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Discovery Laboratories Inc. (NASDAQ:DSCO)

Q2 2008 Earnings Call

August 6, 2008 10.00 am ET

Executives

Lisa Caperelli - Investor Relations

Robert Capetola - President and Chief Executive Officer

David Lopez - Executive Vice President and General Counsel

John Cooper - Executive Vice President and Chief Financial Officer

Analysts

Marko Kozul - Jefferies

Brian Rye - Janney Montgomery

Operator

Good morning. My name is Raquel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2008 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Ms. Caperelli, you may begin your conference.

Lisa Caperelli - Investor Relations

Thank you, Raquel. Good morning, and thank you for participating in Discovery Labs' conference call. This morning's conference call will provide an update on the financial results for the second quarter 2008 as well as progress obtained in responding to the Surfaxin FDA approvable letter.

Before we start, I will read the Safe Harbor statement. This webcast conference call this morning will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or the company's future financial performance. Such statements are subject to certain risks and uncertainties, which could cause our actual risks to differ materially from any future results expressed or implied by such statements. Predominantly, those inherent in the process of discovering, developing and commercializing drugs. The listener is cautioned not to rely on these forward-looking statements. Actual results could vary materially from those described as a result of a number of factors, including those set forth in Discovery's annual report on form 10-K and any subsequent SEC filings as they may have been amended.

Today we have with us Dr. Robert Capetola, Discovery's President and Chief Executive Officer, David Lopez, Executive Vice President, General Counsel, who is responsible for overseeing our regulatory strategy, and John Cooper, Executive Vice President and Chief Financial Officer.

I would like to turn the call over to Dr. Capetola.

Robert Capetola - President and Chief Executive Officer

Lisa, thank you very much, and thanks to call of you for joining us today. We issued two press releases this morning. As Lisa mentioned, the first one was on the second quarter financial results, and you are going to hear from John about that in a few moments. And more importantly, a press release outlining the significant progress we made responding to our May 1st approvable letter, and how we're going to address that in a complete response, which will be coming up in the September time frame.

So I'm just going to make a few introductory comments here and then we'll turn it over to Dave Lopez, who is heading up the regulatory function, and then John will go over the second quarter financial results. And then we'll get into Q&A for those of you who are interested. In the case that there's some new shareholders out there, I just want to remind everybody that we have this core technology based on a novel peptide that mimics human surfactant protein B. It's called KL4. We have an entire platform and plethora pulmonary disorders that we will be approaching. We like to view it as an inverted pyramid with Surfaxin's approval as the lodestone or the cornerstone holding up the potential use of this technology through a variety of different pulmonary disorders. We have made very, very significant advancements during the last two years, which we think will transcend the benefits of that inverted pyramid in many different venues and avenues, both from a manufacturing quality, commercial, regulatory, etcetera, and we'll talk more about that just in a few moments. But I think -- I think it's important also since I think this is the first time we spoke together since the May 1st approvable letter, that I reflect our disappointment in that approvable letter and as I know that you are as well.

But I also want to remind everybody during the last two years, it's a fundamentally different situation now than we had two years ago. We have made very, very significant advancements in all the facets that make up this development cornerstone and this technology progress as it moves forward. Our manufacturing infrastructure, headed here by Chuck Katzer and carried off in toto, and all the ancillary things that go into that are world class. Our quality infrastructure now, and the level of science that were employing and identifying, the attributes that go into the Surfaxin formulation are state-of-the-art. The regulatory interface with the FDA and the financial management of the company, the R&D, and the way we are looking at the pipeline is extraordinarily exciting. And I think now we have this commercial build that's coming on that I think is second to none too. So we are positioning this company for great success in the not too distant future, but what is very, very important is that we get back to the basics and get Surfaxin approved. And that's what we have instructed the company to do.

