---

 

Securities and Exchange Commission

October 1, 2010

Page 9

 

 

Certain of the risks and uncertainties affecting our ability to estimate projections and timelines are discussed in “Item 1– Business – Government Regulation;” and in “Item 1A – Risk Factors– 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;” “– Our research and development activities involve significant risks and uncertainties that are inherent in the clinical development and regulatory approval processes;” “– Our ongoing  clinical trials may be delayed, or fail, which will harm our business,” “– The manufacture of our drug products is a highly exacting and complex process, and if we, our contract manufacturers or any of our materials suppliers encounter problems manufacturing our products or the drug substances used to make our products, this could potentially cause us to delay development or clinical programs or, following approval, product launch, or cause us to experience shortages of products inventories;” as well as elsewhere in this Annual Report on Form 10-K.

 

Our lead development projects are initially focused on the management of RDS in premature infants and include Surfaxin, Surfaxin LS and Aerosurf.  We believe that these neonatal programs have the potential to greatly improve the management of  RDS and expand the current RDS market worldwide.  All of these potential products are either in regulatory review or clinical or pre-clinical development and none are available for commercial sale.  While we anticipate that we will be in a position to file a complete response with the FDA with respect to Surfaxin for the prevention of RDS in premature infants in the first quarter 2011, which could lead to potential approval of Surfaxin in 2011, there can be no assurance that we will be successful in securing such approval or that, if approved, we will be successful in commercializing Surfaxin and realizing a profit in the foreseeable future.  We are preparing for clinical programs for Surfaxin LS and Aerosurf; however, our ability to move forward will depend upon the success of our efforts to secure appropriate strategic alliances and capital to fund these activities.  Accordingly, we are unable to project when we might implement these programs, the pace of such implementation or the overall anticipated expense that we might incur.

 

The status of our lead projects and our other pipeline candidates, including the potential timing and milestones for each, is discussed in “Item 1– Business – Surfactant Replacement Therapy for Respiratory Medicine.” See also, “Item 1 – Business – Business Strategy,” and “Item 1A – Risk Factors – We may not successfully develop and market our products, and even if we do, we may not become profitable,”  “– We will require significant additional capital to continue our planned research and development activities and continue to operate as a going concern.  Moreover, such additional financing could result in equity dilution.”

 

---

 

Securities and Exchange Commission

October 1, 2010

Page 10

 

 

In addition to our lead products, we plan over time to develop our KL4 surfactant technology into a broad product pipeline that potentially will address a variety of debilitating respiratory conditions in patient populations ranging from premature infants to adults.  After we have completed Phase 2 proof-of-concept studies for each potential indication, if successful, we plan to assess the potential markets for these products and determine whether to seek strategic alliances or collaboration arrangements, or utilize other financial alternatives to fund their further development.  At the present time, however, we continue to conserve our resources, predominantly by curtailing and pacing investments in these pipeline programs.  See, “Item 1 – Business – Business Operations,” and “ – Surfactant Replacement Therapy For Respiratory Medicine.”

 

Our ability to generate sufficient capital to support our product development activities and, if approved, commercialization plans, depends upon many factors, including the success of our efforts to secure one or more strategic alliances or other collaboration arrangements.  We believe that our ability to successfully enter into meaningful strategic alliances will likely improve with advances, if any, that we are able to make in finalizing our development efforts and filing the Complete Response for Surfaxin, and in our Surfaxin LS and Aerosurf programs leading to initiation of clinical trials.  There can be no assurance, however, that we will be able to secure strategic partners or collaborators to support and provide expert advice to guide our activities, that our research and development projects will be successful, or that we will be able to obtain additional capital to support our activities when needed on acceptable terms, if at all.

 

Ultimately, if we do not successfully develop and gain marketing approval for our drug product candidates, in the United States or elsewhere, we will not be able to commercialize, or generate any revenues from the sale of, our products and the value of our company and our financial condition and results of operations will be substantially harmed.

 

Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures, page 64

 

Comment 3.

You disclose that your CEO and CFO evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures.  Please tell us why it appears that their conclusion is limited to the design of those controls and procedures and that they do not appear to explicitly conclude as to the operation of the company’s disclosure controls and procedures at the end of the period covered by the report.  This comment also applies to your Forms 10-Q for the quarterly periods ended March 31, 2010 and June 30, 2010.

 

---

 

Securities and Exchange Commission

October 1, 2010

Page 11

 

 

Response:                                We respectfully advise the Staff that it was not the intention of the Company’s CEO and CFO to limit their findings solely to the design of our internal controls, but rather to reflect the language in Rule 13a-15(e) that refers to controls and procedures designed to ensure that information required to be disclosed is recorded, processed, summarized and reported in accordance with the Commission’s rules.  The Company proposes to remove the reference to design in future filings of its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, such that, assuming that each applicable officer’s evaluation so concludes,  the relevant discussion would read as follows:

 

Our Interim Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K.  Based on this evaluation, our Interim Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information  required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Interim Chief Executive Officer and our Chief Financial Officer, to allow for timely decisions regarding required disclosures, and recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Form 10-K/A for the fiscal year ended December 31,2009

 

Item 11. Executive Compensation

 

Compensation Discussion and Analysis

 

Executive Compensation Structure, page 8

 

Comment 4.

