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Discovery Labs Holds Out Hope for Surfaxin

The stock Monday regains some of its sharp Friday losses on the company's positive response to FDA delays. But is the reaction overly optimistic?

Discovery Laboratories

(DSCO)

tried Monday to put a sunny face on the most recent regulatory setback for its infant lung drug Surfaxin, but in reality, there are few reasons for investors to smile.

In an update Monday, Discovery said that it believes it can respond to questions posed by the U.S. Food and Drug Administration within six to eight weeks, and that another Surfaxin review -- the FDA's fourth -- might only take 60 days to complete.

Discovery's optimism appears to be based on its own assessment of the

Surfaxin approvable letter

sent by the FDA Friday. The company also acknowledged Monday, however, that it hasn't met with regulators to go over the details of the approvable letter.

To believe in the best-case scenario laid out by Discovery management means having faith in a company that has failed, after three tries over several years, to gain U.S. regulatory approval for Surfaxin, a synthetically derived lung surfactant for the treatment of premature infants with respiratory distress syndrome.

Is there any reason to give Discovery the benefit of the doubt?

Discovery shares were gaining 33% in Monday trading after losing half their value Friday when the company announced that it failed again to convince the FDA that Surfaxin should receive final approval.

Manufacturing and quality control issues, particularly the latter, appear to be the continuing reason for the FDA's concerns. Monday, Discovery said it believes the company can reach an agreement with the FDA on some new tests to verify the stability and purity of Surfaxin.

But importantly, nowhere in Monday's press release does Discovery say that Surfaxin, as it is currently manufactured, can pass these new or strengthened tests in order to appease the FDA.

Ultimately, that is what really matters.

Even under Discovery's best-case scenario, Surfaxin's approval likely won't happen until the fall, which delays entry again into what is a relatively

small commercial opportunity

. It also makes it more likely that the company will raise money before another FDA review is completed.

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Discovery shares were up 48 cents, or 33%, to $1.93 in recent trading Monday.

Know What You Own

: FDA filings, approvals and rejections can swing a small-cap health care stock to the upside or downside.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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