Discovery Laboratories, Inc. in Precarious Position

Lingering Concerns Regarding FDA Approval for Surfaxin, Executive Management Shakeup has Discovery Laboratories, Inc. in Precarious Position
The third time is not always the charm and Discovery Laboratories, Inc. (NASDAQ: DSCO), the biotechnology company that has been concentrating on developing surfactant therapies for respiratory diseases, has found this out the hard way. Three times they have taken their investigational drug Surfaxin to the FDA and three times they have received acceptable letters from the agency requesting further action before drug approval. Now the company sits on its fourth effort in more than six years to bring Surfaxin to market and while there would be the potential for tremendous financial gains if the FDA gives the go-ahead many investors have seen this show before and aren’t quick to throw their support behind the company.
Shareholders have now been told that it could be the first quarter of next year before DSCO submits its complete response to the latest FDA request on Surfaxin, which is being developed to prevent respiratory distress syndrome in infants born prematurely. Couple that fact with the company’s recent management realignment and it wouldn’t surprise anybody if there were further delays.
That realignment involved the appointment of Dr. Thomas F. Miller as COO, Mr. Charles F. Katzer as CTO, and Mr. John G. Cooper as President and CFO, all of whom will report directly to Mr. W. Thomas Amick, Chairman of the Board and Interim CEO.
According to Amick, “We are realigning the leadership and technical talents of our executive team to strengthen our Company and better position us to execute our business plans successfully. Additionally, we intend to recruit for the Chief Executive Officer role with the goal of filling this key leadership position in 2011.”
It seems that the realignment at Discovery Labs is long overdue. While getting FDA approval for a new drug is certainly a daunting task the mistakes made in their first three efforts could very well have been avoided. Twice they received approvable letters that raised manufacturing questions while the third requested an additional biological activity test for quality control as well as final specifications showing certain ingredients were in compliance with International Conference on Harmonization guidelines on impurities in drug substances.
Each approvable letter was a setback for the company and its shareholders, many of whom followed the positive spin offered by DSCO.
What makes believing in DSCO so easy isn’t their track record but the potential that exists if Surfaxin does hit market. It would be the first synthetic, peptide-containing surfactant available for commercial use in neonatal medicine and would likely have an advantage over what would be its two main competitors, both of which market animal-derived surfactant products: Survanta, an Abbott Labs product derived from cow lungs, and Curosurf, a Chiesi Farmaceutici product made from pig surfactants. The market opportunity for the prevention of respiratory distress syndrome in premature infants alone has been put at $200 million and with DSCO’s intention of expanding Surfaxin’s into the broader market of Acute Respiratory Distress Syndrome which could include include cystic fibrosis, chronic obstructive pulmonary disease asthma and acute-lung injury, a $1.8 billion market in the U.S. alone.
Not only does DSCO appear to have a unique treatment, they have also been working on offering a variety of options as it pertains to the administration of Surfaxin, options that include liquid, aerosol or lyophilized formulations. It is the proprietary capillary aerosolization technology that produces a dense aerosol, with a defined particle size that likely offers the most promising rewards as it would deliver KL4 surfactant to the deep lung without the complications currently associated with liquid surfactant administration.
Earlier this month DSCO announced that new data from a pre-clinical study regarding Surfaxin had been published in Pediatric Research, the official publication of the official publication of the American Pediatric Society, the European Society for Paediatric Research, and the Society for Pediatric Research. That study showed positive results for Surfaxin when compared with Curosurf as it related to lung function following the administration of the drugs to surfactant-deficient preterm lambs. Pulmonary distribution of surfactant actually improved significantly with Surfaxin compared to Curosurf. The findings appear to support the promise of Surfaxin in the treatment of RDS, yet another straw to grasp for investors.
That being said, DSCO is certainly in need of financing as the long road to FDA approval for Surfaxin has taken its toll. Back in April former CEO Robert J. Capetola, who resigned earlier this year, said he expected the company to “forge an alliance with a larger pharmaceutical company in the not-too-distant future” and that alliance would come regardless of the outcome of the FDA’s decision.
Whether that remains a focus of DSCO remains to be seen but negative cash flow and recurring operating losses have left the company in a position where they may not have any alternative.
Of course there have been rumors about potential partnerships and buyouts from heavyweights like Johnson & Johnson (NYSE: JNJ), Merck & Co. (NYSE: MRK) and Pfizer (NYSE: PFE), all of which could generate financial gains for shareholders; DSCO has remained silent on the matter other than mentioning in their August update on key pipeline and business initiatives “We believe that success in entering into meaningful strategic alliances will likely parallel success in advancing Surfaxin towards a complete response and positioning Surfaxin LS and Aerosurf for initiation of clinical trials.” Immediately following that statement, “Although a key priority for Discovery Labs is to secure strategic partners to support ongoing research and development activities and future progress, there can be no assurances that any strategic alliance will be successfully identified or concluded.”
It’s hard to tell if the new executive management team is just trying to appease investors or if they are holding their breath while they wait for the FDA decision.
Perhaps that new management should heed the words of their former CEO who said “You never know what the FDA is going to say.” If the company is hit with a fourth approvable letter without having secured a partnership it could be a deathblow. For the optimist, interim CEO Thomas Amick retired from Johnson & Johnson in 2004 after 30-years, ending that period as Vice President of Business Development. A long relationship with such a powerful company could be a sign that he was bumped up to his position for a reason.
As devastating as the past several years has been for DSCO in relation to the FDA process the company has succeed in surviving and does have the one thing every investor loves, potential. With shares trading in the 0.21 – 0.23 range, below its 50-day moving average of 0.24 and 200-day moving average of 0.44 now could be the time to take a shot; with a potential partnership/buyout or FDA approval it may be worth the risk.
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