We've said that, look, we have significant amount of money, but not enough. We have a lot of activities both in our pipeline and commercial desires. We are going to do what we need to do to make sure that we preserve as much cash as we can, while at the same time, focusing on the entire company on finishing up the last things necessary for Surfaxin approval. That CornerStone of this build, we think, and our board agrees, is the most significant thing to adding value to the company on the go-forward basis. So our efforts have been since May 1st focused almost entirely on Surfaxin approval. We've made extraordinarily notable progress.

Dave is going to outline that for you in just a few minutes. And you see from the press release, they are really down to two main items. One is the level of -- the minor level of the impurities in the active pharmaceutical ingredient, that go into our products and the level of detail that we have about those. We have as much scientific chemical knowledge about our compound as any pharmaceutical that I have ever known of and compared to the others in the class, it's an astronomical step forward. We are very, very proud of the effort that the group put towards that understanding.

The other big item was the biological activity testing. Dave is going to outline the progress there today. I have confidence in our ability to provide both the impurity data as well as the biological activity tests in a timely fashion and that's why after many days of discussion, we are still putting that September time frame together. There are some things had a have to happen to make sure that that occurs. If there's anything that does happen that would derail that for a short while, we will be glad to get that on the conference call and let you know and progress as we move forward. So we have adjusted our spend right. We have focused our efforts. We have not forgotten about our pipeline, but we also understand the importance of getting this thing finally approved and in the process. So I will cut my comments a little bit short so that we can give time for Dave to go over the press release with regard to the FDA activities, and for John to give you an update on the second quarter results, and then we'll be back for some detailed Q&A. David?

David Lopez - Executive Vice President and General Counsel

Good morning, everyone. And again, I encourage you to refer to the press release we issued this morning that updates our progress on gaining Surfaxin approval. For inclusiveness, I want to spend a brief moment touching on some of the requests that the FDA has asked for in the recent May approvable letter that we have mentioned in prior press releases, but that are noticeably absent in this day's press release, because we don't consider them to be key requirements. But I do want to update you. Those are requests with respect to additional information about equipment-related processes that are involved in Surfaxin's manufacture. Indeed the numerical majority of the number of items in the May approvable letter surrounded these equipment-related processes. These are straight processes, tools, what have you, that involve Surfaxin manufacture like the use of an autoclave and the use of steam in place to keep the sterile environment, sterile where it needs to be.

Now, remember these equipment-related processes were, in fact, available and inspected during the preapproval inspection that was successfully concluded by the FDA around the time of our May 1st approvable letter. They have now been requested in that approvable letter for review by the microbiology center at the FDA. As we expected, the work to prepare that information is straight forward. It's essentially complete for responding. It is now in the process of being compiled in a regulatory format for inclusion in the upcoming complete response. Clearly, our interpretation is that this information is anticipated to be within the Class I resubmission guidelines with the shorter two-month review cycle rather than Class II review cycle of six months.

Now I want to focus on the subject of today's updates. The key remaining requirements that we have identified as necessary to achieve Surfaxin approvable, one is a biological activity test and additional information from the FDA regarding that test.

I want to step back and recall that all Surfaxin batches are subjected to a battery of quality control testing, to determine accessible physical and chemical characteristics for at least an ongoing stability assessment. These are things like determining the amount of a drugs in the vial, particle size, contents of Surfaxin's various constituents and traces. Straightforward assessments along those lines.

In addition, in response to the FDA's request several years ago, we have developed and implemented a biological activity test as a recurring quality control test that's also to be used for determining release and stability of Surfaxin batches. Simply, this biological activity test is a QC animal model that determines whether Surfaxin is active by measuring the change in an animal's lung compliance among administration of Surfaxin. A key requirement to gaining Surfaxin approvable by the FDA is to determine the final acceptance criterion for this biological activity test. Simply, this will be the minimum value of increase in lung compliance that test samples of Surfaxin must achieve in the future in order to satisfy release stability requirements for commercially distributed Surfaxin. In essence, that agreed upon acceptance criterion with the FDA will become a specification that commercial Surfaxin must satisfy.

