UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended June 30, 2006
or
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period
from
to
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-3171943
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
|
2600
Kelly Road, Suite 100
|
||
|
Warrington,
Pennsylvania 18976-3622
|
||
|
(Address
of principal executive offices)
|
(215)
488-9300
(Registrant’s
telephone number, including area code)
__________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o
NO
x
As
of August 2, 2006, 62,320,630 shares of the registrant’s common stock, par value
$0.001 per share, were outstanding.
Table
of Contents
PART
I - FINANCIAL INFORMATION
| Item 1. Financial Statements |
Page
|
||
|
CONSOLIDATED
BALANCE SHEETS —
As
of June 30, 2006 (unaudited) and December 31, 2005
|
1
|
||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited) —
For the Three Months Ended June 30, 2006 and 2005 For the Six Months Ended June 30, 2006 and 2005 |
2
|
||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited) —
For the Six Months Ended June 30, 2006 and 2005 |
3
|
||
|
Notes
to Consolidated Financial Statements
|
4
|
||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11
|
||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
25
|
||
| Item 4. Controls and Procedures |
26
|
||
PART
II - OTHER INFORMATION
| Item 1. Legal Proceedings |
27
|
||
| Item 1A. Risk Factors |
28
|
||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
33
|
||
| Item 3. Defaults Upon Senior Securities |
34
|
||
| Item 4. Submission of Matters to a Vote of Security Holders |
34
|
||
| Item 5. Other Information |
34
|
||
| Item 6. Exhibits |
34
|
||
| Signatures |
35
|
||
i
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc., and its wholly-owned, presently
inactive subsidiary, Acute Therapeutics, Inc.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “plans,” “intends,” “may,” “will” or “should” or, in each case, their
negative, or other variations or comparable terminology, though the absence
of
these words does not necessarily mean that a statement is not forward-looking.
The forward-looking statements include all matters that are not historical
facts
and include, without limitation: statements concerning our research and
development programs and clinical trials; the possibility, timing and outcome
of
submitting regulatory filings for our products under development; the seeking
of
collaboration arrangements with pharmaceutical companies or others to develop,
manufacture and market products; the research and development of particular
compounds and technologies; the period of time for which our existing resources
will enable us to fund our operations; and anticipated cost savings and
accounting charges arising out of our recent workforce reductions and corporate
restructuring.
We
intend
that all forward-looking statements be subject to the safe-harbor provisions
of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are subject to many risks and uncertainties which could cause our actual results
to differ materially from any future results expressed or implied by the
forward-looking statements. Examples of the risks and uncertainties include,
but
are not limited to:
| · |
the
risk that financial conditions may change;
|
| · |
risks
relating to the progress of our research and development;
|
| · |
the
risk that we will not be able to raise additional capital or enter
into
additional collaboration agreements (including strategic alliances
for our
aerosol and Surfactant Replacement Therapies);
|
| · |
the
risk that we or our marketing partners will not succeed in developing
market awareness of our products;
|
| · |
the
risk that we or our marketing partners will not be able to attract
or
maintain qualified personnel;
|
| · |
risks
that the FDA or other regulatory authorities may delay consideration
of
any applications that we file;
|
| · |
risks
that the FDA or other regulatory authorities may not accept any
applications we file;
|
| · |
risks
that any such regulatory authorities will not approve the marketing
and
sale of a drug product even after acceptance of an application we
file for
any such drug product;
|
| · |
risks
relating to the ability of our third party materials suppliers and
development partners to provide us with adequate supplies of drug
substance and drug products for completion of any of our clinical
studies;
|
| · |
risks
relating to our drug manufacturing
operations;
|
| · |
risks
relating to the integration of our manufacturing operations into
our
existing operations;
|
| · |
risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers;
|
| · |
risks
relating to our ability and the ability of our collaborators to develop
and successfully commercialize products that will combine our drug
products with innovative aerosolization
technologies;
|
| · |
risks
relating to the significant, time-consuming and costly research,
development, pre-clinical studies, clinical testing and regulatory
approval for any products that we may develop independently or in
connection with our collaboration arrangements;
|
| · |
risks
relating to the development of competing therapies and/or technologies
by
other companies;
|
| · |
risks
relating to our recent workforce reductions and corporate
restructuring:
|
| · |
risks
relating to the impact of litigation that
has been and may be brought against the Company and its officers
and
directors; and
|
| · |
other
risks and uncertainties detailed in Part II, Item 1A: Risk Factors
and
elsewhere in our Annual Report on Form 10-K for the year ended December
31, 2005, and those described from time to time in our future reports
filed with the Securities and Exchange Commission.
|
Except
to
the extent required by applicable laws or rules, we do not undertake to update
any forward-looking statements or to publicly announce revisions to any of
the
forward-looking statements, whether as a result of new information, future
events or otherwise.
ii
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
June
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
26,627
|
$
|
47,010
|
|||
|
Restricted
cash
|
662
|
647
|
|||||
|
Available-for-sale
marketable securities
|
-
|
3,251
|
|||||
|
Prepaid
expenses and other current assets
|
348
|
560
|
|||||
|
Total
Current Assets
|
27,637
|
51,468
|
|||||
|
Property
and equipment, net of accumulated depreciation
|
4,583
|
4,322
|
|||||
|
Other
assets
|
217
|
218
|
|||||
|
Total
Assets
|
$
|
32,437
|
$
|
56,008
|
|||
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
7,203
|
$
|
7,540
|
|||
|
Credit
facility, current portion
|
8,500
|
8,500
|
|||||
|
Capitalized
leases and note payable, current portion
|
1,883
|
1,568
|
|||||
|
Total
Current Liabilities
|
17,586
|
17,608
|
|||||
|
Capitalized
leases and note payable, non-current portion
|
3,282
|
3,323
|
|||||
|
Other
liabilities
|
679
|
239
|
|||||
|
Total
Liabilities
|
21,547
|
21,170
|
|||||
|
Stockholders’
Equity:
|
|||||||
|
Common
stock, $0.001 par value; 180,000 shares authorized;
62,656
and 61,335 shares issued, and
62,321
and 61,022 shares outstanding
at
June
30, 2006 and December 31, 2005, respectively.
|
63
|
61
|
|||||
|
Additional
paid-in capital
|
246,514
|
240,028
|
|||||
|
Unearned
portion of compensatory stock options
|
(115
|
)
|
(230
|
)
|
|||
|
Accumulated
deficit
|
(232,455
|
)
|
(201,965
|
)
|
|||
|
Treasury
stock (at cost); 335 and 313 shares at June 30, 2006 and December
31,
2005, respectively.
|
(3,117
|
)
|
(3,054
|
)
|
|||
|
Accumulated
other comprehensive loss
|
--
|
(2
|
)
|
||||
|
Total
Stockholders’ Equity
|
10,890
|
34,838
|
|||||
|
Total
Liabilities & Stockholders’ Equity
|
$
|
32,437
|
$
|
56,008
|
|||
See
notes to consolidated financial statements
1
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
|
June
30,
|
June
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Contracts
and
Grants
|
$
|
-
|
$
|
24
|
$
|
-
|
$
|
85
|
|||||
|
Expenses:
|
|||||||||||||
|
Research
&
Development
|
5,911
|
5,864
|
13,524
|
10,984
|
|||||||||
|
General
& Administrative
|
4,024
|
4,095
|
12,706
|
8,365
|
|||||||||
|
Restructuring
Charge
|
4,805
|
--
|
4,805
|
--
|
|||||||||
|
Total
Expenses
|
14,740
|
9,959
|
31,035
|
19,349
|
|||||||||
|
Operating
Loss
|
(14,740
|
)
|
(9,935
|
)
|
(31,035
|
)
|
(19,264
|
)
|
|||||
|
Other
income / (expense):
|
|||||||||||||
|
Interest
and
other income
|
377
|
342
|
1,177
|
556
|
|||||||||
|
Interest
and
amortization expense
|
(332
|
)
|
(233
|
)
|
(632
|
)
|
(434
|
)
|
|||||
|
Other
income / (expense), net
|
45
|
109
|
545
|
122
|
|||||||||
|
Net
Loss
|
$
|
(14,695
|
)
|
$
|
(9,826
|
)
|
$
|
(30,490
|
)
|
$
|
(19,142
|
)
|
|
|
Net
loss per common share -
Basic
and diluted
|
$
|
(0.24
|
)
|
$
|
(0.18
|
)
|
$
|
(0.50
|
)
|
$
|
(0.37
|
)
|
|
|
Weighted
average number of common
shares
outstanding -
basic
and diluted
|
61,652
|
53,587
|
61,411
|
52,029
|
|||||||||
See
notes to consolidated financial
statements
2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
Six
Months Ended
|
|||||||
|
June
30,
|
|||||||
|
2006
|
2005
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(30,490
|
)
|
$
|
(19,142
|
)
|
|
|
Adjustments
to
reconcile net loss to net cash used
in
operating activities:
|
|||||||
|
Depreciation
|
448
|
383
|
|||||
|
Stock-based
compensation expense / 401(k) match
|
3,757
|
260
|
|||||
|
Changes
in:
|
|||||||
|
Prepaid
expenses and other current assets
|
212
|
(96
|
)
|
||||
|
Accounts
payable and accrued expenses
|
(337
|
)
|
(1,203
|
)
|
|||
|
Other
assets
|
1
|
12
|
|||||
|
Other
liabilities
|
440
|
(85
|
)
|
||||
|
Net
cash used in operating activities
|
(25,969
|
)
|
(19,871
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of
property and equipment
|
(709
|
)
|
(396
|
)
|
|||
|
Restricted
cash
|
(15
|
)
|
--
|
||||
|
Purchases
of
marketable securities
|
(4,631
|
)
|
(30,108
|
)
|
|||
|
Proceeds
from
sales or maturity of marketable securities
|
7,884
|
7,872
|
|||||
|
Net
cash provided by / (used in) investing activities
|
2,529
|
(22,632
|
)
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from
issuance of securities, net of expenses
|
2,846
|
27,997
|
|||||
|
Proceeds
from
credit facility
|
-
|
2,571
|
|||||
|
Equipment
financed through capital lease obligation
|
1,036
|
433
|
|||||
|
Principal
payments under capital lease obligation
|
(762
|
)
|
(427
|
)
|
|||
|
Purchase
of
treasury stock
|
(63
|
)
|
-
|
||||
|
Net
cash provided by financing activities
|
3,057
|
30,574
|
|||||
|
Net
decrease in cash and cash equivalents
|
(20,383
|
)
|
(11,929
|
)
|
|||
|
Cash
and cash equivalents - beginning of period
|
47,010
|
29,264
|
|||||
|
Cash
and cash equivalents - end of period
|
$
|
26,627
|
$
|
17,335
|
|||
|
Supplementary
disclosure of cash flows information:
|
|||||||
|
Interest
paid
|
$
|
619
|
$
|
377
|
|||
|
Non-cash
transactions:
|
|||||||
|
Unrealized
gain/(loss) on marketable securities
|
2
|
(15
|
)
|
||||
See
notes to consolidated financial
statements
3
Notes
to Consolidated Financial Statements (unaudited)
Note
1 - The Company and Basis of Presentation
The
Company
Discovery
Laboratories, Inc. (the “Company”) is a biotechnology company developing its
proprietary surfactant technology as Surfactant Replacement Therapies (SRT)
for
respiratory disorders. Surfactants are produced naturally in the lungs and
are
essential for breathing. The Company’s technology produces a
precision-engineered surfactant that is designed to closely mimic the essential
properties of natural human lung surfactant. The Company believes that through
this technology, pulmonary surfactants have the potential, for the first time,
to be developed into a series of respiratory therapies for patients in the
neonatal intensive care unit (NICU), critical care unit and other hospital
settings, where there are few or no approved therapies available.
The
Company’s SRT pipeline is initially focused on the most significant respiratory
conditions prevalent in the NICU. The Company’s lead product is Surfaxin®
(lucinactant). The Company has filed a New Drug Application (NDA) with the
U.S.
Food and Drug Administration (FDA) for Surfaxin for the prevention of
Respiratory Distress Syndrome (RDS) in premature infants and has received two
Approvable Letters from the FDA in connection with this NDA. In addition, the
Company recently concluded patient enrollment for its Phase 2 clinical trial
investigating the use of Surfaxin for the prevention and treatment of
Bronchopulmonary Dysplasia (BPD) in premature infants. The Company is also
developing Aerosurf™, its proprietary SRT administered in aerosolized form, for
the prevention and treatment of infants with respiratory distress. The Company
is preparing to initiate Phase 2 clinical studies with Aerosurf administered
through nasal continuous positive airway pressure (nCPAP), potentially obviating
the need for endotracheal intubation and conventional mechanical ventilation.
To
address the various respiratory conditions affecting pediatric, young adult
and
adult patients in the critical care and other hospital settings, the Company
is
also developing its SRT to potentially address Acute Lung Injury (ALI), Acute
Respiratory Distress Syndrome (ARDS), cystic fibrosis and other respiratory
conditions.
The
Company is implementing a business strategy that includes: (i) undertaking
actions intended to gain regulatory approvals for Surfaxin for RDS in premature
infants in the United States, including preparing
to respond to the second Approvable Letter and analysis and remediation of
recent manufacturing issues (discussed in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Plan
of Operations”); (ii) investing in development of SRT pipeline programs,
including Aerosurf, primarily utilizing the aerosol generating technology rights
licensed through a strategic alliance with Chrysalis Technologies, a division
of
Philip Morris USA Inc. (Chrysalis); (iii) continued investment in
manufacturing capabilities at the manufacturing operations in New Jersey
acquired by the Company in December 2005 to produce surfactant drug products
to
meet anticipated clinical and commercial needs (if approved) and, potentially,
investing in additional facilities to be built or acquired by the Company in
the
future; and (iv) potentially entering into strategic partnerships for the
development and commercialization of the Company’s SRT product
candidates.
4
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
for interim financial information in accordance with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normally recurring accruals) considered for fair presentation
have been included. Operating results for the three and six month period ended
June 30, 2006 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2005.
