WINDTREE THERAPEUTICS INC /DE/ - Annual Report: 2012 (Form 10-K)

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x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value		The Nasdaq Capital Market
Preferred Stock Purchase Rights

 

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Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o

 

 

 

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the risk that we will require, and be unable to raise, significant additional capital to continue our operations and our research and development activities, including our planned clinical programs.  Moreover, to the extent that we raise such capital through additional financings, such additional financings could result in equity dilution;

 

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the risk that we are unable for any reason to introduce, or if there is a significant delay beyond the second quarter of 2013 in the commercial introduction of, SURFAXIN and AFECTAIR in the United States (U.S.) and other markets as planned, or if we do not achieve the level of expected revenues that we have forecasted, we may be unable to secure additional capital when needed, from strategic alliances or other sources, to sustain our operations, which could have a material adverse effect on our ability to continue investments in our commercial and medical affairs activities, as well as our research and development programs and operations;

 

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the risk that, if we fail to successfully commercialize SURFAXIN and AFECTAIR, or if SURFAXIN and AFECTAIR do not gain market acceptance for any reason, our revenues would be limited, which ultimately could have a material adverse effect on our business, financial condition and results of operations;

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the risk that we may be unable to enter into strategic alliances or collaboration agreements to support the development of our KL4 surfactant pipeline products, beginning with AEROSURF® (a drug/device combination product based on our aerosolized KL4 surfactant and our CAG technology), including the development of our lyophilized (freeze-dried) KL4 surfactant, and, if approved, commercialization of AEROSURF in markets outside the U.S.; and to support the development of SURFAXIN LS™, our lyophilized dosage form of SURFAXIN, and to support the commercialization of SURFAXIN and, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in the SURFAXIN new drug application (NDA) approved by the United States Food and Drug Administration (FDA);

 

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risks relating to the ability of our sales and marketing organization to effectively market SURFAXIN and AFECTAIR in the U.S., and our other product candidates, if approved, in a timely manner, if at all, and that we or our marketing and advertising consultants will not succeed in developing market awareness of our products or that our product candidates will not gain market acceptance by physicians, patients, healthcare payers and others in the medical community;

 

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risks relating to our plans to secure marketing and distribution capabilities in certain markets through third-party strategic alliances and/or marketing alliances and/or distribution arrangements, that could require us to give up rights to our drug products, drug product candidates and drug delivery technologies;

 

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risks relating to our ability to manage our growth effectively and timely modify our business strategy as needed to respond to developments in our commercial operations and research and development activities, as well as our business, our industry and other factors;

 

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risks relating to our ability to manufacture our KL4 surfactant, which must be processed in an aseptic environment and tested using sophisticated and extensive analytical methodologies and quality control release and stability tests, for both commercial and research and development activities;

 

 

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the risk that we, our contract manufacturer organizations (CMOs) or any of our third-party suppliers, many of which are single-source providers, may encounter problems or delays in manufacturing our KL4 surfactant drug products, related substances used in the manufacture of our drug product, AFECTAIR aerosol-conducting airway connectors and related componentry, CAG devices and other materials on a timely basis or in an amount sufficient to support the commercial introduction of SURFAXIN and the AFECTAIR device for infants, as well as our research and development activities for our other product candidates;

 

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risks relating to the transfer of our manufacturing technology to CMOs and assemblers;

 

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risks relating to the rigorous regulatory approval processes, including pre-filing activities, required for approval of any drug, combination drug-device product or medical device that we may develop, whether independently, with strategic development partners or pursuant to collaboration arrangements;

 

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risks related to our efforts to gain regulatory approval, in the U.S. and elsewhere, for our drug product and medical device candidates, including AEROSURF, a drug-device combination product that we are developing to address RDS in premature infants and our KL4 lyophilized surfactant that we expect will be the drug component of AEROSURF and potentially be developed as a life cycle extension of SURFAXIN under the name SURFAXIN LS; and AFECTAIR, our novel aerosol-conducting airway connectors;

 

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the risk that we and the FDA or other regulatory authorities will not be able to agree on matters raised during the regulatory review process, or that we may be required to conduct significant additional activities to potentially gain approval of our product candidates, if ever;

 

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the risk that the FDA or other regulatory authorities may not accept, or may withhold or delay consideration of, any applications that we may file, or may not approve our applications or may limit approval of our products to particular indications or impose unanticipated label limitations;

 

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risks relating to our research and development activities, which among other things involve time-consuming and expensive preclinical studies and other efforts, and potentially multiple clinical trials that may be subject to potentially significant delays or regulatory holds, or fail;

 

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risks relating to our ability to develop and manufacture drug-device combination products based on our KL4 surfactant and CAG technology for preclinical and clinical studies of our product candidates and, if approved, for commercialization;

 

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the risk that market conditions, the competitive landscape or other factors may make it difficult to launch and profitably sell our products;

 

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risks that reimbursement and health care reform may adversely affect us or that our products will not be accepted by physicians and others in the medical community;

 

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the risk that changes in the national or international political and regulatory environment may make it more difficult to gain FDA or other regulatory approval of our drug product and medical device candidates;

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the risk that we may be unable to maintain compliance with continued listing requirements of The Nasdaq Capital Market® , which could increase the probability that our stock will be delisted, which could cause our stock price to decline;

 

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risks that the unfavorable credit and economic environment will adversely affect our ability to fund our activities, that our ATM Program and Committed Equity Financing Facility (CEFF) may be unavailable or may expire or be exhausted, and that additional equity financings could result in substantial equity dilution or result in a downward adjustment to the exercise price of five-year warrants that we issued in February 2011 (which contain price-based anti-dilution adjustments);

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risks that we may be unable to maintain and protect the patents and licenses related to our products and that other companies may develop competing therapies and/or technologies;

 

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the risk that we may become involved in securities, product liability and other litigation and that our insurance may be insufficient to cover costs of damages and defense;

 

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the risk that we will be unable to attract and retain key employees in a competitive market for skilled personnel, which could have a material adverse effect on our commercial, research and development activities and our operations;

 

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the risk that we or our strategic partners or collaborators will not be able to attract or retain qualified scientific, professional and other personnel, which could affect our ability to develop and market our products; and

 

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other risks and uncertainties detailed in “Risk Factors” and in the documents incorporated by reference in this report.

