and
medical education support to the neonatal medical community regarding
Surfaxin and our SRT pipeline.
|
|
(iii)
|
Direct
pre-clinical and clinical program activities related to the advancement
of
our SRT pipeline. Expenses related to these activities for the
three and
six months ended June 30, 2008 were $0.5 million and $1.3 million,
respectively. Expenses related to these activities for the three
and six
months ended June 30, 2007 were $1.4 and $2.3 million, respectively.
These expenses in 2008 and 2007 primarily include: (a) activities
associated with the ongoing Phase 2 clinical trial evaluating the
use of
Surfaxin for ARF in children up to two years of age; (b) pre-clinical
and
preparatory activities for anticipated Phase 2 clinical trials
for
Aerosurf for the prevention and treatment of RDS in premature infants,
and
(c) pre-clinical activities associated with obtaining data and
other
information included in our Complete Response to the April 2006
Approvable
Letter. The decrease in direct pre-clinical and clinical program
activities for the three and six months ended June 30, 2008, as
compared
to the same period in 2007, is primarily due to activities in 2007
associated with obtaining data and other information included in
our
Complete Response to the April 2006 Approvable
Letter.
|
Research
and development expenses for the three and six months ended June 30, 2008,
included charges of $0.4 million and $0.7 million, respectively, and for the
three and six months ended June 30, 2007, included charges of $0.6 million
and
$0.8 million, respectively, associated with stock-based employee compensation
in
accordance with the provisions of Statement No. 123(R).
20
General
and Administrative Expenses
General
and administrative expenses for the three and six months ended June 30, 2008
were $5.1 million and $9.6 million, respectively. General and administrative
expenses for the three and six months ended June 30, 2007 were $3.5 million
and
$6.2 million, respectively. General and administrative costs primarily include
costs associated with executive management, business development activities,
financial and legal management, pre-launch commercialization activities and
other administrative costs.
The
increase in general and administrative expenses for the three and six months
ended June 30, 2008, compared to the same periods in 2007, primarily reflects
pre-launch commercialization activities in 2008 in anticipation of the potential
approval of Surfaxin related to building a U. S. commercial organization.
Expenditures for these activities for the three and six months ended June 30,
2008 were $1.8 million and $3.1 million, respectively. We did not incur any
pre-launch commercialization expenses for the three and six months ended June
30, 2007.
General
and administrative expenses for the three and six months ended June 30, 2008,
included charges of $0.8 million and $1.5 million, respectively, and for the
three and six months ended June 30, 2007, included charges of $1.2 million
and
$1.6 million, respectively, associated with stock-based employee compensation
in
accordance with the provisions of Statement No. 123(R).
Other
Income and (Expense)
Other
income and (expense) for the three and six months ended June 30, 2008 were
$(0.2) million and $(0.2) million, respectively. Other income and (expense)
for
the three and six months ended June 30, 2007 were $(0.1) million and $(0.3)
million, respectively.
Interest
and other income for the three and six months ended June 30, 2008 were $0.2
million and $0.7 million, respectively. Interest and other income for the three
and six months ended June 30, 2007were $0.6 million and $0.9 million,
respectively.
The
decrease for the three and six months ended June 30, 2008 as compared to the
same period last year is primarily due to a decrease in our average cash and
marketable securities.
Interest,
amortization and other expenses for the three and six months ended June 30,
2008
were $0.4 million and $0.9 million, respectively. Interest, amortization and
other expenses for the three and six months ended June 30, 2007 were $0.7
million and $1.1 million, respectively. These expenses consist of: (i) interest
on the outstanding balance under the PharmaBio loan; (ii) interest expense
related to the amortization of deferred financing costs associated with warrants
issued to PharmaBio in October 2006 in consideration for renegotiating the
terms
of the existing $8.5 million loan; and (iii) interest associated with our
equipment loan obligations with GE Business Financial Services Inc. See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.”
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital
We
have
incurred substantial losses since inception and expect to continue to make
significant investments for continued product research, development,
manufacturing and commercialization activities. Historically, we have funded
our
operations primarily through the issuance of equity securities and the use
of
debt and our equipment financing facility.
We
are
subject to risks customarily associated with the biotechnology industry, which
requires significant investment for research and development. There can be
no
assurance that our research and development projects will be successful, that
our developed products, including Surfaxin for the prevention of RDS in
premature infants, will obtain necessary regulatory approval, or that any
approved product will be commercially viable.
