Positioning itself for a busy upcoming year, Discovery Laboratories Inc. raised about $12.8 million through the private placement of securities to selected institutional and accredited investors.

The Doylestown, Pa.-based firm expects in the second quarter to file a new drug application for its lead candidate, Surfaxin, and conduct further clinical trial work on the drug in other indications throughout the year. The extra funds would offset associated costs of such actions.

"The late-stage portion of our pipeline is for critical care indications," Senior Vice President and Chief Financial Officer John Cooper said. "We'll continue to move those programs toward commercialization. Additionally, we're developing a humanized surfactant in an aerosol formulation. So we'll be using the money to help move those programs through the pipeline, and also we'll be applying some of the funds for expanding manufacturing needs."

Cooper said Discovery's financial resources would adequately support its capital needs until the middle of 2004.

Discovery Labs sold about 6.4 million newly issued shares of common stock for $1.94 each, a market price based on their average daily closing price for the three trading days preceding the definitive purchase agreements. For an additional $0.125 per underlying common share, the investors also purchased warrants exercisable for about 2.9 million shares of common stock with an exercise price of about $2.42 apiece.

Discovery's stock (NASDAQ:DSCO) on Wednesday gained 16 cents to close at $2.05.

Discovery plans to file the NDA for Surfaxin to treat respiratory distress syndrome in premature infants, assuming positive results of an ongoing blinded, worldwide Phase III trial. The lung surfactant, which contains the peptide KL4, a 21-amino-acid peptide modeled after the SP-B protein in the human surfactant system, also is being studied to treat a number of other indications.

"Surfactants are protein-lipid complexes that line the alveoli," Cooper said. "Surfactants reduce the surface tension in the alveoli down to almost zero and allows that alveoli to stay open. There's a ton of medical information that says when the surfactants in the alveoli are degraded or missing, it leads to a number of respiratory diseases."

Discovery expects to collect in the coming year Phase II results for Surfaxin in acute respiratory distress syndrome in adults. The drug also is in a Phase III trial for meconium aspiration syndrome in full-term infants.

"The acute respiratory distress syndrome data will be available in the first quarter of 2003 and, of course, depending on that data, we would use that information to prepare our Phase III trials, which we would begin probably in the late third quarter," Cooper said. "Enrollment in the Phase III meconium aspiration syndrome trial will wrap up very, very late in 2003, and that data will be available in the beginning of 2004."

He said Discovery is about launch a Phase II trial of Surfaxin to treat meconium aspiration syndrome as a prophylaxis.

Discovery retains U.S. rights to such critical care products if they reach the market, though it has entered a sales and marketing deal with Research Triangle Park, N.C.-based Quintiles Transnational Corp., in which Quintiles would earn money based on sales. In Europe, Discovery has entered an agreement for Surfaxin with Barcelona, Spain-based Laboratorios Del Dr. Esteve SA.

Leveraging its technology in humanized lung surfactants, Discovery also plans to enter the clinic late next year with an aerosolized surfactant for severe acute asthma. In preclinical development, Discovery's aerosol formulations are being developed to treat conditions such as asthma, chronic obstructive pulmonary disease and acute lung injury.

"If our products go into critical care, we [will retain] their rights and keep it in the U.S.," Cooper said. "Outside of critical care, our goal is to take our products to a strategic value point and then find partners."

The company also is working on a humanized surfactant as a pulmonary drug delivery vehicle, a development initiative for which Discovery also plans to establish partnerships.

"The one thing we know that belongs in the lung - and nature has provided for that - is a surfactant," Cooper said. "We believe that a surfactant has the ability to be a very effective drug delivery vehicle and has the potential to significantly increase the bioavailability of drugs as they get into the lungs. We believe surfactants can get deep into the lungs and can deliver those proteins better than what may be currently available. So it makes sense for us to gain access to those proteins through collaborative partners."

Palo Alto, Calif.-based BioAsia Investments led the financing, which also included Heartland Value Fund, of Milwaukee; Special Situations Funds, of New York; State Street Research Health Science Fund, of Boston; PharmaBio Development Inc. (the investment subsidiary of Quintiles); Esteve; an unnamed life science investor; as well as SDS Capital Partners and DMG LLC, both of Greenwich, Conn. The placement agent was New York-based Gerard Klauer Mattison & Co. Inc.