 

 

 

PART I
	ITEM 1.	BUSINESS	1
	ITEM 1A.	RISK FACTORS	31
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	61
	ITEM 2.	PROPERTIES	61
	ITEM 3.	LEGAL PROCEEDINGS	62
	ITEM 4.	MINE SAFETY DISCLOSURE	62
PART II
	ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	62
	ITEM 6.	SELECTED FINANCIAL DATA	63
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	64
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	83
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	83
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	83
	ITEM 9A.	CONTROLS AND PROCEDURES	83
	ITEM 9B.	OTHER INFORMATION	86
PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	86
	ITEM 11.	EXECUTIVE COMPENSATION	86
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	86
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	86
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	86
PART IV
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	86
SIGNATURES			87

 

 

ITEM 1.

BUSINESS.

 

 

 

 

 

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We plan to continue to focus our drug research and development activities on the management of RDS in premature infants.  We believe that the RDS market represents a significant opportunity from both a medical and a business perspective.  We further believe that our neonatal programs, SURFAXIN, AEROSURF and SURFAXIN LS, have the potential to greatly improve the management of RDS and, collectively, represent the opportunity, over time, to expand the current RDS estimated worldwide annual market of $200 million to a $1 billion market opportunity.

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To advance our AEROSURF program, we continue our efforts to optimize the design of our CAG with our engineering staff and third-party medical device experts.  In June 2012, we entered into an agreement with Battelle Memorial Institute (Battelle) under which Battelle has agreed to assist us in a multi-phase development program focused on design, testing, and manufacture of clinic-ready CAG devices for our planned AEROSURF Phase 2 clinical trials, which we expect to initiate in the fourth quarter of 2013.  We have conducted preliminary meetings with the FDA regarding the development plan for AEROSURF and we have engaged regulatory consultants to assist us in implementing and, as needed, refining our development plan.  We also plan to retain regulatory consultants to assist us in engaging international regulatory authorities regarding the AEROSURF development plan.

o

To support the planned Phase 2 clinical program for AEROSURF, we are developing clinical operations capabilities that will assume primary responsibility to administer the initial phase of our Phase 2 clinical trial.  For subsequent phases of our clinical program, we expect to engage a contract research organization (CRO) with expertise in the management of clinical trials to assist us in the management of the trials.

o

We plan to develop our lyophilized KL4 surfactant drug product with the objective of improving ease of use for healthcare practitioners, as well as potentially to prolong shelf life and eliminate the need for cold-chain storage.  In 2013, we plan to complete the ongoing technology transfer of our lyophilized KL4 surfactant manufacturing process to a CMO that has expertise in the manufacture of lyophilized dosage forms.  Our current efforts are directed towards the manufacture of our lyophilized KL4 surfactant for use in our AEROSURF program.  We have discussed with the FDA a proposed development program for SURFAXIN LS and expect to engage in further discussions with the FDA.  Once we have secured the necessary capital, we plan to implement a regulatory plan intended to gain marketing authorization for SURFAXIN LS in the U.S., and thereafter potentially in other selected markets.  We believe that SURFAXIN and, if approved, SURFAXIN LS collectively have the potential over time to displace animal-derived surfactants and take a substantial share of the markets in which they are available.

 

 

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To prepare for the commercial introduction of SURFAXIN, we have established our own specialty respiratory critical care commercial and medical affairs organizations that are experienced in and will focus on neonatal indications, beginning with SURFAXIN.  We have trained and deployed these teams in the field, with the primary immediate goal to engage with hospitals that have NICUs, determine and meet the requirements of each hospital to have SURFAXIN included on that hospital’s formulary (the approved list of drugs and therapeutics that the hospital will purchase) and secure adoption of the AFECTAIR device for infants.  Our sales and marketing strategy is focused primarily on hospitals with NICUs that we believe currently represent a significant portion of the surfactant market in the U.S.  To execute this strategy, we expect to incur annual expenses of approximately $13 million for commercial and medical affairs capabilities.  We believe that this strategy will provide us direct control over our U.S. sales and marketing activities, permit us to establish a strong presence in NICUs nationwide, and potentially optimize the economics of our business.

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An important priority for us is to manage and strengthen our long-term strategic and financial position to support the introduction of our approved products, advance our development programs, and maximize stockholder value.  See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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We continue to focus in 2013 on securing a significant strategic alliance predominantly focused on the EU, potentially to provide development and commercial expertise and share research and development expenses for our AEROSURF development program and, if approved, to support the commercial introduction of AEROSURF in the EU and other selected markets outside the U.S.  We also are assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS™, a lyophilized dosage form of SURFAXIN, in the U.S. and potentially other selected markets and plan to seek a strategic alliance to support our efforts.  We may also seek strategic alliances and/or collaboration arrangements to support the potential commercial introduction of SURFAXIN and, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in our SURFAXIN NDA approved by the FDA.  We are engaged in discussions with potential strategic partners who could provide development and commercial expertise as well as financial resources (potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses).  There can be no assurance, however, that we will be successful in concluding any strategic alliance, collaboration or other similar transaction.

o

We have managed and plan in 2013 to continue closely managing our expenditures. We plan to focus our resources on the initiatives outlined above.  To achieve our objectives, we will need access to additional capital.  See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” On February 13, 2013, we entered into a Facility Agreement (Deerfield Facility) with affiliates of Deerfield Management Company, L.P. (Deerfield), pursuant to which Deerfield agreed to loan us up to $30 million on a secured basis on the terms outlined in the Deerfield Facility.  Deerfield advanced  $10 million upon execution of the Deerfield Facility and agreed to advance an additional $20 million, subject to certain conditions, following the first commercial sale of SURFAXIN, provided that the first sale occurs not later than December 31, 2013.  See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”  We plan to use the proceeds of the loans to meet our working capital requirements, including to support our research and development programs.  There can be no assurance that we will meet the conditions for the second $20 million disbursement.

