Expert Financial Analysis and Reporting

Investment Thesis

At the time of launch of Surfaxin on November 8, 2013 Discovery Laboratory’s (DSCO) stock was selling at $2.00. By February 2014, it had climbed to $2.65, but has since slid to $1.60. This weakness was due to disappointment with the launch. The ever growing difficulty in gaining quick Pharmacy and Therapeutics (P&T) committee approval to add a new product to the hospital formulary has caused most new product launches in the hospital to be slow and disappointing. This has proven to be the case with Surfaxin. Initial expectations for Surfaxin were for sales of $8 to $10 million in 2014, but 1H, 2014 sales were only $70,000 and full year sales are unlikely to reach $1 million. This has been the major factor in the price decline.

At the time of launch, I had hoped that the launch would be encouraging and provide a boost to the stock in 2014. Obviously, I was wrong. However, the over-riding reason for my interest in the stock, then and now, has been the potential for Aerosurf. With the disappointing launch of Surfaxin, most of the stock price movement over the next year will probably relate to investor interpretation of how the phase 2 trials of Aerosurf are progressing.

I see Aerosurf as a very unique product in biotechnology. It meets a very significant unmet medical need in neonatal intensive care by allowing a significant expansion of the use of surfactant replacement therapy in babies with RDS. Currently, only about 45,000 of the sickest babies are given surfactant replacement therapy because administration requires the use of intubation and mechanical ventilation which can cause serious lung damage. Given as an aerosol, Aerosurf may allow surfactant replacement therapy to be extended to an additional 120,000 babies in whom currently the benefit of surfactant replacement therapy does not offset the risk of intubation and mechanical ventilation.

Based on my estimated selling price of Aerosurf of $5,000 to $10,000 per each use in these 120,000 babies, the potential addressable market is $600 million to $1.2 billion in the US. The potential is perhaps the same or twice as much in international markets. I am not aware of any other competitive product in human trials. Because of the great unmet medical need, a strong benefit to risk ratio and favorable pharmacoeconomics, I would expect Aerosurf to have a swift uptake if it comes to market-unlike Surfaxin- and to penetrate 60% of the market in a four to six year time.

Aerosurf has very unique and desirable characteristics for a pipeline product. In many other drug categories, most notably oncology, there are seemingly an endless number of new products in development. An investor has to be concerned not only that the product is safe and effective, but also has to make a decision on how it will fare against competitive products. With Aerosurf, the concern is only if it is safe and effective because of its uniqueness.

Aerosurf carries a lesser development risk than a drug based on a new molecular entity. The active drug components are the same as Surfaxin, which has been shown to be safe and effective in clinical trials. We know the drug works. Similarly, the manufacturing process has been validated; problems with manufacturing sometimes lead to long delays as was the case with Surfaxin.

The key uncertainty is whether Aerosurf can effectively disperse the active ingredients throughout the lungs. The company licensed in a device called a capillary aerosol generator nearly eight years ago and has refined the device significantly. Studies in the lungs of lambs, which are a good animal model, have shown that Aerosurf can deliver a therapeutically effective dose of aerosolized active ingredients of Surfaxin. If phase 2 and 3 trials substantiate this, Aerosurf has a high probability of being approved.

The Company will complete a phase 2a trial of Aerosurf in 4Q, 2014 which is the first trial in humans. The trial is primarily to evaluate safety and tolerability in a small 42 patient trial. It is possible that investors may see some signal of therapeutic benefit in this trial, but this is uncertain. The phase 2b trial scheduled to complete in 4Q, 2015 is large enough and is designed to show provide proof of concept. If successful, this would be an enormous catalyst for the stock. Putting odds on success of phase 2b is difficult. However, the small amount of preliminary information coming out of phase 2a on safety and tolerability along with animal studies makes me hopeful that Aerosurf will be the success we are all hoping for.

The next potential catalyst for the stock will probably be the announcement of phase 2a results in 4Q, 2014. The most likely outcome of this trial is that safety and tolerability are shown which is the objective of the trial. There is a chance that some signals of efficacy may be seen, but they are not likely to be conclusive. There is some possibility of an inflection upward in sales in the Surfaxin launch that would be positive for the stock; expectations are very low at present. The truly major event for the Company is the reporting of phase 2b results in 4Q, 2015. If these results are successful, I would look for a substantial, positive impact on the stock.

