Bullish InsidersInsiders have been persistent accumulators of Discovery's shares through its travails. You have to go back to June 2005 to see the last insider sales of shares. The buying started in March 2007 and has continued through this month. In all, eight executives and directors have slowly but surely purchased nearly $1 million worth of DSCO at an average price of $2.07, and at specific prices ranging from $1.60 to $2.54 a share.
Umpteenth Time the Charm?Whether you get in now, betting on Class 1 status this Friday, or wait for the Class 2 disappointment for more short-term weakness, the real payoff -- or plunge -- in DSCO will come around Dec. 31 of this year or April 30th of next year. On the upside, I believe DSCO has the potential to more than double if the FDA finally gives approval. The stock traded up to $3.75 in May 2007 just before the FDA put investors back in the waiting room with yet another approvable letter. The weight of past disappointment may stop the shares from getting back to that level if bullish anticipation once again boosts DSCO prior to the FDA's next decision date. But if actual approval is given, it seems logical that that past bullish level could easily be hit again. True, the potential revenue from Surfaxin alone do not justify a $3.75 share price for Discovery. The worldwide market for treating infants with RDS is only estimated to be $200 million or so per year. But approval for Surfaxin would pave the way for future approval of the aerosolized version of KL4, which has much broader market potential to treat adult respiratory problems. Adult applications could eventually increase the revenue potential of KL4 to more than $1 billion annually. Indeed, it is the anticipation of KL4 being used in larger indications that Discovery's management points to as a reason the FDA has been so careful in its approval procedures for this first KL4-based product.
Real Risks, Real RewardsIf Discovery fails this time around, DSCO will tank -- no doubt. But any innate value in the technology platform should stop the stock from going to zero; there would be the potential for a deeper-pocketed or (critics would quickly offer) better-run biotech firm to take over the platform.
This article was written by Jonathan Moreland, whose newsletter, "TheStreet.com InsiderInsights," parses mounds of data on insider trades to find investable ideas.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Discovery Laboratories to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.