Breathing Easy - Discovery Laboratories

Discovery Laboratories/NASDAQ: DSCO develops humanized lung surfactant as a surfactant replacement therapy (SRT) for respiratory diseases. Back in February 2005, Discovery's Surfaxin received an approvable letter by the FDA for the treatment of respiratory distress syndrome (RDS) in premature babies. But its share price took a hit as there was quality assurance issues associated with its manufacturing facility. The deficiencies were mainly related to basic quality control, process assurance and documentation requirements to support the commercial production process. In our opinion, the reaction was overly harsh.

Since then, the stock has been making a comeback in anticipation of a strong response by the company. However, on July 29, 2005, the stock took another hit in response to the Discovery submitting additional information to the FDA in order to receive final approval for Surfaxin. A reasonable explanation for the sudden raise and pullback in Discovery's share price is that it's trading in line with the overall biotech sector and not due to the concerns over the production of Surfaxin.

Along with its lead product Surfaxin, Discovery can develop other Surfactant Replacement Therapies (SRTs) with larger commercial potential. Discovery's SRT Lung Wash technology is in a Phase II clinical trial to treat acute respiratory distress syndrome in adults (ARDS) and meconium aspiration syndrome (MAS) in full-term infants. An inhaled aerosol version, DSC-104, has generated significant interest in the respiratory medical community and has the potential to treat bronchopulmonary dysplasia, MAS, acute lung injury, asthma, and chronic obstructive pulmonary disease. The company also has planned to initiate a Phase II trial to study its aerosol SRT for the treatment of asthma. Altogether, these treatments needs represent commercial market opportunities in excess of $1 billion.

The market appears to realize the significant potential of Discovery's follow-on SRT technologies. Besides, Surfaxin has clinically demonstrated safety and efficacy advantages over existing products in the U.S. and Europe. The fact that FDA allows Discovery to use the comparison data with existing treatments will assist Discovery sales and its marketing force to convince doctors to switch. Picking up shares of Discovery below $8.00 is an opportunity.

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