All
of
the Company’s current products under development are subject to license
agreements that will require the payment of future royalties.
Certain
prior period balances have been reclassified to conform to the current period
presentations.
Note
2 - Net Loss Per Share
Net
loss
per share is computed based on the weighted average number of common shares
outstanding for the periods. Common shares issuable upon the exercise of options
and warrants are not included in the calculation of the net loss per share
as
their effect would be anti-dilutive.
Note
3 - Stock-Based Employee Compensation
The
Company has a stock-based employee compensation plan. Prior to January 1, 2006,
the Company accounted for this plan under the recognition and measurement
provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees,
(Opinion 25) and related interpretations, as permitted by FASB Statement No.
123, Accounting
for Stock-Based Compensation.
Generally, no stock-based employee compensation cost was recognized in the
statements of operations, as options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date
of
the grant. Effective January 1, 2006, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R), Share-Based
Payment,
using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in the three and six months ended June 30, 2006
includes: (a) compensation cost for all share-based payments granted prior
to,
but not yet vested as of January 1, 2006, based on the grant date fair market
value estimated in accordance with the original provisions of Statement 123,
and
(b) compensation cost for all share-based payments granted subsequent to January
1, 2006, based upon the grant-date fair value estimated in accordance with
the
provisions of Statement 123(R). Results from prior periods have not been
restated.
As
a
result of adopting Statement 123(R) on January 1, 2006, the Company’s net loss
for the three and six months ended June 30, 2006 was $1.6 million (or $0.03
per
share) and $3.2 million (or $0.05 per share), respectively, higher than if
it
had continued to account for share-based compensation under Opinion 25. For
the
three and six months ended June 30, 2006, $0.5 million and $0.9 million was
classified as research and development and $1.1 million and $2.3 million was
classified as general and administrative.
For
comparative purposes, the following table illustrates the effect on net loss
and
net loss per share if the Company had applied the fair value recognition
provisions of Statement 123(R) to options granted under the Company’s stock
option plan for the three and six months ended June 30, 2005. For purposes
of
this pro forma disclosure, the value of the option is estimated using a
Black-Scholes-Merton
option-pricing formula that
uses
the assumptions set forth under “Stock Incentive Plan” below and amortized to
expense over the options’ vesting periods.
5
|
|
||||||||||
| Three Months Ended |
Six
Months Ended
|
|||||||||
|
June
30,
|
June
30,
|
|||||||||
|
(in
thousands, except per share data)
|
2005
|
2005
|
||||||||
|
Net
loss, as reported
|
$
|
(9,826
|
)
|
$
|
(19,142
|
)
|
||||
|
Net
loss per share, as reported
|
$
|
(0.18
|
)
|
$
|
(0.37
|
)
|
||||
|
Add:
Stock-based employee compensation expense included in reported net
loss
|
4,014
|
4,633
|
||||||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards
|
-
|
-
|
||||||||
|
Pro
forma net loss
|
$
|
(13,840
|
)
|
$
|
(23,775
|
)
|
||||
|
Pro
forma net loss per share
|
$
|
(0.26
|
)
|
$
|
(0.46
|
)
|
||||
Stock
Incentive Plan
The
Company’s 1998 Stock Incentive Plan (the Plan), which is shareholder-approved,
permits the grant of share options and shares to its eligible employees,
officers, consultants, independent advisors and non-employee directors for
up to
11,232,000 shares of our common stock, of which 9,798,000 shares were
outstanding and 1,434,000 were available at June 30, 2006. The Company believes
that such awards better align the interests of its eligible participants with
those of its shareholders. Option awards are granted with an exercise price
equal to or greater than the closing sale price per share of the Company’s
common stock on the Nasdaq Global Market on the option grant date. Although
the
terms of any award vary, option awards generally vest based upon three years
of
continuous service and have 10-year contractual terms.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing formula that uses assumptions noted in
the
following table. Expected volatilities are based upon the Company’s historical
volatility and other factors. The Company also uses historical data and other
factors to estimate option exercises and employee terminations within the
valuation model. The risk-free interest rates are based upon the U.S. Treasury
yield curve in effect at the time of the grant.
|
June
30, 2006
|
June
30, 2005
|
|||
|
Expected
volatility
|
101%
|
78%
|
||
|
Expected
term (in years)
|
5
years
|
3.5
years
|
||
|
Risk-free
rate
|
5.0%
|
3.9%
|
||
|
Expected
dividends
|
0%
|
0%
|
6
A
summary
of option activity under the Plan as of June 30, 2006 and changes during the
period is presented below:
(in
thousands, except for weighted-average data)
|
Options
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
|||||||||
|
Outstanding
at January 1, 2006
|
8,440
|
$
|
6.28
|
||||||||||
|
Granted
|
904
|
7.08
|
|||||||||||
|
Exercised
|
(8
|
)
|
3.15
|
||||||||||
|
Forfeited
or expired
|
(60
|
)
|
6.97
|
||||||||||
|
Outstanding
at March 31, 2006
|
9,276
|
$
|
6.35
|
7.3
|
$
|
15,050
|
|||||||
|
Vested
at March 31, 2006
|
6,769
|
$
|
6.63
|
6.9
|
$
|
10,650
|
|||||||
|
Exercisable
at March 31, 2006
|
7,548
|
$
|
6.23
|
6.8
|
$
|
14,199
|
|||||||
|
Outstanding
at March 31, 2006
|
9,276
|
$
|
6.35
|
||||||||||
|
Granted
|
1,664
|
2.20
|
|||||||||||
|
Exercised
|
(2
|
)
|
1.53
|
||||||||||
|
Forfeited
or expired
|
(1,140
|
)
|
7.69
|
||||||||||
|
Outstanding
at June 30, 2006
|
9,798
|
$
|
5.50
|
7.4
|
$
|
476
|
|||||||
|
Vested
at June 30, 2006
|
6,898
|
$
|
6.13
|
6.8
|
$
|
360
|
|||||||
|
Exercisable
at June 30, 2006
|
7,491
|
$
|
5.86
|
6.8
|
$
|
360
|
|||||||
Based
upon application of the Black-Scholes-Merton option-pricing formula described
above, the weighted-average grant-date fair value of options granted during
the
six months ended June 30, 2006 was $2.72. The total intrinsic value of options
exercised during the six months ended June 30, 2006 was $40,482.
A
summary
of the status of the Company’s nonvested shares issuable upon exercise of
outstanding options as of June 30, 2006 and changes during the three and six
month periods is presented below:
(in
thousands, except for weighted-average data)
|
Option
Shares
|
Amount
|
Weighted-Average
Grant-Date Fair Value
|
|||||
|
Nonvested
at January 1, 2006
|
1,907
|
$
|
3.68
|
||||
|
Granted
|
904
|
4.70
|
|||||
|
Vested
|
(252
|
)
|
4.55
|
||||
|
Forfeited
|
(53
|
)
|
5.15
|
||||
|
Nonvested
at March 31, 2006
|
2,506
|
$
|
3.89
|
||||
|
Granted
|
1,664
|
1.68
|
|||||
|
Vested
|
(910
|
)
|
2.00
|
||||
|
Forfeited
|
(360
|
)
|
4.61
|
||||
|
Nonvested
at June 30, 2006
|
2,900
|
$
|
2.08
|
||||
7
As
of
June 30, 2006, there was $7.0 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average vesting
period of 2.4 years.
Note
4 - Comprehensive Loss
Total
comprehensive loss was $14.7 million and $30.5 million for the three months
and
six months ended June 30, 2006, respectively, and $9.8 million and $19.1 and
for
the three and six months ended June 30, 2005. Total comprehensive loss consists
of the net loss and unrealized gains and losses on marketable
securities.
Note
5 - Restricted Cash
There
are
cash balances that are restricted as to use and the Company discloses such
amounts separately on the Company’s balance sheets. The primary component of
Restricted Cash is a security deposit in the amount of $600,000 in the form
of a
letter of credit related to the lease agreement dated May 26, 2004 for office
space in Warrington, Pennsylvania. The letter of credit is secured by cash
and
is recorded in the Company’s balance sheets as “Restricted Cash.” Beginning in
March 2008, the security deposit and the letter of credit will be reduced to
$400,000 and will remain in effect through the remainder of the lease term.
Subject to certain conditions, upon expiration of the lease in November 2009,
the letter of credit will expire.
Note
6 - Q2 2006 Restructuring Charge
In
order
to lower the Company’s cost structure and re-align its operations with business
priorities, the Company has reduced its staff
levels and reorganized corporate management. The Company took these actions
to
respond to the
Company’s
revised
expectations concerning the timing of potential FDA approval and commercial
launch of Surfaxin for RDS in premature infants following the April 2006
Surfaxin process validation stability failure.
The
workforce reduction totaled 52 employees, representing approximately 33% of
the
Company’s workforce, and was focused primarily on its commercial infrastructure,
the development of which is no longer in the Company’s near-term plans. Included
in the workforce reduction were three senior executives. All affected employees
were eligible for certain severance payments and continuation of benefits.
The
Company expects to realize annual expense savings
of
approximately $8.1 million from the reduction in work force and related
operating expenses. Additionally, certain commercial programs were discontinued
and related costs will no longer be incurred. Such commercial program expenses
totaled approximately $5.0 million over the past two fiscal quarters (fourth
quarter of 2005 and first quarter of 2006).
The
Company incurred a restructuring charge of $4.8 million in the second quarter
of
2006 associated with staff reductions and the close-out of certain commercial
programs, which was accounted for in accordance with Statement of Financial
Accounting Standards No. 146 “Accounting
for Costs Associated with Exit or Disposal Activities”
and is
identified separately on the Statement of Operations as Restructuring Charge.
This charge includes $2.5 million of severance and benefits related to staff
reductions and $2.3 million for the termination of certain commercial programs.
As of June 30, 2006, payments totaling $3.3 million had been made related to
these items and $1.5 million were unpaid. Of the $1.5 million that was unpaid
at
June 30, 2006, $0.3 million was included in accounts payable and $1.2 million
was included in accrued expenses, of which $0.8 million was classified as a
current liability and $0.4 million was classified as long-term).
Note
7 - Treasury Stock
Occasionally,
certain members of the Company’s management and certain consultants, pursuant to
terms set forth in the Company’s Amended and Restated 1998 Stock Incentive Plan,
tender shares of the Company’s common stock held by such persons in lieu of cash
for payment for the exercise of certain stock options previously granted to
such
parties. There were no such shares tendered during the three or six months
ended
June 30, 2006 and June 30, 2005. However, as a result of the reductions in
staff
in the second quarter of 2006, 21,544 shares of unvested restricted stock awards
were canceled and recorded as treasury stock.
8
Note
8 -Litigation
The
following actions were filed in May 2006 in the United States District Court
for
the Eastern District of Pennsylvania against the Company and the Company’s Chief
Executive Officer, Robert J. Capetola: on May 1, 2006, by Hal Unschuld,
individually and purportedly on behalf of a class of the Company’s investors who
purchased the Company’s publicly traded securities between December 28, 2005 and
April 25, 2006; on May 8, 2006, by Michael Donuvich, individually and
purportedly on behalf of a class of the Company’s investors who purchased the
Company’s publicly traded securities between December 28, 2005 and April 25,
2006; on May 9, 2006, by Raymond Lawrie, individually and purportedly on behalf
of a class of the Company’s investors who purchased the Company’s publicly
traded securities between March 16, 2004 and April 25, 2006 (the “Lawrie
Action”); and on May 15, 2006, Marilyn DePace, individually and purportedly on
behalf of a class of the Company’s investors who purchased the Company’s
publicly traded securities between February 1, 2005 and April 24, 2006 (the
“DePace Action”). In addition to the Company and Dr. Capetola, the Lawrie Action
names the Company’s Chief Financial Officer, John G. Cooper, and the DePace
Action names the Company’s former Chief Operating Officer, Christopher J.
Schaber. Each of these actions generally alleges violations of Section 10(b)
of
the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act in connection with various
public statements made by the Company and seeks an order that the action may
proceed as a class action and an award of compensatory damages in favor of
the
plaintiff and the other class members in an unspecified amount, together with
interest and reimbursement of costs and expenses of the litigation and other
equitable or injunctive relief. On June 15, 2006, these actions were
consolidated under the caption “In re: Discovery Laboratories Securities
Litigation” and, in July 2006, the court appointed the Mizla Group to serve as
lead plaintiff in these consolidated actions and the law firm of Chimicles
&
Tikellis LLP to act as lead counsel. The court also directed the lead plaintiff
to file a consolidated amended complaint no later than August 7, 2006.
On
May
16, 2005, Royal L. Knab filed a shareholder derivative complaint in the United
States District Court for the Eastern District of Pennsylvania against the
Company’s Chief Executive Officer, Robert J. Capetola, and W. Thomas Amick,
Antonio Esteve, Max E. Link and Herbert H. McDade, Jr., directors of the Company
(the “Knab Action”). A second shareholder derivative complaint was filed on June
6, 2006 by Paul J. Squier, individually and on behalf of the Company, against
the Company’s Chief Executive Officer, Robert J. Capetola and Herbert H. McDade,
Jr., Antonio Esteve, Max E. Link, Marvin E. Rosenthale, W. Thomas Amick,
directors of the Company, and Christopher J. Schaber, the Company’s former Chief
Operating Officer (the “Squier Action”). These actions generally allege
violations of state law, including breaches of fiduciary duties, abuse of
control, gross mismanagement, waste of corporate assets and unjust enrichment,
which were alleged to have occurred, in the Knab Action, from December 28,
2005
through the present, and, in the Squier Action, between 2005 and April 2006.
The
plaintiffs generally seek an award of damages, disgorgement of profits,
injunctive and other equitable relief and award of attorneys’s fees and costs.
In July 2006, the Knab Action and the Squier Action were consolidated under
the
caption “In re: Discovery Laboratories Derivative Litigation.” The parties have
entered into a stipulation providing that the Company is not required to respond
to these consolidated complaints until 60 days following defendants’ answer or a
dispositive ruling on a motion to dismiss filed in response to the consolidated
amended complaint in the class actions, described above.
