Expert Financial Analysis and Reporting

Launch of Surfaxin

The launch of Surfaxin has begun and initial results were 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 or confirmed this long term guidance.

Aerosurf Phase 2 Trials Begin

Aerosurf is the blockbuster component of the Discovery Laboratories (DSCO) story; the phase 2a trial started in February 2014 and I expect topline results in July or August. 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 2a trial will allow the start of the phase 2b proof of concept trial. The key to success in phase 2b is being able to deliver therapeutic amounts of lucinactant to the lungs. Because Aerosurf uses  the active ingredient in Surfaxin, we already know that the product is safe and effective. Success in the phase 2b trial will give investors a very high level of confidence that the phase 3 trials will be successful. I expect the phase 2b 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. Whether its 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 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.

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, 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 on 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.

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, it is difficult to predict the winner. This proprietary position that Aerosurf enjoys is a major investment plus.

Additional Information

This report is a synopsis of a much more in-depth 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. The link is http://smithonstocks.com/discovery-laboratories-an-update-on-the-surfaxin-launch-and-the-phase-2-clinical-trial-program-for-aerosurf-dsco-buy-1-72-paid-subscribers-only/