DISCOVERY LABORATORIES INC /DE/ - DSCO Securities Registration Statement (simplified form) (S-3) ABOUT THIS PROSPECTUS

ABOUT THIS PROSPECTUS

Because this is a summary, it does not contain all the details that may be important to you. You should read this entire prospectus, including “Risk Factors,” carefully before you invest.

COMPANY SUMMARY

Discovery Laboratories, Inc. is a biopharmaceutical company developing its proprietary surfactant technology as Surfactant Replacement Therapies for respiratory diseases. Surfactant is produced naturally in the lungs and are essential for breathing. The absence or depletion of surfactant is involved in a number of respiratory diseases. Our technology produces a precision-engineered, peptide-containing surfactant that is designed to closely mimic the function of human lung surfactant. We believe that through this Surfactant Replacement Therapy technology, pulmonary surfactants have the potential, for the first time, to be developed into a series of respiratory therapies for patients in the Neonatal Intensive Care Unit, critical care unit and other hospitalized settings, where there are few or no approved therapies available.

We have filed a New Drug Application with the FDA and a Marketing Authorization Application with the European Medicines Evaluation Agency for clearance to market Surfaxin ^® , our lead product, for the prevention and treatment of Respiratory Distress Syndrome (“RDS”) in premature infants. The FDA has accepted our NDA filing for Surfaxin for the prevention of RDS in premature infants and had granted a Standard Review designation establishing a target date of February 13, 2005, for the completion of its review of the NDA. The European Medicines Evaluation Agency has validated our Marketing Authorization Application indicating that the application is complete and that its review process has begun.

In addition to Surfaxin for RDS, in an effort to enhance the potential commercial and medical value of our Surfactant Replacement Therapy by addressing the most prevalent respiratory disorders affecting infants in the Neonatal Intensive Care Unit, we are conducting several Neonatal Intensive Care Unit therapeutic programs targeting respiratory conditions cited as some of the most significant unmet medical needs for the neonatal community. We are set to initiate two Phase 2 clinical trials -- Surfaxin for the prevention of Bronchopulmonary Dysplasia (“BPD”) in premature infants and aerosolized Surfactant Replacement Therapy administered through nasal continuous positive airway pressure (nasal CPAP) for Neonatal Respiratory Failures. We are also currently in a Phase 2 prophylactic/early treatment trial of Surfaxin for the treatment of Meconium Aspiration Syndrome in full-term infants.

In an effort to enhance the potential commercial and medical value of our Surfactant Replacement Therapy, we are also developing Surfactant Replacement Therapy to address unmet respiratory conditions affecting pediatric, young adult and adult patients in the critical care and other hospital settings. We are conducting a Phase 2 clinical trial for the treatment of Acute Respiratory Distress Syndrome (“ARDS”) in adults in the intensive care unit (ICU), for which we announced preliminary data on December 7, 2004. With our aerosolized surfactant formulations, we are preparing to initiate a Phase 2 trial for patients with moderate to severe asthma (development name DSC-104). In addition, we are evaluating the development of aerosolized formulations of our precision-engineered Surfactant Replacement Therapy to potentially treat Acute Lung Injury, Chronic Obstructive Pulmonary Disease (“COPD”) and rhinitis/sinusitis.


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We are presently implementing a long-term business strategy which includes manufacturing for the production of our precision-engineered Surfactant Replacement Therapy to meet anticipated clinical and commercial needs, and developing the sales and marketing capabilities for the commercialization of Surfaxin, if approved, in the United States and Europe.

SURFACTANT TECHNOLOGY

Our precision-engineered surfactant technology was invented at The Scripps Research Institute and was exclusively licensed to Johnson & Johnson which, together with its wholly-owned subsidiary, Ortho Pharmaceutical Corporation, developed it further. We acquired the exclusive worldwide sublicense to the technology in October 1996.