The Company states that it has enough cash to see it through to the release of topline phase 2b results in 4Q, 2015. However, this would reduce cash levels to an uncomfortable level and I would look for the Company to bring in more capital in early 2015.

In looking at the stock, I don’t see any pending catalysts that would cause me to say you just have to buy the stock now. However, the current market capitalization of $150 million seems extremely low relative to the potential for Aerosurf. I am certainly maintaining my stock position, but I am not adding at the present time.

Surfaxin Launch is Slow, Grinding and So Far Disappointing

The launch of Surfaxin has been disappointing to investors. Sales in 1Q, 2014 were $28,000 and sales in 2Q, 2014 were $42,000. Late in 2013 as the launch was beginning, the Company had given guidance of $8 to $10 million of sales in the first twelve months of the launch (essentially 2014), $40 million after four years (2017) and peak sales of $100 million. This guidance was withdrawn after the first quarter was reported. Management is not providing any guidance, but my guess is that 2014 sales could be about $0.5 million and 2015 could be about $2 to $3 million. At this point, these are just guesses. I do think that Surfaxin eventually can reach $100 million of sales at its peak.

The surfactant replacement market is a small addressable market opportunity of about $100 million currently in the US and perhaps two to three times as large on a worldwide basis. The two animal based products, Curosurf and Survanta, are well entrenched and the market is generally well satisfied. However, I think that Surfaxin offers meaningful advantages as a synthetic product in terms of consistency that results in statistically significant survival advantages and reduction of damage to infant lungs versus the animal based products which are processed from pig or cattle lungs. Their active ingredients can vary widely from batch to batch so that some doses are not at therapeutic levels. Over time I see Surfaxin capturing over 60% of the US market. However, the characteristics of the hospital market and the surfactant market within the hospital are going to make this a slow and grinding process.

It is hard to launch any product in the hospital that does not immediately fill a great unmet medical need. There are two laborious paths which Surfaxin must take to gain access and be used in a hospital. The traditional one is to gain a recommendation from the Pharmacy and Therapeutics (P&T) committee to add it to the hospital formulary, which includes a list of products that can be prescribed at the discretion of NICU physicians practicing in the hospital. An alternative approach is to gain restricted use, non-formulary allowance in which the institution evaluates the product for a period of time during which usage is usually limited to a few doctors who may only use the product in accordance with a specific protocol.

Most hospitals in the US carry only one of the two animal surfactants. This is primarily because each product requires different preparations and dosages. Having more than one product adds to the risk of improper preparation and dosage. The ultimate goal of the Surfaxin launch is to be exclusive at each institution, but this is not possible in most institutions in the near term.  Hence the initial goal is to get the medical staff to understand the data behind Surfaxin which shows mortality and morbidity benefits. In this regard, it has a huge advantage over the animal surfactants that have almost no clinical data. Once this is achieved, the aim is to gain acceptance as a second surfactant in the hospital with a long term goal of being exclusive.

Neonatologist interest in Surfaxin is high, but the gating factor has been getting before the P&T committees and gaining formulary approval or restricted access. The challenge has been getting in front of the committees. The absence of one individual can sometimes push the decision to the next meeting which can be a month or a quarter later depending on the institution.  The Company mentioned that nearly 50% of planned P&T meetings presentations have been rescheduled and some multiple times. This is the harsh reality of introducing a new hospital product. However, once P&T meetings take place, management states that in the overwhelming majority of cases they have gained formulary or restricted access approval.

I do not think that management has made any major mistakes in the launch other than perhaps underestimating the difficulty of gaining access to P&T committees. A key part of the launch strategy is to focus on a universe of hospitals with a special focus on 30 centers of influence and related hospital systems. These thought leading institutions will then influence surrounding hospitals to follow. The Company is trying very hard to educate institutions.  In addition to sales reps, it has a medical affairs team that converses at a very high intellectual level with neonatology physicians and professionals.

In May at the time of the last conference call, Surfaxin was either on formulary or restricted access in 10 facilities. As of early August, there are now 15 centers in the United States of which 3 are centers of influence. Based upon the current calendar for presentations to P&T committees, management thinks this trend could potentially accelerate. Somewhat encouragingly, four of the 15 hospitals in which Surfaxin is available have made Surfaxin the sole surfactant in the NICU. These are thought leading institutions that had experience with the product and understood the importance of the clinical data package.

