Zonagen is dead meat.
asensio.com
STRONG SELL RECOMMENDATION
November 18, 1997
ZONAGEN, INC. ("ZONA" - OTC)
Current Price: $ 34 7/8
Fully Diluted Shares: 12.8 million (1)
52-Week Trading Range: $45 3/4-$7 1/2
1996 EPS: ($1.92)
Trailing 12-Month Loss: ($2.60)
1995 EPS: ($1.11)
Est. 1998 Loss: ($3.00)
1994 EPS: ($1.07)
(1) Includes options, warrants and Convertible Preferred Stock.
SUMMARY AND RECOMMENDATION
Zonagen, Inc. ("Zonagen" or the "Company") is a 10-year-old "development stage company" with a market value in excess of $ 446 million. This market value is mostly, if not entirely, dependent on projected sales of its "product candidate," Vasomax. Vasomax is an oral formulation (a pill) of a 45-year-old generic drug, phentolamine, that is under investigation by the Company as a possible treatment for erectile dysfunction ("ED"). Zonagen has neither filed a New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for Vasomax, nor does it have a patent on a phentolamine pill. Clinical studies have shown that phentolamine is not effective in treating ED. Phentolamine is Vasomax's only active ingredient.
Based on Zonagen's clinical trial results, we believe that Vasomax will never be approved by the FDA as an oral treatment for organic ED. However, even if Zonagen is allowed to sell phentolamine as a treatment for psychogenic ED, we believe Vasomax has no commercial value. Vasomax's only active ingredient is a generic drug. Pfizer, Inc. is reported to have spent approximately $400 million to develop Viagra, its newly developed oral ED drug. Viagra has received FDA expedited review status. Viagra has shown far greater efficacy than that demonstrated by Vasomax's very own highly controversial trials. Zonagen bought its Vasomax rights for less than $300,000. We know of no economic or scientific competitive advantage for Zonagen or Vasomax in the ED market. It is absurd to claim Vasomax will take any share from Viagra.
Excluding cash, Zonagen possesses no valuable asset. We believe the only possible explanations for the Company's excessive stock prices are management's misrepresentations about Vasomax's test results, patent protection and sales potential. Therefore we see little, if any, terminal value for Zonagen's shares. We see no reason to buy or hold Zonagen shares and strongly recommend that the shares be sold.
COMPANY BACKGROUND
Zonagen was founded to develop an alternative to the surgical spaying of cats and dogs. Based on the prospects for a "genetically engineered vaccine that could replace surgical spaying," Zonagen was able to arrange a IPO through Reich & Company, Inc. Zonagen never developed or sold any such product. On April 14, 1994, Zonagen acquired certain rights related to phentolamine from Dr. Adrian Zorgniotti and Gamogen, Inc. Zonagen owns no pharmaceutical manufacturing capacity. As of September 30, 1997, Zonagen had accumulated losses of over $41.4 million. These losses have been funded through a series of stock offerings. Zonagen has never received approval or announced a filing of an NDA for any drug.
DESCRIPTION OF ZONAGEN'S PATENT
Zonagen does not possess a patent on the Vasomax formulation. In fact, Zonagen does not own a patent on either phentolamine or an oral phentolamine pill. Zonagen acquired Dr. Adrian Zorgniotti's "method-of-use" patent (U.S. Patent number: 5,565,466) for the "transmucosal, transdermal, intranasal, and rectal" administration of phentolamine as a treatment for ED. Zonagen obtained this right from Dr. Zorgniotti and Gamogen, Inc. for $100,000 in cash, 19,512 shares (closing price on April 12, 1996 was $10.25) and a royalty agreement. The Zorgniotti patent is Zonagen's only ED related patent.
The Zorgniotti patent is not relevant to Zonagen's "impotence pill" business. On the contrary, the Zorgniotti patent specifically describes the drawbacks associated with oral administration of a drug in an attempt to effect delivery to a specific site. Zonagen filed a separate patent application in 1995 to cover the formulation and delivery of oral phentolamine. To date, Zonagen has not disclosed whether the claims made in this second patent application have been allowed. The patent is still pending. In any case, we see no value in a patent on a phentolamine pill for the treatment of impotence since the drug is a generic and has been repeatedly shown to be ineffective.
ANALYSIS OF TRIAL RESULTS
We studied eight separate clinical studies in four different countries that have been conducted on phentolamine and Vasomax. These included Zonagen's German, Mexican and U.S. clinical studies. None of Zonagen's studies have ever been publicly disclosed in their entirety. Neither has Zonagen nor any of its investigators ever published complete medical papers for peer review. This failure to make full disclosure of its studies makes it difficult for investors and the medical community to assess the validity of Zonagen's trial result claims.