You disclose that in deciding on total compensation packages for your executives, your Compensation Committee considers, among other things and in addition to the Radford Life Sciences Survey, compensation practices of biotech and pharmaceutical companies that are similarly situated.  It appears that you use this data as a reference point on which, wholly or in part, to base, justify or provide a framework for your compensation decisions.  Please provide us with draft disclosure of your 2010 compensation for future filings which provides all the names of the companies included in these benchmarks.  If you benchmarked against a survey in its entirety, you may provide the name of the survey.  See Question 118.05 of the Regulation S-K Compliance and Disclosure Interpretations.

 

---

 

Securities and Exchange Commission

October 1, 2010

Page 12

 

 

Response:                                We respectfully advise the Staff that the Company’s Compensation Committee is provided the Radford Survey (Radford Survey) and one other survey, the BioWorld Executive Compensation Report (collectively, the Surveys), for use in its deliberations of executive compensation.  The Compensation Committee determines compensation for new hires and sets the initial base salary of an executive by reference to the Radford Survey data, based on the level of experience, scope of the position being filled, the executive’s employment history, and the need to maintain internal equity among similarly-situated executives.  For example, the Compensation Committee may set incoming salaries of experienced executives in the range of the 50-75 percentiles in the Radford Survey for a particular job category, while the incoming salaries of less experienced executives may be set in the range of the 25-50 percentiles in the Radford Survey for the same job category.  However, after an executive is hired, salaries are compared against the Surveys in subsequent years as a source of information only; for annual evaluation of tenured executives, the Radford Survey is not a dominant factor in the Compensation Committee’s discussions.  Similarly, in any given year, the Compensation Committee may refer to the financial statements and compensation information, if available, of a limited number of companies thought to be similarly situated (which may include, without limitation, location, capitalization, regulatory status, etc.).  The Compensation Committee may look at different companies in different years and for different purposes.  However, such information is a source of general information and not used ultimately to establish a framework for setting the compensation levels of executives.  The Compensation Committee considers the Surveys and company information to be only one non-binding factor in its deliberations concerning annual performance reviews of executives.  The foregoing process was used in assessing executive compensation for 2010.  At the present time, the Compensation Committee has not made a final determination with respect to the method it will employ to set compensation levels in the next fiscal year and, in particular whether it will continue to conduct its deliberations as described above or adopt a more formal, benchmarking approach.

 

Because the Company had a market capitalization of less than $75 million on the last business day of its second fiscal quarter in 2010 (June 30, 2010), it qualifies under the Commission’s rules as a “smaller reporting company” for the remainder of 2010 and the 2011 fiscal year ending December 31, 2011.  As such, the Company does not plan to include in its disclosure for 2010 a full compensation discussion and analysis as set forth in Item 402(b) of Regulation S-K.  Instead, the Company plans to provide the information required by Item 402(m) of Regulation S-K.  For that reason, we have not provided a draft of that disclosure in this response.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence, page 26

 

Comment 5.

Throughout the Business section of your Form 10-K you disclose that you have a license and collaboration agreement with Laboratorios del Dr. Esteve, S.A.  Since this relationship is ongoing and Dr. Esteve is one of your directors, it appears that this may be related party transaction pursuant to Item 404 of Regulation S-K.  Please revise to provide the required disclosure pursuant to Item 404 of Regulation S-K.  Alternatively, please provide us with an analysis that supports your conclusion that this is not a related party transaction pursuant to Item 404 of Regulation S-K.

 

---

 

Securities and Exchange Commission

October 1, 2010

Page 13

 

 

Response:                                We respectfully advise the Staff that Item 404(a) of Regulation S-K provides for disclosure of “any transaction, since the beginning of the registrant’s last fiscal year, or any currently proposed transaction, in which the registrant was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have direct material interest.”  The Company concurs with the Staff’s assessment that Laboratorios del Dr. Esteve is a related party to the Company for the purposes of Item 404 of Regulation S-K.  However, as no transaction involving amounts in excess of $120,000 have occurred under the collaboration agreement with Laboratorios del Dr. Esteve since January 1, 2009, the beginning of our last fiscal year, the Company  concluded that no disclosure relating to its relationship with Dr. Esteve was required under Item 404 of Regulation S-K in the 2009 10-K.

 

Form 10-Q for the quarterly period ended June 30, 2010

 

Note 4 - Stockholder’s Equity, page 8

 

Comment 6.

It appears that many of your outstanding warrants were issued in conjunction with unit offerings under shelf registration statements, including your May 2009 registered direct offering, your February 2010 and June 2010 public offerings, your April 2010 offering with PharmaBio and your June 2010 Committed Equity Financing Facility with Kingsbridge.  By operation of the U.S. Securities Laws the identified warrants can only be settled with registered shares, which is beyond your control, unless otherwise agreed to by the holder.  Although the warrants associated with these offerings have cashless exercise provisions, it appears that the holder is not required to settle in unregistered shares.  Please explain to us why you have not accounted for these warrants as derivative liabilities.  In your response, please explain to us how you overcome the presumption in ASC 815-40-25-14 that these warrants are net cash settleable.  In addition, please clarify whether any of your other outstanding warrants were issued pursuant to registered offerings and, if so, include those warrants in the assessment requested above.