Good day, ladies and gentlemen. And welcome to the pSivida First Quarter Fiscal 2017 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Doug Sherk of EVC Group. Mr. Sherk, you may begin.

Thank you, Nicholas and good afternoon, everyone. Thank you for joining us today to review pSivida's first quarter of fiscal 2017 financial results as well as corporate objective updates. Participating on today's call are Nancy Lurker, pSivida's President and Chief Executive Officer, Dr. Dario Paggiarino, Vice President and Chief Medical Officer, and Len Ross, Vice President of Finance. Before I begin, I'd like to remind you that all statements other than statements of historical fact are forward-looking statements and we cannot guarantee that the results and other expectations expressed, anticipated, or implied will be realized. Actual results could differ materially from those anticipated, estimated, or projected in the forward-looking statements. For a more detailed discussion of risk factors that could impact our future results and financial condition, I refer you to our filings with the SEC, including our annual report on Form 10-K for the year ended June 30, 2016. We undertake no obligation to update any forward-looking statement, in order to reflect events or circumstances that may arise after this conference call. And now, I'd like to turn the call over to pSivida's Product and Executive Officer, Nancy Lurker.

Thank you, Doug and good afternoon everyone. I appreciate everyone taking the time to join us this afternoon, on this, my first conference call with pSivida. It's been a couple of months since the Board of Directors appointed me President and CEO and it's been three months since Dr. Dario Paggiarino was named our Chief Medical Officer. During that time, our team has worked closely together to perform a deep dive to assess the significant clinical and commercial potential of pSivida's pipeline that is largely based on our proven Durasert sustained release drug technology. During my recruitment process, I came to quickly understand that Durasert is an undisputed leader. It is the only sustained drug release technology with three ocular product approvals. At the same time, the commercial potential and resulting shareholder returns from this leadership position have yet to materialize Today, I'd like to spend the majority of my time with you outlining how we are embarking on a course to turn our potential into making a true difference in patient's lives while building greater returns for our shareholders. While our assessment continues, we've come to a number of conclusions. First, we have reaffirmed the clear strength and quality of the clinical data generated from studies of our Durasert three-year treatment for Posterior Segment Uveitis. This product was formerly known as Medidur and we expect to finalize a brand name as part of our go to market strategy. Second, we plan to submit our regulatory application to market this product in both the European Union and the United States during 2017. Third, we determined that our product candidate evaluation and regulatory filing processes required improvements, which have been implemented. Fourth, as part of the candidate evaluation process, we have re-prioritized our pre-clinical programs to lower our technical risk and…

Thank you, Nancy. I'd like to start this afternoon reviewing new program, pSivida's next generation Durasert bio-erodible shorter duration treatment for posterior segment uveitis. Our team has decided to prioritize this development program and is initiating formulation testing now, in order to begin pre-clinical safety and PK studies of this product candidate in the first half of 2017. We believe this product will provide enhanced benefits to patients and physicians by offering a shorter delivery time period in an erodible device of a corticosteroid and will also provide more flexibility to physicians with multiple dosing intervals. This can bring another valuable therapeutic options to physicians and patients in addition to our three-year Durasert product. Another clinical program that has us excited is Durasert implant for severe osteoarthritis of the knee. On August 1, 2016, the hospital for special surgery in New York and pSivida announced the opening of an IND in support of investigator sponsored clinical study of Durasert to treat severe osteoarthritis of the knee. This is a large and growing condition with a high-unmet medical need. The Durasert implant is designed to provide long-term pain relief for severe knee osteoarthritis, which if effective, could potentially result in the delay of knee replacement surgery. The studies on open-label, single dose, safety and tolerability study of a screw implant to deliver dexamethasone, a corticosteroid previously proven to provide pain relief in knee osteoarthritis. To date, two patients have received the implant and the hospital for special surgery expects to have all six patients implanted over the next few months. While a safety and tolerability study, change from baseline in weekly mean of pain intensity scored at rest, during activity, and at night will be assessed weekly through 24 weeks. Should a safety study be positive, we plan to quickly pursue further development. Moving onto our TKI program for Wet AMD, the team continues to believe this could bring a valuable advancement to the treatment of this very difficult eye disease. However, we have now determined that the program, which was focused on one TKI and was effective in an animal model, may have potential freedom to operate issues to the specific TKI tested. Consequently, we believe it is prudent to evaluate additional compounds in the same class. We are currently actively pursuing a new lead candidate for the clinic. Finally, there is our Tethadur preclinical program that applies proprietary technology to achieve the sustained release of a large molecule such as biologics. This program has a long history with our Company. We have narrowed the program's focus to silica-based technology from the previous silicon-based technology and we will focus our efforts on addressing the remaining technical issues. Also, we have now established clear technical specification in order to make a go, no go decision in the next six to nine months. That concludes my remarks and I'll turn the call back over to Nancy.