Rationale for Aerosurf

There is a growing trend toward the use of nasal continuous positive airway pressure (nCPAP) in the respiratory support of preterm babies suffering from respiratory distress syndrome (RDS). This is because evidence suggests that endotracheal intubation and mechanical ventilation that are now used to dose animal surfactants and Surfaxin, can cause long term lung injury. While nCPAP reduces this risk, the problem is that these surfactant-deficient babies are denied the benefit of surfactant replacement therapy. When the neonatologist institutes nCPAP as the primary and first respiratory therapy for these babies, they are denied surfactant replacement that could clearly benefit them.

Published literature and studies presented in major meetings have suggested that 30% to up to 70% of preterm infants that are started on nCPAP go on to require endotracheal intubation and mechanical ventilation. This defeats the purpose of nCPAP, because their airways ultimately are still being instrumented while the benefit of surfactant replacement therapy has been delayed.

Aerosurf may allow delivery of therapeutic quantities of aerosolized surfactant for those babies who are receiving nCPAP. This technology has the potential to decrease the number of babies who are started on nCPAP that ultimately require intubation and mechanical ventilation. Aerosurf could potentially revolutionize the treatment of babies with RDS by enabling neonatologists to support babies who could benefit from surfactant replacement therapy while decreasing the risk of subsequent endotracheal intubation and mechanical ventilation.

Aerosurf Clinical Trial Program

The phase 2a part of the clinical trial program is now underway. It is designed to assess the safety and tolerability of three sequentially increasing doses of Aerosurf. The next stage of the program is phase 2b which is designed to provide an estimate of the size of the clinical effect of the Aerosurf treatment, provide further safety information and also determine the optimum dose for phase 3.

The phase 2a study was initially planned to enroll babies of 29 to 32 weeks gestational age; this was recently expanded to 29 to 34 weeks. These babies are to be compared on the basis of physiologic data and clinical observations with control infants receiving only nCPAP. The primary focus of this study is to demonstrate safety and tolerability of Aerosurf. However, some of the physiological measurements that will be made could be an indicator of potential therapeutic benefit.

During the course of the study they learned some interesting things. Initially, they were actively screening the population of interest which was 29- to 32-week gestation infants for potential enrollment. However, they have discovered that there are a number of infants of 33 to 34 weeks gestational age that could benefit as well. As a result, they have amended the protocol to include 33- to 34-week gestation infants in our phase 2a study. This has resulted in the number of infants in the study being expanded from 36 to 42. This has pushed out the completion date from 3Q, 2014 to 4Q, 2014. This adds substantial numbers patients that are eligible for recruitment into the study. Moreover, it should expand the commercial opportunity for the product.

The phase 2a program will now evaluate a total of 42 patients because of the change in enrollment criteria. The previous enrollment goal was 36 infants. The Company won’t say where they are now in terms of enrollment. This is a small sample size and it could be the case that they will need a sample size of 100 or so to tease out efficacy signals.

Once phase 2a shows safety and tolerability, the Company can advance to phase 2b in which they expect to demonstrate both physiologic and clinical evidence of the beneficial therapeutic effect in infants ranging from 29 to 34-week gestation infants. Success in phase 2b should allow DSCO to properly design the Phase 3 study that will demonstrate efficacy and safety. The phase 2b program remains on track to complete in 2H, 2015.

The Importance of the Capillary Aerosol Generator

Aerosurf is a lyophilized dosage form Surfaxin but instead of delivering it by intratracheal intubation, it is delivered as an aerosol in the nCPAP setting. Aerosurf is a drug/ device combination in which the aerosolization technology is novel and proprietary to DSCO and is based on a capillary aerosol generator.

Since the introduction of animal surfactants in the 1990s there has been an interest in delivering surfactants via aerosolization. However, these efforts have been unsuccessful in adequately aerosolizing the animal surfactants so that they can be delivered in sufficient and consistent quantities. The capillary aerosol generator has demonstrated that it can deliver sufficient output of Aerosurf with the appropriate respirable properties, such as particle size, for as long as needed. This is something that to my knowledge and that of DSCO, no current aerosol generator can duplicate.

