Expert Financial Analysis and Reporting

Key Points:

• The phase 2b trial failed, but there was an encouraging signal of activity.
• The failure was related to clogging of a cartridge used in the medical device used to deliver Aerosurf which affected some patients in the 50 minute dose cohort. In patients unaffected by this problem, results were positive and if they been replicated in the entire cohort the phase 2b trial would have been viewed as highly positive
• In the best case, the Company could execute a phase 3 trial and report topline results in 2H 2019, but it is likely to take longer.
• Windtree is almost out of cash and it is highly unlikely that it can turn to the equity market or to business development to fund a phase 3 trial.
• Some sophisticated and deep pocketed investors have invested significant sums of money in the Company and I can’t see them walking away from their investment in the near term and they might well fund the entire phase 3
• I remain hopeful that Aerosurf will eventually be successfully developed.
• However, I am going to sell my shares and take a tax loss. The development timeline is long and the capital needed to fund development through phase 3 will be on terms that are likely to enormously dilute us small shareholders.

Phase 2b Trial Results Were Disappointing

Windtree announced disappointing results for the phase 2b trial of Aerosurf for premature babies with respiratory distress syndrome (RDS) of 28 to 32 weeks gestational age. The trial enrolled 221 patients at 48 sites in North America, Europe and Latin America. The dosage of Aerosurf is constant in the amount of drug delivered per unit of time so that the overall dosage is a function of the amount of time that the aerosolized product is delivered. There were two dosage groups of 25 and 50 minutes and one control group in the trial. The key objectives of this trial were to:

• evaluate efficacy by assessing: (I) incidence of nCPAP failure (defined as the need for intubation), (ii) time to nCPAP failure, and (iii) physiological parameters indicating the effectiveness of lung function;
• define the dose regimen(s) for the planned phase 3 clinical program;
• provide an estimation of the expected efficacy margin of AEROSURF treatment;
• evaluate performance and further the development of the aerosol delivery system (ADS); and
• further characterize the AEROSURF safety profile

Results Were Disappointing, But…….

The trial did not meet the primary endpoint of a reduction in nCPAP failure at 72 hours. The nCPAP failure rates for the 25 minute (n=71) and 50 minute (n=72) dose groups were comparable to nCPAP alone (n=71); the failure rate was 44% in each group. The safety and tolerability profile of the Aerosurf treated patients was generally comparable to the control group.

The Company attributed the poor results to treatment interruptions caused by clogging of disposable cartridges used in the delivery device. The clogging seemed to occur in the 50 minute dosage group rather than the 20 minute dosage. The problems occurred principally in lots that were used at clinical sites in Poland and Chile. The US and the remainder of world sites were not affected.

Windtree believes that there was a strong signal of activity in 45 patients in the 50 minute dose group whose dose was not impacted by this problem. In this group, the nCPAP failure rate was 31% compared to 44% in the control group which is a 13% absolute reduction or a 30% relative reduction in nCPAP failure compared to control. The Company had previously indicated that a 20% to 30% reduction would be medically significant. This estimate was based on a survey of 278 neonatologists who were asked what rate of reduction in nCPAP failure would be significant. Had there been a 30% reduction in nCPAP failures in the entire 72 patients in the 50 minute dosage cohort, the trial would likely have been seen as being successful.

Where Do We Go from Here?

The Company believes that the results in the 45 patients just discussed are a strong signal of activity. In a few weeks there will be an end of phase 2 meeting to discuss these and other results with the FDA. Management believes that this strong signal is sufficient to go forward with a phase 3 trial. However, the FDA may not agree.

Another key issue is that the Company is developing an improvement in the delivery device that it believes will improve the delivery of Aerosurf and reduce the potential for clogging. They are close to completion of laboratory benchmarks that are needed to show equivalence to the device used in phase 2b. The plan is to use this device in the phase 3 trial. Prior to starting the phase 3 the plan was to test these devices in some of the clinical sites that participated in the phase 2b trial for about three months.

In the very best case, the FDA would give the go ahead to begin a phase 3 trial with the new device and Aerosurf would be on the same timeline as if the phase 2b trial had been successful. In this case, the verification procedures need to show that the new delivery device was equivalent to the one used in phase 2b would begin shortly and planning for the design of the phase 3.This could take a few months and then design and plan the phase 3. It could well take a year to begin the phase 3 trial. The trial once begun could be completed very quickly so that topline results might be available six to twelve months later. In this best case, we could see topline results in 2H-2019.

I have concerns that the best case outcome is unlikely to come about. The FDA may require a bridging study in humans that shows the new device is comparable to the device used in phase 2b. I am also skeptical that the FDA will view the results seen in the 45 patients as being sufficient to go into phase 3. It could well require another phase 2b trial before beginning a phase 3and if so, this could push the topline result from the phase 3 trial out 12 to 18 months beyond the 2H-2019 suggested in the best case.

Financial Situation is Critical

The Company had brought in just enough cash to get to determine topline results from phase 2 b. Management was planning on the results being positive which would allow it to raise money through an equity offering and/or business development efforts in order to execute a phase 3 trial. I think that the Company is almost out of money and will have to scramble to bring in about $2 million or so to stay in business until the end of phase 2 meeting with the FDA is completed. At that time, the Company will have a clear idea on the clinical development pathway.

I think that in the best case scenario, the Company might have to raise $25 million or more to stay in business and execute the phase 3 trial. Complicating the situation is that Windtree is required to repay $12.5 million of debt to Deerfield in early 2018 and another $12.5 million in early 2019. For a company with a market capitalization of about $20 million and a very poor reputation with investors, it is difficult to imagine that this amount of money can be raised in the equity markets.

Will Windtree Go Bankrupt? I Don’t Think So

I think that the results for the 45 patients in the 50 minute dosage group were an encouraging signal of activity that suggests that Aerosurf could be successful in a phase 3 trial. The Company has some sophisticated investors like Deerfield and Baker Brothers who have invested significant amounts of capital already and have deep pockets to further invest. I don’t see them letting the Company go bankrupt.

There is another strong reason why Windtree won’t go bankrupt. It licensed KL-4 from Johnson & Johnson and the device technology from Phillip Morris. I don’t know the details of the licensing agreements, but it is highly probable that in the event of bankruptcy that these assets would revert to these companies. I don’t think the afore-mentioned investors would let this happen.

What I Think Will Happen

I think that the deep pocketed investors will conclude that there is a sufficient signal of activity for Aerosurf that they will invest more money to first determine the clinical path forward and then perhaps to complete the phase 3 program. I can’t see them walking away and letting Windtree go bankrupt. However, raising this money will be enormously dilutive to current shareholders.

If I were a major investor in the Company like those mentioned, I would look very closely at taking the Company private. I think that if venture capitalists were to analyze the technology base of Windtree and the clinical data that it has generated that it would be possible to raise the money to complete the phase 3 trial and then bring the Company public some years in the future.