Surfactants are protein and lipid (fat) compositions that are produced naturally in the lungs and are critical to all air-breathing mammals. They cover the entire alveolar surface, or air sacs, of the lungs and the terminal conducting airways which lead to the air sacs. Surfactants facilitate respiration by continually modifying the surface tension of the fluid normally present within the alveoli, or air sacs, that line the inside of the lungs. In the absence of sufficient surfactant or should the surfactant degrade, these air sacs tend to collapse, and, as a result, the lungs do not absorb sufficient oxygen. In addition to lowering aveolar surface-tension, surfactants play other important roles in human respiration including, but not limited to, lowering the surface tension of the conducting airways and maintaining airflow and airway patency (keeping the airways open and expanded). Human surfactants include four known surfactant proteins, A, B, C and D. It has been established, through numerous studies, that surfactant protein B (SP-B) is essential for respiratory function.

Presently, the FDA has approved surfactants as replacement therapy only for RDS in premature infants, a condition in which infants are born too soon and thus have an insufficient amount of their own natural surfactant. The most commonly used of these approved replacement surfactants are derived from pig and cow lungs. Though they are clinically effective, they have drawbacks and cannot readily be scaled or developed to treat broader populations for RDS in premature infants and other respiratory diseases. There is presently only one approved synthetic surfactant available. However, this product does not contain surfactant proteins, is not widely used and is not actively marketed by its manufacturer.

Animal-derived surfactant products are prepared using a chemical extraction process from minced cow and pig lung. Because of the animal-sourced materials and the chemical extraction processes, there is a potential for significant variation in production lots and, consequently, product quality specifications must be broad. In addition, the protein levels of these animal-derived surfactants are inherently lower than the protein levels of native human surfactant. The production costs of these animal-derived surfactants are high, relative to other analogous pharmaceutical products, generation of large quantities is severely limited and these products cannot readily be reformulated for aerosol delivery to the lungs.


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Our precision-engineered surfactant product candidates, including Surfaxin, are engineered versions of natural human lung surfactant and contain a humanized peptide, sinapultide. Sinapultide is a 21 amino acid protein-like substance that is designed to closely mimic the essential attributes of human surfactant protein B (SP-B), the surfactant protein that is most important for the proper functioning of the respiratory system. Our products have the ability to be precisely formulated, either as a liquid instillate, aerosolized liquid or dry powder, to address various medical indications.

We believe that our engineered precision-engineered surfactant can be manufactured in sufficient quantities, in more exact and consistent pharmaceutical grade quality, less expensively than the animal-derived surfactants and has no potential to cause adverse immunological responses in young and older adults, all important attributes for our products to potentially meet significant unmet medical needs. In addition, we believe that our engineered precision-engineered surfactants might possess other pharmaceutical benefits not currently found with the animal surfactants such as longer shelf-life, reduced number of administrations to the patient’s lungs and elimination of the risk of animal-borne diseases including the brain-wasting bovine spongiform encephalopathy (commonly called “mad-cow disease”).

Aerosolized Surfactant Formulations

Many respiratory diseases are associated with an inflammatory event that causes surfactant dysfunction and a loss of patency of the conducting airways. Scientific data support the premise that the therapeutic use of surfactants in aerosol form has the ability to reestablish airway patency, improve pulmonary mechanics and act as an anti-inflammatory. Surfactant normally prevents moisture from accumulating in the airways’ most narrow sections and thereby helps maintain the patency of the conducting airways.

We are currently developing aerosolized formulations of our precision-engineered surfactant to potentially treat patients who could benefit from surfactant-based therapy to improve lung function and maintain proper airflow through the respiratory system. Our aerosol development program is initially focused on surfactant-based therapy to treat premature infants in the NICU suffering from neonatal respiratory failure and for hospitalized patients suffering from severe acute asthma or Acute Lung Injury. In addition, we believe that scientific rationale supports the development of aerosolized formulations of our precision-engineered surfactant to potentially treat COPD, sinusitis, rhinitis, sleep apnea and otitis media (inner ear infection).