21
We
plan
to fund our research, development, manufacturing and potential commercialization
activities through:
|
·
|
the
issuance of equity and debt financings;
|
|
·
|
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
|
·
|
sales
of Surfaxin and our other SRT, if
approved;
|
|
·
|
equipment
financings; and
|
|
·
|
interest
earned on invested capital.
|
Our
capital requirements will depend on many factors, including the success of
the
product development and, if approved, our commercialization plans. Even if
we
succeed in developing and subsequently commercializing product candidates,
we
may never achieve sufficient sales revenue to achieve or maintain profitability.
We
have
Committed Equity Financing Facilities (CEFFs) that we entered effective May
27,
2008 (2008 CEFF) and in 2006 (2006 CEFF). Each of the 2008 CEFF and the 2006
CEFF allows us to raise capital for a period of three years ending June 19,
2011
and May 12, 2009, respectively, at the time and in amounts deemed suitable
to
us. Our shares of common stock are issued at a predefined discount based on
the
volume weighted average price of our common stock (VWAP) on each trading day.
Use of each CEFF is subject to certain conditions, including share and dollar
limitations. As of June 30, 2008, under the 2008 CEFF approximately 19.3million
shares were potentially available for issuance, not to exceed an aggregate
of
$60.0 million and provided that the VWAP on each trading day must be at least
equal to the greater of $1.15 or 90% of the closing price of our common stock
on
the trading day immediately preceding the draw down period. As of June 30,
2008,
under the 2006 CEFF, approximately 5.2 million shares were potentially available
for issuance, not to exceed $35.5 million and provided that the VWAP on each
trading day must be at least equal to the greater of $2.00 or 85% of the closing
price of our common stock on the trading day immediately preceding the draw
down
period. We anticipate using our CEFFs, when available, to support our working
capital needs in 2008. (For a discussion of the 2008 CEFF, see“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Working Capital - Committed Equity Financing
Facility”. For a discussion of the 2006 CEFF, see
our most
recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Committed Equity Financing Facility”).
We
continue to evaluate a variety of strategic transactions, including, but not
limited to, potential business alliances, commercial and development
partnerships, financings and other similar opportunities, although there can
be
no assurance that we will be able to obtain additional capital when needed
with
acceptable terms, if at all.
Cash,
Cash Equivalents and Marketable Securities
As
of
June 30, 2008, we had cash, cash equivalents and marketable securities of $33.4
million, as compared to $53.0 million as of December 31, 2007. The decrease
is
primarily due to cash used in operating activities, purchases of capital
expenditures and principal payments on outstanding debt.
Committed
Equity Financing Facility (CEFF)
2008
CEFF
On
May
22, 2008, we entered into a new Committed Equity Financing Facility (2008 CEFF)
with Kingsbridge , in which Kingsbridge committed to purchase, subject to
certain conditions, the lesser of up to $60 million or up to 19,328,000
newly-issued shares of our common stock. The 2008 CEFF, like the 2006 CEFF,
allows us to raise capital, subject to certain conditions, at the time and
in
amounts deemed suitable to us, during a three-year period ending June 19, 2011.
We are not obligated to utilize the entire $60 million available under this
CEFF.
The
purchase price of shares sold to Kingsbridge under the 2008 CEFF is at a
discount ranging from 6 to 12 percent of the volume weighted average of the
price of our common stock (VWAP) for each of the eight trading days following
our initiation of a “draw down”. The discount on each of these eight trading
days is determined as follows:
22
|
VWAP*
|
%
of VWAP
|
|
|
(Applicable
Discount)
|
|||
|
Greater
than $7.25 per share
|
94
|
%
|
(6
|
)%
|
|||
|
Less
than or equal to $7.25 but greater than $3.85 per share
|
92
|
%
|
(8
|
)%
|
|||
|
Less
than or equal to $3.85 but greater than $1.75 per share
|
90
|
%
|
(10
|
)%
|
|||
|
Less
than or equal to $1.75 but greater than or equal to $1.15 per
share
|
88
|
%
|
(12
|
)%
|
_____
*
As such
term is set forth in the Common Stock Purchase Agreement dated May 22, 2008
(“2008 CEFF Agreement”).
If
on any
trading day during the eight trading day pricing period for a draw down, the
VWAP is less than the greater of (i) $1.15 or (ii) 90 percent of the closing
price of our common stock for the trading day immediately preceding the
beginning of the draw down period, no shares will be issued with respect to
that
trading day and the total amount of the draw down for that pricing period will
be reduced for each such trading day by one-eighth of the draw down amount
that
we had initially specified.
Our
ability to require Kingsbridge to purchase our common stock is subject to
various limitations. Each draw down is limited to the lesser of 3.0 percent
of
the closing price market value of the outstanding shares of our common stock
at
the time of the draw down or $10 million. Unless Kingsbridge agrees otherwise,
a
minimum of three trading days must elapse between the expiration of any draw
down pricing period and the beginning of the next draw down pricing period.