Management reports that DSCO’s capillary aerosol generator has been performing quite well in the clinic. DSCO says that it fits well into the workflow of the neonatal intensive care unit and infants are tolerating Aerosurf very well. Clinicians using this device report having a positive experience and their enthusiasm is high. The phase 2a study is an open label study so that clinical observations can be made. The Company would not comment on specifics but said that so far they are very pleased with the physiologic data and clinical observations they have seen. There have been no concerning safety signals associated with Aerosurf administration.

There is a lot of interest in the neonatal intensive care community in participating in the clinical program, and DSCO expects to have no issues finding interested neonatal intensive care units who want to participate in the study. They expect that they will be able to pick the best neonatal intensive care units for participation. They also expect that the current phase 2a sites will also participate in the phase 2b study, and are evaluating additional clinical sites. They expect to transition smoothly into the phase 2b study, and expect to complete that study in the second half of 2015.

Potential Data from Phase 2a

The trial is looking at physiologic measurements, such as the amount of oxygen the baby needs, the amount of nCPAP support that the baby needs and other therapeutic interventions that are required during the nCPAP course of therapy. They are also looking at vital signs and adverse experiences that occur frequently in the NICU population.

When they complete the study, they will look at differences in safety and tolerability between the treated group and the control group. They will also look for potential signs that would suggest that there is a potential benefit. However, this is a small study and it may be hard to tease out therapeutic differences and also difficult to rule out that any differences did not occur by chance. The sample size might have to be 100 or so infants to get a clear signal of efficacy and this trial will only enroll 42.

 

Partnering Opportunities

In regard to Surfaxin, they are having discussion with firms that could commercialize and manage a hospital-based product like Surfaxin in areas of the world in which Surfaxin approval in the US is sufficient for approval in those areas. These areas are Latin America and the Middle East, Northern African countries. Based on conversations with potential partners, DSCO believes that the market in Latin America could be equal to or possibly larger than the US.

With respect to Aerosurf, over the last two to three years they have talked to a number of companies. DSCO intends to retain marketing rights in the US. Those companies that they are talking to, in the end, want to see data. Whether the phase 2a data is going to be sufficient for whether phase 2b data will be necessary will depend on the risk profile of the potential partner. My view is that partners will want to see phase 2b data so that this pushes Aerosurf partnering into early 2016.

Target Population for Aerosurf

The DSCO thesis centers on the Aerosurf being able to get the surfactant into the lung without the need for invasive and mechanical ventilation. From an epidemiologic perspective in this country, there are about 45,000 or so babies that receive first-line surfactant therapy today. These are babies that are intubated immediately, very oftentimes right in the delivery room, as soon as they are born, and get a dose of surfactant.

There is a secondary population of approximately of equal size, about another 45,000 babies, that are trialed initially on CPAP and ultimately fail, meaning -- failure meaning a need for rescue intubation, mechanical ventilation and very likely, surfactant therapy. But now that surfactant, in that circumstance, is being administered well outside of the optimal therapeutic window, and you only wish -- the medical teams only wish that there was a way to predict who was going to be successful on CPAP and who's not going to be successful on CPAP, but no such predicted demography exists. That's really the fundamental dilemma that the neonatology community has today, and the problem that we hope to solve with AEROSURF.

So we see a patient population that is larger -- an eligible patient population that is larger for a potential AEROSURF application in the order of magnitude of about 160,000 or so children in the United States. And that's larger than the entire surfactant-treated population today.

The one thing I might add is that when a neonatologist is standing at the bed side, they really have an important choice to make within the first few minutes of this baby's life after birth. And I think that some neonatologists are going to tend to be a little bit more towards the utilization of CPAP. But with that said, with the availability of the aerosolized surfactant, they're going to go right there -- right to there to mitigate the risk.

We also have to keep in mind that there are some babies that neonatologists would tend to intubate that otherwise, we might -- they might consider using CPAP if there was a way of noninvasively delivering surfactant as well. I think the answer to your question is, is that we're going to have 2 technologies that, I think, answer the sum total of solutions facing the neonatologist with regard to RDS. We're going to have the solution for the babies that require endotracheal intubation for other reasons, and we're going to have the solution for the babies receiving nasal CPAP, and that will definitely expand our reach within the neonatal care space.

