risks relating to the rigorous regulatory approval processes, including pre-filing activities, required for approval of any drug, combination drug-device product or medical device that we may develop, whether independently, with strategic development partners or pursuant to collaboration arrangements, including that the FDA or other regulatory authorities may not file, or may withhold or delay consideration of, any applications that we may submit, the FDA or other regulatory authorities will not be able to agree on matters raised during the regulatory review process and other interactions, or that we may be required to conduct significant additional activities to potentially gain approval of our product candidates, if ever; or that the FDA or other regulatory authorities may not approve our applications or may limit approval of our products to particular indications or impose unanticipated label limitations;
| ● | risks relating to our ability to manufacture our KL4 surfactant, which must be processed in an aseptic environment and tested using sophisticated and extensive analytical methodologies and quality control release and stability tests, for both commercial and research and development activities;
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the risk that we may be unable to identify and enter into strategic alliances, collaboration agreements or other strategic transactions that would provide capital to support our AEROSURF development activities and resources and expertise to support the registration and commercialization of AEROSURF in markets outside the U.S. and potentially support the development and, if approved, commercialization, of our other potential KL4 surfactant pipeline products; | ● | the risk that we, our contract manufacturer organizations (CMOs) or any of our third-party suppliers, many of which are single-source providers, may encounter problems or delays in manufacturing our KL4 surfactant drug products, related substances used in the manufacture of our drug product, AFECTAIR aerosol-conducting airway connectors and related componentry, CAG devices and other materials on a timely basis or in an amount sufficient to support the commercial introduction of SURFAXIN and the AFECTAIR device for infants, as well as our research and development activities for our other product candidates;
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| ● | risks relating to the transfer of our manufacturing technology to CMOs and assemblers; |
| ● | risks relating to the rigorous regulatory approval processes, including pre-filing activities, required for approval of any drug, combination drug-device product or medical device that we may develop, whether independently, with strategic development partners or pursuant to collaboration arrangements; |
| ● | risks related to our efforts to gain regulatory approval, in the U.S. and elsewhere, for our drug product and medical device candidates, including AEROSURF, a drug-device combination product that we are developing to address RDS in premature infants and our KL4 lyophilized surfactant that we expect will be the drug component of AEROSURF and potentially be developed as a life cycle extension of SURFAXIN under the name SURFAXIN LS; and AFECTAIR, our novel aerosol-conducting airway connectors;
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| ● | the risk that we and the FDA or other regulatory authorities will not be able to agree on matters raised during the regulatory review process, or that we may be required to conduct significant additional activities to potentially gain approval of our product candidates, if ever; |
| ● | 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, or may not approve our applications or may limit approval of our products to particular indications or impose unanticipated label limitations; |
| ● | risks relating to our research and development activities, which among other things involve time-consuming and expensive preclinical studies and other efforts, and potentially multiple clinical trials that may be subject to potentially significant delays or regulatory holds, or fail; |
| ● | risks relating to our ability to develop and manufacture drug-device combination products based on our KL4 surfactant and CAG technology for preclinical and clinical studies of our product candidates and, if approved, for commercialization;
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| ● | the risk that market conditions, the competitive landscape or other factors may make it difficult to launch and profitably sell our products; |
| ● | risks that reimbursement and health care reform may adversely affect us or that our products will not be accepted by physicians and others in the medical community; |
| ● | 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 and medical device candidates; |
| ● | the risk that we may be unable to maintain compliance with continued listing requirements of The Nasdaq Capital Market® , which could increase the probability that our stock will be delisted, which could cause our stock price to decline;
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risks relating to the transfer of our manufacturing technology to contract manufacturing organizations (CMOs) and assemblers, and our CMOs’ ability to manufacture our lyophilized KL4 surfactant, which must be processed in an aseptic environment and tested using sophisticated and extensive analytical methodologies and quality control release and stability tests, for our research and development activities and, if approved, commercial applications;
iv
risks relating to our and our CMOs’ compliance status or ability to develop and manufacture our ADS and related components for preclinical and clinical studies of our combination drug/device product candidates and, if approved, commercial activities;
the risk that we, our CMOs or any of our third-party suppliers, many of which are single-source providers, may encounter problems in manufacturing our KL4 surfactant drug product, the APIs used in the manufacture of our KL4 drug product, ADS and related components, and other materials on a timely basis or in an amount sufficient to support our needs;
| ● | risks that the unfavorable credit and economic environment will adversely affect our ability to fund our activities, that our ATM Program and Committed Equity Financing Facility (CEFF) may be unavailable or may expire or be exhausted, and that additional equity financings could result in substantial equity dilution or result in a downward adjustment to the exercise price of five-year warrants that we issued in February 2011 (which contain price-based anti-dilution adjustments); |
risks relating to our pledge of substantially all of our assets to secure our obligations under our loan facility (Deerfield Loan) with affiliates of Deerfield Management Company, L.P., which could make it more difficult for us to secure additional capital to satisfy our obligations and require us to dedicate cash flow to payments for debt service, which would reduce the availability of our cash flow to fund working capital, capital expenditures and other investment; moreover, we may be required to seek the consent of Deerfield to enter into certain strategic transactions;
| ● | risks that we may be unable to maintain and protect the patents and licenses related to our products and that other companies may develop competing therapies and/or technologies; |
risks that reimbursement and health care reform may adversely affect our ability to secure appropriate funding an reimbursement; or that our products will not be accepted by physicians and others in the medical community; or that market conditions, the competitive landscape or other factors may make it difficult to launch and profitably sell our products;
| ● | the risk that we may become involved in securities, product liability and other litigation and that our insurance may be insufficient to cover costs of damages and defense; |
the risk that we, our strategic partners or collaborators will be unable to attract and retain key employees, including qualified scientific, professional and other personnel, in a competitive market for skilled personnel, which could have a material adverse effect on our commercial and development activities and our operations;
| ● | the risk that we will be unable to attract and retain key employees in a competitive market for skilled personnel, which could have a material adverse effect on our commercial, research and development activities and our operations; |
the risks that we may be unable to maintain and protect the patents and licenses related to our products and that other companies may develop competing therapies and/or technologies;
| ● | the risk that we or our strategic partners or collaborators will not be able to attract or retain qualified scientific, professional and other personnel, which could affect our ability to develop and market our products; and |
the risks that we may become involved in securities, product liability and other litigation and that our insurance may be insufficient to cover costs of damages and defense; and
| ● | other risks and uncertainties detailed in “Risk Factors” and in the documents incorporated by reference in this report. |
other risks and uncertainties detailed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K, and in the documents incorporated by reference in this report.
Pharmaceutical, biotechnology and medical device technology companies have suffered significant setbacks in advancedconducting clinical trials, even after obtaining promising earlier trial results. Datapreclinical and clinical data. Moreover, 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 and biotechnology companies face considerable challenges in marketing and distributing their products, and may never become profitable.
The forward-looking statements contained in this report or the documents incorporated by reference herein speak only as of their respective dates. Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict them all. Except to the extent required by applicable laws, rules or regulations, we do not undertake any obligation to publicly 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.
Trademark Notice
AEROSURF®,®, AFECTAIR®,®, DISCOVERYLABS®,®, INSPIRED INNOVATION®, SURFAXIN®, andWARMING CRADLE SURFAXIN® are registeredand common law trademarks of Discovery Laboratories, Inc. (Warrington, PA).
DISCOVERY LABORATORIES, INC.
Table of Contents to Annual Report on Form 10-K For the Fiscal Year Ended December 31, 20122015
| PART I | | |
| | | |
| ITEM 1. | | 1 |
| | ITEM 1A. | | 3127 |
| | ITEM 1B. | | 6156 |
| | ITEM 2. | | 6156 |
| | ITEM 3. | | 6256 |
| | ITEM 4. | | 62 |
| PART II | | |
| | | |
| ITEM 5. | | 62 56 |
| | ITEM 6. | | 6357 |
| | ITEM 7. | | 6457 |
| | ITEM 7A. | | 8373 |
| | ITEM 8. | | 8373 |
| | ITEM 9. | | 8373 |
| | ITEM 9A. | | 8373 |
| | ITEM 9B. | | 8674 |
| | |
| PART III | | |
| | | |
| ITEM 10. | | 8675 |
| | ITEM 11. | EXECUTIVE COMPENSATION | 86 |
| | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 86 |
| | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 86 |
| | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES | 86 |
| | |
| PART IV | | |
| | | |
| ITEM 15. | | 8675 |
SIGNATURES | | 87 | |
| 76 |
PART I
COMPANY OVERVIEW
Discovery Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a Delaware corporation, with our principal offices located at 2600 Kelly Road, Suite 100, Warrington, Pennsylvania. We were incorporated as a Delaware corporation in 1992. Our telephone number is 215-488-9300 and our corporate website address is www.discoverylabs.com. Our common stock is listed on The Nasdaq Capital Market®®, where our symbol is DSCO.1
We are a specialty biotechnology company focused on creating life-saving productsdeveloping novel KL4 surfactant therapies for critical care patients with respiratory diseasediseases and improvingother potential applications. Surfactants are produced naturally in the standard of care in pulmonary medicine.lung and are essential for normal respiratory function and survival. Our proprietary drug technology producesplatform includes a synthetic, peptide-containing surfactant (KL4 surfactant) that is structurally similar to endogenous pulmonary surfactant, a substance produced naturally in the lung and essential for normal respiratory function and survival. We are developing our KL4 surfactant in liquid, lyophilized and aerosolized dosage forms. We are also developing novel drug delivery technologies potentiallybeing developed to enable efficient deliverynoninvasive administration of aerosolized drugs, including our aerosolized KL4 surfactant, and other inhaled therapies.surfactant. We believe that our proprietary technologiestechnology platform may make it possible for the first time, to develop a significant pipeline of surfactant products to address a variety of respiratory diseases for which there frequently are few or no approved therapies.
Initial Focus – Respiratory Distress Syndrome (RDS) in Premature Infants
Our initial strategycore development program, AEROSURF® (lucinactant for inhalation), is to develop our KL4 surfactant and drug delivery technologies to improvefocused on improving the management of respiratory distress syndrome (RDS) in premature infants. RDS isinfants, a serious respiratory condition caused by insufficient surfactant production in underdeveloped lungs of premature infants, and the most prevalent respiratory disease in the Neonatal Intensive Care Unit (NICU). RDSthat can result in long-term respiratory problems, developmental delay and death. MortalityPremature infants born prior to 37 weeks gestational age may not have fully developed natural lung surfactant and therefore may need surfactant therapy to sustain life. Higher incidence and severity of RDS are correlated with younger gestational ages; however, RDS can occur at any premature gestational age. RDS is the most prevalent respiratory disease in the neonatal intensive care unit (NICU). We estimate that 120,000 to 150,000 premature infants are given respiratory support after birth each year in the United States because they have or are at risk for RDS.
Surfactant therapy is a life-saving treatment for RDS and the primary therapy to address an underlying surfactant deficiency. Surfactants currently available in the U.S. are animal-derived and must be administered using invasive endotracheal intubation and mechanical ventilation, each of which may result in serious respiratory conditions and other complications. Intubation is associated with airway trauma and clinical instability that can extend beyond the respiratory system such as increased intracranial pressure and risk for brain injury. Mechanical ventilation is associated with ventilator-associated lung injury, chronic lung disease and increased risk of infection. To avoid these risks, many premature infants are initially treated with noninvasive respiratory support, such as nasal continuous positive airway pressure (nCPAP). Unfortunately, since nCPAP does not address the underlying surfactant deficiency, many premature infants respond poorly to nCPAP (typically within the first 72 hours of life) and may require intubation and delayed surfactant therapy (an outcome referred to as nCPAP failure).
In addition, many premature infants with RDS who receive surfactant therapy as initial therapy are capable of breathing without mechanical ventilation, but require surfactant therapy for RDS. Because surfactant therapy requires intubation, these infants generally are supported with mechanical ventilation for either a limited or extended period of time. If surfactant therapy could be administered noninvasively, neonatologists would be able to provide surfactant therapy to these premature infants without exposing them to the risks associated with intubation and mechanical ventilation.
AEROSURF is an investigational combination drug/device product that combines our proprietary KL4 surfactant with our novel aerosol delivery system (ADS), which is based primarily on our capillary aerosol generator technology. We are developing AEROSURF to enable administration of aerosolized KL4 surfactant to premature infants receiving nCPAP, without invasive intubation and mechanical ventilation. We believe that, if approved, AEROSURF will have the potential to transform the treatment of RDS, allow for earlier treatment of those premature infants who currently receive surfactants later in their course of treatment, decrease the morbidities and complications currently associated with surfactant administration, and reduce the number of premature infants who are subjected to invasive intubation and delayed surfactant therapy as a result of nCPAP failure.
1Information concerning the shares of our common stock and related share prices in this Annual Report on Form 10-K has been adjusted to reflect a 1-for-14 reverse split of our common stock and a change in the number of shares of common stock authorized for issuance under our Amended and Restated Certificate of Incorporation, as amended, that were made effective on January 22, 2016.
The current surfactant market for RDS is estimated to be approximately $75 million annually in the U.S. and $250 to $300 million annually worldwide; however, we believe that this market has been constrained, in part, by the risks associated with surfactant administration and lack of medical innovation. Treatment options for RDS have not improved significantly, nor have mortality and morbidity rates associated withfor RDS have not meaningfully improved over the last decade. few decades. We believe that the RDS market is presently underserved,neonatal medical community would respond favorably to the introduction of a synthetic, peptide-containing (KL4) surfactant and a less-invasive method of surfactant administration. By enabling delivery of our aerosolized KL4 surfactant using noninvasive methods, we believe that our RDS programs haveAEROSURF, if approved, will address a serious unmet medical need and potentially provide transformative clinical and pharmacoeconomic benefits. We believe that AEROSURF has the potential to greatly improve the managementcreate a worldwide annual market opportunity of $600 million to a $1 billion per year. See, “– Surfactant Therapy – The RDS and, collectively over time, to become a new standard of care for premature infants with RDS.Market.”
The drug product component of our AEROSURF product candidate is a lyophilized (freeze-dried) dosage form of our KLOn March 6, 2012,4 surfactant liquid instillate drug product that was approved by the U.S. Food and Drug Administration (FDA) granted us marketing approval forin 2012 under the name SURFAXIN® (lucinactant) Intratracheal Suspension for the prevention of RDS in premature infants at high risk for RDS. SURFAXIN is the first synthetic, peptide-containing surfactant approved for use in neonatal medicine and provides healthcare practitioners with an alternative to the animal-derived surfactants that today are the standard of care to manage RDS in premature infants. See, “–Surfactant Replacement Therapy for Respiratory Medicine – Respiratory Distress Syndrome in Premature Infants (RDS) – SURFAXIN for the Prevention of RDS in Premature Infants at High Risk for RDS.” See also, “– Proprietary Platform – Surfactant and Aerosol Technologies – Our KL4 Surfactant Technology.”
In the third quarter of 2012, during a routine review of the results and processes related to the analytical testing and quality control of SURFAXIN drug product, we determined that one of our analytical chemistry methods used to assess SURFAXIN drug product conformance to specifications required improvement and that an update to product specifications was needed. We proactively communicated these findings to the FDA, improved and validated the analytical chemistry method, and submitted updated product specifications to the FDA. As a result of these efforts, we delayed the commercial availability of SURFAXIN drug product. Although there can be no assurances, if we are able to successfully conclude our planned activities and receive confirmation of our updated product specifications from the FDA within our anticipated timeline in the second quarter of 2013,2015, we believe that we remain on trackdetermined to manufacture SURFAXIN drug product forcease commercial use in the second quarter of 2013. This delay in availability of SURFAXIN drug product from the fourth quarter 2012 to the second quarter of 2013 is not expected to have a material adverse effect on our business or financial position, in part because our commercial launch plansand manufacturing activities for SURFAXIN during this period have always been to focus initiallyour limited resources on hospital formulary acceptance.
advancing the AEROSURF® is a drug/device combination product that combines clinical development program and our aerosolized KL4 surfactant with our proprietary capillary aerosol generator (CAG).pipeline. We are developing AEROSURF for premature infants with or at risk for developing RDS. Premature infants with RDS currently are treated with surfactants that can only be administered by endotracheal intubation supported with mechanical ventilation, both invasive procedures that frequently result in serious respiratory conditions and complications. Consequently, neonatologists generally will not treat infants who could benefit from surfactant therapy unless they determine that the potential benefits of surfactant therapy outweigh the risks associated with such invasive administration procedures. AEROSURF potentially will provide practitioners with the ability to deliver surfactant therapy using a less-invasive method. For this reason, we believe that AEROSURF, if approved, potentially may enablegaining the treatmentapproval of a significantly greater number of premature infants at risk for RDS who could benefit from surfactant therapy but are currently not treated. See, “– Surfactant Replacement Therapy for Respiratory Medicine – Respiratory Distress Syndrome in Premature Infants (RDS) – AEROSURF for RDS in Premature Infants.”
We are developing a lyophilized (freeze-dried) dosage formSURFAXIN provided us valuable experience to support the further development of our KL4 surfactant that is stored as a powder and resuspended to liquid form prior to useproduct candidates, beginning with the objective of improving ease of use for healthcare practitioners, as well as potentially to prolong shelf life and eliminate the need for cold-chain storage. We are engaged in a technology transfer of our lyophilized KL4 surfactant manufacturing process to a contract manufacturing organization (CMO) that has expertise in lyophilized products, and we expect that it will manufacture drug product for use in our preclinical and clinical development activities. Our development plan is intended initially to support the use of our lyophilized KL4 surfactant in our AEROSURF development program. We are also assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS™, a lyophilized dosage form of SURFAXIN, in the United States (U.S.) and potentially in other major markets.AEROSURF.
Beyond RDS
AFECTAIR® devices are our novel disposable aerosol-conducting airway connectors that simplify
In the delivery of aerosolized medications (including our aerosolized KL4 surfactant) and other inhaled therapies to critical-care patients requiring ventilatory support by introducing the aerosolized medication directly at the patient interface and minimizing the number of connections in the ventilator circuit. In February 2012,future, we registered our AFECTAIR device in the U.S. as a Class I, exempt medical device. Our initial device is AFECTAIR aerosol-conducting airway connector for infants receiving aerosolized medication in neonatal or pediatric intensive care units (NICUs and PICUs, respectively). We are initiating a user experience program that is being conducted in select U.S. critical care centers that represent approximately ten percent (10%) of our target institutions. This initial phase, which is intended to facilitate peer-to-peer exchange among physicians and respiratory therapists and enable discussion about the potential advantages and proper utilization of this novel device, is expected to be conducted in the first half of 2013. Following the initial phase, we expect to initiate a broader introduction of the AFECTAIR device for infants in a national phase. We believe that AFECTAIR aerosol-conducting airway connectors have the potential to become a new standard of care for the delivery of aerosolized medications and inhaled therapies to infants receiving aerosolized medication in the NICU and PICU. We believe that revenues from the AFECTAIR device for infants in the fourth full selling year could potentially be $10 million in the U.S. and $20 million globally.
We expect that we willmay be able to leverage the information, data and know-how that we gain from our development efforts with AEROSURFactivities for RDSour KL4 surfactant, in liquid, lyophilized and the AFECTAIR device for infantsaerosolized dosage forms, to support development of a potential product pipeline intendedof KL4 surfactant products to address serious critical care respiratory and other conditions of largerin children and adults in PICUspediatric and adult intensive care units (ICUs). However,units. While we are delaying these developmentremain focused on AEROSURF, we have supported and plan in the future to support potential opportunities to explore the utility of our KL4 surfactant to address a variety of respiratory conditions. Although there can be no assurance, we would consider supporting such efforts in the near term in order to focus our resources and expertise on meeting our 2013 goals to advance our development program for AEROSURF to Phase 2 clinical trials and execute the commercial introduction of SURFAXIN and the AFECTAIR device for infants. Iffuture if we are able to achieve our 2013 objectives, we believe we will be in a better position to assess thesecure separate funding, including through potential of developing products based on our CAGgovernment-supported and aerosol-conductor airway connector technologies to address the critical care needs of patients in the PICU and ICU.
In the U.S., we have established our own specialty respiratory critical care commercial and medical affairs organizationsother grant programs that are experienced in and will focus on neonatal indications. These organizations will be primarily responsiblededicated to effect the commercial introduction of SURFAXIN. With our established relationships and contacts in the neonatal community, we believe that we also will be able to use our commercial and medical affairs organizations to effectively introduce the AFECTAIR device for infants in the U.S. We also expect that, in the future, these teams will be able to leverage the experience and relationships that we gain with the introduction of SURFAXIN and the AFECTAIR device for infants to efficiently support the introductions of AEROSURF and SURFAXIN LS, if approved.
An important priority is to secure strategic resources to support the continued development and commercial introduction of our RDS products. While we currently intend to retain all rights and commercialize our approved products in the U.S., we are focused on identifying potential strategic alliances to assist us in markets outside the U.S. We seek strategic partners that have broad experience in the designated markets, including regulatory and product development expertise as well as, if our products are approved, an ability to commercialize our products. In addition to development and commercial support, such alliances typically also would provide us with financial resources to support our efforts, potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing ofadvancing research and development expenses. In 2013, we are focused on securing a significant strategic alliance predominantly focused on the European Union (EU). Ininitiatives.
We believe that our discussions to date, the primary focus of our discussions has been on AEROSURF. We also would consider various financing alternatives or collaboration arrangements that would provide infusions of capital and other resources needed to advance ouraerosolized KL4 surfactant, development programs. We may also seek strategic alliances and/alone or collaboration arrangements to supportin combination with other pharmaceutical compounds, has the potential commercial introductionto be developed to address a range of SURFAXINserious respiratory conditions and if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated bymay be an effective intervention for such conditions as acute lung injury (ALI), including acute radiation exposure to the information contained in our SURFAXIN new drug application (NDA) approved by the FDA.lung (acute pneumonitis and delayed lung injury), chemical-induced ALI, and influenza-induced ALI. In addition, although there can be no assurance, we may explore opportunities to apply KL4 surfactant therapies to treat conditions such as chronic rhinosinusitis, complications of certain major surgeries, mechanical ventilator-induced lung injury (often referred to as VILI), pneumonia, diseases involving mucociliary clearance disorders, such as chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF). There can be no assurance, however, that we will secure the additional capital needed to undertake such explorations, that we will undertake such explorations or that, even if we do, that we will be successful in concluding any strategic alliance, collaboration or other similar transaction.successful.