The
Company intends to vigorously defend these actions. The potential impact of
these actions, all of which are expected to seek unquantified damages, attorneys
fees and expenses is uncertain. Additional actions based upon similar
allegations, or otherwise, may be filed in the future. There can be no assurance
that an adverse result in these proceedings would not have a potentially
material adverse effect on the Company’s business, results of operations and
financial condition.
Note
9 - Working Capital
Cash
is
required to fund the Company’s working capital needs, to purchase capital
assets, and to pay debt service, including principal and interest payments.
The
Company does not currently have any source of operating revenue and will require
significant amounts of cash to continue to fund operations, clinical trials
and
research and development efforts until such time, if ever, that one of the
Company’s products has received regulatory approval for marketing. Because the
Company has not generated any revenue from the sale of any products, the Company
has primarily relied upon the capital markets and debt financings as its primary
sources of funding. The Company will continue to be opportunistic in accessing
the capital markets to obtain financing on terms satisfactory to the Company.
The Company plans to fund its future cash requirements through:
9
| · |
the
issuance of equity and debt
financings;
|
| · |
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
| · |
sales
of Surfaxin, if approved;
|
| · |
capital
lease financings; and
|
| · |
interest
earned on invested capital.
|
Upon
receiving a second Approvable Letter and experiencing the manufacturing issues
that have caused the Company to modify its expectations concerning the timing
of
potential FDA approval and commercial launch of Surfaxin, the market value
of
the Company’s common stock declined, which has made it more difficult to obtain
equity and debt financing on terms that would be beneficial to the Company
in
the long term. The Company has engaged Jefferies & Company, Inc., the New
York-based investment banking firm, to assist the Company in identifying and
evaluating strategic alternatives intended to enhance the future growth
potential of the Company’s SRT pipeline and maximize shareholder value. The
Company is considering multiple alternatives including, but not limited to,
potential business alliances, commercial and development partnerships,
financings, business combinations and other similar opportunities. No assurances
can be given that this evaluation will lead to any specific action or
transaction.
After
taking into account the recently implemented cost containment measures and
before taking into account any strategic alternatives (including the potential
restructuring of the Company’s credit facility with PharmaBio Development Inc.),
potential financings or amounts that may be potentially available through the
CEFF, the Company believes that its current working capital is sufficient to
meet planned activities into 2007. Under the CEFF, Kingsbridge is not obligated
to purchase shares for any day during a draw-down when the volume weighted
average price of the Company’s common stock is below $2.00. Currently, the
Company’s common stock is trading below $2.00 per share and, therefore, the CEFF
is not available to raise capital. If the Company’s stock price rises above
$2.00 per share, the Company would anticipate using the CEFF to support working
capital needs in 2006 and 2007.
10
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” should
be read in connection with our accompanying Consolidated Financial Statements
(including the notes thereto) appearing elsewhere herein.
OVERVIEW
We
are a
biotechnology company developing our proprietary surfactant technology as
Surfactant Replacement Therapies (SRT) for respiratory diseases. Surfactants
are
produced naturally in the lungs and are essential for breathing. Our technology
produces a precision-engineered surfactant that is designed to closely mimic
the
essential properties of natural human lung surfactant. We believe that through
this technology, pulmonary surfactants have the potential, for the first time,
to be developed into a series of respiratory therapies for patients in the
neonatal intensive care unit (NICU), critical care unit and other hospital
settings, where there are few or no approved therapies available.
Our
SRT pipeline is initially focused on the most significant respiratory conditions
prevalent in the NICU. Our lead product is Surfaxin® (lucinactant). We have
filed a New Drug Application (NDA) with the U.S. Food and Drug Administration
(FDA) for Surfaxin for the prevention of Respiratory Distress Syndrome (RDS)
in
premature infants and have received two Approvable Letters in connection with
this NDA.
In
addition, we recently concluded patient enrollment for a Phase 2 clinical trial
investigating the use of Surfaxin for the prevention and treatment of
Bronchopulmonary Dysplasia (BPD) in premature infants. We are also developing
Aerosurf, a proprietary SRT administered in aerosolized form, for the prevention
and treatment of infants with respiratory distress. We are preparing to initiate
Phase 2 clinical studies with Aerosurf administered through nasal continuous
positive airway pressure (nCPAP), potentially obviating the need for
endotracheal intubation and conventional mechanical ventilation.
To
address the various respiratory conditions affecting pediatric, young adult
and
adult patients in the critical care and other hospital settings, we recently
completed and announced preliminary results of a Phase 2 clinical trial to
address Acute Respiratory Distress Syndrome (ARDS) and we are also developing
our SRT to potentially address Acute Lung Injury (ALI), cystic fibrosis and
other respiratory conditions.
Due
to
our previously-announced manufacturing issues, we have revised our expectations
concerning the timing of potential FDA approval and commercial launch of
Surfaxin for the prevention of RDS in premature infants. Further, as our
manufacturing issues could not be resolved within the regulatory time frames
mandated by the European Medicines Agency (EMEA), we have voluntarily withdrawn
our Marketing Authorization Application (MAA) for Surfaxin for the prevention
and rescue treatment of RDS in premature infants in Europe. For a discussion
of
these events, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Plan of Operations.”
To
respond to the anticipated financial impact of our revised timing for potential
FDA approval and commercial launch in the U.S. of Surfaxin for the prevention
of
RDS in premature infants, we have lowered our cost structure and re-aligned
our
operations to address our business priorities. On May 4, 2006, we announced
a
reorganized management and a workforce reduction primarily affecting our
commercial infrastructure, the development of which is no longer in our
near-term plans. We also concluded our Phase 2 clinical trial of Surfaxin for
the prevention and treatment of BPD in premature infants. For a discussion
of
these events, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Q2 2006 Restructuring
Charge” and “Plan of Operations - Research and Development.”
In
addition, our revised expectations concerning the timing of potential FDA
approval have had a significant impact on our business strategy. We are now
implementing a business strategy which includes:
11
| · |
taking
actions intended to gain regulatory approvals for Surfaxin for RDS
in
premature infants in the United States, including preparing
to respond to the second Approvable Letter and conducting a comprehensive
investigation, analysis and remediation of our recent manufacturing
issues;
|
| · |
investing
in development of SRT pipeline programs, primarily
Aerosurf, which uses the aerosol generating technology rights licensed
through a strategic alliance with Chrysalis Technologies
(Chrysalis);
|
| · |
use
of our newly-acquired manufacturing facility, which is critical to
the
production of Surfaxin and our SRT clinical programs, to produce
Surfaxin,
other SRT formulations and aerosol development capabilities. We view
our
acquisition of this facility as an initial step in our manufacturing
strategy for the continued development of our SRT portfolio, including
life cycle management of Surfaxin, potential formulation enhancements,
and
expansion of our aerosol SRT products, beginning with Aerosurf. Our
strategy also includes, where appropriate, contracting with third-party
manufacturers and building or acquiring additional manufacturing
capabilities for the production of our precision-engineered surfactant
drug products; and
|
| · |
raising
additional working capital and securing additional strategic partnerships
for the development and commercialization of our proprietary SRT
product
candidates, including Surfaxin. We have recently engaged Jefferies
&
Company, Inc., the New York-based investment banking firm, to assist
us in
identifying and evaluating strategic alternatives intended to enhance
the
future growth potential of our surfactant replacement therapy pipeline
and
maximize shareholder value. We are considering multiple alternatives
including, but not limited to, potential business alliances, commercial
and development partnerships, financings, business combinations and
other
similar opportunities, although no assurances are given that this
evaluation will lead to any specific action or
transaction.
|
Since
our
inception, we have incurred significant losses and, as of June 30, 2006, we
had
an accumulated deficit of $232.5 million (including historical results of
predecessor companies). The majority of our expenditures to date have been
for
research and development activities and, since 2005, also include significant
general and administrative, primarily pre-commercialization, activities.
Research and development expenses represent costs incurred for scientific and
clinical personnel, clinical trials, regulatory filings and developing
manufacturing capabilities. We expense research and development costs as they
are incurred. General and administrative expenses consist primarily of Surfaxin
pre-launch commercialization sales and marketing, executive management,
financial, business development, legal and general corporate activities and
related expenses. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings, debt arrangements and strategic
collaborations. As of June 30, 2006, we had: (i) cash and investments of $27.3
million; (ii) $47.8 million potentially available under the CEFF with
Kingsbridge, subject to the terms and conditions of the agreement; (iii) a
$9.0
million capital equipment lease financing arrangement with General Electric
Capital Corporation (GECC), of which an aggregate of $7.4 million has been
drawn
during the life of the facility and, after giving effect to principal payments,
$5.2 million of which was still payable; and (iv) a secured revolving credit
facility of $8.5 million with PharmaBio Development Inc. (PharmaBio), of which
the entire amount is currently outstanding and due on December 31, 2006. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.”
RESEARCH
AND DEVELOPMENT
Research
and development expenses for the three and six months ended June 30, 2006 were
$5.9 million and $13.5 million, respectively, and for the three and six months
ended June 30, 2005 were $5.9 million and $11.0 million, respectively. These
costs are charged to operations as incurred and are tracked by category rather
than by project. Research and development costs consist primarily of expenses
associated with research and pre-clinical operations, manufacturing development,
clinical and regulatory operations and other direct clinical trials
activities.
12
These
cost categories typically include the following expenses:
Research
and Pre-Clinical Operations
Research
and pre-clinical operations reflects activities associated with research prior
to the initiation of any potential human clinical trials. These activities
predominantly represent projects associated with the development of aerosolized
and other related formulations of our precision-engineered lung surfactant
and
engineering of aerosol delivery systems to potentially treat a range of
respiratory disorders prevalent in the NICU and the hospital. Research and
pre-clinical operations costs primarily reflect expenses incurred for personnel,
consultants, facilities and research and development arrangements with
collaborators (including a research funding and option agreement with The
Scripps Research Institute which expired in February 2005).
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to develop current good
manufacturing practices (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Manufacturing development activities
include costs associated with operating our manufacturing facility in Totowa,
New Jersey (which we acquired in December 2005), such as employee expenses,
depreciation, the purchase of raw materials, quality control and assurance
activities, and analytical services. In addition, manufacturing activities
include expenses associated with our comprehensive investigation, analysis
and
remediation of our recent manufacturing issues, as well as implementation of
enhancements to quality controls, process assurances and documentation
requirements that support the production process and expanding the operations
to
meet production needs for our SRT pipeline.
Unallocated
Development -- Clinical and Regulatory Operations
Clinical
and regulatory operations reflect the preparation, implementation and management
of our clinical trial activities in accordance with current good clinical
practices (cGCPs). Included in unallocated clinical development and regulatory
operations are costs associated with personnel, supplies, facilities, fees
to
consultants, and other related costs for clinical trial implementation and
management, clinical quality control and regulatory compliance activities,
data
management and biostatistics.
Direct
Expenses -- Clinical Trials
Direct
expenses of clinical trials include patient enrollment costs, external site
costs, expense of clinical drug supply and external costs such as contract
research consultant fees and expenses.
The
following summarizes our research and development expenses by the foregoing
categories for the three and six months ended June 30, 2006 and 2005:
|
(
in thousands)
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
||||
|
Research
and Development Expenses:
|
2006(1)
|
2005
|
2006(1)
|
2005
|
||
|
Research
and pre-clinical operations
|
$
560
|
$
426
|
$
1,068
|
$
1,355
|
||
|
Manufacturing
development
|
2,892
|
2,656
|
5,391
|
4,046
|
||
|
Unallocated
development - clinical and regulatory operations
|
2,007
|
1,845
|
4,537
|
3,484
|
||
|
Direct
clinical trial expenses
|
452
|
937
|
2,528
|
2,099
|
||
|
Total
Research and Development Expenses
|
$
5,911
|
$
5,864
|
$
13,524
|
$
10,984
|
||
(1)
Included in expenses for the three and six months ended June 30, 2006 is a
charge of $0.5 million and $0.9 million associated with stock-based employee
compensation in accordance with the provisions of FAS No. 123(R).
13
Due
to
the significant risks and uncertainties inherent in the clinical development
and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are not reasonably estimable.
Results from clinical trials may not be favorable and data from clinical trials
are subject to varying interpretation and may be deemed insufficient by the
regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All
of
our potential products are in regulatory review, clinical or pre-clinical
development. The status and anticipated completion date of each of our lead
SRT
programs is discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations,” below. Successful
completion of development of our SRT is contingent on numerous risks,
uncertainties and other factors, some of which are described in detail in the
section entitled “Risk Factors”.
These
factors include, but are not limited to:
| · |
Completion
of pre-clinical and clinical trials of our product candidates with
the
scientific results that support further development and/or regulatory
approval;
|
| · |
Receipt
of necessary regulatory approvals;
|
| · |
Obtaining
adequate supplies of surfactant raw materials on commercially reasonable
terms;
|
| · |
Obtaining
capital necessary to fund our operations, including our research
and
development efforts, manufacturing requirements and clinical
trials;
|
| · |
Obtaining
corporate partnerships for the development of our SRT pipeline, including
Surfaxin.
|
| · |
Performance
of our third-party collaborators on whom we rely for supply of raw
materials and related services necessary to manufacture our SRT drug
product candidates, including
Surfaxin;
|
| · |
Timely
resolution of the CMC and cGMP-related matters at our manufacturing
operations in New Jersey with respect to Surfaxin and our other SRTs
presently under development, including matters that were noted by
the FDA
in its inspectional reports on Form FDA 483 and our recent drug stability
testing issues;
|
| · |
Successful
manufacture of SRT drug product candidates, including Surfaxin, at
our
operations in New Jersey;
|
| · |
Successful
development and implementation of a manufacturing strategy for the
Chrysalis aerosolization device and related materials to support
clinical
studies and commercialization of
Aerosurf.
|
| · |
Obtaining
additional manufacturing operations, for which we presently have
limited
resources.
|
As
a
result of the amount and nature of these factors, many of which are outside
our
control, 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,
| · |
Slow
patient enrollment;
|
| · |
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 complimentary
technologies;
|
| · |
Lack
of effectiveness of the product candidate being tested;
and
|
| · |
Lack
of sufficient funds.
|
If
we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. If we do not obtain and maintain regulatory
approval for our products, we will not generate any revenues from the sale
of
our products and the value, financial condition and results of operations will
be substantially harmed.