In an SEC filing of a Form S-3 dated November 14, 1996, Zonagen has acknowledged that its own Phase II clinical trial results had no statistical significance. Yet Zonagen now claims that its Phase III trials (which used the same Vasomax formulation used in its Phase II trials) showed statistically significant positive results. We do not agree with Zonagen's interpretation of its Phase III trial results. We found the Phase III trials to be flawed in design and execution. Furthermore, the materials we studied, which includes all of the limited information Zonagen has disclosed about its clinical trials, clearly indicate that Vasomax is not an effective treatment for organic ED.
Zonagen changed the primary endpoint from one trial to the next. In its failed Phase II trial, the endpoint was penetration. The FDA accepted penetration as an endpoint for Vivus, Inc., Schwarz Pharma A.G. and Pharmacia & Upjohn, Inc. ED treatment trials. In its Phase III trials, Zonagen did not use penetration as the endpoint. Furthermore, in its Phase III trials Zonagen altered the type of patients it allowed to enroll, and the method of reporting results. This deeply changed the results and makes the data incomparable among the different trials. Finally, these tainted Vasomax results were then compared to a placebo, as opposed to any other known FDA approved treatments. In fact, Zonagen did not even compare Vasomax against Yohimbine, an oral drug with existing ED treatment data.
Zonagen failed to disclose the number of patients enrolled in individual test centers. Positive results from a few test centers with a disproportionate number of patients can distort a trial's reported results. In fact, Dr. Raymond C. Rosen, a Zonagen consultant, reported that Zonagen's Phase II trial had "enormous variability from one study center to another" that confounded the results. This is called "center noise". We believe center noise is particularly important in Zonagen's U.S. Phase III trials because certain of its consultants and investigators have reputations for promoting experimental ED treatments being developed by small, public companies. These include Drs. Irwin Goldstein, Harin Padma-Nathan and David Ferguson. Dr. Ferguson was a Senior Vice President of Affiliated Research Centers, Inc. ("ARC") the company that helped design and implement Zonagen's U.S. clinical trials. Dr. Ferguson may have been a consultant to Zonagen while still employed by ARC, during the time ARC provided its services to Zonagen. Zonagen has issued shares of its common stock to its consultants without disclosing each individual recipient or the purpose of the payments.
Despite claiming success with its Phase III trials that were completed over five months ago, Zonagen still has not filed an NDA. Instead, the Company recently began a new U.S. trial that is larger than all its other trials combined. We believe that a study of this magnitude, given Zonagen's claims of success with the prior studies, would only have been undertaken if in fact the original Phase I, II and III trials results were inadequate to support an FDA NDA filing.
DESCRIPTION OF VASOMAX
Phentolamine, Vasomax's only active ingredient, is a generically available drug originally called Regitine, developed by Ciba-Geigy and approved by the FDA in 1952 as an injectable agent to control acute hypertension. Phentolamine has the ability to lower the blood pressure of the body when used in higher doses. Phentolamine can produce heartbeat irregularities, diarrhea, and abdominal discomfort. Partly because of its side effects profile, intravenous phentolamine is now only used in rare cases. An oral formulation of phentolamine used to treat hypertension is no longer on the market. Phentolamine is an easily manufactured, readily obtainable, inexpensive generic drug that has been repeatedly shown to be ineffective in treating ED. In fact, we found a study that showed that phentolamine is ineffective in causing erections even when injected directly into the penis.
Since 1983, urologists have been using a "back-office" mixture of three drugs (phentolamine, papaverine and prostaglandin) to induce erections when injected into the penis. This mixture referred to as "tri-mix" has demonstrated good results. However, it is important to note that clinical studies have shown that phentolamine by itself is ineffective in producing erections even when injected directly into the penis. In 1988, a study of 15 impotent patients found that 13 achieved a full erection with the drug combination of papaverine and phentolamine but only one achieved a full erection with phentolamine alone.
In its SEC filings, Zonagen has acknowledged that a formerly available oral formulation of phentolamine has had limited utility in treating ED. Despite this apparently conclusive statement, Zonagen still alleges that Vasomax is an effective ED treatment. Zonagen alleges that its pill is an effective ED treatment because of its "special formulation." However, Vasomax's alleged "special formulation" does not contain any other active ingredient. In other words, Zonagen is claiming that the same drug that is known not to be effective in causing erections when taken orally, or even when injected directly into the penis, will cause an erection if it is labeled Vasomax.
CONCLUSION
Zonagen is by all economic and financial measures grossly overvalued. We believe that this is a result of Zonagen's highly selective disclosures concerning its Vasomax test results, promotion of its future prospects and failure to disclose material negative information. We believe that Zonagen's management has consistently misled investors about Vasomax's NDA filing deadlines, product efficacy and patent position. We see no possible realistic outcome that can justify Zonagen's current stock price. We believe that there is no legitimate support for Zonagen's market value and expect the shares to soon trade well below $5 per share. |