BUSINESS STRATEGY
Our immediate goal isWe continue to successfully introduce SURFAXINfocus our drug research and development activities on the AFECTAIR device for infantsmanagement of RDS in the U.S. and advance development of our AEROSURF program, including development of our lyophilized KL4 surfactant and CAG. If wepremature infants. We are able to secure the necessary additional capital, we also plan to implementcurrently conducting a clinical development program intended to gain marketing authorization for our lyophilized KL4 surfactant drug product, SURFAXIN LS, inAEROSURF for the U.S. and potentially in other major markets. Key elementstreatment of ourRDS. Our strategy to achieve theseour goals include:includes:
| · | We plan to continue to focusare focusing our efforts on advancing the AEROSURF clinical development program and our aerosolized KL4 surfactant pipeline candidates. We opened an investigational new drug researchapplication (IND) with the FDA and development activities oninitiated a phase 2 clinical program for AEROSURF for the managementtreatment of RDS in premature infants.infants in November 2013. |
| o | In May 2015, we announced the results of our initial AEROSURF phase 2a open label clinical trial conducted in 48 premature infants 29 to 34 week gestational age who were receiving nCPAP for RDS. The primary goal of this trial was to evaluate the safety and tolerability of a single exposure of aerosolized KL4 surfactant administered in three escalating inhaled doses (15, 30 and 45 minutes) to premature infants with RDS, compared to infants receiving nCPAP alone. In addition, a key objective of this trial was to establish proof of concept for our proprietary technology platform with (1) physiological data indicating that aerosolized KL4 surfactant is being delivered into the lung of premature infants, and (2) acceptable performance of the novel ADS in the NICU. Physiological data from this clinical trial suggest that, with AEROSURF, KL4 surfactant is being delivered to the lungs of premature infants with RDS and potentially improves gas exchange. In addition, parameters related to timing and frequency of the need for invasive surfactant therapy suggest that a single dose of AEROSURF may delay the time to invasive surfactant therapy due to nCPAP failure. Based on these encouraging results, we initiated a study to explore whether multiple or increased doses of AEROSURF may potentially reduce the need for invasive surfactant therapy. |
| o | In October 2015, we completed enrollment in an AEROSURF phase 2a clinical expansion study in 32 premature infants 29 to 34 week gestational age who were receiving nCPAP for RDS. This trial was designed to evaluate safety and tolerability of aerosolized KL4 surfactant administered in higher (60 and 90 minutes) doses compared to infants receiving nCPAP alone. In November 2015, we announced top line data from our overall phase 2a clinical program in premature infants 29 to 34 week gestational age, including the previously announced data from the initial phase 2a clinical trial. The data suggestthat aerosolized KL4 surfactant delivered to premature infants with RDS is generally safe and well tolerated and may be reducing the incidence of nCPAP failure. The reported adverse events and serious adverse events were those that are common and expected among premature infants with RDS and comparable to the control group. Through 72 hours after the start of treatment, AEROSURF treated patients, predominantly receiving a single dose, had lower rates of nCPAP failure compared to control in each of the last three dose groups studied. nCPAP failure rates were 53% in the control group (n=40) compared to 38% (n=8), 14% (n=7, excluding one patient who was inappropriately enrolled) and 38% (n=8) in the 45, 60 and 90 minute AEROSURF dose groups, respectively. |
| o | We also are enrolling a phase 2a multicenter, randomized, open-label, controlled clinical study in 32 premature infants 26 to 28 week gestational age receiving nCPAP for RDS that is designed to evaluate safety and tolerability of aerosolized KL4 surfactant administered in two escalating (30 and 45 minutes) doses, with potential repeat doses, compared to infants receiving nCPAP alone. We anticipate completing enrollment in the second quarter of 2016 and releasing top-line results in the third quarter of 2016. As with the previous phase 2a clinical trials, the primary objective of this 2a clinical trial is to evaluate safety and tolerability and we are also assessing performance of the ADS in the NICU and available physiological data for information that indicates that aerosolized KL4 surfactant is being delivered to the lungs and potentially reducing or delaying the time to invasive surfactant therapy due to nCPAP failure. |
| o | Based on the safety and tolerability profile observed in the phase 2a clinical program, we initiated the AEROSURF phase 2b clinical trial in premature infants 26 to 32 weeks gestational age receiving nCPAP for RDS. The trial is a multicenter, randomized, controlled study with masked treatment assignment in approximately 240 premature infants and is designed to evaluate the safety and tolerability of aerosolized KL4 surfactant (including with potential repeat doses) administered in two dose groups (25 and 50 minutes), compared to infants receiving nCPAP alone. We plan to evaluate the following endpoints: time to nCPAP failure (defined as the need for intubation and delayed surfactant therapy), incidence of nCPAP failure and physiological parameters indicating the effectiveness of lung function. The trial is expected to be conducted in up to 60 clinical sites in the U.S., Canada, Europe and Latin America. Enrollment is beginning with premature infants 29 to 32 week gestational age, and will include premature infants 26 to 28 weeks gestational age after completion of the ongoing phase 2a clinical trial in this age group. We anticipate completing enrollment for this clinical trial by the end of 2016 and releasing top-line results in the first quarter of 2017. |
| · | We are also planning for the manufacture of a sufficient number of ADSs to support the AEROSURF phase 2b clinical trial. We are working with Battelle Memorial Institute (Battelle), which assisted us in the development and manufacture of our phase 2a clinic-ready ADS to manufacture a sufficient number of ADSs to support our continuing development activities and our phase 2b clinical trial. The ADS has been demonstrated to produce consistent and controlled output rates, particle size, and other aerosol characteristics throughout extended KL4 surfactant dosing periods. We believe that the RDS marketADS represents a significant opportunity from both a medicalrobust platform to support reliable and a business perspective. Wereproducible clinical development, potential commercialization of our AEROSURF combination drug / device product, if approved, and, in the future, further believe that our neonatal programs, SURFAXIN, AEROSURF and SURFAXIN LS, have the potential to greatly improve the management of RDS and, collectively, represent the opportunity, over time, to expand the current RDS estimated worldwide annual market of $200 million to a $1 billion market opportunity.life-cycle product development. |
| o· | To advanceWe are developing a lyophilized (freeze-dried) dosage form of our KL4 surfactant that can be stored as a dry substance and reconstituted to liquid form just prior to use and is being developed potentially to improve ease of use for healthcare providers, prolong shelf life and reduce the need for cold-chain storage. We are developing lyophilized KL4 surfactant initially for our AEROSURF program,development program. In the first quarter of 2015, we continue our efforts to optimize the designcompleted a technology transfer of our CAG withlyophilized surfactant manufacturing process to our engineering staff and third-party medical device experts. In June 2012, wecontract manufacturing organization (CMO), Patheon Manufacturing Services LLC (Patheon), which manufactured a sufficient supply of clinical drug product to support our AEROSURF phase 2 clinical program. We are currently engaged in a second technology transfer to a new facility at Patheon. We also have entered into ana manufacturing development agreement with Battelle Memorial Institute (Battelle) under which Battelle has agreed to assist us in a multi-phasePatheon for the further development program focused on design, testing, and manufacture of clinic-ready CAG devicesthis lyophilized KL4 surfactant, potentially for our planned AEROSURF Phase 2 clinical trials, which we expect to initiate in the fourth quarter of 2013. We have conducted preliminary meetings with the FDA regarding the development plan for AEROSURFphase 3 program and, we have engaged regulatory consultants to assist us in implementing and, as needed, refining our development plan. We also plan to retain regulatory consultants to assist us in engaging international regulatory authorities regarding the AEROSURF development plan.if approved, commercial supply. |
| · | To achieve our business objectives over time, we will require significant additional capital and resources to support our operations, advance our development programs, manufacture our drug product and medical devices, and support the commercialization of our approved products in markets around the world. We continue to assess potential opportunities that could provide capital resources and strengthen our capabilities. |
| o | To support the planned Phase 2 clinical programIn October 2014, we entered into a Collaboration Agreement with Battelle providing for AEROSURF, we are developing clinical operations capabilities that will assume primary responsibility to administer the initial phasefurther development of our Phase 2 clinical trial. For subsequent phases of our clinical program, we expect to engage a contract research organization (CRO) with expertise in the management of clinical trials to assist us in the management of the trials. |
| o | We plan to develop our lyophilized KL4 surfactant drug product with the objective of improving ease of use for healthcare practitioners, as well as potentially to prolong shelf life and eliminate the need for cold-chain storage. In 2013, we plan to complete the ongoing technology transfer of our lyophilized KL4 surfactant manufacturing process to a CMO that has expertise in the manufacture of lyophilized dosage forms. Our current efforts are directed towards the manufacture of our lyophilized KL4 surfactantADS for use in our planned AEROSURF program. We have discussed with the FDA a proposed developmentphase 3 clinical program for SURFAXIN LS and expect to engage in further discussions with the FDA. Once we have secured the necessary capital, we plan to implement a regulatory plan intended to gain marketing authorization for SURFAXIN LS in the U.S., and thereafter potentially in other selected markets. We believe that SURFAXIN and, if AEROSURF is approved, SURFAXIN LS collectively haveinitial commercial supply. The collaboration involves a sharing of development expense and provides us the potential over time to displace animal-derived surfactantscontinued benefit of Battelle’s expertise in developing and take a substantial share of the markets in which they are available.integrating aerosol devices using innovative and advanced technologies. See,
“– Business Operations – Strategic Alliances and Collaboration Arrangements – Battelle Collaboration Agreement.” |
| · | To prepare for the commercial introduction of SURFAXIN, we have established our own specialty respiratory critical care commercial and medical affairs organizations that are experienced in and will focus on neonatal indications, beginning with SURFAXIN. We have trained and deployed these teams in the field, with the primary immediate goal to engage with hospitals that have NICUs, determine and meet the requirements of each hospital to have SURFAXIN included on that hospital’s formulary (the approved list of drugs and therapeutics that the hospital will purchase) and secure adoption of the AFECTAIR device for infants. Our sales and marketing strategy is focused primarily on hospitals with NICUs that we believe currently represent a significant portion of the surfactant market in the U.S. To execute this strategy, we expect to incur annual expenses of approximately $13 million for commercial and medical affairs capabilities. We believe that this strategy will provide us direct control over our U.S. sales and marketing activities, permit us to establish a strong presence in NICUs nationwide, and potentially optimize the economics of our business. |
| · | An important priority for us is to manage and strengthen our long-term strategic and financial position to support the introduction of our approved products, advance our development programs, and maximize stockholder value. See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
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| o | We continueplan in the future to focus in 2013 on securingseek opportunities to enter into a significant strategic alliance, predominantly focused on the EU, potentially to provide development and commercial expertise and share research and development expenses forcollaboration or other strategic transaction that would support our AEROSURF development programactivities, potentially by providing development, regulatory and commercial market expertise as well as financial resources, and, if approved, to support the commercial introduction of AEROSURF in the EU and other selected markets outside the U.S. We also are assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS™, a lyophilized dosage form of SURFAXIN, in the U.S. and potentially other selected markets and plan to seek a strategicFinancial resources provided by such an alliance to support our efforts. We may also seek strategic alliances and/or collaboration arrangements to support the potential commercial introduction of SURFAXIN and, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in our SURFAXIN NDA approved by the FDA. We are engaged in discussions with potential strategic partners who could provide development and commercial expertise as well as financial resources (potentially intake the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses). There can be no assurance, however, that we will be successful in concluding any strategic alliance, collaboration or other similar transaction.expenses. |
| · | We plan to closely manage our cash resources and will seek additional capital, including potentially from strategic transactions and through future debt and equity financings, as we deem necessary to maintain and strengthen our financial position. However, with our current market capitalization, we may be constrained in our efforts by several factors, including: (i) our ability to conduct primary offerings, including under the ATM Program, is constrained by a restriction under our universal shelf registration statement on Form S-3 (File No. 333-196420), which was declared effective on June 13, 2014 (2014 Universal Shelf), that limits the value of primary securities offerings we may conduct in any 12-month period to no more than one-third of our public float; (ii) the number of authorized shares currently available for issuance under our Amended and Restated Certificate of Incorporation, as amended, likely would be insufficient to fund our activities through equity offerings; (iii) if in a financing, we seek to issue more than 20% of our outstanding shares of common stock, we may be required to first seek approval of our stockholders, a time-consuming and expensive process; (iv) if we fail to maintain compliance with Nasdaq listing requirements, including without limitation the minimum bid price, minimum market capitalization or minimum stockholders’ equity requirements, our common stock may be subject to delisting, which could affect the liquidity and value of our common stock. |
| o | We continue to pursue non-dilutive funding opportunities, including in the form of U.S. Government-funded research and preclinical development initiatives that explore the use of our KL4 surfactant in the treatment of a range of respiratory diseases. Since 2012, we have received $4.1 million in funding, including approximately $1.9 million to fund our AEROSURF phase 2a clinical program. |
| o | We have managedIn July 2015, we completed a registered public offering of 1,791,667 Series A units and plan3,000,000 Series B units each at a price per unit of $8.40, resulting in 2013gross proceeds of $40.25 million ($37.6 million net after underwriting discount and expenses). The proceeds included $5.0 million in non-cash consideration from affiliates of Deerfield Management, L.P. (Deerfield) in the form of a reduction in future interest payments due under the Deerfield Loan (discussed below). Each Series A unit consists of one share of common stock and a Series A warrant to continue closely managing our expenditures. We planpurchase one share of common stock at an exercise price of $9.80 per share. Each Series B unit consists of a fully paid pre-funded Series B warrant to focus our resources on the initiatives outlined above. To achieve our objectives, we will need accesspurchase one share of common stock at an exercise price of $8.40 per share, and a Series B warrant to additional capital. purchase one share of common stock at an exercise price of $9.80 per share. See, “Item Item 7 – Management’sManagement Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” On February 13, 2013, we entered into a Facility Agreement (Deerfield Facility) with affiliates of Deerfield Management Company, L.P. (Deerfield), pursuantResources – Financings Pursuant to which Deerfield agreed to loan us up to $30 million on a secured basis on the terms outlined in the Deerfield Facility. Deerfield advanced $10 million upon execution of the Deerfield Facility and agreed to advance an additional $20 million, subject to certain conditions, following the first commercial sale of SURFAXIN, provided that the first sale occurs not later than December 31, 2013. See, “Item 7Common Stock Offerings – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.Registered Public Offerings.” We plan to use the proceeds of the loans to meet our working capital requirements, including to support our research and development programs. There can be no assurance that we will meet the conditions for the second $20 million disbursement.
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| o | Also, onIn February 11, 2013, we entered into an At-the-Market Equity Offering Sales Agreement (Stifel(Sales Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel), underpursuant to which Stifel, as our exclusive agent, at our discretion andmay sell through an “at-the-market” program (ATM Program), at such times that we determine from time to time, may sell overelect during a three-year periodterm, up to a maximum of $25,000,000 of shares of our common stock (Shares) throughstock. In February 2016, we entered into an “at-the-market” program (ATM Program). We are not requiredamendment to sell any Shares at any time duringthe Sales Agreement to extend the term three years to February 11, 2019. As of December 31, 2015, approximately $23.0 million remains available under the ATM Program. We intend
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| o | In February 2013, we entered into a secured loan agreement with Deerfield, under which we secured long-term debt of $30 million (Deerfield Loan). In July 2015, we entered into two amendments to use the net proceeds from the ATM Program, if any, to meet our working capital requirements to execute our business plans, including, without limitation, to support the commercialization in 2013 of SURFAXIN and the AFECTAIR device for infants. There can be no assurance that we will issue any Sharesloan agreement, pursuant to which we prepaid $5 million of the ATM Program.outstanding principal amount, eliminated the initial principal payment due in February 2017; increased each of the remaining principal payments due in February 2018 (which may be deferred one year if we achieve a market capitalization milestone) and February 2019 to $12.5 million; agreed to pay $5 million in satisfaction of future interest obligations through issuance to Deerfield of $5 million securities in the July 2015 public offering; and reduced the rate of any remaining interest accruing under the Deerfield Loan from 8.75% to 8.25%. The loan agreement also includes certain negative covenants that may require us to seek Deerfield’s consent before entering into certain strategic transactions, which could impair our ability to enter into certain strategic transactions. See, “Item 7 – Management’sManagement Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.Resources – Deerfield Loan.” |
| · | We have invested,plan to continue prosecuting and will continue to invest, in maintaining and enforcing our potential competitive position by protecting our exclusive rights in and to our KL4 surfactant technology, pipelinedrug products and our drug delivery technologies, including our CAG and aerosol-conducting airway connectors, through patents, patent extensions, trademarks, trade secrets and regulatory exclusivity designations, including potential orphan drug and new drug product and supplemental exclusivities. We believe that our development programs may also provide opportunities for new patent filings, which potentially may extend our exclusivity rights into the future. |
| · | We have evaluated, and will continue to evaluate, and invest in, our quality systems and manufacturing capabilities, including at our drug manufacturing operations in Totowa, New Jersey, and our analytical testing and medical device development laboratories in Warrington, Pennsylvania. We plan to manufacture sufficient amounts of SURFAXIN drug product to meet our anticipated commercial requirements and to support SURFAXIN related preclinical, clinical and formulation development activities for our other KL4 surfactant product candidates. For AEROSURF, we plan to use our lyophilized KL4 surfactant drug product and are conducting a technology transfer of our lyophilized manufacturing process to a CMO that complies with the FDA’s current good manufacturing processes (cGMP) and with expertise in lyophilization processes. To produce CAG devices, we have entered into an agreement with Battelle to manufacture clinic-ready CAG devices to be used in the first phase of our planned AEROSURF Phase 2 clinical trials. For AFECTAIR, we have entered into a Manufacturing and Supply Agreement with Lacey Manufacturing, a unit of Precision Engineered Products, LLC, to manufacture and supply AFECTAIR devices for commercial sale.
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| · | While we are focused initially on advancing our lead KL4 surfactant and drug delivery technologies through patents, patent term restoration, trademarks and trade secrets. We expect that, as we advance our development programs, we may identify opportunities to treat critical care infants with or at riskextend the duration of our market exclusivities, through new patents and other intellectual property. We also plan to utilize and seek regulatory designations that may provide post-approval market exclusivity for RDS, weour approved products. See, “– Licensing, Patents and Other Proprietary Rights and Regulatory Designations.”
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| · | We believe that our KL4 surfactant technology has the potential to be developed intomay potentially support a broad product pipeline to address a variety of debilitating respiratory conditions and diseases. As our resources permit,diseases that could represent potentially significant market opportunities. While we will consider opportunities to conductremain focused on RDS, we have participated in investigator-initiated research programs and government-funded research and preclinical development activities potentiallyinitiatives that explore the use of our KL4 surfactant in the treatment of a range of respiratory diseases. For example, since 2012, we have participated in a U.S. Government-funded study to address acute lung injury (ALI). We recently announced four collaborations with leading research institutions to conduct a series of preclinical studies funded through various U.S. Government-sponsored, Biodefense-related initiatives. See, “– Surfactant Replacement Therapy for Respiratory Medicine – Serious Respiratory Indications Associated with Inflammation of the Lungs – Acute Lung Injury (ALI).” In 2010, we supported an investigator-initiated Phase 2a clinical trial assessing the safety, tolerability and short-term effectiveness (via improvement in mucociliary clearance) of ourassess whether aerosolized KL4 surfactant may mitigate radiation-induced lung injury in patients with cystic fibrosis (CF). Wean animal model. Although there can be no assurance, we may in the future consider supporting such independent initiatives that explore the utilitysupport development activities to establish a proof-of-concept and, if successful, thereafter determine whether to seek strategic alliances or collaboration arrangements or pursue other financial alternatives to fund further development and, if approved, commercialization of applying ouradditional KL4 surfactant to address CF and other respiratory diseases, such as COPD. See, “– Surfactant Replacement Therapy for Respiratory Medicine – Cystic Fibrosis (CF),” and “– Surfactant Replacement Therapy for Respiratory Medicine – Respiratory Distress Syndrome in Premature Infants (RDS) – AEROSURF for RDS in Premature Infants.”indications. |
Although we currently believe that we will be successful in completing our ongoing AEROSURF clinical trials within the time frames set forth above and that the results will support our planned AEROSURF phase 3 clinical program and registration of AEROSURF in the U.S.; that we will be able to manufacture a sufficient supply of lyophilized KL4 surfactant and ADSs and related components to support our AEROSURF clinical program; and that we will be able to secure the additional capital that we will require to achieve our business objectives, including through a strategic alliance or other strategic transaction, there can be no assurance that we will be successful. Our activities involve significant risks and uncertainties that could cause the results of our efforts to differ from our expectations. See, “Item 1A – Risk Factors.”
Our estimates of market size and business opportunities included in this Item 1 – Business Section and elsewhere in this Annual Report on Form 10-K are based in part on our analysis of data derived from the following sources, among others: third-party market research conducted for us by Deerfield Institute, Defined Health and Compass Consulting with U.S. and EU based neonatologists in 2014; Annual Summary of Vital Statistics: 2010, Pediatrics, Martin et. al.; CDC National Vital Statistics, 2005;2013; IMS Midas Data MAT, December 2011;2013; HCUP Hospital Discharge data, 2008;2013; Obstetric and Neonatal Care Practices for Infants 501 to 1500 g From 2000 to 2009; Pediatrics, July 2013, Soll; Hospital Insurance Claim Database, 2009; Management and Outcomes of Very Low Birth Weight, New England Journal of Medicine (NEJM), 2008, Eichenwald, Stark; Cost of hospitalization for preterm and low birth weight infants in the United States, Pediatrics 2007, Russell RB; Market Intelligence Report on Number of ICU Beds in EU5 Countries; The Cystic Fibrosis Foundation website; Vermont Oxford Network Data, 2006; estimates from other companies with information on surfactant sales in countries where IMS data reporting is often incomplete or non-existent; and Discovery Labs Primary Market Research, December 2010 and May 2011; as well as our analysis of the SELECT and STAR trials described below. Although we believe that the information contained in these sources are reliable as of the date of this Annual Report on Form 10-K, we have not independently verified such data and do not guarantee the accuracy or completeness of such information. In addition, our analysis and assumptions take into account estimated patient populations, expected adoption rates of our products, current pricing, and economics and anticipated potential pharmacoeconomic benefits of our drug products, if approved. We provide estimates and projections to give the reader an understanding of our strategic priorities, but we caution that the reader should not rely on our estimates and projections. These estimates and projections are forward-looking statements, which we intend to be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. For a discussion of forward-looking statements, see, “Forward-Looking Statements” on page iiiii of this Annual Report on Form 10-K, and “Item 1A – Risk Factors.”
SURFACTANT THERAPY
The RDS Market
Prior to the FDA’s approval of SURFAXIN, the only pulmonary surfactants commercially available in the U.S. were introduced in the 1990’s. All of the available pulmonary surfactants were animal-derived and approved for RDS in premature infants. SURFAXIN was the first synthetic, peptide-containing surfactant approved for use in neonatal medicine in the U.S.
We estimate that approximately 300,000 to 350,000 low birth weight premature infants are born annually in the U.S. (and approximately 500,000 to 600,000 in the major U.S., European and Japanese medical markets). In addition, our current market data suggests that the number of low birth weight premature infants born annually in the Latin America, Asia and the Pacific markets may represent opportunities similar to Europe and Japan and we plan to conduct further market research on this topic. In the U.S., we estimate that approximately 120,000 to 150,000 premature infants are given respiratory support because they have or are at risk for RDS. Approximately 40% (50,000 to 60,000) of these infants currently are treated with surfactant as the initial therapy for RDS, usually within the first hours of life, generally because the perceived benefits of surfactant therapy for these very fragile infants outweigh the increased risks associated with invasive intubation and mechanical ventilation. The remaining infants are usually initially supported with nCPAP alone. As discussed above, a large percentage of these patients (approximately 25%) experience nCPAP failure and require delayed surfactant therapy administered via intubation and mechanical ventilation. We estimate that approximately 20,000 to 25,000 infants will receive delayed surfactant therapy (post-nCPAP failure), bringing the total number of premature infants in the U.S. who are treated with surfactants for RDS to approximately 70,000 to 85,000.
Market research conducted with clinicians for us by third parties suggests that, if AEROSURF were approved, a significant number of the 120,000 to 150,000 premature infants given respiratory support because they have or are at risk for RDS would receive aerosolized KL4 surfactant as the initial treatment for RDS.
We estimate the surfactant market to be approximately $75 million annually in the U.S. and $250 to $300 million annually worldwide; however, we believe that this market has been constrained, in part, by the risks associated with surfactant administration and lack of medical innovation. By enabling delivery of aerosolized KL4 surfactant using noninvasive means, we believe that, over time, AEROSURF has the potential to expand the current RDS estimated worldwide annual market to a $600 million to a $1 billion per year market opportunity. See, “– Potential Pharmacoeconomic Benefits of AEROSURF.”)
Potential Pharmacoeconomic Benefits of AEROSURF
In addition to the potential clinical benefits of aerosolized KL4 surfactant, AEROSURF has the potential to provide significant pharmacoeconomic benefits for hospitals, payers and healthcare systems. In the U.S., for example, the cost to support a mechanically ventilated premature infant (an estimated $55,000 per patient), is much greater than the cost to manage a premature infant who does not need mechanical ventilation (an estimated $8,500 per patient). These costs increase even more if complications associated with intubation and mechanical ventilation should develop, including bronchopulmonary dysplasia. Other healthcare system costs include the need to transport RDS patients who require intubation and mechanical ventilation to tertiary care neonatal intensive care units as well as family relocation costs. Accordingly, by providing clinical and pharmacoeconomic benefits through the reduction or elimination of the need for intubation and mechanical ventilation to treat RDS, we estimate that AEROSURF may, over time, expand the size of the global surfactant market.
Serious Respiratory Indications Associated with Inflammation of the Lungs
Many respiratory diseases are associated with an inflammatory event that causes surfactant dysfunction and a loss of patency of the conducting airways. Scientific data support the premise that the therapeutic use of surfactants in aerosol form has the ability to reestablish airway patency, improve pulmonary mechanics and act as an anti-inflammatory. For this reason, we believe that AEROSURF is a highly promising program and that, with the knowledge that we gain from developing AEROSURF, we may be able to apply our technology platform to potentially address serious respiratory conditions affecting pediatric and adult patient populations. We believe that our proprietary aerosolized KL4 surfactant technology potentially may be effective as a preventive measure to treat patients at risk for ALI and, possibly in the future, other conditions, such as COPD and CF.
Acute lung injury (ALI) is associated with conditions that either directly or indirectly injure the air sacs of the lung. ALI is a syndrome of inflammation and increased permeability of the lungs with an associated breakdown of the lungs’ surfactant layer. Among the causes of ALI are complications typically associated with certain major surgeries, mechanical ventilator-induced lung injury (often referred to as VILI), smoke inhalation, pneumonia and sepsis. There are a significant number of patients at risk in the U.S. for ALI annually and there are no currently approved therapies other than supportive respiratory care.
We have collaborated in a number of preclinical studies funded through various U.S. government-sponsored, biodefense-related initiatives, including without limitation: (i) University of Pennsylvania, funded by the NIH’s National Institute of Allergy and Infectious Diseases (NIAID) to assess the ability of KL4 surfactant to mitigate effects of acute radiation exposure to the lung (award number R44AI102308); (ii) University of Rochester, to evaluate the use of KL4 surfactant to protect the lung in a radiation-induced multi-organ dysfunction animal model; (iii) a facility’s contract with the U.S. Department of Defense through the NIH Office of the Director and the Countermeasures Against Chemical Threats (CounterACT) program, to assess the utility of KL4 surfactant for the treatment of chemical-induced ALI; (iv) a program funded by NIAID, to investigate the use of KL4 surfactant as a treatment for influenza-induced ALI. We received additional awards of $1.0 million each from NIAID to support continued work with University of Pennsylvania to study (i) in 2014, how KL4 surfactant may mitigate radiation-induced lung injury, and in 2015, to support continued development of our aerosolized KL4 surfactant as a potential medical countermeasure to mitigate acute and chronic/late-phase radiation-induced lung injury. We recently received from NIAID $225,000 fixed-price contract (contract HHSN272201500027C) to study KL4 surfactant aerosol to reduce influenza lung injury. The foregoing content concerning these initiatives is solely the responsibility of Discovery Labs and does not necessarily represent the official views of the NIH.
We may in the future invest in or support third-party studies of these and other indications. If a proof-of-concept should be established, we would then determine whether to seek strategic alliances or collaboration arrangements or utilize other financial alternatives to fund their further development. There can be no assurance that we will invest or support studies in these indications, that we will secure the necessary capital, whether through government-sponsored grants or otherwise, that any such efforts will be successful, or that we will be able to conclude any such strategic alliance, collaboration arrangement or secure any financial alternative.
PROPRIETARY PLATFORM – KL4SURFACTANT AND AEROSOL TECHNOLOGIES
Our KL4 Surfactant Technology
Pulmonary surfactants are protein and phospholipid compositions that form naturally in the human lung and are critical to survival and normal respiratory function. They spread in a thin mono-layer to cover the entire alveolar surface orof the air sacs, or alveoli, of the lungs and the terminal conducting airways that lead to the air sacs andalveoli. Surfactants facilitate breathing by continually modifying the surface tension of the fluid that lines the inside of the lungs. If the lungs have a surfactant deficiency, as frequently occurs in premature infants, or experience surfactant degradation, generally due to disease, lung insult or trauma, the air sacsalveoli in the lungs will tend to collapse and will not absorb sufficientenough oxygen, resulting in severe respiratory diseases and disorders. In addition to lowering alveolar surface tension, surfactants contribute in other important ways to respiration including, but not limited to,for example, by lowering the surface tension of the conducting airways and maintaining airflow and airway patency (keeping the airways open and expanded). Human surfactants include four known surfactant proteins, A, B, C and D. Numerous studies have established that, of the four known surfactant proteins, surfactant protein B (SP-B) is essential for respiratory function. In our KL4 surfactant, KL4 is a synthetic peptide that is designed to closely mimic the essential attributes of surfactant protein B (SP-B).
Many respiratory disorders are associated with surfactant deficiency or surfactant degradation. However, the use of surfactant therapy presently has limited application and is FDA-approvedcurrently approved by the FDA only for managingto manage RDS in premature infants. Currently available surfactants are derived from pig and cow lungs using a chemical extraction process. Although clinically effective, these surfactants have several potential drawbacks and have not been developed to treat broader populations and other respiratory diseases.
We believe our KL4 surfactant and our CAG technology may expand the therapeutic options to treat previously unaddressed respiratory problems in a range of patient populations, from premature infants to adults. We plan to develop our aerosolized KL4 surfactant initially for RDS in premature infants and thereafter for a range of indications in neonatal, pediatric and adult critical care patient populations.
Our KL4 Surfactant Technology
Our proprietary KL4 surfactant technology produces a synthetic surfactant that is structurally similar to human pulmonary surfactant and contains a proprietary synthetic peptide, KL4 (sinapultide). KL4 is, a 21 amino21-amino acid peptide that closely mimicsis designed to imitate the essential attributes of the human surfactant protein B (SP-B), which isone of four known surfactant proteins and the surfactant protein that is most important for the proper functioning of the respiratory system. Our synthetic surfactant may beis manufactured to preciserigorous specifications, and formulated as awith minimal lot-to-lot variability, is currently approved by the FDA in liquid instillate form, and is being developed in lyophilized dosage form (freeze-dried), or and aerosolized dosage form. In October 1996, we licensedforms. We hold an exclusive worldwide rightslicense and sublicense to this technology, which was invented at The Scripps Research Institute and exclusively licensed to Johnson & Johnson, Inc. (J&J) and further developed by an affiliate of Johnson & Johnson, Inc. (J&J).
OurWe previously demonstrated in preclinical studies that our KL4 surfactant is a synthetic surfactant that can be manufactured consistently and with minimal lot-to-lot variability. We also believe that our synthetic surfactant mightmay possess pharmaceutical benefits not currently exhibited by the animal-derived surfactants. Our synthetic KL4 surfactant has also demonstrated in preclinical studies unique characteristics,certain beneficial properties, including modulation of the inflammatory process, antimicrobial properties and non-immunogenicity. (Wolfson, M.R., Wu, J., Hubert, T.L., Gregory, T.J., Mazela, J., & Shaffer, T.H. (2012), “Lucinactant attenuates pulmonary inflammatory response, preserves lung structure, and improves physiologic outcomes in a preterm lamb model of RDS.” Pediatr Res, 72(4), 375-383; Black C, Leon C, Pluim J. Bactericidal properties of the novel, peptide-containing surfactant - Surfaxin®. Pediatric Academic Societies, Honolulu, HI, May, 2008. E‑PAS2008:633756.11; and Clayton RG, Cochrane CG, Gregory TJ. Surfaxin® (lucinactant) does not induce an immune response in a standardized preclinical model. Pediatric Academic Societies, Honolulu, HI, May, 2008. E‑PAS2008:633756.12.) We believe these characteristics willproperties may be important attributes as we seek to develop our KL4 surfactant technology pipeline potentially to address a broad range of respiratory conditions that represent significant unmet medical needs. A number of preclinical studies assessingHowever, the potential advantages of our KL4 surfactant technology have been reported in professional journals and presented at major medical congresses, including the following:
| · | In September 2012, preclinical data from a study using a well-established preterm lamb model of RDS was published in Pediatric Research. The study found that the lungs of preterm lambs that were treated with SURFAXIN were more homogenously expanded both within and between lung regions, a finding that is suggestive of more uniform distribution of surfactant throughout the lung, and the lungs of SURFAXIN treated lambs had less cellular debris and fewer inflammatory cells when compared with the lungs of non-treated lambs and the lambs treated with Curosurf® and Survanta®. The investigators also noted lower levels of inflammatory mediators following treatment with SURFAXIN compared with negative controls as well as both animal-derived surfactants. The study concluded that early intervention with SURFAXIN may mitigate progression of pulmonary pathophysiological consequences of RDS when compared with the animal-derived surfactants Curosurf and Survanta.
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| · | In May 2012, preclinical data from a study comparing the effects of SURFAXIN LS and Curosurf on pulmonary function, as well as the physiologic reactions to surfactant administration in preterm lambs with RDS, was published in Pediatric Research. The study found that both surfactants significantly improved pulmonary function (p < 0.05). However, lambs treated with SURFAXIN LS required significantly lower mechanical ventilator pressures to maintain pulmonary function compared with Curosurf-treated lambs (p < 0.05). In contrast to lambs treated with SURFAXIN LS, lambs treated with Curosurf experienced significant reductions in heart rate and rapidly increased brain oxygenation during the peridosing period (p < 0.05). The investigators concluded that SURFAXIN LS may enable ventilation at lower mean airway pressures, thereby potentially reducing the incidence of bronchopulmonary dysplasia (BPD), and as such may be an effective substitute for the currently-marketed surfactant products.