In
addition, Kingsbridge may terminate the CEFF under certain circumstances,
including if a material adverse effect (as defined in the 2008 CEFF Agreement)
relating to our business continues for 10 trading days after Kingsbridge
provides notice of such material adverse effect.
As
of
June 30, 2008, there were approximately 19.3 million shares available for
issuance under the 2008 CEFF (up to a maximum of $60.0 million in gross
proceeds) for future financings.
In
early
July 2008, we completed a financing pursuant to the 2008 CEFF resulting in
gross
proceeds of approximately $1.6 million from the issuance of 1,104,850 shares
of
our common stock at an average price per share, after the applicable discount,
of $1.41.
In
late
July 2008, we completed a financing pursuant to the 2008 CEFF resulting in
gross
proceeds of $1.5 million from the issuance of 991,537 shares of our common
stock
at an average price per share, after the applicable discount, of
$1.51.
On
May
22, 2008, in connection with the 2008 CEFF, we issued a warrant to Kingsbridge
to purchase up to 825,000 shares of our common stock at an exercise price of
$2.506 per share, which is fully exercisable for a five year period beginning
November 22, 2008. The warrant is exercisable in whole or in part for cash,
except in limited circumstances, with expected total proceeds to us, if
exercised, of approximately $2.1 million.
2006
CEFF
In
April
2006, we entered into a Committed Equity Financing Facility (2006 CEFF) in
which
Kingsbridge committed to purchase the lesser of up to $50 million or up to
11,677,047 shares of our common stock. Use of the 2006 CEFF is subject to
certain conditions, including that the VWAP on each trading day of the eight
trading day pricing period must be at least equal to the greater of $2.00 or
85%
of the closing price of our common stock for the trading day immediately
preceding the beginning of the draw down period. (See
our most
recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Committed Equity Financing Facility”.) As of June 30, 2008, there were
approximately 5.2 million shares available for issuance under the 2006 CEFF
(up
to a maximum of $35.5 million in gross proceeds).
In
2006,
in connection with the 2006 CEFF, we issued a Class C Investor Warrant to
Kingsbridge to purchase up to 490,000 shares of our common stock at an exercise
price of $5.6186 per share. The warrant, which expires in October 2011, is
exercisable in whole or in part for cash, except in limited circumstances,
with
expected total proceeds, if exercised, of approximately $2.8 million. As of
June
30, 2008, the Class C Investor Warrant had not been exercised.
23
In
2004,
in connection with a previous Committed Equity Financing Facility that we
entered with Kingsbridge in July 2004 (2004 CEFF), which has been terminated,
we
issued a Class B Investor Warrant to Kingsbridge to purchase up to 375,000
shares of our common stock at an exercise price equal to $12.0744 per share.
The
warrant, which expires in January 2010, is exercisable in whole or in part
for
cash, except in limited circumstances, with expected total proceeds, if
exercised, of approximately $4.5 million. As of June 30, 2008, the Class B
Investor Warrant had not been exercised.
Universal
Shelf Registration Statement
On
June
13, 2008, we filed a universal shelf registration statement on Form S-3 (2008
Shelf Registration Statement) with the SEC for the proposed offering from time
to time of up to $150 million of our securities. Under the 2008 Shelf
Registration Statement, we have the flexibility to react to market opportunities
as they arise and will be able to issue and sell a variety of securities,
including common stock, preferred stock, varying forms of debt and warrant
securities, or any combination of the foregoing, on terms and conditions that
will be determined at that time. We currently have no immediate plans to sell
securities under the 2008 Shelf Registration Statement.
In
October 2005, we filed a universal shelf registration statement on Form S-3
(2005 Shelf Registration Statement) with the SEC for the proposed offering,
from
time to time, of up to $100 million of our debt or equity securities. In
December 2005, we completed a registered direct offering of 3,030,304 shares
of
our common stock to select institutional investors resulting in gross proceeds
to us of $20.0 million. In April 2007, we completed a registered direct offering
of 14,050,000 shares of our common stock to select institutional investors
resulting in gross proceeds of $30.2 million. In December 2007, we completed
a
registered direct offering of 10,000,000 shares of our common stock to select
institutional investors resulting in gross proceeds of $25.0 million.
The
2005
Shelf Registration Statement may permit us, from time to time, to offer and
sell
up to an additional approximately $24.8 million of equity or debt securities.
