Discovery Labs has been in the news quite a bit in the past year. They received a Complete Response letter from the FDA for their drug, Surfaxin, in April of 2009, accepted the resignation of their former CEO Robert Capetola in August of 2009, submitted a trial protocol to the FDA for Surfaxin in November of 2009, and just recently announced this past month guidance from the FDA which showed a clear and less expensive path to approval for Surfaxin. Discovery Labs has spent millions of dollars developing the drug and their RDS portfolio over the years and with the guidance of the agency, are very close to putting the final pieces of the puzzle together for Surfaxin approval. Over the last couple of trading days, Discovery Labs has seen their share price go from 74 cents to 54 cents on news of another stock offering, this time for $16.5 million of stock and warrants. However, one look at the pipeline and potential market for Surfaxin, and it could easily be argued the shares are extremely undervalued.
According to the company profile, Discovery Labs develops surfactant replacement therapies (NYSE:SRT) to treat respiratory disorders and diseases. The proprietary technology that the company uses, KL4 Surfactant, produces a synthetic, peptide-containing surfactant that is structurally similar to pulmonary surfactant. Its products include Surfaxin, a synthetic, peptide-containing surfactant for use in pediatric medicine; Surfaxin (lucinactant) for the prevention of respiratory distress syndrome (RDS) in premature infants; and Aerosurf, which is a KL4 Surfactant in aerosolized form to treat premature infants at risk for RDS.
The main focus of the company is getting Surfaxin, a drug which prevents Respiratory Distress Syndrome in premature infants, approved and marketed worldwide. Discovery Labs estimates that there are approximately 500,000 infants at risk for developing RDS and fewer than 200,000 worldwide actually receive therapy. The market for their products focusing on this condition is enormous, and they intend on owning the RDS space. They recently announced that in order to do gain approval of this valuable drug, the FDA is requiring a limited clinical trial and newly optimized BAT (Biological Activity Test). This is good news for the company because it requires them to do additional preclinical work instead of conducting a limited clinical trial. This will save the company money and time and will allow for possible approval much sooner than expected.
During their most recent conference call, interim CEO Thomas Amick updated shareholders and analysts on the progress of the company and most importantly, on the progress of negotiations with several interested parties in Discovery Lab’s pipeline. Not only is Discovery Labs pursuing drugs in RDS, but they also have candidates focused on the Acute Respiratory Failure space. They are also using their KL4 surfactant technology to continue to explore its effectiveness on viral pathogens and cystic fibrosis. Investors are well aware of the “gold mine” Discovery Labs seems to have in their drug pipeline, but the main problem has been the lack of partnerships or funding to pursue operations and further studies without diluting shares. Still, only 126 million shares are outstanding and DSCO has a current market cap of around $68 million. During the call, Mr. Amick and other members of the DSCO team made it very clear that they are in negotiations with multiple parties, some of these negotiations have involved interested parties doing due diligence on Discovery Labs portfolio, and acquiring a valuation of that portfolio. Mr. Amick characterized these discussions as being in the middle stages. That was three months ago, and investors are eagerly awaiting news of a possible partnership with bigger pharma that would provide the funding to propel these drugs into further studies and get Surfaxin approved and marketed as soon as possible.
The recent announcement of the stock offering certainly didn’t help the price of DSCO shares, but I would suggest that this presents a unique buying opportunity. I would also suggest that such a small offering clearly shows the company is in the latter stages of a very good partner negotiation and needs a little bit more time to complete those negotiations. Discovery Labs has a $ 10.4 million dollars in debt owed by April of this year, but they stated during the conference call that it was in discussion to do a strategic restructuring of that debt. They most likely will be using the $16.5 million that they are attempting to raise, in order to help restructure this debt and improve their leverage in ongoing negotiations. Discovery Labs has a tremendous technology on their hands and products that have proven to be extremely effective in trials. At a price of 54 cents a share, there could be unbelievable upside to the company in the coming weeks. With the good news of just a preclinical trial needed for Surfaxin in order to proceed with approval and middle to late stage negotiations that are ongoing with several interested parties, once the offering is complete, the stock price could easily double or triple in the coming weeks. Of course, shareholders have heard this talk of partnerships before and have seen many stock offerings in the past year or two, but this time certainly does appear to be different. With their interim leader, Thomas Amick, Discovery Labs appears to finally be on its way to Surfaxin approval and a very meaningful deal with a bigger pharma company. If management keeps true to its word, current shareholders may just be the one’s sitting on a gold mine.
Disclosure: Long DSCO