Scott Gordon - IR, President of CorProminence LLC Steven Quay - Chairman and CEO Kyle Guse - CFO, General Counsel and Secretary

Pooya Hemami - Edison Investment Research

Good afternoon and welcome to the Atossa Genetics' Earnings Conference Call for the First Quarter Ended June 30, 2016. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Scott Gordon, President of CorProminence. Please go ahead, sir.

Thank you, Dan, and thank you everybody for joining today's conference call to discuss Atossa Genetics' corporate developments and financial results for the quarter ended June 30, 2016. With us today are Dr. Steven Quay, Chairman, CEO and President; and Mr. Kyle Guse, CFO and General Counsel. On August 12, Atossa released financial results for the quarter ended June 30, 2016. If you have not received Atossa’s earnings release, please visit www.atossagenetics.com. Before we begin, I'd like to note that comments made during this call may include forward-looking statements regarding future events or the future financial performance of the Company. Such statements are predictions only and actual events or results could differ materially from those made in any forward-looking statements, due to a number of risks and uncertainties including assumptions about future events based on current expectations, plans, business development efforts, near and long-term objectives, regulatory actions, potential new business strategies or organizational changes, changing markets, future business performance and outlook. Please see Atossa's most recent filings with the SEC, including without limitations, Form 10-K, 10-Q, and 8-K. I'll now turn the call over to Dr. Quay.

Thank you, Scott and good afternoon. Atossa is a clinical stage pharmaceutical company focused on the development of novel therapeutics and delivery methods for the treatment of breast cancer and other breast conditions. Our leading program uses our patented intraductal microcatheters, which deliver locally administered pharmaceuticals through the breast ducts. We initiated a Phase II clinical study in March 2016 using our microcatheters to deliver fulvestrant as a potential treatment of ductal carcinoma in situ or DCIS and breast cancer. Fulvestrant is commercially available in the United States as a monthly intramuscular injection costing about $12,000 per dose. This study is being conducted by Columbia University Medical Center Breast Cancer programs. In June 2016, we commenced a new drug development program with oral endoxifen. Endoxifen is an active metabolite of tamoxifen, an FDA approved drug for breast cancer patients to prevent recurrence, as well as new breast cancer. Before I provide an update, Kyle will summarize our second quarter 2016 financial results.

Thank you, Steve, and good afternoon, everyone. Total operating expenses were $1.7 million and $4 million for the three months and six months ended June 30, 2016 respectively, consisting of G&A expenses of $1.6 million and $3.7 million respectively and R&D expenses of $169,000 and $319,000 respectively. As a result of the sale of the NRLBH, operating expenses related to the NRLBH are presented separately as discontinued operations for the three months and six months ended June 30, 2015. Operating expenses from continuing operations for the three months and six months ended June 30, 2016 decreased $1.5 million and $2.4 million or 45.7% and 37.1% respectively from $3.2 million and $6.4 million for the three months and six months ended June 30, 2015 respectively, which consisted of G&A expenses of $2.4 million and $4.8 million, respectively. R&D expenses of $373,000 and $939,000 respectively and selling expenses of $343,000 and $689,000 respectively. The decrease in operating expenses is mainly attributed to the 2015 launch of new devices and services which are not being pursued in 2016 and investing more in new R&D programs in the first quarter of 2015 compared to '16. For the three months and six months ended June 30, 2016, Company recorded a net loss of $1.7 million and $4 million respectively. Our cash and cash equivalents as of June 30, 2016 were approximately $1.2 million. On August 4, 2016 we settle our dispute with Besins Healthcare. And as a result are expecting a cash payment from them this week of $1.76 million. n May 25, 2016 we terminated our November 11, 2015 stock purchase agreement with Aspire Capital and we entered into a new stock purchase agreement with them, which provided that Aspire Capital is committed to purchase up to an aggregate of $10 million of shares of our common stock over the 30-month term the purchase agreement. As of the date of filing the quarterly report with the SEC, no shares of stock have been sold to Aspire Capital under the May 25, 2016 purchase agreement. That concludes my comments. And I'd like to turn the call back over to Steve.

