Discovery Labs Awaits FDA Word on Surfaxin

Discovery Labs (DSCO Quote) expects to learn Thursday, May 1, whether U.S. drug regulators will approve its lung surfactant Surfaxin as a treatment for premature infants suffering from respiratory distress.

This is the third time Discovery has brought Surfaxin to the Food and Drug Administration. Manufacturing and quality control issues have stymied the previous stabs at approval.

In recent public forums and conference calls, Discovery management has sounded confident that it's solved all FDA concerns this time around. The stock, long battered due to the Surfaxin delays, has started to rebound as investors anticipate better news from the FDA this time around.

From an investor angle, the ugly truth about Discovery, however, is that the commercial opportunity for Surfaxin right now is relatively small, and with well over 90 million shares outstanding, it's going to be hard for the company to generate much value from an approval.

Discovery is currently trading around $2.82 a share. An approval Thursday might pop the stock to about $5, but it's not really worth much more than that until the company can meaningfully expand Surfaxin use or make progress on its drug development pipeline.

Two analysts covering the company -- Jon Aschoff at Brean Murray Carret and Adam Walsh at Jefferies -- both have $5 price targets on Discovery, assuming that Surfaxin gets approved this week.

How Surfaxin Works

A surfactant is like lubrication for the lungs. Think of it as a slick goo that surrounds and coats the air sacs in the lungs, making them flexible and allowing them to absorb oxygen.