Discovery Labs Awaits FDA Word on Surfaxin

We all have natural surfactant in our lungs, but some premature babies are born with lungs that aren't fully formed and lack natural surfactant. In the worst of these cases, preemies suffer from respiratory distress syndrome so severe that doctors must insert breathing tubes to deliver artificial surfactant to their lungs.

There are a couple of animal-derived lung surfactants on the market today, made from chopped up and refined cow and pig lungs. These work, but given the source of the material and the manufacturing process, the quality of animal-derived surfactants can vary from one batch to another.

Discovery solves this problem by manufacturing an entirely synthetic surfactant, Surfaxin, that is more consistent and better mimics the precise mix of lipids and proteins contained in natural surfactant.

Market Potential

If Surfaxin is approved, it should displace much of the animal-derived surfactant in use today.

The problem is that the premature infant respiratory distress syndrome (RDS) market is fairly small. According to Discovery, RDS afflicts about 120,000 premature infants in the U.S. each year. Of these, about 75,000 RDS infants are treated with the currently approved surfactants.

Brean Murray's Aschoff says the total U.S. RDS market opportunity for Surfaxin is about $100 million, based on projected pricing of around $1,200 per treatment.

Even if you assume (very optimistically) that Discovery can treat all of these infants and take 100% market share from the animal-derived surfactants, $100 million in peak Surfaxin revenue in 2011 (roughly three years from launch) still only gets you a net present value of about $59 million.

Assuming a six-times sales multiple, that comes to an enterprise value of $359 million for Discovery, or about $3.70 a share. (You see where the 90 million-plus shares outstanding hurts the company's valuation.)