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| · | In October 2011, an AEROSURF study was presented at the 2011 European Society for Paediatric Research Annual Meeting (ESPR). These data were initially presented at the 2011 Pediatric Academic Societies Annual Congress (PAS) in May 2011. This preclinical study was conducted to determine which dose of AEROSURF would produce the optimal physiologic response and demonstrated that AEROSURF significantly improved gas exchange (p < 0.05), pulmonary mechanics (p < 0.05) and lung structure integrity (p < 0.05), and reduced levels of inflammatory mediators in the lung (p < 0.05), in a dose-dependent manner, in the well-recognized preterm lamb model of RDS. The data also suggest that of the doses tested, AEROSURF delivered during a 20 to 30 minute dosing interval results in the most desirable overall dosing strategy.
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| · | Also at the 2011 ESPR, data were presented from a study demonstrating that treatment with either bolus or aerosolized KL4 surfactant resulted in a significant improvement in lung function and survival when treating ALI in a preclinical model of ALI. These data were initially presented at the 2011 PAS. The objective of this study was to evaluate aerosolized KL4 surfactant in a piglet model with lung injury and subsequent reduced pulmonary function consistent with what is observed in humans with ALI. Piglets were randomized to receive either endotracheal bolus KL4 surfactant with extubation to continuous positive airway pressure (CPAP), aerosolized KL4 surfactant while on CPAP, or CPAP alone (control). Relative to control piglets on CPAP alone, treatment with either bolus or aerosolized KL4 surfactant resulted in a significant improvement in both oxygenation response (p < 0.001) and overall survival (p < 0.05) throughout the evaluation period, with the most robust response observed in the aerosolized KL4 surfactant treatment group. Piglets treated with aerosolized KL4 surfactant had reduced tissue levels of interleukin–8 (IL-8), a key marker of lung inflammation, compared with control piglets (p < 0.03).
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We believe that our KL4 surfactant has promising novel properties and attributes that potentially may be of benefit in addressing various respiratory diseases and disorders in broad patient populations. The clinical relevance of such attributes has not been adequately established and, accordingly, warrants further study.
In the clinical environment, our synthetic KL4 surfactant has demonstrated attributes that we believe are uniquely beneficial in the treatment of premature infants at risk for RDS and warrant further scientific assessment to address a variety of debilitating respiratory conditions for which there currently are no or few approved therapies.
| · | In December 2012, the Journal of Pediatric Pharmacology and Therapeutics (Volume 17, Number 3, 2012) published a pharmacoeconomic analysis based on data from our pivotal SELECT and STAR Phase 3 clinical trials for SURFAXIN titled “A Pharmacoeconomic Analysis of In-Hospital Costs Resulting from Reintubation in Preterm Infants Treated with Lucinactant, Beractant, or Poractant Alfa.” This study employed a pharamacoeconomic model that utilized observations from a post hoc analysis that examined the consequences of reintubation and the potential effect of the choice of surfactant on reintubation rates (see below) to assess the potential cost benefits associated with the lower rate of reintubation observed with SURFAXIN when compared with reintubation rates of infants treated with the current global market leading surfactants, Curosurf and Survanta. The study concluded that the lower rate of reintubation, as observed in infants who received SURFAXIN, may result in significantly lower in-hospital costs primarily related to costs associated with mechanical ventilation.
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| · | In December 2012 at the 2012 Hot Topics in Neonatology Annual Meeting, data was presented from a pharmacoeconomic analysis of data published in 2011 in the Journal of Neonatal-Perinatal Medicine (Volume 4, Number 2, 2011, discussed below). The analysis demonstrated that the previously-reported reduced rate of reintubation in preterm infants treated with SURFAXIN may also result in an average potential hospital cost savings of $389,247 per 100 treated infants by reducing the frequency of bronchopulmonary dysplasia (BPD) when compared with reintubation rates of infants treated with the current global market leading surfactants, Curosurf and Survanta. In addition, in May 2012, we announced the results of an earlier pharmacoeconomic analysis that demonstrated that the lower rate of reintubation observed in infants treated with SURFAXIN also resulted in a potential hospital cost savings of $160,000 to $252,000 per 100 infants.
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| · | In 2011, the Journal of Neonatal-Perinatal Medicine (Volume 4, Number 2, 2011) published a post-hoc analysis of data from our SELECT and STAR Phase 3 clinical trials for SURFAXIN titled “Reintubation and risk of morbidity and mortality in preterm infants after surfactant replacement therapy.” The article evaluated the consequences of reintubation and the potential effect of the choice of surfactant on reintubation rates and subsequent clinical outcomes in premature infants. The analysis indicates that, for preterm infants at risk for RDS who received prophylactic surfactant therapy and were extubated, infants who were reintubated had significantly higher rates of six major complications of prematurity, including bronchopulmonary dysplasia (BPD, a chronic lung condition), necrotizing enterocolitis (a severe intestinal condition often requiring surgery and loss of bowel), sepsis, and intraventricular hemorrhage (bleeding into the brain). The analysis also indicates that infants treated with SURFAXIN had a significantly lower incidence of reintubation and a significantly higher incidence of survival without reintubation, compared with infants who received animal-derived surfactants Survanta and Curosurf, the current standard of care.
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KL4 Surfactant Drug Product – Dosage Form FlexibilityForms
SURFAXIN is aSurfactants currently marketed in the U.S. are liquid instillate that isand must be stored in refrigerated conditions, warmed prior to use, and administered using endotracheal intubation and mechanical ventilation, which is the same method of administration required for currently-approved animal-derived surfactants. In addition to the liquid dosage form, we are developing ourventilation. Our KL4 surfactant can be lyophilized (freeze-dried) and reconstituted to potentially be availablea liquid just prior to administration. We have demonstrated in aerosolizedlaboratory experiments that our lyophilized KL4 surfactant retains many of the key attributes and characteristics of our liquid instillate. We believe that it may provide additional benefits in a clinical setting, including potentially:
| · | improved ease of use for healthcare practitioners, including potential elimination of the drug warming process allowing for shortened preparation time; and potential reduction of continuous cold chain storage and refrigeration requirements; |
| · | potential for extended shelf life; and |
| · | relatively lower viscosity than that of a liquid instillate, which may aid and/or improve the distribution of KL4 surfactant throughout the lung and potentially may reduce the frequency of transient peri-dosing events typically observed during administration of surfactants. |
We have demonstrated that we can aerosolize both the liquid and lyophilized dosage forms.
We have also demonstrated through research and feasibility studies that we can aerosolizeforms of our KL4 surfactant and that our aerosolized KL4 surfactant product candidate has the following important characteristics:
| · | full retention of the surface-tension lowering properties of a functioning surfactant necessary to restore lung function and maintain patency of the conducting airways; |
| · | full retention of the surfactant composition upon aerosolization; and |
| · | drug particle size believed to be suitable for deposition into the lung. |
OurWe are using lyophilized KL4 surfactant technology also can be produced in a lyophilized (freeze-dried) dosage form that is resuspended to liquid form prior to administration. We plan to use our lyophilizeddevelop aerosolized KL4 surfactant in our AEROSURF development program.program to treat RDS in premature infants. Thereafter, we potentially will be able to address a range of indications in neonatal, pediatric and adult critical care patient populations.
The Safety and Efficacy Profile of SURFAXIN for the Prevention of RDS in Premature Infants at High Risk for RDS
Our new drug application (NDA) for SURFAXIN was supported by a phase 3 pivotal trial (SELECT) to evaluate the safety and efficacy of SURFAXIN for the prevention of RDS in premature infants. Co-primary endpoints were the incidence of RDS at 24 hours and RDS-related mortality at 14 days. The primary comparator was Exosurf® (colfosceril palmitate) with the intent of demonstrating superiority. SURFAXIN demonstrated a statistically significant improvement in both RDS at 24 hours and RDS-related mortality through day 14. Survanta® (beractant) served as an additional active comparator. SURFAXIN demonstrated a statistically significant reduction in RDS-related mortality through day 14 versus Survanta. We also conducted a multicenter, double-blind, active-controlled, phase 3 clinical trial (STAR) which was designed as a non-inferiority trial comparing SURFAXIN to Curosurf® (poractant alfa), a surfactant derived from pig lung, and was used to support the safety of SURFAXIN.
The SELECT and STAR trials, as well as a pooled phase 3 analysis, have conductedbeen presented at several experimentsinternational medical meetings and the results from the two studies were published in Pediatrics, the Official Journal of the American Academy of Pediatrics and a premier medical journal for pediatric healthcare practitioners. Post-hoc analysis of data from our SELECT and STAR phase 3 clinical trials indicates that demonstratepremature infants with RDS who were extubated after treatment with surfactant and who later required reintubation had a significantly higher rate of mortality than those infants who did not require reintubation. The data also indicate that premature infants treated with SURFAXIN may require less reintubation than currently approved animal-derived surfactants. Moreover, pharmacoeconomic analysis suggests that lower reintubation rates may result in significant hospital cost savings associated with reduction in time spent on mechanical ventilation and reduced rates of bronchopulmonary dysplasia (BPD), air leak, sepsis, necrotizing enterocolitis (NEC), or intraventricular hemorrhage (IVH).
SURFAXIN was approved by the FDA in 2012. In the second quarter of 2015, we decided to cease our lyophilizedcommercial and manufacturing activities for SURFAXIN and focus our capital resources on advancing the AEROSURF clinical development program and our aerosolized KL4 surfactant drug product (SURFAXIN LS) retains the key characteristics of our liquid KL4 surfactant (SURFAXIN) and may provide additional benefits in a clinical setting, including:
| · | improved ease of use for healthcare practitioners, including shortened preparation time due to potential elimination of drug product warming process prior to use; and potential elimination or reduction of continuous cold chain storage and refrigeration requirements; |
| · | potential improved product stability and extended shelf life; and |
pipeline.
| · | relatively lower viscosity, which may aid and/or improve the distribution of KL4 surfactant throughout the lung and potentially reduce the frequency of transient peri-dosing events typically observed during administration of surfactants.
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Our Aerosolization Delivery Technologies
Capillary Aerosol Generator TechnologyDelivery System (ADS)
We have worldwide exclusive rights to our CAG technology through exclusive license agreements with Philip Morris USA Inc. (PMUSA) in the U.S.,ADS, which consists of a capillary aerosol generator and Philip Morris Products S.A. (PMPSA) in the territories outside of the U.S. Each of these license agreements provides us with exclusive rights to the CAG technologyrelated components, for use with pulmonary surfactants (alone or in combination with any other pharmaceutical compound(s)) for all respiratory diseases and conditions. In addition, we hold in the U.S. exclusive rights to the CAGthis technology for use with certain non-surfactant drugs to treat a wide range ofcertain other pediatric and adult respiratory indications in hospitals and other health care institutions. Our ADS is protected by a portfolio of patents covering the core components of the system.
See, “– Licensing, Patents and Other Proprietary Rights and Regulatory Designations – Patents and Proprietary Rights – Philip Morris USA Inc. and Philip Morris Products S.A.”9
Our proprietary CAG technology has the potential to enable targeted, upper respiratory, airway or alveolar delivery of therapies, and has been initiallyADS is designed to produce high-quality aerosols for delivery to the lung.aerosolize our KL4 surfactant. An aerosol is created by pumping our KL4 surfactant through a heated capillary, after which converts the drug product to a vapor state. Upon exiting the capillary, the vapor streamaerosol cools and slows in velocity, yielding a dense aerosol with a defined particle size. With this technology, we believe that we may control and adjust the particle size through device modifications and potentially changes in drug formulation. With the assistance of our own and third-party medical device engineers, we are currently optimizing the design of the CAG devicesuitable for anticipated clinical development in our AEROSURF development program and, if approved, potential commercial use.
respiration. In studies conducted with our initial CAG devicecapillary aerosol generator and our KL4 surfactant, we have generated an aerosol that:aerosolized KL4 surfactant at consistent and reproducible volumes that could support delivery of therapeutic doses in reasonable periods of time. In our AEROSURF phase 2a clinical program, we assessed physiological data suggesting that AEROSURF may be delivering surfactant into the lung (where it needs to act) and reducing the incidence of nCPAP failure. We believe that our ADS is capable of delivering our KL4 surfactant to the lung of premature infants with RDS without having to resort to invasive intubation and mechanical ventilation, procedures that are currently required to administer surfactants.
| · | retains the surface-tension lowering properties of a functioning surfactant; |
| · | AFECTAIRretains the surfactant composition of our liquid KL®4 Aerosol-Conducting Airway Connector surfactant; |
| · | has a drug particle size believed to be suitable for deposition into the lung; |
| · | is produced at rates that can deliver therapeutic dosages in a reasonable period of time, with consistent reproducible output. Preclinical studies presented at the 2007 PAS comparing our CAG technology to commercially-available aerosol devices indicated that our CAG device generated as much as a 10-fold higher aerosol output rate compared with the other devices studied; and |
| · | produces in vivo evidence of uniform lung distribution and superior physiologic outcomes versus nCPAP alone in an animal model of RDS.
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Aerosol-Conducting Airway Connectors
We have also developed our AFECTAIR, device, a novel aerosol-conducting airway connector. Our AFECTAIRdisposable aerosol-conducting airway connector simplifiesfor infants that is intended to simplify the delivery of aerosolized medications (including our aerosolized KL4 surfactant) and other inhaled therapies to critical-care patientsinfants requiring ventilatory support by introducing the therapysupport. This device introduces aerosolized medications directly at the patient interface and minimizingminimizes the number of connections in the ventilator circuit. The initial AFECTAIR device for infants is being introduced in the U.S. in the first half of 2013. We are planning to develop a customized aerosol-conducting airway connector for use in our AEROSURF program for use with our CAG to address RDS in premature infants.
The AFECTAIR device has been registered in the U.S. as a Class I, exempt medical device. In the EU, we believevitro studies have demonstrated that this device will be classified as a Class IIa device, which must be cleared for marketing in the EU through a European conformity (CE) marking process. We are currently working with a regulatory services firm to obtain CE marking and believe that we will be cleared to market our initial AFECTAIR device in the EU by the fourth quarter of 2013.
With the information that we gain from the introduction of the AFECTAIR device for infants in the U.S., we expect to develop a plan for the introduction of the AFECTAIR device for infants in the EU and other major markets. We plan to support the launch of AFECTAIR in markets outside the U.S., including the EU, through arrangements with third-party distributors experienced in introducing respiratory medical products into hospitals. In addition, to benefit all critical care patients who require aerosolized medications or other inhaled therapies and who are receiving ventilatory support, we believe that our experience with the AFECTAIR device for infants will support efforts to develop one or more additional AFECTAIR devices, potentially for use in larger children and adults in PICUs and Intensive Care Units (ICUs). At the present time, however, we are focused on gaining information and learning from the introduction of the AFECTAIR device for infants in the U.S. Thereafter, we plan to implement a regulatory and manufacturing plan that, if successful, could result in the commercial introduction of a second AFECTAIR device. We believe that AFECTAIR has the potential to become a new standard of care for the delivery of aerosolized medications and inhaled therapies to all critical care patients.
Several in vitro studies have been presented at medical meetings in the last few years that suggest that AFECTAIRconnector improves the delivery of inhaled therapies to patients oninfants requiring ventilatory support, including:
| · | An in vitro study that compared the dose of aerosolized albuterol sulfate delivered to a lung simulator under various neonatal ventilator settings using the AFECTAIR device for infants versus the current standard of care (SoC) delivery system. The investigators observed that use of AFECTAIR resulted in a statistically significant 6-to-14 fold increase (p < 0.05) in the delivery of aerosolized albuterol when compared with SoC, and concluded that potential clinical use of AFECTAIR may result in increased delivery of aerosolized medication to neonates receiving positive pressure ventilatory support;
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| · | An in vitro study that compared the performance of the AFECTAIR device for infants with a current SoC ventilator system in the delivery of nitric oxide under simulated neonatal ventilator conditions. The simulated breathing pattern was maintained within narrow ranges and the delivery of oxygen was not different between the study conditions. The investigators observed a 50 to 70 percent decrease in nitric oxide utilization requirements to achieve desired inhaled nitric oxide dose with the AFECTAIR device, compared with SoC (p < 0.001). The study investigators concluded that the AFECTAIR device significantly decreased the nitric oxide utilization requirements to achieve the desired inhaled nitric oxide concentration and that results of the study support further investigation of the AFECTAIR device in the delivery of other medical gases and with other ventilation methods;
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| · | An in vitro study, the objective of which was to determine the particle size distribution (PSD) using the AFECTAIR device for infants versus SoC delivery system to deliver aerosolized albuterol in a neonatal ventilatory circuit. PSD is an important determination for effective aerosolized medication delivery, where the ‘optimal PSD’ spans the human respirable range of 2-5 microns. The investigators observed PSD at or below the lower end of the respirable range when using the SoC delivery system. In contrast, the PSD observed using the AFECTAIR device spanned the entire respirable range, suggesting that the potential clinical use of the AFECTAIR device may result in increased delivery and retention of aerosolized medication in the lung;
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| · | An in vitro study, the objective of which was to determine if the AFECTAIR device for infants impacts respiratory system resistance in a ventilator circuit, compared with SoC connectors currently used in ventilator circuits. The investigators observed that resistance measurements were similar between AFECTAIR and the SoC delivery system and concluded that AFECTAIR may be a comparably safe alternative to SoC in ventilator circuits; and
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| · | A study that assessed the AFECTAIR device for infants and concluded that the device reduces gas dilution when administered during CPAP respiratory support without increasing flow resistance, potentially improving efficiency of aerosolized medications delivery to preterm neonates receiving positive pressure ventilator support. |
support. We have and plan to continue to sponsor and support studies that explore the benefits of AFECTAIR devices. We have conducted a series of studies with several inhaled therapies that have been or will be presented at medical congresses and medical meetings. We are pleased with the results of our early studies, andtherefore believe that using our AFECTAIR has the potential to address a considerable unmet medical need and become a new standard of care fordevice with our ADS will improve the delivery of aerosolized medications and inhaled therapies to patients requiring ventilatory support.
SURFACTANT REPLACEMENT THERAPY FOR RESPIRATORY MEDICINE
The only pulmonary surfactants commercially available today were introduced in the U.S. in the 1990’s. All are animal-derived and are approved only for RDS in premature infants. These products have not been approved for other respiratory indications. SURFAXIN is the first synthetic, peptide-containing surfactant approved for use in neonatal medicine and provides healthcare practitioners with an alternative to the animal-derived surfactants that today are the standard of care to manage RDS in premature infants. We believe that our proprietary KL4 surfactant technology makes it possible, for the first time, to develop a significant pipeline of surfactant products targeted to treat a wide range of respiratory problems, including those for which there are currently few or no approved therapies. Our potential programs include:
Respiratory Distress Syndrome in Premature Infants (RDS)
We are currently focused primarily on addressing RDS in premature infants, one of the most common serious respiratory problems facing premature infants in the NICU. RDS is a condition in which premature infants are born with a lack of natural lung surfactant and are unable to absorb sufficient oxygen. Premature infants born prior to 37 weeks gestation have not fully developed their own natural lung surfactant and therefore need treatment to sustain life. RDS is experienced in approximately half of the babies born between 26 and 32 weeks gestational age. The incidence of RDS approaches 100% in babies born less than 26 weeks gestational age. RDS can result in long-term respiratory problems and death.
Premature infants with RDS often require endotracheal intubation and mechanical ventilation to administer one of the currently available animal-derived surfactants (usually within the first hours of birth) and to provide respiratory support. Unfortunately, many infants relapse following initial surfactant therapy and require reintubation and prolonged mechanical ventilation as well as supplemental oxygen, increasing their risk of developing further serious respiratory complications. Neonatologists generally try to avoid mechanically ventilating infants due to the perceived risks associated with intubation, such as the risk of trauma and the need for paralytic agents and sedation. As a result, many neonatologists will only intubate in cases of severe respiratory disease, where the benefits of invasive surfactant administration clearly outweigh the associated risks. For all but the very low birth weight infants with severe RDS, a common ventilatory support treatment alternative to intubation and mechanical ventilation is nCPAP. Unfortunately, a significant number of infants do not respond adequately to nCPAP, an outcome referred to as nCPAP failure, and require subsequent surfactant administration via intubation and mechanical ventilation. Several recent published studies point toward a high rate of nCPAP failure in the neonatal population (Finer et al, “Early CPAP versus surfactant in extremely preterm infants,” N Engl J Med 2010;362(21):1970-9 (Finer, et al, NEJM 2010); Morely et al, “Nasal CPAP or Intubation at Birth for Very Preterm Infants,” N Engl J Med 2008;358:700-8 (Morely et al, NEJM 2008)). As it is not possible to ascertain in advance which patients will experience nCPAP failure, neonatologists are faced with a dilemma, because the outcome for those infants who experience nCPAP failure and receive delayed surfactant therapy may not be as favorable as the outcome for those infants who receive surfactant therapy in the first hours of life.
We estimate that approximately 360,000 low birth weight premature infants are born annually in the U.S. and at risk for RDS (approximately 600,000 children inclusive of the U.S., major European medical markets and Japan). Of the U.S. total, we estimate that approximately 130,000 are diagnosed with RDS and approximately 86,000 are treated with surfactant replacement therapy, for either the prevention or treatment of RDS. We also estimate that approximately 240,000 infants receive early nCPAP (as an initial respiratory support therapy). Recent peer-reviewed, published studies report rates of nCPAP failure ranging between 60-80% of children receiving early nCPAP, depending on gestational age evaluated (Finer et al, NEJM 2010; Morely et al, NEJM 2008).
We believe that the neonatal medical community increasingly recognizes the potential benefits of (i) a synthetic, peptide-containing surfactant, such as SURFAXIN and SURFAXIN LS, and more importantly, (ii) a less-invasive method of delivering surfactant, such as AEROSURF, to treat premature infants at risk of suffering from respiratory disorders. While the current RDS market for surfactants is estimated to be approximately $75 million annually in the U.S. and $200 million annually worldwide, we believe that this market has been constrained by the lack of further development of animal-derived surfactants coupled with the risks associated with surfactant administration. We believe that SURFAXIN, and, if approved SURFAXIN LS and AEROSURF have the potential over time to displace animal-derived products and take a substantial share of the markets in which they are available.
SURFAXIN for the Prevention of RDS in Premature Infants at High Risk for RDS
SURFAXIN is the first synthetic, peptide-containing surfactant that is structurally similar to pulmonary surfactant and mimics the surface-active properties of human surfactant. SURFAXIN is a liquid instillate and is administered (usually within the first hours of birth) via endotracheal tube supported by mechanical ventilation for respiratory support. SURFAXIN represents the first synthetic, peptide-containing surfactant approved for use in neonatal medicine.
Our NDA for SURFAXIN was filed with the FDA in April 2004 and is supported by a Phase 3 pivotal trial (SELECT) for the prevention of RDS in premature infants. The SELECT trial enrolled 1,294 patients and was designed as a multinational, multicenter, randomized, masked, controlled, prophylaxis, event-driven, superiority trial to demonstrate the safety and efficacy of SURFAXIN over Exosurf®, an approved, non-protein containing synthetic surfactant. Survanta, a surfactant derived from cow lung and a leading surfactant used in the U.S., served as a reference arm in the trial. Key trial results were assessed by an independent, blinded, adjudication committee comprised of leading neonatologists and pediatric radiologists. This committee provided a consistent and standardized method for assessing critical efficacy data in the trial. An independent Data Safety Monitoring Board was responsible for monitoring the overall safety of the trial and no major safety issues were identified.
Data from the SELECT study demonstrate that SURFAXIN is significantly more effective in the prevention of RDS, death due to RDS, and the development of certain severe respiratory problems as compared to Exosurf, the primary comparator. Although the reference arm using Survanta was not the primary focus of comparison, significantly fewer infants treated with SURFAXIN died due to RDS compared with infants treated with Survanta.
We also conducted a supportive, multinational, multicenter, prophylaxis, randomized, controlled, masked, Phase 3 clinical trial (STAR) which enrolled 252 patients and was designed as a non-inferiority trial comparing SURFAXIN to Curosurf, a surfactant derived from pig lung and the leading surfactant used throughout the developed world. The STAR trial demonstrated the overall safety and non-inferiority of SURFAXIN compared with Curosurf.
The SELECT and STAR trials, as well as a pooled Phase 3 analysis, have been presented at several international medical meetings and the results from the two studies were published in Pediatrics, the Official Journal of the American Academy of Pediatrics and a premier medical journal for pediatric healthcare practitioners.
Post-hoc analysis of data from our SELECT and STAR Phase 3 clinical trials reveals that premature infants with RDS who were extubated after treatment with surfactant and who later required reintubation had a significantly higher rate of mortality than those infants who did not require reintubation. The data also indicate that premature infants treated with SURFAXIN required less reintubation compared to those treated with Survanta and Curosurf. Although the data indicated that the infants treated with SURFAXIN were observed to have a statistically significant lower incidence of reintubation than those infants treated with comparator surfactants, the clinical relevance of this finding has not been adequately established and, accordingly, warrants further study.
On March 6, 2012, the FDA granted marketing approval for SURFAXIN. In the third quarter of 2012, during a routine review of the results and processes related to the analytical testing and quality control of SURFAXIN drug product, we determined that one of our analytical chemistry methods used to assess SURFAXIN drug product conformance to specifications required improvement and that an update to product specifications was needed. We improved and validated the analytical chemistry method and submitted updated product specifications to the FDA. As a result of these efforts, we delayed the commercial availability of SURFAXIN drug product. If we are able to successfully conclude our planned activities and receive confirmation of our updated product specifications from the FDA within our anticipated timeline, we anticipate that SURFAXIN drug product will be commercially available in the second quarter of 2013.
To facilitate proper administration of SURFAXIN, we plan to make available to hospitals our WARMING CRADLE® dry-block heating device that is designed to warm drug vials at the same temperature that is designated in the SURFAXIN prescribing information. WARMING CRADLE dry-block heater is registered with the FDA as a Class I, exempt laboratory medical device. Our commercial organization will work with hospitals medical device control units to gain the appropriate clearances to make WARMING CRADLE dry-block heaters available to NICUs for use with SURFAXIN.AEROSURF for RDS in Premature Infants
AEROSURF is a drug-device combination product that produces our KL4 surfactant in aerosolized form using our CAG and drug delivery technologies. Premature infants with RDS currently are treated with surfactants that can only be administered by endotracheal intubation supported with mechanical ventilation, both invasive procedures that frequently result in serious respiratory conditions and complications. In many cases today, neonatologists will not treat infants who could benefit from surfactant therapy if the perceived potential benefits of surfactant therapy are outweighed by the risks associated with such invasive administration procedures.
AEROSURF, if approved, may potentially be administered through less-invasive nCPAP, and is being developed to potentially reduce or eliminate the need for intubation and mechanical ventilation. We believe that AEROSURF holds the promise to significantly expand the use of our KL4 surfactant in neonatal respiratory medicine by potentially providing neonatologists with a means to administer KL4 surfactant to infants without subjecting them to the invasive procedures associated with administration of currently approved surfactants.
In 2005, prior to the initiation of our AEROSURF program, we announced the results of a pilot Phase 2 clinical trial using aerosolized KL4 surfactant for the prevention of RDS in premature infants, which was designed as an open label, multicenter study to evaluate the feasibility, safety and tolerability of aerosolized KL4 surfactant delivered using a commercially-available aerosolization device (Aeroneb® Pro) via nCPAP within 30 minutes of birth over a three hour duration. The study showed that it is feasible to deliver our aerosolized KL4 surfactant via nCPAP and that the treatment was generally safe and well tolerated. We have since conducted or sponsored a number of studies evaluating AEROSURF and our aerosolized KL4 surfactant drug product. See, “– Proprietary Platform – Surfactant and Aerosol Technologies – Our KL4 Surfactant Technology.”We are currently developing AEROSURF using our CAG technology. See, “– Proprietary Platform – Surfactant and Aerosol Technologies – Our Aerosolization Delivery Technologies – Capillary Aerosol Generator Technology.” In June 2012, we entered into a Research and Development Services Agreement with Battelle, which has a particular expertise in developing and integrating aerosol devices using innovative and advanced technologies. Battelle has agreed to provide technical support and expertise and assist our medical device engineering team in the development of CAG device components in phased programs focused on design, testing, and manufacture of clinic-ready CAG devices for our planned AEROSURF Phase 2 clinical trials. We have retained authority for all final decisions and all responsibility for the formulation, design, manufacture, assembly, packaging, marketing, distribution and sale of our products. For our AEROSURF development plan, we previously conducted preliminary meetings with the FDA. In addition to our internal resources, we have engaged regulatory consultants to assist us in implementing and, as needed, refining this development plan as we anticipate filing an Investigational New Drug (IND) application in advance of initiating the first part of our Phase 2 clinical program in the fourth quarter of 2013. We also plan to retain regulatory consultants to assist us in engaging international regulatory authorities regarding the AEROSURF development plan.
