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Government Nukes Hollis-Eden's Radiation Drug
By Will Swarts Published: March 8, 2007
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Hollis-Eden Pharmaceuticals (HEPH)
Share price as of Wednesday's close: $4.28
Share price now: $2.90
Percent change: -32.2%
Volume: 6.8 million shares, daily average 303,500
The News
Investors in Hollis-Eden Pharmaceuticals (HEPH: 2.90, -1.38, -32.2%) jammed evacuation routes Thursday after the U.S. government abruptly pulled the rug from under plans to stockpile the San Diego company's experimental treatment for radiation sickness. Shares dropped 32% by the close of trading.
The Department of Health and Human Services late Wednesday cancelled its request for proposals, a move that effectively ended prospects for Neumune, Hollis-Eden's flagship steroid compound that was being developed as a treatment for acute radiation syndrome. Early animal testing showed the drug to be effective in improving survival rates in monkeys, dogs and mice if used between four and 24 hours after radiation exposure.
Neumune was developed under the auspices of Project BioShield, a $5.6 billion government-funded program intended to harness the private sector to develop remedies to biological and nuclear terrorism threats. The drug hasn't been approved by the Food and Drug Administration, but had been tested by the Department of Defense and reduced the internal bleeding, infection and bone marrow damage caused by radiation in animals.
Richard Hollis, chief executive of Hollis-Eden, said the decision came as a complete surprise considering all communications with Health and Human Services led management to expect a contract for 100,000 doses of the drug. The company has spent $80 million to $90 million over the past four years to develop Neumune.
"This decision by HHS to exclude our proposal and cancel the RFP [request for proposals] is shocking and difficult to understand," Hollis said in a conference call Thursday afternoon. "No other rationale was provided for this decision. While we will attempt to gain a better understanding from HHS why this determination was made, we clearly met all of the very detailed requirements of the solicitation.
"With Neumune's attractive safety and efficacy profile, we are at a loss to explain why HHS would not want to procure this drug candidate for the protection of the American people. It would be more understandable if there were other medical countermeasures as far along in development with a superior profile, but given that HHS has chosen to cancel the solicitation altogether, that is clearly not the case."
Mark Wilson, a spokesman for the agency, says federal law prevents HHS from detailing its reasons for canceling the drug order. However, Hollis-Eden has the right to request a thorough debriefing from the agency.
"The department is ready to provide them with that briefing," Wilson says. "We definitely plan on issuing a new request for proposals as soon as possible. The department remains committed to purchasing products to respond to this type of threat. This is not totally scrapping the program — we are going to pursue these products, and there will be a new RFP."
Hollis said the company will soon begin clinical trials on Neumune as a potential treatment for infection. He added that within the year Hollis-Eden will also embark on the path to FDA approval with two other steroidal drugs, one for diabetes and rheumatoid arthritis, and the other for treating prostate cancer and breast cancer.
"Despite the near-term setback, our opportunities do not rest with for acute radiation syndrome alone," the CEO said.
Canaccord Adams analyst Joseph Pantginis lowered his rating on the stock to Hold from Buy on the news.
The Analysis
There are radioactive isotopes that are easier to handle than some negotiations between publicly traded companies and government bureaucracies, and Hollis-Eden learned that the hard way. The absence of further information made a lousy impression on Wall Street as well.
"We are deeply disappointed with the obscurity by which the agency makes its decisions," wrote Rodman & Renshaw analyst Navdeep Jaikaria in a note published Thursday. However, he maintained his Buy rating on the stock, saying that Hollis-Eden's scientific advances, unrelated to governmental machinations, have been significant.
"They have created tremendous value from the second-generation steroid platform," Jaikaria says, because they can harness the immunosuppressive properties of steroids without the damaging side effects. "That is obviously something of a dream."
But Hollis-Eden was concentrating on a nightmare scenario — the aftermath of a nuclear attack or an instance of nuclear terrorism — and the government response left its CEO bewildered and enraged.
"This industry in general has not participated heavily in Project BioShield," Hollis said. "There's a lack of transparency, and the ability to change the rules in the middle of the game is very disheartening. We spent four years with this drug's development, and not being told along the way what technical merits we weren't meeting would make it hard to participate in another HHS procurement process."
He said investors have every right to be disappointed, but that may prove a secondary consideration if the government effectively sidelines the most promising treatment for radiation sickness at a time when the threat of nuclear terrorism is still high.
"I have a little edge to me here — we've been focused on this technology for quite a while, and we've made incredible progress," Hollis said. "We felt that developing Neumune for the country would give the company, would give the science, the recognition it deserves. This is a setback we're not very pleased with."
Fred Ikle, a fellow at the Center for Strategic and International Studies and an expert on nuclear issues, says the BioShield project has given more weight to the threat of biological warfare than the consequences of a nuclear attack.
"If I may make a rough judgment, protection against biological warfare is farther along," he says. That's partly due to the nature of BioShield program, which must jostle for attention along with the Department of Homeland Security and the Department of Defense. "It has a lot of good features, which in my view have not been well implemented."
Pantginis, of Canaccord Adams, said HHS is a troubled agency, and that political machinations may well be playing a bigger role than pure science. The news program "60 Minutes" last January broadcast a report that said Rep. Tom Davis, a Virginia Republican, sought the removal of Project BioShield Director Stewart Simonson, a political appointee whom the congressman said showed the same sort of "arrogance" and "lack of experience" as disgraced former FEMA director Michael Brown.
"Health and Human Services is an agency that's been broken," Pantginis says. "There's been a lot of turnover there. This is not about science. This is about politics."
The Bottom Line
Biotech investors aren't strangers to the harsh extremes of fortune. Even encouraging intermediate trial results can send a company's stock through the roof, and bad news can sink a stock with equal speed and severity.
Hollis-Eden's travails in the snake pit of governmental infighting should not have been a complete surprise to investors, despite management's assurances that the process was moving along nicely.
A quick look at VaxGen (VXGN: 2.05, -0.08, -3.8%), another BioShield darling, shows that in 2004 it received an $877 million contract to develop an anthrax vaccine. Investors bid up the shares at a feverish pace. The company never delivered the vaccine, and HHS recently canceled the contract. Along the way, VaxGen managed to get itself delisted from the Nasdaq due to accounting irregularities.
Since then, Pantginis says BioShield contracts have been small, despite ample funding. Over the last 18 months, BioPort, now Emergent BioSolutions (EBS: 11.99, +0.42, +3.6%), notched a $120 million anthrax vaccine contract; Human Genome Sciences (HGSI: 10.66, +0.08, +0.8%) got a $165 million anthrax vaccine contract; and Canadian company Cangene received an anthrax vaccine contract worth $165 million and a botulism treatment contract worth $363 million.
"From day one, when Project BioShield was approved, it has never been enacted the way it was intended — which was to foster companies and give them incentives to develop responses against these threats," Pantginis says. "The company spent $80 million to $90 million on this drug that maybe will never see the light of day."
If it's possible to look past the infighting and the political fallout, Jaikaria says this is a buying opportunity for an entirely different type of investor. With a cash balance of $72 million, Hollis-Eden has sufficient funds to survive for a bit more than two years at its current burn rates, enough to push some of its drugs down a more conventional developmental pipeline.
"In our view it's a shakeup to all the people who were looking for a contract, but it allows the new investor, the long-term investor to come in," he says. "It's a true opportunity in my view."
News that HHS has sidetracked a potential treatment for an attack that remains unthinkable — but all too possible — may well result in congressional hearings and a closer look at the modest achievements of Project BioShield.
"Until then," says Pantginis, "it's time to get back to the 'normal' business of biotech." |