 

 

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Also, on February 11, 2013, we entered into an At-the-Market Equity Offering Sales Agreement (Stifel Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel), under which Stifel, as our exclusive agent, at our discretion and at such times that we determine from time to time, may sell over a three-year period up to a maximum of $25,000,000 of shares of common stock (Shares) through an “at-the-market” program (ATM Program).  We are not required to sell any Shares at any time during the term of the ATM Program.  We intend to use the net proceeds from the ATM Program, if any, to meet our working capital requirements to execute our business plans, including, without limitation, to support the commercialization in 2013 of SURFAXIN and the AFECTAIR device for infants.  There can be no assurance that we will issue any Shares pursuant to the ATM Program.  See, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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We have invested, and will continue to invest, in maintaining and enforcing our potential competitive position by protecting our exclusive rights in and to our KL4 surfactant technology, pipeline products and our drug delivery technologies, including our CAG and aerosol-conducting airway connectors, through patents, patent extensions, trademarks, trade secrets and regulatory exclusivity designations, including potential orphan drug and new drug product and supplemental exclusivities.  We believe that our development programs may also provide opportunities for new patent filings, which potentially may extend our exclusivity rights into the future.

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We have evaluated, and will continue to evaluate, and invest in, our quality systems and manufacturing capabilities, including at our drug manufacturing operations in Totowa, New Jersey, and our analytical testing and medical device development laboratories in Warrington, Pennsylvania.  We plan to manufacture sufficient amounts of SURFAXIN drug product to meet our anticipated commercial requirements and to support SURFAXIN related preclinical, clinical and formulation development activities for our other KL4 surfactant product candidates.  For AEROSURF, we plan to use our lyophilized KL4 surfactant drug product and are conducting a technology transfer of our lyophilized manufacturing process to a CMO that complies with the FDA’s current good manufacturing processes (cGMP) and with expertise in lyophilization processes.  To produce CAG devices, we have entered into an agreement with Battelle to manufacture clinic-ready CAG devices to be used in the first phase of our planned AEROSURF Phase 2  clinical trials.  For AFECTAIR, we have entered into a Manufacturing and Supply Agreement with Lacey Manufacturing, a unit of Precision Engineered Products, LLC, to manufacture and supply AFECTAIR devices for commercial sale.

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While we are focused initially on advancing our lead KL4 surfactant and drug delivery technologies to treat critical care infants with or at risk for RDS, we believe that our KL4 surfactant technology has the potential to be developed into a broad product pipeline to address a variety of debilitating respiratory conditions and diseases.  As our resources permit, we will consider opportunities to conduct research and preclinical development activities potentially to address acute lung injury (ALI).  We recently announced four collaborations with leading research institutions to conduct a series of preclinical studies funded through various U.S. Government-sponsored, Biodefense-related initiatives.  See, “– Surfactant Replacement Therapy for Respiratory Medicine – Serious Respiratory Indications Associated with Inflammation of the Lungs – Acute Lung Injury (ALI).”  In 2010, we supported an investigator-initiated Phase 2a clinical trial assessing the safety, tolerability and short-term effectiveness (via improvement in mucociliary clearance) of our aerosolized KL4 surfactant in patients with cystic fibrosis (CF).  We may in the future consider supporting such independent initiatives that explore the utility of applying our KL4 surfactant to address CF and other respiratory diseases, such as COPD.  See, “– Surfactant Replacement Therapy for Respiratory Medicine – Cystic Fibrosis (CF),”  and “– Surfactant Replacement Therapy for Respiratory Medicine – Respiratory Distress Syndrome in Premature Infants (RDS) – AEROSURF for RDS in Premature Infants.”

 

 

 

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In September 2012, preclinical data from a study using a well-established preterm lamb model of RDS was published in Pediatric Research.  The study found that the lungs of preterm lambs that were treated with SURFAXIN were more homogenously expanded both within and between lung regions, a finding that is suggestive of more uniform distribution of surfactant throughout the lung, and the lungs of SURFAXIN treated lambs had less cellular debris and fewer inflammatory cells when compared with the lungs of non-treated lambs and the lambs treated with Curosurf® and Survanta®.  The investigators also noted lower levels of inflammatory mediators following treatment with SURFAXIN compared with negative controls as well as both animal-derived surfactants.  The study concluded that early intervention with SURFAXIN may mitigate progression of pulmonary pathophysiological consequences of RDS when compared with the animal-derived surfactants Curosurf and Survanta.

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In May 2012, preclinical data from a study comparing the effects of SURFAXIN LS and Curosurf on pulmonary function, as well as the physiologic reactions to surfactant administration in preterm lambs with RDS, was published in Pediatric Research.  The study found that both surfactants significantly improved pulmonary function (p < 0.05).  However, lambs treated with SURFAXIN LS required significantly lower mechanical ventilator pressures to maintain pulmonary function compared with Curosurf-treated lambs (p < 0.05).  In contrast to lambs treated with SURFAXIN LS, lambs treated with Curosurf experienced significant reductions in heart rate and rapidly increased brain oxygenation during the peridosing period (p < 0.05).  The investigators concluded that SURFAXIN LS may enable ventilation at lower mean airway pressures, thereby potentially reducing the incidence of bronchopulmonary dysplasia (BPD), and as such may be an effective substitute for the currently-marketed surfactant products.

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In October 2011, an AEROSURF study was presented at the 2011 European Society for Paediatric Research Annual Meeting (ESPR).  These data were initially presented at the 2011 Pediatric Academic Societies Annual Congress (PAS) in May 2011.  This preclinical study was conducted to determine which dose of AEROSURF would produce the optimal physiologic response and demonstrated that AEROSURF significantly improved gas exchange (p < 0.05), pulmonary mechanics (p < 0.05) and lung structure integrity (p < 0.05), and reduced levels of inflammatory mediators in the lung (p < 0.05), in a dose-dependent manner, in the well-recognized preterm lamb model of RDS.  The data also suggest that of the doses tested, AEROSURF delivered during a 20 to 30 minute dosing interval results in the most desirable overall dosing strategy.