Thank you, Dario. In addition to our ongoing programs, we have also taken steps during the past few weeks to expedite potential collaborations based on our proven Durasert technology with other drug candidates. As I mentioned earlier on this call, this will be a key focus of Deb Jorn, our new EVP of Corporate and Commercial Development. Before I turn the call over to Len, let me add that our re-prioritization has moved the characterization of our development program effort from a high risk, longer term focus to one that is more moderate risk and nearer term. We believe that this new focus will better position pSivida to accelerate leveraging its substantial technology advantages and therefore provide better shareholder returns. With that, now I'll turn the call over to Len Ross for a brief review of our first quarter financials. Len?

Thank you, Nancy, and good afternoon everyone. I will briefly review our first quarter results we reported during today's close. Revenue for the first fiscal quarter ended September 30, 2016 totaled $277,000 compared to $466,000 for the prior year quarter. The year-over-year decrease was primarily attributable to $157,000 of non-royalty sublicense consideration earned from Alimera Sciences in the prior year period. First quarter operating expenses totaled $7.5 million compared to $5.4 million in the 2016 fiscal first quarter. The increase was primarily attributable to approximately $1.1 million of severance costs, professional fees, and stock based compensation expense related to the September CEO transition. Additional costs included $436,000 from the previously announced U.K. restructuring and approximately $300,000 of increased CRO and regulatory contractor costs for our Durasert three-year Uveitis product candidate. The net loss for the quarter ended September 30, 2016 was $7.2 million or $0.21 per share compared to a net loss of $4.9 million or $0.17 per share for the prior year quarter. At September 30, 2016, cash, cash equivalents, and marketable securities totaled $22.5 million. I'll now turn the call back over to Nancy for her closing comments.

Thank you, Len. In summary, I'm very excited to be at pSivida and surrounded by a strong team that helped develop our sustained-release drug technology. The level of enthusiasm is high and together, we are focused on the solid execution of the strategy discussed today. Our priorities have shifted from high risk, longer term potential to moderate risk and nearer tem potential to monetize our technologies and enhance shareholder value. Lastly, I will be in New York City later this week, meeting investors, as I believe we have an exciting and undervalued story to share. Operator, we're ready to take questions.

[Operator Instructions]. And our first question comes from the line of Suraj Kalia with Northland Securities. Your line is now open. Please proceed with your question.

So Nancy, congrats on your first call. Do appreciate the clarity provided. I guess if I could just pick up on and forgive me for hopping in between calls, your commentary on Durasert/Medidur. Can you just expand on that a little bit in terms of the going forward strategy, specifically if you'll have R&D going direct?

Yes, so I believe just to clarify what your question is, do we plan to commercialize and we're dropping the name Medidur for now ongoing, because right now we don't have trademark clearance. So we're going to be calling it by, if you want to say, its generic name, Durasert three-year uveitis. So your question is, Durasert three-year uveitis, do we plan to commercialize it in the U.S. on our own and/or partner it outside the U.S. So to answer the question, we expect to find an EU out license partner and sublicense that out. For the U.S., however, right now, we do plan to commercialize Durasert three-year uveitis on our own. And let me explain a bit why that is the case. First of all, it's a very narrow, orphan category of only around 2,000 retinol and Uveitis specialists. That's a very, very small target list and it's imminently doable by a company our size, fi done correctly. I want to add, obviously, it's been seven years running a contract sales organization where we did this tens and tens, 20s of times for other companies around pSivida's size, who effectively commercialized in this small space. So I would actually see that we would potentially use a CSO, not build that infrastructure ourselves in-house. You contract out for a lot of that back office operations. They know how to do it very well. It risk mitigates the commercial execution risk. We would see, again, we haven't nailed down final numbers but certainly, no more than 20 reps probably going out. You do a regional stage launch so that as you begin to get traction and as you start to see that you're building momentum you then slowly start to add reps to get up to that 20 number. So it's a phased rollout at launch, and again, using a partner, a contract sales organization. And as I said, probably maximum you'd be looking at somewhere between, at peak, 15 to 20 reps. And then you'd have, of course, some, a number of MSLs with you, payer reps, et cetera. I do not foresee this to be a substantial commercial outlay. Certainly, it would require some but for this small category, it's certainly very doable. Certainly, with the experience that I bring and now with the experience that Deb Jorn brings, we believe that this is something we could do in a risk mitigated way. Does that answer your question?