Phase 2a Trial

But in the Phase IIa trial, could you tell us how long the babies are being maintained on the aerosol? And could you compare that to what an actual clinical practice -- would it be the same, or a greater period of time? And then, could you make some kind of comment on whether you've seen any change in the characteristics of the aerosol? For example, is -- on the particle size, is there any clumping over time? Have there been any situations where the generator has clogged up and they've had to make some kind of an adjustment? And I'm sure you can embellish on that, but I think you know the point I'm getting at -- is that -- are you maintaining pretty much the same type of flow over the life of -- over the time that you're giving the aerosol? And how does that relate to actual clinical practice?

They are controlling the dosage by lengthening the time of administration as opposed to increasing the concentration of the drug. Hence the dose is escalated by increasing the administration time. The first cohort was exposed for a relatively short period of time and future cohorts will be given longer periods of administration. All of the exposures will be less than one hour. Management said that they would remain vague on precise times as other companies are interested in aerosolizing surfactants. Management states that the period of time for aerosolization fits well within the practice of the NICU and babies seem to be tolerating the exposure to the aerosol quite well.

One of the issues with attempts to aerosolize animal surfactants has been that the viscosity of the lipid protein complex causes the aerosol generators to “gunk up”. In in vitro testing of the capillary aerosol generator, they have been able to run the capillary aerosol generator for several hours without any change in operational characteristics. The particle size remains extremely constant within a narrow band. These babies have small airways so that the particles can’t be too large and they also don’t want to make them too small. They think that they have found the “Goldilocks” solution to particle size. The drug device delivers the same particle size and hence drug amount at 1 minute, 60 minutes, 120 minutes and 320 minutes. Management characterizes it as “an incredibly dependable workhorse type of aerosolization technology”.

This is in contrast to some of the other aerosol generators that DSCO has looked at in their labs. Management won’t go into detail on specifics with regard to the brands of aerosol generators. However, they did say that these tend to produce much more variability in particle size and that clunking of particles occurs that can lead to a falloff in emitted dose over time. They believe that they have a superior and novel device with their capillary aerosol generator.

The administration of Aerosurf is given over a distinct period of time within the time period that a baby is on nasal CPAP. The treatment is designed to be a single dose and the intent is to administer Aerosurf as quickly as possible.  Also, it would not be practical for the staff to run the aerosol generator continuously over several days. This would be too labor intensive. More importantly, for the amount of Aerosurf that they are administering, this is unnecessary. Management won’t be specific about the length of time that Aerosurf will be administered as determining this is one of the objectives of the phase 2a and 2b trials. However, I get the impression that it is going to be less than two or three hours. In the Surfaxin trials, 70% of babies received only a single dose. While it is too early to say with certainty, this is likely to be the case with Aerosurf.

During the call, management added that the capillary aerosol generator has applications to other respiratory diseases in which delivery of an aerosolized surfactant could be of benefit. This could result in building a pipeline of products beyond the neonatology practice that Surfaxin and Aerosurf target. Management said that we will hear more of that in the future.

How Surfactant Therapy is Currently Practiced

Surfactants are used to treat respiratory distress syndrome (RDS) in the neonatal intensive care unit (NICU). In current usage, they are dosed as a liquid distillate. In current medical practice, babies with RDS are intubated and the surfactant is delivered through an endotracheal tube into the lungs; this process is followed by mechanical ventilation. To dose the surfactant, physicians pick up an infant and tilt their heads downward. They then pour the surfactant through the endotracheal tube and into the lungs. The baby is turned first on one side and then the other in order to spread the surfactant throughout the lungs.

The process of intubation and mechanical ventilation can be life saving, but it carries a serious risk of causing long term lung damage. Because of this surfactant replacement therapy is used only in the most severe cases of RDS where the life saving benefit warrants the risk of lung damage. An alternative process for less severe cases of RDS uses nasal continuous positive airway pressure (nCPAP) in which air is delivered through a mask fitting over the baby’s face which delivers air at positive pressure. This keeps the lungs partially expanded and makes it easier for the baby to breathe in. There is a growing trend towards the use of nCPAP.

The problem with nCPAP is that babies being treated are surfactant-deficient and would benefit from surfactant replacement therapy. When the neonatologist institutes nCPAP as the primary and first respiratory therapy for these babies, they have to forgo surfactant replacement. Published literature and studies presented in major meetings have suggested that from 30% to up to 70% of preterm infants that are started on nasal CPAP go on to require endotracheal intubation and mechanical ventilation. This defeats the purpose of nCPAP, because the infant still suffers the trauma of intubation and making matters worse has his surfactant therapy delayed.

