Discovery Laboratories: Surfaxin Launch Has Been Slow, But Clinical Trials Of Aerosurf Are Beginning At Last

| About: Windtree Therapeutics, (WINT)


The Surfaxin launch has been slow, and analysts' expectations are for $2 million of sales in 2014.

The potential for Aerosurf to become a blockbuster in neonatology is the key issue for the stock.

Phase IIa results for Aerosurf are due in 3Q 2014, and Phase IIb proof-of-concept results could be available in 4Q 2015.

Launch of Surfaxin

The launch of Surfaxin has begun, and initial results have been below expectations, causing the company a few months ago to withdraw guidance of $8 to $10 million of sales in 2014. This, along with the general weakness in emerging biotechnology stocks has caused weakness in the stock. New guidance will probably be issued in the summer. The consensus analyst view is for $2 million of sales in 2014. Previous long-term guidance was that Surfaxin would reach $40 million of sales within four years, and could reach peak sales of $100 million. The company has neither changed nor confirmed this long-term guidance.

Aerosurf Phase II Trials Begin

Aerosurf is the blockbuster component of the Discovery Laboratories (DSCO) story; the Phase IIa trial started in February 2014, and I expect topline results in July or August of 2014. This is a trial whose primary endpoint is safety, which is largely determined by the ability of the baby to breathe. Management has told investors not to expect any indications of efficacy, but the measures used to determine breathing function for safety reasons could give some insight into efficacy.

Success in the Phase IIa trial will allow the start of the Phase IIb proof-of-concept trial for Aerosurf. The key to success in Phase IIb is being able to deliver therapeutic amounts of lucinactant to the lungs; the same active ingredient as is used in Surfaxin. Because Aerosurf uses the same active ingredient as Surfaxin, we already know that the product is safe and effective. The issue is whether Aerosurf will be able to deliver adequate amounts of lucinactant to the deep lungs. Success in the Phase IIb trial will give investors a very high level of confidence that the Phase III trials will be successful. I expect the Phase IIb trial to read out topline results in late 2015.

The degree of success of the Surfaxin launch is important to the company. However, it is not a gating factor for Aerosurf. Whether Surfaxin sales in four years are $40 million or more or less won't affect the potential sales for Aerosurf. I see the addressable market for Aerosurf as $600 million to $1.2 billion in the US and at comparable levels in international markets. I do not see competition on the horizon, and I expect a very high level of penetration of the addressable market if Aerosurf is successful in its clinical trials and approved by the FDA.

Investment View

I continue to recommend purchase of Discovery Laboratories. Biotechnology investing is a test of will. There are constant surprises on clinical trial outcomes, regulatory decisions, commercialization (as is now the situation with Surfaxin), patent challenges, capital raising and a host of lesser issues. It comes as no surprise that stock prices are extremely volatile, as investors in Discovery can well attest. Investors have to constantly ask themselves "Why am I investing in this stock?", and when negative surprises occur (they always do), is that reason still valid.

In the case of Discovery, the reason underlying my owning and recommending the stock is that I believe that Aerosurf could lead to a paradigm shift in the practice of neonatology. It addresses one of the great unmet medical needs in neonatology in potentially being able to deliver surfactant to newborn babies at risk of respiratory distress syndrome without the need for intubation and mechanical ventilation. Aerosurf delivers the active ingredients of Surfaxin in aerosol form, using nasal CPAP. This would provide very significant quality of life and also mortality benefits to many premature babies.

One of the most striking things about Aerosurf from an investment standpoint is that it is so unique. I am not aware of any product that might effectively compete with Aerosurf that is in clinical trials. This is in sharp contrast to drug development areas like cancer, in which there are literally hundreds of drugs being developed; with multiple drugs targeted at the same cancer indication, making it difficult to predict winners. This proprietary position in clinical development that Aerosurf enjoys is a major investment plus.

Additional Information

This report is a synopsis of a much more in-depth, multi-page report that can be found on my website called Discovery Laboratories: "An Update on the Surfaxin Launch and the Phase 2 Clinical Trial Program for Aerosurf".

Disclosure: The author is long DSCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.