Skeeter Bug, in an effort to increase the paranoia level on this thread I am posting a Barrons story about - shall we say 'shenanigans' - in the biotech area. It's a bit long, but this way those without access don't have to register. (from current issue)
Bitter Pill
As Liposome investors lose half a billion dollars, bullish
analyst heads for promising new job
Sandra Ward
One of the biggest declines on the Nasdaq stock market last week was
posted by a biotechnology outfit called Liposome, whose shares fell a stunning
60% on Wednesday to close a shade over 9 1/2. The cause of this
biotechnology disaster, like so many others, had to do with a once-promising
drug that flopped in a phase of testing deemed crucial to gaining approval from
the Food and Drug Administration. As Liposome shareholders lost $560 million
in market value Wednesday, it went almost unnoticed that on the same day,
ardent Liposome bull Marc Ostro left his post as biotechnology analyst at UBS
Securities, an arm of UBS, the Swiss banking giant. Ostro's vantage point on
Liposome was unique. Not only did he own 206,000 shares of the company,
but until 1993 he had served as Liposome's vice chairman, chief science officer
and director. What's more, in recent months Ostro had played a crucial role in
wooing styrofoam-cup magnate Kenneth Dart as an important new investor in
Liposome. Dart acquired 7.5 million Liposome shares, or 20% of the company,
and his buying had helped push the stock's price into the mid 20s - before last
week's crash, that is.
Ostro's counsel would appear to have cost Dart more than $100 million, so it
seems particularly unusual that Ostro in his new job will be working for none
other than Kenneth Dart. Ostro claims he was offered the opportunity to
become chief health-care and biotech analyst in Dart's investment outfit on
Tuesday, the day before Liposome's announcement.
``This may look kind of funny in terms of timing,'' he says. ``Everyone's going to
think one thing had to do with the other, but it didn't.''
Of course, it's possible that Dart isn't miffed with Ostro. After all, Dart could
have managed to hedge against some of his potential losses by buying puts in the
options market, giving him the right to sell Liposome shares at the high prices
they were fetching before last week's unfortunate decline. In fact, what first
attracted Barron's eye to Liposome was the rather frantic buying of Liposome
puts in recent weeks.
In an interview last week, Ostro made clear that he himself didn't hedge his
position. ``I didn't hedge, I didn't sell, I didn't short,'' said Ostro. ``I stuck with
it, and I'm going to continue to stick with it.''
It's unclear whether Dart hedged. Officials at Dart's capital-management group
in the Cayman Islands didn't return telephone calls. Ostro declined to discuss
whether Dart hedged ahead of the announcement: ``I'm not empowered to tell
you that. I won't tell you what he has done or what he plans to do.''
As a holder of more than 10% of Liposome, Dart couldn't have sold his shares
outright without first alerting the Securities and Exchange Commission. But Dart
got around the stricture in early June by buying one million shares directly from
Liposome in April and having the company inform the SEC on June 9 that at
some point he might dump all 7.5 million of his Liposome shares.
Perhaps it was a coincidence, but a few days after that filing with the SEC,
volume in Liposome options exploded. On June 11, for example, 3,000
Liposome options traded. This suggests investors could have been getting the
right to sell hundreds of thousands of Liposome shares at $20 a share or more
in July and August. In subsequent trading sessions, volume in Liposome options
remained unusually heavy. Late Friday, Barron's learned that the Chicago
Board Options Exchange had opened a routine inquiry into trading in Liposome
options.
Yet Dart's position of 7.5 million shares was so big that it seems highly unlikely
that he could have fully hedged himself using only options that are listed on
exchanges. Indeed, even using over-the-counter options, which would have
been tailored to his needs by a brokerage firm, the 7.5 million-share position
would have been difficult to fully hedge.
Dart, 42, is no stranger to high finance. In 1993, he and his investment group
bought a huge amount of Brazilian government debt at deep discounts, and the
following year he stalled a major restructuring agreement that had been worked
out for Brazil by the world's commercial banks. Dart is also the second-largest
holder of Salomon Brothers shares, behind venerated investor Warren Buffett.
And Dart caused a stir when he renounced his U.S. citizenship three years ago
and became a citizen of Belize in an effort to dodge taxes.
The drug that helped cause the huge decline in Liposome's share price
is called C-53, better known as Ventus. The hope was that Ventus
would help victims of a deadly condition known as adult respiratory
distress syndrome, or ARDs. But the results of the Phase 3 trials announced
Wednesday indicate that Ventus doesn't reduce the amount of time ARDs
victims have to spend on respirators, nor does it reduce their mortality rate.
Beyond highlighting the incredibly risky nature of investing in biotechnology
companies, Liposome's disastrous stock slide neatly illustrates a peril that is
particularly common in the biotechnology industry, where scientific knowledge is
so vital to the investment process. Specifically, we speak of the revolving doors
and cozy relationships that, in most cases, go on unbeknownst to small
investors. While Ostro's relationship to Liposome was disclosed in his research
reports, chances are slim that brokers peddling Liposome took the time to
remind each of their clients about this bit of fine print.
Then, too, take a look at the wide split that existed between the opinions on
Liposome offered by independent research firms and those that were offered by
Wall Street's major brokerage houses, the folks that make big money doing
underwritings for outfits like Liposome. Evan Sturza of Sturza's Investment
Research and Sven Borho of Mehta & Isaly have long felt that the research
protocol for Ventus was deeply flawed. Both also noted that deep-pocketed
Pharmacia & Upjohn had abandoned a similar drug for ARDs patients a
decade ago. These two analysts warned investors in recent months that buying
Liposome was extremely risky.
Analysts at the major brokerages didn't seem to feel any such qualms. Ostro at
UBS certainly didn't. Then there's David Crossen of Montgomery Securities,
who named Liposome as his ``best biotech stock pick of 1997'' and gushed that
he anticipated that ``pivotal milestones will be reached in the first half of 1997
that will override reductive or negative views of the company's prospects.'' Late
last week he admitted that he was ``dead wrong'' about Ventus's prospects, but
he remains bullish.
Crossen himself is the former chief executive of Cortech, a biotech company
that has hit the skids and trades in fractions. After leaving Cortech, he landed a
job as a biotech analyst with UBS. While Crossen was at Cortech, he came into
contact with Ostro, who had left Liposome, flopped in his effort to start a hedge
fund, and begun work as an analyst with Mabon Securities. Crossen hired
Ostro away from Mabon to work at UBS. The two worked together until
Crossen was lured away by Montgomery.
There's been speculation that Crossen might join Ostro in the Dart operation,
but Crossen says he has no such plans.
Ostro, meanwhile, says he is happy to leave Wall Street and his clients behind.
``One of the reasons I left is I just got frustrated,'' he says. ``You have to
answer to so many people . . . and everyone wants you to be right. It's an
impossible job. It's so hard to be right.''
Which leaves the biggest question unanswered: If Ostro finds it so hard to be
right, why does Ken Dart want his advice?
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