Aerosurf allows delivery of sufficient quantities of aerosolized surfactant for these babies who are receiving nasal CPAP. This technology may decrease the number of babies that require intubation and mechanical ventilation. Aerosurf will potentially revolutionize NICU practice by enabling neonatologists to support the substantial population of the preterm infants with nasal CPAP, while decreasing the risk of endotracheal intubation and mechanical ventilation.

Phase 2a and 2b Trials

The active ingredient in Aerosurf is the same as that in Surfaxin. A very positive aspect of the Aerosurf program is that investors know beforehand that the drug is effective and safe. The issue is delayering the drug in therapeutic levels to the lungs. While this is not a trivial issue, the risk of successful development is much less than for a new and unproven molecular entity. The aim of the phase 2a and 2b program is to show that effective levels of Aerosurf can be given safely and effectively via aerosolization.

Aerosurf is a lyophilized dosage form of the Surfaxin which instead of being administered as a liquid through an endotracheal tube is delivered as an aerosol. At first glance, many investors underappreciate the process of aerosolization of a surfactant. They tend to visualize this as being comparable to commonly used aerosols used to deliver many small molecule drugs. The aerosolization of Aerosurf is very different. Surfaxin is comprised of a protein, two lipids and a spreading agent. It is a highly viscous substance that is extremely difficult to aerosolize. The animal products are even more complex mixtures. This is why after 30 years on the market there are no aerosolized dosage forms of the animal surfactants.

Aerosurf carries a lesser development risk than a drug based on a new molecular entity. The active drug components are the same as Surfaxin, which has been shown to be safe and effective in clinical trials. We know the drug works. Similarly, the manufacturing process has been validated; problems with manufacturing sometimes lead to long delays as was the case with Surfaxin. The key uncertainty is whether Aerosurf can disperse the active ingredients across the lungs to prevent nCPAP failure. The company licensed in a device called a capillary aerosol generator nearly eight years ago and has refined the device significantly. Studies in the lungs of lambs, which are a good animal model, have shown that Aerosurf can deliver a therapeutically effective dose of aerosolized active ingredients of Surfaxin. If phase 2 and 3 trials substantiate this, Aerosurf has a high probability of being approved.

The phase 2a part of the clinical program is now underway. It is designed to assess the safety and tolerability of three sequentially increasing doses of Aerosurf and to produce evidence that the drug is now getting into the lungs of a child at therapeutically effective levels. This will be followed by phase 2b which will determine the clinical effect, provide further safety information and also determine the optimum dose for phase 3. The phase 2a trial could report out data in 4Q, 2014 and the phase 2b in 4Q, 2015.

The phase 2a study was initially planned to enroll babies of 29 to 32 weeks gestational age. These babies were to be compared on the basis of physiologic data and clinical observations from control infants receiving only nasal CPAP and versus infants receiving nasal CPAP plus Aerosurf. The primary focus of phase 2a is to demonstrate safety and tolerability. However, some of the physiological measurements may also be an indicator of potential therapeutic benefit.

If phase 2a establishes safety and tolerability, they can advance to phase 2b in which they expect to demonstrate both physiologic and clinical evidence of the beneficial therapeutic effect in infants ranging from 26- to 34-week gestation infants. Success phase 2b should allow the design the Phase 3 study that will demonstrate efficacy and safety. The phase 2a program will evaluate a total of 42 patients.

When the phase 2a trial began, DSCO felt that babies in the 33 and 34 week gestational age group would not contribute to the clinical program. Their early research suggested that although this is a very large group, only a very small proportion of those babies would have RDS that was severe enough to benefit from Aerosurf. However, as they got into the phase 2a screening and enrollment, they concluded that these babies had disease that also could benefit from aerosolized surfactant therapy.

This enlarges the commercial opportunity and also adds substantial numbers patients eligible for the trial. The decision was made to enlarge the size of the phase 2a trial from 36 to 42 patients to expand enrollment to include babies of 33 and 34 weeks. This pushed completion of the study from 3Q, 2014 to 4Q, and 2014.