The aerosolized formulations of our precision-engineered surfactant that we are currently developing are intended to be administered using various aerosol devices and, to date, we have achieved the following important development objectives:

—	full retention of the surface-tension lowering properties of a functioning surfactant necessary to restore lung function and maintain patency of the conducting airways;

—	full retention of the surfactant composition upon aerosolization;

—	drug particle size suitable for deposition in the deep-lungs;

—	delivery rates to achieve therapeutic dosages in a reasonable time period; and

—	reproducible aerosol output and minimal waste of surfactant dose.


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SURFACTANT THERAPY FOR RESPIRATORY MEDICINE

Products for Neonatal Intensive Care Indications

Surfaxin for Respiratory Distress Syndrome in Premature Infants

RDS is a condition in which premature infants are born with an insufficient amount of their own natural surfactant. In most cases, premature infants born prior to 32 weeks gestation have not fully developed their own natural lung surfactant and therefore need treatment to sustain life. This condition often results in the need for the infant to undergo Surfactant Replacement Therapy or mechanical ventilation. RDS is experienced in approximately half of the babies born between 28 and 32 weeks gestational age. The incidence of RDS approaches 100% in babies born less than 26 weeks gestational age. Surfaxin is the first precision-engineered, protein B-based agent that mimics the surface-active properties of human surfactant. To treat premature infants suffering from RDS, surfactants, including Surfaxin, are delivered in a liquid form and injected through an endotracheal tube (a tube inserted into the infant’s mouth and down the trachea).

In April 2004, we filed an NDA with the FDA for the approval of Surfaxin in the United States for the prevention of RDS in premature infants. In June 2004, the FDA announced that it had accepted our NDA , granted a Standard Review designation to the NDA and established a target date of February 13, 2005, for completion of the review of the NDA . The NDA was based on the successful results obtained from the completion of both a landmark, pivotal Phase 3 clinical trial and a supportive Phase 3 clinical trial of Surfaxin for the treatment of RDS in premature infants. In October 2004, t he European Medicines Evaluation Agency validated our Marketing Authorization Application that we filed previously for clearance to market Surfaxin for the same indication in Europe. This validation indicated that the Marketing Authorization Application was complete and that the review process had begun.

Our pivotal Phase 3 trial enrolled 1,294 patients and was designed as a multinational, multicenter, randomized, masked, controlled, prophylaxis, event-driven, superiority trial to demonstrate the safety and efficacy of Surfaxin over Exosurf ^® , an approved, non-protein containing synthetic surfactant. Survanta ^® , a cow-derived surfactant and the leading surfactant used in the United States, served as a reference arm in the trial. Key trial results were assessed by an independent adjudication committee comprised of leading neonatologists and pediatric radiologists. This committee provided a consistent and standardized method for assessing critical efficacy data in the trial. An independent Data Safety Monitoring Board (DSMB) was responsible for monitoring the overall safety of the trial and no major safety issues were identified. In accordance with the study’s trial design, we continue to conduct six and twelve month clinical follow-up on all enrolled patients.

The supportive, multinational Phase 3 clinical trial enrolled 252 patients and was designed as a non-inferiority trial comparing Surfaxin to Curosurf ^® , a porcine (pig) derived surfactant and the leading surfactant used in Europe. This trial demonstrated the overall safety and non-inferiority of Surfaxin to Curosurf. In accordance with the study’s trial design, we continue to conduct six and twelve month clinical follow-up on all enrolled patients.


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There are over 3,000,000 premature infants born annually worldwide. More than 850,000 of these premature infants are considered “very low birth weight” infants (less than 1,250 grams), of which approximately 700,000 are considered at significant risk for RDS. Due to limitations associated with the animal-derived surfactant products that are currently approved to treat RDS in premature infants, access to such therapy is mainly limited to the approximately 170,000 very low birth weight infants born in the United States, Western Europe and Japan. This results in hundreds of thousands of premature infants born in the world each year who need, but do not receive, effective Surfactant Replacement Therapy.