The 2008 Shelf Registration Statement may permit us, from time to time, to
offer
and sell up to $150.0 million of our securities. There can be no assurance,
however, that we will be able to complete any such offerings. Factors
influencing the availability of additional financing include the progress of
our
research and development activities, investor perception of our prospects and
the general condition of the financial markets, among others.
Debt
Loan
with PharmaBio
PharmaBio,
the strategic investment group of Quintiles Transnational Corp., extended to
us
a secured, revolving credit facility of $8.5 to $10.0 million in 2001.
Currently, the outstanding principal amount, $8.5 million, matures on April
30,
2010. Interest on the loan accrues at the prime rate, compounded annually,
and
after October 1, 2006, is payable together with the outstanding principal at
maturity. We may repay the loan, in whole or in part, at any time without
prepayment penalty or premium. Our obligations to PharmaBio under the loan
documents are secured by an interest in substantially all of our assets, subject
to limited exceptions set forth in the related Security Agreement.
In
October 2006, in consideration of PharmaBio’s agreement to restructure the loan,
we entered into a Warrant Agreement with PharmaBio, pursuant to which PharmaBio
has the right to purchase 1.5 million shares of our common stock at an exercise
price equal to $3.5813 per share. The warrants have a seven-year term and are
exercisable, in whole or in part, for cash, cancellation of a portion of our
indebtedness under the PharmaBio loan agreement, or a combination of the
foregoing, in an amount equal to the aggregate purchase price for the shares
being purchased upon any exercise. In connection with the Warrant Agreement,
we
filed a registration statement with the SEC with respect to the resale of the
shares issuable upon exercise of the warrants. As of June 30, 2008, the warrants
had not been exercised.
As
of
June 30, 2008, the outstanding balance under the loan was $9.9 million ($8.5
million of pre-restructured principal and $1.4 million of accrued interest)
and
was classified as a long-term loan payable on the Consolidated Balance
Sheets.
24
Equipment
Financing Facility with GE Business Financial Services Inc.
In
May
2007, we entered into a Credit and Security Agreement (Credit Agreement) with
GE
Business Financial Services Inc. (formerly known as Merrill Lynch Business
Financial Services Inc.) (“GE”), as Lender, pursuant to which GE agreed to
provide us a $12.5 million facility (Facility) to fund our capital programs.
Prior to May 2007, our capital financing arrangements had been primarily with
the Life Science and Technology Finance Division of General Electric Capital
Corporation under a Master Security Agreement dated December 20, 2002, as
amended (Previous Facility). Upon execution of the Credit Agreement, we
simultaneously drew down approximately $4.0 million of the Facility to prepay
all of our then-outstanding indebtedness under the Previous
Facility.
The
right
to draw funds under the Facility was due to expire on May 30, 2008. On May
30,
2008, we and GE amended the Credit Agreement to extend the term of the Facility
for an additional period of six months for the purpose of funding our
anticipated capital investments for that period, up to $300,000. In
consideration of the extension, we agreed to pay GE’s legal fees and expenses of
up to $2,000 and a non-refundable consent fee of $1,500. All other terms and
conditions under the Credit Agreement remain unchanged. (See
our most
recent Annual Report on Form 10-K at “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Debt - Equipment Financing Facility”.)
As
of
June 30, 2008, approximately $4.4 million was outstanding under the Facility
($2.9 million classified as current liabilities and $1.5 million as long-term
liabilities) and $0.3 million remained available for use, subject to the
conditions of the Facility.
Pennsylvania
Machinery and Equipment Loan Fund
In
October 2007, the Commonwealth of Pennsylvania, Department of Community and
Economic Development (Department), under a jobs creation program, accepted
our
application for a loan from the Machinery and Equipment Loan Fund (MELF Loan)
in
the maximum amount of up to $500,000. In connection with this approval, we
paid
a commitment fee of $5,000. The MELF Loan is to be used to defray part of the
cost of the purchase and installation of new machinery and equipment or the
upgrade of existing machinery and equipment at our new analytical and
development laboratory located at our headquarters location in Warrington,
Pennsylvania. If the MELF Loan is not closed on or before October 31, 2008,
our
application will be void. The MELF Loan is expected to close in the third
quarter 2008.
Under
the
MELF Loan Agreement (MELF Agreement), the right to draw funds will expire two
years after the effective date of the MELF Agreement. Principal and interest
on
each advance will be payable in equal monthly installments over a period of
seven years. Interest will accrue at a fixed rate per annum equal to 5.0%.
We
may prepay the MELF Loan at any time without penalty.
