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Expert Financial Analysis and Reporting

Discovery Laboratories (DSCO): An Update and Buy Re-iteration

I have just published a new report on Discovery Laboratories; this emerging company has two products approved for U.S. marketing with Surfaxin and Afectair and controls worldwide rights to these products with the exception of Surfaxin in Spain and Portugal. It also has a highly promising pipeline. Surfaxin LS is a meaningful improvement over Surfaxin and Aerosurf is conceptually one of the most intriguing biotechnology products in development with worldwide sales potential of $750 million to $1 billion by my estimates. Due to a lengthy delay in gaining approval of Surfaxin, the company is not well followed or understood and has a current market capitalization (based on fully diluted shares) of $157 million, which seems modest for a company with its fundamentals.


I continue to recommend purchase of DSCO. After the approval of Surfaxin, the stock soared to a high of $4.08. However, the company then completed an equity financing at $2.80 which took all of the wind out of the sails of the stock. This offering raised $43 million and was critically necessary to give the company the financial resources necessary to launch Surfaxin and Afectair. However, the execution of the deal was painful for existing shareholders. In the aftermath of the deal, the stock drifted down to $2.39, perhaps due to disillusionment with the financing.


Investors are focused on the launch of Surfaxin and Afectair in 4Q, 2012. While success of the launches is critical to the company's future, it will be sometime in 1H, 2013 before we begin to get a good read. One of the most important catalysts in the meantime is likely to be increased analyst coverage. The approval of Surfaxin has caused considerable interest in the stock. DSCO has had little or no coverage over the past several years due to the well documented problems in gaining regulatory approval for Surfaxin. With this behind the company, analysts can focus on the intriguing potential for Surfaxin, Surfaxin-LS and Aerosurf rather than fretting about whether Surfaxin will be approved. This could stimulate demand for the stock.


Perhaps the most important catalyst for the balance of the year could be the consummation of a partnering deal for Surfaxin, Surfaxin-LS and Aerosurf. This is likely to be for rights outside of the U.S. as DSCO wants to commercialize these products on its own in the U.S. However, the company is open to any deal that maximizes shareholder value. A partnering deal would be the added touch of validation that might cause the company to light up on institutional investors' radar screens. The company has expressed confidence that a deal can be consummated by 1Q, 2013 and more likely by the end of 2012.

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