We believe that AEROSURF is a highly promising program. In December 2010, the National Institutes of Health (NIH) awarded us Phase I of a Fast Track Small Business Innovation Research (SBIR) Grant to support up to $580,000 of AEROSURF development activities. Following conclusion of the Phase I grant activities, we anticipate that the NIH may potentially award us a Phase II of the SBIR Grant, which could provide up to an additional $1.88 million to support further AEROSURF development. With the knowledge that we gain from our development activities to treat premature infants with RDS, we plan to leverage our technology platform to potentially address several respiratory conditions affecting pediatric and adult patient populations. See, “–Surfactant Replacement Therapy For Respiratory Medicine - Serious Respiratory Indications Associated with Inflammation of the Lungs – Acute Lung Injury (ALI),” and “– Licensing, Patents and Other Proprietary Rights and Regulatory Designations – Patents and Proprietary Rights – Philip Morris USA Inc. and Philip Morris Products S.A.”Lyophilized SURFAXIN for RDS in Premature Infants – SURFAXIN LS
We are developing a lyophilized (freeze-dried) dosage form of our KL4 surfactant that is stored as a powder and resuspended to liquid form prior to use with the objective of improving ease of use for healthcare practitioners, as well as potentially to prolong shelf life and eliminate the need for cold-chain storage. We are engaged in a technology transfer of our lyophilized KL4 surfactant manufacturing process to a CMO that has expertise in lyophilized products, and we expect that it will manufacture drug product for use in our preclinical and clinical development activities. Our development plan is intended initially to support the use of our lyophilized KL4 surfactant in our AEROSURF development program. We have discussed with the FDA a proposed development program for SURFAXIN LS and expect to engage in further discussions with the FDA. We are assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS, a lyophilized dosage form of SURFAXIN, in the U.S. and potentially in other major markets.
Serious Respiratory Indications Associated with Inflammation of the Lungs
Many respiratory diseases are associated with an inflammatory event that causes surfactant dysfunction and a loss of patency of the conducting airways. Scientific data support the premise that the therapeutic use of surfactants in aerosol form has the ability to reestablish airway patency, improve pulmonary mechanics and act as an anti-inflammatory.
We believe that our proprietary aerosolized KL4 surfactant technology may be used to address debilitating respiratory disorders such as ALI and, possibly in the future COPD. As resources permit, we may invest in or support third-party studies of these indications. If a proof-of-concept should be established, we will then determine whether to seek strategic alliances or collaboration arrangements or utilize other financial alternatives to fund their further development and/or commercialization, if approved. There can be no assurance that we will invest or support studies in these indications, that any such efforts will be successful, or that we will be able to conclude any such strategic alliance, collaboration arrangement or secure any financial alternative. We believe that these investments could potentially address significant unmet medical needs and redefine respiratory medicine.
Acute Lung Injury (ALI)
ALI is associated with conditions that either directly or indirectly injure the air sacs of the lung. ALI is a syndrome of inflammation and increased permeability of the lungs with an associated breakdown of the lungs’ surfactant layer. Among the causes of ALI are complications typically associated with certain major surgeries, mechanical ventilator-induced lung injury (often referred to as VILI), smoke inhalation, pneumonia and sepsis. There are a significant number of patients at risk in the U.S. for ALI annually and there are no currently approved therapies other than supportive respiratory care.
We believe that our aerosolized KL4 surfactant may potentially be effective as a preventive measure to treat patients at risk for ALI. We have conducted research and preclinical studies in collaboration with a prominent academic investigator to assess the use of our KL4 surfactant to potentially address ALIpremature infants. Although we initially implemented a plan in an animal model. This prophylactic approach2013 to separately market AFECTAIR, we later concluded that it may reduce the number of patients requiring costly intensive care therapy, eliminate long periods of therapyprovide a potential competitive advantage and generate cost savingsdecided to reserve AFECTAIR for use with our ADS in the hospital setting.
In September 2012, we announced initiation of four research projects designed to explore the use of KL4 surfactants in the prevention and treatment of ALI. We believe that our KL4 surfactant may be an effective intervention for people at risk for, or with, ALI. We are collaborating with leading research institutions in a series of preclinical studies funded through various U.S. Government-sponsored, Biodefense-related initiatives. These studies include: a collaboration with the University of Pennsylvania funded by the NIH’s National Institute of Allergy and Infectious Diseases (NIAID) to assess the ability of KL4 surfactant to mitigate effects of acute radiation exposure to the lung; a collaboration with the University of Rochester to evaluate the use of KL4 surfactant to protect the lung in a radiation-induced multi-organ dysfunction animal model; a collaboration with a facility of the U.S. Department of Defense through the NIH Office of the Director and the Countermeasures Against Chemical Threats (CounterACT) program assessing the utility of KL4 surfactant for the treatment of chemical-induced ALI; and a program funded by NIAID investigating the use of KL4 surfactant as a treatment for influenza-induced ALI.AEROSURF development program.
Chronic Obstructive Pulmonary Disease (COPD)
COPD is an incurable, chronic respiratory disorder that includes both emphysema and chronic bronchitis and is characterized by obstruction to airflow that interferes with normal breathing, inflammation, mucus plugs formation, infection, and disruption of the normal lung architecture.
We believe that our KL4 surfactant has unique attributes, including potential modulation of the inflammatory process and anti-microbial properties, that, when combined with a potential ability to enhance mucus clearance may be an effective treatment for COPD, potentially improving outcomes for these very ill patients.
Cystic Fibrosis (CF)
CF is a life-threatening genetic disease affecting the respiratory and other body systems. CF is characterized by a genetic mutation that results in the production of thick, viscous mucus that is difficult to clear from the airways of the lung and typically leads to life-threatening respiratory infections. Preclinical and exploratory clinical studies suggest that therapeutic surfactants may improve lung function by loosening mucus plugs and enhancing mucociliary clearance.
CF is the most common, life-threatening genetic disorder in the U.S., occurring in approximately one in every 3,500 Caucasian live births. CF affects approximately 30,000 patients in the U.S. and nearly 70,000 worldwide. To date, treatment of pulmonary conditions in CF primarily includes antibiotics to address lung infection and airway clearance therapies to break down and remove mucus. Life expectancy for CF has more than doubled in the past 25 years to age 37, due to significant advances in research and care.
Our aerosolized KL4 surfactant was evaluated in an investigator-initiated Phase 2a clinical trial in CF patients conducted at The University of North Carolina with the support of the Cystic Fibrosis Foundation to evaluate whether aerosolized KL4 surfactant is safe and well tolerated in patients with mild to moderate CF lung disease, and to assess the short-term effectiveness (via improvement in mucociliary clearance) of our aerosolized KL4 surfactant. The trial demonstrated that aerosolized KL4 surfactant delivery to CF patients was feasible, generally safe and well tolerated and was not associated with serious adverse events. Both aerosolized KL4 surfactant and the active comparator, aerosolized saline control, produced a marked, significant (p < 0.01) increase from patient baseline in mucociliary clearance measured one hour after the last dose in both whole lung and peripheral lung compartments. We believe these results support further scientific assessment of a potential complementary therapeutic role for aerosolized KL4 surfactant specifically targeting airway mucus adhesion. Additionally, in 2010 the FDA granted us orphan drug designation for the treatment of CF with KL4 surfactant.
We believe that our novel synthetic, peptide-containing surfactant has unique attributes, potentially including anti-microbial properties, modulation of the inflammatory process, and lack of immunogenicity, that when combined with a potential ability to enhance mucociliary clearance in CF lung disease, may advance the treatment of CF and improve treatment outcomes for these very ill patients. While our near-term plans are focused on treating RDS in a critical care setting, we will continue to support investigator-initiated studies that explore the utility of using our KL4 surfactant to treat CF and other diseases.
BUSINESS OPERATIONS
Research and Development
Our research and development activities are focused on developing our proprietary KL4 surfactant, CAG,ADS, and aerosol delivery technologies into a series of KL4 surfactant pipeline programs that potentially could support a significant respiratory critical care franchise. We are initially focused on the management of RDS in premature infants. We continually evaluatereassess our research and development priorities in light of a number of factors, including the results obtained in our clinical trials, preclinical research and related activities, advances in technology and progress in our device development programs, and relationship of a project to our near-term objectives; our cash flow requirements, and financial liquidity and ability to secure necessary capital; and the potential for development partnerships, and collaboration agreements the results obtained inand other strategic transactions. As part of our research and development activities, advances in technology, and our abilityassessments, we expect to secure necessary capital. In connection with our evaluations, we modify and adapt our research and development plans from time to time and anticipate that we will continue to do so.so in the future.
We have managed and in 2013 plan to continue closely managing our expenditures. We plan to focus ourOur research and development resources are focused in the near term primarily on our RDS programs, primarily AEROSURF and, if we secure the necessary capital, SURFAXIN LS.development program to address RDS. We expect to initiateare presently engaged in a Phasephase 2 clinical program for AEROSURFprograms and have initiated our phase 2b clinical trial. Battelle assisted us in the fourth quarterdevelopment of 2013.a phase 2 clinic-ready ADS and has manufactured and will continue to manufacture a supply of ADS to support our preclinical activities and our phase 2 clinical program. We also planare working with Battelle under a collaboration agreement to conduct preclinical studiesdevelop a phase 3 clinic-ready ADS to assess the utilitysupport additional research and development activities, our phase 3 clinical program and potential benefitscommercial supply. We are also working with Patheon to manufacture a supply of lyophilized KL4 surfactant to support our phase 2 activities and conduct further manufacturing development work for the AFECTAIR device for infants. After we have completed the commercial introduction of the AFECTAIR device for infants inplanned phase 3 clinical trial.
In markets outside the U.S., for AEROSURF, we expectplan to implementseek regulatory advice and discuss with international regulatory authorities a potential AEROSURF development plan that could resultto advance AEROSURF in a second AFECTAIRselected major markets around the world. We also would invest in research and development activities to address serious critical care respiratory conditions of larger children and adults in PICUs and ICUs. For our RDS programs, an important objective for us is to enter intosupport a significant strategic alliance predominantly focused on the European Union (EU). We seek strategic partners that have broad experience inEU and/or other selected markets outside the designated markets, including regulatory and product development expertise as well as, if our products are approved, an ability to commercialize our products. In addition toU.S. for the development and, commercial support, such alliances typically also would provide us with financial resources to support our efforts, potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses. In our discussions to date, the primary focus of our discussions has been on AEROSURF. We also would consider various financing alternatives or collaboration arrangements that would provide infusions of capital and other resources needed to advance our KL4 surfactant development programs. We are also assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS, a lyophilized dosage form of SURFAXIN, in the United States (U.S.) and potentially other major markets. We may also seek strategic alliances and/or collaboration arrangements to support the potentialif approved, commercial introduction of SURFAXIN and, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in our SURFAXIN NDA approved by the FDA. Although we are considering several potential opportunities, there can be no assurance that any strategic alliance or other financing alternatives or collaboration arrangement will be successfully concluded. Until we secure sufficient strategic and financial resources to support the continuing development of our pipeline programs and support our operations, we will continue to focus our resources on RDS programs and pace investments in potential non-RDS pipeline programs. See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
We will continue to consider supporting investigator-initiated studies, and may invest opportunistically in studies of other potential KL4 surfactant pipeline programs that would target adult and other indications, such as ALI and CF. We believe that these programs could represent significant market opportunities. If we were able to demonstrate proof-of-concept for any of these indications, we would consider whether to develop these products through potential strategic alliances or collaboration arrangements, or utilize other financial alternatives to fund their further development and commercialization, if approved. There can be no assurance that we will pursue such investments or, if we do, that we will succeed in demonstrating proof of concept or entering into any such alliance.AEROSURF.
To support our research and development activities, we have:
| · | physicians withand scientists on staff and available under consulting arrangements who have expertise in pediatric and pulmonary medicine and extensive contacts in the neonatal medical community; |
| · | expertise in the design and implementationexecution of preclinical experiments and studies to support drug development. We conduct certain development-related experiments and bench studies in-house and also engage professional research laboratories as well asand collaborate with academic and educationscientific centers to conduct animal studies and experiments requiring specialized equipment and expertise; |
| · | expertise in the design, development and management of clinical trials. OurWe have our own expertise includes scientific, medical, biostatistics, and trial and data management capabilities. In anticipation of the AEROSURF Phase 2 clinical program, we plan to enhance these capabilities in 2013. For the initial phase of the AEROSURF program, we plan to analyze and report onhave managed our clinical trial data, supported by third-party technology systems and independent consultants, and will monitormonitored all clinical activities using our clinical operations capabilities. We rely on scientific advisory committees and other medical and consulting experts to assist in the design and monitoring of clinical trials. We also plan to rely on CROshave retained contract research organizations (CROs) to support operations of our plannedongoing multi-center AEROSURF trials, including for locations outsidein the U.S.;, EU, Latin America and Canada; |
| · | regulatory personnel with expertise in FDA regulatory matters. We also consult extensively with independent FDA and international regulatory experts, including former senior scientific staff of the FDA; |
| · | engineering expertise to support development of our CAGADS and aerosol delivery technologies. In addition to our collaboration with Battelle, which has significant expertise in developing and integrating aerosol device technologies, we have our own design engineering team we are engaged in a development program with Battelle that provides consulting design engineers, medical device and planning experts and other resources to advance the development ofis focused on further optimizing our CAG device and manufacture of clinic-ready CAG devices for use in the first phase of our Phase 2 AEROSURF clinical trials;ADS; |
| · | quality operations capabilities to assure compliance of our drug and device development activities with applicable regulations; |
| · | manufacturing capabilities to manufacture our liquid KL4 surfactant for use in preclinical studies. We also plan towe rely on CMOs to produce our lyophilized dosage form of our KL4 surfactant, APIs and to manufacture and assembleother materials for our AFECTAIR devices.drug product. We plan to rely on third-party manufacturers to manufacture and assemble our CAG systemsADS and related components; and
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| · | our own analytical and testing laboratories,laboratory and research and medical device development laboratory. We also rely on a number of third-party analytical and testing laboratories to support our research activities and provide certain laboratory services.services in support of our manufacturing activities. |
Research and development costs are charged to operations as incurred. During the years ended December 31, 2012,2015, and 2011, ourDecember 31, 2014, we invested approximately $28.9 million and 26.7 million, respectively, for research and development expenses were $21.6 million,expense, which includes (i) product development and $17.2 million, respectively.manufacturing, (ii) medical and regulatory operations, and (iii) direct preclinical and clinical programs.
Manufacturing and Distribution
KL4 Surfactant
OurWe use third parties for the manufacture of our lyophilized KL4 surfactant, products, including SURFAXIN, must beADS and related components, AFECTAIR aerosol-conducting airway connector and related components, certain analytical and laboratory services in support of our manufacturing activities, clinical supply labeling, packaging warehousing and distribution. To support our manufacturing operations, we maintain our own analytical and technical support laboratory at our headquarters in Warrington, Pennsylvania (Warrington Laboratory).
KL4 Surfactant
We believe that our KL4 surfactant product is manufactured in compliance with current good manufacturing practices (cGMP) established by the FDA and other international regulatory authorities, as applicable. SURFAXINOur KL4 surfactant is a complex drug product comprised of four active ingredients.pharmaceutical ingredients (APIs). It must be aseptically manufactured at our facility as a sterile, liquid suspension andthat requires ongoing monitoring of drug product stability and conformance to specifications.
Our drug products are manufactured by combining active pharmaceutical ingredients (APIs), such as We currently rely on single source suppliers under separate product supply agreements for KL4, which is provided by Bachem California, Inc., and other APIs, including certain lipids that are provided by suppliers such as Corden Pharma (from a facility that was owned previously by Genzyme Pharmaceuticals) and Avanti Polar Lipids, Inc. We currently obtainPOPG, two of our APIs, and source the other two APIs from single-source providers, althougha single source supplier under purchase orders that we issue from time to time. To mitigate our risk, we plan to qualify secondary suppliers for our APIs over the next 12 to 24 months.several years. Our risk of losing a source of supply is currently somewhat mitigated by our strategydecision to maintain minimum inventoriesenlarge our safety stock of all APIs. Suppliers of our primary packaging components and excipients used in our manufacturing process include West Pharmaceutical Services, Inc., Gerresheimer Glass Inc. and Spectrum Chemical Mfg. Corp. Our primary packaging components and excipients are generally readily available from multiple sources.
We manufacture our lyophilized KL4 surfactant at Patheon under a development agreement that expires October 24, 2016. We completed development work for the technology transfer of our lyophilized KL4 surfactant manufacturing process to Patheon in 2013. We have established arrangements with ASD Specialty Healthcare Inc. and Integrated Commercialization Solutions, Inc. (ICS), affiliatessince manufactured a sufficient clinical supply of AmerisourceBergen Specialty Group, for warehousing, distribution and related services. ICS isKL4 surfactant to support our third-party logistics provider and assists us with inventory tracking, customer service, order management, distribution, contract and accounts receivable management, certain financial management servicesphase 2 clinical program and other similar services. We have also identifieddevelopment activities. During the fourth quarter of 2014, we began a providertechnology transfer of vial labeling and secondary packaging services for our SURFAXIN commercial drug product and have negotiated and are finalizing an agreement.
lyophilized KLOur4 surfactant manufacturing process to another facility in Totowa, New Jersey, consists of pharmaceutical manufacturing and development space that is designed for theat Patheon, where we expect to manufacture and filling of sterile pharmaceuticals in compliance with cGMP. our lyophilized KLSee,4 “Item 2 – Properties.” These operations are configured and approved to produce commercial SURFAXIN drug product. These operations also produce SURFAXINsurfactant for use in our researchAEROSURF phase 3 clinical program. Under our arrangement with Patheon, we provide the APIs and development activities. OwningPatheon purchases excipients and other materials required to manufacture our manufacturing operations has provided us with direct operational control as we worked through manufacturing development activities and produced SURFAXIN drug product for preclinical activities supporting our efforts to gain regulatory marketing approval for SURFAXIN in the U.S. We also are conducting a technology transfer of the SURFAXIN LS dosage form manufacturing process to a cGMP-compliant CMO with expertise in lyophilized formulations.KL4 surfactant.
In January 2012, the FDA completed a pre-approval inspection (PAI) of our manufacturing facility and issued an Establishment Inspection Report indicating an approval recommendation for our SURFAXIN NDA. In March 2012, the FDA granted us marketing approval for SURFAXIN.
Our manufacturing operation also includes our analytical testing and quality system. We have consolidated all of our in-houseWarrington Laboratory, we conduct certain analytical development and quality control activities, in our analytical and technical support laboratory at our headquarters in Warrington, Pennsylvania. We conductincluding release testing of all APIs as well asand release and stability testing of SURFAXINour lyophilized KL4 surfactant clinical and commercial drug product supply. In the third quarter of 2012, during a review of the results and processes related to theproduct. Our Warrington Laboratory also provides analytical testing and quality control of SURFAXIN drug product, we determined that one of our analytical chemistry methods used to assess drug product conformance to specifications required improvement and that an update to product specifications will be necessary. We improved and validated the analytical chemistry method, and submitted updated product specifications to the FDA. As a result of these efforts, we delayed the commercial availability of SURFAXIN drug product. Although there can be no assurance, if we successfully conclude our planned activities and receive confirmation of our updated product specifications from the FDA within our anticipated timeline in the second quarter of 2013, we believe that we are on track to manufacture SURFAXIN drug product for commercial use in the second quarter of 2013.
We also perform research and development work at our Warrington analytical and technicalsystem support laboratory for our lyophilized and aerosolized KL4 surfactant dosage forms, as well asour research to identify and protect our intellectual property, including studying other potential formulations of our KL4 surfactant and in support of our efforts to identify and protect our intellectual property. In addition, we have a microbiology laboratory at our Totowa facility to support the manufacture of our drugother potential KL4 surfactant product candidates. We also maintain a medical device development laboratory with resources and capabilities that our internal development engineering team uses for ongoing preclinical development activities for AEROSURF and our aerosol delivery technologies, while at the same time controlling the related expense and conserving our financial resources.
In addition, to further support our development activities and quality programs, weWe also work with a number of third-party institutions and laboratories that perform various studies as well as quality control release and stability testing and other activities related to our KL4 surfactant development and manufacturing activities. Among these, our BAT release and stability testing is conducted at a laboratory owned by the University of California, San Diego, School of Medicine, Department of Pediatrics. At the present time, several of these laboratories are single sourcesingle-source providers. We expect over the next 12-24 months to implement a plan to identify and potentially qualify additional sources to meet our key release testing and stability requirements.
CAG Device and Related Componentry and Aerosol Delivery Devices
AEROSURF combinesWe previously manufactured our commercial supply of SURFAXIN, our KL4 surfactant technologyin liquid instillate form, at our manufacturing operations located in a leased facility in Totowa New Jersey (Totowa Facility). In connection with our CAGdecision to cease commercialization activities for SURFAXIN, we allowed our lease for this facility to expire in June 2015. Our Totowa facility consisted of pharmaceutical manufacturing space that was designed for the manufacture and filling of sterile liquid pharmaceuticals in compliance with cGMP. To support our manufacturing activities, we also operated a microbiology laboratory at our Totowa Facility.
Aerosol Delivery System (ADS)
AEROSURF is an investigational combination drug/device product that produces aerosolized KL4 surfactant by combining our lyophilized KL4 surfactant with our aerosol delivery technologies. We are developing and, if approved, willplan to commercialize AEROSURF in the U.S. for RDS inthe treatment of premature infants. See, “– Licensing, Patents and Other Proprietary Rights and Regulatory Designations – Patents and Proprietary Rights – Philip Morris USA Inc. and Philip Morris Products S.A.”infants with RDS. We also believe that in the future our aerosolized KL4 surfactant may be used to address a broad range of serious respiratory conditions.conditions in the NICU as well as in children and adults in the PICU and ICU.
We are currently focused on developing an optimized, clinic-ready CAG device to meet regulatoryThe ADS includes a durable, reusable aerosol control unit and ease-of-use design requirements and prepare for planned Phase 2 and later Phase 3 clinical trials.a disposable AEROSURF delivery pack (ADP). The ADP includes components that must be manufactured in an environmentally-controlled area and, when assembled, the critical drug product-contact components that are either cleaned or manufactured in an environmentally-controlled, clean area. The control unit and patient interface systems must beADPs are assembled and packaged and sterilized.in a clean area. Each of the CAG devices and disposable components must be quality controlADPs is tested prior to release and monitored for conformance to designated product specification. See, “Item 1A – Risk Factors – Manufacturing problems potentially could cause usspecifications during assembly and each of the assembled control units must meet quality control standards prior to delay preclinical or clinical programs, or, if our products are approved,release and conform to designated product launch, or cause us to experience shortages of products inventories, which could have a material adverse effect on our business.”specifications.
In JuneBeginning in 2012, we entered into an agreement with Battelle under which Battelle has agreed to assistassisted us in a multi-phase development program focused on design testing, and manufacturetesting of clinic-ready CAG devicesADS for use in our planned AEROSURF Phasephase 2 clinical trials, which we expect to initiate in fourth quarterand manufactured a sufficient number of 2013. Under our agreement with Battelle, Battelle will manufacture CAG devicesADSs for the initial phase of the AEROSURF Phase 22a clinical program. In the future, we expecttrial in premature infants 29 to rely on third-party CMOs34 week gestational age. Battelle also agreed to manufacture and assemble the CAG devicea sufficient supply of control units, ADPs and related components to support our ongoing phase 2a clinical trial in premature infants 26 to 28 week gestational age, our phase 2b clinical trial in premature infants 26 to 32 week gestational age and development activities. We expect to arrange for additional control units, ADPs and related components from Battelle, as needed. For our planned phase 3 clinical program, we and Battelle are collaborating to further develop the phase 2 ADS. Under our Collaboration Agreement, we and Battelle have agreed to negotiate in good faith for the manufacture of phase 3 control units, ADPs and related components. We are also assessing other potential partners to assure continued availability of ADS for our clinical and development activities plannedthrough our phase 3 clinical studiesprogram, and, if approved, potential commercialization of AEROSURF.
AFECTAIR Aerosol-Conducting Airway Connectors“– Business Operations – Strategic Alliances and Collaboration Arrangements – Battelle Collaboration Agreement.”
In February 2012, we entered into a supply agreement (Agreement) withOur AFECTAIR aerosol-conducting airway connector has been manufactured by Lacey Manufacturing Company, a division of Precision Products, LLC (Lacey), which also provided labeling and packaging services. We hold sufficient quantities of this device to manufacturesupport our initial AFECTAIR devices. Lacey operates a cGMP-compliant manufacturing facility and has significant experience with the mold injection process required to manufacture AFECTAIR devices. In addition to providing manufacturing support, Lacey will label, package, and prepare AFECTAIR devices for shipment. Lacey will ship the finished product to ICS who has agreed to warehouse and provide third-party logistic services for us. See, “– KL4 Surfactant.” ASD has agreed to act as distributor for AFECTAIR devices.AEROSURF phase 2b clinical trial.
The initial term of our Agreement with Lacey is four years. The term may be extended by written agreement of the parties. Among other rights to terminate the Agreement, either party may terminate the Agreement upon 30 days written notice to the other party if we, after a good faith effort, are unable to agree on (i) go-forward planning steps to complete development of one or more AFECTAIR devices, or (ii) key terms, including, without limitation, pricing or order volume requirements. We will retain ownership of all equipment, molds and tooling and other capital assets purchased by Lacey to manufacture AFECTAIR devices on our behalf. In connection with any termination of the Agreement, Lacey is obligated to cooperate and provide us reasonable assistance to transfer all equipment, inventory and materials to any successor manufacturing site or to such other location that the Company may designate in writing.
Distribution
We are currently manufacturingreceive labeling, packaging and distribution services to support our AEROSURF clinical activities in the U.S., European Union and Latin America from Almac Group Limited under an agreement that expires October 15, 2016.
We received warehousing, distribution and related services for SURFAXIN as a liquid instillate that requires cold-chain storage and distribution. We arranged forfrom ASD Specialty Healthcare Inc. (ASD) to actand Integrated Commercialization Solutions, Inc. (ICS), affiliates of AmerisourceBergen Specialty Group. ICS provided third-party logistics and assisted us with inventory tracking, customer service, order management, distribution, returned goods, contract and accounts receivable management, certain financial management services and other similar services for SURFAXIN and AFECTAIR. ASD acted as our exclusive specialty distributor for SURFAXIN WARMING CRADLE dry-block heaters and AFECTAIR devices in the U.S. Thisand provided related services. Following the cessation of commercial activities for SURFAXIN, we terminated the arrangement was originally put in place in 2006. We have amended and updated this agreementwith ASD. ICS continues to provide limited inventory services for distribution and related services. We also expectAFECTAIR in support of our clinical activities under an agreement that ASD may provide certain promotional and marketing activities, maintain inventory, shipping and certain compliance and regulatory activities.will expire in October 2016.
Our collaboration with Laboratorios del Dr. Esteve, S.A. (Esteve) provides that Esteve has responsibility for distribution of specified KL4 surfactant products in Andorra, Greece, Italy, Portugal and Spain. See, “– Strategic Alliances and Collaboration Arrangements – Laboratorios del Dr. Esteve, S.A.” In other parts of the world, we planexpect to evaluatecontract for third-party distribution capabilitiesservices prior to commercializing in those regions.
To distribute AFECTAIR devices in the EU and elsewhere, we will consider different opportunities, including potentially a network of distributors, or one or more strategic alliances (either as separate collaborations or integrated with broader alliances for the development of our RDS portfolio of KL4 surfactant drug candidates, including AEROSURF). We expect that any distributor network would involve regional distributors that have a focus and expertise in distributing hospital-based medical device products in their respective territories.
General and Administrative
We intend to continue investing in general and administrative resources primarily to support our intellectual property portfolios (including building and enforcing our patent and trademark positions), our business development initiatives, financial systems and controls, legal and corporate and healthcare compliance requirements, management information technologies, and general management capabilities.
