Expert Financial Analysis and Reporting

Investment Thesis

The current market valuation of Windtree is only $16 million. This seems extremely low for a Company that is close to having phase 2b data for its key drug Aerosurf. With success in phase 2b, Aerosurf, which potentially has blockbuster commercial potential, will be ready for a phase 3 trial. This key asset might at that point potentially have value of well over $100 million if it were auctioned off to another company. The low valuation reflects investor skepticism about the Company due to a near ten year string of disappointing performance.

Also, its strained financial condition leads investors to fear that the current share base will be greatly diluted by future equity offerings. If the Company were to try to fund a phase 3 trial by raising cash in the current equity market at recent prices it would cause astronomical dilution. There are currently 8.0 million shares outstanding. If the Company tried to raise say $50 million (this is a guess) that might be needed to fund a phase 3 trial, it would have to sell 25.0 million shares and issue perhaps 12.5 million warrants. This would raise the fully diluted share count from 8.0 million to 45.5 million.

Management would be derelict if it tried to raise money on these terms. They are hoping that positive phase 2b data will propel the stock to a much higher valuation. Indeed, if the Company were well capitalized and not in need of cash to conduct the phase 3, I think that the market valuation after a success in phase 2b could be $300+ million. Overhanging the Company like a dark ominous cloud is the desperate need for cash.

I think that it is possible that licensing or partnering deals could bring in substantial cash in the aftermath of positive phase 2b results and the resultant stronger financial position could have a significant positive effect on valuation. This might then allow the Company to raise additional capital in the equity markets at much more favorable terms. I think that an outright sale of the Company is also a distinct possibility if the stock market continues to place a low value on the Company. Aerosurf with positive phase 2b data would have substantial value. I could see an acquirer paying substantially more than $100 million which is $13 per share. For a more detailed report on the Company, you should see my report, "Windtree Therapeutics: Clinical Trial Data over Next Year Could Validate the Promise of Aerosurf".

I own this stock in my account, but I want to caution that it is extremely risky. If the upcoming data from phase 2a for babies of 26 to 28 weeks gestational age (GA) or the phase 2b data leads investors to believe that the Company cannot conduct a phase 3 trial, Windtree will go out of business and investors will lose all of their investment. If the Company has to raise money to fund phase 3 solely in the equity markets, there will be enormous dilution. If you own this stock like me or plan to buy it, you should accept the risk that you could lose all of your money. However, there is asymmetric upside potential which entices me to accept the risk.

Overview

Windtree held its conference call on 1Q, 2016 on the morning of May 12. 2016. There was nothing dramatically new but there were some things that caught my attention.

Enrollment in Phase 2a and Phase 2b Trials on Target

The Company reiterated guidance that topline data for the 32 babies in the 26 to 28 weeks GA cohort of the phase 2a trial will be released in 3Q, 2016. Management also reiterated that topline data for the critically important phase 2b trial will be released in 1Q, 2017. Recall that babies of 29 to 34 weeks GA are already being enrolled and enrollment of babies 26 to 28 weeks GA will begin shortly after the phase 2a results in this age group are known.

The Company at the current burn rate will be running out of cash by early 2Q, 2017. I will talk about the strained financial situation later in this report. Also, original guidance on timelines for the phase 2a trial was much too optimistic so that investors are concerned as to whether the current guidance may also be too optimistic. It is critical that the Company meet its release of topline data guidance for both financing and credibility reasons.

During the call, management highlighted that it was very pleased with trial enrollment in sites in Canada and Poland and that it plans to quickly bring on sites in Chile. Windtree and investigators at sites in these countries are quite familiar with each other based on their prior interaction in the Surfaxin phase 3 trial. The enrollment appears to be somewhat quicker in these countries compared to the US and importantly, the quality of both care and investigators is on a par with the US. This significant enlargement in number of sites bolsters management’s confidence that it can meet its announced timelines.

Type C Meeting with FDA is Encouraging

A research team from Windtree recently had a Type C meeting with the FDA to discuss the Aerosurf program. Let me put this in perspective. After phase 2 is completed (for Windtree this will be 1Q, 2017), there will be a Type B, end of phase 2 meeting between the company and FDA to discuss the Company’s planning on the design of a phase 3 trial. Type B meetings are required by federal regulations. In this meeting, critical issues such as enrollment criteria, clinical endpoints, statistical design, etc. are discussed. It is extremely important for a company to have interaction with the FDA to try to gauge how FDA views on these issues agree or disagree with the Company. Very importantly, the FDA will not lock themselves into an agreement or contract with the Company on how to conduct a trial in most cases. An exception is the Special Protocol Assessment or SPA which I won’t go into in this note.

The FDA is not required by federal regulations to have a Type C meeting before phase 2 is completed. It is encouraging that representatives of the Pulmonary-Allergies Division of the FDA agreed to the meeting. Management would not go into any detail on the meeting other than to say that they were pleased with the discussion. It is logical to assume that the meeting discussed Windtree’s plans for enrollment and endpoints in phase 3. Management has previously indicated that it thought the primary endpoint of phase 3 might be reducing the rate of intubation of babies treated with nCPAP.

Observational Study

Windtree has done a prospective observational study in about 1700 babies treated with nCPAP. This study could be invaluable in determining how the control arm of the future phase 3 trial responds to nCPAP and incorporating the findings into the trial design. The Company did not go into much detail on findings in the study which it will reveal at some future time. It did reveal an important finding that 60% of intubations in nCPAP babies occur in babies of 29 to 34 weeks GA and 40% occur in babies of 26 to 28 weeks GA. This was surprising as management had anticipated that most intubations would be in the 26 to 28 weeks GA.

Windtree is Very Strained from a Financial Standpoint

The Company ended 1Q, 2016 with $29.4 million of cash and guided that the 2Q, 2016 cash burn would be $8.5 million. It did not offer guidance beyond 2Q but at an $8.5 million quarterly cash burn, the Company would run out of cash midway through 1Q, 2017. The Company has guided that the cash would fund operations through Q1, 2017.

The Company believes that the release of positive phase 2b data could have a very meaningful effect on its ability to raise capital either through licensing or equity issuance. As previously mentioned, the topline data on phase 2b will be released in 1Q, 2017. My guess is that the Company may need to raise somewhere between $5 and $10 million to maintain operations through the second quarter. If the phase 2b results are positive, Windtree will have a phase 3 ready product with strong clinical data.