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Also at the 2011 ESPR, data were presented from a study demonstrating that treatment with either bolus or aerosolized KL4 surfactant resulted in a significant improvement in lung function and survival when treating ALI in a preclinical model of ALI.  These data were initially presented at the 2011 PAS.  The objective of this study was to evaluate aerosolized KL4 surfactant in a piglet model with lung injury and subsequent reduced pulmonary function consistent with what is observed in humans with ALI.  Piglets were randomized to receive either endotracheal bolus KL4 surfactant with extubation to continuous positive airway pressure (CPAP), aerosolized KL4 surfactant while on CPAP, or CPAP alone (control).  Relative to control piglets on CPAP alone, treatment with either bolus or aerosolized KL4 surfactant resulted in a significant improvement in both oxygenation response  (p < 0.001) and overall survival (p < 0.05) throughout the evaluation period, with the most robust response observed in the aerosolized KL4 surfactant treatment group.  Piglets treated with aerosolized KL4 surfactant had reduced tissue levels of interleukin–8 (IL-8), a key marker of lung inflammation, compared with control piglets (p < 0.03).

 

 

 

 

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In December 2012 at the 2012 Hot Topics in Neonatology Annual Meeting, data was presented from a pharmacoeconomic analysis of data published in 2011 in the Journal of Neonatal-Perinatal Medicine (Volume 4, Number 2, 2011, discussed below).  The analysis demonstrated that the previously-reported reduced rate of reintubation in preterm infants treated with SURFAXIN may also result in an average potential hospital cost savings of $389,247 per 100 treated infants by reducing the frequency of bronchopulmonary dysplasia (BPD) when compared with reintubation rates of infants treated with the current global market leading surfactants, Curosurf and Survanta.  In addition, in May 2012, we announced the results of an earlier pharmacoeconomic analysis that demonstrated that the lower rate of reintubation observed in infants treated with SURFAXIN also resulted in a potential hospital cost savings of $160,000 to $252,000 per 100 infants.

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In 2011, the Journal of Neonatal-Perinatal Medicine (Volume 4, Number 2, 2011) published a post-hoc analysis of data from our SELECT and STAR Phase 3 clinical trials for SURFAXIN titled “Reintubation and risk of morbidity and mortality in preterm infants after surfactant replacement therapy.”  The article evaluated the consequences of reintubation and the potential effect of the choice of surfactant on reintubation rates and subsequent clinical outcomes in premature infants.  The analysis indicates that, for preterm infants at risk for RDS who received prophylactic surfactant therapy and were extubated, infants who were reintubated had significantly higher rates of six major complications of prematurity, including bronchopulmonary dysplasia (BPD, a chronic lung condition), necrotizing enterocolitis (a severe intestinal condition often requiring surgery and loss of bowel), sepsis, and intraventricular hemorrhage (bleeding into the brain).  The analysis also indicates that infants treated with SURFAXIN had a significantly lower incidence of reintubation and a significantly higher incidence of survival without reintubation, compared with infants who received animal-derived surfactants Survanta and Curosurf, the current standard of care.

 

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improved ease of use for healthcare practitioners, including shortened preparation time due to potential elimination of drug product warming process prior to use; and potential elimination or reduction of continuous cold chain storage and refrigeration requirements;

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potential improved product stability and extended shelf life; and

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relatively lower viscosity, which may aid and/or improve the distribution of KL4 surfactant throughout the lung and potentially reduce the frequency of transient peri-dosing events typically observed during administration of surfactants.

 

 

 

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retains the surface-tension lowering properties of a functioning surfactant;

 

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retains the surfactant composition of our liquid KL4 surfactant;

 

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has a drug particle size believed to be suitable for deposition into the lung;

 

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is produced at rates that can deliver therapeutic dosages in a reasonable period of time, with consistent reproducible output.  Preclinical studies presented at the 2007 PAS comparing our CAG technology to commercially-available aerosol devices indicated that our CAG device generated as much as a 10-fold higher aerosol output rate compared with the other devices studied; and

 

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produces in vivo evidence of uniform lung distribution and superior physiologic outcomes versus nCPAP alone in an animal model of RDS.

 

 

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An in vitro study that compared the dose of aerosolized albuterol sulfate delivered to a lung simulator under various neonatal ventilator settings using the AFECTAIR device for infants versus the current standard of care (SoC) delivery system.  The investigators observed that use of AFECTAIR resulted in a statistically significant 6-to-14 fold increase (p < 0.05) in the delivery of aerosolized albuterol when compared with SoC, and concluded that potential clinical use of AFECTAIR may result in increased delivery of aerosolized medication to neonates receiving positive pressure ventilatory support;

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An in vitro study that compared the performance of the AFECTAIR device for infants with a current SoC ventilator system in the delivery of nitric oxide under simulated neonatal ventilator conditions.  The simulated breathing pattern was maintained within narrow ranges and the delivery of oxygen was not different between the study conditions.  The investigators observed a 50 to 70 percent decrease in nitric oxide utilization requirements to achieve desired inhaled nitric oxide dose with the AFECTAIR device, compared with SoC (p < 0.001).  The study investigators concluded that the AFECTAIR device significantly decreased the nitric oxide utilization requirements to achieve the desired inhaled nitric oxide concentration and that results of the study support further investigation of the AFECTAIR device in the delivery of other medical gases and with other ventilation methods;

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An in vitro study, the objective of which was to determine the particle size distribution (PSD) using the AFECTAIR device for infants versus SoC delivery system to deliver aerosolized albuterol in a neonatal ventilatory circuit.  PSD is an important determination for effective aerosolized medication delivery, where the ‘optimal PSD’ spans the human respirable range of 2-5 microns.  The investigators observed PSD at or below the lower end of the respirable range when using the SoC delivery system.  In contrast, the PSD observed using the AFECTAIR device spanned the entire respirable range, suggesting that the potential clinical use of the AFECTAIR device may result in increased delivery and retention of aerosolized medication in the lung;

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An in vitro study, the objective of which was to determine if the AFECTAIR device for infants impacts respiratory system resistance in a ventilator circuit, compared with SoC connectors currently used in ventilator circuits.  The investigators observed that resistance measurements were similar between AFECTAIR and the SoC delivery system and concluded that AFECTAIR may be a comparably safe alternative to SoC in ventilator circuits; and

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A study that assessed the AFECTAIR device for infants and concluded that the device reduces gas dilution when administered during CPAP respiratory support without increasing flow resistance, potentially improving efficiency of aerosolized medications delivery to preterm neonates receiving positive pressure ventilator support.