Strategic Alliances and Collaboration Arrangements
Battelle Collaboration Agreement
On October 10, 2014, we entered into the Collaboration Agreement with Battelle providing for the further development of our ADS for potential use in our planned phase 3 clinical program for AEROSURF for the treatment of RDS in premature infants and, if AEROSURF is approved for commercial sale by the FDA or other regulatory authority, initial commercial supply. In August 2015, we agreed to amend the Collaboration Agreement to adjust the anticipated Project Plan Cost (as defined in the Agreement) and change the date for completion of Stage 3 (“Milestone Date”) as defined in the Collaboration Agreement from May 31, 2016 to July 15, 2016. As of December 31, 2015, if this development project is successfully completed, we expect to fund development activities of approximately $6.6 million through 2016, subject to certain rights of termination outlined in the Collaboration Agreement.
Pursuant to the Collaboration Agreement, we and Battelle (i) have defined the requirements of the phase 3 ADS and agreed upon a detailed project plan for the next two stages of the project (Stage 1), (ii) are developing the ADS in accordance with the project plan (Stage 2), and (iii) plan to complete all required testing, verification and documentation to be in a position to manufacture a sufficient supply of ADSs (Stage 3) to support our phase 3 clinical program. Upon completion of the three-stage project plan, we and Battelle intend to negotiate in good faith potentially to enter into an agreement for the manufacture of a sufficient number of ADS to support the planned AEROSURF phase 3 clinical program, and, if AEROSURF is approved, to negotiate in good faith potentially to enter into a supply agreement providing for an initial commercial supply of ADSs.
A Steering Committee, comprised of an equal number of members appointed by each party, oversee the work of the project. The foregoing notwithstanding, we will retain final decision-making authority on all matters related to the design, registration, manufacture, packaging, marketing, distribution and sale of ADSs. We and Battelle shared equally in the costs of Stage 1 activities. Following completion of Stage 1, we and Battelle agreed on a detailed project plan, including projected costs, for Stages 2 and 3. The parties will share equally in the costs of the project plan for Stages 2 and 3 as set forth in the project plan. Battelle will bear the entire cost of any cost overruns associated with execution of the project plan and we will bear the entire cost of any increase in the agreed upon project plan costs resulting from changes in the scope of the product requirements as agreed in Stage 1 and set forth in the project plan.
In connection with the Collaboration Agreement, we issued to Battelle two warrants to purchase shares of our common stock, each having an exercise price of $70 per share and a term of 10 years, subject to earlier termination under certain circumstances set forth therein, including (i) a warrant to purchase up to 71,429 shares of our common stock, exercisable upon successful completion by Battelle of the Stage 3 activities (Initial Warrant), and (ii) a warrant to purchase up to 35,714 shares of our common stock (Additional Warrant; and together with the Initial Warrant, the Battelle Warrants), exercisable if and only if Battelle successfully completes the Stage 3 activities no later than July 15, 2016 (Milestone Date), which date may be adjusted as provided in the Collaboration Agreement. We and Battelle have agreed to execute a registration rights agreement providing for the registration of the resale of shares underlying the Battelle Warrants. The Battelle Warrants may be exercised for cash only, except that, in the event a registration statement is not effective at the time of exercise and if an exemption from registration is otherwise available at that time, the Battelle Warrants may be exercised on a cashless basis.
In addition, if Battelle successfully completes the Stage 3 activities, we have agreed to pay Battelle royalties equal to a low single-digit percentage of the worldwide net sales and license royalties on sales of AEROSURF for the treatment of RDS in premature infants, up to an aggregate limit of $25 million.
The term of the Collaboration Agreement will end at the time we fulfill our payment obligations to Battelle, unless sooner terminated by a party as provided in the Collaboration Agreement, including for a “failure of purpose” (as defined therein) or a material breach by either party.
Laboratorios del Dr. Esteve, S.A.
We have a strategic alliance with Laboratorios del Dr. Esteve, S.A. (Esteve) for the development, marketing and sales of a broad portfolio of potential KL4 surfactant products in Andorra, Greece, Italy, Portugal, and Spain.Spain (collectively, the territory). Antonio Esteve, Ph.D., a principal of Esteve, served as a member of our Board of Directors from May 2002 until his resignation in January 2013, is a principal of Esteve.2013. Under the alliance, Esteve will pay us a transfer price on sales of our KL4 surfactant products. We will be responsible for the manufacture and supply of all of the covered products and Esteve will be responsible for all sales and marketing in the territory. Esteve is obligated to make stipulated cash payments to us upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for the covered products. In addition, Esteve has agreed to contribute to Phasephase 3 clinical trials for the covered products by conducting and funding development performed in the territory. As part of a 2004 restructuring of this alliance in December 2004 that includedwhich Esteve returningreturned certain rights to us in certain territories (Former Esteve Territories), we agreed to pay to Esteve 10% of any cash up front and milestone fees (up to a maximum aggregate of $20 million in the aggregate)million) that we may receive in connection with any strategic collaborations for the development and/or commercialization of certain of our KL4 surfactant products in the Former Esteve Territories. The alliance will terminate as to each covered product, on a country-by-country basis, upon the latest to occur of: the expiration of the last patent claim related to a covered product in such country; the first commercial sale in such country of the first-to-appear generic formulation of the covered product, and the tenth anniversary of the first sale of the covered product in such country. In addition to customary termination provisions for breach of the agreement by a party, the alliance agreement may be terminated by Esteve on 60 days’ prior written notice, up to the date of receipt of the first marketing regulatory approval, or, on up to six months’ written notice, if the first marketing regulatory approval has issued. We may terminate the alliance agreement in the event that Esteve acquires a competitive product (as defined in the agreement).
Potential Alliances and Collaboration Arrangements
We continue to seekenter into discussions with entities with a view to enter into strategic alliances, collaboration arrangements and other collaborative arrangements foropportunities to support our AEROSURF development activities and resources and expertise to support the registration and commercialization of AEROSURF and potentially support the development and/orand, if approved, commercialization of our other KL4 surfactant product candidates. While we currently intend to retain all rights and commercialize our approved products in the U.S., we are focused on identifying potential strategic alliances to assist uscandidates in markets outside the U.S. We seek strategic partners that have broad experience in the designated markets, including regulatory and product development expertise as well as, if our products are approved, an ability to commercialize our products. In addition to development and commercial support, such alliances typically also would provide us with financial resources to support our efforts, potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses. In 2013, we are focused on securing a significant strategic alliance predominantly focused on the EU. In our discussions to date, the primary focus of our discussions has been on AEROSURF. We also would consider various financing alternatives or collaboration arrangements that would provide infusions of capital and other resources needed to advance our KL4 surfactant development programs. We may also seek strategic alliances and/or collaboration arrangements to support the potential commercial introduction of SURFAXIN and, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in our SURFAXIN new drug application (NDA) approved by the FDA. Although we are considering several potential opportunities, there can be no assurance that any strategic alliance or other financing alternatives or collaboration arrangement will be successfully concluded. See, “– Business Strategy,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financings Pursuant to Common Stock Offerings.”
LICENSING, PATENTS AND OTHER PROPRIETARY RIGHTS AND
REGULATORY DESIGNATIONS
We continue to invest in maintaining and enforcing our potential competitive position through a number of means: (i) by protecting our exclusive rights in our KL4 surfactant, CAGADS and aerosol-conducting airway connector technologies through patents and patent extensions,term restorations, (ii) by seeking regulatory exclusivities, including potential orphan drug and new drug product exclusivities, and (iii) through protecting our trade secrets and proprietary methodologies that support our manufacturing and analytical processes.
Patents and Proprietary Rights
Johnson & Johnson, Ortho Pharmaceutical Corporation and The Scripps Research Institute
Our precision-engineered KL4 surfactant technology, including SURFAXIN, is based on the proprietary synthetic peptide KL4 (sinapultide), a 21 amino acid protein-like substance that closely mimics the essential human lung protein SP-B. This technology was invented at The Scripps Research Institute (Scripps) and was exclusively licensed to and further developed by J&J. We have received an exclusive, worldwide license and sublicense from J&J and its wholly-owned subsidiary, Ortho Pharmaceutical Corporation for, with rights to, a series of over 30 patents and patent filings (worldwide) which are important, either individually or collectively, to our strategy for commercializing our KL4 surfactant product candidates. The license and sublicense give us the exclusive rights to such patents for the life of the patents. Under the license agreement, we are obligated to pay the licensors fees of up to $2.5 million in the aggregate upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for certain designated products. In addition, we have paid $950,000 to date for milestones that have been achieved. In addition, we are required to make royalty payments at different rates, depending upon type of revenue and country, in amounts in the range of a high single-digit percent of net sales (as defined in the agreement) of licensed products sold by us or sublicensees, or, if greater, a percentage of royalty income from sublicensees in the low double digits. The license agreement provides that the license will expire, on a country-by-country basis, upon the payment of royalties for all licensed products for ten years beginning on the date of the first commercial sale of the first licensed product in such country and thereaftercountry. Thereafter, royalties shall be paid in respect of a given licensed product until the expiration of the last licensed patent containing a valid claim covering the licensed product in such country; or forcountry. For countries in the EU in which royalties are paid only by virtue of licensed know-how, uponroyalties shall be payable commencing from the paymentdate of royaltiesfirst commercial sale of the first licensed product in such country and ending on the earlier of (i) the date on which the licensed know-how becomes public or (ii) the tenth anniversary of the first commercial sale of the first licensed product in any such country.country of the EU. In addition to customary termination provisions for breach of the agreement by a party, we may terminate the agreement, as to countries other than the U.S. and Western Europe territories (as defined in the agreement), on a country-by-country basis, on six months’ prior written notice; and as to the entire agreement, on 60 days’ prior written notice.
Patents covering our proprietary precision-engineered surfactant technology that have been issued worldwide include composition of matter, formulation, and uses and include the following issued United StatesU.S. patents: U.S. Patent No. 5,407,914; U.S. Patent No. 5,952,303; U.S. Patent No. 6,013,619; and U.S. Patent No. 6, 613,764 (along with certain corresponding issued foreign counterparts). These patents relate to precision-engineered pulmonary surfactants (including SURFAXIN), certain related peptides (amino acid protein-like substances) and compositions, methods of treating respiratory distress syndromes with these surfactants and compositions, and a pulmonary lavage method of treating RDS with these surfactants. Our licensed patent estate also includes the U.S. and foreign patents that relate to methods of manufacturing SURFAXIN and certain peptides that may be used in the manufacture of SURFAXIN, and other aspects of our precision-engineered surfactant technology. These patents include U.S. Patent No. 5,741,891; U.S. Patent No. 5,952,303; U.S. Patent No. 6,013,764; U.S. Patent No. 6,120,795; U.S. Patent No. 6,492,490; and U.S. Patent No. 8,217,142 (along with certain corresponding issued foreign counterparts).
The patent term of U.S. Patent No. 5,407,914 has beenwas previously extended until November 17, 2013 with further extensions potentially available until November 17, 2014.2014 and is now expired. U.S. Patent No. 5,952,303 will expire on March 29, 2017. U.S. Patent No. 5,741,891 will expire on October 22, 2016. U.S. Patent No. 6,013,764 will expire on June 25, 2017. U.S. Patent No. 6,120,795 will expire on March 4, 2017. U.S. Patent No. 6,013,764, U.S. Patent No. 6,492,490 and U.S. Patent No. 8,217,142 will expire on June 25, 2017. U.S. Patent No. 6,013,619 will expire on April 28, 2017.
We also have licensed or optioned for license certain patents and pending patent applications from Scripps that relate to combination therapies of pulmonary surfactant and other drugs, and methods of use. Some of these patent applications have issued and some are still pending in the U.S. and a number of foreign jurisdictions, including Australia, Canada, EuropeIsrael, Japan, New Zealand, South Africa, South Korea, and Japan. For example,Singapore. In the U.S., selected compositions of pulmonary surfactants and protease inhibitors and methods of administering these compositions are claimed in the U.S. Patent No. 7,863,241 titled “Compositions for treatment and prevention of pulmonary conditions” which issued on January 4, 2011 and will expire on February 17, 2025.August 21, 2023.
Our KL4-Related Patents and Patent Rights
We have been active in seeking patent protection for our innovations relating to new dosage forms, formulations and methods of manufacturing and delivering synthetic peptide containing pulmonary surfactants. Our patent activities have focused particularly on improved dosage forms and delivery of aerosolized pulmonary surfactant.
In November 2005, we filed U.S. and International patent applications (US 11/274,701 which is now U.S. Patent No. 7,582,312 issued on September 1, 2009 and PCT US/2005/041281, now entered national phase), directed to lyophilized formulations of synthetic peptide containing pulmonary surfactants and methods of manufacture. U.S. Patent No. 7,582,312 will expire on November 15, 2025.
In December 2005, we filed U.S. and International patent applications (US 11/316,308 which is now U.S. Patent No. 8,337,815 issued on December 25, 2012 and PCT US/2005/046862, now entered national phase), directed to synthetic peptide containing pulmonary surfactant formulations having improved viscosity characteristics, aerosolization capacity and storage stability. U.S. Patent No. 8,337,815 will expire on December 12, 2028.
In January 2006, we filed U.S. and International patent applications (US 11/326,885 which is now U.S. Patent No 7,541,331 issued on June 2, 2009 and PCT/US06/000308, now entered national phase), directed to a surfactant treatment regimen for BPD. U.S. Patent No 7,541,331 will expire on January 6, 2026.
In September 2007, we filed U.S. and International patent applications (US 11/901,866 which is now U.S. Patent No. 8,221,772 and PCT US/2007/020260, now entered national phase) directed to surfactant compositions and methods of promoting mucus clearance and treating pulmonary disorders such as cystic fibrosis. U.S. Patent No. 8,221,772 will expire on September 19, 2027.
Each of the above-listed PCTIn March 2013, we filed International patent applications has(PCT/US13/34364 and PCT/US13/34464, now entered national phase and commenced expedited examination in EuropeU.S. and Japan, among other countries.EU) directed to lyophilized pulmonary surfactant and methods of manufacture. In this patent family, two U.S. Patents Nos. 8,748,396 and 8,748,397 were issued on June 10, 2014, European patent 2723323B1 issued on September 23, 2015 and another U.S. patent application (US 14/387707) along with multiple foreign counterparts are pending. U.S. Patents Nos. 8,748,396 and 8,748,397 and European patent 2723323B1will expire on March 28, 2033.
Philip Morris USA Inc. and Philip Morris Products S.A.
In 2008, we restructured ourto restructure a December 2005 strategic alliance, with PMUSA andwe entered into an Amended and Restated License Agreement with PMUSAPhilip Morris USA, Inc. (PMUSA) with respect to the U.S. (U.S. License Agreement), and, as PMUSA had assigned its ex-U.S. rights to Philip Morris Products S.A. (PMPSA) all, we entered into a license agreement with PMPSA with respect to rights in and to the CAG technology outside of the U.S. (International Rights), effective on the same date we entered into a License Agreement with PMPSA with respect to the International Rights (International License Agreement)and on substantially the same terms and conditions as the U.S. License Agreement. These agreements licensed to us all rights in and to PMUSA and PMPSA proprietary aerosol technology. In addition to customary termination provisions for breach of the agreements, we may terminate the License Agreements, in whole or in part, upon advance written notice to the licensor. In addition, either party to each License Agreement may terminate upon a material breach by the other party (subject to a specified cure period).
Under the License Agreements, we are obligated to pay royalties at a rate equal to a low single-digit percent of sales of products sold in the Exclusive Field (as defined below) in the territories. In connection with exclusive undertakings of PMUSA and PMPSA not to exploit the CAG technology for all licensed uses, we are obligated to pay royalties on all product sales, including sales of aerosol devices that are not based on the CAG technology; provided, however, that no royalties are payable to the extent that we exercise our right to terminate the license with respect to a specific indication. We also agreed in the future to pay minimum royalties, but are entitled to a reduction of future royalties in the amount of any minimum royalties paid. Our license rights extend to innovations to the CAG technology that are made under the License Agreements. With these proprietary rights, we believe that our AEROSURF aerosolized KL4 surfactant can be developed to potentially address a broad range of serious respiratory conditions. We are developing AEROSURF to treat premature infants with or at risk for RDS using the CAG technology.
Capillary Aerosolization Technology Patents and Patent Rights
We currently hold exclusive licenses to the CAG technology both in and outside of the U.S. for use with pulmonary surfactants (alone or in combination with any other pharmaceutical compound(s)) for all respiratory diseases and conditions. In addition, under the U.S. License Agreement, our license to use the CAG technology includes certain non-surfactant drugs to treat a wide range of pediatric and adult respiratory indications in hospitals and other health care institutions. The aerosolization technology patents expire on various dates beginning in May 2016 and ending in 2031, or, in some cases, possibly later. Our license under each License Agreement, unless terminated earlier, will expire as to each licensed product, on a country-by-country basis, upon the latest to occur of: the date on which the sale of such licensed product ceases to be covered by a valid patent claim in such country; the date a generic form of the product is introduced in such country; or the tenth anniversary of the first commercial sale of such licensed product.
Under the License Agreements, we are obligated to pay royalties at a rate equal to a low single-digit percent of sales of products sold in the Exclusive Field (see, “– Aerosol Technology Patents and Patent Rights.”) in the territories. In connection with exclusive undertakings of PMUSA and PMPSA not to exploit the aerosol technology for all licensed uses, we are obligated to pay royalties on all product sales, including sales of certain aerosol devices that are not based on the licensed aerosol technology; provided, however, that no royalties are payable to the extent that we exercise our right to terminate the license with respect to a specific indication. We also have been required to pay minimum royalties quarterly beginning in 2014, but are entitled to reduce future quarterly royalties above the quarterly minimums in the amount of the true-up payments we make to satisfy minimum royalties for prior quarters. Our license rights extend to innovations to the aerosol technology that are made under the License Agreements. We believe that our AEROSURF aerosolized KL4 surfactant can be developed to potentially address a broad range of serious respiratory conditions. We are developing AEROSURF to treat premature infants with RDS using the proprietary aerosol technology.
Aerosol Technology Patents and Patent Rights
We currently hold exclusive licenses to the aerosol technology, which is the core technology in our ADS. This technology is based on a capillary aerosol generator and is licensed both in and outside of the U.S. for use with pulmonary surfactants (alone or in combination with any other pharmaceutical compound(s)) for all respiratory diseases and conditions. In addition, under the U.S. License Agreement, our license to use the aerosol technology includes certain non-surfactant drugs to treat certain designated pediatric and adult respiratory indications in hospitals and other health care institutions. The aerosol technology patents expire on various dates beginning in May 2016 and ending in 2031, or, in some cases, possibly later.
Aerosol-Conducting Airway Connector Technology Patents and Patent Rights
In March 2009, we filed International patent application (PCT US/2009/037409)037409, now entered national phase) directed to aerosol-conducting airway connectors that we plan to market under the trademark AFECTAIR and improvements of an aerosol delivery system using AFECTAIR. The International patent application is an interim phase in the prosecution of patents and is now concluded. Beginning on September 16, 2010, this application entered national phase in US, Europe and Japan, among other countries and is currently pending. The claims of this application are directed to a novel ventilation circuit adaptor (an aerosol-conducting airway connector) and related aerosol circuitry that are intended to increase the efficiency of aerosol delivery to the patient by allowing more efficient delivery of aerosols to the patient, reduce drug compound dilution and wastage and result in more precise aerosol dosing. In November 2012, we filedthis patent family, U.S. Patent No. 8,701,658 was issued on April 22, 2014, European patent No. 2265309 was issued on December 16, 2015 and International patent application (PCT/US12/63038) directed to further improvements of an aerosol delivery system and ventilation circuit adaptors. See, “Proprietary Platform – Surfactant and Aerosol Technologies – Our Aerosolization Device Technologies.”several foreign patents have issued during 2011 through 2015. U.S. Patent No. 8,701,658 will expire on March 17, 2029.
See, “Item 1A – Risk Factors – If we cannot protect our intellectual property, other companies could use our technology in competitive products. Even if we obtain patents to protect our products, those patents may not be sufficiently broad or they may expire and others could then compete with us;” “– Intellectual property rights of third parties could limit our ability to develop and market our products;” and “– If we cannot meet requirements under our license agreements, we could lose the rights to our products.”
Trademarks
AEROSURF®, AFECTAIR®, AFECTAIRDISCOVERYLABS® DUO, DISCOVERYLABS®, SURFAXIN®, SURFAXIN LS™, and WARMING CRADLE® are our registered and common law trademarks.
Trade Secrets
In addition to our patent exclusivities, we rely on trade secrets to protect and maintain our competitive position. We take measures to protect and maintain our trade secrets and know-how licensed to us or developed by us by entering in confidentiality agreements with third parties. Our trade secrets and know-how include information related to manufacturing processes for our drug products and devices, analytical methods and procedures, research and development activities, provisional patent applications, as well as certain information provided to FDA that was not made public which relates to our regulatory activities and clinical trials.
Other Regulatory Designations
New Drug Product Exclusivity
SURFAXIN is expected to receive at least three years of marketing exclusivity as a new drug product based on the new data from the SELECT and STAR clinical trials. In addition, the FDA has indicated that our SURFAXIN drug product also qualifies as a “new molecular entity,” which we expect may provide extended marketing exclusivity of five years. However, the FDA has not made its final determination as to the length of the exclusivity period for SURFAXIN.
Orphan Drug and Orphan Medicinal Product Designations
“Orphan Drugs” are pharmaceutical products that are intended to address diseases affecting fewer than 200,000 patients in the U.S. The Office of Orphan ProductProducts Development of the FDA grantsdetermines whether to designate a drug as an Orphan Drug. If a drug is designated as an Orphan Drug, it is eligible to obtain certain advantages to the sponsors of Orphan Drugsbenefits, including, but not limited to, seven years of market exclusivity upon approval of the drug for the orphan indication, certain tax incentives for clinical research and grants to fund testing of the drug. The FDA has granted Orphan Drug designation for SURFAXINour KL4 surfactant for the treatment of RDS in premature infants. However, as our indication for SURFAXIN is for the prevention, rather than treatment, of RDS, we filed a request with the FDA to allow for application of this designation to SURFAXIN. We were advised in 2012 that the FDA had denied our request. If we develop AEROSURF or SURFAXIN LS for the treatment of RDS, this orphan drugOrphan Drug designation may apply for that indication.those indications. We are currently seeking confirmation from the FDA. The FDA has also granted Orphan Drug designation to (i) SURFAXINour KL4 surfactant for the prevention and treatment of BPD in premature infants, (ii) our KL4 surfactant for the treatment of ARDSacute respiratory distress syndrome (ARDS) in adults, and (iii) our KL4 surfactant for the treatment of CF.
The European Commission grants “Orphan Medicinal Product” designation for pharmaceutical products for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting no more than 5 in 10,000 people which provides for exclusive marketing rights for indications in Europe for 10 years (subject to revision after six years) following marketing approval by the EMA.European Medicines Agency (EMA). In addition, the designation would enable us to receive regulatory assistance in the further development process, and to access reduced regulatory fees throughout its marketing life. We have received Orphan Medicinal Product designation for (i) SURFAXINour KL4 surfactant for the prevention and treatment of RDS in premature infants of less than 32 weeks gestational age, (ii) our KL4 surfactant for the treatment of ALIRDS in adults (which in this circumstance encompasses ARDS), andpremature infants of less than 37 weeks gestational age, (iii) our KL4 surfactant for the treatment of ALI (which in this circumstance encompasses ARDS), and (iv) our KL4 surfactant for the treatment of CF. In submitting our request to the EMA for Orphan Medicinal Product designations, instead of listing the drug product under the USAN name (lucinactant) as we have in the U.S., we were required to submit our request under the names of the four APIs in our KL4 surfactant (lucinactant) as follows: sinapultide (KL4), dipalmitoylphosphatidylcholine, palmitoyl-oleoyl phosphatidylglycerol and palmitic acid.
Fast Track Designations and Priority Review
Designation as a “Fast Track” product means that the FDA has determined that the drug is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to address unmet medical needs, and that the FDA will facilitate and expedite the development and review of the application for the approval of the product. The FDA generally willmay grant priority review for an NDA for a drug granted Fast Track designation withinif relevant criteria are met, and rolling review, which means that the review goal for the NDA would be six months.
The FDA has granted “Fast Track” designation for (i) SURFAXIN for the prevention and treatment of BPD in premature infants, and (ii) our KL4 surfactant for the treatment of ARDS.ARDS in adults. We believe that other of our products may qualify for Fast Track or other designations, including potentially breakthrough therapy, accelerated approval and priority review. These designations and programs are intended to facilitate and expedite development and review of an NDA to address unmet medical needs in the treatment of serious or life-threatening conditions.
COMPETITION
We are engaged in the highly competitive fields of pharmaceutical research and development. Competition from numerous existing companies and others entering the fields in which we operate is intense and expected to increase. We expect to compete with conventional pharmaceutical companies, among others. Most of these companies have substantially greater research and development, manufacturing, marketing, financial, technological personnel and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical or health care companies could further enhance such competitors’ financial, marketing and other resources. Moreover, competitors that are able to complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before we do may enjoy a significant competitive advantage over us. There are also existing therapies that may compete with the products we are developing. See, “Item 1A – Risk Factors – Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.”
Currently, the FDA has approved surfactants as replacement therapy only for the prevention andand/or treatment of RDS in premature infants. Administration of these surfactants requires invasive intubation and mechanical ventilation. The most commonly used of these approved surfactants are Curosurf (poractant(poractant alfa), which is derived from a chemical extraction process of porcine (pig) lung, and Survanta (beractant), which is derived from a chemical extraction process of bovine (cow) lung. Curosurf is marketed in Europe by Chiesi Farmaceutici S.p.A. and in the U.S. by Cornerstone Therapeuticsits wholly-owned subsidiary, Chiesi USA, Inc. In addition, Chiesi has published the results of a preclinical study indicating that it is engaged in an early-stage effort to develop a synthetic surfactant (Sato A, Ikegami M (2012) SP-B and SP-C Containing New Synthetic Surfactant for Treatment of Extremely Immature Lamb Lung. PLoS ONE 7(7): e39392.doi:10.1371/journal.pone.0039392). Chiesi has also completed a first-in-human clinical trial to study the safety and tolerability of intratracheal administration of two different single doses of its investigational synthetic surfactant in preterm infants with RDS (clinicaltrials.gov). Survanta historically has beenis marketed internationally by Abbott Nutritionals, Inc. (Abbott). On December 10, 2012, a wholly-owned subsidiary of Abbott, AbbVie, Inc. (AbbVie) filed with the SEC a Form S-1 Registration Statement, which was declared effective by the SEC on December 31, 2012, in connection with a distribution by Abbott to its shareholders of 100% of the outstanding shares of AbbVie. The registration statement indicates that the distribution is intended to effect the separation of Abbott’s research-based pharmaceuticals business from the remainder of its businesses. We understand that Survanta is among the assets transferred to AbbVie. ONY, Inc. markets Infasurf®, a surfactant derived from calf lung surfactant lavage, in the U.S.
With respect to our aerosolized surfactant drug delivery technologies, we believe that efforts to aerosolize animal-derived surfactants have not been very successful.satisfactory due to limitations with conventional technologies. Recent studies suggest that to aerosolize a surfactant for delivery to premature infants, it is necessary to optimize the aerosol to a particular particle size range, use an aerosol generator with characteristics that are compatible with the patient’s breathing, and employ a delivery system that delivers sufficient drug product to the patient (Mazela, et. al., Aerosolized Surfactants, Current Opinion in Pediatrics 2007, 19:155–162; Finer, et. al., An Open Label, Pilot Study of AEROSURF Combined with nCPAP to Prevent RDS in Preterm Neonate, Journal of Aerosol, Medicine and Pulmonary Drug Delivery, Volume 23, Number 5, 2010). In addition, aerosol particle size and output consistency is important throughout the aerosolized surfactant dosing period. In particular, for clinical registration trials, a surfactant aerosol delivery system needs to deliver a consistent dose to the patient throughout the individual dosing period as well as consistent dose from device to device. There are a number of device manufacturers with aerosolization expertise, including PariPARI and Aerogen.Aerogen, Inc. These companies manufacture aerosol devices such as nebulizers, aerosol masks, and compressors. Pari, for example, has provided nebulizers for use in clinical research and in commercial productproducts for several companies. Chiesi has recently investigated the use of nebulized Curosurf using a PARI eFlow® Neonatal Nebulizer System (CureNeb study; PAS 2013 abstract). Aerogen manufactures a number of aerosolization devices, including a disposable, single patient nebulizer and a reusable, multi-patient nebulizer. Our AFECTAIR devices are novel aerosol-conducting airway connectors that are intended to replace standard connectorsAerogen nebulizers have also been used in surfactant aerosolization clinical trials including, see Finer, et al, JAMP, Volume 23, Number 5, 2010 and in the ventilatory circuit. We currently are not awareongoing study by Sood, et al (https://clinicaltrials.gov/ct2/show/NCT02294630?term=sood+surfactant&rank=1). Another potential competitor to our aerosolized surfactant drug technology may be other minimally invasive surfactant therapies (MIST). MIST is delivery of any efforts onexogenous surfactant to the partlung via brief catheterization of anythe trachea with an instillation catheter in a preterm infant, followed by reinstitution of CPAP. Currently, a phase 4 clinical trial is being conducted to assess the efficacy of this therapy versus CPAP alone (ClinicalTrials.gov Identifier: NCT02140580). Unlike AEROSURF, these or other companiesapproaches would still require invasion of the vocal cords with a surfactant administration apparatus. A further potential competitor to develop an alternative to AFECTAIR.our aerosolized surfactant drug technology may be administration of surfactant via laryngeal mask airway (LMA).
