Why Discovery Laboratories Inc. Shares Tumbled

Discovery Labs fell after reporting its fourth-quarter results. Is this dip a buying opportunity or a cue to keep your distance?

Mar 13, 2014 at 1:19PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Discovery Laboratories (NASDAQ:DSCO), a biopharmaceutical company focused on developing therapies to treat respiratory diseases, lost as much as 11% after reporting its fourth quarter results before the opening bell.

So what: For the quarter, Discovery Labs reported gross revenue of $74,000, but noted that sales of Surfaxin ($140,000), its newly approved drug for the prevention of respiratory distress syndrome (RDS) in infants at high risk for RDS, were deferred in accordance with its revenue recognition policy. Net loss grew 72% to $11.7 million, or $0.16 per share loss. Comparatively speaking, the loss matched Wall Street's estimates, but revenue of $360,000 had been expected.

More so than its earnings report, Discovery Labs' 8-K filing appears to be harming its share price. Within that 8-K, Discovery Labs removed its short-term revenue guidance from Surfaxin for 2014 noting:

Experience to date indicates that the cycle time required to have SURFAXIN reviewed by hospital committees, accepted on hospital formulary, purchased by the hospital pharmacy, and ultimately used in the neonatal intensive care unit ("NICU") is considerably longer than the Company assumed in its previous guidance for 2014. The Company believes that, to effectively forecast revenue in the short term, it will require more actual experience with the SURFAXIN product cycle time. Until that time, the Company will not be in a position to provide informative short-term revenue guidance.

Now what: Usually investors are willing to give biopharmaceutical companies that are launching new products a reprieve for a couple quarters, but its 8-K filing, which demonstrates that it may not understand how marketable Surfaxin is, or how to best approach physicians to get its drug sold. That is a bit concerning. Discovery Labs has plenty of cash now after completing a stock offering during the quarter, but it appears unlikely that it will be delivering profits to shareholders anytime soon. Nowadays half the battle is getting a drug approved by the Food and Drug Administration, but the other half is in successfully launching a new drug. Surfaxin is still very wet around the ears and probably needs time to develop through physician education -- but that also means there's probably little reason for you to chase Discovery Labs shares at the moment, either.

Surfaxin may offer Discovery Labs' shareholders a lot of potential -- but even it may struggle to keep up with this top stock moving forward
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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