In the recent June FDA meeting, we agreed to conduct additional testing to determine the final approved acceptance criteria. Today that work is ongoing. A good portion of it is complete, and the results are expected and are acceptable and are promising. Now, we will finalize the upcoming complete response and in support of the final specifications, through conducting additional work in this area. But that is playing another key role in supporting the Surfaxin used in the clinical trials. That is the same biological activity test that I was just referring to. That is upon approval, FDA approval for commercial distribution, we will have to show that there's a comparability between the Surfaxin that was manufactured in the clinic to the Surfaxin that will be manufactured for commercial distribution at our Tonowa facility. Why must we do this? All drug candidates must establish this particular comparability. We will call it the FDA reviews a drug candidate's safety and efficacy profile from its registration trials, and in finding that profile compelling, they want to insure that the commercial manufacturing process, that they are also approving at the same time, will produce the similar drug that will produce the similar results.

Many pharmaceutical manufacturers have to deal with this comparability challenge in line with having made clinical process to manufacturing process changes, and scale changes from clinical to commercial scale. We don't have to do that. We did not have those challenges. Our process that we employed in the clinic is the same process that we intend to employ for commercial manufacture of Surfaxin, and at the same scale has always been employed, what we did do is that we did move our manufacturing process from a contract manufacturer that manufactured Surfaxin for us during the clinic, in an effort for business reasons, and for greater control over that process to the CMO that's more proximal to Discovery.

Indeed, in an additional effort to gain more control over quality, we have taken over and now own that manufacturing operation, but we do also have to satisfy this requirement of establishing comparability.

Now to do this at the December 2006 FDA meeting, we agreed to conduct a matrix of testing employing the biological activity test as well as a well-characterized and recognized model of premature RDF. This testing was conducted with a successfully manufactured new PV batches that were produced at that time. They are still fine and they still support approval. And the data was provided to the FDA and reviewed during the cycle ending with the May '08 approvable letter. Those results demonstrate comparability.

At the recent June FDA meeting, we agreed to attach one more arm of testing to that matrix of comparability. Simply, additional testing to generate data with the biological activity test at the same dose that was used clinically in our registration trials, indeed, it's the same prescribed dose that we agreed to with the agency for the package insert and the same dose that we employed in that well-characterized and recognized model of premature RDF. Also at the same time, we have agreed to contemporaneously conduct the same RDS animal model that we have performed in the past with the same batches that are now being used for this additional biological activity testing. This testing and all of this work will be conducted in exactly the same centers, using the same personnel with exactly the same models as the previous work.

Today, a good portion of that work is done, and my optimism comes from the fact that the results to date are comparable to previous. They are as expected. We need to conclude this work and as you can imagine, a great deal of attention is being paid by Discovery to manage the performance of these activities to have them completed in time for the upcoming complete response. Similarly, our interpretation of this additional arm of that comparability matrix and the work necessarily to definitively establish the final acceptance criterion is within the purvey of a Class One review designation by the FDA.

The other item, the other key requirement that we call out in today's press release, is our requirement to finalize the specifications for select lipid-related impurities in Surfaxin's active pharmaceutical ingredients.

Now, recall that Surfaxin is comprised of four separate active pharmaceutical ingredients, a fatty acid, our novel peptide, which is the proteinomimetic of the important surfactin protein B and two phospholipids. Now, no unresolved questions in the approvable letter about our novel peptide were present and at this time, based on the clarification we have gained with the June FDA meeting that just occurred, we think final Surfaxin drug product specifications can be readily finalized.

A key requirement, though, remaining is to satisfied the ICH, the International Conference of Harmonization guidelines that the FDA relies on with select lipid-related impurities in the two phospholipid active pharmaceutical ingredients that comprise surfaxin. Now these phospholipids are naturally present in the human lung and at the June 18th FDA meeting, we discussed with the FDA our approach to justify certain of these lipid-related impurity levels based on those impurities actually being present in the human lung at levels greater than those in Surfaxin's phospholipids. To fully justify their levels in this matter, the FDA requested additional information about these naturally occurring lipid impurities, specific to the neonatal lung.

