DSCO position

DSCO has a PDUFA date for today so will hear from the FDA about the decision on Surfaxin, its recombinant, plant-derived surfactant product. I had a position in DSCO before Christmas which I exited in Mid-Jan at $2.05 for a 27% gain. It turned out that my exit was very premature as the stock subsequently took off and is currently trading in the mid-$3’s. The perils of a stop-loss order – I was stopped out at essentially the lowest point in the last 2 months.

At any rate, I am bearish about the stock now. There are a few reasons behind this which are as follows:

  1. There is certainly a chance that Surfaxin will receive a CRL. This is its 5th time in front of the FDA and the agency may just dislike the drug.
  2. If it is approved, there is no reason to believe that DSCO will be able to competently market the drug. They have not shown any great competency in terms of development so why should we believe that they will be any better at commercialization?
  3. This is a tiny market and there is no reason to believe it will grow. Less than 1% of live develop RDS in the US. The current total market in the US is ~$75M. If (big if) DSCO can achieve a peak penetration that will only amount to $25M. The total market may grow slightly in the interim but not by much – this is not a very dynamic disease area.
  4. While Abbot is probably indifferent about Survanta, Cornerstone will defend Curosurf’s market aggressively (and indeed is currently pushing hard to increase its US presence).

The stock is up >100% since the start of the year. In my mind the price will go down whether the drug is approved or not. If DSCO gets a CRL then the price will drop to <$1.50. If there is an approval then I think the price may increase but that if it does it will be temporary and will be followed by a drop towards the $2 level.

 

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