The FDA has granted us Orphan Drug Designation for Surfaxin for RDS. Orphan drugs are pharmaceutical products that are intended to treat diseases affecting fewer than 200,000 patients in the United States. The Office of Orphan Product Development of the FDA grants certain advantages to the sponsors of orphan drugs including, but not limited to, seven years of market exclusivity upon approval of the drug, certain tax incentives for clinical research and grants to fund testing of the drug. Most recently, the Commission of the European Communities has designated Surfaxin as an Orphan Medicinal Product for the prevention and treatment of RDS in premature infants. This designation allows us exclusive marketing rights for Surfaxin for indications of RDS in Europe for 10 years (subject to revision after six years) following marketing approval by the European Medicines Evaluation Agency. In addition, the designation enables us to receive regulatory assistance in the further development process of Surfaxin, and to access reduced regulatory fees throughout its marketing life.

Surfaxin for the Prevention of Bronchopulmonary Dysplasia

BPD is a serious form of chronic lung disease that is associated with the prolonged use of mechanical ventilation and oxygen supplementation. Babies with BPD suffer from abnormal lung development and typically have a need for respiratory assistance, often times, for many months, as well as comprehensive care spanning multiple years. There are presently no approved drugs for the treatment of BPD .

We expect to initiate a Phase 2 clinical trial of Surfaxin for the prevention of BPD by the end of 2004 with enrollment beginning in January 2005. Surfaxin, in its pivotal, landmark, multinational Phase 3 clinical trial for the prevention of RDS in premature infants, demonstrated statistical benefit in the reduction of BPD compared with another approved surfactant. We believe that Surfaxin is the first surfactant that has been able to demonstrate such a statistical benefit in comparison to another surfactant.

Aerosolized Surfactant Replacement Therapy for Premature Infants

Serious respiratory problems are some of the most prevalent medical issues facing premature infants in Neonatal Intensive Care Units. On top of the approximately 700,000 premature infants born annually worldwide at risk for RDS, there are another approximately 1,000,000 premature infants, 300,000 of which are in the United States and Europe, born annually at risk for a range of other respiratory problems associated with surfactant dysfunction. These infants are usually at a birth weight greater than 1,250 grams and neonatologists generally try to avoid mechanically ventilating these patients because doing so requires intubation (the highly invasive process of inserting a breathing tube down the patient’s trachea). This reluctance is due to the perceived risks by many neonatologists regarding the intubation of these larger babies, such as the risk of trauma and infection, and the need for paralytic agents and sedation. As a result, many neonatologists will only intubate in cases of severe respiratory disease, where the benefits clearly outweigh the risks. We believe that there is growing recognition by the neonatal medical community for the potential utility of a non-invasive method of delivering Surfactant Replacement Therapy to treat premature infants suffering from respiratory disorders including BPD, bronchiolitis, acute hypoxia, pneumonia, and transient tachypnea.


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We are preparing a Phase 2 clinical trial which we expect to initiate by the end of 2004, with enrollment beginning in January 2005, using aerosolized Surfactant Replacement Therapy with nasal continuous positive airway pressure (nasal CPAP) as a non-invasive means to potentially treat premature infants in Neonatal Intensive Care Units suffering from neonatal respiratory failure.

Surfaxin for Meconium Aspiration Syndrome in Full-Term Infants

Meconium Aspiration Syndrome is an inflammatory condition in which full-term infants are born with meconium in their lungs that depletes the natural surfactant in their lungs. Meconium is a baby’s first bowel movement in its mother’s womb and, when inhaled, Meconium Aspiration Syndrome can occur. Meconium Aspiration Syndrome can be life-threatening as a result of the failure of the lungs to absorb sufficient oxygen. There are no approved therapies for this condition and the standard of care principally consists of mechanical ventilation. Surfaxin has been shown to not only remove inflammatory and infectious infiltrates from the lungs when using our proprietary lavage (or “lung wash”) but to also replenish the vital surfactant levels in the babies’ lungs.