Capillary Aerosol Generator is Key Differentiator of Aerosurf

Aerosurf uses a novel, proprietary capillary aerosol generator. Since the introduction of animal surfactants in the 1990s there has been an interest in delivering surfactants via aerosolization. However, these efforts have been unsuccessful in adequately aerosolizing a sufficient quantity of surfactant, either for preterm babies or for other populations. An aerosolized product must deliver sufficient output of surfactant at the appropriate particle size, for as long as needed.

The dosage of Aerosurf is controlled by lengthening the time of administration as opposed to increasing the concentration of the drug. The initial cohorts in phase 2a will be given drug for a relatively short period of time and later cohorts will be dosed longer. All of the exposures will be less than one hour.

One of the issues with attempts to aerosolize animal surfactants has been that the viscosity of the lipid-protein complexes causes the aerosol generators to “gunk up” which renders the product ineffective. Management has said that in in vitro studies they have been able to run the capillary aerosol generator for several hours without any change in operational characteristics. The particle size remains extremely constant within a narrow band. These babies have small airways so that the particles can’t be too large and they also don’t want to make them too small. They think that they have found the “Goldilocks” solution to particle size. The drug device delivers the same particle size and at 1 minute, 60 minutes, 120 minutes and 320 minutes. Management characterizes it as “an incredibly dependable workhorse type of aerosolization technology”.

This is in contrast to other aerosol generators that DSCO has looked at in their labs. Management won’t go into detail on specifics with regard to the brands of competitive aerosol generators. However, they did say that these tend to produce much more variability in particle size and that clunking of particles occurs that can lead to a falloff in emitted dose over time. They believe that they have a superior and novel device with their capillary aerosol generator. DSCO says that it is fitting well into the workflow of the neonatal intensive care unit, and the infants are tolerating aerosol very well. The clinicians using this device have had a positive experience thus far and enthusiasm is high.

The administration of Aerosurf is given early in the time period that a baby is on nasal CPAP. The treatment is designed to be a single dose and the intent is to administer Aerosurf as quickly as possible.  It would not be practical for the staff to run the aerosol generator continuously over several days. This would be too labor intensive. More importantly, for the amount of Aerosurf that they are administering, this is unnecessary.

Management won’t be specific about the length of time that Aerosurf will be administered as determining this is one of the objectives of the phase 2a and 2b trials. However, I get the impression that it is going to be less than two or three hours. In the Surfaxin trials, 70% of babies received only a single dose. While it is too early to say with certainty, this is likely to be the case with Aerosurf.

Results of Phase 2a

While the primary purpose of phase 2a is to determine safety and tolerability, physicians may be able to see some physiologic effects as it is an open label study so that observations can be made. They are looking at physiologic measurements, such as the amount of oxygen the baby needs, the amount of CPAP pressure support that the baby needs and other therapeutic interventions that the baby needs. They are also looking at vital signs and adverse experiences that occur frequently in the NICU population. The Company would not comment on specifics but said that so far they are very pleased with the physiologic data and clinical observations they have seen. There have been no concerning safety signals associated with Aerosurf administration.

When they complete the study, they will look at differences in safety and tolerability between the treated group and the control group. They will also look for potential signs that would suggest that there is a potential benefit. However, this is a small study and it may be hard to tease out therapeutic differences and also difficult to rule out that the differences did not occur by chance.

The phase 2a study was initially screening and enrolling infants of 29 to 32 weeks gestational age. However, in conducting the study they have discovered that there are a number of infants of 33 to 34 weeks gestational age that could benefit as well. As a result, they have amended the protocol to include 33- to 34-week gestation infants in the phase 2a study. This has resulted in the number of infants in the study being expanded from 36 to 42. This has pushed out the completion date form 3Q, 2014 to 4Q, 2014.

Phase 2b

There is a lot of interest in the NICU community in participating in the clinical program. Management does not anticipate any issues in lining up sites for phase 2b. They believe that they will have the pick of the best NICUs. They also expect that the current phase 2a sites will roll into the phase 2b program. They expect to transition smoothly into the Phase 2b study, and we expect to complete that study in the second half of 2015.

Partnering Opportunities

Discovery will market Surfaxin in the US and partnering is not a consideration. They are having discussions with firms that could commercialize and manage a hospital-based product like Surfaxin in areas of the world in which Surfaxin approval in the US is sufficient for approval. These areas include Latin America and the Middle East, Northern African countries. Based on conversations with potential partners, DSCO believes that the market in Latin America is equal to or possibly larger than what is in the United States.