 

 

 

 

To facilitate proper administration of SURFAXIN, we plan to make available to hospitals our WARMING CRADLE® dry-block heating device that is designed to warm drug vials at the same temperature that is designated in the SURFAXIN prescribing information.  WARMING CRADLE dry-block heater is registered with the FDA as a Class I, exempt laboratory medical device.  Our commercial organization will work with hospitals medical device control units to gain the appropriate clearances to make WARMING CRADLE dry-block heaters available to NICUs for use with SURFAXIN.

 

 

 

In 2005, prior to the initiation of our AEROSURF program, we announced the results of a pilot Phase 2 clinical trial using aerosolized KL4 surfactant for the prevention of RDS in premature infants, which was designed as an open label, multicenter study to evaluate the feasibility, safety and tolerability of aerosolized KL4 surfactant delivered using a commercially-available aerosolization device (Aeroneb® Pro) via nCPAP within 30 minutes of birth over a three hour duration.  The study showed that it is feasible to deliver our aerosolized KL4 surfactant via nCPAP and that the treatment was generally safe and well tolerated.  We have since conducted or sponsored a number of studies evaluating AEROSURF and our aerosolized KL4 surfactant drug product.  See, “– Proprietary Platform – Surfactant and Aerosol Technologies – Our KL4 Surfactant Technology.”

 

We believe that AEROSURF is a highly promising program.  In December 2010, the National Institutes of Health (NIH) awarded us Phase I of a Fast Track Small Business Innovation Research (SBIR) Grant to support up to $580,000 of AEROSURF development activities.  Following conclusion of the Phase I grant activities, we anticipate that the NIH may potentially award us a Phase II of the SBIR Grant, which could provide up to an additional $1.88 million to support further AEROSURF development.  With the knowledge that we gain from our development activities to treat premature infants with RDS, we plan to leverage our technology platform to potentially address several respiratory conditions affecting pediatric and adult patient populations.  See, “–Surfactant Replacement Therapy For Respiratory Medicine - Serious Respiratory Indications Associated with Inflammation of the Lungs – Acute Lung Injury (ALI),” and “– Licensing, Patents and Other Proprietary Rights and Regulatory Designations – Patents and Proprietary Rights – Philip Morris USA Inc. and Philip Morris Products S.A.”

 

 

 

 

 

 

 

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physicians with expertise in pediatric and pulmonary medicine and extensive contacts in the neonatal medical community;

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expertise in the design and implementation of preclinical experiments and studies to support drug development.  We conduct certain development-related experiments and bench studies in-house and also engage professional research laboratories as well as academic and education centers to conduct animal studies and experiments requiring specialized equipment and expertise;

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expertise in the design, development and management of clinical trials.  Our own expertise includes scientific, medical, biostatistics, and trial and data management capabilities.  In anticipation of the AEROSURF Phase 2 clinical program, we plan to enhance these capabilities in 2013.  For the initial phase of the AEROSURF program, we plan to analyze and report on our clinical trial data, supported by third-party technology systems and independent consultants, and will monitor all activities using our clinical operations capabilities.  We rely on scientific advisory committees and other medical and consulting experts to assist in the design and monitoring of clinical trials.  We also plan to rely on CROs to support operations of our planned multi-center trials, including for locations outside the U.S.;

 

 

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regulatory personnel with expertise in FDA regulatory matters.  We also consult extensively with independent FDA and international regulatory experts, including former senior scientific staff of the FDA;

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engineering expertise to support development of our CAG and aerosol delivery technologies.  In addition to our own design engineering team, we are engaged in a development program with Battelle that provides consulting design engineers, medical device and planning experts and other resources to advance the development of our CAG device and manufacture of clinic-ready CAG devices for use in the first phase of our Phase 2 AEROSURF clinical trials;

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quality operations capabilities to assure compliance with applicable regulations;

·

manufacturing capabilities to manufacture our liquid KL4 surfactant for use in preclinical studies.  We also plan to rely on CMOs to produce our lyophilized dosage form of our KL4 surfactant and to manufacture and assemble our AFECTAIR devices.  We plan to rely on third-party manufacturers to manufacture and assemble our CAG systems and related components; and

·

our own analytical and testing laboratories, research and medical device development laboratory.  We also rely on a number of third-party analytical and testing laboratories to support our research activities and provide certain laboratory services.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In March 2009, we filed International patent application (PCT US/2009/037409) directed to  aerosol-conducting airway connectors that we plan to market under the trademark AFECTAIR and improvements of an aerosol delivery system using AFECTAIR. The International patent application is an interim phase in the prosecution of patents and is now concluded.  Beginning on September 16, 2010, this application entered national phase in US, Europe and Japan, among other countries and is currently pending.  The claims of this application are directed to a novel ventilation circuit adaptor (an aerosol-conducting airway connector)  and related aerosol circuitry that are intended to increase the efficiency of aerosol delivery to the patient by allowing more efficient delivery of aerosols to the patient, reduce drug compound dilution and wastage and result in more precise aerosol dosing.  In November 2012, we filed and International patent application (PCT/US12/63038) directed to further improvements of an aerosol delivery system and ventilation circuit adaptors.  See, “Proprietary Platform – Surfactant and Aerosol Technologies – Our Aerosolization Device Technologies.”

