VaxGen's players show self-interest can taint views
By Scott Herhold
Mercury News
Posted on Fri, Feb. 28, 2003
Behind every big drama in the stock market are dozens of cameos -- investors struggling for the entrances or the exits, managers trying to protect their options from the deluge, hedge funds looking for a way to play both sides.
In that spirit, let me introduce you to an intriguing sidebar to the meltdown early this week of VaxGen, the Brisbane company that lost more than half its value when its AIDS vaccine fell short. It's the story of the tycoon and the tout.
You know the big theme: After a long study that involved more than 5,000 people, VaxGen (VXGN) had to acknowledge Sunday night that its AIDS vaccine had failed to protect most of the subjects from infection.
What you may not know is how intimately the tycoon -- Microsoft co-founder Paul Allen -- was involved with the company, or what his departure from the stock in recent months signaled.
And unless you're a VXGN investor, you probably don't know how vigorously a newsletter writer named Porter Stansberry pushed the stock. Even as the results came in, he stayed positive, saying, ``I have remarkable news.''
The opposing directions taken by these two men can teach investors a fundamental lesson: Self-interest bends our point of view.
Take the tycoon first. Through his investment arm, Vulcan Ventures, Paul Allen was an early investor in VaxGen, which spun off from the better-known Genentech in the early '90s. In December, 1999, after VXGN had already gone public, Allen stepped up his investment in a big way, putting $25 million into the company to fund its AIDS research. At $11.50 a share, he bought nearly 2.2 million shares. By mid-2000, he owned more than 20 percent of the company. A Vulcan Ventures biotech analyst, Ruth Kunath, took a board seat.
But over the past year, Allen has edged away almost completely from VaxGen. Kunath quit the board in mid-2002. And by the end of 2002, Allen had only 664,682 shares left, shares he filed to sell by the end of January. (While SEC records don't indicate those sales were completed, you can assume they were.)
Newsletter writer Stansberry, meanwhile, was headed in the opposite direction. On his site, Pirateinvestor.com, he's been bullish on VaxGen for at least two years. In January, about the time Allen was bailing, he sent out a note urging investors to buy his newletter (special price: $74.50) detailing his research on the AIDS vaccine.
Although he didn't mention VaxGen by name, it was clear Stansberry was describing the company when he said, ``I've uncovered a business currently worth $250 million that will soon be worth several billions. . . . In a matter of weeks, this stock will skyrocket when a story about it appears in the Wall Street Journal.''
In fact, much the opposite happened. But even as VaxGen was announcing its disappointing results Sunday night, Stansberry refused to surrender. Noting seemingly hopeful numbers among Asians and blacks, he concluded, ``AIDSVAX seems to work.''
So whom to follow, the tycoon or the tout? At a glance, you'd say Allen in a heartbeat. And you'd be right, though the record is mixed. Over time, Stansberry has picked a number of winners. And Allen has taken some notorious losses, particularly in cable and fiber optics.
What makes the choice clear, however, is the context. Remember that the purpose of Allen's investment was to further the company's AIDS vaccine research. Remember, too, that he has a biotech analyst who sold her own shares. When Allen leaves, it matters. (Neither Vulcan nor Stansberry responded to requests for comment.)
The newsletter writer, meanwhile, bought into the stock himself recently, though he says the purchases came after his newsletter appeared. So it's safe to assume he had a vested interest in keeping VaxGen afloat even after the flood started.
Given the company's slender prospects, it's an ever grimmer task. Since Sunday, further questions have come up about VaxGen's claim of good results among some minorities. The stock finished Thursday at $4.25, down 79 percent from its January high of $19.94.
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Scott Herhold's Stocks.comment appears every Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail sherhold@sjmercury.com; phone (408) 920-5877. |