We are conducting a Phase 2 clinical trial of our proprietary Surfaxin lavage in up to 60 full-term infants for use as a prophylactic or early treatment for patients who are at risk of developing Meconium Aspiration Syndrome but have not shown symptoms of compromised respiratory function. Surfaxin is administered as a liquid bolus through an endotracheal tube as well as by our proprietary lavage (“lung-wash”) technique. We believe an effective and affordable surfactant prophylactic therapy could significantly lower the risk to meconium-stained infants of chronic respiratory conditions and reduce the need for costly and invasive mechanical ventilation.

There are presently no drug therapies approved for the treatment of Meconium Aspiration Syndrome in full-term infants and we believe that Surfaxin is the only product being developed worldwide to treat this syndrome. An estimated 60,000 infants are born in the United States and Europe that require treatment for Meconium Aspiration Syndrome, however, a significantly greater number of infants are born worldwide each year at risk. The FDA has granted us Fast-Track Status and Orphan Drug Designation for Surfaxin in this indication. We have also received orphan medical product designation of Surfaxin for this indication from the European Medicines Evaluation Agency .


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Products for the Critical Care Unit and other Hospital Settings

Surfaxin for Acute Respiratory Distress Syndrome in Adults

ARDS is a life-threatening disorder for which no approved therapies exist anywhere in the world. It is characterized by an excess of fluid in the lungs and decreased oxygen levels in the patient. One prominent characteristic of this disorder is the destruction of surfactants naturally present in lung tissue. The conditions are caused by illnesses including pneumonia and septic shock (a toxic condition caused by infection) and events such as smoke inhalation, near drowning, industrial accidents and other traumas.

We are currently conducting a Phase 2 open-label, controlled, randomized, multi-center clinical trial of Surfaxin for the treatment of adults with ARDS. On December 7, 2004, we announced encouraging preliminary data from this trial and that we were modifying the trial protocol to allow for increased enrollment of up to 160 patients.

The Phase 2 trial is designed to compare the safety and efficacy of Surfaxin to current standard of care (mechanical ventilation only). In the trial, Surfaxin is administered to patients in a high concentration via our proprietary sequential bronchopulmonary segmental lavage technique (a “lung wash” where Surfaxin is delivered through a tube, called a bronchoscope, to each of the 19 to 20 segments of the lung), which is intended to cleanse and remove inflammatory substances from the lungs, while approximately one-half of the Surfaxin remains to help re-establish the lung’s capacity to absorb oxygen. In addition to the Surfaxin lavage, the Surfaxin patients may also receive up to two boluses of Surfaxin. The objective is to restore functional surfactant levels and to allow critically ill patients to be removed from mechanical ventilation sooner. The primary endpoint of this trial is the incidence rate of patients being alive and off mechanical ventilation at Day 28. Key secondary endpoints include mortality at the end of Day 28 and safety and tolerability of Surfaxin and the bronchoscopic lavage procedure. The Phase 2 trial is expected to be completed by the fourth quarter of 2005.

The current standard of care for ARDS includes placing patients on mechanical ventilators in intensive care units at a cost per patient of approximately $8,500 per day, typically for an average of 21 to 28 days. There are estimated to be between 150,000 and 200,000 adults per year in the United States suffering from ARDS with similar numbers afflicted in Europe. Because there are no approved treatments for these diseases, the mortality rate can range from 30% to 40%.

The FDA has granted us Fast-Track Status and Orphan Drug Designation for Surfaxin for the treatment of ARDS in adults. The European Medicines Evaluation Agency has granted us orphan medical product designation for Surfaxin for the treatment of Acute Lung Injury in adults (which in this circumstance is a larger patient population that encompasses ARDS). We were awarded and received a $1 million Fast-Track Small Business Innovative Research Grant by the National Institutes of Health to develop Surfaxin for the treatment of ARDS and Acute Lung Injury in adults.


