Discovery Labs Earnings: An Early Look

Earnings season is winding down, with most companies already having reported their quarterly results. But there are still some companies left to report, and Discovery Labs (NASDAQ: DSCO) is about to release its quarterly earnings report. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Discovery Labs had to wait a long time, but it finally got its best drug prospect approved last year. But so far, that hasn't led to the long-anticipated ramp-up in sales, and investors are nervous about the delay. Let's take an early look at what's been happening with Discovery Labs over the past quarter and what we're likely to see in its quarterly report on Wednesday.

Stats on Discovery Labs

Source: Yahoo! Finance.

Will Discovery Labs move forward this quarter?
Analysts haven't moved much on their estimates for Discovery Labs, adding a single penny per share to loss estimates for the just-ended quarter and the full 2013 year. But the stock has jumped more than 16% as the company gets closer to finally bringing in substantial revenue.

Discovery Labs is the model of how tenacity can eventually lead to success in the biotech industry. After years of waiting eight years and overcoming four separate rejections from the FDA, Discovery finally received approval for Surfaxin, its treatment to prevent infant respiratory distress syndrome. The company also got its Afectair drug-delivery product approved, which makes use of inhaled drugs more efficient, and Discovery opened 2013 with an announcement that it had started its launch of Afectair.

But the real question is how well Discovery will do in marketing and selling Surfaxin. Last October, the company said it would delay sales of Surfaxin until the second quarter of 2013, citing the need to improve one of the methods Discovery uses to assure quality control. Moreover, AbbVie (ABBV -0.38%) already offers the competing Survanta, and Cornerstone Therapeutics offers its Curosurf drug. But Surfaxin's advantage is that it's synthetic rather than derived from animals, which should appeal more to medical professionals.

In February, the company successfully got a credit facility from Deerfield Management, which will provide as much as $30 million in financing, with $20 million becoming available as soon as the company makes its first commercial sale of Surfaxin. But with Deerfield getting warrants to buy as many as 7 million shares of Discovery at $2.81 per share, investors will face substantial dilution if the share price rises.

In its quarterly report, watch closely for Discovery to talk about its plans for Surfaxin. Investors have been patient, but at some point, the company has to finally get moving toward making its long-awaited success a reality.

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