West Coast Editor

Discovery Laboratories Inc. drives onward in its bid to get Surfaxin accepted by the FDA, and the company disclosed work force reduction of 34 percent, or 55 employees, as a way of lowering costs.

Discovery's stock (NASDAQ:DSCO) closed Friday at $3.20, up 33 cents, or 11.5 percent.

In late April, the firm got its second approvable letter from the FDA regarding Surfaxin, designed to mimic the function of natural human lung surfactant, for respiratory distress syndrome in premature infants. The agency's issues had mainly to do with chemistry, manufacturing and controls, and Discovery warned of a potentially significant delay in approval due to the failure of stability parameters in some batches of the drug. (See BioWorld Today, April 26, 2006.)

Company officials could not be reached Friday.

Cutting personnel from 160 to 105 employees across the board, Discovery expects to save about $8 million. Sales and marketing costs totaled about $5 million over the past two quarters, and those expenses are gone, too, though the firm will take a one-time restructuring charge of $4.5 million to $5 million in the second quarter.

The company said goodbye to three senior executives: Christopher Schaber, vice president and chief operating officer; Deni Zodda, vice president of business development; and Mark Osterman, vice president of sales and marketing.

Analyst Katherine Xu, with Pacific Growth Equities in San Francisco, wrote in an April research report that the latest trouble could mean a 15-month to 18-month stall for Surfaxin, and forecast approval around June 2008, while downgrading the stock to a "sell" rating.

"They're in pretty high financial distress," Xu told BioWorld Today, when asked about the staff reductions. "They have a very valuable franchise here, but with the stock at this level, [a potential buyer] would try to lowball the franchise, and management would be reluctant to do that."

A partner in the U.S. "will most likely be the case," she said, although Discovery hoped to go it alone. "Shareholder lawsuits are piling up," she added.

Philadelphia-based Janney Montgomery Scott's analyst Sanyou Chen said in a report that observers "remain frustrated by the seemingly never-ending string of problems Discovery Labs has had during the entire approval process," adding that he suspected "a lot of effort [will be needed] to dig out the major cause" for the stability failure, which "appears to be an isolated case that occurred at the worst possible time."

The 2008 approval is a "reasonable" estimate, Chen told BioWorld Today, adding that restructuring "is good for the company overall at this stage. There is not much those employees can do at the moment anyway."

Chen noted that Discovery has about $50 million in cash and another $50 million in equity financing if needed, which should be enough to solve the Surfaxin manufacturing issue and continue development of Aerosurf, its Phase II aerosolized surfactant, which both analysts agreed likely is to hold the most value for the firm.

Can the company hold out?

"It depends on the investors' timeline," Xu said. "If you're a hedge fund, you want to get out next week. For longer-term investors, hopefully it will work. But until [Discovery gets] a definitive approval from the FDA, I don't think The Street will trust them."