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Aerosolized Surfactant (development name DSC 104) for Severe, Acute Asthma

Asthma is a common disease characterized by sudden constriction and inflammation of the lungs. Constriction of the upper airway system occurs when the airway muscles tighten while inflammation is a swelling of the airways usually due to an allergic reaction caused by an airborne irritant. Both of these events cause airways to narrow and may result in wheezing, shortness of breath and chest tightness. Several studies have shown that surfactant damage and dysfunction is a significant component of asthma -- airway constriction occurs when there is a surfactant dysfunction in the airways of the deep lung of the type that develops during an asthma attack. We believe that Surfactant Replacement Therapy has the potential to relieve the constriction in the airways associated with asthma.

According to information provided by the American Lung Association, asthma afflicts more than 20,000,000 people in the United States and its incidence rate continues to rise. Asthma is a chronic disease; it is prevalent in people of all ages and an estimated 12,000,000 people have experienced an asthma attack within the past year. In the United States alone, there are roughly 1,000,000 hospital outpatient visits, approximately 1,800,000 emergency room visits and 9,300,000 physician visits each year due to asthma. Asthma ranks within the top 10 prevalent activity-limiting health conditions costing $14 billion in United States healthcare costs annually.

Asthma may require life-long therapy to prevent or treat episodes. Ten percent of patients are considered severe asthmatics and require moderate to high doses of drugs. Currently available asthma medications include inhaled and oral steroids, bronchodilators and leukotriene antagonists. Bronchodilators cannot be used to control severe episodes or chronic, severe asthma. Oral steroids can cause serious side effects when used for prolonged periods and, thus, are typically limited to severe asthmatic episodes and chronic, severe asthma. We believe that supplying surfactant as an inhaled aerosol may relieve airway obstruction in the deep lung and lead to a more rapid improvement in asthmatic symptoms.

We recently completed a Phase 1b clinical trial to evaluate the safety and lung tolerability and deposition characteristics of our precision-engineered lung surfactant, delivered as an inhaled aerosol to treat individuals who suffer from asthma. This masked, placebo-controlled, randomized, Phase 1b study included six healthy subjects and eight mild-persistent asthmatic patients. Results demonstrated that DSC-104 was safe and well tolerated, did not induce bronchospasm and was deposited to both the central and peripheral regions of the lungs in the mild-persistent asthmatic group and the healthy volunteers. We are presently preparing a Phase 2 clinical trial which we expect to initiate in the first half of 2005 for patients with moderate to severe asthma (development name DSC-104).

Aerosolized Surfactant for Acute Lung Injury

Acute Lung Injury is associated with conditions that either directly or indirectly injure the air sacs of the lung. Acute Lung Injury is a syndrome of inflammation and increased permeability of the lungs with an associated breakdown of the lungs’ surfactant layer. The most serious manifestation of Acute Lung Injury is ARDS.


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Among the causes of Acute Lung Injury are complications typically associated with certain major surgeries, mechanical ventilator induced lung injury (often referred to as VILI), smoke inhalation, pneumonia and sepsis. There are an estimated 1 million patients at risk in the United States for Acute Lung Injury annually and there are no currently-approved therapies.

We are evaluating aerosolized formulations of our precision-engineered surfactant to potentially treat Acute Lung Injury. We believe that our proprietary precision-engineered aerosol surfactant may be effective as a preventive measure for patients at risk for Acute Lung Injury. This prophylactic approach may result in fewer patients requiring costly intensive care therapy, thereby eliminating long periods of therapy and offering cost savings in the hospital setting.