So Nancy, could you give me some additional markers, any example where use of a CFO yielded this profile for a certain product adoption.

Well, yes, let me say a couple of things. First of all, as, it would not be appropriate for me to divulge confidential information but sufficed to say, when I was at PDI, we often did ROIs and what became very, very clear is that the way that this is done now is that you put the managers on your payroll and you put the sales reps on their payroll and all the back office operations is managed by them. And then you have the option to roll those reps in-house after a year or more, at your discretion. So that's a very typical go to market strategy now. In fact, you would find that a lot, if not I would say 50% or more of small companies that opt to commercialize themselves now go to market in this way. Why is that? As I mentioned to you, and I could name numerous internal studies we had done for our clients that the ROI is actually greater using a CSO than it is using your internal field force, at least in the first year or two. And the reason for that is you save a tremendous amount of money in the build out of the commercial cost. And quality of the sales reps is about the same because you end up with, as you know, we had a dramatic downsizing in the U.S. in general of sales reps. And so the ability to recruit and hire excellent, experienced sales reps, in our case the ophthalmology space, is actually quite good. So more than anything what determines your success is the quality of the management team, obviously strategy, but the quality of the management team and the quality of the reps. And today, you can hire very ,very good reps. So the ROI generally is a little better using the CSO, at least in the first year or two. And then it starts to even out as some of those factors I mentioned start to roll off on a quarter-to-quarter basis.

And Nancy, ROI for the CSO is measured after four quarters, after eight quarters? I guess where I'm trying to go is how much how would you say, you know what, guys, give me this much these many quarters to get this product launched through a CSO and then start measuring productivity and start analyzing all the metrics. How much time, from, let's say tomorrow until whenever you think we would be in a position to analyze the metrics through the sales [inaudible]?

Let me say this, I don't think it matters whether you're using the CSO or you're building it internally. You're launching a drug and what I would say is, is that with all drugs, you want to look at what is the uptake curve compared to analogs. How are you doing based on what management has projected and that's what I would expect to be to hold my team and what I would expect investors to hold us accountable to. I don't think it shouldn't it will not matter whether you use a CSO for outsourcing some of that versus if you use your own internal field force. That's more of a management decision and I would expect we would be held to the same criteria regardless of what strategy you go to market with.

Any update on your, sorry I'm drawing a blank, just jumping in between calls. Alimera, Nancy, to the extent that you can share with us, what's working? What's not working? It seems like the net profit margins derived from Alimera still are not translating into a revenue uptick. Any color you can provide there as to what you see and what valves are working in the engine and which are not?

Yes, so let me say this. It wouldn't be appropriate for me to comment on Alimera's marketing or commercialization efforts around Iluvien. However, let me say this. They are clearly a valued partner to us and I have already had numbers of conversations with them, and my goal is to build a productive relationship with them and to work to enhance the commercialization potential where possible on Iluvien. But as you recall, the way the agreement is structured is that they control the commercialization of Iluvien. So at this point, it wouldn't be appropriate for me to comment on it, other then they're a valued partner and we're here to help in any way.

Fair enough. And finally, and I'll hop back in queue, the osteoarthritis product, did you guys give any update on the number of patients enrolled? I know there's a six-month follow-up but just curious on the latest and greatest there. Thank you for taking my questions and welcome, Nancy.