In
addition to customary terms and conditions, the form MELF Agreement provides
that we must (i) retain seven employees currently employed at our laboratory
and
create 25 new positions at our Warrington, PA laboratory within three years
after the date of disbursement of the MELF Loan (Job Requirement), (ii) execute
a Promissory Note and Security Agreement, and (iii) comply with certain
state-contracting requirements in completing the laboratory project. In the
event that we fail to comply with the Job Requirement within the three-year
period, the interest rate on the Promissory Note, except in limited
circumstances, shall be increased to a fixed rate equal to two percentage points
above the current prime rate for the remainder of the term.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania, New Jersey and
California.
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, analytical technical services, research and development, sales
and
marketing, and administration. In April 2007, the lease, which originally
expired in February 2010 with total aggregate payments of $4.6 million, was
extended an additional three years through February 2013 with additional
payments of $3.0 million over the extension period.
25
We
lease
21,000 square feet of space for our manufacturing facility in Totowa, New
Jersey, at an annual rent of $150,000. This space is specifically designed
for
the production of sterile pharmaceuticals in compliance with cGMP requirements
and is our only manufacturing facility. The lease expires in December 2014,
subject to a right of the landlord, first exercisable after December 2007 and
upon two years’ prior notice, to terminate the lease early. This termination
right is subject to certain conditions, including that the master tenant, a
related party of the landlord, must have ceased all activities at the premises,
and, in the earlier years, if we satisfy certain financial conditions, the
landlord must make payments to us of significant early termination amounts.
The
total aggregate payments since inception of the lease are $1.4 million. For
a
discussion of our manufacturing strategy, see
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations - Research and Development - Manufacturing.”
We
leased
approximately 5,600 square feet office and analytical laboratory space in
Doylestown, Pennsylvania, with an annual rent of approximately $93,800. The
lease was terminated effective July 31, 2008 and all activities at this location
have been consolidated into our new laboratory space in Warrington,
Pennsylvania.
We
leased
16,800 square feet of office and laboratory space at our facility in Mountain
View, California, at an annual rent of approximately $275,000. In December
2007,
we consolidated these activities into our new laboratory space in Warrington,
Pennsylvania. The term of this lease expired without renewal or extension on
June 30, 2008.
Future
Capital Requirements
Unless
and until we can generate significant cash from our operations, we expect to
continue to require substantial additional funding to conduct our business,
including our manufacturing, research and product development activities and
to
repay our indebtedness. Our operations will not become profitable before we
exhaust our current resources; therefore, we will need to raise substantial
additional funds through additional debt or equity financings or through
collaborative, joint development or commercialization arrangements with
potential corporate partners. We may in some cases elect to develop products
on
our own instead of entering into collaboration arrangements and this would
increase our cash requirements. Other than our CEFFs with Kingsbridge and our
equipment financing facility with GE, the use of which are subject to certain
conditions, we have no contractual arrangements under which we may obtain
additional financing. We continue to evaluate a variety of strategic
transactions, including, but not limited to, potential business alliances,
commercial and development partnerships, financings and other similar
opportunities, although there can be no assurance that we will enter into any
specific actions or transactions.
If
a
transaction involving the issuance of additional equity and debt securities
is
concluded, such a transaction may result in additional dilution to our
shareholders. We cannot be certain that additional funding will be available
when needed or on terms acceptable to us, if at all. If we fail to receive
additional funding or enter into business alliances or other similar
opportunities, we may have to reduce significantly the scope of or discontinue
our planned research, development and manufacturing activities, which could
significantly harm our financial condition and operating results.
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and,
by
policy, limit the amount of credit exposure to any one issuer. We currently
do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses
in
principal if forced to sell securities that have declined in market value due
to
a change in interest rates.
26
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent all error and all fraud. A control system,
no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment
in
evaluating the cost-benefit relationship of possible controls and procedures.
Our
Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of the design and operation of
our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by
this
Quarterly
Report
on Form
10-Q.
Based
on this
evaluation,
our
Chief Executive Officer and our Chief Financial Officer
concluded that as
of the
end of the period covered by this report our
disclosure controls and procedures were
effective in their
design to ensure that
information
required
to be disclosed by
us
in
the
reports that
we
file
or
submit
under
the
Exchange Act
is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
(b) Changes
in internal controls
There
were no changes in internal controls over financial reporting or other factors
that could materially affect those controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART
II - OTHER INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
On
April
29, 2008, the Third Circuit Court of Appeals affirmed the dismissal by the
United States District Court for the Eastern District of Pennsylvania of a
securities class action brought against us and certain of our executive
officers. On March 15, 2007, the District Court had granted defendants’ motion
to dismiss the Second Consolidated Amended Complaint filed by the Mizla Group,
individually and on behalf of a class of investors who purchased our publicly
traded securities between March 15, 2004 and June 6, 2006, alleging securities
laws-related violations in connection with various public statements made by
our
Company. The amended complaint had been filed on November 30, 2006 against
us,
our Chief Executive Officer, Robert J. Capetola, and our former Chief Operating
Officer, Christopher J. Schaber, under the caption “In re: Discovery
Laboratories Securities Litigation” and sought an order that the action proceed
as a class action and an award of compensatory damages in favor of the
plaintiffs and the other class members in an unspecified amount, together with
interest and reimbursement of costs and expenses of the litigation and other
equitable or injunctive relief.
