The specialty biotechnology company Discovery Laboratories (DSCO) seems to be on the mend following the market's disappointment over an Oct. 24 press release that announced a delay in the highly anticipated market launch of Discovery Labs' newly approved product SURFAXIN (lucinactant), but not AFECTAIR (which is already available). Surfaxin is a treatment for respiratory distress syndrome (RDS). RDS is a problem that occurs in newborns that is specifically caused by insufficient surfactant production in the lungs. It is extremely common, and also potentially fatal. This explains why it is the leading cause of death in preterm infants.
With Surfaxin, Discovery introduces the first synthetic surfactant which can replace current surfactants that are refined from animals. Generally speaking, patients (and some doctors) get concerned about the use of animal-derived products for the treatment of humans -- especially when it comes to newborns. Discovery's stance is that Surfaxin's status as a synthetic product, combined with their demonstrated efficacy in clinical trials compared to animal-derived surfactants Survanta and Curosurf, should allow it to eventually dominate the RDS lucinactant market after launch.
Clinical trial data also supports Surfaxin's profile against the animal-derived surfactants. Discovery proved statistically superior reduction in the mortality rates of RDS patients in Surfaxin-treated newborns relative to those given animal-derived surfactants. The company also mentioned recently that a pharmacoeconomic analysis presented at the Hot Topics In Neonatology Annual Meeting held Dec. 2-4, 2012. This makes it seem even more likely that Surfaxin will be able to take the bulk of market share away from the currently dominant surfactants Survanta, Curosurf, as well as others.
Surfaxin's FDA approval in the earlier part of March 2012 was supposed to result in a product launch by the end of 2012, but the company delayed the event due to a problem with one of its quality assurance tests for the manufacturing of Surfaxin itself. While the market sent the stock roughly 30% lower on this minor delay, I think that investors were presented with a clear buying opportunity that is being taken away as the stock continues to move upward.
I think that Surfaxin will not have a problem attaining $40 million in annual sales, which already justify the $100 million valuation of the company single-handedly. It gets more interesting when you consider the potential for their aerosol surfactant Aerosurf, which is still in development.
Discovery makes the argument that neonatologists worry about the risks associated with intubation and mechanical ventilation for the treatment of respiratory distress syndrome, which makes traditional surfactants viable only for severe cases of RDS where the infant is in jeopardy. With the aerosolized surfactant Aerosurf, Discovery can effectively expand the surfactant market with an effective, synthetic product. Adding the easier-to-use dry powder form of Surfaxin (called Surfaxin LS) into the situation as well expands Discovery's annual sales potential again.
I don't think it's radical to say that Discovery could see $200 million in annual revenue a few years after the launch of Aerosurf. Shares of DSCO would probably trade closer to $10/share in that situation, which would be outstanding for investors who went long today.
Ultimately, 2013 should be a very telling year for DSCO. Those invested in the stock should make sure that Surfaxin is on an upward trajectory right off the bat, or we may see the market lose some interest in the product's surfactant argument. A weak market launch may also suggest that we overestimated the potential on Surfaxin, which would dampen the overall outlook on the company. Clearly, this is an undesirable outcome for investors, so keep your guard up.