Thank you. I'm going to turn this over to Dr. Paggiarino on that.

Hi. So, the study is a small, open label study targeted on safety and the plan is to enroll six patients, so enroll and implant six patients with severe knee osteoarthritis. Two patients were actually implanted recently and we expect to complete enrollment and implant in the additional four patients in the next few months.

Yes, and just a reminder, this is an investigator controlled study so we don't control the timing of it. However, we're pleased with the results so far.

Our next question comes from the line of Matt Kaplan with Ladenburg Thalmann. Your line is now open. Please proceed with your question.

Just starting off with the, I guess it's called the three-year uveitis program. Just wanted to get some more detail on the U.S. regulatory submission. You gave us some updated EU submission and with respect to potential pediatric protocol needed. Is there anything else that you know of besides completing the second study that's kind of rate limiting stuff for the U.S. submission?

At this time, no, we don't. Other than as you may noted, we just simply said it's going to be a second half filing. We want to get away from giving quarterly timelines when we're more than six months out. So that's going to be a policy going forward. But right now, all systems seem to be go.

Great and you expect data from the second Phase 3 at what timing now? Any change in that?

So we plan to have a read out in the first half of next year, in 2017 forecast Phase 3 trial.

And we are pleased that the enrollment is now closed and completed.

And just following up on the osteoarthritis program at HSS, besides safety, are you looking at any other endpoints in that study in the first six patients?

Yes, we also looked in a pain scale so we do a pain assessment. Those are mean weekly pain intensity scale. And so we [indiscernible] the primary endpoint, the safety wheel. So expect to have some level of readout for the pain assessment, hopefully give us some good indications for the next study.

Great. And I guess, Nancy, what's your strategy with the program? Obviously, outside of your ophthalmic focus, what are your thoughts there?

Well, let me say this. It's very, very early to say at this point and so we're just now diving into it. I mean clearly, this is an enormous market so I would not see that we would commercialize this 100% on our own. I can probably safely say that given the size of this that this one would certainly merit a partnership strategy. But we're in the very early days of this. The good news is we are in a human clinical study and HSS is, we look forward to working with them on this.

And how much further will you carry the ball, so to speak, after this study? Is it something that you bring into additional studies on your own or is, it's something that you'll partner on early in development or too early?

Matt, it's probably still too early to say. There's probably some dose ranging that would need to be done. So if they're smaller studies we easily could probably manage that on our own, but beyond that, I wouldn't want to commit.

Okay, fair enough. And then in terms of the bio-erodible Durasert shorter acting, shorter duration, tell us about that bio-erodible technology and where it is and what you know pre-clinically about it and what you're anticipating in terms of getting into the clinic that needs to get done before you're able to do that.

Yes, Matt, I will answer your question. So the technology is a Durasert technology so you realize it's the same essentially, the same matrix that we use for the non-erodible device. And we're working on, obviously, doing some testing with the modified device that essentially entails looking at release rates and understanding really the, again, the erosion of the device. And those are all work that we'll need to be done, we initiated it. And we're planning by the end of first half in 2017 to basically, essentially qualify the candidate device with of course the active ingredient, which is fluocinolone. So that's what we plan to do. It's essentially a formulation development work.

And you think you'll have it in the clinic in the first half of next year? Is that what you're guiding?

No, we plan to have it.

Sometime in 2017.

Sometime, yes.

Let me just say this, our goal is to move as quickly as feasible with this product. The good news is, is that as Dario said, it's built off the Durasert technology. We've got some work left to do but we think we can move fairly quickly. So some time in 2017, we would hope to be in the clinic.

And then, thank you for that added detail. And then in terms of your thoughts on the TKI program, it sounds like taking a step back, going to focus on another API, where does that put that program in terms of moving into the clinic at this point?

You want to answer that, Dario?

So we are actually, as we indicated we evaluated one TKI, one specific TKI in a clinical in a pre-clinical efficacy model that was successful and we identified some potential FDO issues. And so we are essentially looking at other options, other candidates that could potentially represent an alternative to the first one. And so we plan to conduct the work that, as I said, formulation development work that is necessary to really understand the potential in a sustained delivery program.

And timing of the clinic.

And so, and time of the clinic. So again, this is something that we expect to possibly start in the clinic before the end of 2017.

