Discovery Laboratories, Inc. (DSCO)

Discovery is a biotechnology company developing its proprietary surfactant replacement therapies (SRT) for respiratory diseases. The company offers Surfaxin, a protein B-based agent for the prevention of respiratory distress syndrome in premature infants. It has developed a pipeline centered on surfactant, the protein and lipid mixture that coats the inside of the lung and makes breathing possible. It also offers its products for the treatment of acute respiratory distress syndrome in infants and adults in the intensive care unit, as well as a precision-engineered SRT used as an inhaled aerosol for patients suffering from asthma.

Surfaxin successfully completed two Phase II trials in neonatal respiratory distress syndrome in March 2006. Unfortunately, manufacturing deficiencies have continually delayed Surfaxin’s approval for which the US FDA has issued two separate approvable letters. Discovery expects to re-file Surfaxin’s new drug application (NDA) in late 2007 after resolving its manufacturing issues, suggesting a launch in mid 2008, if approved.

Further Discovery has voluntarily withdrawn the Marketing Authorization Application (MAA) for Surfaxin from the European Medicines Evaluation Agency (EMEA) in June 2006. Withdrawal precludes resolution of certain outstanding clinical issues, relating to the Surfaxin Phase III clinical trials, including the design and lack of comparison to Curosurf, the leading surfactant in Europe. As a consequence, additional clinical trials may be required to support approval of Surfaxin in Europe.

For the nine months ended September 2006, revenues were nil, down from $105,000 reflecting the absence of contracts and grants revenues from Chrysalis Technologies, its partner in commercializing SRT. In May 2006, the company announced a reorganized management and a 33% workforce reduction primarily affecting its commercial infrastructure. However, net loss also rose 30% reflecting a 17% increase in general and administration expenses and 12% increase in research and preclinical operations cost and a $4.8 million restructuring charge that the company incurred. There seems to be a bleak possibility to generate profits in the near-term, making Discovery an underperformer in the near-term.