Today, a good deal of our optimism regarding our progress to satisfy ICH guidelines with respect to these lipid-related impurities is based on the progress of our work with our lipid AZI suppliers to either outright accept the ICH retro limit, that is 3.5%, for final specifications of these lipid impurities in the approved active pharmaceutical that we will use in commercial Surfaxin drug manufacture, or to work with those AZI supplies to simply reduce the levels of such lipid impurities to satisfy that same ICH threshold limit of 3.5%. again notable progress has been made on this approach to directly work with the lipid AZI suppliers.

Importantly, this approach avoids the need to justify such lipids by other methods such as the review of scientific literature or preclinical study, and simply reducing the actual levels and now being able to accept tightened specifications is the most definitive, determinative and compelling way we believe to satisfy ICH guidelines regarding these impurities. As such, we deem this to be the most direct way and what would constitute a Class I resubmission with the 60 day review cycle. At this time I want to take a second to very vocally thank our AZI suppliers for their assistance, their focus, their progress on this approach to date. Quite frankly, their approach far exceeds that of a sterile business relationship. Essentially they have become an important component of our complete response team. By default, they have adopted our mission to get Surfaxin approved and available to benefit premature babies. And I want to thank them again and I will continue to thank them for their focus and their efforts.

With that, I will turn the call over to our CFO, John Cooper to review the financial aspects.

John Cooper - Executive Vice President and Chief Financial Officer

Thanks, Dave. Before I get into the finances, I will step back a second. Let's put everything in perspective. We all know as a company where we are financially, and you can see it in our results. $33.5 million of cash to start the quarter. Two steps that are in place that almost approach $100 million in potential availability. And a market that we all know is a tough market right now. It's a tough market for raising money. It's a tough market financing companies. It's a market that we see quite a bit of partnership and M & A activity happening.

Number two, here we are as a company with the technology, as you heard David speak to, and you heard Dr. Capetola speak to, which is quite compelling. We have to get Surfaxin approved. With Surfaxin being approved, what the world now will have is the first peptide-containing surfactant available to go after and address a number of respiratory diseases. There's a lot of things we can do with this technology. We have abilities to add on, create new formulations. We can aerosolize the technology, and we are extremely eager to invest in that area, so that the pipeline of our technology can show through.

Of course, not only in valuation from an investors perspective, but also for the medical community to see that, the neonatology community, and they are quite eager, especially with the aerosol technology, and quite frankly eager too. They were voicing their displeasure, I guess you could say, with the fact that we're not approved at this point in time. But what we're doing is we are working on making sure through whether it be a quality control release assay, whether it makes sure that we have to -- we are dotting all the I's and crossing the T's in our manufacturing operations and quality group, as well as making sure that the product is the most elegant pharmaceutical surfactant available.

Remember, we are not an animal-derived product. We are synthetic peptide containing surfactant that can be applied. I'm going into all of this because that's the attitude we are taking, and the way we are managing our company in these tough financial markets going forward. We intend to be a long-term player. We intend to invest in a technology that's going to show quite a bit over the next few years, but we have to get Surfaxin approved first.

With that said, we are managing this company to make sure that that is the number one goal, and then we'll go from there with respect to investing in the other opportunities that we have. So with all of that said as a backdrop, that's the attitude we are taking into our financial performance, and our financial management as a company.

So for the second quarter, we had a loss of $10.2 million or $0.11 per share. That included $1.2 million for stock-based compensation under FAS 123. When you take that out, our loss for the quarter was $9 million, and when you take into account the cash flow implications of our quarter, we had a net cash flow of $8.2 million. That's a cash outflow as you know. 7.1 from operations, 400,000 was invested in CapEx this quarter, 700,000 principal payments on our debt arrangements. Now we benefited this quarter technologically speaking, as well as financially speaking, from our arrangement with Philip Morris/Chrysalis in taking over the technology that we control now through our collaboration or our modified collaboration with Chrysalis, which is the capillary aerosolization technology. Associated with that modified arrangement, Chrysalis has agreed to provide us with $4.5 million to support the further development of that technology. $2 million of that was recorded as revenue in the first quarter, when we signed the deal. We received that money in the second quarter, and obviously that benefited our financial situation in the second quarter. $2.5 million was earned in the second quarter associated with the technology transfer, and the effective technology transfer from Chrysalis to Discovery.