Thank you, Kyle. As Phase II clinical stage pharmaceutical company, Atossa is now solely focused on our pharmaceutical programs for the development of novel therapeutics and delivery methods for the treatment of breast cancer and other breast conditions. Our key objectives are to advance our pharmaceutical candidates through Phase II trials and then evaluate further development independently or through partners and to advance one or more of our preclinical programs into the clinical stage. I'll spend our time today discussing the progress we've made with our two therapeutic programs. We have two Phase II programs in the breast cancer space. One that is currently enrolling patients and another that we are preparing for a Phase II study. One program which we call intraductal fulvestrant is in the Neoadjuvant setting, meaning the drug is administered before surgery. The other program, which we call oral endoxifen for patients refractory to tamoxifen is in the adjuvant setting, meaning it would be administered after surgery. I will spend most of our remaining time talking about these two programs. In June 2016, we announced our oral endoxifen drug development program intended for breast cancer patients who are refractory to tamoxifen. Endoxifen is an active metabolite of tamoxifen, which itself is an FDA approved drug for breast cancer patients to prevent recurrence, as well as new breast cancers. We've made substantial progress on this program, having filed patent applications, contracted for the initial drug supply, and identified its initial indication. Breast cancer patients who are refractory to tamoxifen thereby getting little or no benefit from the drug. Of the estimated 1 million patients annually in the United States who take tamoxifen, up to 50% of those patients are refractory, meaning they receive little or no benefit from the drug for any number of reasons including low levels of a liver enzyme. We expect to initiate a Phase II clinical study for this drug in 2017. We are also progressing as planned with our Phase II trial of fulvestrant by intraductal administration utilizing Atossa's patented microcatheter device in estrogen receptor positive women with DCIS or invasive breast cancer slated for mastectomy or lumpectomy, which opened for enrollment in March 2016 after gaining IRB approval. Atossa's microcatheters were invented by Dr. Susan Love, a world-renowned breast surgeon and were acquired from Hologic. This study will assess the safety and tolerability of fulvestrant when delivered directly into breast milk ducts of these patients and is being conducted by Dr. Sheldon Feldman, current President of the American College of Breast Surgeons and Chief of breast surgery at Columbia-Presbyterian Hospital, in New York City. Providing drug directly into the ducts targeting the site of the localized cancerous lesions could reduce the need for systemic anticancer drugs and potentially reduce or even eliminate the systemic side effects of the drugs and the associated morbidity in such patients and ultimately improve drug regimen compliance. The primary endpoint of the clinical trial is to assess the safety and tolerability of intraductal administration of fulvestrant in women with DCIS or Stage I or Stage 2 invasive cancer prior to surgery. The secondary objective of the study is to determine if there are changes in the expression of Ki67, as well as estrogen and progesterone receptors between a pre-fulvestrant biopsy and post-fulvestrant surgery specimens. This will help us assess the degree that the drug is permeating the breast tissue. Mammography before and after drug administration in both groups will be performed to determine the effect of fulvestrant on breast density of the participants. Atossa owns one issued patent and several patent applications directed to the treatment of breast conditions including cancer by the intraductal administration of fulvestrant and other pharmaceuticals. In order to understand our main clinical program, it's important to understand the current uses and market for this FDA approved intramuscular injected drug and how it will compare to our introductally administered product. As we discussed in our last conference call, I want to again frame the potential market opportunity that's successfully developing our lead candidate conveys. According to the prescribing information, fulvestrant is administered monthly as an injection of two shots typically given into the buttocks. In 2012, a published study documented that the single-dose cost of intramuscular fulvestrant was approximately $12,000. Annual sales of fulvestrant are approximately $700 million and it is an important contributor to Astra Zeneca's oncology product revenue. So the first potential market for intraductal therapy is to take advantage of the huge difference in the amount of drug that gets into the tissue with the intramuscular injection versus the intraductal route. One analysis suggests that the drug levels in tissue might be over 20,000 times higher when administered intraductally. It's simply impossible to get this kind of tissue level when a drug is administered with the traditional intramuscular method. This high local dose provides the potential to test a one-in-done intraductal treatment modality instead of the monthly injections and to potentially obtain better tissue levels that are possible with intramuscular administration. Doing so would save the healthcare system a lot of money and at the same time potentially improving the safety and efficacy of the drug by delivering it directly to the breast. Even if it turned out the intraductal administration needs to be performed every six months, there is a huge potential to obtain efficacy with much lower costs. Again we have an issued patent for the intraductal use of fulvestrant, as well as many other pharmaceuticals. The second potential for use of our patented microcatheter is in the Neoadjuvant setting, meaning that a drug would be delivered before the primary treatment of surgery. High drug concentration at the site of tumor and lack of systemic exposure and subsequent toxicity could represent real treatment advances. The current Neoadjuvant schedules can run for three months before surgery and the ability to shorten that by one or even two months could have immense value to the patient and the healthcare system. As I’ve mentioned previously with respect to the regulatory path forward, we expect that our program could qualify for designation under the 505(b)(2) status, allowing us to file with clinical data only and without having to perform additional significant clinical or preclinical studies. So the path to market is both faster and less expensive than a standard NDA program. I’d now like to touch upon the recent settlement we achieved with Besins Healthcare on August 4, 2016. Atossa and Besins have agreed to terminate our intellectual property license agreement and dismiss the legal action relating to the license agreement settling all claims between us. We will have no further rights to clinical, regulatory, manufacturing, or proprietary information and all other development and commercialization activities with respect to 4-hydroxytamoxifen and Afimoxifene topical gel. Atossa gains reimbursement for the expenses we incurred during the AfTG program and a termination payment in the total amount of $1,760,000. We are pleased with this outcome and we will utilize these funds to drive our research and development related efforts in pursuing our drug development goals. We remain encouraged by our continued progress on both programs and as we pursue strategic initiatives that include completion of the oral endoxifen drug development efforts to support an IND filing to the FDA, which is anticipated to occur in 2017. I wish to thank our valued shareholders for their continued commitment and support. We are resolute in our passion to achieve our goals of developing and commercializing treatments for breast cancer, DCIS, and other breast illnesses and we will keep you informed of our latest developments and achievements as they occur. This concludes our prepared remarks. I'll now turn the call back to the operator for any additional questions.

