Stock Regulators Urge Caution
On Firms' Anthrax Promises
By AARON ELSTEIN
THE WALL STREET JOURNAL ONLINE
There's a new anthrax warning, but this one comes from securities regulators.
Since terrorists unleashed the potentially lethal bacteria, which has caused four deaths and 18 known cases of infection, a number of companies have stepped forward with purported ways to prevent mail contamination.
While some of these approaches may be legitimate, securities-industry regulators warn that investors should view such claims skeptically. Many companies claiming their products can address the anthrax threat have thinly traded stocks that aren't followed by Wall Street or medical experts who could verify their claims. And some are attracting attention via promoters on the Internet, who get paid to recommend shares and often stand to profit when they rise.
"As sure as the sun will rise tomorrow, you can bet that there are promoters taking advantage of current events," says Brad Skolnik, Indiana securities commissioner and chairman of the North American Securities Administrators Association's enforcement section. "Be wary, that's all I suggest."
Nasdaq Stock Market regulators have already halted trading in a small Long Island consulting company, eSafetyWorld.
Its shares more than quadrupled after it said it would introduce a new product to combat anthrax sent through the mail. The device amounts to a sealed box with rubber gloves attached.
And shares in a small Maine company, ImmuCell, soared when investors got word that its treatment to wipe off cow teats could be used to treat anthrax. But the company says the product hasn't been independently tested to see if it is effective against anthrax.
Investment pros say only one company to date has won a government contract to address the anthrax threat: SureBeam, a unit of longtime Pentagon contractor Titan. The U.S. Postal Service is paying $40 million for SureBeam to make at least eight devices to sanitize mail.
SureBeam shares have more than tripled since early October to as high as $16.75 on Oct. 29 on Nasdaq, though the stock has since retreated a bit. At 4 p.m. Monday, the shares settled at $13.05, up $1.60 in Nasdaq trading.
But investors counting on a profit-windfall from the contract might be disappointed. Gerard Klauer & Mattison analyst Stephen Levenson says that because Titan owns 84% of SureBeam, it will collect most of the profits from the contract. "The upside is limited for SureBeam," he says. "Titan gets the best of this."
Indeed, shares of Titan have been on a roll. They closed up 81 cents in New York Stock Exchange trading Monday at $26.25, not far off their 52-week high and more than double their 52-week low.
SureBeam, whose mainstay until lately was sterilizing medical devices, is expected to remain unprofitable through next year, even with the postal-service deal, according to a consensus of analysts surveyed by Thomson Financial/First Call. SureBeam had a third-quarter loss of $7.7 million, or 14 cents a share, and revenue of $14.5 million. That compares with a loss of $300,000, or one cent a share, and revenue of $6.5 million in the year-earlier period.
A.G. Edwards analyst Mark Jordan says that the postal-service contract could generate $14 million of profit for the company. "Of course, if the government increases the size of the contract, that changes things for SureBeam," says Mr. Jordan. "But until we know more, I don't think it's wise to make any guesses about the future." He adds that the company could be vulnerable to competitors, such as Ion Beam Applications, whose shares trade in Belgium.
As for the handful of small companies claiming to have products to treat anthrax-laced mail, analysts encourage investors to tread carefully. Such companies include Airtech International Group and Vital Living Products, whose shares are quoted on the OTC Bulletin Board, a quotation service for tiny stocks that is operated by the National Association of Securities Dealers.
"The difference between SureBeam and other companies is SureBeam says it has something to address the anthrax threat, and the government agrees," says Mr. Levenson, the Gerard Klauer analyst. "The others just say they have something."
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Consider eSafetyWorld. Its stock traded as high as $3.46 on Oct. 19, up from 62 cents on Nasdaq, the day the Bohemia, N.Y., company said that it would unveil a new product to "combat anthrax terror." The product would prevent the spread of anthrax spores by letting people open their mail using rubber gloves connected to a sealed box, the company said. It would be available in about two weeks and cost less than $500, but the company didn't say whether the product had been independently tested.
Until now, ESafetyWorld has focused on "business strategy" consulting, according to a regulatory filing. It had a net loss in the fiscal year ending June 30 of $243,000, or eight cents a share, and revenue of $385,000. That compares with a profit of $32,000, or one cent a share, and revenue of $724,000 in fiscal 2000. It reported $2.9 million of cash.
On Oct. 23, four days after the company issued the release promoting its new product, officials at Nasdaq halted trading in its stock to seek "additional information." The stock, which closed that day at $2.49, hasn't resumed trading since. ESafetyWorld said in a press release that regulators wanted a product demonstration, which was scheduled for Oct. 24.
It isn't clear if the demonstration took place. Nasdaq officials declined to comment, and company executives didn't return calls. The company said in its annual report issued Monday that it also may have violated Nasdaq regulations, such as failing to clear all press releases with Nasdaq officials prior to dissemination.
Shares of eSafetyWorld were promoted on the Web, including a site called Insidewallstreet.com2. It is run by a financial-public relations firm called Madison & Wall Worldwide Inc., based in Longwood, Fla. The firm's president, Dodi Handy, says Madison & Wall didn't prepare the press release about eSafetyWorld's purported anthrax-treatment, though it did disseminate it on the Web. ESafetyWorld paid Madison & Wall $50,000 and 30,000 restricted shares, according to Madison & Wall's Web site. ESafetyWorld also gave the firm the option to buy 200,000 additional shares at prices ranging from $10 to $16 a share.
Madison & Wall was formerly known as Continental Capital & Equity. The firm's founder and former owner, John Manion, was sentenced to 15 months in federal prison for securities fraud in September 2000. He is scheduled to be released at the end of January 2002, according to the Federal Bureau of Prisons.
Federal authorities alleged that he cheated shareholders in Legend Sports, an operator of golf courses in Florida, by paying new investors with money he had collected from previous ones. Mr. Manion's stake in his firm was acquired by management, and he is no longer involved with Madison & Wall. "His problems weren't our problems," Ms. Handy says.
Investors have also gravitated to the shares of ImmuCell, a small Portland, Me., company. The stock nearly doubled to $5.75 on Nasdaq recently, amid local news coverage and Internet message-board chatter that its skin-sanitation product could be used to treat anthrax by rubbing it on infected areas. The company acknowledged such interest in its quarterly earnings release last week, and added that the product "is known to have broad spectrum antibacterial properties."
But ImmuCell CEO Michael Brigham says the investor enthusiasm is premature. While it's true that one of his company's products has been found to effective against some kinds of bacteria, he says no tests have been made to see whether it would be effective in treating anthrax. Currently, he says, the skin-sanitation product is used by dairy farmers to clean cows' teats before milking them.
"We got caught up in the wave of hype," Mr. Brigham says. Shares of ImmuCell closed Monday at $3.49, down one cent.
Write to Aaron Elstein at aaron.elstein@wsj.com3
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