14
CORPORATE
PARTNERSHIP AGREEMENTS
Chrysalis
Technologies, a Division of Philip Morris USA Inc.
In
December 2005, we entered into a strategic alliance with Chrysalis Technologies
(Chrysalis), a division of Philip Morris USA Inc., to develop and commercialize
aerosol SRT to address a broad range of serious respiratory conditions, such
as
ALI, neonatal respiratory failure, COPD, asthma, cystic fibrosis and others.
The
alliance unites two complementary respiratory technologies - our
precision-engineered surfactant technology with Chrysalis’ novel aerosolization
device technology that is being developed to enable the delivery of therapeutics
to the deep lung.
Chrysalis
has developed a proprietary aerosol generation technology that is being designed
with the potential to enable targeted upper respiratory or deep lung delivery
of
therapies for local or systematic applications. The Chrysalis technology is
designed to produce high-quality, low velocity aerosols for possible deep lung
aerosol delivery. Aerosols are created by pumping the drug formulation through
a
small, heated capillary wherein the excipient system is substantially converted
to the vapor state. Upon exiting the capillary, the vapor stream quickly cools
and slows in velocity yielding a dense aerosol with a defined particle size.
The
defined particle size can be readily controlled and adjusted through device
modifications and drug formulation changes.
The
alliance focuses on therapies for hospitalized patients, including those in
the
neonatal intensive care unit (NICU), pediatric intensive care unit (PICU) and
the adult intensive care unit (ICU), and can be expanded into other hospital
applications and ambulatory settings. We and Chrysalis are utilizing our
respective capabilities and resources to support and fund the design and
development of integrated drug-device systems that can be uniquely customized
to
address specific respiratory diseases and patient populations. Chrysalis is
responsible for developing the design for the aerosol device platform, patient
interface and disposable dose packets. We are responsible for aerosolized SRT
drug formulations, clinical and regulatory activities, and the manufacturing
and
commercialization of the drug-device products. We have exclusive rights to
Chrysalis’ aerosolization technology for use with pulmonary surfactants for all
respiratory diseases and conditions in hospital and ambulatory settings.
Generally, Chrysalis will receive a tiered royalty on product sales: the base
royalty generally applies to aggregate net sales of less than $500 million
per
contract year; the royalty generally increases on aggregate net sales in excess
of $500 million per contract year, and generally increases further on aggregate
net sales of alliance products in excess of $1 billion per contract
year.
Our
lead
neonatal program utilizing the Chrysalis technology is Aerosurf administered
via
nCPAP to treat premature infants in the NICU at risk for respiratory failure.
Our lead adult program utilizing the Chrysalis technology is the development
of
aerosolized SRT administered as a prophylactic for patients in the hospital
at
risk for Acute Lung Injury (ALI).
Laboratorios
del Dr. Esteve, S.A.
In
December 2004, we reached an agreement with Esteve to restructure our
pre-existing strategic alliance for the development, marketing and sales of
our
products in Europe and Latin America. Under the revised alliance, we regained
full commercialization rights in key European markets, Central America and
South
America for SRT, including Surfaxin for the prevention of RDS in premature
infants and the treatment of ARDS in adults. Esteve will focus on Andorra,
Greece, Italy, Portugal, and Spain, and now has development and marketing rights
to a broader portfolio of potential SRT products. Esteve will pay us a transfer
price on sales of Surfaxin and other SRT. 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 revised territory. Esteve has
agreed to make stipulated cash payments to us upon its achievement of certain
milestones, primarily upon receipt of marketing regulatory approvals for the
covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy
to
Dompe Farmaceitici Spa (Dompe), a privately owned Italian company. Under the
sublicense agreement, Dompe will be responsible for sales, marketing and
distribution in Italy of Surfaxin.
15
PLAN
OF OPERATIONS
We
have
incurred substantial losses since inception and expects to continue to expend
substantial amounts for continued product research, development, manufacturing,
and general business activities. We anticipate that during the next 12 to 24
months:
Research
and Development
We
will
focus our research, development and regulatory activities in an effort to
develop a pipeline of potential SRT for respiratory diseases. The drug
development, clinical trial and regulatory process is lengthy, expensive and
uncertain and subject to numerous risks including, without limitation, the
applicable risks discussed in the “Risk Factors” section herein and those
contained in our most recent Annual Report on Form 10-K.
Our
major
research and development projects include:
SRT
for Neonatal Intensive Care Unit
|
In
order to address the most prevalent respiratory disorders affecting
infants in the NICU, we are conducting several NICU therapeutic programs
targeting respiratory conditions cited as some of the most significant
unmet medical needs for the neonatal community.
|
Surfaxin
for RDS in Premature Infants
In
April
2006, we received a second Approvable Letter from the FDA for Surfaxin for
the
prevention of RDS in premature infants. Specifically, the FDA requested certain
information primarily focused on the Chemistry, Manufacturing and Controls
(CMC)
section of the NDA. The information predominately involves the further
tightening of active ingredient and drug product specifications and related
controls. Consistent with previous review, the FDA did not have any clinical
or
statistical comments. Also in April, ongoing analysis of data from Surfaxin
process validation batches indicated that certain stability parameters had
not
been achieved. These process validation batches were manufactured as a
requirement for our NDA and had been undergoing periodic stability
testing.
We
are
completing our analysis of the second Approvable Letter and preparing a
comprehensive information package for the FDA addressing the issues in the
second Approvable Letter. Once we believe that we have resolved our Surfaxin
manufacturing issues, including completing our comprehensive investigation
covering among other things, manufacturing processes, test methods, and drug
substance suppliers, we will request a meeting with the FDA and submit the
comprehensive information package. Upon receipt of our request, procedurally,
the FDA must respond within 14 days and the meeting must occur within 75
days of
the written request. At the meeting, we will seek to clarify the issues
identified by the FDA in the second Approvable Letter and agree on a plan
to
obtain potential approval. Thereafter, to meet FDA regulatory requirements,
we
plan to manufacture new process validation batches and, once we have achieved
satisfactory Surfaxin process validation and stability testing over an
acceptable period (currently contemplated to be six-months), we will submit
our
formal response to the second Approvable Letter. The FDA will then advise
us if
it will accept the submitted response to the second Approvable Letter as
a
"complete" response and the time frame in which it will complete its review
of
the NDA.
As
a
result of these events, we have revised our expectations concerning the timing
of potential FDA approval of Surfaxin for the prevention of RDS in premature
infants.
To
address our manufacturing issues, we initiated a comprehensive investigation
to
determine the cause of the stability failure covering, among other things,
manufacturing processes, test methods, and drug substance suppliers and,
to date
we have achieved the following progress:
| § |
We
recently manufactured two “investigation batches” of Surfaxin
that have passed all of the critical release specification assays,
with
the remaining release analytical procedures and stability monitoring
ongoing. These investigation batches are intended to assess the impact
of
the investigative observations and will provide significant supportive
data to a comprehensive investigation report and a corrective action
and
preventative action (CAPA) plan. These investigation batches are
not
designated as process validation batches,
however.
|
16
| § |
The
data and information gathering phase of the investigation is nearly
complete and we have begun to prepare the investigation report and
the
CAPA plan.
|
| § |
We
have been able, through the investigative process, to simultaneously
address certain issues associated with the second Approvable Letter
received from the FDA. We believe that resolution of the manufacturing
issues and implementation of a CAPA plan will also resolve a number
of
issues raised by the FDA in the second Approvable
Letter.
|
Dependent
upon satisfactory completion of our investigation, we expect to meet with
the
FDA and manufacture new process validation batches in the fourth quarter
of
2006.
We
also
filed an MAA with the EMEA for clearance to market Surfaxin for the prevention
and rescue treatment of RDS in premature infants in Europe. We received the
Day
180 List of Outstanding Issues from the Committee for Medicinal Products for
Human Use (CHMP) in relation to our MAA. We submitted a written response to
all
of the CHMP’s outstanding issues in April 2006 and, subsequently met with
the EMEA to discuss the response. Because our manufacturing issues could
not be resolved within the regulatory time frames mandated by the EMEA, in
June
2006 we determined to voluntarily withdraw the MAA for Surfaxin for the
prevention and rescue treatment of RDS in premature infants.
Surfaxin
for BPD in Premature Infants
On
May 9,
2006, with enrollment totaling 136 patients, we determined to conclude our
Phase
2 clinical trial of Surfaxin for the prevention and treatment of BPD in
premature infants. This double-blind, controlled Phase 2 clinical trial was
intended to enroll up to 210 very low birth weight premature infants born at
risk for developing BPD and its conclusion was related to cost-cutting measures
and the potentially adverse effect that our manufacturing issues may have had
on
the near-term availability of Surfaxin drug product for this clinical trial.
The
study’s objective is to determine the safety and tolerability of administering
Surfaxin as a therapeutic approach for the prevention and treatment of BPD.
In
January 2006, the FDA granted Fast Track designation to Surfaxin for prevention
and treatment of BPD in premature infants and, in October 2005, the Office
of
Orphan Products Development of the FDA (OOPD) granted Orphan Drug designation
to
Surfaxin for the treatment of BPD. In June 2006, the OOPD also granted Orphan
Drug designation to Surfaxin for the prevention of BPD. We plan to perform
a
comprehensive analysis of the clinical data from this trial and report top-line
results in the fourth quarter of 2006.
Aerosurf,
Aerosolized SRT
|
Aerosurf
is our precision-engineered aerosolized SRT administered via nCPAP
intended to treat premature infants at risk for respiratory failures.
In
September 2005, we completed and announced the results of our first
pilot
Phase 2 clinical study of Aerosurf, which was designed as an open
label,
multicenter study to evaluate the feasibility, safety and tolerability
of
Aerosurf delivered using a commercially-available aerosolization
device
via nCPAP for the prevention of RDS in premature infants administered
within 30 minutes of birth over a three hour duration. The study
showed
that it is feasible to deliver Aerosurf via nCPAP and that the treatment
was generally safe and well tolerated.
|
In
December 2005, we entered into a strategic alliance with Chrysalis. The alliance
unites two highly complementary respiratory technologies - our
precision-engineered surfactant technology with Chrysalis’ novel aerosolization
device technology that is being developed to enable the delivery of therapeutics
to the deep lung. Through this alliance, we gained exclusive rights to their
aerosolization technology for use with pulmonary surfactants for all respiratory
diseases. Our lead neonatal program utilizing the Chrysalis technology is
Aerosurf administered via nCPAP to treat premature infants in the NICU at risk
for neonatal respiratory disorders. We anticipate initiating a pilot Phase
2
clinical study of Aerosurf utilizing the Chrysalis aerosolization technology
in
the first half of 2007. This timeline may be affected by our efforts to
remediate our manufacturing issues discussed above.
17
SRT
for Critical Care and Hospital Indications
In
March
2006, we completed and announced preliminary results of a Phase 2 clinical
trial
for the treatment of Acute Respiratory Distress Syndrome (ARDS) in adults using
our precision-engineered surfactant delivered via bronchoscopic segmental lavage
(Surfactant Lavage). The ARDS Phase 2 clinical trial was an open-label,
controlled, multi-center, international study of Surfactant Lavage for the
treatment of ARDS in adults that was designed to enroll up to 160 patients.
Total enrollment in the trial was 124 patients.
The
objective of the Surfactant Lavage was to restore functional surfactant levels
in the patients’ lungs, thereby improving oxygenation in order to remove
critically ill patients from mechanical ventilation sooner. Following our
analysis of this trial, we plan to submit the data for publication in a peer
review journal. We plan to seek potential partners, with which we can apply
the
scientific and clinical observations generated from this trial to support the
design of potential future trials to treat ARDS.
We
are
also evaluating the development of aerosol formulations of SRT to potentially
address ALI, cystic fibrosis, and other respiratory conditions. In December
2005, we entered into a strategic alliance with Chrysalis to develop and
commercialize aerosolized SRT to address a broad range of serious respiratory
conditions. Our lead adult program utilizing the Chrysalis technology is the
development of aerosolized SRT administered as a prophylactic for patients
in
the hospital at risk for Acute Lung Injury (ALI). Given our current priority
to
focus on developing the SRT pipeline for the NICU, we will be assessing the
timing and further prioritization of these adult programs.
Manufacturing
Surfaxin
is a complex drug and, unlike many drugs, contains four active ingredients.
Surfaxin is aseptically manufactured at our facility as a sterile, liquid
dispersion. The manufacturing process to produce Surfaxin is complex, must
be
conducted in a sterile environment, and requires ongoing monitoring of the
stability and conformance to product specifications of each of the four active
ingredients.
We
will
invest in and support our manufacturing strategy for the production of our
precision-engineered SRT to meet anticipated clinical needs and, if approved,
commercial needs in the United States, Europe and other markets:
Manufacturing
- New Jersey Operations
In
December 2005, we purchased the manufacturing operations of Laureate Pharma
(our
contract manufacturer at that time) that are critical to the production of
Surfaxin and our SRT clinical programs. This facility is our only validated
clinical facility in which we produce clinical grade material of our drug
substance. We will use this pharmaceutical manufacturing and development
facility for the production of Surfaxin and for the development and enhanced
formulations of Surfaxin and the development of aerosol formulations including
Aerosurf. In connection with our acquisition of the facility, we entered into
a
transitional services arrangement under which Laureate agreed to provide us
with
certain limited manufacturing-related support services through December 2006.
As
of July 31, 2006, we have terminated the arrangement and have transitioned
the
Laureate support activities to our facility.