Yes, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] And our first question comes from Pooya Hemami of Edison Investment Research. Please go ahead.

Oh yes, good afternoon and thank you for taking my questions. Just have a few questions on, I guess the fulvestrant study to date. Can you list how many patients have been enrolled thus far and do you still expect that to be finished in 2016 with the guidance would be completing your study?

Yes, thanks for your question. I appreciate at this time. We are not announcing the status of the program other than to say that we are enrolling patients and we do expect to be able to report results at the end of 2016.

Okay. So you’re still confident in gaining results again this year. Also can you tell us a little bit about the expectations in terms of how -- what will be the next step after the study in terms of what kind of clinical trial design would be needed? And I guess along with that, have you had discussions with FDA in terms of whether it will be accepted through a 505(b)(2) approach or will it need to go through something like an NDA or PMA, because it is a device that could be somewhat invasive. Can you give us some thoughts on that?

Sure. We're waiting, detailed discussions with the FDA to include the results from this study and the end points that we're measuring here. We believe it will qualify for the 505(b)(2) route because the process of changing the route administration going from intramuscular to intraductal is one of the criteria called out by the FDA as a reason for proving something under the 505(b)(2). But we will await discussions concerning our Phase III trial with the FDA with when we have results in hand.

Okay, perfect. So there is an expectation of a Phase III study afterwards. And also are you working on other drugs for the intraductal microcatheters platform, any other products that could be used with this platform? And is there -- have been any discussions with potential partners in terms of potentially using it with other products to extend revenue opportunities?

Yes, great question. As you know fulvestrant is the most powerful anti-estrogen and so treat one of the three major kinds of breast cancer that is ER-positive cancers. But the other two kinds one driven by HER2 positivity and the other the triple negative criteria would be open for an intraductal approach and in due course you should expect programs from Atossa in those areas.