So now we have it. We control it. $2.5 million was revenue on our books. That money will be received in the third quarter and actually it will be received very shortly. So that was a significant component of the second quarter operations. Next, we invested $7.4 million in R&D. A large portion of that, $4.4 million, is for manufacturing, development, quality assurance and analytical activities. And upon the potential approval of Surfaxin, a significant portion of that in the future will go towards inventory build and cost of sales. Also, in our R&D, $2.6 million was for pure pipeline development. It includes our development and regulatory team. It includes medical affairs to support the scientific and medical education of Surfaxin to the neonatal community, and not only Surfaxin, but we are providing quite a bit of knowledge with respect to what's behind Surfaxin in our pipeline and how that can benefit the neonatal and pediatric community.

Also in our pipeline development is our Phase II trial for acute respiratory failure, where Surfaxin is being used to address children 2 years and under with ARF, and also in our pipeline development expenses we have costs associated with the delivery or the development of our aerosol technology that I just described, as well as the development of new formulations of our Surfaxin technology. Last piece as far as the quarter is concerned G&A, $5.1 million was spent in G&A. That includes 300,000 of noncash expenses for stock expense, FAS 123. It also includes $1.8 million for precommercialization activities.

Again, keep in mind, as Dr. Capetola mentioned, we are building our own US commercial operation for addressing the neonatal and pediatric community. It's intended for Surfaxin. It's intended for Surfaxin's life cycle indications, such as acute respiratory failure, BPD, it's intended for Aerosurf, it's intended for additional applications of our technology beyond that. We intend to build something that will be quite frankly, tight, meaning we don't need a major organization to take advantage, hopefully based upon success and development of a very attractive opportunity. Already in our burn rate, it includes our executives, Dr. Miller and John Wilson, who head up our commercialization and business development operations and these gentleman have extensive experience in dealing with the launch of hospital products. They have extensive experience in dealing with the launch of specialty products. It already includes a marketing team.

Our burn already includes four regional sales directors. Our burn already includes the fact that we have made a significant investment at some of the major congresses, the most notable one being the annual PAS, Pediatric Academic Society, conference which is the premier scientific and medical meeting in pediatrics and we had a major presence there in May. What our burn does not include right now, of course, is the sales force, and what we are doing is we have identified quite a number of candidates who at the point in time when we have Surfaxin approved by the FDA, will be in a position to then begin making that investment, but we'll have to do that accordingly as well. Because as you know, we do not want to incur significant losses at a point in time when the valuation of the company is relatively low and we need to manage our burn rate accordingly. So we'll manage that within the timing of when Surfaxin potentially is approved.

And with that said, the important part for us again is having the financial flexibility to modify our financial situation, and to improve it as we go along, but do it in a way where we can manage the dilutive effect very, very carefully. We started the third quarter with $33.5 million. We have a CEFF. We have two CEFFs. We have one from April of '06, and as you know, in the second quarter, we put in a new CEFF. We call that our May 2008 CEFF. The 2006 CEFF has 5.2 million shares remaining available for future financings. Can't exceed $35 million, it's available through April of '09, but there's a minimum floor price by which we can use the CEFF and that's $2. The new CEFF that we just put in provides potential proceeds in the aggregate of up to $60 million. The limit is for future financings on shares is 19.3 million shares. It's a CEFF to be used and intended to be used over a three-year period.