GOVERNMENT REGULATION
The development, manufacture, distribution, marketingIn the U.S., drug products, medical devices, and advertising of drugdrug-device combination products are subject to extensive regulation by federal, state and local governmental authorities in the U.S., including Food and Drug Administration, or the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, clearance, labeling, promotion, advertising and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of drug products, medical devices, and drug-device combination products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve or clear pending new submissions to market drugs or devices warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and by similar agencies in other countries. Any product that we developcriminal prosecution. Drug products, medical devices, and drug-device combination products must receive all relevant regulatory approvals or clearances before it may be marketed in a particular country. Gaining regulatory approval of a drug product candidate requires the expenditure of substantial resources over an extended period. As a result, larger companies with greater financial resources will likely have a competitive advantage over us.U.S. Drug products, medical devices, and drug-device combination products are subject to extensive regulation, including premarket review and marketing authorization, by similar agencies in other countries.
Drug Product RegulationsProducts
Development Activities: To gain regulatory approvalPharmaceutical product development for a new product or certain changes to an approved product in the U.S. typically involves preclinical laboratory and animal tests, the submission to the FDA of our KL4 surfactant technology pipeline products, wean investigational new drug application, or IND, which must demonstrate, through experiments, preclinical studiesbecome effective before clinical testing may commence, and adequate and well-controlled clinical trials that each of our drug product candidates meetsto establish the safety and efficacy standards established by the FDA and other international regulatory authorities. In addition, we and our suppliers and CMOs must demonstrate that all development-related laboratory, clinical and manufacturing practices comply with regulationseffectiveness of the drug for each indication for which FDA other international regulatorsapproval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and local regulators. Regulations establish standards for such things as drug substances, materialsthe actual time required may vary substantially based upon the type, complexity, and excipients; medical device components, subassemblies and device manufacture; drug manufacturing operations and facilities and analytical laboratories and medical device development laboratories processes and environments; in each instance, in connection with research, development, testing, manufacture, quality control, labeling, storage, record keeping, approval, advertising and promotion, and distributionnovelty of the product or disease.
Preclinical tests include laboratory evaluation of product candidates, on a product-by-product basis. See, “Item 1A – Risk Factors – The regulatory approval process for our products is expensivechemistry, formulation, and time-consuming and the outcome is uncertain. We may not obtain required regulatory approvals for the commercialization of our products.”
Preclinical Studies and Clinical Trials: Development testing generally begins with laboratory testing and experiments,toxicity, as well as research studies using animal modelstrials to obtain preliminary information on a product’sassess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and to identify any safety issues.requirements, including good laboratory practices. The results of these studiespreclinical testing are compiledsubmitted to the FDA as part of an IND along with other information, in an investigational new drug (IND) application, whichincluding information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is filed with the FDA. After resolving any questions raised by the FDA, which may involve additional testing and animal studies, clinical trials may begin. Regulatory agencies in other countries generally require a Clinical Trial Application (CTA) to be submitted and approved before each trial can commence in each country.submitted.
A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.
Clinical trials normallyinvolve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with good clinical practice, or GCP, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, andbut the phases may take a number of years to complete.overlap. In Phase 1, consiststhe initial introduction of testing the drug product in a small number of humans, normallyinto healthy volunteers,human subjects or patients, the drug is tested to determine preliminary safetyassess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses, and, tolerable dose range.if possible, early evidence on effectiveness. Phase 2 usually involves studiestrials in a limited patient population to evaluatedetermine the effectiveness of the drug product in humans having the disease or medical condition for which the product is indicated, determinea particular indication, dosage tolerance, and optimaloptimum dosage, and to identify possible common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 consiststrials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of additional controlled testingpatients, typically at multiplegeographically dispersed clinical trial sites, to establish clinical safety and effectiveness in an expanded patient population of geographically dispersed test sitespermit FDA to evaluate the overall benefit-risk relationship for administeringof the productdrug and to provide an adequate basisinformation for product labeling.the labeling of the drug. In most cases FDA requires two adequate and well‑controlled Phase 43 clinical trials to demonstrate the efficacy of the drug. A single Phase 3 trial with other confirmatory evidence may be conducted after approval to gain additional experience fromsufficient in rare instances where the treatmentstudy is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of patientsa clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.
After completion of the intended therapeutic indication.
The conduct ofrequired clinical trialstesting, an NDA is subject to stringent medicalprepared and regulatory requirements. The time and expense required to establish clinical sites, provide training and materials, establish communications channels and monitor a trial over a long period are substantial. The conduct of clinical trials at institutions located around the world is subject to foreign regulatory requirements governing human clinical trials, which vary widely from country to country. Delays or terminations of clinical trials could result from a number of factors, including stringent enrollment criteria, slow rate of enrollment, size of patient population, having to compete with other clinical trials for eligible patients, geographical considerations and others. Clinical trials are monitored by the regulatory agencies as well as medical advisory and standards boards, which could determine at any time to reevaluate, alter, suspend, or terminate a trial based upon accumulated data, including data concerning the occurrence of adverse health events during or related to the treatment of patients enrolled in the trial, and the regulator’s or monitor’s risk/benefit assessment with respect to patients enrolled in the trial. If they occur, such delays or suspensions could have a material impact on our KL4 surfactant technology development programs. See, “Item 1A–Risk Factors – Our research and development programs for AEROSURF and SURFAXIN LS involve significant risks and uncertainties that are inherent in the clinical development and regulatory approval processes.,” and “– Our clinical trials may be delayed, or fail, which will harm our business.”
Regulatory Review: The results of preclinical and clinical trials are submitted to the FDA. FDA in an NDA, with comparable filings submitted to other international regulators. After the initial submission, the FDA has a periodapproval of time in which it must determine if the NDA is complete. Ifrequired before marketing of the product may begin in the U.S. The NDA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is acceptedsubstantial. The submission of most NDAs is additionally subject to a substantial application user fee, currently exceeding $2,374,000 for filing, followingfiscal year 2016, and the FDA’s review,manufacturer and/or sponsor under an approved new drug application are also subject to annual product and establishment user fees, currently exceeding $114,000 per product and $585,000 per establishment for fiscal year 2016. These fees are typically increased annually.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be filed based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. If the NDA submission is filed, the FDA may grant marketing approval, request additional information, or denyreviews the application if it determines thatNDA to determine, among other things, whether the application does not provide an adequate basis for approval. If the FDA grants approval, the approval may be conditioned upon the conduct of post-marketing clinical trials or other studies to confirm the product’s safetyproposed product is safe and efficacyeffective for its intended use. UntilThe FDA has agreed to certain performance goals in the review of new drug applications. Most such applications for standard review drug products are reviewed within ten to twelve months; most applications for priority review drugs are reviewed in six to eight months. Priority review can be applied to drugs that the FDA has issued its approval,determines offer major advances in treatment, or provide a treatment where no marketing activities canadequate therapy exists. The review process for both standard and priority review may be conductedextended by FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the U.S. Similar regulations apply in other countries.submission.
The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisory committee—typically a panel that includes clinicians and other experts—for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not acceptbound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, and may deliver what is referred to as a Complete Response Letter that describes the shortcomings of the application, including whether the applicant should consider additional clinical trials, which could have the effect of terminating a development program.
Manufacturing Standards: The FDA and other international regulators establish standards and routinely inspect facilities and equipment, analytical and quality laboratories and processes used in the manufacturing and monitoring of products. Prior to granting approval of a drug product, the FDA will conduct a pre-approval inspection oftypically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with current good manufacturing practices, or cGMPs, is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.
After FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and the facilities of suppliers, to determine that the drug product is manufacturedmay require substantial additional testing, or information, in accordance with cGMP regulations and product specifications. Following approval,order for the FDA will conduct periodic inspections.to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in connection with a facility inspection,resubmission of the FDA determines that a manufacturer does not comply with cGMP,NDA, the FDA will issue an inspection report citingapproval letter. FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.
An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential violationsrisks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may seekrequire substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a rangenew NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.
Orphan Drugs
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition – generally a disease or condition that affects fewer than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of remedies, from administrative sanctions, including the suspensiondrug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, our manufacturing operations,the regulatory review and approval process. The first NDA applicant to seeking civil or criminal penalties. In connection with our efforts to gainreceive FDA marketing approval for SURFAXIN,a particular active moiety to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in January 2012,the U.S. for that product, for that indication. During the seven-year exclusivity period, the FDA conductedmay not approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a Pre-approval Inspectionshowing of our Totowa, New Jersey manufacturing operationsclinical superiority to the product with orphan drug exclusivity by means of greater effectiveness, greater safety, or providing a major contribution to patient care. Orphan drug exclusivity does not prevent FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and our analytical and testing laboratory in Warrington, Pennsylyania, and othera waiver of the quality assurance/quality control facilities for SURFAXIN including those of our third-party raw material suppliers and testing laboratories. On February 24, 2012, the FDA issued an EIR recommending approval of our Totowa manufacturing operations for the manufacture of SURFAXIN. The FDA may determine to conduct such inspections at any time and for any reason, including in connection with our recent notification that one of our analytical chemistry methods used to assess drug product conformance to specifications required improvement and our submission of updated product specifications for SURFAXIN. See, “Item 1A – Risk Factors – Manufacturing problems potentially could cause us to delay preclinical or clinical programs, or, if our products are approved, product launch, or cause us to experience shortages of product inventories, which could have a material adverse effect on our business.”NDA application user fee.
Fast Track Designation
FDA is required to facilitate the development, and expedite the review, of drugs that are intended for the treatment of a serious or life-threatening disease and which demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a fast track drug concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.
Under the fast track program, sponsors have the opportunity to engage in more frequent interactions with FDA. In addition, FDA may initiate review of sections of a fast track drug’s NDA before the application is complete. This rolling review is available if the applicant provides, and FDA approves, a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, FDA’s time period goal for reviewing an application does not begin until the last section of the NDA is submitted. Additionally, the fast track designation may be withdrawn by FDA if FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
The Hatch-Waxman Act
Orange Book ListingInternational Approvals: In additionseeking approval for a drug through an NDA, applicants are required to seeking regulatorylist with the FDA each patent with claims covering the applicant’s product or method of using the product. Upon approval to market our productsof a drug, each of the patents listed in the U.S., we also expectapplication for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown to applybe bioequivalent to the listed drug. Other than the requirement for such approval with other international regulators. Regulatory requirementsbioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.
The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval processesis sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA labeling does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.
A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are similar in approachinvalid, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to thatthe FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been received by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant.
An applicant submitting an NDA under Section 505(b)(2) of the FDC Act, which permits the filing of an NDA where at least some of the information required from approval comes from studies not conducted by, or for, the applicant and for which the applicant has not obtained a right of reference, is required to certify to the FDA regarding any patents listed in the Orange Book for the approved product it references to the same extent that an ANDA applicant would.
Market Exclusivity: Market exclusivity provisions under the FDC Act also can delay the submission or the approval of certain applications. The FDC Act provides a five-year period of non-patent exclusivity within the U.S. butto the first applicant to gain approval of an NDA for a new chemical entity, or NCE. A drug is entitled to NCE exclusivity if it contains a drug substance no active moiety of which has been previously approved by the FDA. During the exclusivity period, the FDA may not receive for review an ANDA or file a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a Paragraph IV certification. The FDC Act also provides three years of market exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are not fully harmonized. With certain exceptions, althoughdeemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions for use associated with the new clinical investigations and does not prohibit the FDA carries considerable weight, international regulatorsfrom approving ANDAs for drugs for the original conditions of use, such as the originally approved indication. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all the non-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Patent Term Extension: After NDA approval, the owner of a relevant drug patent may apply for up to a five-year patent extension. Only one patent may be extended for each regulatory review period, which is composed of two parts: a testing phase, and an approval phase. The allowable patent term extension is calculated as half of the drug’s testing phase - the time between the day the IND becomes effective and NDA submission – and all of the review phase – the time between NDA submission and approval – up to a maximum of five years. The time can be shortened if FDA determines that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years.
For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the U.S. Patent and Trademark Office must determine that approval of the drug covered by the patent for which a patent extension is being sought is likely. Interim patent extensions are not bound byavailable for a drug for which an NDA has not been submitted.
Post-Approval Requirements
Once an NDA is approved, a product will be subject to certain post-approval requirements. For instance, FDA closely regulates the findings of the FDA and there is a risk that foreign regulators will not accept a clinical trial design or may require additional data or other information not requested by the FDA. In Europe, there is a centralized procedure available under which the EMA will conduct the application review and recommend marketing approval to the European Commission, or not, for the sale of drug products in the EU countries.
Post-approval Regulation: Following the grant of marketing approval, the FDA regulates thepost-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling.
Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketing testing, known as Phase 4 testing, risk evaluation and mitigation strategies, or REMS, and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality-control, drug products. Promotional claimsmanufacture, packaging, and labeling procedures must continue to conform to current good manufacturing practices, or cGMPs, after approval. Drug manufacturers and certain of their subcontractors are generally limitedrequired to the information provided in the product package insert for each drug product, which is negotiatedregister their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the NDA review process.agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered. In addition, prescription drug manufacturers in the FDA enforces regulations designedU.S. must comply with applicable provisions of the Drug Supply Chain Security Act and provide and receive product tracing information, maintain appropriate licenses, ensure they only work with other properly licensed entities, and have procedures in place to guard against conflicts of interest, misleading advertisingidentify and improper compensation of prescribing physicians. The FDA will review, among other things, direct-to-consumer advertising, prescriber-directed advertisingproperly handle suspect and promotional materials, sales representative communicationsillegitimate products.
Pediatric Information
Under the Pediatric Research Equity Act, or PREA, NDAs or supplements to healthcare professionals, promotional programming and promotional activities on the Internet. The FDA will also monitor scientific and educational activities. If the FDA determines that a company has promoted a product for an unapproved (off-label) use, or engaged in other violations, it may issue a regulatory letter and may require corrective advertising or other corrective communications to healthcare professionals. Enforcement actions may also potentially include product seizures, injunctions and civil or criminal penalties. The consequences of such an action and the related adverse publicity could have a material adverse effect on a developer’s ability to market its drug and its business as a whole. Regulation and enforcement of advertising and promotion by institutions other than FDA are discussed below.
Following approval, the FDA and other international regulators will continue to monitorNDAs must contain data to assess the safety and efficacyeffectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an approved drug. A post-approval discoveryindication for which orphan designation has been granted.
The Best Pharmaceuticals for Children Act, or failureBPCA, provides NDA holders a six-month extension of any exclusivity—patent or non-patent—for a drug if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to comply with the applicable regulatory requirementsuse of a new drug in the pediatric population may resultproduce health benefits in restrictionsthat population, FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the marketing of a product or a recall or withdrawalrequested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications, with all of the product from the market, as well as possible civil or criminal sanctions. Similar oversight is provided by international regulators.benefits that designation confers.
Combination Drug-Device Products
Combination drug products such as AEROSURF and potentially other aerosolized KL4 surfactant drug products are similarly subject to extensive regulation by federal, state and local governmental authorities in the U.S. and in other countries. Combination products involve review of two or more regulated components that might normally be reviewed by regulatory authorities having different expertise and may involve more complicated and time-consuming regulatory coordination, approvals and clearances than a drug product alone. In the U.S., our aerosolized KL4 surfactant combination drug-device product will be reviewed by the Center for Drug Evaluation and Research (CDER) of the FDA, with input from the Center for Devices and Radiological Health (CDRH). Among other things, we will have to demonstrate compliance with both cGMP, to ensure that the drug possesses adequate strength, quality, identity and purity, and applicable Quality System Regulations (QSR), to ensure that the device is in compliance with applicable performance standards. Although cGMP and QSR overlap in many respects, each is tailored to the particular characteristics of the types of products to which they apply, such that compliance with both cGMP and QSR may present unique problems and manufacturing challenges.
Medical Device Products
To varying degrees, eachA medical device is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part, or accessory which is: (i) recognized in the official National Formulary, or the U.S. Pharmacopoeia, or any supplement to them; (ii) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or (iii) intended to affect the structure or any function of the regulatory agencies having oversight overbody of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.
The FDC Act classifies medical devices including the FDA and comparable foreign regulators, has laws and regulations governing the development, testing, manufacturing, labeling, marketing, and distribution of medical devices. In the U.S., medical device products are subject to regulation that is intended to calibrate regulatory requirements to the issues of safety and efficacy presented by specific devices. Medical devices are classified into one of three classescategories based on the risks associated with the device and the level of control necessary to assure theprovide reasonable assurance of safety and effectiveness of the device. The three classes and the requirements that apply to them are: (i) Class I General Controls, with exemptions and without exemptions, (ii) Class II General Controls and Special Controls, with exemptions and without exemptions, and (iii) Class III General Controls and Premarket Marketing authorization. The class to which a device is assigned determines the process that applies for gaining marketing authorization. Mosteffectiveness. Class I devices are exempt from Premarketdeemed to be low risk and are subject to the fewest regulatory controls. Class III devices are generally the highest risk devices and are subject to the highest level of regulatory control to provide reasonable assurance of the device’s safety and effectiveness. Class III devices must typically be approved by FDA before they are marketed.
Generally, establishments that manufacture and/or distribute devices, including manufacturers, contract manufacturers, sterilizers, repackagers and relabelers, specification developers, reprocessors of single-use devices, remanufacturers, initial importers, manufacturers of accessories and components sold directly to the end user, and U.S. manufacturers of export-only devices, are required to register their establishments with the FDA and provide FDA a list of the devices that they handle at their facilities.
Pre-market Authorization and Notification 510(k);
While most Class I and some Class II devices require Premarket Notificationcan be marketed without prior FDA authorization, most medical devices can be legally sold within the U.S. only if the FDA has: (i) approved a premarket approval application, or PMA, prior to marketing, generally applicable to Class III devices; or (ii) cleared the device in response to a premarket notification, or 510(k); submission, generally applicable to Class I and mostII devices. Some devices that have been classified as Class III are regulated pursuant to the 510(k) requirements because FDA has not yet called for PMAs for these devices. Other less common regulatory pathways to market for Class III devices require Premarket Marketing authorization. As noted below, we have determined that our AFECTAIRinclude the humanitarian device qualities asexception, or HDE, or a product development protocol or PDP.
Exempt Devices
If a manufacturer’s device falls into a generic category of Class I medical device. We haveor Class II devices that FDA has exempted by regulation, a premarket notification is not determined at this time under which classification our CAGrequired before marketing the device and related componentry will fall. A brief summary overviewin the U.S. Manufacturers of the three classifications is set forth below.
Exempt Class I Medical Device: Priorsuch devices are required to marketing an exempt Class I medical device, the manufacturer must register its establishment,their establishments and list the generic category or classification name of the medical device being marketed and pay a registration fee. After consulting with our regulatory experts, in February 2012, we registered our AFECTAIR device as antheir devices. Some 510(k)-exempt devices are also exempt Class I medical device. We will be required to update and renew our registration annually.from Quality System Regulation, or QSR, requirements.
510(k) Clearance Process: A Class II medical device requires FDA clearance in the U.S. pursuant to the 510(k) clearance process. The 510(k) clearance process is available to medical device developers that can demonstrate that their device is substantially equivalent to a legally marketed medical device. In this process, the developer would be required to submit data that supports the equivalence claim and wait for an order from the FDA finding substantial equivalence to another legally marketed medical device before distributing the device for commercial sale. Modifications to cleared medical devices can be made without using the 510(k) process if the changes do not significantly affect safety or effectiveness.
Pre-market Marketing Authorization: A more rigorous and time-consuming process applicable to Class III medical devices, known as pre-market marketing authorization (PMA), would require the developer to independently demonstrate that a medical device is safe and effective. This is done by presenting data regarding design, materials, bench and animal testing, and human clinical data for the medical device. The FDA will authorize commercial release of a Class III medical device if it determines there is reasonable assurance that the medical device is safe and effective. This determination is based on benefit outweighing risk for the population intended to be treated with the device. This process is much more detailed, time-consuming and expensive than the 510(k) clearance process. We do not believe that we will be required to file an application for PMA.
European Compliance (CE) Marking Process: The European Union has comparable regulations to the FDA for the registration or marketing authorization of medical devices. We believe that in the European Union our AFECTAIR device qualifies as a Class IIa device, which requires us to obtain a “CE mark” by filing a statement of registration. We must first seek a review of a third-party “Notified Body” that will conduct an ISO13485 quality management system certification audit to ensure that our manufacturers and we are in compliance with the standard. If the audit is successful, the Notified Body will grant ISO13485 certification, which is a requisite to pursue CE marking for our AFECTAIR device. We obtained ISO13485 certification in early 2013, and we are currently working a regulatory services firm to obtain CE marking. The regulatory services firm will assist us with compiling the required technical file, labeling review, a clinical evaluation report to support CE marking, design control and quality system implementation, subcontractor audit and general regulatory consulting. In addition, in the European Union we will have to designate a single Authorized Representative located in the European Union to interact with the local authorities and respond to technical document requests. The Authorized Representative will be responsible for preparing supplemental submissions to member states that have additional requirements for marketing authorization.
Other RegulatoryPostmarket Requirements: Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements may apply. These include:
| ● | product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; |
| ● | product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; |
the QSR, labeling regulations, the FDA’s general prohibition against promoting products for unapproved or “off‑label” uses, the Medical Device Reporting regulation (which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur), and the Reports of Corrections and Removals regulation (which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act).
FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as: fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions, partial suspension or total shutdown of production; refusing requests for 510(k) clearance or PMA approval of new products; withdrawing 510(k) clearance or PMA approvals already granted; and criminal prosecution.
Combination Products
A combination product is a product comprised of (i) two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are physically, chemically, or otherwise combined or mixed and produced as a single entity; (ii) two or more separate products packaged together in a single package or as a unit and comprised of drug and device products, device and biological products, or biological and drug products; (iii) a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication, or effect and where upon approval of the proposed product the labeling of the approved product would need to be changed, e.g., to reflect a change in intended use, dosage form, strength, route of administration, or significant change in dose; or (iv) any investigational drug, device, or biological product packaged separately that according to its proposed labeling is for use only with another individually specified investigational drug, device, or biological product where both are required to achieve the intended use, indication, or effect.
FDA is divided into various branches, or Centers, by product type. Different Centers typically review drug, biologic, or device applications. In order to review an application for a combination product, the FDA must decide which Center should be responsible for the review. FDA regulations require that FDA determine the combination product’s primary mode of action, or PMOA, which is the single mode of a combination product that provides the most important therapeutic action of the combination product. The Center that regulates that portion of the product that generates the PMOA becomes the lead evaluator. If there are two independent modes of action, neither of which is subordinate to the other, the FDA makes a determination as to which Center to assign the product based on consistency with other combination products raising similar types of safety and effectiveness questions or to the Center with the most expertise in evaluating the most significant safety and effectiveness questions raised by the combination product. When evaluating an application, a lead Center may consult other Centers but still retain complete reviewing authority, or it may collaborate with another Center, by which the Center assigns review of a specific section of the application to another Center, delegating its review authority for that section. Typically, the FDA requires a single marketing application submitted to the Center selected to be the lead evaluator, although the agency has the discretion to require separate applications to more than one Center. One reason to submit multiple evaluations is if the applicant wishes to receive some benefit that accrues only from approval under a particular type of application, like new drug product exclusivity. If multiple applications are submitted, each may be evaluated by a different lead Center.
International Approvals
Drug products, medical devices, and drug-device combination products are subject to extensive regulation, including premarket review and marketing authorization, by similar agencies in other countries. Regulatory requirements and approval processes are similar in approach to that of the U.S. but are not harmonized. International regulators are independent and not bound by the findings of the FDA and there is a risk that foreign regulators will not accept clinical trial design/results or may require additional data or other information not requested by the FDA. In addition, international regulators may require different manufacturing practices than the FDA’s cGMPs.
| ● | Quality System Regulation (QSR), which is the medical device term for good manufacturing practices, requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
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| ● | clearance of product modifications that could significantly affect safety or efficacy or that would constitute a significant change in the safety or efficacy of our cleared devices; |
| ● | medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;
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| ● | post-approval or post-clearance restrictions or conditions, including post-approval or post-clearance study commitments; |
| ● | post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and |
| ● | the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations. |
Anti-Kickback, False Claims Act, and Other Laws Regarding Advertising and Promotion
In addition to FDA’s ongoing post-approval regulationFDA restrictions on marketing of drugs,pharmaceutical products, medical devices, and combination products, discussed above, several other types of lawsstate and regulations, subject to differing enforcement regimes, govern advertising and promotion. In recent years promotional activities of FDA-regulated products have come under intense scrutiny andfederal laws have been applied to restrict certain marketing practices in the subject of enforcement action brought by the Department of Justice (DOJ), state authorities,medical product industry in recent years. These laws include anti-kickback statutes, false claims statutes, and even private individuals.
other statutes pertaining to health care fraud and abuse. The federal Anti-Kickbackhealthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid, or other federally financed healthcare programs. The Patient Protection and Affordable Care Act, or PPACA, amended the intent element of the federal statute so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. This statute has been interpreted to apply to arrangements between pharmaceutical or device manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties, and exclusion from participation in federal healthcare programs. Any salesAlthough there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or marketingother regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases, or recommendations may be subject to scrutiny under the Anti-Kickback statute. Many states have likewise adopted state anti-kickback statutes, and enforcement has been significant.if they do not qualify for an exemption or safe harbor.
Another development affecting the healthcare industry is the increased use of the federal civil False Claims Act to impose liability onFederal false claims laws prohibit any person from knowingly presenting, or entity who, among other things, knowingly presents, or causescausing to be presented, a false or fraudulent claim for payment by a federal healthcare program. If certain conditions are met, the False Claims Act allows a private individual called a “whistleblower” to bring a civil action on behalf of the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. This includes claims made to programs where the federal government reimburses, such as Medicaid, as well as programs where the federal government is a direct purchaser, such as when it purchases off the Federal Supply Schedule. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to sharepricing services, which in any monetary recovery. In recent years,turn were used by the number or suits brought by private individuals has increased dramatically.government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, manycertain marketing practices, including off-label promotion, may also violate false claims laws. Additionally, PPACA amended the healthcare program anti-kickback statute such that a violation can serve as a basis for liability under the federal false claims law. The majority of states also have enacted false claim lawsstatutes or regulations similar to the federal False Claims Act.anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
remuneration to a Medicaid or Medicare beneficiary that the offeror/payor knows or should know is likely to influence the beneficiary to order a receive a reimbursable item or service from a particular supplier, and the healthcare fraud statute, which prohibits knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations, or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items, or services.
A host of other laws and regulations govern the advertising and promotion of drugs and devices. The federal Sunshine Law, which is part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, imposes federal “sunshine” provisions, requiring annual reporting of various types of payments to physicians and teaching hospitals. Although implementation of the sunshine provisions was initially delayed by the U.S. Centers for Medicare and Medicaid Services (CMS), a final rule was released in February 2013. Under the rule, applicable manufacturers must begin tracking relevant transfer-of-value data in August 2013, and must report data collected between August 1 and the end of 2013 to CMS by March 31, 2014. CMS will publish the data on a public website by September 30, 2014. Inaccurate or incomplete reports may be subject to enforcement. Like the federal Sunshine Law, several states have existing laws that require manufacturers to report transfers of value to select healthcare providers licensed within the state. Additionally, other laws such as the federal Lanham Act and similar state laws allow competitors and others to initiate litigation relating to advertising claims. Additionally, the U.S. Foreign Corrupt Practices Act and local laws of other countries potentially implicate the sale and marketing of drugs and devices internationally. This complex patchwork of laws can change rapidly with relatively short notice.