Okay, perfect. So I will have a few more, but I will step back in the queue and let someone ask some questions too.

[Operator Instructions] And we have a follow-up from Pooya Hemami with Edison Investment Research. Please go ahead.

Thank you. Okay, so going back into now the endoxifen program, can you talk to us a little bit in terms of how this formulation differs from other groups that studied endoxifen, for instance the Mayo Group has done some studies on endoxifen in a similar patient population. Are there differences in the proxy [ph] that you’re going to be working with compared to what Mayo and some other research groups have been using?

Yes. We have a proprietary chemical composition of endoxifen. We haven't disclosed the details on it at this point in time. But we think it will have some patentable distinctions and advantages over some of the other studies done with endoxifen, but we do believe the work done at the Mayo Clinic supports the unique properties of this molecule in the breast cancer space as the folks there have found that in fact in tamoxifen refract -- tamoxifen resistant patients, those can no longer take tamoxifen can actually be successfully treated with endoxifen.

Okay. So that being said, so there are going to be some differentiation between the formation offered by Atossa and what Mayo have used. So then, do you expect -- there has been some patent applications, do you expect to have strong IT support to protect your product once assume everything goes well with the clinical pathway?

We do. We think we will have a strong composition as well as method to use patents around our endoxifen program.

Okay. And can you talk us through a little bit what you expect in terms of the clinical development strategy? I assume this is not going to be a 505(b)(2), this would probably need to go to with the traditional NDA approach?

Well, that also is not clear since endoxifen is a metabolite of the active ingredient. Tamoxifen itself is a prodrug. So again, the literal reading of the 505(b)(2) statute indicates that metabolites of active ingredients can be approved by that pathway. On the other hand, we’ve not approached the FDA concerning that question at this point in time.

Okay. And so the expectation there was that once the Phase II data is -- you reach your Phase II stage, you will be looking then at either developing it further or going through partnerships to see the next stage?

That is correct. Yes, I think in general we will be looking to partner our programs with strong Phase II data, which is always an attractive position for a small biotech company.

Okay. And can you talk us a little bit about what clinical trial design you expect for endoxifen, because I think now you're expecting this to start in 2017? And it's probably a bit early, but can you give us some framework in terms of, let's say how many patients you expect to be enroll? Is it going to be a dose ranging study? What are the end points you will be looking at?

Yes, yes. So, the typical place where tamoxifen is currently being used in clinical practice is at the juncture of adjuvant therapy. So a woman has undergone her diagnosis or primary surgical treatment and then she begins a five-year process of taking tamoxifen typically daily dose of that. But as indicated in fairly large studies of 4 to 600 patients, up to 50% of women will not get a therapeutic blood level of endoxifen after say two months of taking oral tamoxifen. Those women go on to have a significantly increased risk of recurrence or new cancers even though they’re compliant in taking tamoxifen. So that patient population, the population we've defined as tamoxifen refractory that is taking tamoxifen adequately, but not getting therapeutic levels of endoxifen, those patients are the candidates for initiation of endoxifen treatment in them directly. So that would be the patient population and it's kind of a thumbnail on the study. All women will begin on tamoxifen, you would measure endoxifen levels at some point, two to three months down the road and you would then put women on endoxifen who had inadequate levels in the bloodstream.

Okay, perfect. Yes, that sounds like a very clear pathway in terms of who are the subpopulation of people who will be doing the study, but do we have any, I guess, idea of the Phase 1, what you expect in terms of the duration or what kind of markers you would be looking at? Will you be looking at endoxifen levels in terms of that subpopulation?

Yes, that’s correct. It would be a dose rising study looking at endoxifen and then looking at some of the biomarkers of safety for tamoxifen drugs.

Okay, perfect. Well, thank you very much for taking my questions.

Thank you.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Dr. Quay for any closing remarks.

I just want to thank you for your attention today, your support for Atossa Genetics. We have some exciting programs between now and the end of the year and early into 2017, we're going to be making a great deal of progress and we're excited to have you along board. Thank you very much for your time.

And ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.