The old saying goes, "If something seems too good to be true, then it usually is." This approach is great for guiding a person's overall business logic, because we should always be weighing risk vs. reward. As someone rather familiar with medical practice, and having tracked Discovery Laboratories (DSCO) for a while, I see this company as being well worth the risk to own.
Each year, I often skim through biotechnology companies that are striving to have drugs receive FDA approval. Most of these drugs seem like long shots to get approval, and buying shares of the company is simply not worth the risk. When I came across Discovery Laboratories though, I was very intrigued. I thought the company had two great drugs that had a shot of approval and I was right. However, to me it was not worth the risk of buying prior to the FDA hearing because it was too much of a gamble. A year later, Discovery Laboratories has two products that are FDA approved and in my opinion the stock is a great speculative biotech candidate for any portfolio.
Afectair and Surfaxin are the two products that were approved by the FDA last year. Afectair is a drug delivery product that simplifies the delivery of any inhaled therapies. It has began production in the U.S. and European Union earlier last month. Surfaxin too, is expected to hit the market later this year. Surfaxin is a synthetic form of surfactant, and a recent study showed that synthetic forms of surfactants can be much more cost effective than animal-derived surfactants. In fact, a study performed by Discovery Laboratories recently showed that Surfaxin resulted in a potential hospital cost savings of $160,000 to $242,000 per 100 infants. The company also estimate that approximately 130,000 infants are born with RDS annually in the United States alone and of the 130,000 about 90,000 require surfactant replacement therapy.
Revenue & EPS Outlook
There is always great risk involved when approaching a low cap investment such as Discovery Laboratories. Its financing hasn't been stellar and its EPS has been inconsistent and negative. Through these past four years though, Discovery Laboratories has been in a developmental stage for most of its major pharmaceutical products. With two products recently approved, it would be wise keep an eye on the company's EPS and net income. If Discovery Laboratories can straighten out its finances, then maybe it would become an appealing long-term speculative option.
Income Statement Quarterly Annual
|NET SALES OR REVENUES||582||0||0||4,600|
|Depreciation, Depletion And Amortization||1,234||1,549||1,992||2,215|
|Amortization of Intangibles||534||--||592||615|
|Selling, General & Admin Expenses||23,460||23,979||26,605||40,779|
|Research and Development Expense||17,230||17,136||18,877||26,566|
|Extraordinary Credit - Pretax||3,560||6,422||369||0|
|Extraordinary Charge - Pretax||(400)||0||(600)||0|
|Non-Operating Interest Income||13||13||48||802|
|Other Income/Expenses - Net||(6)||275||5||100|
|Interest Expense On Debt||20||357||1,096||1,614|
|NET INCOME BEFORE EXTRA ITEMS/PREFERRED DIVIDENDS||(20,965)||(19,175)||(29,871)||(39,106)|
|NET INCOME USED TO CALCULATE BASIC EARNINGS PER SHARE||(20,965)||(19,175)||(29,871)||(39,106)|
|Shares used in computing earnings per share - Fully Diluted||22,660||11,602||7,680||6,541|
|Earning per Common Share - Basic||(0.93)||(1.65)||(3.89)||(5.98)|
|Earning per Common Share - Fully Diluted||(0.93)||(1.65)||(3.89)||(5.98)|
= Negative Values
In U.S. dollars
Values are displayed in thousands except for earnings per share
I would not encourage building a portfolio around stocks like this. However, I feel Discovery Laboratories is worth the gamble, considering the low share price and two products it has. While investing in traditional biotechnology companies such as Merck (NYSE:MRK), Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), and Abbott Laboratories (NYSE:ABT) is a better choice for your portfolio, I think every portfolio needs a speculative stock like this to keep it interesting. Weight the risk yourself though, and if you think the reward outweighs the risk, go for it.
Disclosure: I am long DSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.