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The approval of Surfaxin has given Discovery Laboratories (NASDAQ:DSCO) a significant boost in stock price and now the question is what to do with the stock. My view continues to be positive based on a price target for the Surfaxin/ Surfaxin LS business of $8 to $11 in 2016. I think that good clinical results for Aerosurf that increase the potential for its commercialization in 2017 have the potential to add substantially to this price objective. My focus is on the long term and I remain a buyer.

The near term issue that some investors will worry about is the need for an equity financing that I estimate could be $20 to $30 million. There is a knee jerk reaction among some investors that equity financings are dilutive and bad. I have always found that to be naïve. The willingness of other investors to provide the money to bring Surfaxin, Surfaxin LS and Aerosurf to commercialization provides great value to existing shareholders. In the case of Discovery, it allows the company to keep full control of US operations and not give away most of the economics through having to partner the product.

The approval of Surfaxin will very likely broaden the analyst coverage of Discovery Laboratories. There has been a dearth of coverage, but I think that the approval of Surfaxin will change this and broaden investor awareness and participation in the stock. This should bode well for the stock.

Overview of Conference Call

The approval of Surfaxin is an enormous achievement for Discovery Laboratories and sets the stage for commercialization of Surfaxin and more importantly the development of the pipeline products Surfaxin LS and Aerosurf. I listened to the conference call following the approval and this note focuses on the highlights of that call. I am not going to go into detail on the company and I would suggest that readers who want more in-depth understanding of the company refer to my February 22 report "Buy Discovery Laboratories Before March 6th PDUFA Date. "

There were lots of questions from investors on aspects of the Surfaxin and Affectair launches. The company plans to launch both products before the end of 2012, but isn't giving a precise date. It will not partner Surfaxin in the US and will launch with a small number of salesmen and medical liaison personnel that it will soon bring on board. Affectair will be sold through distributors.

One very positive aspect of the Surfaxin launch story is the narrow target audience of 225 hospitals in the US that accounts for 50% of surfactant usage. Product launches targeted at more widespread audiences can cost hundreds of millions of dollars. DSCO believes that launching Surfaxin (and Affectair) will only cost $12 to $13 million. Even though DSCO is s a small company, this factor will allow them to control all of the economics of Surfaxin in the US and then use the same infrastructure to introduce Surfaxin LS and Aerosurf. Sometimes the launch expenses are far beyond the reach of the small developing company and require partnering. However, partnering is very dilutive to shareholders as the company may lose half of the economic value of the product to a partner. Retaining control of Surfaxin and the pipeline products in the US is a major positive for shareholders.

The company also has another unique aspect to this launch. In the case of some launches, when the product comes to market there is limited awareness of the product. Ironically, the long delay in gaining Surfaxin approval has given time for Discovery to publish articles and make presentations on data generated in the phase III SELECT and STAR trials. As I pointed out in my February 22 report, the continuing analysis of this data has shown that Surfaxin had a statistically significant improvement in survival and reducing the rate of intubation. Surfaxin has the advantage of having a very high level of recognition with the neonatology community and key opinion leaders that has been established over the last several years. Pre-launch awareness of Surfaxin is high.

The initial focus of the launch will be on gaining formulary acceptance. Most formularies choose to carry one surfactant because each requires slightly different administration techniques and carrying more than one surfactant could cause confusion on the neonatology floor. The company believes that this is an advantage for Surfaxin in only having to dislodge one instead of three animal surfactants.

The company spends about $26 million per year on R&D and S, G& A and will have to spend about $3-4 million on the Surfaxin launch this year and $12 to $13 million next year. Total spending through the end of 2013 could in at about $60 million. The company will probably need to raise about this amount of cash by the end of 2013.

There are about 5 million warrants outstanding at $2.94 scheduled to expire in May and if exercised will bring in $14 million. The company thinks that a partnering deal for foreign sales of Surfaxin LS and Aerosurf is possible before year end and my guess is that this could bring in $25 to $50 million of cash. These two factors, then, could bring in $40 million to $65 million of cash. It is my judgment that the company will raise $30 million of new equity through a combination of a public offering, the ATM commitment and the CEFF commitment.

Source: Surfaxin Approval Gives A Boost To Discovery Laboratories