In
April
2006, ongoing analysis of data from Surfaxin process validation batches
indicated that certain stability parameters had not been achieved. These process
validation batches were manufactured as a requirement for our NDA and had been
undergoing periodic stability testing. To meet FDA regulatory requirements,
following the meeting that we expect to have with the FDA, we expect to
manufacture new process validation batches in the fourth quarter of 2006 and
subject them to periodic stability testing over an acceptable period (currently
contemplated to be six-months). As a result of these events, we have revised
our
expectations concerning the timing of potential FDA approval of Surfaxin for
the
prevention of RDS in premature infants. We are investing in manufacturing and
regulatory activities intended to gain such FDA approval, including preparing
our response to the second Approvable Letter and analysis and remediation of
our
recent manufacturing issues.
18
Longer-Term
Manufacturing Capabilities
We
view
the acquisition of a New Jersey manufacturing facility as an initial step of
our
manufacturing strategy for the continued development of our SRT portfolio,
including life cycle management of Surfaxin, potential formulation enhancements,
and expansion of our aerosol SRT products, beginning with Aerosurf. The lease
for our New Jersey manufacturing operations is through December 2014. In
addition to the customary terms and conditions, the lease contains an early
termination option, beginning in December 2009. The early termination option
can
only be exercised by the landlord upon a minimum of two years prior notice
and,
in the earlier years, payment to us of significant early termination amounts,
subject to certain conditions. Taking into account this early termination option
for our Totowa, NJ, facility, our long-term strategy includes building or
acquiring additional manufacturing capabilities for the production of our
precision-engineered surfactant drug products.
Aerosol
Devices and Related Componentry
For
our
planned clinical trials, we plan on utilizing third-party contract
manufacturers, suppliers and assemblers for the aerosolization devices and
related componentry for our aerosol SRT product candidates.
See
the
applicable risks discussed in the “Risk Factors” section herein and those
contained in our most recent Annual Report on Form 10-K.
General
and Administrative
We
intend
to invest in general and administrative resources primarily to support our
legal
requirements, intellectual property portfolios (including building and enforcing
our patent and trademark positions), our business development initiatives,
financial systems and controls, management information technologies, and general
management capabilities.
We
will
need to generate significant revenues from product sales, related royalties
and
transfer prices to achieve and maintain profitability. Through June 30, 2006,
we
had no revenues from any product sales, and had not achieved profitability
on a
quarterly or annual basis. Our ability to achieve profitability depends upon,
among other things, our ability to develop products, obtain regulatory approval
for products under development and enter into agreements for product
development, manufacturing and commercialization. In addition, our results
are
dependent upon the performance of our strategic partners and suppliers.
Moreover, we may never achieve significant revenues or profitable operations
from the sale of any of our products or technologies.
Through
June 30, 2006, we had not generated taxable income. On December 31, 2005, net
operating losses available to offset future taxable income for Federal tax
purposes were approximately $187.0 million. The future utilization of such
loss
carryforwards may be limited pursuant to regulations promulgated under Section
382 of the Internal Revenue Code. In addition, we have a research and
development tax credit carryforward of $3.8 million at December 31, 2005. The
Federal net operating loss and research and development tax credit carryforwards
expire beginning in 2009 through 2024.
RESULTS
OF OPERATIONS
The
net
loss for the three and six month periods ended June 30, 2006 was $14.7 million
(or $0.24 per share) and $30.5 million (or $0.50 per share), respectively.
The
net loss for the three and six month periods ended June 30, 2005 was $9.8
million (or $0.18 per share) and $19.1 million (or $0.37 per share),
respectively.
19
Included
in the GAAP net loss for the quarter ender June 30, 2006 is a restructuring
charge of $4.8 million, or $0.08 per share, related to the staff reductions
and
the close-out of certain commercial programs as a result of our revised
expectations for the timing of potential FDA approval and commercial launch
of
Surfaxin for the prevention of Respiratory Distress Syndrome (RDS) in premature
infants. Additionally, we adopted Financial Accounting Standards No. 123(R)
(“FAS 123(R)”) on January 1, 2006 using the modified prospective method, which
resulted in the recognition of stock compensation expenses in the statement
of
operations during the three and six months ended June 30, 2006 without adjusting
the prior year three and six month periods. The net loss for the three and
six
months ended June 30, 2006 includes $1.6 million (or $0.03 per share) and $3.2
million (or $0.05 per share), respectively, of stock-based compensation expenses
as a result of our adoption of FAS 123(R). Excluding these charges, the net
loss
for the three and six months ended June 30, 2006 was $8.3 million (or $0.13
per
share) and $22.5 million (or $0.37 per share), respectively.
Revenues
Revenue
for the three and six months ended June 30, 2006 was $0 for both periods.
Revenue for the three and six months ended June 30, 2005 was $24,000 and
$85,000, respectively. The revenue in 2005 was associated with our corporate
partnership agreement with Esteve to develop, market and sell Surfaxin in
Southern Europe.
Research
and Development Expenses
Research
and development expenses for the three and six months ended June 30, 2006 were
$5.9 million and $13.5 million, respectively, and for the three and six months
ended June 30, 2005 were $5.9 million and $11.0 million, respectively. Research
and development cost consist primarily of expenses associated with research
and
pre-clinical operations, manufacturing development, clinical and regulatory
operations and other direct clinical trial activities. The increase as compared
to the same prior year periods primarily reflects:
| (i) |
manufacturing
development activities (included in research and development expenses)
to
support the production of clinical and commercial drug supply for
our SRT
programs, including Surfaxin, SRT formulations and aerosol development
capabilities, in conformance with current Good Manufacturing Practices
(cGMPs). Expenses related to manufacturing development activities
for the
three and six months ended June 30, 2006 were $2.9 million and $5.4
million, respectively, as compared to $2.7 million and $4.0 million
for
the three and six months ended June 30, 2005, respectively. The increase
in expenses is primarily associated with the ownership of our
manufacturing operation in Totowa, New Jersey, which we purchased
from
Laureate Pharma, Inc. (our contract manufacturer at that time) in
December
2005. Expenditures in 2005 for manufacturing activities included
improvements and enhancements to Laureate’s Totowa, New Jersey facility in
response to the FDA inspectional observations on Form FDA 483.
Additionally, there was a charge of $0.1 million and $0.3 million
for the
three and six months ended June 30, 2006, respectively, associated
with
stock-based employee compensation in accordance with the provisions
of
SFAS No. 123R.
|
| (ii) |
research
and development activities, excluding manufacturing development
activities, were $3.0 million and $8.1 million for the three and
six
months ended June 30, 2006, respectively, as compared to $3.2 million
and
$7.0 million for the three and six months ended June 30, 2005,
respectively. These costs are primarily associated with the development
of
aerosolized and other related formulations of our precision-engineered
lung surfactant and engineering of aerosol delivery systems, clinical
trial implementation and management, clinical quality control and
regulatory compliance activities, data management and biostatistics,
including, among other things: (A) U.S. and European regulatory activities
associated with Surfaxin for RDS in premature infants; (B) clinical
activities for the Phase 2 trial for ARDS in adults and the Phase
2 trial
for BPD in premature infants; and (C) development activities related
to
Aerosurf for neonatal respiratory disorders. Additionally, there
were
charges of $0.4 million and $0.6 million for the three and six months
ended June, 2006, respectively, associated with stock-based employee
compensation in accordance with the provisions of SFAS No.
123R.
|
20
General
and Administrative Expenses
General
and administrative expenses for the three and six months ended June 30, 2006
were $4.0 million and $12.7 million, respectively, and for the three and six
months June 30, 2005, were $4.1 million and $8.4 million, respectively. General
and administrative expenses consist primarily of the costs of executive
management, finance and accounting, business and commercial development,
pre-launch commercial sales and marketing, legal, facility and other
administrative costs.
The
increase in general and administrative expenses as compared to the same prior
year periods primarily reflects pre-launch commercial activities to build a
United States commercial infrastructure in preparation for the previously
anticipated commercial launch of Surfaxin in the second quarter of 2006. For
the
three and six months ended June 30, 2006, costs associated with these pre-launch
commercial activities were $0.8 million and $5.5 million, respectively, as
compared to $2.1 million and $4.4 million for the three and six months ended
June 30, 2005, respectively. In April 2006, in connection with the second
Approvable Letter and the failure of Surfaxin process validation batches to
achieve certain stability parameters, which caused us to modify our expectations
concerning the timing of potential FDA approval of Surfaxin, we discontinued
pre-launch commercial activities and significantly downsized our commercial
infrastructure. The cost associated with the discontinuance of such activities
are a component of the Q2 2006 restructuring charge. Additionally, there is
a
charge of $1.1 million and $2.3 million for the three and six months ended
June
30, 2006, respectively, associated with stock-based employee compensation in
accordance with the provisions of SFAS No. 123R.
Q2
2006 Restructuring Charge
In
order
to lower our cost structure and re-align our operations with business
priorities, we reduced staff levels and reorganized corporate management. We
took these actions as a result of receiving a second Approvable Letter and
experiencing manufacturing issues that have caused us to modify our expectations
concerning the timing of potential FDA approval and commercial launch of
Surfaxin for the prevention of RDS in premature infants. The workforce reduction
totaled 52 employees, representing approximately 33% of our workforce, and
was
focused primarily on our commercial infrastructure, the development of which
is
no longer in our near-term plans. Included in the workforce reduction were
three
senior executives. All affected employees were eligible for certain severance
payments and continuation of benefits. We expect to realize annual expense
savings of approximately $8.1 million from the reduction in work force and
related operating expenses. Additionally, certain commercial programs were
discontinued and related costs will no longer be incurred. Such commercial
program expenses totaled approximately $5.0 million over the past two fiscal
quarters (fourth quarter of 2005 and first quarter of 2006).
We
incurred a restructuring charge of $4.8 million in the second quarter of 2006
associated with staff reductions and the close-out of certain commercial
programs, which was accounted for in accordance with Statement of Financial
Accounting Standards No. 146 “Accounting
for Costs Associated with Exit or Disposal Activities”
and is
identified separately on the Statement of Operations as Restructuring Charge.
This charge includes $2.5 million of severance and benefits related to staff
reductions and $2.3 million for the termination of certain commercial programs.
As of June 30, 2006, payments totaling $3.3 million had been made related to
these items and $1.5 million were unpaid. Of the $1.5 million that was unpaid
at
June 30, 2006, $0.3 million was included in accounts payable and $1.2 million
was included in accrued expenses, of which $0.8 million was classified as a
current liability and $0.4 million was classified as long-term).
Other
Income/(Expense)
Other
income and (expense) for the three and six months ended June 30, 2006 was
$45,000 and $545,000, respectively, compared to $109,000 and $122,000 for the
three and six months ended June 30, 2005.
Included
in other income for the six months ended June 30, 2006 was $280,000 of proceeds
from the sale of our State of Pennsylvania research and development tax
credits.
21
Interest
income for the three and six months ended June 30, 2006 $377,000 and $897,000,
respectively, compared to $342,000 and $556,000 for the three and six months
ended June 30, 2005. The
increase is primarily due to a general increase in earned market interest rates.
Interest
expense for the three and six months ended June 30, 2006 was ($332,000) and
($632,000), respectively, compared to ($233,000) and ($434,000) for the three
and six months ended June 30, 2005. The increase is primarily due to interest
expense associated with our credit facility and capital lease financing
arrangements. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.”
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital
Cash
is
required to fund our working capital needs, to purchase capital assets, and
to
pay our debt service, including principal and interest payments. We do not
currently have any source of operating revenue and will require significant
amounts of cash to continue to fund our operations, our clinical trials and
our
research and development efforts until such time, if ever, that one of our
products has received regulatory approval for marketing. Because we have
not
generated any revenue from the sale of any products, we have primarily
relied
on
the capital markets and debt financings as our source of funding. We will
continue to be opportunistic in accessing the capital markets to obtain
financing on terms satisfactory to us. We plan to fund our future cash
requirements through:
| · |
the
issuance of equity and debt
financings;
|
| · |
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
| · |
sales
of Surfaxin, if approved;
|
| · |
capital
lease financings; and
|
| · |
interest
earned on invested capital.
|
Upon
receiving a second Approvable Letter and experiencing manufacturing issues
that
have caused us to modify our expectations concerning the timing of potential
FDA
approval and commercial launch of Surfaxin for the prevention of RDS in
premature infants, the market value of our common stock declined, which has
made
it more difficult to obtain equity and debt financing on terms that would be
beneficial to us in the long term. We have engaged Jefferies & Company,
Inc., the New York-based investment banking firm, to assist us in identifying
and evaluating strategic alternatives intended to enhance the future growth
potential of our SRT pipeline and maximize shareholder value. We are considering
multiple alternatives including, but not limited to, potential business
alliances, commercial and development partnerships, financings, business
combinations and other similar opportunities. No assurances can be given that
this evaluation will lead to any specific action or transaction.
After
taking into account the recently implemented cost containment measures, we
believe our current working capital is sufficient to meet planned activities
into 2007, before taking into account any strategic alternatives, potential
financings or amounts that may be potentially available through the CEFF. Under
the CEFF, Kingsbridge is not obligated to purchase shares for any day during
a
draw-down when the volume weighted average price of our common stock is below
$2.00. Currently, our common stock is trading below $2.00 per share and,
therefore, the CEFF is not available to raise capital. If our stock price rises
above $2.00 per share, we would anticipate using the CEFF to support working
capital needs in 2006 and 2007.
We
will
need additional financing from investors or collaborators to complete research
and development, manufacturing, and commercialization of our current product
candidates under development, and satisfy debt obligations. Working capital
requirements will depend upon numerous factors, including, without limitation,
the progress of our research and development programs, clinical trials, the
timing and cost of obtaining regulatory approvals, remediation of manufacturing
issues, levels of resources that we devote to the further development of
manufacturing and product development capabilities, technological advances,
status of competitors, ability to establish collaborative arrangements with
other organizations, the ability to defend and enforce intellectual property
rights, litigation and regulatory activities, and the establishment of
additional strategic or licensing arrangements with other companies or
acquisitions.
