Discovery Finds Its Way

With the Nasdaq Biotechnology Index trading flat for the year, 2006 wasn't the greatest year for biotech stocks. Discovery Laboratories (NASDAQ:DSCO) had an even worse year, with shares down 66% as a result of numerous delays in gaining approval for its lead product, the respiratory drug Surfaxin. But Discovery may have a better 2007; earlier in the week, it finally issued a new timeline for Surfaxin to potentially find its way to the market.

Discovery designed Surfaxin to be used to prevent respiratory death syndrome (RDS) in premature infants. RDS occurs in approximately 120,000 infants annually in the U.S., and Surfaxin would compete against two similar but potentially inferior drugs currently serving the market.

Discovery first received an approvable letter from the FDA for Surfaxin back in February 2005. The company had estimated that it would take no later than January of last year to correct the labeling and manufacturing issues that were the subject of the letter. But then the FDA rejected its response to the approval letter as insufficient, and Discovery pushed the timeline on possible approval back to April 2006, pending the resolution of 12 "chemistry and manufacturing" issues with the drug.

When April came, Discovery received another approvable letter as a result of continued concerns over the manufacturing of Surfaxin. Months passed, and late in September, Discovery announced that it had found the probable cause of the manufacturing difficulties. On Monday, a new timeline for the drug came out that has Discovery filing its response to the FDA in September or October of this year, with potential approval of Surfaxin six months later.

So what are investors getting with Discovery today? Right now, it's a biotech with an approvable drug that has failed to get final regulatory approval two times now because of manufacturing issues. At a $160 million market cap, Discovery is also cheaply valued, considering that the market for Surfaxin is several hundred million dollars just for the RDS indication alone.

On the flip side, even though Discovery has been in control of its manufacturing plant for only one of the approvable letters, another failure to get approval of Surfaxin will probably be strike three for most investors.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.