So it's available through June 2011. When we use the CEFF, it can be used in tranches to a maximum of the lesser of 3% of the market cap or $10 million, and as you can see, the way we have used it in the past has been to be very, very judicious with it, and we have been using it in very small sips. The pricing for the new CEFF, as long as the stock is between $1.15 and the $1.75, the discount that we issue on the CEFF is at 12%. From $1.76 up to 3.85, the discount is 10%, and above $3.86, the discount is 8%. That's up to $7.25. Above $7.25, the discount is 6%.

We have a very effective financing vehicle by which to keep our company strong and to hit milestones so that we can in the future take advantage of more attractive financing arguments for the company. With that said now, here's some guidance for the third quarter. Remember this guidance is subject to all the typical uncertainties, and the risk factors that are contained in our public filings. Also keep in mind that the Q, the 10-Q will be filed later this week. And we urge you to please review that for all of the details associated with the financials of the company.

For the third quarter we are looking at a net cash burn of $7 million. That's our cash from operations from debt service, and any investments that we make on the CapEx side but right now our CapEx needs are very satisfied. What we have done so far in the third quarter is we have dipped into the CEFF two times. Each time has been for 1.5 million shares. So ultimately, what we are trying to accomplish is to just -- I'm sorry, $1.5 million. What we are trying to accomplish is to maintain our cash position throughout the third quarter.

In essence, get into the fourth quarter at a time when we have a PDUFA date, at a time when we have a complete response, at a time ideally when that would be reflecting in the company's value, and still be financially strong going into that period of time.

Last, before we get into Q&A, just a quick update on our capital structure. Currently, there are 98.8 million shares outstanding. That reflects and includes the recent CEFF draws. There are 7.2 million warrants outstanding. 100,000 of those went to Kings Bridge with the new CEFF. That's at $2.51 a share. 2.3 million of the warrants are at 3.18 a share. And 1.5 million of the warrants were associated with the loan restructuring we did a few years with Quintiles. That's at $3.58 a share. That group of warrants right there are exercisable for cash in the future. The total proceeds potentially in the future would be about $15 million. And then the balance of the warrants are all priced between $5 and $12 per share. We have 13.9 million options, outstanding 30% of those options are priced above $5. 16% of those options are between $3 and $5.

So with that said, I would like to turn the call now back to the operator for the Q&A session, and I will be happy to answer any of your questions that you have for more details. Thank you.

Lisa Caperelli - Investor Relations

Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adam Walsh with Jefferies.

Marko Kozul

Good morning, it's Marko Kozul in for Adam. How's everybody today?

Robert Capetola

All right. Hi Marko.

Marko Kozul

Great. First question when did you realize you may need to work with your suppliers to lower lipid related impurities levels down to ICH thresholds rather than satisfy the FDA's request simply through scientific literature review?

Robert Capetola

Just remember during the last two years is one of the things that we didn't get into is the advancements made in analytical technology. Some of the impurities that we identified today were not known nine months ago. So science moves forward, analytical technologies move forward, we've had two approaches Marko with this. We think that two phospholipids in our formulation are the dominant lipid, DPPC is the dominant lipid in all mammals, and the impurities, even though they are also in the human lung, it was easier to attempt to employ the latest scientific advances with our suppliers to work on enhancing impurity levels, sacrificing a little yield, obviously to do so, but rather than trying to determine the values in the neonatal lung as the FDA requested. Even though we are still making all of those attempts.

In some of these things we are the only ones we think in the world that have the analytical capabilities to see some of these impurities. So some of it's new. And since May 3rd, I have given instructions Marko to the team that the most straight forward way of approaching this issue with the FDA is to do everything scientifically, humanly possible with our suppliers to get the levels down. I don't care what the yield costs, because as John has mentioned to you in times past, given the potential for the value of this Surfaxin technology and the pyramid, the cost of goods, while one always has to worry about it, should be insignificant compared to the value generated from the technology.

John Cooper

And especially the relative costs of the phospholipid, Marko to our final Surfaxin product is very small.