22
Cash,
Cash Equivalents and Marketable Securities
As
of
June 30, 2006, we had cash, cash equivalents, restricted cash and marketable
securities of $27.3 million, as compared to $50.9 million as of December 31,
2005, a decrease of $23.6 million. The decrease primarily consists of cash
used
in operating and investing activities of $26.5 million, offset by $2.2 million
of proceeds from a financing pursuant to the CEFF that resulted in the issuance
of 1,078,519 shares of our common stock and $0.7 million of proceeds from the
exercise of stock options and warrants.
Committed
Equity Financing Facility
In
April 2006, we entered into a new Committed Equity Financing Facility (CEFF)
with Kingsbridge Capital Limited (Kingsbridge), a private investment group,
in
which Kingsbridge committed to purchase, subject to certain conditions, the
lesser of up to $50 million or up to 11,677,047 shares of our common stock.
Our
previous Committed Equity Financing Facility, entered into with Kingsbridge
in
July 2004 (2004 CEFF) and which had capital of up to $47.6 million available,
automatically terminated on May 12, 2006, the date on which the SEC declared
effective the registration statement filed in connection with the new
CEFF.
This
new
CEFF allows us to raise capital, subject to certain conditions that we must
satisfy, at the time and in amounts deemed suitable to us, during a three-year
period beginning on May 12, 2006. We are not obligated to utilize any of the
$50
million available under the new CEFF.
The
purchase price of the shares sold to Kingsbridge will be at a discount ranging
from 6 to 10 percent of the volume weighted average of the price of our common
stock (VWAP) for each of the eight trading days following our election to sell
shares, or “draw down” under the CEFF. The discount on each of these eight
trading days will be determined as follows:
|
VWAP*
|
%
of VWAP (Applicable Discount)
|
|||
|
Greater
than $10.50 per share
|
94%
|
(6)%
|
||
|
Less
than or equal to $10.50 but greater than $7.00 per share
|
92%
|
(8)%
|
||
|
Less
than or equal to $7.00 but greater than or equal to $2.00 per
share
|
90%
|
(10)%
|
||
_____
*
As such
term is set forth in the Common Stock Purchase Agreement.
During
the eight trading day pricing period for a draw down, if the VWAP for any one
trading day is less than the greater of (i) $2.00 or (ii) 85 percent of the
closing price of our common stock for the trading day immediately preceding
the
beginning of the draw down period, the VWAP from that trading day will not
be
used in calculating the number of shares to be issued in connection with that
draw down, and the draw down amount for that pricing period will be reduced
by
one-eighth of the draw down amount we had initially specified.
Our
ability to require Kingsbridge to purchase our common stock is subject to
various limitations. Each draw down is limited to the lesser of 2.5 percent
of
the closing price market value of our outstanding shares of our common stock
at
the time of the draw down or $10 million. Unless Kingsbridge agrees otherwise,
a
minimum of three trading days must elapse between the expiration of any draw
down pricing period and the beginning of the next draw down pricing period.
Kingsbridge is not obligated to purchase shares for any day during a draw-down
when the VWAP on such day is below $2.00 per share. In addition, Kingsbridge
may
terminate the CEFF under certain circumstances, including if a material adverse
effect relating to our business continues for ten trading days after notice
of
the material adverse effect.
In
connection with the new CEFF, we issued a Class C Investor Warrant to
Kingsbridge to purchase up to 490,000 shares of our common stock at an exercise
price of $5.6186 per share, which is fully exercisable beginning October 17,
2006 and for a period of five years thereafter. The warrant must be exercised
for cash, except in limited circumstances.
23
In
May 2006, we entered into a financing pursuant to the CEFF resulting in proceeds
of $2.2 million from the issuance of 1,078,519 shares of our common stock at
an
average price of $2.03.
In
connection with the 2004 CEFF, we issued a Class B Investor warrant to
Kingsbridge to purchase up to 375,000 shares of our common stock at an exercise
price equal to $12.0744 per share. The warrant, which expires in January 2010,
must be exercised for cash, except in limited circumstances, for total proceeds
equal to approximately $4.5 million, if exercised. As of March 31, 2006, the
Class B Investor Warrant had not been exercised in whole or in part.
Potential
Financings under the October 2005 Universal Shelf Registration
Statement
In
October 2005, we filed a universal shelf registration statement on Form S-3
with
the SEC for the proposed offering, from time to time, of up to $100.0 million
of
our debt or equity securities. In December 2005, we completed a registered
direct offering of 3,030,304 shares of our common stock to select institutional
investors resulting in gross proceeds to us of $20.0 million.
The
universal shelf registration statement may permit us, from time to time, to
offer and sell up to an additional approximately $80.0 million of equity or
debt
securities. There can be no assurance, however, that we will be able to complete
any such offerings of securities. Factors influencing the availability of
additional financing include the progress of our research and development
activities, investor perception of our prospects and the general condition
of
the financial markets, among others.
Debt
Facilities
Credit
Facility with PharmaBio, an Investment Group of Quintiles Transnational
Corp.
We
entered into a collaboration arrangement with Quintiles Transnational Corp.
(Quintiles), in 2001, to provide certain commercialization services in the
United States for Surfaxin for the treatment of RDS in premature infants and
MAS
in full-term infants. In connection with the commercialization agreement,
PharmaBio, Quintiles strategic investment group, extended to us a secured,
revolving credit facility of $8.5 to $10.0 million to fund pre-marketing
activities associated with the launch of Surfaxin in the United States. The
facility was renegotiated in November 2004. At June 30, 2006, $8.5 million
was
outstanding under the credit facility and is classified as a current liability.
The interest rate is the greater of 8% or prime rate plus 2% annually and
payments are due quarterly in arrears. We are presently assessing a potential
restructuring of this credit facility. Without such restructuring, principal
and
interest outstanding under this credit facility will be due and payable as
a
balloon payment on December 31, 2006.
Capital
Lease and Note Payable Financing Arrangements with General Electric Capital
Corporation
Our
primary capital lease financing arrangement is with the Life Science and
Technology Finance Division of General Electric Capital Corporation (GECC).
Under this arrangement, we purchase capital equipment, including manufacturing,
information technology systems, laboratory, office and other related capital
assets and subsequently finance those purchases through this capital lease
financing arrangement. The capital lease is secured by the related assets.
Subject to certain conditions, this arrangement provides for financing of up
to
$9 million. On May 9, 2006, GECC agreed to amend the arrangement, which would
have expired April 30, 2006, such that the funds are now available through
October 2006,
subject
to certain conditions and in consideration of certain undertakings on our part,
including a pledge of certain proceeds of certain components of our intellectual
property and an agreement not to pledge, with certain exceptions, any interest
in our intellectual property. Laboratory and manufacturing equipment is financed
over 48 months and all other equipment is financed over 36 months. Interest
rates vary in accordance with changes in the three and four year treasury rates.
As of June 30, 2006, $5.2 million is outstanding ($1.9 million classified as
current liabilities and $3.3 million as long-term liabilities) and $1.6 million
remains available for future use, subject to certain conditions.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania, New Jersey and
California.
24
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, sales and marketing, and administration. The lease expires in
February 2010 with total aggregate payments of $4.6 million.
We
lease
a 21,000 square foot pharmaceutical manufacturing and development facility
in
Totowa, NJ that is specifically designed for the production of sterile
pharmaceuticals in compliance with cGMP requirements. The lease expires in
December 2014 with total aggregate payments of $1.4 million ($150,000 per year).
The lease contains an early termination option, first beginning in December
2009. The early termination option can only be exercised by the landlord upon
a
minimum of two years prior notice and payment of significant early termination
amounts to us, subject to certain conditions.
We
also
lease approximately 11,000 square feet of office and laboratory space in
Doylestown, Pennsylvania. We maintain the Doylestown facility for the
continuation of analytical laboratory activities under a lease that expires
in
August 2006, and is subject to extensions on a monthly basis.
We
lease
office and laboratory space in Mountain View, California. The facility is 16,800
square feet and houses our aerosol and formulation development operations.
The
lease expires in June 2008 with total aggregate payments of
$804,000.
Future
Capital Requirements
Unless
and until we can generate significant cash from our operations, we expect to
continue to require substantial additional funding to conduct our business,
including our manufacturing and research and product development activities
and
to repay our indebtedness. Our operations will not become profitable before
we
exhaust our current resources; therefore, we will need to raise substantial
additional funds through additional debt or equity financings or through
collaborative ventures with potential corporate partners. We may in some cases
elect to develop products on our own instead of entering into collaboration
arrangements and this would increase our cash requirements. Other than our
CEFF
with Kingsbridge and our capital lease financing arrangement with General
Electric Capital Corporation, we have not entered into any additional
arrangements to obtain additional financing.
On
June
20, 2006, we announced that we have engaged Jefferies & Company, Inc., the
New York-based investment banking firm, to assist us in identifying and
evaluating strategic alternatives intended to generate additional funds and
enhance the future growth potential of our surfactant replacement therapy
pipeline and maximize shareholder value. We are considering multiple
alternatives, including, but not limited to, potential business alliances,
commercial and development partnerships, financings, business combinations
and
other similar opportunities. No assurances can be given that this evaluation
will lead to any specific action or transaction.
If
a
transaction involving the issuance of additional equity and debt securities
is
concluded, such a transaction may result in additional dilution to our
shareholders. We cannot be certain that additional funding will be available
when needed or on terms acceptable to us, if at all. If we fail to receive
additional funding or enter into business alliances or other similar
opportunities, we may have to reduce significantly the scope of or discontinue
our planned research and development activities, which could significantly
harm
our financial condition and operating results.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and,
by
policy, limit the amount of credit exposure to any one issuer. We currently
do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses
in
principal if forced to sell securities that have declined in market value due
to
a change in interest rates.
25
ITEM
4. CONTROLS
AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls or internal control over financial
reporting will prevent all error and all fraud. A control system, no matter
how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also
be
circumvented by the individual acts of some persons, by collusion of two or
more
people, or by management override of the controls. The design of any system
of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls
may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or
fraud may occur and not be detected. In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our
Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of
our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by
this
Quarterly Report
on Form
10-Q.
Based
on this
evaluation,
the
Chief Executive Officer and Chief Financial Officer
concluded that as
of the
end of the period covered by this report,
the
disclosure controls and procedures were
effective in their
design to ensure that
information
required
to be disclosed in
the
reports that
we
file
or
submit
under
the
Exchange Act
is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
(b) Changes
in internal controls
There
were no changes in internal controls over financial reporting or other factors
that could materially affect those controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
26
PART
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
The
following actions were filed in May 2006 in the United States District Court
for
the Eastern District of Pennsylvania against the Company and the Company’s Chief
Executive Officer, Robert J. Capetola: on May 1, 2006, by Hal Unschuld,
individually and purportedly on behalf of a class of the Company’s investors who
purchased the Company’s publicly traded securities between December 28, 2005 and
April 25, 2006; on May 8, 2006, by Michael Donuvich, individually and
purportedly on behalf of a class of the Company’s investors who purchased the
Company’s publicly traded securities between December 28, 2005 and April 25,
2006; on May 9, 2006, by Raymond Lawrie, individually and purportedly on behalf
of a class of the Company’s investors who purchased the Company’s publicly
traded securities between March 16, 2004 and April 25, 2006 (the “Lawrie
Action”); and on May 15, 2006, Marilyn DePace, individually and purportedly on
behalf of a class of the Company’s investors who purchased the Company’s
publicly traded securities between February 1, 2005 and April 24, 2006 (the
“DePace Action”). In addition to the Company and Dr. Capetola, the Lawrie Action
names the Company’s Chief Financial Officer, John G. Cooper, and the DePace
Action names the Company’s former Chief Operating Officer, Christopher J.
Schaber. Each of these actions generally alleges violations of Section 10(b)
of
the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act in connection with various
public statements made by the Company and seeks an order that the action may
proceed as a class action and an award of compensatory damages in favor of
the
plaintiff and the other class members in an unspecified amount, together with
interest and reimbursement of costs and expenses of the litigation and other
equitable or injunctive relief. On June 15, 2006, these actions were
consolidated under the caption “In re: Discovery Laboratories Securities
Litigation” and, in July 2006, the court appointed the Mizla Group to serve as
lead plaintiff in these consolidated actions and the law firm of Chimicles
&
Tikellis LLP to act as lead counsel. The court also directed the lead plaintiff
to file a consolidated amended complaint no later than August 7, 2006.
On
May
16, 2005, Royal L. Knab filed a shareholder derivative complaint in the United
States District Court for the Eastern District of Pennsylvania against the
Company’s Chief Executive Officer, Robert J. Capetola, and W. Thomas Amick,
Antonio Esteve, Max E. Link and Herbert H. McDade, Jr., directors of the Company
(the “Knab Action”). A second shareholder derivative complaint was filed on June
6, 2006 by Paul J. Squier, individually and on behalf of the Company, against
the Company’s Chief Executive Officer, Robert J. Capetola and Herbert H. McDade,
Jr., Antonio Esteve, Max E. Link, Marvin E. Rosenthale, W. Thomas Amick,
directors of the Company, and Christopher J. Schaber, the Company’s former Chief
Operating Officer (the “Squier Action”). These actions generally allege
violations of state law, including breaches of fiduciary duties, abuse of
control, gross mismanagement, waste of corporate assets and unjust enrichment,
which were alleged to have occurred, in the Knab Action, from December 28,
2005
through the present, and, in the Squier Action, between 2005 and April 2006.
The
plaintiffs generally seek an award of damages, disgorgement of profits,
injunctive and other equitable relief and award of attorneys’s fees and costs.
In July 2006, the Knab Action and the Squier Action were consolidated under
the
caption “In re: Discovery Laboratories Derivative Litigation.” The parties have
entered into a stipulation providing that the Company is not required to respond
to these consolidated complaints until 60 days following defendants’ answer or a
dispositive ruling on a motion to dismiss filed in response to the consolidated
amended complaint in the class actions, described above.
The
Company intends to vigorously defend these actions. The potential impact of
these actions, all of which are expected to seek unquantified damages, attorneys
fees and expenses is uncertain. Additional actions based upon similar
allegations, or otherwise, may be filed in the future. There can be no assurance
that an adverse result in these proceedings would not have a potentially
material adverse effect on the Company’s business, results of operations and
financial condition.
