April 20, 2009 / 12:56 PM / 10 years ago

UPDATE 3-US FDA declines to approve Discovery Lab's lung drug

* FDA declines to approve lung drug for infants

* Says FDA has questions on drug’s stability test

* Says starts Q2 with $20 million in cash

* Says has 2 committed equity financing facilities

* Shares sink 61 pct (Adds details from conference call, updates share movement)

By Anand Basu

BANGALORE, April 20 (Reuters) - Discovery Laboratories Inc DSCO.O said U.S. health regulators declined to approve the marketing application for its drug to treat respiratory illness in infants, sending its shares down as much as 61 percent to a lifetime low.

The delay is a further setback for the company, which had failed to win marketing approval for the drug Surfaxin in several previous attempts since 2004, and it was banking on the drug to bail itself out of “going concern” doubts raised by its auditors.

“They do need cash, and I think the floor price may be too low to draw down on any credit facility now. It will be harder to obtain any exclusive U.S. partnership for this drug,” Kimberly Lee, analyst at Wedbush PacGrow LifeSciences, told Reuters by phone.

Discovery said in a conference call with analysts that it started the second quarter with about $20 million in cash and two Committed Equity Financing Facilities.

But one of the CEFF has a floor price of $15 to use it, while the other one has a floor price of 60 cents.

Analyst Lee said the U.S. Food and Drug Administration needs additional comparability data for Surfaxin to compare the drug used in clinical trial with the commercial drug.

ANOTHER SETBACK

The company said it received a “complete response” letter, which outlined questions that the U.S. FDA raised on certain aspects of a Surfaxin biological activity test, a quality control stability and release test.

“The compound that we made during the conduct of our late-stage trial should be identical to the product that we are manufacturing on a go forward basis,” Discovery said during the call. The company needs to give more detail and it could either be a 60-day review or a 6-month review, analyst Lee said.

Discovery said it plans to schedule a meeting with the FDA within 30 to 75 days to discuss the issues. Lee maintained her “hold” rating on the stock, citing execution risk and financial risks.

Discovery Labs said it believes it has already submitted data necessary to respond to the FDA’s questions about the quality test in its marketing filing and that this is sufficient to gain marketing approval of Surfaxin.

The company said certain other issues raised by the regulator could be readily addressed.

Discovery Labs had said in the past it was exploring strategic alternatives, including, but not limited to, potential additional financings, as well as potential business alliances, commercial and development partnerships.

Shares of the company were down 47 percent at 96 cents in late morning trade on Nasdaq. They earlier touched a lifetime low of 71 cents.

For the alerts double-click [ID:nWNAB4882] (Editing by Anthony Kurian and Gopakumar Warrier)

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