Other Regulatory Designations

 

 

 

 

 

 

Manufacturing Standards:  The FDA and other international regulators establish standards and routinely inspect facilities and equipment, analytical and quality laboratories and processes used in the manufacturing and monitoring of products.  Prior to granting approval of a drug product, the FDA will conduct a pre-approval inspection of the manufacturing facilities, and the facilities of suppliers, to determine that the drug product is manufactured in accordance with cGMP regulations and product specifications.  Following approval, the FDA will conduct periodic inspections.  If, in connection with a facility inspection, the FDA determines that a manufacturer does not comply with cGMP, the FDA will issue an inspection report citing the potential violations and may seek a range of remedies, from administrative sanctions, including the suspension of our manufacturing operations, to seeking civil or criminal penalties.  In connection with our efforts to gain FDA marketing approval for SURFAXIN, in January 2012, the FDA conducted a Pre-approval Inspection of our Totowa, New Jersey manufacturing operations and our analytical and testing laboratory in Warrington, Pennsylyania, and other of the quality assurance/quality control facilities for SURFAXIN including those of our third-party raw material suppliers and testing laboratories.  On February 24, 2012, the FDA issued an EIR recommending approval of our Totowa manufacturing operations for the manufacture of SURFAXIN.  The FDA may determine to conduct such inspections at any time and for any reason, including in connection with our recent notification that one of our analytical chemistry methods used to assess drug product conformance to specifications required improvement and our submission of updated product specifications for SURFAXIN.  See, “Item 1A – Risk Factors – Manufacturing problems potentially could cause us to delay preclinical or clinical programs, or, if our products are approved, product launch, or cause us to experience shortages of product inventories, which could have a material adverse effect on our business.”

 

 

 

●

product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;

●

product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;

 

 

 

 

 

 

 

 

 

 

ITEM 1A.

RISK FACTORS.

Also in February 2013, we entered into an At-the-Market Equity Offering Sales Agreement (Stifel Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel), under which Stifel, as our exclusive agent,  at our discretion and at such times that we determine from time to time, may sell over a three-year period up to a maximum of $25,000,000 of shares (Shares) of our common stock.  During the term of the ATM Program, we are not required to sell any Shares at any time.  We intend to use the net proceeds from the ATM Program, if any, to meet our working capital requirements to execute our business plans, including, without limitation, to support the commercialization in 2013 of SURFAXIN and the AFECTAIR device for infants. There can be no assurance that we will issue any Shares pursuant to the ATM Program.

 

 

 

 

 

 

 

●

the number of hospitals and critical care centers that agree to place SURFAXIN drug product on their formulary lists and the length of time required to achieve broad formulary acceptance;

●

the willingness of the target hospitals to accept and employ WARMING CRADLE® dry-block heater;

 

●

the number of hospitals and critical care centers that agree to include AFECTAIR devices on their approved materials list and the degree of use of AFECTAIR devices for critical care patients;

●

the effectiveness of our marketing, sales and medical affairs organizations and their ability to (a) accurately describe SURFAXIN consistent with its approved labeling, (b) educate and provide critical care providers and hospitals with medical and scientific education and information concerning our products, and (c) educate critical care providers and hospitals regarding the potential utility of AFECTAIR devices;

●

our ability to gain access to the entire market with our commercial organizations and, if we so determine, through any third-party distributor arrangements;

●

the safety and efficacy of SURFAXIN, our ability to provide hospitals acceptable evidence of the safety and efficacy of SURFAXIN, and the perceived advantages of SURFAXIN and AFECTAIR over alternative treatment methods;

●

the pharmacoeconomic benefits (which are determined by comparing, among other things, the cost and effects of a product when compared to different treatment options) and cost-effectiveness of our products;

●

the budget impact of adding our products and devices to relevant formulary and medical device hospital lists and the availability, cost and potential advantages of alternative treatments, including less expensive generic drugs and other competitive products;

●

the availability of different size drug vials and medical devices to meet the specific needs of healthcare practitioners;

●

the claims, limitations, warnings and other information that appear in the package insert and labeling of SURFAXIN drug product;

●

the willingness of third-party payers, including government payers, to provide coverage and reimbursements to patients, physicians and other providers who wish to prescribe and use our products;

●

our ability to secure and maintain regulatory marketing approvals from the U.S. and foreign regulatory authorities;

●

the rate of preterm births;

●

the number of infants who are diagnosed with respiratory distress syndrome (RDS) and the number treated with SURFAXIN;

●

our ability to finalize development of a second AFECTAIR device for use with children and adults;

●

the growth of commercial sales;

●

our ability to meet commercial demand for SURFAXIN and AFECTAIR, including through maintenance of commercial supplies of our active drug substances and other excipients, and manufacturing capabilities, by ourselves and through third-party manufacturers; and commercial inventory supplies of our medical device products; and

 

 

●

the sufficiency of coverage or reimbursement by third parties.

 

 

●

the willingness of physicians to utilize our products;

●

the degree of acceptance of AFECTAIR devices as the standard of care for delivery of inhaled therapies for patients requiring ventilatory support;

●

the safety and efficacy of our products as perceived by the medical community, regulatory agencies and insurers and other payers, on both a short and long-term basis;

●

the potential advantages over alternative treatments;

●

the relative convenience and ease of administration;

●

the prevalence and severity of any adverse events, including any unexpected adverse events of which we become aware; and

●

the degree to which the market believes that we are able to manufacture our products and produce supply sufficient to meet market demand.

 

 

 

 

●

our distributors or collaborators may require that we transfer to them important rights to our products and/or product candidates;

 

 

●

we may not be able to control the amount and timing of resources that our distributors or collaborators devote to the commercialization of our products;

●

if our distributors or collaborators fail to perform their obligations under our arrangements to our satisfaction, we may not achieve our projected sales and our revenues would suffer.  We also may incur additional expense to terminate such arrangements and to identify and enter into arrangements with replacement distributors or collaborators;

●

our distributors or collaborators may experience financial difficulties; and

●

business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to perform its obligations under any arrangement, which would adversely affect our business.

 

 

 

 

●

could impair our liquidity;

●

could make it more difficult for us to satisfy our other obligations;

●

require us to dedicate cash flow to payments on our debt obligations, which would reduce the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements;

●

impose restrictions on our ability to incur other indebtedness, grant liens on our assets, other than permitted indebtedness and permitted liens, and could impede us from obtaining additional financing in the future for working capital, capital expenditures, acquisitions and general corporate purposes;

 

 

●

impose restrictions on us with respect to the use of our available cash, including in connection with future acquisitions;

●

could adversely affect our ability to enter into strategic transactions and similar agreements, or require us to obtain the consent of our lenders;

●

make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility to plan for, or react to, changes in our licensing markets; and

●

could place us at a competitive disadvantage when compared to our competitors who are not similarly restricted.