Right, and then I guess final question in terms of the Tethadur moving to silica versus silicon-based technology. Does that necessitate kind of a restart of that and starting from square one or where is that?

So we have worked on bio-silica before. So we one example is, well, we publicly presented last summer with a sustained release of avastin. So we have done work in bio-silica and I think it's a complex technology and we just need to address some issues and we have a clear path forward in terms of meeting exactly specifications for that technology.

Yes, so let me just add with regard to Tethadur. Obviously, if you look at the history of pSivida, with that, we've spent a long time on this technology. Clearly, if we could solve some of the remaining technical issues, it would be a huge advance. Nevertheless, we've spent a lot of time and a lot of money on it, and we need to begin to be very clear, which we are now, around what needs to be done so that we give it enough runway, without spending too much capital and make a go, no go decision. Part of some of the reprioritization I've talked about is making sure that we're focusing our efforts and our capital where we can begin to see progress. And if you can't see the progress that's needed then you should not continue to put money into it. So though we want to make this successful, we have established some clear specifications, and our goal is that within six to nine months, we're going to be able to say we either have it figured out and we can really begin to move forward very aggressively with it, or we need to stop and move onto some of the other things I've talked about where we do believe we've got lower risk and better opportunity with our current Durasert technology.

[Operator Instructions]. Our next question comes from the line of Vernon Bernardino with FBR and Company. Your line is now open. Please proceed with your question.

Hi, Nancy. Thanks for taking my question and happy almost two-month anniversary. I'm sure it seems like ages now.

Thank you.

I just want to follow-up on Suraj's question. So I don't know if you would agree, but can you tell me if you would agree that if you were to commercialize three-year posterior uveitis yourself, it would have a cost that's different than farming out the sales force even if it was initial slow sales offered, like regional and then building up to 20. Depending on the cost, wouldn't then therefore the peak sales estimates differ and therefore the cost estimates and return on investment also differ?

Yes, so let me just make sure I'm clear what you're asking. You're talking about versus out-licensing it in the U.S. or are you talking about using a CSO? I'm just maybe…

So commercializing yourself versus using a CSO.

Actually, it's really no different. Again, I just want to reiterate this because if you look at best practices today in the U.S., particularly actually almost even all the drugs. It doesn't matter whether they're major blockbuster drugs or even very, very small rare orphan disease drugs. What you're seeing from a best practice standpoint is that more and more companies are moving to a regional type rollout, a slower rollout as opposed to what we used to do, if you go way back 10, 15 years ago but up to even five years ago, which was hit it hard up front. Why have they switched? The reason they switched is because the reimbursement challenges have increased substantially. You're now having ACOs with the Affordable Care Act. All of those bodies are now putting in much more of a gatekeeper approach to uptake of your product. So if you go back again and you look even at the last three years, the vast majority of products have underperformed this benchmark analogs and have underperformed the projections to Wall Street. And the reason, again, is because of the payer dynamic that is occurring. So you want to be very careful that you do not overspend up front and get out ahead of your skis. It doesn't matter. It's immaterial whether you use a CSO or you build it internally and as I said, the cost pretty much is almost the same. It's not that much of a cost variance, whether you do it other than the capital infrastructure that you have to build, as I said, for the back office operations can be substantial. So I want to put that clarification. But in terms of the actual performance, it really doesn't matter whether you're using the CSO or you're doing it yourself. The regional rollout, the slower rollout is more to do with the fact that uptake curves have slowed, reimbursement pressures have dramatically increased and as a result, you're starting to see best practices go with more of a staged rollout rather than this hit it all at once approach, which was more typical in the past. Does that answer your question, Vernon?

Yes, that's very helpful and very educational. I appreciate you giving me that and all my other questions have been answered. Thank you.

Okay, thank you.

This concludes today's Q&A session. I would now like to turn the call back over to management for closing remarks.

So thank you everyone for participating in the call. I look forward to keeping your apprised. As I said, we're quite enthused about our ability to leverage our technology here and optimize in a nearer term basis some of the opportunities that we have in front of us and what I've laid out to you. So I look forward to staying in touch with you. Thank you for your time and attention on this call and I will now close the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.