Discovery Laboratories: A Hidden Gem In Biotech

| About: Windtree Therapeutics, (WINT)

Investing in biotech companies can be viewed as "risky business" in today's world, with the FDA having a tight grip over the regulations needed for a product to reach the market. This year though, Discovery Laboratories Inc. (DSCO) introduced not one, but two new products to the market that could have a huge impact on healthcare.

Pulmonary surfactant is a lipoprotein that everyone has in their lungs to prevent atelectasis, or alveolar collapse. This lipoprotein usually begins to develop around 26 weeks of gestation, and continues to develop until birth. The reason why this is all relevant is because babies born prematurely, often have poorly developed pulmonary surfactant and have a syndrome known as infant respiratory distress syndrome (RDS). The treatment for RDS is surfactant replacement, but up until this year there have been no synthetic forms of surfactant on the market, only animal derived surfactants.

Preterm births have risen worldwide, so the market for Discovery Laboratories Inc. is enormous. The chart below is from Claire Blencowe PhD, at this website.

Afectair and Surfaxin are the two products that were approved by the FDA this year. Afectair is a drug delivery product that simplifies the delivery of any inhaled therapies. It is expected to be introduced in the U.S. and European Union later this year. 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. They 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. That study can be found here.

Discovery Laboratories only has a market capitalization of $117 million currently, however if people consider the market size that is available for its current products they may want to consider adding it to their portfolios as a speculative pharmaceutical stock. Better days are ahead for Discovery Laboratories. It is a safer bet to invest in a company with two FDA approved products, than investing in a company with products awaiting approval from the FDA.

Some notable companies awaiting FDA approval on products in 2012 include: Merck (NYSE:MRK) and Ariad Pharmaceuticals (NASDAQ:ARIA) with ridaforolimus for sarcoma, Ironwood Pharmaceuticals (NASDAQ:IRWD) with linaclotide for irritable bowel syndrome, Amarin (NASDAQ:AMRN) with AMR101 for dyslipidemia, and Onyx Pharmaceuticals (NASDAQ:ONXX) with carfilzomib for multiple myeloma. Those who own shares in these companies should be aware of the date in which they will be evaluated for FDA approval. That information can be found here.

The chart below is from cnbc.com and outlines Discovery Laboratories financing over the past four years:

2011
12/31/11
2010
12/31/10
2009
12/31/09
2008
12/31/08
NET SALES OR REVENUES 582 0 0 4,600
Depreciation, Depletion And Amortization 1,234 1,549 1,992 2,215
Depreciation 700 -- 1,400 1,600
Amortization of Intangibles 534 -- 592 615
GROSS INCOME (652) (1,549) (1,992) 2,385
Selling, General & Admin Expenses 23,460 23,979 26,605 40,779
Research and Development Expense 17,230 17,136 18,877 26,566
OPERATING INCOME (24,112) (25,528) (28,597) (38,394)
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
PRETAX INCOME (20,965) (19,175) (29,871) (39,106)
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) (0.60) (1.35)
Earning per Common Share - Fully Diluted (0.93) (1.65) (0.60) (1.35)
Click to enlarge

There is always great risk involved when approaching a low cap investment such as Discovery Laboratories. Their financing hasn't been stellar and their 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 their finances, then maybe it would become an appealing long-term speculative option.

2011
12/31/11
2010
12/31/10
2009
12/31/09
2008
12/31/08
NET SALES OR REVENUES 582 0 0 4,600
Depreciation, Depletion And Amortization 1,234 1,549 1,992 2,215
Depreciation 700 -- 1,400 1,600
Amortization of Intangibles 534 -- 592 615
GROSS INCOME (652) (1,549) (1,992) 2,385
Selling, General & Admin Expenses 23,460 23,979 26,605 40,779
Research and Development Expense 17,230 17,136 18,877 26,566
Click to enlarge

Don't ever go into an investment without doing your own research. When it comes to biotechnology, don't forget to look at both the financials, as well as the science behind the product. Small cap biotech stocks can be risky, so tread carefully. For a long-term speculative option though, keep Discovery Laboratories on your radar over the next few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.