27
ITEM
1A. RISK
FACTORS
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.
The
risk
factors set forth below have been revised based on recent events related to
the
Company and described elsewhere in this report. These risk factors should be
read together with the factors discussed in Part I, Item 1A - Risk Factors
in
our Annual Report on Form 10-K for the year ended December 31,
2005.
The
risks
described in this report and in our Annual Report on Form 10-K are not the
only
risks we face. Additional risks and uncertainties not currently known to us
or
that we currently deem to be immaterial also may materially adversely affect
our
business, financial condition and/or operating results.
Refocusing
our business subjects us to risks and uncertainties.
Since
we
received our second Approvable Letter from the FDA, we have been reassessing
the
business environment, our position within the biotechnology industry and our
relative strengths and weaknesses. As a result of this reassessment, we have
implemented significant changes to our operations as part of our overall
business strategy. For example, we have reduced the size of our workforce and
made changes to senior management. Additional changes to our business will
be
considered as our management seeks to strengthen financial and operational
performance. These changes may be disruptive to our established organizational
culture and systems. In addition, consideration and planning of strategic
changes diverts management attention and other resources from day to day
operations.
We
may fail to realize the benefits that we expect from our cost-savings
initiatives.
We
have
undertaken and expect to continue to undertake cost-savings initiatives.
However, we cannot assure you that we will realize on-going cost savings or
any
other benefits from these initiatives. Even if we realize the benefits of our
cost savings initiatives, any cash savings that we achieve may be offset by
other costs, such as costs related to ongoing development activities and
pre-clinical and clinical studies. Staff reductions may reduce our workforce
below the level needed to effectively manage our business and service our
development programs. Our failure to realize the anticipated benefits of our
cost-savings initiatives could have a material adverse effect on our business,
results of operations and financial condition.
The
regulatory approval process for our products is expensive and time-consuming,
and the outcome is uncertain. We may not obtain required regulatory approvals
for the commercialization of our products.
To
sell
Surfaxin or any of our other products under development, we must receive
regulatory approvals for each product. The FDA and foreign regulators
extensively and rigorously regulate the testing, manufacture, distribution,
advertising, pricing and marketing of drug products like our products. This
approval process includes preclinical studies and clinical trials of each
pharmaceutical compound to establish the safety and effectiveness of each
product and the confirmation by the FDA and foreign regulators that, in
manufacturing the product, we maintain good laboratory and manufacturing
practices during testing and manufacturing. Even if favorable testing data
is
generated by clinical trials of drug products, the FDA or EMEA may not accept
or
approve an NDA or MAA filed by a pharmaceutical or biotechnology company for
such drug product. To market our products outside the United States, we also
need to comply with foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products.
We
have
filed an NDA with the FDA for Surfaxin for the prevention of RDS in premature
infants. As part of the review of the Surfaxin NDA, the FDA, in January 2005,
issued a Form FDA 483 to our then contract manufacturer, Laureate Pharma,
Inc.
The FDA cited inspectional observations related to basic quality controls,
process assurances and documentation requirements that support the commercial
production process necessary to comply with current good manufacturing practices
(cGMPs). The FDA issued an Approvable Letter to us in February 2005 regarding
our NDA. To address the Form FDA 483 inspectional observations, we and Laureate
implemented improved quality systems and documentation controls believed
to
support the FDA’s regulatory requirements for the approval of Surfaxin. In
October 2005, the FDA accepted our responses to the Approvable Letter as
a
complete response thereby establishing April 2006 as its target to complete
its
review of our NDA. In April 2006, analysis of ongoing stability data from
Surfaxin process validation batches, which were produced as a requirement
for
our NDA, indicated that certain stability parameters had not been achieved
and,
therefore, three additional process validation batches will likely have to
be
produced. We are presently conducting an investigation to determine the cause
and define the corrective action and preventative action plan needed to
potentially remediate these manufacturing issues. Our investigation covers,
among other things, manufacturing processes, test methods, and drug substance
suppliers. Also in April 2006, the FDA issued a second Approvable Letter
to us,
requesting certain information primarily focused on the CMC section of the
NDA.
We are preparing a comprehensive information package and, after we are satisfied
that the manufacturing issues have been remediated, we will request a meeting
with the FDA to discuss plans for the manufacture of new process validation
batches and clarify the issues identified in the second Approvable Letter.
Thereafter, we will submit our formal response to the second Approvable Letter.
At that time, the FDA will advise us of the time frame in which it will complete
its review and advise us if it will accept our response to the second Approvable
Letter as a complete response. After the FDA has accepted our response as
a
complete response, the FDA might still delay its approval of our NDA or reject
our NDA, which would have a material adverse effect on our
business.
28
We
filed
an MAA with the EMEA for clearance to market Surfaxin for the prevention and
rescue treatment of RDS in premature infants in Europe. In February 2006, we
received the Day 180 List of Outstanding Issues from the Committee for Medicinal
Products for Human Use (CHMP) in relation to our MAA. We submitted a written
response to all of the CHMP’s outstanding issues in April 2006 and subsequently
met with the EMEA to discuss the response. Because our manufacturing issues
could not be resolved within the regulatory time frames mandated by the EMEA,
in
June 2006, we determined to voluntarily withdrawn the MAA for Surfaxin for
the
prevention and rescue treatment of RDS in premature infants in Europe. We intend
to have further discussions with the EMEA and develop a strategy for potential
Surfaxin approval in Europe.
See
also
Item 2: “Management’s Discussion and Analysis of Financial Condition and Results
of Operation - Overview and Plan of Operations.”
Our
pending NDA for Surfaxin for the prevention of RDS in premature infants may
not
be approved by the FDA in a timely manner or at all, which would adversely
impact our ability to commercialize this product.
We
submitted an NDA to the FDA for Surfaxin for the prevention of RDS in premature
infants. In April 2006, we received a second Approvable Letter from the FDA,
which contained a list of inspectional observations on Form FDA 483. Thereafter,
we learned that analysis of ongoing stability data from Surfaxin “process
validation batches”, which are a part of our NDA, indicated that certain
stability parameters had not been achieved and, therefore, three additional
Surfaxin process validation batches will likely have to be produced. These
events have caused us to revise our expectations concerning the timing of
potential FDA approval of our NDA. When we have completed and submitted our
response to the second Approvable Letter and remediated our manufacturing
issues, the FDA may request additional information from us, including data
from
additional clinical trials. Ultimately, the FDA may not approve Surfaxin for
RDS
in premature infants. Any failure to obtain FDA approval or further delay
associated with the FDA’s review process would adversely impact our ability to
commercialize our lead product.
The
manufacture of our products is a highly exacting and complex process, and if
we
or one of our materials suppliers encounter problems manufacturing our products,
our business could suffer.
The
FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with cGMP or similar requirements that the FDA or foreign
regulators establish. We or our materials suppliers may face manufacturing
or
quality control problems causing product production and shipment delays or
a
situation where we or the supplier may not be able to maintain compliance with
the FDA’s cGMP requirements, or those of foreign regulators, necessary to
continue manufacturing our drug substance. Manufacturing or quality control
problems have already and may again occur at our Totowa facility or our
materials suppliers. Such problems, including, for example, our recent product
stability testing program issues, require potentially complex, time-consuming
and costly investigations to determine the causes and may also require detailed
and time-consuming remediation efforts, which can further delay the regulatory
approval process. Any failure to comply with cGMP requirements or other FDA
or
foreign regulatory requirements could adversely affect our clinical research
activities and our ability to market and develop our products.
29
In
December 2005, we acquired Laureate’s clinical manufacturing facility in Totowa,
New Jersey. The facility has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
With
this acquisition, we now maintain a complete manufacturing facility and we
will
be manufacturing our products. We currently own certain specialized
manufacturing equipment, employ certain manufacturing managerial personnel,
and
we expect to invest in additional manufacturing equipment. We may be unable
to
produce Surfaxin and our other SRT drug candidates to appropriate standards
for
use in clinical studies or commercialization. If we do not successfully develop
our manufacturing capabilities, it will adversely affect the sales of our
products.
In
connection with the development of Aerosurf, we expect to rely on third-party
contract manufacturers to manufacture the Chrysalis drug device products and
components to support our clinical studies and potential commercialization
of
Aerosurf. The drug device products must be manufactured in a sterile
environment, subject to ongoing monitoring of conformance to product
specifications of each device. The manufacturer must be registered with and
qualified by the FDA and must conduct its manufacturing activities in compliance
with cGMP requirements, or those of foreign regulators. We may be unable to
identify a qualified manufacturer to meet our requirements or the manufacturer
we identify may be unable to manufacture the drug product devices to our
specifications for use in clinical studies or commercialization. If we do not
successfully identify and enter into a contractual agreement with drug device
and components manufacturers, it will adversely affect development and
commercialization of Aerosurf.
If
the parties we depend on for supplying our drug substance raw materials and
certain manufacturing-related services do not timely supply these products
and
services, it may delay or impair our ability to develop, manufacture and market
our products.
We
rely
on suppliers for our drug substance raw materials and third parties for certain
manufacturing-related services to produce material that meets appropriate
content, quality and stability standards and use in clinical trials of our
products and, after approval, for commercial distribution. To succeed, clinical
trials require adequate supplies of drug substance and drug product, which
may
be difficult or uneconomical to procure or manufacture. The manufacturing
process for the drug product devices used in Aerosurf includes the integration
of a number of products that we expect will be produced by one or more
manufacturers. We and our suppliers and vendors may not be able to (i) produce
our drug substance, drug product or drug product devices to appropriate
standards for use in clinical studies, (ii) perform under any definitive
manufacturing, supply or service agreements with us or (iii) remain in business
for a sufficient time to successfully produce and market our product candidates.
If we do not maintain important manufacturing and service relationships, we
may
fail to find a replacement supplier or required vendor or develop our own
manufacturing capabilities which could delay or impair our ability to obtain
regulatory approval for our products and substantially increase our costs or
deplete profit margins, if any. If we do find replacement manufacturers and
vendors, we may not be able to enter into agreements with them on terms and
conditions favorable to us and, there could be a substantial delay before a
new
facility could be qualified and registered with the FDA and foreign regulatory
authorities.
We
will need additional capital and our ability to continue all of our existing
planned research and development activities is uncertain. Any additional
financing could result in equity dilution.
We
will
need substantial additional funding to conduct our presently planned research
and product development activities. Based on our current operating plan, we
believe that our currently available working capital will be adequate to satisfy
our capital needs into 2007, before taking into account any amounts that may
be
available through the CEFF. Our future capital requirements will depend on
a
number of factors that are uncertain, including the results of our research
and
development activities, clinical studies and trials, competitive and
technological advances and the regulatory process, among others. We will likely
need to raise substantial additional funds through collaborative ventures with
potential corporate partners and through additional debt or equity financings.
We may also continue to seek additional funding through capital lease
transactions. We may in some cases elect to develop products on our own instead
of entering into collaboration arrangements. This would increase our cash
requirements for research and development.
30
We
have
not entered into arrangements to obtain any additional financing, except for
the
CEFF with Kingsbridge, our revolving credit facility with PharmaBio and our
capital equipment lease financing arrangement with GECC. Kingsbridge has the
right under certain circumstances to terminate the CEFF, including as a
consequence of a material adverse effect.
On
June
20, 2006, we announced that we have engaged Jefferies & Company, Inc., the
New York-based investment banking firm, to assist us in identifying and
evaluating strategic alternatives intended to generate additional funds and
enhance the future growth potential of our surfactant replacement therapy
pipeline and maximize shareholder value. We are considering multiple
alternatives, including, but not limited to, potential business alliances,
commercial and development partnerships, financings, business combinations
and
other similar opportunities. No assurances can be given that this evaluation
will lead to any specific action or transaction or generate additional capital
for the Company.
If
we
seek additional financing, such additional financing could include unattractive
terms or result in significant dilution of stockholders’ interests and share
prices may decline. If we fail to receive additional funding or enter into
business alliances or other similar opportunities, we may have to delay, scale
back or discontinue certain of our research and development operations, and
consider licensing the development and commercialization of products that we
consider valuable and which we otherwise would have developed ourselves. If
we
are unable to raise required capital, we may be forced to limit many, if not
all, of our research and development programs and related operations, curtail
commercialization of our product candidates and, ultimately, cease operations.
See also “Risk Factors: Our Committed Equity Financing Facilities may have a
dilutive impact on our stockholders.”
Furthermore,
if the market price of our common stock declines as a result of the dilutive
aspects of such potential financings, we could cease to meet the financial
requirements to maintain the listing of our securities on The Nasdaq National
Market. See “Risk
Factors: The market price of our stock may be adversely affected by market
volatility.”
Our
secured, revolving credit facility with PharmaBio is due on December 31, 2006.
If we are unable to renegotiate the terms of the credit facility, payment of
the
outstanding principal and interest would significantly reduce our available
working capital.
As
of
June 30, 2006, we have $8.5 million outstanding under this credit facility.
Outstanding principal and interest under this credit facility are due and
payable as a balloon payment on December 31, 2006. We are currently assessing
a
potential restructuring of this credit facility. There is no assurance, however,
that such a restructuring will be successful. If we are unable to restructure
this credit facility, we expect to pay the outstanding principal and interest
on
December 31, 2006. Such a payment would significantly reduce our available
working capital and our ability to implement our business strategy and could
have a material adverse effect on and our business, results of operations and
financial condition.
Our
Committed Equity Financing Facilities may have a dilutive impact on our
stockholders.
The
issuance of shares of our common stock under the CEFFs and upon exercise of
the
warrants we issued to Kingsbridge will have a dilutive impact on our other
stockholders and the issuance or even potential issuance of such shares could
have a negative effect on the market price of our common stock. In addition,
if
we access the CEFF, we will issue shares of our common stock to Kingsbridge
at a
discount of between 6% and 10% of the daily volume weighted average price of
our
common stock during a specified period of trading days after we access the
CEFF.
Issuing shares at a discount will further dilute the interests of other
stockholders.
