from Kate Wellings editorial:
Talk about a bitter pill. We're referring, of course, to the news that Redux and related diet drugs, which over the last year had been embraced by millions of dieters, were being yanked from the market because of reports of potentially fatal cardiac complications.
Only two weeks after the Food and Drug Administration urged a "voluntary" recall, there is speculation that damage claims from the six million or so Americans who've taken Redux or its chemical cousin, Pondimin, could easily top the $4 billion awarded in breast implant cases.
To be sure, reports of what appear to be serious adverse reactions are a far cry from the results of controlled scientific studies.
A point made in no uncertain terms last week by a spokesman for the closely held French drug house Les Laboratoires Servier SA, which discovered both diet compounds. Servier, which has sold both dexfenfluramine, or Redux, and fenfluramine (Pondimin) to some 70 million people in 85 countries over the past 35 years, has not taken its drugs off the market, but merely suspended their sale as an "extreme precaution." Calling the recall "a catastrophe for obese patients everywhere," a Servier spokesman contended that more research would demonstrate the diet pills' safety.
In this country, Interneuron Pharmaceuticals, the little Boston-based holding company that Servier licensed to make and market Redux here (and which was selling the diet drug alongside its sublicensee, American Home Products), was considerably more circumspect. Still, it took pains to point out that while it did the "prudent" thing in withdrawing Redux, it was far from convinced that its drug was to blame for reported heart-valve problems. For its part, American Home Products likewise stressed that the recall was based on only preliminary information.
Nonetheless, shares of AHP quickly sank from around 77 to below 70, wiping out around $4.5 billion from what had been a $50 billion market capitalization. Interneuron Pharmaceuticals, meanwhile, saw its own share price slashed by about one-third, whittling its market cap by some $250 million, to $500 million.
It's the disparity in those hits that's striking. To be sure, American Home Products has, as liability lawyers love to put it, "deep pockets." But diet pills were scarcely its whole shtick. Descriptions of the global company's many and varied pharmaceutical offerings fill literally pages and pages of the venerable Physician's Desk Reference. Moreover, its June 30 balance sheet lists around $1 billion in cool cash and something approaching $8 billion in stockholders' equity.
By comparison, Interneuron's pockets are quite shallow. Its June 30 balance sheet does boast almost $152 million in cash, and shows stockholders' equity as just under $125 million. But those sums are far more reflective of management's money-raising acumen (Interneuron's majority shareholders are brokerage firm D.H. Blair founder J. Morton Davis and his family, along with various trusts; its chairman, Dr. Lindsay Rosenwald, is Morton's son-in-law) than any demonstrated ability to generate product revenues, much less profits.
To be sure, buoyed by the explosive growth in its royalties on AHP's sales of Redux, as well as its own efforts to peddle the pills, Interneuron's revenues surged to $54.9 million for the fiscal nine months ended June 30, from only $8 million the year earlier. Alas, it still didn't earn any money. In fact, it lost more than the year before. And, since virtually all of those revenues were derived from sales of the now-recalled diet drug, its revenues, for the foreseeable future, will likely be slim, indeed.
When we touched base with Interneuron's designated spokesman recently, he noted that the company's shares have held up "pretty well" despite the recall. In part, he ventured, because analysts had started scaling back their expectations for Redux in July, when the first reports of the heart problems made the headlines and sales hit the skids. But mostly because "even before the recall, the focus of the investment community was really on our products for stroke, congestive heart failure, anxiety and panic."
Now, those may be wonderfully promising compounds, but none of the four is anywhere close to coming to market. What's more, the Redux revenues with which Interneuron was planning to fund much of its continuing research on the compounds have evaporated.
More worrisome still for shareholders are revelations that emerge from a close reading of Interneuron's financial documents. Specifically, Interneuron was so eager to get Redux to market that it agreed to indemnify virtually every other company involved in the drug's manufacture and marketing from product liability claims.
Or, as a prospectus Interneuron filed in February puts it: "The company is required to indemnify Servier, Boehringer [its contract manufacturer for Redux] and American Home Products against claims, damages, liabilities in connection with Redux under certain circumstances."
Interneuron's spokesman refused to discuss what those "certain circumstances" might be.
But exhibit 10.78, attached to Interneuron's 1995 10K, is a copy of the company's contract manufacturing agreement with Boehringer. In it, Interneuron indemnifies the manufacturer "from any claim for product liability arising from the use of the product" as long as it made Redux according to spec. What's more, the agreement provides that "Interneuron shall reimburse Boehringer for any provable damages incurred by Boehringer resulting from a recall, stop sale or governmental action."
Another exhibit, 10.83, is a copy of the co-promotion agreement between Interneuron and AHP's Wyeth-Ayerst Laboratories unit, filed with the June 1996 10Q. In it, Wyeth indemnifies Interneuron from claims, liabilities, etc., "unless such claims arise from a manufacturing or design defect of Redux," and Interneuron cross-indemnifies Wyeth from any claims, liabilities, etc., "including a manufacturing or design defect of Redux." (Emphasis added)
Exhibit 10.12, filed with Interneuron's amended registration statement on Feb. 13, 1990, is a copy of the patent and know-how license agreement between it and Servier. "Licensee [Interneuron] ... shall indemnify and hold licensor harmless against claims made or lawsuits instituted against Licensor, judgments thereon, and against any and all liability, damages, losses, costs and expenses ... with respect to product liability... ."
All contracts, of course, are subject to interpretation. And Interneuron, like American Home Products, undoubtedly has platoons of lawyers studying these issues. But somehow we just can't shake the notion that Redux will eventually prove the ultimate diet scheme-for Interneuron shareholders' wealth |