27
Additional
actions such as this one, based upon similar allegations, or otherwise, may
be
filed in the future. The potential impact of such actions, which generally
seek
unquantified damages, attorneys’ fees and expenses, is uncertain. There can be
no assurance that an adverse result in any such proceedings would not have
a
potentially material adverse effect on our business, results of operations
and
financial condition.
We
have
from time to time been involved in disputes and
proceedings arising in the ordinary course of business, including in connection
with the termination in 2006 of certain pre-launch commercial programs following
our process validation stability failure. Such claims, with or without merit,
if
not resolved, could be time-consuming and result in costly litigation. While
it
is impossible to predict with certainty the eventual outcome of such claims,
we
believe the pending matters are unlikely to have a material adverse effect
on
our financial condition or results of operations. However, there can be no
assurance that we will be successful in any proceeding to which we are or may
be
a party.
|
ITEM
1A.
|
RISK
FACTORS
|
In
addition to the risks, uncertainties and other factors set forth below and
elsewhere in this Form 10-Q, see the “Risk Factors” section contained in our
most recent Annual Report on Form 10-K.
Under
our restructured collaboration arrangement with Chrysalis, we are responsible
for future development, which will require us to build internal development
capabilities or enter into future collaboration or other arrangements to gain
the engineering expertise required to further develop the Chrysalis
Technology.
In
March
2008, we restructured our collaboration arrangement with Philip Morris USA
Inc.,
d/b/a Chrysalis Technologies (Chrysalis). We now have responsibility for the
development of the Chrysalis’ proprietary capillary aerosolization technology
(Chrysalis Technology) and will not have development support from Chrysalis
after June 30, 2008. Our future development of the Chrysalis Technology is
subject to certain risks and uncertainties, including, without
limitation:
|
·
|
We
may not be able to complete the development of the initial prototype
aerosolization device, if at all, on a timely basis and such inability
may
delay or prevent initiation of our planned Phase 2 clinical trials;
|
|
·
|
We
will require sophisticated engineering expertise to continue the
development of the Chrysalis Technology. Although we are building
our own
internal medical device engineering expertise and have recently
begun
working with a leading engineering and design firm that has a successful
track record of developing innovative devices for major companies
in the
medical and pharmaceutical industries, there is no assurance that
our
efforts will be successful or that we will be able to identify
other
potential collaborators to complete the development of the next-generation
aerosolization system and enter into agreements with such collaborators
on
terms and conditions that are favorable to us, and, if we are unable
to identify or retain design engineers and medical device experts
to
support our development program, this could impair our ability
to
commercialize or develop our aerosolized SRT;
and
|
|
·
|
We
have additional rights under the U.S. License Agreement that are
not
provided under the International License Agreement. Although the
International License Agreement provides for the potential expansion
of
rights with the consent of PMPSA, there can be no assurance that
PMPSA
would agree to any such expansion and, as a result, we may be unable
to
develop and commercialize Licensed Products under the expanded
rights
outside the United States markets.
|
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Plan of Operations - Research and Development - Corporate
Partnership Agreements.”
28
Receipt
of the May 2008 Approvable Letter has caused us to refocus our efforts and
conserve our financial resources, which may subject us to unanticipated risks
and uncertainties.
As
a
result of the May 2008 Approvable Letter, and the delay with respect to the
timing of potentially gaining approval for Surfaxin for the prevention of RDS
in
premature infants, we have adopted a strategy of focusing our efforts
primarily on responding to the Approvable Letter to potentially gain approval
for Surfaxin in 2008 while conserving our financial resources. This has caused
us to reassess the level of investment and the pace of our research and
development programs, including programs for Aerosurf, BPD, ARF and new
formulations of our SRT. We presently anticipate that we will
experience some delays in the progress of these programs. While we remain
reasonably confident that we can achieve our goals, we will continue to reassess
the business environment, the competitive landscape, our position within the
biotechnology industry and the adequacy of our financial resources. As a
consequence of our reassessment, at any time we may implement additional
and potentially significant changes to our development plans and our operations
as we seek to strengthen our financial and operational position. Such changes,
if adopted, could prove to be disruptive and detrimental to our development
programs. Moreover, consideration and planning of such strategic changes diverts
management’s attention and other resources from day to day operations, which
subjects us to further risks and uncertainties.
