Philly Inc: With FDA approval, Discovery Labs breathes easier

Posted: March 19, 2012

For the last six years, Discovery Laboratories Inc. has seemed to be a living-dead company.

The tiny Warrington drug firm had been seeking approval for its first product, called Surfaxin, from the Food and Drug Administration since April 2004. Surfaxin is a synthetic substance that hospitals use to prevent a respiratory illness that affects premature infants.

But Discovery Labs encountered a series of setbacks, involving manufacturing and quality-control data, that led the FDA to delay approval several times.

I'd already seen that movie often: Small company pushes what it believes is groundbreaking technology. Big government doesn't say no, but doesn't say yes. Small company winds up laying off most of its employees as it runs out of cash. Fade to black.

After the FDA issued its most recent "complete response letter" on Surfaxin in April 2009, it seemed clear that regulators weren't going to approve the treatment without another clinical trial, and that Discovery Labs was in a financial squeeze. Cue the credits, right?

Not so fast. After all, what the living dead may lack in speed, they make up for in persistence.

On March 6, the FDA finally approved Surfaxin, which the company hopes will become a substitute for the animal-derived surfactants that are currently the standard of care for the 90,000 premature infants in the United States each year at risk of respiratory distress syndrome.

Discover Labs chief executive W. Thomas Amick told investors on a conference call that he applauded the efforts of his employees for "bringing this across the goal line."

The day after FDA approval, Discovery Labs shares jumped as high as 44 percent, to $5.39. They settled that day at $4.08, up 33 cents on heavier-than-normal volume.

Now, the challenge for the company, which employs fewer than 100 people, will be launching Surfaxin this year. The unprofitable Discovery Labs had just $10.2 million in cash at the end of 2011.

On the same conference call with analysts, chief operating officer Thomas F. Miller indicated that the company would need to spend from $12 million to $13 million annually to support commercialization of Surfaxin and Afectair, a recently approved medical device used as part of other inhaled therapies.

That's why Discovery Labs announced a secondary offering of 16.07 million shares of common stock at $2.80 per share last week. The company estimated that the offering, managed by Lazard Capital Markets, Stifel Nicolaus Weisel, and Roth Capital Partners, would raise net proceeds of $42.1 million.

Thanks to Surfaxin's FDA approval, shares of Discovery Labs are up 63 percent over the last 52 weeks. But shareholders who have held the stock for five years are likely holding their applause, since their shares remain down 88 percent.

After Discovery Labs disclosed details of its stock offering Friday, its shares closed at $2.85 per share, down 65 cents.

Contact Mike Armstrong at 215-854-2980 or marmstrong@phillynews.com, or @PhillyInc on Twitter. Read his blog, "PhillyInc," at www.phillyinc.biz.

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