National Editor

With promising early data from a Phase III support trial of its lead product Surfaxin in hand, Discovery Laboratories Inc. raised $27.5 million through a private placement to keep the development going at a steady rate.

Surfaxin, synthetically engineered to mimic natural human surfactant, could push existing, animal-derived products "off the market within three years," if approved and if the lessons of history hold true, said John Cooper, chief financial officer of Doylestown, Pa.-based Discovery.

Synthetics of "top-notch pharmaceutical quality" such as Surfaxin typically outdo animal-based products over time, since the latter are costly and difficult to manufacture and could carry side effects, he noted.

The company sold about 5 million newly issued shares at $5.50 per share and warrants exercisable for about 1 million shares of common stock with an exercise price of $6.875 each.

Earlier this month, Discovery offered preliminary data from its ongoing support trial of Surfaxin comparing the treatment to the approved product Curosurf, a pig-lung extract that is viewed as the standard pulmonary surfactant therapy.

Surfaxin appears at least equivalent to Curosurf in respiratory distress syndrome in premature babies, and a complete analysis of the 252-patient study is expected to be disclosed this fall. (See BioWorld Today, June 6, 2003.)

A pivotal trial in the same indication is designed to enroll 1,500 patients. Data from the trial are scheduled to be released in the fourth quarter. The trial compares Surfaxin to London-based GlaxoSmithKline plc's synthetic Exosurf in one arm and to Survanta (derived from bovine lungs), from Abbott Laboratories, of Abbott Park, Ill., in the other.

"Curosurf is the most widely used product in Europe," Cooper said. "It's considered the gold standard, but Survanta is marketed by Abbott in the U.S. and they have a lot of marketing muscle," so Survanta is the leader there.

Why hasn't synthetic Exosurf - the first approved surfactant - held its ground against the animal products?

"It takes between six and 12 hours for [Exosurf] to kick in, and this is because of the lack of critical surfactant protein," Cooper said. Animal-derived products act "generally within minutes," he added. "In each case, it's acting as a catalyst to the body to begin producing its own surfactant."

Cooper said the company wanted to make sure it had trials comparing both Curosurf and Survanta. In Europe, Discovery has a marketing deal with Laboratorios Del Dr. Esteve SA, of Barcelona, Spain. In the U.S., for neonatal indications, there's a marketing arrangement with Quintiles Transnational Corp., of Research Triangle Park, N.C.

"They're working with us to put together a specialty sales force," which Discovery can take over after seven years, Cooper said, noting that Quintiles has made similar deals with CV Therapeutics Inc., of Palo Alto, Calif., and Sunnyvale, Calif.-based Scios Inc.

Another surfactant, Infasurf, is derived from calf lung and is manufactured by Forest Laboratories Inc., of New York, but lags behind Survanta, Cooper noted.

Surfactants, described as soap-like substances, are produced naturally in the lungs and modify surface tension of fluids normally present in alveoli. Premature infants lack natural surfactant and their lungs can collapse as a result.

Surfaxin is designed to get around the supply difficulties in animal-derived products, and the potential side effects in adults.

"Babies' immune systems haven't really matured yet, so you haven't seen situations where you have problems in terms of animal diseases," Cooper allowed. But if the animal-derived products are used for lung conditions in older people "you will definitely have a problem," he said.

The company also has chalked up encouraging results of Part A of its Phase II trial with Surfaxin for acute respiratory distress syndrome in adults, and is developing it as an inhalable aerosol for severe asthma and acute lung injury. A Phase Ib/IIa trial in asthma is expected to begin in the fourth quarter or early in 2004.

Annual revenue potential with Surfaxin in neonatal applications has been estimated by Discovery at $150 million to $200 million, although the actual market is believed to be greater since many infants in the world do not get proper treatment.

As of March 31, Discovery had $14.2 million in cash, an $8.5 million line of credit with Quintiles, and a $1 million lease line with GECC Life Sciences. The added money will let the company finish its late-stage trials and launch the aerosol clinical programs.

"Our burn rate is $1.5 million per month, but that will go down when we finish the Phase III trials at the end of this year," Cooper said. "When we begin our Phase III trials for [adult respiratory distress syndrome], Esteve will help develop and support that." The ARDS indication is partnered with Esteve in Europe but is not partnered in the U.S.

The financing included Quaker BioVentures Inc., of Philadelphia; BayStar Capital Management LLC, of San Francisco; Special Situations Funds, of New York; PharmaBio Development Inc., the investment subsidiary of Quintiles; Laboratorios Del Dr. Esteve; and other selected investors including a well-known mutual fund. Gerard Klauer Mattison & Co., of New York, acted as the placement agent.

Discovery's stock (NASDAQ:DSCO) closed Friday at $5.80, down 33 cents.