Jonathan Moreland

Inside the Markets: Umpteenth Time a Charm for Biotech Industry?

Insiders still enjoy this high-risk/high-reward game.

January 20, 2009
by Jonathan Moreland

[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.]

Discovery Laboratories (NASDAQ: DSCO) just can’t seem to receive anything better than back-handed compliments from the U.S. Food and Drug Administration (FDA) about its drugs. The latest snub came last November.


As many CPA Insider™ readers may recall from my past column, Discovery Labs (Discovery) is developing a drug (Surfaxin) that treats prematurely-born infants who suffer from respiratory distress syndrome. Discovery is also developing a version of the drug in aerosol form, called Aerosurf. Both compounds incorporate KL4, a synthetic peptide that mimics the essential properties of surfactants that allow proper breathing.

In the latest chapter of Surfaxin’s saga, the FDA took three weeks leading up to last November to decide whether Discovery’s response to an approvable letter for the drug should be given Class 1 or Class 2 status. If it had been the former, the company could have expected to get a definitive thumbs up or down on its Surfaxin application within 60 days.

Although the firm’s latest response contained no new clinical data — the FDA agrees that Surfaxin is more efficacious than the animal derived surfactants already on the market — the latest application was only given Class 2 status. This means that investors will have to wait until mid-April to find out if their high-risk bet on Discovery’s shares pays off or not.

Investor Observations

Many investors obviously decided not to wait, and DSCO lost over half its value after the November disappointment.

But I remain impressed that the aerosolized version of Discovery’s KL4 surfactant was chosen independently by the University of North Carolina and the Cystic Fibrosis Foundation to be used in a Phase IIa clinical trial for cystic fibrosis patients.

I also can’t help noticing that, Surfaxin appears to be making real progress toward eventual approval.

In any case, just as shares of Discovery Labs started to creep up in anticipation of the FDA’s Class 1 or Class 2 decision last year, I expect speculative hands to bid its shares up once again as the FDA’s April 17th decision date approaches. If and when that happens, CPAs who have client-investors and who want to get in today should have the chance to reap some profits even before the decision is made.

The FDA’s next decision on Surfaxin should be a big one if it receives a Prescription Drug User Fee Act (PDUFA) date. If it does, I expect shares to triple from its present levels.

Still, for you have clients who are interested in a high-risk/high-return proposition, I view Discovery as a very reasonable choice at its present price. Sure, this microcap is volatile. But so are the stocks of many established mega-caps with household names. At least the risks involved with a bet on DSCO are out in the open with a specific timeline for playing out, instead of waiting to ambush investors in a seemingly defensive Blue Chip investment when the next round of destruction is meted out by the global economic crisis.

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Jonathan Moreland is the Director of Research at New York-based InsiderInsights.com. View a FREE trial issue of the firm's weekly newsletter InsiderInsights.