To
the
extent that Kingsbridge sells shares of our common stock issued under the CEFFs
to third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock
to or
by Kingsbridge may cause holders of our common stock to sell their shares,
or it
may encourage short sales of our common stock or other similar transactions.
This could contribute to a decline in the stock price of our common
stock.
We
may
not be able to meet the conditions we are required to meet under the CEFF and
we
may not be able to access any portion of the up to $47.8 million currently
available under the CEFF. Under the CEFF, Kingsbridge is not obligated to
purchase shares for any day during a draw-down when the volume weighted average
price of our common stock is below $2.00. Currently, our common stock is trading
below $2.00 per share and, therefore, the CEFF is not available to raise
capital.
31
In
addition, we are dependent upon the financial ability of Kingsbridge to fund
the
CEFF. Any failure by Kingsbridge to perform its obligations under the CEFF
could
have a material adverse effect upon us.
We
do not have sales and marketing experience and our lack of experience may
restrict our success in commercializing our product candidates.
We
do not
have experience in marketing or selling pharmaceutical products. As a result
of
our recent manufacturing problems, we have determined that the establishment
of
a commercial infrastructure is no longer in our near-term plans. To achieve
commercial success for Surfaxin, or any other approved product, we will be
dependent upon entering into arrangements with others to market and sell our
products.
We
may be
unable to establish satisfactory arrangements for marketing, sales and
distribution capabilities necessary to commercialize and gain market acceptance
for Surfaxin or our other product candidates. To obtain the expertise necessary
to successfully market and sell Surfaxin, or any other product, will require
the
development of collaborative commercial arrangements and partnerships. Our
ability to make that investment and also execute our current operating plan
is
dependent on numerous factors, including, the performance of third party
collaborators with whom we may contract. Accordingly, we may not have sufficient
funds to successfully commercialize Surfaxin or any other potential product
in
the United States or elsewhere.
We
depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our
products.
We
are highly dependent upon the principal members of our management team,
especially our Chief Executive Officer, Dr. Capetola, and our directors, as
well
as our scientific advisory board members, consultants and collaborating
scientists. Many of these people have been involved in our formation or have
otherwise been involved with us for many years, have played integral roles
in
our progress and we believe that they will continue to provide value to us.
A
loss of any of our key personnel may have a material adverse effect on aspects
of our business and clinical development and regulatory programs. In
order
to lower our cost structure and re-align our operations with business
priorities, on May 4, 2006, we announced a reduction in the number of our
employees and a reorganized corporate structure. The workforce reduction totaled
55 employees, representing approximately 34% of our workforce, and was focused
primarily on commercial infrastructure, the development of which is no longer
in
our near-term plans. Included in the workforce reduction were three senior
executives. The duties and responsibilities of these executives have been
transferred within the management organization and we presently do not expect
to
fill those positions in the near-term. As
a
consequence of this reduction in force, our dependence on our remaining
management team is increased. If we find it necessary or advisable to hire
additional managers, a portion of the expected cost savings from our recent
restructuring might not be realized.
To
retain
and provide incentives to certain of our key continuing executives, we recently
entered into amended and new employment agreements with our executive management
and other officers, which agreements provide for employment for a stated term,
subject to automatic renewal, severance payments in the event of termination
of
employment, enhanced severance benefits in the event of a change of control
and
equity incentives in the form of stock and option grants.
Although
these employment agreements generally include non-competition covenants and
provide
for
severance payments that are contingent upon the applicable employee’s refraining
from competition with us, the applicable noncompete provisions can be difficult
and costly to monitor and enforce. The loss of any of these persons’ services
would adversely
affect our ability to develop and market our products and obtain necessary
regulatory approvals. Further, we do not maintain key-man life
insurance.
Our
future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel. We experience intense competition for qualified personnel,
and the existence of non-competition agreements between prospective employees
and their former employers may prevent us from hiring those individuals or
subject us to suit from their former employers.
32
While
we
attempt to provide competitive compensation packages to attract and retain
key
personnel, some of our competitors are likely to have greater resources and
more
experience than we have, making it difficult for us to compete successfully
for
key personnel.
A
substantial number of our securities are eligible for future sale and this
could
affect the market price for our stock and our ability to raise
capital.
The
market price of our common stock could drop due to sales of a large number
of
shares of our common stock or the perception that these sales could occur.
As of
June 30, 2006 we had 62,320,630 shares of common stock issued and outstanding.
We
have a
universal shelf registration statement on Form S-3 (File No. 333-128929), filed
with the SEC on October 11, 2005, for the proposed offering from time to time
of
up to $100 million of our debt or equity securities, of which $80 million is
remaining. We have no immediate plans to sell any securities under this
registration statement. However, we may issue securities from time to time
in
response to market conditions or other circumstances on terms and conditions
that will be determined at such time.
Additionally,
there are 375,000 shares of our common stock that are currently reserved for
issuance with respect to the Class B Warrant issued in connection with the
2004
CEFF and 12,167,047 shares of our common stock that are currently reserved
for
issuance under the CEFF. See “Risk Factors: Our Committed Equity Financing
Facility may have a dilutive impact on our stockholders.”
As
of
June 30, 2006, up to 12,651,946, shares of our common stock were issuable upon
exercise of outstanding options and warrants. Holders of our stock options
and
warrants are likely to exercise them, if ever, at a time when we otherwise
could
obtain a price for the sale of our securities that is higher than the exercise
price per security of the options or warrants. This exercise, or the possibility
of this exercise, may impede our efforts to obtain additional financing through
the sale of additional securities or make this financing more costly, and may
reduce the price of our common stock.
The
failure to prevail in litigation or the costs of litigation, including
securities class action and patent claims, could harm our financial performance
and business operations.
We
are
potentially susceptible to litigation. For example, as a public company, we
are
subject to claims asserting violations of securities laws, as well as derivative
actions. In particular, in early May 2006, four shareholder class actions and
two derivative actions were filed in the United States District Court for the
Eastern District of Pennsylvania. against the Company and its Chief Executive
Officer, Robert J. Capetola, Ph.D. Certain of the complaints also named other
officers of the Company and certain of its directors. Additional actions may
be
filed against the Company. Although we cannot predict the outcome of any of
these actions, an adverse result in one or more of them could have a potentially
material adverse effect on the Company’s business, results of operations and
financial condition.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In
the
quarter ended June 30, 2006, pursuant to the exercise of outstanding warrants
and options, we issued an aggregate of 2,333 shares of our common stock at
an
exercise prices of $1.53 per share for a aggregate consideration equal to
$3,569. We claimed the exemption from registration provided by Section 4(2)
of
the Securities Act for these transactions. No broker-dealers were involved
in
the sale and no commissions were paid.
We
have a
voluntary 401(k) savings plan covering eligible employees. Effective January
1,
2003, we allowed for periodic discretionary matches of newly issued shares
of
our common stock with the amount of any such match determined as a percentage
of
each participant’s cash contribution. The total fair market value of our match
of our common stock to the 401(k) for the quarter ended June 30, 2006 was
$78,059, resulting in the issuance of 37,349 shares. There were no stock
repurchases in the quarter ended June 30, 2006.
33
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
At
our
annual meeting of the stockholders held on June 8, 2006 the following matters
were voted on by the stockholders: (i) the election of five directors; (ii)
the
approval of Ernst & Young LLP as the Company’s independent registered public
accounting firm for the fiscal year ending December 31, 2006; and (iii)
consideration and approval of an amendment to our Amended and Restated 1998
Stock Incentive Plan to increase the number of shares of our common stock
available for issuance under the Amended and Restated 1998 Stock Incentive
Plan
by 1,200,000 shares. The results of such shareholder votes are as
follows:
(i) Election
of Directors
|
For
|
Withheld
|
|
| W. Thomas Amick |
48,497,780
|
4,483,012
|
| Robert J. Capetola, Ph.D. |
47,725,666
|
5,255,126
|
| Antonio Esteve, Ph.D. |
45,461,662
|
7,519,130
|
| Max Link, Ph.D. |
47,523,620
|
5,457,172
|
| Herbert H. McDade, Jr. |
47,500,970
|
5,479,822
|
| Marvin E. Rosenthale, Ph.D |
47,548,850
|
5,431,942
|
(ii) Approval
of Ernst & Young LLP as the Independent
Company’s Registered Public Accounting Firm
|
For
|
Against
|
Abstain
|
|
51,786,483
|
942,901
|
251,408
|
(iii) Amendment
to the 1998 Amended and Restated Stock Incentive Plan
|
For
|
Against
|
Abstain
|
Withheld
|
|
15,204,099
|
8,841,704
|
180,595
|
28,754,394
|
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
Exhibits
are listed on the Index to Exhibits at the end of this Quarterly Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
34
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| Discovery Laboratories, Inc. | ||
| |
|
(Registrant) |
| Date: August 9, 2006 | By: | /s/ Robert J. Capetola, Ph.D. |
|
Robert J. Capetola, Ph.D. |
||
| President and Chief Executive Officer | ||
| |
|
|
| Date: August 9, 2006 | By: | /s/ John G. Cooper |
|
John G. Cooper
Executive Vice President and Chief Financial
Officer
|
||
| (Principal Financial Officer) | ||
35
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report. All management
contracts or compensatory plans or arrangements, if any, are marked with
an
asterisk.
|
Exhibit
No.
|
Description
|
Method
of Filing
|
||
|
3.1
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC
on March
31, 2003.
|
||
|
3.2
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery,
dated as of
May 28, 2004.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
9,
2004.
|
||
|
3.3
|
Certificate
of Amendment to the Restated Certificate of Incorporation of Discovery,
dated as of July 8, 2005.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
8,
2005.
|
||
|
3.4
|
Amended
and Restated By-Laws of Discovery.
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC
on March
15, 2004.
|
||
|
3.5
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004.
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
||
|
4.1
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between
Discovery
and Continental Stock Transfer & Trust Company.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 6, 2004.
|
||
|
4.2
|
Form
of Class E Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on March 29, 2000.
|
||
|
4.3
|
Form
of Unit Purchase Option issued to Paramount Capital, Inc.
|
Incorporated
by reference to Exhibit 4.4 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the
SEC on
March 30, 2000.
|
||
|
4.4
|
Form
of Class A Investor Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003.
|
||
|
4.5
|
Class
B Investor Warrant, dated July 7, 2004, issued to Kingsbridge Capital
Limited.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004.
|
||
E-1
| Exhibit No. | Description | Method of Filing | ||
|
4.6
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery
and
QFinance, Inc.
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004.
|
||
|
4.7
|
Class
C Investor Warrant, dated April 17, 2006, issued to Kingsbridge
Capital
Limited
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
||
|
4.8
|
$8,500,000
Amended and Restated Promissory Note, amended and restated as of
November
3, 2004, by and between Discovery and PharmaBio Development
Inc.
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004.
|
||
|
4.9
|
Registration
Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge
Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004.
|
||
|
4.10
|
Registration
Rights Agreement, dated April 17, 2006, by and between Discovery
and
Kingsbridge Capital Limited.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
||
|
10.1
|
Common
Stock Purchase Agreement, dated April 17, 2006, by and between
Discovery
and Kingsbridge Capital Limited.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
||
|
10.2*
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by
and between
Discovery and Robert J. Capetola, Ph.D.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 10-Q,
as filed with the SEC on May 10, 2006.
|
||
|
10.3*
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by
and between
Discovery and John G. Cooper
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 10-Q,
as filed with the SEC on May 10, 2006.
|
||
|
10.4*
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by
and between
Discovery and David L. Lopez, Esq., CPA
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Current Report on Form 10-Q,
as filed with the SEC on May 10, 2006.
|
||
|
10.5*
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by
and between
Discovery and Robert Segal, M.D., F.A.C.P.
|
Incorporated
by reference to Exhibit 10.4 to Discovery’s Current Report on Form 10-Q,
as filed with the SEC on May 10, 2006.
|
||
|
10.6*
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by
and between
Discovery and Kathryn A. Cole
|
Incorporated
by reference to Exhibit 10.5 to Discovery’s Current Report on Form 10-Q,
as filed with the SEC on May 10, 2006.
|
||
|
10.7
|
Amendment
No.4, dated as of May 9, 2006, to the Master Security Agreement
between
General Electric Capital Corporation and Discovery.
|
Incorporated
by reference to Exhibit 10.8 to Discovery’s Current Report on Form 10-Q,
as filed with the SEC on May 10, 2006.
|
||
E-2
| Exhibit No. | Description | Method of Filing | ||
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Filed
herewith.
|
||
|
31.2
|
Certification
of Chief Financial Officer and Principal Accounting Officer Pursuant
to
Rule 13a-14(a) of the Exchange Act.
|
Filed
herewith.
|
||
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed
herewith.
|
E-3
Exhibit
31.1
CERTIFICATIONS
I,
Robert
J. Capetola, certify that:
1. I
have
reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d)
Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
| |
|
|
| Date: August 9, 2006 | By: | /s/ Robert J. Capetola |
|
Robert J. Capetola, Ph.D. |
||
|
President
and Chief Executive Officer
|
||
Exhibit
31.2
CERTIFICATIONS
I,
John
G. Cooper, certify that:
1. I
have
reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d)
Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
| |
|
|
| Date: August 9, 2006 | By: | /s/ John G. Cooper |
|
John G. Cooper
|
||
| Executive Vice President and Chief Financial Officer | ||
Exhibit
32.1
CERTIFICATIONS
Pursuant
to 18 U.S.C. § 1350, each of the undersigned officers of Discovery Laboratories,
Inc. (the “Company”) hereby certifies that, to his knowledge, the Company’s
Quarterly Report on Form 10-Q for the period ended June 30, 2006 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Date:
August 9, 2006
/s/
Robert J. Capetola
Robert
J.
Capetola, Ph.D.
President
and Chief Executive Officer
/s/
John G. Cooper
John
G.
Cooper
Executive
Vice President
and Chief Financial Officer
A
signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to the Company and will be retained by the Company
and furnished to the SEC or its staff upon request.
This
certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange
Act
of 1934.