Discovery Laboratories reports net loss of $11.3 million for third quarter 2014

Discovery Laboratories, Inc. (Nasdaq: DSCO), a specialty biotechnology company dedicated to advancing a new standard in respiratory critical care, today announced financial results for the third quarter ended September 30, 2014, as well as recent business updates. The Company will host a conference call today, November 6, 2014 at 9:00 AM ET to discuss the 2014 third quarter financial results and other business updates.

Financial update

• Reported an operating loss of $10.3 million and net cash outflows before financing activities of $10.6 million for the third quarter of 2014;
• Ended the third quarter of 2014 with cash and cash equivalents of $54.9 million; and
• Awarded $1.0 million of a Phase II Small Business Innovation Research (SBIR) Grant valued at up to $3.0 million from the National Heart, Lung, and Blood Institute (NHLBI) of the National Institutes of Health (NIH) to support the development of aerosolized KL4 surfactant as a medical countermeasure to mitigate acute and chronic/late-phase radiation-induced lung injury.

SURFAXIN® (lucinactant) Intratracheal Suspension: SURFAXIN is the liquid instillate dosage form of the Company's novel KL4 surfactant and is the first FDA-approved synthetic, peptide-containing alternative to animal-derived surfactants. Currently, the Company is focused on securing formulary acceptance with hospitals that it considers to be influential centers of influence with strong reputations in the neonatal community, as well as affiliated and regional hospitals. The Company achieved formulary acceptance or restricted use allowance in 17 neonatal critical care facilities as of the end of the third quarter, compared to 13 as of the end of the second quarter.

AEROSURF®: AEROSURF, the Company's novel investigational drug-device combination product being developed to deliver aerosolized KL4 surfactant to premature infants with respiratory distress syndrome (RDS), addresses a significant unmet medical need. The phase 2 clinical program consists of an ongoing phase 2a trial designed to assess safety and tolerability of aerosolized KL4 surfactant delivered through continuous positive airway pressure (nCPAP), and a planned phase 2b trial intended to determine the optimal dose and define the expected efficacy margin for a phase 3 clinical program. Based upon the Company's most recent assessment of the clinical trial plan, the Company now anticipates phase 2a data in the first quarter of 2015.

Strategic Collaboration: In October, the Company entered into a strategic collaboration with Battelle Memorial Institute (Battelle) intended to advance the design of its capillary aerosol generator (CAG) and related components (the AEROSURF System) for use in the planned phase 3 clinical program and, if approved, potential commercial activities. The collaboration combines Battelle's world-class capabilities in aerosol drug delivery device development with Discovery Labs' expertise in synthetic surfactant technology and neonatal RDS. Battelle and the Company generally will share equally in the agreed costs of the device development for the AEROSURF System; Battelle received 1.5 million warrants to purchase the Company's common stock at an exercise price of $5.00, exercisable upon the achievement of certain milestones and, if the project is successful, will be entitled to future royalties on AEROSURF sales and license sales revenues.

"For decades, there have been no alternatives to animal derived surfactants and limited therapeutic advancements in the management of premature infants born at risk of RDS," commented John G. Cooper, President and Chief Executive Officer at Discovery Labs. "We believe that our proprietary synthetic KL4 surfactant represents the future of surfactant therapy, beginning with SURFAXIN, which enables us to begin building relationships with key hospitals in the U.S. Our AEROSURF development program represents our commitment to further innovation for the NICU, and has the potential to transform the way neonatologists manage these fragile infants."

Summary Financial Results for the Third Quarter Ended September 30, 2014

The Company reported a net loss of $11.3 million ($0.13 per basic share) on 85.2 million weighted-average common shares outstanding for the quarter ended September 30, 2014, compared to a net loss of $12.2 million ($0.22 per basic share) on 54.8 million weighted-average common shares outstanding for the comparable period in 2013. Included in the net loss is the change in fair value of certain common stock warrants that are classified as derivative liabilities, resulting in non-cash income of $0.2 million and non-cash expense of $1.1 million for the quarters ended September 30, 2014 and 2013, respectively.

For the quarter ended September 30, 2014, the Company reported an operating loss of $10.3 million compared to $10.8 million for the comparable period in 2013.

During the third quarter of 2014, sales of SURFAXIN to the Company's specialty distributor were approximately $219,000, compared to $114,000 in the second quarter of 2014. Demand sales into hospitals grew approximately 60 percent during the third quarter to $116,000, compared to $72,000 in the second quarter of 2014. In accordance with the Company's revenue recognition policy, for the third quarter of 2014, the Company recognized $106,000 in revenue for sales of SURFAXIN, compared to $42,000 in recognized revenue in the second quarter of 2014. The Company also recognized $0.4 million in grant revenue under a $1.9 million Fast Track SBIR Grant from the NIH to provide support for the ongoing phase 2a clinical trial for AEROSURF. The remaining $0.4 million available under the grant is expected to be received by the end of 2014.

Operating expenses for the third quarter ended September 30, 2014 and 2013 were $10.9 million. Key investments in the third quarter of 2014 were to support ongoing conduct of the AEROSURF phase 2a clinical study and the initial manufacturing of clinic-ready CAG devices for the planned AEROSURF phase 2b clinical study. Key investments in the third quarter of 2013 were related to activities in preparation for the AEROSURF phase 2a clinical study including development of our clinic-ready CAG and developing our lyophilized KL4 surfactant manufacturing process at our contract manufacturer.

Other expense for the quarter ended September 30, 2014 was $1.2 million which represents interest expense related to long-term debt. Of the $1.2 million, $0.7 million is cash interest expense and $0.5 million is non-cash amortization of the debt discount.

Net cash outflows before financing activities for the quarter ended September 30, 2014 were $10.6 million.

As of September 30, 2014, the Company had cash and cash equivalents of $54.9 million. For the fourth quarter of 2014, the Company anticipates operating cash outflows before financing activities of approximately $11 million.

As of September 30, 2014, the Company had $30 million of long-term debt with principal payable in three equal annual installments beginning in February 2017, subject to a potential one-year deferral of all amounts due in each of 2017 and 2018 if certain financial milestones are achieved.

As of September 30, 2014, the Company reported a common stock warrant liability of $3.0 million, related to five-year warrants issued in February 2011. These warrants are not subject to cash settlement, but they have been classified as derivative liabilities in accordance with generally accepted accounting principles because they contain anti-dilution provisions that adjust the exercise price of the warrants in certain circumstances.

The Company had 85.3 million and 84.6 million shares of common stock outstanding as of September 30, 2014 and December 31, 2013, respectively.