SURFAXIN is our first approved drug product in the U.S. and AFECTAIR is our first registered medical device in the U.S. None of our other products under development has been approved for marketing in the U.S. or elsewhere. We may not be able to obtain regulatory approval for any of these products. If we do not obtain the requisite governmental approvals or if we fail to obtain approvals of the scope we request, we or our licensees or strategic alliance or marketing partners may be delayed or precluded entirely from marketing our products, or the commercial use of our products may be limited. Such events would have a material adverse effect on our business, financial condition and results of operations. See, “Item 1A – Risk Factors – Our technology platform is based solely on our proprietary KL4 surfactant technology, our novel CAG technology, and our novel aerosol-conducting airway connectors;” “– Our research and development programs for AEROSURF and SURFAXIN LS involve significant risks and uncertainties that are inherent in the clinical development and regulatory approval processes;” “– Our clinical trials may be delayed, or fail, which will harm our business”, “– We may fail in the development and commercialization of our products,” “– The regulatory approval process for our products is expensive and time-consuming and the outcome is uncertain. We may not obtain required regulatory approvals to commercialize our products,” and “– Even if we succeed in gaining regulatory approval to market our drugs, if the FDA and foreign regulators later withdraw their approval or otherwise restrict marketing, our business would be materially harmed.”
Certain of our product candidates may qualify for Fast Track and/or Orphan Drug designation. Fast Track designation means that the FDA has determined that the drug is intended to treat a serious or life-threatening condition and demonstrates the potential to address unmet medical needs. An important feature is that it provides for accelerated approval and the possibility of rolling submissions and emphasizes the critical nature of close, early communication between the FDA and sponsor to improve the efficiency of product development. The FDA generally will review an NDA for a drug granted Fast Track designation within six months instead of the typical review cycle that can extend a year or more. Orphan Drug designation is granted to pharmaceutical products that are intended to address diseases affecting fewer than 200,000 patients in the U.S. and provides certain advantages to the Orphan Drugs sponsors, including, but not limited to, seven years of market exclusivity upon approval of the drug, certain tax incentives for clinical research and grants to fund testing of the drugs. See, “Item 1A – Risk Factors – Even though some of our product candidates have qualified for expedited review, the FDA may not approve them at all or any sooner than other product candidates that do not qualify for expedited review,” and “– Licensing, Patents and Other Proprietary Rights and Regulatory Designations – Patents and Proprietary Rights – Other Regulatory Designations.”
EMPLOYEES
As of March 1, 2013,11, 2016, we have 12158 employees, 105including 5 part-time employees. All of whichour employees are full-time, two are part-time and 14 are employed in connection with our manufacturing operations in Totowa, New Jersey, subject to a collective bargaining agreement that expires on December 3, 2013. All are employedbased in the U.S. See, “Item 1A – Risk Factors – We depend upon key employees and consultants in a competitive market for skilled personnel. If we or our strategic partners or collaborators are unable to attract and retain key personnel, it could adversely affect our ability to develop and market our products.”See also, “Part III – Item 10 – Directors, Executive Officers and Corporate Governance,” and “– Item 11 – Executive Compensation.”
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission.Commission (SEC). You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Many of ourIn addition, the SEC filings aremaintains an Internet site that contains reports, proxy and information statements, certain and other information that we may file electronically with the SEC (http://www.sec.gov). We also available to the public from the SEC’s website at “http://www.sec.gov.” We make available for download free of charge through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have filed it electronically with, or furnished it to, the SEC.
We maintain aour corporate website at http://www.DiscoveryLabs.com. Our website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.
You should carefully consider the following risks and any of the other information set forth in this Annual Report on Form 10-K and in the documents incorporated herein by reference, before deciding to invest in shares of our common stock. The risks described below are not the only ones that we face. Additional risks that are not presently known to us or that we currently deem immaterial may also impair our business operations. The following risks, among others, could cause our actual results, performance, achievements or industry results to differ materially from those expressed in our forward-looking statements contained herein and presented elsewhere by management from time to time. If any of the following risks actually occurs, our business prospects, financial condition or results of operations could be materially harmed. In such case, the market price of our common stock would likely decline due to the occurrence of any of these risks, and you could lose all or part of your investment.
Note: Information concerning the shares of our common stock and related share prices in these risk factors has been adjusted to reflect a 1-for-14 reverse split of our common stock and a change in the number of shares of common stock authorized for issuance under our Amended and Restated Certificate of Incorporation, as amended (Certificate of Incorporation), that were made effective on January 22, 2016.
To be able to secure the additional capital that we will require, we are substantially dependent upon our ability to successfully complete enrollment in our ongoing phase 2b clinical trial before the end of 2016 and release top line data in the first quarter of 2017, in accordance with our plan. If we are unable to successfully complete enrollment and release top line data in accordance with our plan, or if the results of our clinical trial are inconclusive, or present an unacceptable benefit / risk profile due to suboptimal efficacy and / or safety profile, we may be unable to secure the additional capital that we will require to support our research and development activities and operations and have sufficient cash resources to service and repay debt, which could have a material adverse effect on our business and our ability to continue as a going concern.
Our business and our ability to secure the significant additional capital that we will require to support our research and development activities and operations and have sufficient cash resources to service and repay debt, is highly dependent upon our ability to successfully develop, manufacture, secure regulatory approval for, and commercialize our AEROSURF combination drug/device product candidate for the treatment of respiratory distress syndrome (RDS) in premature infants. At the present time, we are conducting a phase 2b clinical trial, the enrollment for which is expected to be completed before the end of 2016, with top line results expected in the first quarter of 2017. At December 31, 2015, we had cash and cash equivalents of approximately $38.7 million, which we expect to be sufficient to fund our phase 2b clinical trial and our operations through the first quarter of 2017. If for any reason, we should experience delays in successfully completing this clinical trial, whether due to slower rates of enrollment or of initiation of clinical sites, or failure to timely supply aerosol delivery system (ADS) and disposable AEROSURF delivery packs as needed, or otherwise, and any such delay extends beyond the period for which we have sufficient funding, we may have difficulty securing the additional capital that we require to complete the trial and continue our development program on acceptable terms, if at all. Moreover, even if we are able to complete our phase 2b clinical trial on time, but obtain results that are inconclusive, fail to achieve our stated endpoints, or otherwise present an inappropriate benefit / risk profile, or if we suffer regulatory setbacks or delays that jeopardize or ability to successfully commercialize our product, if approved, we may be unable to secure the additional capital that we require before we exhaust our cash resources. Accordingly, failure to obtain acceptable and promising results within the required time could have a material adverse effect on our ability to secure the additional capital that we will require, through strategic transactions or otherwise, and likely adversely affect our ability to continue as a going concern.
We will require significant additional capital to continuesupport our operations and continue our planned research and development activities.activities and operations and have sufficient cash resources to service and repay debt, but our ability to raise such capital may be adversely impacted by a number of factors may represent significant challenges to accessing the capital markets at a time when we would like or require, and at an increased cost of capital. Moreover, such additional financingany financings could result in substantial additional dilution ofto our stockholders, cause our stock price to fall and adversely affect our ability to raise capital.
We will need substantial additional funding to support our commercial operations and our ongoing research and development activities and our operations. As of December 31, 2012,2015, we had cash and cash equivalents of approximately $38.7 million, current accounts payable and accrued expenses of $10.8 million, and $25 million of long-term debt under a secured loan (Deerfield Loan) with affiliates of Deerfield Management, L.P. (Deerfield). The principal portion of the debt is payable in two equal installments in February 2018 (subject to potential deferral in certain circumstances) and February 2019. Before any additional financings, we anticipate that we will have sufficient cash available to support our operations and debt service obligations through the first quarter of 2017.
Our operations have consumed substantial amounts of cash since inception. As of December 31, 2015, we have an accumulated deficit of approximately $434.7$579 million and we expect to continue to incur significant, increasing operating losses over the next several years. To date,Following the approval of SURFAXIN® in 2012, we initiated commercial activities in late 2013. However, with revenue growth slower than expected and more of our capital and resources being allocated to SURFAXIN than expected, we reassessed and initiated a plan to focus our limited capital and resources to the development of AEROSURF. Our plan was to (i) enter into a strategic alliance or collaboration arrangement to support the manufacture and commercialization of SURFAXIN, or (ii) cease our manufacturing and commercial activities for SURFAXIN. After considering potential alternatives, we began winding down commercial activities in April 2015. In 2014, cash outflows for manufacturing, marketing, medical and commercial activities for SURFAXIN were approximately $19 million. We also reduced our work force by approximately 50%, predominantly in commercial infrastructure and manufacturing. In addition, we allowed our real property lease for our Totowa, NJ manufacturing operations to expire in June 2015. Since that time, we have generatedfocused our capital to support our activitiesand resources primarily from equity financings, research grants, collaboration agreements,on the AEROSURF clinical development program and investments. As of December 31, 2012, we had cash and cash equivalents of approximately$26.9 million. In February 2013, we entered into an agreement (Deerfield Facility) with affiliates of Deerfield Management Company, L.P. (Deerfield), pursuant to which Deerfield advanced $10 million to us and has agreed to advance an additional $20 million, subject to certain conditions, on or about the date of the first commercial sale of SURFAXIN, provided that the first sale occurs not later than December 31, 2013. While we believe that we remain on track to effect the first commercial sale of SURFAXIN in the second quarter of 2013, if for any reason we fail to meet the condition for disbursement of the second Deerfield advance, we would forego access to those funds.
Also in February 2013, we entered into an At-the-Market Equity Offering Sales Agreement (Stifel Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel), under which Stifel, as our exclusive agent, at our discretion and at such times that we determine from time to time, may sell over a three-year period up to a maximum of $25,000,000 of shares (Shares)further development of our common stock. During the termlyophilized KL4 surfactant drug product and our aerosol delivery system (ADS), which is based on our capillary aerosol generator technology.
We expect to continue to require significant additional infusions of the ATM Program, we are not required to sell any Shares at any time. We intend to use the net proceeds from the ATM Program, if any, to meet our working capital requirements to execute our business plans, including, without limitation, to support the commercialization in 2013 of SURFAXIN and the AFECTAIR device for infants. There can be no assurance that we will issue any Shares pursuant to the ATM Program.strategy u
In addition to potential funding that may be available under the Deerfield Facility, the ATM Program, and our Committed Equity Financing Facility (CEFF) (which is subject to certain conditions and expires on June 11, 2013), we will require significant infusions of capital to fund the anticipated increase in our cash outflows as we continue to invest in our commercial and medical affairs organization and execute the commercial introduction of our approved products, as well as our research and development programs. The process of achieving hospital formulary acceptance and securing adoption of our approved products is expensive and can be time consuming. As a result, our investments in commercial and medical affairs activities are expected to outpace the rate at which we generate revenues untilntil such time as our revenues have achieved the anticipated rate over time. We will require infusions of capital until such time as our revenues from SURFAXINthe commercialization of AEROSURF, if approved, and AFECTAIRfrom potential strategic alliance and collaboration arrangements, and other sources, are sufficient to fund our ongoing activities.
If for any reason, we experience a longer delay in the commercial introduction of SURFAXIN than currently anticipated, depending upon the length of delay and the underlying cause, we believe that such events could have a material adverse impact on our ability to raise additional capital, whether through use of our ATM Program or otherwise. We anticipate that, in a moderate delay, we would likely assess our level of investment in ongoing programs and pace our expenditures to manage and extend the availability of our existing cash resources. Such reductions in investment could cause us to experience delays in the progress of some of our programs and affect the valuations of our business. However, if the delay were not of a long duration, we believe that our fundamental strategy could remain intact and we would continue to manageoffset our cash resources closely until such time asflow requirements. For the next several years, we have resolved our issues and reinitiated our effortsdo not expect to effect the commercial introduction of SURFAXIN. If any delay were extended for longer periods of time and we are unable to raise additional capital for any reason, we would have to reassess our business strategy and the level of our investments in all categories and would have to consider fundamental changes to our business plans. If we are unable to successfully raise sufficient additional capital, through future debt and equity financings and/or strategic and collaborative arrangements with potential partners, we will likely not have sufficient cash flows and liquidity to fund our business operations as presently contemplated. In that event, we may be forced to further limit development of many, if not all, of our programs and consider other means of creating value for our stockholders, such as outsourcing certain of our activities and licensing the development and/or commercialization of products that we consider valuable and might otherwise plan to develop or commercialize ourselves. If we are unable to raise the necessary capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise additional capital, such financings may only be available on unattractive terms, or could result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline.
Even if we are successful in generatingreceive revenues from the sale of approved products, in the future, we will likely not have sufficientand our cash flow and liquidity to fund our research andoutflows for development programs, operations and will require additional capitaldebt service are likely to support these efforts. We would prefer to accomplish these objectives through strategic alliances and collaboration arrangements. We are seeking strategic alliances to supportfar outpace the development of AEROSURF® and, if approved, to commercialize these product candidates in the European Union (EU)rate at which we may generate revenues and other markets outside the United States (U.S.). We are also assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS™, a lyophilized dosage form of SURFAXIN, in the U.S. and potentially other major markets. If we are unable to successfully raise the necessary additional capital, we will likely not have sufficient cash flow and liquidity to fund our research and development programs and may be forced to further limit investments in our development programs, which could have a material adverse effect on our business. Even if we are able to raise additional capital, such financings may only beinflows from all available on unattractive terms, or could result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline. sources. See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue our research and development programs, or, if approved, commercialization of our products.
We also could be required to:
Moreover, dependingseek collaborators for one or more of our development programs for territories that we had planned to retain or on terms that are less favorable than might otherwise be available; and/or
relinquish or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.
If we are unable to secure capital from strategic alliances and collaboration arrangements and other similar transactions, we may need to seek additional capital in the equity markets, which could have a dilutive impact on our stockholders and the issuance, or even potential issuance, of shares could have a negative effect on the market price of our common stock. However, a number of factors, including our status as a smaller reporting company under the SEC regulations, conditions in the global financial markets, weand the timing and outcomes of our clinical activities, may facepresent significant challenges to accessing the capital markets at a time when we would like or require, and at an increased cost of capital. Except for the potential second disbursement of funds under our Deerfield Facility, our ATM Program and our CEFF,at-the-market equity program (ATM Program) with Stifel, Nicolaus & Company, Incorporated (Stifel), which has available approximately 1.1 million shares and expires in June 2013,can be cancelled at any time, we currently do not have in place arrangements to obtain additional financing.capital. Any such financing could be difficult to obtain or only available on unattractive terms and could result in significant dilution of stockholders’ interests. In any such event, the market price of our common stock may decline. In addition, failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business plan, financial performance and stock price and could delay new product development and clinical trial plans.
Our near-term prospects are highly dependent on the success of SURFAXIN and AFECTAIR. To the extent we fail to successfully commercialize SURFAXIN and AFECTAIR, or if our efforts to commercialize SURFAXIN and AFECTAIR are significantly delayed, our business, financial condition and results of operations would be materially adversely affectedstatus under SEC regulations as a smaller reporting company and the price ofrelated limitation on primary offerings under our common stock would likely decline.
In March 2012,universal shelf registration statement, which was filed with the FDA approved SURFAXIN (lucinactant) for the prevention of RDS in premature infants at high risk for RDS. In February 2012, we successfully registered our AFECTAIR deviceSEC on Form S-3 (File No. 333-196420) and declared effective on June 13, 2014 (2014 Universal Shelf), may make it more difficult to raise additional capital in the United States. The initial AFECTAIR device has been developed for use with infants in the Neonatal Intensive Care Unit (NICU) and smaller infants in the Pediatric Intensive Care Unit (PICU) receiving ventilatory support. We believe that SURFAXIN and AFECTAIR product sales may constitutepublic markets when needed, if at all, including under our ATM Program or most of our total revenue over the next several years.pursuant to a public offering.
InOur ability to use our ATM Program with Stifel or to raise additional capital from time to time through a public offering under our 2014 Universal Shelf may be constrained by restrictions under the third quarterForm S-3, which limits the value of 2012, duringprimary securities offerings in any 12-month period by companies whose equity securities held by nonaffiliated persons and entities (public float) is less than $75 million to no more than one-third of their public float. To raise needed capital, we may be required to seek other forms of transactions, including, for example, under a routine reviewregistration statement on Form S-1, the preparation and maintenance of the resultswhich would be more time consuming and processes relatedcostly, or privately placed, potentially with registration rights or priced at a discount to the analytical testing and quality control of SURFAXIN drug product, we determined that onemarket value of our analytical chemistry methods usedstock, or contain other terms and conditions, or other transactions, any of which could result in substantial equity dilution of stockholders’ interests. In addition, failure to assess SURFAXIN drug product conformance to specifications required improvementsecure any necessary financing in a timely manner and that an update to product specifications was needed. We proactively communicated these findings to the FDA, improved and validated the analytical chemistry method, and submitted updated product specifications to the FDA. As a result of these efforts, we delayed the commercial availability of SURFAXIN drug product. Although there can be no assurances, if we are able to successfully conclude our planned activities and receive confirmation of our updated product specifications from the FDA within our anticipated timeline in the second quarter of 2013, we believe that we remain on track to manufacture SURFAXIN drug product for commercial use in the second quarter of 2013. This delay in availability of SURFAXIN drug product from the fourth quarter 2012 to the second quarter of 2013 is not expected tofavorable terms could have a material adverse effect on our business plan, financial performance and stock price and could delay new product development and clinical trial plans.
If we fail to adhere to the strict listing requirements of The Nasdaq Capital Market (Nasdaq), we may be subject to delisting. As a result, our stock price may decline and our common stock eventually may be delisted. If our stock were no longer listed on Nasdaq, the liquidity of our securities likely would be impaired.
Our common stock currently trades on Nasdaq under the symbol DSCO. If we fail to adhere to the market’s strict listing criteria, our stock may be delisted. This could potentially impair the liquidity of our securities not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and the potential reduction in media coverage. As a result, an investor might find it more difficult to dispose of our common stock. We believe that current and prospective investors would view an investment in our common stock more favorably if it continues to be listed on Nasdaq. Any failure at any time to meet the continuing Nasdaq listing requirements could have an adverse impact on the value of and trading activity in our common stock.
On June 29, 2015, we received a letter from The Nasdaq Stock Market indicating that for 30 consecutive trading days our common stock had not maintained a minimum closing per share bid price of $1.00 (Minimum Bid Price Requirement) as required by Nasdaq Listing Rule 5550(a)(2). Under Nasdaq’s Listing Rules, we initially had 180 calendar days from the date of the notification (the Compliance Period), or financial position,until December 28, 2015, to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of our common stock must close above $1.00 for a minimum of 10 consecutive business days; thereafter, our common stock would continue to be eligible for listing on Nasdaq. At the end of the initial Compliance Period, Nasdaq notified that us we qualified for an extension of the Compliance Period to June 2016. On January 21, 2016, at a Special Meeting of Stockholders, our stockholders approved a 1-for-14 reverse split, which was effective on January 22, 2016 and brought us into compliance with the Minimum Bid Price Requirement.
Although we have regained compliance with the Minimum Bid Price Requirement, there can be no assurance that we will be able to maintain continued compliance with the Minimum Bid Price Requirement or the other listing requirements of Nasdaq. There can be no assurance that the closing bid price of our common stock will continue to trade above $1.00. Moreover, if trading activity in our common stock were to reduce the total market capitalization of our company, we may find it difficult to fund our activities, which would result in reductions in our stockholders’ equity. In addition to the Minimum Bid Price Requirement, certain other Nasdaq continued listing requirements require that we maintain a market capitalization of at least $35 million or stockholders’ equity of at least $2.5 million. If we are unable to meet these requirements we would receive another delisting notice from Nasdaq for failure to comply with one or more of the continued listing requirements.
Our clinical development program for AEROSURF involves significant risks and uncertainties that are inherent in the clinical development and regulatory approval processes. Our clinical trials may be delayed, or fail, which will harm our business prospects.
We are currently conducting a phase 2a clinical program evaluating the safety and tolerability of aerosolized KL4 surfactant drug product administered to premature infants 26 to 28 week gestational age who are receiving nasal continuous positive airway pressure (nCPAP) for respiratory distress syndrome (RDS), compared to infants receiving nCPAP alone. We are also conducting a phase 2b clinical trial in premature infants 26 to 32 weeks gestational age receiving nCPAP for RDS, which is designed to evaluate the safety and tolerability of aerosolized KL4 surfactant compared to infants receiving nCPAP alone and evaluate certain endpoints, including time to nCPAP failure (defined as the need for intubation and delayed surfactant therapy), incidence of nCPAP failure and physiological parameters indicating the effectiveness of lung function. These clinical trials are two of a series of clinical trials that will be needed to gain marketing authorization for AEROSURF, if at all. Such development programs generally take two to five years or more to complete and may be delayed by a number of factors. We may not reach agreement with the U.S. Food and Drug Administration (FDA) or a foreign regulator on the design of any one or more of the clinical trials necessary for approval, or we may be unable to reach agreement on a single design that would permit us to conduct a single clinical program. Conditions imposed by the FDA and foreign regulators on our clinical program could significantly increase the time required to complete and the costs of conducting clinical trials. For example, we may not be successful in achieving a study design that is acceptable to both the FDA and regulators in other countries, which would cause us to limit the scope of our activities or greatly increase our investment. Like many biotechnology companies, even after obtaining promising preliminary findings or results in earlier preclinical studies and clinical trials, we may suffer significant setbacks in any stage of our clinical trials. Clinical data is susceptible to varying interpretations that may delay, limit or prevent regulatory approval. In addition, we may be unable to enroll patients quickly enough to meet our expectations for completing any or all of these trials.
The timing and completion of current and planned clinical trials of our product candidates depend on many factors, including the rate at which patients are enrolled. Delays in patient enrollment in clinical trials may occur, which would be likely to result in increased costs, program delays, or both. Patient enrollment is a function of many factors, including:
the number of clinical sites;
the size of the patient population;
the severity of the disease under investigation;
the eligibility and enrollment criteria for the study;
the willingness of patients’ parents or guardians to participate in the clinical trial;
the perceived risks and benefits of the product candidate under study;
the existence of competing clinical trials;
the existence of alternative available products; and
geographical and geopolitical considerations.
We have opened a number of clinical sites outside the U.S. where our experience is more limited. We use the services of third party clinical trial providers and third party contract research organizations (CROs) to carry out most of our clinical trial related activities and accurately report their results, which may impact our ability to control the timing, conduct, expense and quality of our clinical trials. One CRO has responsibility for substantially all of our clinical trial related activities and reporting. If our CROs do not successfully carry out their activities or meet expected deadlines, our trials may be delayed. We may also need to replace our CROs. Although we believe that there are a number of other third-party CROs we could engage to continue these activities, the replacement of an existing CRO may result in delay of the affected trials or otherwise adversely affect our efforts to obtain regulatory approvals and commercialize our drug candidates. If we fail to adequately manage the design, execution and regulatory aspects of our complex and diverse clinical trials, our studies and any potential regulatory approvals may be delayed, or we may fail to gain approvals for our product candidates.
If patients are enrolled in our clinical trials, they could suffer adverse medical events or side effects that are known to be associated with surfactant administration or currently unknown to us. It is also possible that we, our AEROSURF Clinical Trial (ACT) Steering Committee, the Independent Safety Review Committee (ISRC), or the FDA could interrupt, delay or halt any one or more of our clinical trials for AEROSURF or any of our product candidates. If our ACT Steering Committee, the ISRC, any regulator or we believe that study participants face unacceptable health risks, any one or more of our clinical trials could be suspended or terminated. In addition, clinical trials may be interrupted, delayed or halted, in whole or in part, becausefor reasons other than health and safety concerns, including, among other things, matters related to the design of the study, drug availability, ACT Steering Committee and/or ISRC recommendation, or business reasons.
In addition to our commercial launch plans for SURFAXIN during this period have always beenplanned clinical program to focus initially on hospital formulary acceptance. However, ifsupport AEROSURF, in the delay is extended for any reason, failurefuture, we also may initiate or support clinical trials evaluating other KL4 surfactant pipeline products. All of these clinical trials will be time-consuming and potentially costly. Should we fail to timely initiate the commercial introduction of SURFAXIN couldcomplete our clinical development programs or should such programs yield unacceptable results, such failures would have a material adverse effect on our operations, including our research and development programs, and our financial condition.
We currently believe that we will successfully execute the commercial introduction of SURFAXIN within our anticipated timeframe. However, our efforts are subject to a variety of risks and uncertainties that could cause actual results to be materially different. The FDA may not accept our submission or may require that we develop and submit additional data or other information. Moreover, although the guidelines set forth in the Prescription Drug User Fee Act (PDUFA) indicate that the FDA will endeavor to respond within four months after the date of our submission, the FDA may not respond within that timeframe, or may require additional information that would require additional time and extend the FDA’s review. Ultimately, the FDA may deny our request to consider updated product specifications. In addition, the FDA may determine to initiate a facility inspection to review our manufacturing, quality control and assurance activities and verify the thoroughness of our investigation into the issues identified in our review of the analytical method. Any failure to satisfy any issues raised by the FDA, in our submission or in connection with a facilities inspection, could significantly delay, or preclude outright, our gaining FDA confirmation of the updated product specifications, or, ultimately, could result in an action by the FDA to restrict our ability to commercialize some or all of our products, which could potentially delay or prevent the commercial availability of SURFAXIN drug product.
In addition, if we successfully make our products commercially available, the commercial success of SURFAXIN and AFECTAIR and our ability to generate and increase revenues will depend on a number of factors, including the following:
| ● | the number of hospitals and critical care centers that agree to place SURFAXIN drug product on their formulary lists and the length of time required to achieve broad formulary acceptance; |
| ● | the willingness of the target hospitals to accept and employ WARMING CRADLE® dry-block heater;
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| ● | the number of hospitals and critical care centers that agree to include AFECTAIR devices on their approved materials list and the degree of use of AFECTAIR devices for critical care patients; |
| ● | the effectiveness of our marketing, sales and medical affairs organizations and their ability to (a) accurately describe SURFAXIN consistent with its approved labeling, (b) educate and provide critical care providers and hospitals with medical and scientific education and information concerning our products, and (c) educate critical care providers and hospitals regarding the potential utility of AFECTAIR devices; |
| ● | our ability to gain access to the entire market with our commercial organizations and, if we so determine, through any third-party distributor arrangements; |
| ● | the safety and efficacy of SURFAXIN, our ability to provide hospitals acceptable evidence of the safety and efficacy of SURFAXIN, and the perceived advantages of SURFAXIN and AFECTAIR over alternative treatment methods; |
| ● | the pharmacoeconomic benefits (which are determined by comparing, among other things, the cost and effects of a product when compared to different treatment options) and cost-effectiveness of our products; |
| ● | the budget impact of adding our products and devices to relevant formulary and medical device hospital lists and the availability, cost and potential advantages of alternative treatments, including less expensive generic drugs and other competitive products; |
| ● | the availability of different size drug vials and medical devices to meet the specific needs of healthcare practitioners; |
| ● | the claims, limitations, warnings and other information that appear in the package insert and labeling of SURFAXIN drug product; |
| ● | the willingness of third-party payers, including government payers, to provide coverage and reimbursements to patients, physicians and other providers who wish to prescribe and use our products; |
| ● | our ability to secure and maintain regulatory marketing approvals from the U.S. and foreign regulatory authorities; |
| ● | the rate of preterm births; |
| ● | the number of infants who are diagnosed with respiratory distress syndrome (RDS) and the number treated with SURFAXIN; |
| ● | our ability to finalize development of a second AFECTAIR device for use with children and adults; |
| ● | the growth of commercial sales; |
| ● | our ability to meet commercial demand for SURFAXIN and AFECTAIR, including through maintenance of commercial supplies of our active drug substances and other excipients, and manufacturing capabilities, by ourselves and through third-party manufacturers; and commercial inventory supplies of our medical device products; and |
| ● | the sufficiency of coverage or reimbursement by third parties. |
Our efforts to achieve formulary acceptance of SURFAXIN and adoption of AFECTAIR, and to educate the medical community and third-party payers regarding the benefits of SURFAXIN and AFECTAIR will require significant, focused and competent resources and we may not be successful in achieving our objectives. SURFAXIN is approved for marketing only in the U.S. While we plan to register AFECTAIR in markets outside the U.S., beginning with the EU, we cannot predict the extent to which AFECTAIR will be utilized in the rest of the world. We cannot predict whether physicians, healthcare insurers or maintenance organizations, or the medical community in general, will accept or utilize SURFAXIN, AFECTAIR and our other products and devices, if approved. If we are not successful in our efforts to gain broad acceptance of SURFAXIN and AFECTAIR in our target hospitals, the revenues we generate from sales will be limited and our business may not be profitable.business.
The commercial success of our product candidates, including SURFAXIN and AFECTAIR, will depend upon the degree of market acceptance by physicians, patients, healthcare payers and others in the medical community.
