Discovery Labs (NASDAQ: DSCO) is developing a proprietary humanized lung surfactant for respiratory diseases and surfactant replacement therapies. Discovery’s lead product is Surfaxin, being developed initially for critical-care patients with life-threatening respiratory disorders where there are few, if any, approved therapies. Surfactants are substances that are produced naturally in the lungs and are essential to the lungs’ ability to absorb oxygen and to maintain proper airflow through the respiratory system. The absence or depletion of surfactants is involved in a number of respiratory diseases.
Discovery’s Surfaxin is an engineered version of natural human lung surfactant containing a peptide, sinapultide that is designed to precisely mimic the essential human lung surfactant protein B (SP-B) and to potentially treat a broad range of respiratory diseases.
In our opinion, the company is on target to get Surfaxin approved by the FDA, as they recently completed two Phase III clinical trials of Surfaxin for the treatment of respiratory distress syndrome (RDS) in premature infants, are currently evaluating Surfaxin in a Phase III and a Phase II clinical trial for meconium aspiration syndrome in full-term infants, and a Phase II clinical trial for acute RDS in adults. In addition, the company is currently preparing to initiate a follow-on Phase II clinical trial evaluating the safety, tolerability and efficacy of Surfaxin as an inhaled aerosol (development name DSC-104) to treat patients with asthma.
We believe the most important market for Surfaxin is in premature infants, a large market and one that, unfortunately, is growing. According to the March of Dimes, one in eight infants born in the U.S. is premature and of these, 40,000 require surfactant to assist in their breathing as because they are born with a lack of natural surfactant in their lungs. Without surfactant, the air sacs in the lungs collapse and are unable to absorb sufficient oxygen. The current standard of care for treating these patients is surfactant replacement therapy using animal-derived surfactants.
Surfaxin was fast track by the FDA in February 2004 and Discovery submitted the New Drug Application to the FDA on April 14, 2004, so we may know later this year if Surfaxin will receive FDA approval with the hopes of launching the drug in 2005.
How well will Surfaxin do if it gets approved? As we mentioned above, the primary market is premature babies, which is not a huge market in number, but is with respect to healthcare. The ability to assist premature babies with their breathing will lead to decreased hospital care, which in turn lowers the cost for healthcare in general. With this in mind, we believe Surfaxin will create a consistent revenue stream for Discovery Labs. Wall Street analysts must be aware of this, as Discovery’s share price has tripled in the last year. Even at the company’s current share price (approximately $10.400 per share), we think it is still worth considering. Since Surfaxin has the potential to be used in other large markets like respiratory disorders and asthma, positive clinical results in these disorders would drive the shares of Discovery up. The company plans to file for European approval of Surfaxin for respiratory disorders in 2004, initiate Phase II clinical trial of DSC-104 in asthma and release results from Phase IIb trial of Surfaxin in ARDS in the second half of 2004.
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