 

 

 

 

●

seek collaborators for one or more of our development programs for territories that we had planned to retain or on terms that are less favorable than might otherwise be available; or

●

relinquish or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

 

●

the need to make necessary modifications to qualify and validate a facility;

●

difficulties with production and yields, including manufacturing and completing all required release testing on a timely basis to meet demand;

●

difficulties with production and yields, including manufacturing and completing all required release testing on a timely basis to meet demand;

●

quality control and assurance problems related to, among other things, the release and stability testing of our drug product, or materials and drug substances;

●

casualty damage to a facility; and

●

shortages of qualified personnel.

 

 

We currently do not have a back-up facility.  Any interruption of our manufacturing operations at Totowa, New Jersey, could result in a shortage of our commercial drug supply of SURFAXIN and could affect our commercial supply and potentially our preclinical and clinical development activities.  A number of factors could cause interruptions, including:

 

●

equipment malfunctions or failures;

●

technology malfunctions;

●

work stoppages or slowdowns;

●

damage to or destruction of the facility;

●

regional power shortages; and

●

product tampering.

 

●

we may be unable to identify manufacturers with whom we might establish appropriate arrangements on acceptable terms, if at all, because the number of potential manufacturers is limited and the FDA must approve any replacement contractor.  This approval would require new testing and compliance inspections as well as a potentially lengthy qualification process.  In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our approved products after receipt of FDA approval;

●

third-party manufacturers might be unable to manufacture our products in the volume and to our specifications to meet our clinical needs and, if approved, commercial needs, or we may have difficulty scheduling the production of product batches in a timely manner to meet our timing requirements;

 

 

●

CMOs may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products;

●

CMOs are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration, and corresponding state agencies to ensure strict compliance with cGMP and/or quality system regulations (QSR) and other government regulations and corresponding foreign standards.  We do not have control over third-party manufacturers’ compliance with these regulations and standards;

●

if any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to any such innovation.  We may be required to pay fees or other costs for access to such improvements; and

●

each of these risks could delay our development programs, the approval, if any, of our product candidates by the FDA or the commercialization of our product candidates or result in higher costs or deprive us of potential product revenues.

 

 

Under the FDA medical device reporting regulation, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur.  If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us.  Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action.  Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

 

 

In addition, for both our AFECTAIR device and SURFAXIN, we will have to comply with reporting requirements applicable to medical devices and drug products, including the reporting of adverse events and device malfunctions related to our products.  Later discovery of previously unknown problems, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems or failure to comply with regulatory requirements may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market or regulatory enforcement actions.

 

 

 

 

 

●

complete our preclinical and clinical trials of our KL4 surfactant product candidates with scientific results that are sufficient to support further development and regulatory approval;

●

receive the necessary regulatory approvals;

●

obtain adequate supplies of surfactant active drug substances, manufactured to our specifications and on commercially reasonable terms;

●

perform under agreements to supply drug substances, medical devices and related components and related services necessary to manufacture our KL4 surfactant product candidates;

●

provide for sufficient manufacturing capabilities, at our manufacturing operations in Totowa and with CMOs, to produce sufficient drug product, including for KL4 surfactant-related studies, AEROSURF and SURFAXIN LS development activities, and CAG devices and related materials to meet our preclinical and clinical development requirements; and

●

obtain the capital necessary to fund our research and development efforts, including our business administration, preclinical and clinical organizations, and our quality and manufacturing operations.

 

 

●

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 complementary technologies;

●

failure of a drug product candidate to demonstrate effectiveness; and

●

lack of sufficient funds.

 

 

 

●

the number of clinical sites;

●

the size of the patient population;

●

the number of clinical sites;

●

the size of the patient population;

●

the proximity of patients to the clinical sites;

●

the eligibility and enrollment criteria for the study;

●

the willingness of patients or their parents or guardians to participate in the clinical trial;

●

the existence of competing clinical trials;

●

the existence of alternative available products; and

●

geographical and geopolitical considerations.

 

●

We may not successfully develop a CAG device that is suitable for use in a clinical environment, if at all, on a timely basis and such inability may delay or prevent initiation of our planned clinical trials.

●

We will require access to sophisticated engineering capabilities.  We have medical device engineering staff with industry experience in developing medical devices, and are currently working with Battelle, which has expertise in medical device development and medical device design and a successful track record in developing aerosolization systems for the medical and pharmaceutical industries.  If for any reason we are unable to retain our own engineering capabilities, the agreement with Battelle is terminated, and we are unable to identify design engineers and medical device experts to support our development efforts, including for a clinic-ready CAG system for use in our planned clinical trials and, potentially, for later versions of the CAG systems, it would have a material adverse effect on our business strategy and impair our ability to commercialize or develop AEROSURF or other aerosolized KL4 surfactant products.

 

 

 

 

 

●

announcements of the results of clinical trials by us or our competitors;

●

patient adverse reactions to drug products;

●

governmental approvals, delays in expected governmental approvals or withdrawals of any prior governmental approvals or public or regulatory agency concerns regarding the safety or effectiveness of our products;

●

changes in the U.S. or foreign regulatory policy during the period of product development;

●

changes in the U.S. or foreign political environment and the passage of laws, including tax, environmental or other laws, affecting the product development business;

●

developments in patent or other proprietary rights, including any third-party challenges of our intellectual property rights;

●

announcements of technological innovations by us or our competitors;

●

announcements of new products or new contracts by us or our competitors;

●

actual or anticipated variations in our operating results due to the level of development expenses and other factors;

 

 

●

changes in financial estimates by securities analysts and whether our earnings meet or exceed the estimates;

●

conditions and trends in the pharmaceutical and other industries;

●

new accounting standards; and

●

the occurrence of any of the risks described in these “Risk Factors” or elsewhere in this Annual Report on Form 10-K or our other public filings.

 

 

 

 

●

safe, effective and medically necessary;

●

appropriate for the specific patient;

●

cost-effective; and

●

neither experimental nor investigational.

 

 

 

 

 

 

 

 

 

 

●

developing products;

●

developing products;

●

undertaking preclinical testing and human clinical trials;

●

obtaining FDA and other regulatory approvals or products; and

●

manufacturing and marketing products.

Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or foreign regulatory approval or commercializing products before us.  Our competitors may successfully secure regulatory exclusivities in various markets, which could have the effect of barring us or limiting our ability to market our products in such markets.  As we commence commercial product sales, we will compete against companies with greater marketing and manufacturing capabilities that may successfully develop and commercialize products that are more effective or less expensive than our products.  As none of our products are available at this time, we currently have limited or no experience in these areas.  In addition, developments by our competitors may render our drug product candidates obsolete or noncompetitive.

 

 

 

●

agreements may be breached;

●

agreements may not provide adequate remedies for the applicable type of breach;

●

our trade secrets or proprietary know-how may otherwise become known;

●

our competitors may independently develop similar technology; or

●

our competitors may independently discover our proprietary information and trade secrets.

 

 

 

 

●

uninsured expenses related to defense or payment of substantial monetary awards to claimants;

●

a decrease in demand for our drug product candidates;

●

damage to our reputation; and

●

an inability to complete clinical trial programs or to commercialize our drug product candidates, if approved.

 

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

ITEM 2.

PROPERTIES.

 

 

ITEM 3.

LEGAL PROCEEDINGS.

 

ITEM 4.

MINE SAFETY DISCLOSURE.

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

 

		2012								2011
		High				Low				High				Low
Period:
First Quarter		$	5.39			$	1.67			$	4.18			$	1.71
Second Quarter		$	3.15			$	2.12			$	2.95			$	1.79
Third Quarter		$	3.51			$	2.30			$	2.70			$	1.93
Fourth Quarter		$	3.29			$	1.71			$	2.01			$	1.44

 

 

ITEM 6.

SELECTED FINANCIAL DATA.

Consolidated Statement of Operations Data: (in thousands, except per share data)
		For the year ended December 31,
		2012				2011				2010				2009				2008
Revenues from grants		$	195			$	582			$	-			$	-			$	-
Revenues from collaborative agreements			-				-				-				-				4,600
Operating Expenses:
Research and development			21,570				17,230				17,136				19,077				26,566
Selling, general and administrative			16,444				7,864				8,392				10,120				16,428
Total expenses(1)			38,014				25,094				25,528				29,197				42,994
Operating loss			(37,819	)			(24,512	)			(25,528	)			(29,197	)			(38,394	)
Change in fair value of common stock warrant liability			555				3,560				6,422				369				-
Other (expense) / income			(51	)			(13	)			(69	)			(1,043	)			(712	)
Net loss		$	(37,315	)		$	(20,965	)		$	(19,175	)		$	(29,871	)		$	( 39,106	)
Net loss per common share - basic and diluted		$	(0.95	)		$	(0.93	)		$	(1.65	)		$	(3.89	)		$	(5.98	)
Weighted average number of common shares outstanding			39,396				22,660				11,602				7,680				6,541

 

Consolidated Balance Sheet Data:
(in thousands)		December 31,
		2012				2011				2010				2009				2008
Cash and investments		$	26,892			$	10,189			$	10,211			$	15,741			$	24,792
Working capital			16,107				(516	)			2,920				176				15,551
Total assets			29,943				13,324				14,537				21,403				32,889
Long-term obligations, less current potion			591				913				935				1,118				12,090
Total stockholder’s equity		$	17,653			$	1,264			$	6,026			$	1,296			$	10,933

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

●

Company Overview and Business Strategy:  this section provides a general description of our company and business plans.

 

●

Critical Accounting Policies:  this section contains a discussion of the accounting policies that we believe are important to our financial condition and results of operations and that require the exercise of judgment and use of estimates on the part of management in their application.  In addition, all of our significant accounting policies, including the critical accounting policies and estimates, are discussed in Note 3 to the accompanying consolidated financial statements.

 

●

Results of Operations:  this section provides an analysis of our results of operations presented in the accompanying consolidated statements of operations, including comparisons of the results for the years ended December 31, 2012, 2011 and 2010.

 

●

Liquidity and Capital Resources:  this section provides a discussion of our capital resources, future capital requirements, cash flows, committed equity financing facilities, historical financing transactions, outstanding debt arrangements and commitments.

 

 

 

 

 

 

 

 

An important priority is to secure strategic resources to support the continued development and commercial introduction of our RDS products.  While we currently intend to retain all rights and commercialize our approved products in the U.S., we are focused on identifying potential strategic alliances to assist us in markets outside the U.S.  We seek strategic partners that have broad experience in the designated markets, including regulatory and product development expertise as well as, if our products are approved, an ability to commercialize our products.  In addition to development and commercial support, such alliances typically also would provide us with financial resources to support our efforts, potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses.  In 2013, we are focused on securing a significant strategic alliance predominantly focused on the EU.  In our discussions to date, the primary focus of our discussions has been on AEROSURF.  We also would consider various financing alternatives or collaboration arrangements that would provide infusions of capital and other resources needed to advance our KL4 surfactant development programs.  We may also seek strategic alliances and/or collaboration arrangements to support the potential commercial introduction of SURFAXIN and, if approved, SURFAXIN LS in countries where regulatory marketing authorization is facilitated by the information contained in our SURFAXIN new drug application (NDA) approved by the FDA.  There can be no assurance that we will be successful in concluding any strategic alliance, collaboration or other similar transaction.

 

 

 

 

 

 

 

For the year ended December 31, 2011, we recognized $0.6 million of revenue for funds received and expended under a Fast Track SBIR from NIH to support the development of aerosolized KL4 surfactant for RDS.

 

 

 

 

 

 

 

Research and Development Expense by Major Expense Category

 

(in thousands)		Years Ended December 31,
		2012				2011				2010
Salaries & Benefits		$	9,986			$	8,231			$	6,858
Contracted Services			6,332				3,317				4,395
Raw Materials & Supplies			1,652				1,871				1,009
Rents & Utilities			1,366				1,531				1,442
Depreciation			841				1,141				1,207
Contract Manufacturing			15				143				990
Travel			316				188				202
Stock-Based Compensation			488				289				479
All Other			574				519				554
Total		$	21,570			$	17,230			$	17,136