If
we are not successful in gaining approval for Surfaxin within our anticipated
timeline, we will have to raise significant additional capital to continue
our
existing planned research and development activities. Moreover, such
additional financing could result in equity dilution.
As
a
result of the May 2008 Approvable Letter, we presently anticipate that we may
potentially obtain approval for Surfaxin in the fourth quarter 2008.
If we are not successful in obtaining approval within our anticipated timeline,
we may not have sufficient working capital to fund the activities necessary
to
gain approval for Surfaxin and continue our operations and will need substantial
additional funding until such time, if ever, as we are able to
commercialize our Surfaxin drug product, if approved, and generate
revenues. If we are unable to raise substantial additional funds through
future debt and equity financings and /or collaborative ventures with
potential corporate partners, we may be forced to limit many, if not all, of
our
research and development programs and related operations, curtail all other
activities and, ultimately, potentially cease operations.
We
presently do not have arrangements to obtain any additional financing, except
for the CEFFs with Kingsbridge and our equipment financing facility with
GE. Any future financing could be on unattractive terms or result in
significant dilution of stockholders’ interests and, in such event, the market
price of our common stock may decline. Furthermore, if the market price of
our common stock were to decline, we could cease to meet the financial
requirements to maintain the listing of our securities on The Nasdaq Global
Market.
We
continue to consider multiple strategic alternatives, including, but not limited
to potential additional financings as well as potential business alliances,
commercial and development partnerships and other similar opportunities,
although we cannot assure you that we will take any further specific actions
or
enter into any transactions.
Our
pending NDA for Surfaxin for the prevention of RDS in premature infants may
not
be approved by the FDA in a timely manner or at all, which would adversely
impact our ability to commercialize this product.
Receipt
of the May 2008 Approvable Letter has delayed the FDA’s review of our NDA for
Surfaxin for the prevention of RDS in premature infants. Based on our assessment
of this Approvable Letter and the results of our June 2008 meeting with the
FDA,
we believe that, with the exception of two items, we can prepare our responses
to this Approvable Letter using readily available data. With respect to the
two
remaining items, the FDA has requested that we augment previously provided
data
with additional preclinical data and related information. See“Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations - Research and Development - SRT for Neonatal Intensive Care
Unit
- Surfaxin
for the Prevention of RDS in Premature Infants.”
There
can be no assurance that the final results of our activities will comply with
the FDA’s requirements or that the FDA will classify our Complete Response as a
Class 1 resubmission. Ultimately, the FDA may not approve Surfaxin for the
prevention of RDS in premature infants. Any failure to obtain FDA approval
or
further delay associated with the FDA’s review process would adversely impact
our ability to commercialize our lead product and would have a material adverse
effect on our business.
29
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the three and six months ended June 30, 2008, we did not issue any unregistered
shares of common stock pursuant to the exercise of outstanding warrants and
options. There were no stock repurchases during the three and six months
ended
June 30, 2008.
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
At
our
annual meeting of the stockholders held on June 11, 2008 the following matters
were voted on by the stockholders: (i) the election of six directors, and (ii)
the approval of Ernst & Young LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2008. The results of
the
stockholder votes are as follows:
|
(i)
|
Election
of Directors
|
|
|
For
|
|
Withheld
|
||||
|
W.
Thomas Amick
|
60,902,736
|
20,097,652
|
|||||
|
Robert
J. Capetola, Ph.D.
|
75,758,065
|
5,242,323
|
|||||
|
Antonio
Esteve, Ph.D.
|
65,651,437
|
15,348,951
|
|||||
|
Max
Link, Ph.D.
|
60,906,239
|
20,094,149
|
|||||
|
Herbert
H. McDade, Jr.
|
76,225,400
|
4,774,988
|
|||||
|
Marvin
E. Rosenthale, Ph.D.
|
60,952,421
|
20,047,967
|
|||||
|
(ii)
|
Approval
of Ernst & Young LLP as our Independent Registered Public Accounting
Firm
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
79,071,588
|
987,349
|
941,451
|
|
ITEM
5.
|
OTHER
INFORMATION
|
None.
|
ITEM
6.
|
EXHIBITS
|
Exhibits
are listed on the Index to Exhibits at the end of this Quarterly Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
30
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| Discovery Laboratories, Inc. | ||
| |
|
(Registrant) |
| Date: August 8, 2008 | By: | /s/ Robert J. Capetola |
|
Robert J. Capetola, Ph.D. |
||
| President and Chief Executive Officer | ||
| Date: August 8, 2008 | By: | /s/ John G. Cooper |
|
John G. Cooper |
||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||
31
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report on Form
10-Q.
|
Exhibit
No.
|
Description
|
Method
of Filing
|
||
|
3.1
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on
March
31, 2003.
|
||
|
3.2
|
Amended
and Restated By-Laws of Discovery.