Over the last two to three years they have talked to a number of companies about partnering Aerosurf. DSCO intends to retain marketing rights in the US. The Surfaxin launch will allow the Company to build a strong relationship with the neonatal community in the US. If Aerosurf is approved in the US, there should be a smooth transition into commercialization.

Discovery lacks the resources and time to market Aerosurf in international markets and will partner the product. They are talking to a number of companies. These companies want to see more clinical data. It is possible that some company might want to partner based on phase 2a data, but it is more likely that a partner will want to see phase 2b results. This points to a partnering deal occurring in early 2016.

Target Population for Aerosurf

The target population for Aerosurf is children diagnosed with respiratory distress syndrome or RDS; by definition this means surfactant deficiency. The most severe cases are currently treated with liquid surfactants and mechanical ventilation. The act of intubation or inserting an endotracheal tube into the airway of the child, in and of itself, can be problematic. Because of the risk of intubation and mechanical ventilation, not all infants with RDS are given this therapy.  The goal with Aerosurf is to administer the surfactant into the lung without using intubation and mechanical ventilation which cannot be dome with existing products.

From an epidemiologic perspective in the US, there are about 45,000 or so babies that receive first-line surfactant therapy using intubation and mechanical ventilation. These are babies are intubated immediately, very often right in the delivery room. It is highly unlikely that Aerosurf will find much use in this patient population.

The currently marketed animal surfactants and Surfaxin are given as liquid instillates that are administered by an endotracheal tube (intubation) directly into the lungs of a premature infant with respiratory distress syndrome or RDS. Through lessening surface tension, they make it easier for a baby’s lungs to expand and contract when used in conjunction with a mechanical ventilator. Because of the considerable risks associated with intubation, doctors will only give this treatment to babies with the most severe form of RDS; there are about 45,000 such babies treated each year in this way.

There are an additional 120,000 premature babies born each year who have less severe forms of RDS. These babies are given continuous positive airway pressure through nasal clips or nCPAP to help breathing in and out. About 45,000 babies that are treated initially on nCPAP ultimately fail and need rescue intubation, mechanical ventilation and surfactant therapy. The problem nCPAP is that the surfactant is delivered well outside of the optimal therapeutic window. Unfortunately, physicians are unable to predict which babies will fail on nCPAP and will need to be intubated and mechanically ventilated. This is the fundamental dilemma in the neonatology community that Aerosurf will hopefully solve.

When a neonatologist is standing at the bed side, they really have an important choice to make within the first few minutes that could have a critical bearing on the baby’s life. Should they intubate or go with nCPAP. Currently, neonatologists seem to tend towards nCPAP. With the availability of Aerosurf, it would hasten the decision to go the nCPAP route. Discovery believes that the addition of a surfactant to nCPAP will prevent a significant percentage of these babies from failing nCPAP and moving to liquid surfactants plus intubation and mechanical ventilation. Because there is no way of predicting which of the 120,000 babies treated with nCPAP might progress to mechanical ventilation, Aerosurf potentially would be used in most of these patients.

Aerosurf targets one of the greatest unmet medical needs in neonatology. It also provides very favorable pharmacoeconomics. Use of mechanical ventilation can lead to lung damage that can last a life time and the treatment is very expensive, costing about $2,500 per day. A common complication of mechanical ventilation is bronchopulmonary dysplasia (BPD), which causes serious lung damage and can cost $100,000 to treat. Aerosurf could provide enormous value to infants and cost savings to hospitals. I think that it might be priced at $5,000 to $10,000 per course of therapy which for the 120,000 nCPAP treated babies is an addressable market of $600 million to $1.2 billion in the US with perhaps the same or twice as much potential abroad.

Pipeline Opportunities

During the call, management added that the capillary aerosol generator has applications to other respiratory diseases in which delivery of an aerosolized surfactant could be of benefit. This could result in building a pipeline of products beyond the neonatology practice that Surfaxin and Aerosurf target. Management said that we will hear more of that in the future.

 

 

 

Tagged as Aerosurf, Discovery Laboratories Inc, DSCO, Surfaxin, Windtree Therapeutics + Categorized as Company Reports