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Biotech / Medical : Zonagen (zona) - good buy? -- Ignore unavailable to you. Want to Upgrade?

To: Tokyo VD who wrote (818)	11/19/1997 2:57:00 PM
From: F. Jay Abella, III	Read Replies (2) \| Respond to of 7041

You all may be interested in this from the www.westergaard.com website. Is the Internet the medium for the self-fulfilling prophecy? It is undoubtedly a powerful medium for the rapid dissemination of "information." Just ask Zonagen Corporation (Nsdq:ZONA), who was forced to reject claims made about it on the Internet by a relatively obscure short seller at Asensio and Company. In the report, Asensio claims that ZONA has conducted flawed clinical trials of its experimental impotence drug, Vasomax, and does not have appropriate patent protection for the drug. As a result, ZONA shares at $33.00 are grossly overvalued. The report comes in the wake of a deal ZONA signed with Schering-Plough Corporation (NYSE-SGP) in which ZONA will receive $10mm upfront payments, support with the Vasomax regulatory filing, milestone payments up to $47.5mm, and a royalty stream. The purpose of this piece is not to debate the merits or demerits of the data for Vasomax. Having never seen them at Westergaard, and questioning how others may have been privy to them, we leave the final arbitration to the FDA (and not Wall Street). In our opinion, companies who are structured like ZONA are prone to attract short sellers like Asensio because the risk/reward ratio of a long position is skewed with respect to the probability of the drug concept never reaching market, especially at a late stage. With thelong history of biotech blowups, why would Asensio not take a short position in any development stage biotech company that was nearing an FDA decision on its product? Even more fascinating to us is how quickly the perception of breached trust is invoked by a well-written short position defense. Not to guess on the psychology of crowds, but the movement in ZONA yesterday may have been a rapid response for many to a gut-feeling they have had about the company, or its structure, for a while. But, does the downward pressure on ZONA shares lend credibility to the Asensio report? Would the movement in ZONA shares been as pronounced if Asensio had issued a strong buy? Or, does the ZONA case demonstrate that the internet has shifted the power paradigm of self-fulfilling analyst prophecies from Morgan Stanley, Goldman Sachs and Alex Brown to Joe short seller or an individual investor with above-average writing skills? If our experience with the cyberpatrol service at Westergaard in general, or the Pluvia matter in particular is any indication, we are convinced that the problems facing ZONA presently, and all companies eventually, are real. While we love contrary opinion, we fear that deliberate hatchet jobs online to support short positions, are here to stay. This point is especially true as the Asensios of the world teach us that taking the rise out of a stock is sometimes easier than keeping it up (pun intended).