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC on
March
15, 2004.
|
||
|
3.3
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004.
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
||
|
3.4
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery, dated
as of
May 28, 2004.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
9,
2004.
|
||
|
3.5
|
Certificate
of Amendment to the Restated Certificate of Incorporation of Discovery,
dated as of July 8, 2005.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
8,
2005.
|
||
|
4.1
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 6, 2004.
|
||
|
4.2
|
Form
of Class A Investor Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003.
|
||
|
4.3
|
Class
B Investor Warrant dated July 7, 2004, issued to Kingsbridge Capital
Limited.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004.
|
||
|
4.4
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery
and
QFinance, Inc.
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004.
|
||
|
4.5
|
Class
C Investor Warrant, dated April 17, 2006, issued to Kingsbridge Capital
Limited
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21,
2006.
|
|
Exhibit
No.
|
Description
|
Method
of Filing
|
|
4.6
|
Second
Amended and Restated Promissory Note, dated as of October 25, 2006,
issued
to PharmaBio Development Inc. (PharmaBio)
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 26, 2006.
|
||
|
4.7
|
Warrant
Agreement, dated as of October 25, 2006, by and between Discovery
and
PharmaBio
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 26, 2006.
|
||
|
4.8
|
Warrant
Agreement, dated November 22, 2006
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on November 22, 2006.
|
||
|
4.9
|
Warrant
Agreement dated May 22, 2008 by and between Kingsbridge Capital Limited
and Discovery.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on May 28, 2008.
|
||
|
10.1
|
Common
Stock Purchase Agreement, dated as of May 22, 2008, by and between
Kingsbridge Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on May 28, 2008.
|
||
|
10.2
|
Registration
Rights Agreement, dated as of May 22, 2008, by and between Kingsbridge
Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on May 28, 2008.
|
||
|
10.3
|
First
Amendment to Credit and Security Agreement, dated May 30, 2008 between
GE
Business Financial Services Inc. and Discovery.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on May 30, 2008.
|
||
|
10.4
|
Amendment
dated July 15, 2008 to the Amended and Restated Employment Agreement
dated
as of May 4, 2006 between Robert Segal and Discovery.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 18, 2008
|
||
|
10.5
|
Amendment
dated July 15, 2008 to the Amended and Restated Employment Agreement
dated
as of May 4, 2006 between Chuck Katzer and Discovery.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 18, 2008
|
||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Filed
herewith.
|
||
|
31.2
|
Certification
of Chief Financial Officer and Principal Accounting Officer pursuant
to
Rule 13a-14(a) of the Exchange Act.
|
Filed
herewith.
|
||
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed
herewith.
|
Exhibit
31.1
CERTIFICATIONS
I,
Robert
J. Capetola, certify that:
1. I
have
reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d)
Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
| Date: August 8, 2008 | By: | /s/ Robert J. Capetola |
|
Robert J. Capetola, Ph.D. |
||
| President and Chief Executive Officer | ||
Exhibit
31.2
CERTIFICATIONS
I,
John
G. Cooper, certify that:
1. I
have
reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d)
Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
| Date: August 8, 2008 | By: |
/s/
John G. Cooper
|
|
John
G. Cooper
|
||
|
Executive
Vice President and Chief Financial
Officer
|
||
Exhibit
32.1
CERTIFICATIONS
Pursuant
to 18 U.S.C. § 1350, each of the undersigned officers of Discovery Laboratories,
Inc. (the “Company”) hereby certifies that, to his knowledge, the Company’s
Quarterly Report on Form 10-Q for the period ended June 30, 2008 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Date:
August 8, 2008
| /s/ Robert J. Capetola | |||
|
Robert J. Capetola, Ph.D. |
|||
|
President
and Chief Executive Officer
|
| /s/ John G. Cooper | |||
|
John G. Cooper |
|||
|
Executive
Vice President
and Chief Financial Officer
|
A
signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to us and will be retained by us and furnished
to
the SEC or its staff upon request.
This
certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange
Act
of 1934.