David Lopez

Perfect. I'm sorry, just to clarify. This has not foreclosed all of the approaches that we can employ under ICH guidelines. This is just considered to be given, as Bob mentioned, the advances we made in analytical methodology, in understanding the profile of the drug both here and at our API manufacturers, the most direct, compelling way to satisfy this issue. That is to say in with respect to regulatory profile.

Marko Kozul

Thanks for answering the question. My other one relates to biologic activity testing. You mentioned that you are observing encouraging preliminary results. Can you give us a little more color there?

David Lopez

Yes, I mean, that's very simple and I'm sorry, I didn't articulate it more clearly. In essence, we are getting the same type of compliance measurements as we got with the prior work that we did on that area which involves the biological activity test at its previously employed dosing, and the animal model that was conducted in response to the December 2006 meeting with the FDA, that involved the clinical dose that was used and, in fact, is the prescribed dose that will move forward with Surfaxin. What you want to do, of course, in the vain of establishing comparability is to seek comparable results. We are seeing that with a good portion of the work done. Still needs to be completed. There's that we want to, of course, point out, to be able to submit the full package of data to the FDA, but what we see right now is exactly where we expected it to be.

Marko Kozul

Great. And finally you mentioned that you should be on target for September response letter. Do you have any sense of whether that would be towards the beginning or the end of the month?

Robert Capetola

My guess is it would be towards the end of September, Marko.

Marko Kozul

Great. Thanks for answering my questions.

Robert Capetola

You are welcome.

Operator

Your next question comes from Brian Rye with Janney Montgomery.

Robert Capetola

Hi, Brian.

Brian Rye

Thank you for taking my question. I guess most of my Surfaxin-related questions have been answered. But just wanted to circle back maybe on aerosurf, and I guess probably speaking the aerosol affected technology and given that Chrysalis is no longer directly involved, even though it's not a direct point of focus for the company, I'm sort of curious what engineering or development issues remain and need to be addressed and with Chrysalis now sort of not directly involved, whose skill sets will you be relying on when it comes time to focus?

Robert Capetola

I think at some point in the future, we should have an aerosol day -- technology day with appropriate investors because there as a lot of exciting things happening. Remember, Brian we now have three internal engineers headed up by our manufacturing facility here that all have expertise in the capillary aerosol technology, and they are now working with a couple of outside groups, one of which is the largest commercial engineering device manufacturer I think in the country. And a significant advance has been made in that respect. The other thing is -- and the reason we will have that technology day is there's that for the more intricate patients that we want to deal with, and then there's some other technologies that we put in place that are more simplistic in nature, but yet still aerosol and tremendously value generating. And while I can't talk about those now, at some point in the future, we will be able to do so.

We are really excited about it. We have not spent the amount that we wanted to spend on these circumstances but we haven't gotten about them either. A lot of technology is going on. A lot of patent law is going on. There's a lot of things happening behind the scenes to put us in a position to take full advantage of this once this product is approved, and the financial and/or partnering activities we envision in the future are realized.

Brian Rye

Great. Thank you, Bob. And then I guess one last housekeeping question for John. The guidance for the third quarter, the net cash burn of $7 million, did that include the impact of the $2.5 million in cash to be received from Chrysalis?

John Cooper

Yes that does.

Brian Rye

Great thank you guys and I look forward to your response next month.

Robert Capetola

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call over to Dr. Capetola. Please go ahead with your closing remarks.

Robert Capetola

Well thank you very much again for listening in today, we're really excited about the progress that has been made. Again, to summarize the focus of the efforts of this company now is in compiling the complete response and getting Surfaxin approved, solidifying our cash position, and not forgetting about our pipeline, and employing the appropriate spend when that time comes.

I thank you very much for spending the time with us. Any additional questions you can get through Lisa or John or myself, and thanks again. Bye-bye.

Operator

Thank you for your participation. This concludes today's conference call. You may now disconnect.

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Source: Discovery Laboratories Inc. Q2 2008 Earnings Call Transcript
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