Even if we are successful in achieving our goalsregulatory approval process for formulary acceptance of SURFAXIN and adoption of AFECTAIR devices, if we do not achieve broad market acceptance of our products by physicians, patients, healthcare payersis expensive and others intime-consuming and the medical community, weoutcome is uncertain. We may not generate sufficient revenuesobtain required regulatory approvals to support continued commercialization of these and our other products, if approved for commercial sale. The degree of market acceptance of SURFAXIN and AFECTAIR and our product candidates, if approved, will depend on a number of factors, including:
| ● | the willingness of physicians to utilize our products;
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| ● | the degree of acceptance of AFECTAIR devices as the standard of care for delivery of inhaled therapies for patients requiring ventilatory support; |
| ● | the safety and efficacy of our products as perceived by the medical community, regulatory agencies and insurers and other payers, on both a short and long-term basis; |
| ● | the potential advantages over alternative treatments; |
| ● | the relative convenience and ease of administration; |
| ● | the prevalence and severity of any adverse events, including any unexpected adverse events of which we become aware; and |
| ● | the degree to which the market believes that we are able to manufacture our products and produce supply sufficient to meet market demand. |
We may fail in the development and commercialization ofcommercialize our products.
Although we have regulatory clearance to market SURFAXIN and AFECTAIR, they are not currently available for sale and we have no other products approved for marketing. We are implementing a plan intended to result in the commercial introduction of SURFAXIN in the second quarter of 2013. We are initiating a user experience program with our AFECTAIR aerosol-conducting airway connector for infants in the first half of 2013, to be followed by a national program. We are also conducting further development activities to introduce a second vial size of SURFAXIN and, after we have completed introduction of our AFECTAIR device for infants, had planned to complete development a second AFECTAIR device for use with children and adults. However, we have decided to delay these development efforts in the near term so thatBefore we can focus our resources and expertise on meeting our 2013 goals to advance our development program for AEROSURF to address RDS. We have and will continue to conduct and sponsor studies evaluating the potential utility of AFECTAIR in delivering aerosolized medications and other inhaled therapies, as compared to current standard of care. We are also conducting research and development on our other product candidates. As a result, we have not begun to market or generate revenues from the commercialization of any of our products.
We may experience a delay in, or be unable to achieve, the commercial introduction of SURFAXIN and AFECTAIR in the U.S. and other markets as planned, or we may not succeed with our development efforts to manufacture a second vial size of SURFAXIN or a second AFECTAIR device. We may not successfully develop and market our other KL4 surfactant and drug/device combination and aerosol delivery products. Our long-term viability will be impaired if we experience a significant delay or fail to successfully commercialize our approved products or obtain regulatory approval for, and successfully market, our product candidates. Even if we successfully develop and gain regulatory approval for our products, we stillmust receive regulatory approvals for each product. The FDA and foreign regulators, such as the European Medicines Agency (EMA), extensively and rigorously regulate the testing, manufacture, distribution, advertising, pricing and marketing of drug products. This approval process includes (i) preclinical studies and clinical trials of each drug product candidate and active pharmaceutical ingredient to establish its safety and effectiveness, and (ii) confirmation by the FDA and foreign regulators that we maintain good laboratory and manufacturing practices during testing and manufacturing. Even if favorable data are generated by clinical trials, the FDA or foreign regulator may not generate sufficientaccept, file or sustainable revenuesapprove a new drug application (NDA) or we may not become profitable, which could havemarket authorization application (MAA) filed for a material adverse effectdrug product on our ability to continue our marketing and distribution efforts, research and development programs and operations.a timely basis or at all. See,
“Item 1 – Business – Government Regulation.”
Generally, before we can attempt to sell products inWe are currently conducting a hospital, drug products must be approvedphase 2 clinical program for addition to that hospital’s list of approved drugs, or formulary list, by the hospital’s pharmacy and therapeutics (P&T) committee. A hospital’s P&T committee typically governs all matters pertaining to the use of medications within the institution, including the review of medication formulary data and recommendations for the appropriate use of drugs within the institution to the medical staff. The frequency of P&T committee meetings at hospitals varies considerably, and P&T committees often require additional information to aid in their decision-making process. Therefore, we may experience substantial delays in obtaining formulary approvals. In addition, our AFECTAIR devices must be approved for use by hospitals’ materials management.AEROSURF. There can be no assurance that issues requiring protracted and time-consuming preclinical studies will not arise or that our clinical program trials will be concluded successfully. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. As a result, data we will successfully gainobtain from our phase 2a clinical program may not accurately predict phase 2b or phase 3 results due to many factors such as differences in sample size, study arms, duration, endpoints and features of the required hospital approvals forADS used. In addition, if the ADS to be used in our products. Additionally, hospitalsphase 3 program differs in potentially important ways from that used in phase 2, we may be concerned thatrequired to conduct bridging studies or repeat important studies conducted with the cost of acquiring our products for use in their institutions will adversely impact their overall budgets, which could cause resistance to efforts to add our drugs to the formulary and products to the materials list, or to implement restrictions on the usage of our drugs and products in order to control costs. We cannot guarantee that we will be successful in obtaining the approvals we need from enough hospitals quickly enough to optimize hospital sales of SURFAXIN, AFECTAIR or our other products, if approved.
In order to facilitate proper preparation and administration of SURFAXIN, we plan to make available to hospitals WARMING CRADLE dry-block heating devices that are designed to warm drug vials at the same temperature and for the time period that is designated in the SURFAXIN prescribing information. We will need to arrange with each hospital to include WARMING CRADLE dry-block heating devices on the hospital’s list of approved laboratory equipment.earlier version. There can be no assurance that we will be successful in gaining such approvals.regulatory approval for AEROSURF.
WeClinical trials may commit substantial efforts, fundsindicate that our product candidates lack efficacy, have harmful side effects or raise safety or other concerns that may significantly reduce the likelihood of regulatory approval, result in significant restrictions on use and other resources to developing commercially successful products. A high rate of failure, or costly delay, is inherentsafety warnings in the approved label, adversely affect placement within the treatment paradigm, or otherwise significantly diminish the commercial potential of the product candidate. Also, positive results in a registration trial may not be replicated in subsequent confirmatory trials. Even if later stage clinical trials are successful, regulatory authorities may disagree with our view of the data or require additional studies, may disagree with trial design or the endpoints employed in the trials, may fail to approve the processes used to manufacture a product candidate, may find the cGMP compliance status of a facility that manufactures a product candidate unsatisfactory, may fail to approve or delay approval of our product candidates, dosing or delivery methods, companion devices or may otherwise grant marketing approval that is more restricted than anticipated, including indications covering narrow patient populations and the imposition of safety monitoring or educational requirements or risk evaluation and mitigation strategies. The occurrence of any such events could result in the incurrence of significant costs and expenses, have an adverse effect on our business, including our financial condition and results of operations, or cause our stock price to decline or experience periods of volatility. Even if we are able to successfully develop new products or indications, we may make a strategic decision to discontinue development of new medical products. Currently,such product or indication if, for example, we arebelieve commercialization will be difficult relative to other opportunities in our pipeline.
For AEROSURF, we currently plan to pursue clinical development in the processU.S., the European Union, Latin America and Canada, and, if approved, market and sell our products in the U.S. and potentially in other major markets. To accomplish this objective, we must obtain and maintain regulatory approvals and comply with regulatory requirements in each jurisdiction. To avoid the significant expense and lengthy time required to complete multiple clinical programs, we expect to meet with relevant regulatory authorities. While we would prefer to design a single, global clinical program that would satisfy the regulators in all of developing a second vial size for SURFAXIN as well as additional designs of AFECTAIR devices. Thereour target markets, there can be no assurance that our efforts will be successful. If we are unable to reach agreement with the various regulatory authorities, we may not be able to pursue regulatory approval of our products in all of our selected markets.
The FDA and foreign regulatory bodies have substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of product candidates for many reasons, which may include:
| · | the FDA or a foreign regulator may disagree with the design or implementation of one or more clinical trials; |
| · | the FDA or a foreign regulator may not deem a product candidate safe and effective for its proposed indication, or may deem a product candidate’s safety or other perceived risks to outweigh its clinical or other benefits; |
| · | the FDA or a foreign regulator may not find the data from preclinical studies and clinical trials sufficient to support approval, or the results of clinical trials may not meet the level of statistical or clinical significance required by the FDA or the applicable foreign regulatory body for approval; |
| · | the FDA or a foreign regulator may disagree with our interpretation of data from preclinical studies or clinical trials performed by us or third parties; |
| · | the data collected from clinical trials may not be sufficient to support the submission of an NDA or other applicable regulatory filing; |
| · | the FDA or a foreign regulator may require additional preclinical studies or clinical trials; |
| · | the FDA or a foreign regulator may identify deficiencies in the formulation, quality control, labeling or specifications of our current or future product candidates; |
| · | the FDA or a foreign regulator may grant approval contingent on the performance of costly additional post-approval clinical trials; |
| · | the FDA or a foreign regulator also may approve our current or any future product candidates for a more limited indication or a narrower patient population than we originally requested; |
| · | the FDA or a foreign regulator may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates; |
| · | the FDA or a foreign regulator may not approve of the manufacturing processes, controls or facilities of third-party manufacturers or testing labs with which we contract; or |
| · | the FDA or a foreign regulator may change its approval policies or adopt new regulations in a manner rendering our clinical data or regulatory filings insufficient for approval. |
The approval procedures vary among countries in complexity and timing. We may not obtain approvals from regulatory authorities outside the U.S. on a timely basis, if at all, which would preclude us from commercializing products in those markets. There may be situations in which demonstrating the efficacy and safety of a product candidate may not be sufficient to gain regulatory approval unless superiority to comparative products can be shown. Also, legislative bodies or regulatory agencies could enact new laws or regulations or change existing laws or regulations at any time, which could affect our ability to obtain or maintain approval of our products or product candidates. For example, the EU recently finalized legislation, which will apply as early as mid-2016, related to the conduct of clinical trials. While the aim of the new legislation is to improve in operational efficiency and streamline the overall clinical trial authorization process, the new requirements also provide for increased transparency of clinical trial results and submission of quality data relating to the products and product candidates used for such trials. Starting in 2015, the EMA will make certain clinical trial reports publicly available, which may limit our ability to protect competitively-sensitive information contained in our clinical trial reports. Failure to comply with new laws or regulations could result in significant monetary penalties as well as reputational and other harms. We are unable to predict when and whether any further changes to laws or regulatory policies affecting our business could occur, such as efforts to reform medical device regulation or the pedigree requirements for medical products or to implement new requirements for combination products, and whether such changes could have a material adverse effect on our business and results of operations. Regulatory authorities may also question the sufficiency for approval of the endpoints we select for our clinical trials. Regulatory authorities could also add new requirements, such as the completion of additional studies, as conditions for obtaining approval or obtaining an indication. The imposition of additional requirements may delay our clinical development and regulatory filing efforts, and delay or prevent us from obtaining regulatory approval for new product candidates, new indications for existing products or maintenance of our current labels
In addition, some countries, particularly the countries of the EU, regulate the pricing of prescription pharmaceuticals. In these countries, pricing discussions with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of their product candidate to other available therapies. Such trials may be time-consuming and expensive, and may not show an advantage in efficacy for our products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, in either the U.S. or the EU, we could be adversely affected.
Our research and development programs, including for AEROSURF, involve significant risks and uncertainties that are inherent in the clinical development and regulatory approval processes.
Development risk factors include, but are not limited to, whether we, or our third-party collaborators, CROs, drug substances and materials suppliers and contract manufacturing organizations (CMOs), will be able to:
competently execute and complete our preclinical and clinical trials of our KL4 surfactant product candidates with scientific results that are sufficient to support further development and regulatory approval;
receive the necessary regulatory approvals;
obtain adequate supplies of the active pharmaceutical ingredients, manufactured to our specifications and on commercially reasonable terms;
perform under agreements to supply drug substances, medical devices and related components and related services necessary to manufacture our KL4 surfactant product candidates;
provide for sufficient manufacturing capabilities with CMOs, to produce sufficient drug product and ADSs and related materials to meet our preclinical and clinical development requirements; and
obtain the capital necessary to fund our research and development efforts, including our business administration, preclinical and clinical organizations, and our quality and manufacturing operations.
Because these factors, many of which are outside our control, could have a potentially significant impact on our development activities, the success, 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. The timing and cost to complete drug trials alone may be impacted by, among other things:
our substantial reliance on third-party collaborators, CROs, CMOs and suppliers;
long treatment time required to demonstrate effectiveness;
lack of sufficient clinical supplies and material;
adverse medical events or side effects in treated patients;
lack of compatibility with complementary technologies;
failure of a drug product candidate to demonstrate effectiveness; and
lack of sufficient funds.
If we do not successfully complete clinical trials, we will not receive regulatory approval to market our KL4 surfactant pipeline products. Failure to obtain and maintain regulatory approval and generate revenues from the sale of our products would have a material adverse effect on our financial condition and results of operations and likely reduce the market value of our common stock.
Failure to complete the development of our ADS and related componentry in a timely manner, if at all, would have a material adverse effect on our efforts to develop theseAEROSURF or our other aerosolized KL4 surfactant products, and our business strategy.
We have developed a clinic-ready ADS that is suitable for use in our ongoing phase 2 clinical program and currently are working with Battelle Memorial Institute (Battelle) to further develop the ADS in our planned phase 3 clinical trial and potentially for commercial use. Our development activities are subject to certain risks and uncertainties, including, without limitation:
We may not successfully develop an ADS that is acceptable for use in a phase 3 program and commercial environment, if at all, on a timely basis and such inability may delay or prevent initiation of our phase 3 clinical program.
We will require access to sophisticated engineering capabilities. We have our own medical device engineering staff and we are currently working with Battelle, which has expertise in medical device development and medical device design and a successful track record in developing aerosolization systems for the medical and pharmaceutical industries. If for any reason we are unable to retain our own engineering capabilities, the agreement with Battelle is terminated, and we are unable to identify design engineers and medical device experts to support our development efforts, including for a clinic-ready ADS for use in our planned phase 3 clinical program and, potentially, for commercial use and later versions of the ADS, it would have a material adverse effect on our business strategy and impair our ability to commercialize or develop AEROSURF or other aerosolized KL4 surfactant products.
We will also require additional capital to advance our development activities and plan to seek a potential strategic partner or third-party collaborator to provide financial support and potentially medical device development and commercialization expertise. There can be no assurance, however, that we will successfully identify or be able to enter into agreements with such potential partners or collaborators on terms and conditions that are favorable to us. If we are unable to secure the necessary medical device development expertise to support our development program, this could impair our ability to commercialize or develop AEROSURF or other aerosolized KL4 surfactant products.
The realization of any of the foregoing risks would have a material adverse effect on our business.
We are continually evaluating our business strategy and may modify this strategy in light of developments in our business and other factors.
In 2015, we modified our business strategy to focus primarily on the development of aerosolized KL4 surfactants, beginning with AEROSURF. We plan to continually evaluate our business strategy and will modify our plans as necessary to achieve our objectives. The execution of a clinical program is complex and involves the cooperation of many individuals and entities, including third parties that we may not be able to control, and require the coordination of a number of elements, any one of which could involve delays or unforeseen events or circumstances that require adjustment or the development of alternative strategies. If we encounter such events or circumstances, we will change our strategy and plans if we believe that such a change will be in our best interest. For example, when we experienced slower enrollment in our phase 2a clinical trials than we expected, we reassessed the number of sites that would be needed and expanded our activities ex-U.S. In the future, if we determine that an alternative approach would better enable us to achieve our objectives, we will consider adopting such other approaches. Similarly, if a potential partner or collaborator were to make observations or recommendations concerning the focus, sequence or approach of any or all of our research and development programs, we may consider taking such observations or recommendations into account in our planning process and activities. There can be no assurance, whether or not we alter our strategy or plans for any reason, that we will be successful, or that thesewe will secure regulatory approval for our products will be commercially viable. Failure can occurand execute any product launches effectively and on time, if at any pointall, in the development process, including after significant funds have been invested.all markets that we may identify.
Promising new product candidates may failOur ability to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property rights of others. Even if we successfullydiscover and develop new products or enhancements or new generations ofdepends on our existinginternal research capabilities and our ability to acquire products. Although we continue to conduct research and development activities on our KL4 surfactant products, they may be quickly rendered obsolete by newer products, changing customer preferences or changing industry standards. Innovationsour limited resources may not be accepted quickly insufficient to discover and develop new product candidates. To assist us with the marketplace because of, among other things, entrenched patterns of clinical practice or uncertainty over third party reimbursement. We cannot state with certainty when or whether anydevelopment of our products under development will be launched, whether we will be able to develop, license or otherwise acquire products, or whether any products will be commercially successful. Failure to launch successful new products or new indications for existing products may causeand, if approved, commercialization of our products to become obsolete.
To support the commercialization of SURFAXIN in markets outside the U.S., we continue to evaluate potential strategic alliances, collaboration arrangements and other strategic transactions. However, there can be no assurance that our efforts will be successful or that, even if we identify and enter into any strategic transaction, that such transactions will be successfully implemented, if at all, within our expected time frames.
We plan to relycontinue evaluating our business strategy and may modify our strategy in the future. To respond to changing circumstances, we may expand or alter our research and development activities from time to time, and allocate resources to work on onedevelopment of different products or more strategic alliances to supportmay pace, delay or halt the development of potential product programs. As a result of changes in our strategy, we may also change or refocus our existing drug development and if approved, distribution andmanufacturing activities or our plans for commercialization of our products, if approved. This decisions could require changes in our facilities and personnel and restructuring various financial arrangements. There can be no assurances that any product development or other changes that we implement will be successful or that, after implementation of any such changes, that we will not refocus our efforts on new or different objectives.
We have limited resources, which could impair our ability to manage our diverse activities and accomplish our business objectives.
The demands on our management team have grown over time. Our development program for AEROSURF has progressed into phase 2b and we are planning for a potential phase 3 clinical program. Our planned clinical trials are expected to enroll more patients, be conducted in a larger number of sites both in the U.S. and abroad, and will require more of our management resources to be successful. In addition to working on the AEROSURF development program, from time to time, we support studies of other potential KL4 surfactant pipeline products. We have also devoted resources to identifying potential strategic partnerships, collaboration arrangements and similar transactions, in the U.S. and EU and in other selected markets. These activities have and will continue to place additional significant demands on our management and our financial and operational resources, and will require that we continue to develop and improve our financial, operational and other internal controls. From time to time, we will be required to make difficult decisions on how to best allocate our resources. For example, as a result of our limited resources, we determined to either seek a strategic alliance for SURFAXIN or cease our manufacturing and commercial activities.
If we are successful in identifying potential strategic or collaboration partners, we will be required to dedicate management resources and implement controls to establish alliance structures, and potentially add a layer of complexity to our operations. We plan to distribute our products, if approved, in the U.S. on our own. For other major markets, we plan to identify potential strategic alliances and collaboration arrangements that would have the resources and capabilities to distribute our products. This expansion could further increase the challenges involved in implementing appropriate operational and financial systems, expanding manufacturing and production capacity, expanding our infrastructure and capabilities, and providing adequate training and supervision to maintain high quality standards. We believe that the significant challenges associated with these potential activities will require us to recruit, train and integrate skilled management, scientific, medical and operations personnel; establish and effectively manage strategic partnerships and collaboration arrangements to support our development and commercialization activities; and provide for manufacturing, including analytical testing and distribution capabilities, for our products, and AFECTAIR devices. clinical capabilities for our products under development. Our inability to grow our business effectively and appropriately or otherwise adapt to these challenges would cause our business, financial condition and results of operations to suffer.
We may enter into distributor arrangements to manage the commercial introduction of AFECTAIR devices in markets outside the U.S. If we enter into distributor arrangements or strategic alliances we may be required to transfer rights to our products and will be exposedor other collaboration arrangements, which could expose us to risks associated with the transfer of control to third parties.parties and may require that we transfer rights to our products to our partners and collaborators.
To support our AEROSURF development program and potentially the commercial introduction of SURFAXIN and AFECTAIR in the U.S., we plan to rely on our own commercial and medical affairs organization. However,AEROSURF in markets outside the U.S., we plan to seek one or morea significant strategic alliances and/or collaboration arrangementsalliance that potentially to share researchcould provide financial resources for our AEROSURF development program, and development, expenses for our KL4 surfactant development programs,regulatory and if approved,commercial market expertise to support the commercial introduction of these productsAEROSURF in selected markets outside the U.S. We seek to identify potential strategic partners who could provide local development and commercial expertise as well as financial resources (potentially in the Europe Unionform of upfront payments, milestone payments, commercialization royalties and elsewhere. We may also seek strategic alliances and/or collaboration arrangements to support the potential commercial introductiona sharing of SURFAXINresearch and development expenses), although there can be no assurance that we will ultimately secure such an alliance, if approved, SURFAXIN LS, in countries where regulatory marketing authorization is facilitated by the recent approval of SURFAXIN by the FDA.
at all, on acceptable terms.
If we succeed in entering into one or more strategic alliances or other collaboration arrangements, our ability to execute our operating plan will depend upon numerous factors, including the performance of the strategic partners and collaborators with whom we may contract.engage. Under these arrangements, our partners may control key decisions relating to the development and, assuming approval,if approved, commercialization, of our products. Such partner rights of our partners would limit our flexibility in considering development strategies and in commercializing our products. In addition, if we breach or terminate our strategic alliance agreements or if our strategic partners or collaborators otherwise fail to conduct their activities in a timely manner, or if there is a dispute about our respective obligations, we may need to seek other partners or collaborators or, in the alternative and after a potentially unacceptable delay, develop our own internal sales and marketing capabilities to develop and commercialize our products in markets outside the U.S. If we fail to successfully develop these relationships, or if we or our partners or collaborators fail to successfully develop or commercialize any of our products, it may delay or prevent us from developing or commercializing our products in a competitive and timely manner and would have a material adverse effect on the commercialization of our products.
For example, our collaboration arrangement with Laboratorios del Dr. Esteve, S.A. (Esteve) for SURFAXIN and certain other of our drug product candidates is focused on Andorra, Greece, Italy, Portugal and Spain.Spain (Esteve Territory). We have limited influence over the decisions made by Esteve or its sublicensees or the resources that they may devote to the marketing and distribution of our KL4 surfactant products in their licensed territory, and Esteve or its sublicensees may not meet their obligations in this regard. Our marketing and distribution arrangement with Esteve may not be successful, and, as a result, we may not receive any revenues from it. In addition, we may not be able to enter into marketing and sales agreements for our KL4 surfactant pipeline products on acceptable terms, if at all, in territories not covered by the Esteve agreement, or for any of our other drug product candidates. If Esteve or we should fail to conduct our respective collaboration-related activities in a timely manner, or otherwise breach or terminate the agreements that make up our collaboration arrangements, or if a dispute should arise under our collaboration arrangements, such events could impair our ability to commercialize or develop our products forin the Esteve territory in Europe.Territory. In that event, we may need to seek other partners andand/or collaboration arrangement,arrangements, or we may have to develop our own internal capabilities to market the covered products in the Esteve territory without a collaboration arrangement.Territory.
Our plan to use strategic alliances and collaboration arrangements to leverage our capabilities may not be successful if we are unable to integrate our partners’ capabilities with our operationsown or if our partners’ capabilities do not meet our expectations.
As part of our strategy, we intend to continue to evaluate opportunities for strategic partnership opportunitiesalliances and collaboration arrangements. In order forFor these efforts to be successful, we must first identify partners whose capabilities complement and integrate well with ours. TechnologiesAmong other things, technologies to which we gain access may prove ineffective or unsafe. Ownership of these technologies may be disputed. The agreements that grant us access to such technologies may expire and may not be renewable or could be terminated if our partners or we do not meet our respective obligations. In addition, our partners may provide certain services for us, such as product development support or distribution services. These agreements may be subject to differing interpretations and we and our partners may not agree on the appropriate interpretation or specific requirements. Among other things, our partners may prove difficult to work with, less effective than we originally expected or unable to satisfy their financial and other commitments to us. Failure of our partners to perform as needed could place us at a competitive disadvantage.
If one of our strategic partners or collaborators pursues a product that competes with our products, there could be a conflict of interest and we may not receive expected revenues or milestone or royalty payments.
Certain of our potential strategic partners and collaborators may be developing or marketing a variety of products, some with other partners. Partners or collaborators with whom we enter into distribution agreements may sell and market products that compete with ours, or they may seek to develop, market or sell existing or alternative products or technologies or products targeted at the same diseases or conditions as the products that are the subject of an arrangement with us. Our strategic partners and collaborators may also develop products that are similar to or compete with products they are developing in collaboration with us. If these entities pursue other products instead of our products, we may not receive the anticipated revenues or milestone or royalty payments, or our efforts to distribute our products may be adversely affected.affected, and it is likely that we would have no recourse against our partners or collaborators.
We currently have limited experience in marketing or selling pharmaceutical products and limited marketing capabilities, which may restrict our success in commercializing our product candidates. We have developed our own commercial and medical affairs organizations to launch our drug products in the U.S. While we believe that this strategy greatly improves our ability to introduce our products in the U.S., it may also increase the cost to commercialize our products. We also plan to use our marketing, sales and medical affairs organizations to executive the commercial introduction of our AFECTAIR device for infants. We plan to consider strategic alliances and third-party distribution arrangementsor collaboration agreements to supportpotentially provide for the commercialization of AFECTAIR in markets outside the U.S., which could require us to give up rights to our products.
We have limited experience in marketing or selling pharmaceutical products, although we have endeavored to hire individuals that individually have significant experience in neonatal indications and/or hospital-based products. We plan primarily to rely on our own specialty respiratory critical care commercial and medical affairs organizations to market and support SURFAXIN, and, if approved, AEROSURF and SURFAXIN LS in the U.S. We expect that our commercial organization will also support the commercial introduction of our AFECTAIR device. Commercializing our drug product candidates in the U.S. on our own will likely cause our commercialization costs to increase, but will potentially avoid the transfer of rights to our products or drug product candidates and thereby potentially increase the revenue opportunity. Building our own commercial and medical affairs capabilities is potentially a difficult, expensive and time-consuming process and requires a substantial capital investment. Recruiting, training and retaining qualified personnel will be critical to our success. Competition for such personnel can be intense, and we may be unable to attract and retain a sufficient number of qualified individuals to successfully support the launch and continued distribution of our products. We also may be unable to provide competitive incentives to retain our sales force. If we are unable to successfully attract, motivate and retain our commercial and medical affairs organizations to support the introduction and sale of our products, if approved, including AEROSURF, which expose us to additional risks.
To secure the additional capital that we will have difficulty selling, maintaining and increasingrequire to advance the salesdevelopment of our products, which could have a material adverse effect on our business.
We also plan to rely on our own commercial and medical affairs organizations to introduce the AFECTAIR device for infants in the U.S. We believe that this AFECTAIR device will be of interest to many of the same hospitals, neonatologists and neonatal intensive care units that purchase SURFAXIN. We plan to review and re-assess this strategy at the time thatproduct candidates, we introduce additional AFECTAIR devices in the future.
Even with our own commercial and medical affairs organizations to support the launch of SURFAXIN and the AFECTAIR device for infants in the U.S., we may also need to enter into co-marketing arrangements with third parties where our own personnel are neither well situated nor numerous enough to achieve maximum penetration in the market. In addition, we may seek one or more strategic alliances, and/distribution or collaboration arrangements tothat could support the potential commercial introductioncommercialization of SURFAXIN and,AEROSURF, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in the SURFAXIN new drug application (NDA) approved by the FDA. We also plan to consider strategic alliances and/or collaboration arrangements, including third-party distributors or marketing alliances to sell, our AFECTAIR devices in international markets. We may not be successful in entering into any such arrangements, and theapproved. The terms of any such arrangements may not be favorable to us. In addition, if we enter into co-marketing arrangements to market and sell additional products directly, we may need to further expand our commercial staff and incur additional expense.
We may not be successful in identifying strategic alliances and/or collaboration arrangements, third-party distributorships or marketing alliances or finalizing such arrangements on terms and conditions that are favorable to us and, as a result, we may not be able to commercialize our products on a timely basis. If we are not successful in finalizing such arrangements, we may not have sufficient funds to successfully commercialize SURFAXIN and AFECTAIR or any other potential product, in the U.S. or elsewhere. If we enter into alliances, and distribution or collaboration arrangements to commercialize our products, such arrangements will subject us to a number of risks, including:
| ● | our alliance partners, distributors or collaborators may require that we transfer to them important rights to our products and/or product candidates; |
we may not be able to control the amount and timing of resources that our distributors or collaborators devote to the commercialization of our products;