Restructured Commercialization Arrangements

Quintiles

In November 2004, we reached an agreement with Quintiles Transnational Corp. to restructure our business arrangements and terminate our commercialization agreements for Surfaxin in the United States. We will now have full commercialization rights for Surfaxin in the United States. Under the commercialization agreement we entered into with Quintiles in 2001, Quintiles and its affiliates would have provided commercialization services for seven years post-launch, with an obligation to fund such services up to $10 million per year. Such services included the hiring and training by Quintiles of a dedicated United States sales force for Surfaxin that would have been branded as Discovery’s sales force in the market. Quintiles was entitled to a commission on net sales in the United States of Surfaxin for the treatment of RDS and Meconium Aspiration Syndrome for 10 years following launch. Pursuant to the restructuring, Quintiles is no longer obligated to provide any commercialization services and our obligation to pay a commission on net sales in the United States of Surfaxin for the treatment of RDS and Meconium Aspiration Syndrome to Quintiles has been terminated. In addition, we have entered into a three-year limited preferred-provider arrangement with Quintiles. See “Risk Factors - We currently have a limited sales and marketing team and, therefore, must develop a sales and marketing team or enter into distribution arrangements and marketing alliances to successfully commercialize Surfaxin or our other potential products, which could require us to give up rights to such products. Our limited sales and marketing experience may restrict our success in commercializing our product candidates. ”

In connection with obtaining full commercialization rights for Surfaxin, we have entered into a warrant agreement pursuant to which we issued to QFinance, Inc., a Quintiles affiliate, a warrant to purchase 850,000 shares of our common stock at an exercise price equal to $7.19 per share. The warrant has a 10-year term and is exercisable for total proceeds equal to approximately $6 million in cash (or as an offset to cancel indebtedness of the Company to PharmaBio Development, Inc., Quintiles’ strategic investment affiliate, in connection with the existing secured revolving credit facility of $8.5 million. We expect to take a charge against earnings equal to approximately $4 million for the fourth quarter of 2004 in connection with the issuance of such warrant. The existing secured revolving credit facility of $8.5 million with PharmaBio will remain available to us and the original maturity date of December 10, 2004, is now extended until December 31, 2006. Amounts to be drawn down under the credit facility will remain available up to the date of the commercial launch of Surfaxin .


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Esteve

On December 3, 2004, we restructured our strategic alliance with Laboratorios del Dr. Esteve S.A. for the development, marketing and sales of our products in Europe and Latin America. In this restructuring, we regained full commercialization rights for our Surfactant Replacement Therapies, including Surfaxin for RDS and ARDS in Central America, South America and most countries in Europe. Esteve retained the commercialization rights for Andorra, Greece, Italy (including the Republic of San Marino and the Vatican City), Portugal, and Spain. Under the restructured collaboration, Esteve will pay us a transfer price on sales of Surfaxin and our other Surfactant Replacement Therapies that is increased from those provided for in our previous collaborative arrangement. We will be responsible for the manufacture and supply of all of the covered products and Esteve will be responsible for all sales and marketing in the revised territory.

Esteve has also agreed to pay us stipulated cash fees upon our achieving certain milestones, primarily upon marketing regulatory approvals for the covered products. In addition, Esteve has agreed to contribute to Phase 3 clinical trials for the covered products, by conducting and funding development performed in the revised territory.

In consideration for regaining commercial rights in the restructuring, we issued to Esteve 500,000 shares of common stock for no cash consideration and granted to Esteve rights to additional potential Surfactant Replacement Therapy products in our pipeline. We expect to take a charge against earnings equal to approximately $4.2 million for the fourth quarter of 2004 in connection with the issuance of such shares. We also agreed to pay to Esteve 10% of cash up-front and milestone fees that we receive in connection with any future strategic collaborations for the development and commercialization of Surfaxin for RDS, ARDS or certain of our other Surfactant Replacement Therapies in the territory for which we had previously granted a license to Esteve. Any such up-front and milestone fees that we may pay to Esteve are not to exceed $20 million in the aggregate.

CORPORATE INFORMATION

Surfaxin ^® is our trademark. This prospectus may also include product names, trademarks and trade names of other companies, which names are the exclusive property of the holders thereof.

Our executive offices are located at 2600 Kelly Road, Warrington, Pennsylvania 18976. Our telephone number is (215) 488-9300 and our facsimile number is (215) 488-9301.