Hank, don't know if you've seen this yet, but Fortune has a big article in current issue "The Selling of Impotence"
This is the main part re:ZONA , for the whole piece
pathfinder.com
No company exemplifies the risks of the impotence game better than Zonagen. Its pill, Vasomax, is regularly named among the front-runners in the ED race, and Schering-Plough, a $6.7-billion-a-year drug company, recently agreed to help develop and market the drug. Zonagen's stock has been an investor roller coaster, more than quadrupling in value last year after a string of upbeat company announcements and media reports, before being hammered by shortsellers.
Formed in 1987 with backing from prominent venture capitalists and Ross Perot, the company, in The Woodlands, Texas, had an unpropitious start. A contraceptive for pets it tried to develop didn't pan out, and a plan to devise a similar product for humans was iffy at best. In 1992, Joseph Podolski, an engineer who had managed operations at Monsanto, was named CEO. The following year Zonagen completed a $7.4 million initial public offering and then went shopping for a product that could turn things around.
In early 1994, it zeroed in on one: For about $300,000 it bought Adrian Zorgniotti's patent for orally absorbed phentolamine as a treatment for ED. Acquiring the patent from the elderly physician, who died three months later, seemed a stunning coup. In a 1993 study Zorgniotti had reported that a third of 69 impotent men who let phentolamine tablets dissolve in their mouths had strong erections, vs. 13% who took a placebo--compelling for a proof-of-principle experiment. Zonagen also retained a prominent Mayo Clinic impotence expert, Dr. Ronald Lewis, as a consultant. Overnight it seemed poised to lead in the race to develop an oral drug for ED.
However, when the company tested Zorgniotti's idea, says Podolski, patients complained that phentolamine held in the mouth was extremely bitter. Rather than walking away--Zonagen had little else going for it by this time--the company took a fateful gamble: It abandoned the melt-in-the-mouth approach to pursue a swallowed phentolamine pill, which it named Vasomax.
As the company switched strategies, it also switched advisers. Lewis, like Zorgniotti after his early experiments, doubted that swallowed phentolamine would work--stomach acid and liver enzymes would neutralize it. Without using risky large doses of the potent blood-pressure drug, says Lewis, now at the Medical College of Georgia, "I couldn't see how Vasomax would lead to high enough blood levels" to boost erections. Soon he was off the team. "They read my skepticism and figured I wouldn't be out there pushing," conjectures Lewis. Zonagen disagrees, saying it replaced Lewis with experts associated with a contractor it hired to do clinical trials. They included Goldstein and Ferguson.
Like any biotech or drug startup, Zonagen faced a daunting financial challenge in developing Vasomax. It would need to raise significant capital to compete with industry giants that regularly spend more than $100 million developing a single product. Part of the challenge involved science; part involved keeping investors excited. At the latter, Zonagen proved particularly adept.
Soon after it started developing Vasomax, Zonagen began issuing upbeat releases about its clinical tests. After racing through a first phase of safety tests, the company announced in May 1995 that it had begun a "phase II" efficacy trial in Germany. Phase II results often make or break a drug: If they show little or no efficacy, a startup like Zonagen typically can't proceed--investors won't be willing to place the hefty bets needed to finance larger phase III trials, which typically cost tens of millions of dollars and which the FDA requires to firmly establish that a drug is safe and effective.
The German study involved 177 impotent men. Each was asked to try to achieve vaginal penetration on three separate occasions after receiving Vasomax or a placebo--those succeeding at least once were deemed to have responded positively. In March 1996, Zonagen announced Vasomax had worked well: "Positive" results in the German study would soon be followed by a phase III trial, said the press release. Focusing on a subset of the German data, it noted that one group of patients had shown a striking "50% improvement in efficacy over placebo with no side effects."
But like a profit-and-loss statement missing the bottom line, the rosy release made no mention of the study's overall result--which Zonagen did not disclose until eight months later, in a Securities and Exchange Commission filing. The news wasn't good: The German trial had failed to show statistically significant efficacy. Podolski defends Zonagen's press release as an accurate disclosure of promising early data.
Zonagen plunged ahead. In 1996, it rushed Vasomax into phase III trials, one in Mexico and two in the U.S. To investors the move into phase III trials was a good sign; Zonagen's drug was moving toward approval. In June the company had more good news: It announced in a press release that the U.S. Patent Office had approved its patent "covering the use of Vasomax as a treatment for erectile dysfunction."
That announcement might have surprised the late Dr. Zorgniotti. The patent that had been approved was his, which covered melt-in-the-mouth phentolamine pills but not the swallowed kind that Zonagen was now testing. (In fact, statements in the patent cast doubt on whether a swallowed pill would be effective.)
For a patent to protect Vasomax, the company had filed a separate application, which the release said was pending. Zonagen subsequently disclosed that the patent office rejected the second application, a decision the company is trying to get reversed. In a recent interview, Podolski concedes, "You can say today no patent specifically covers Vasomax"; he claims the company's issued patent "broadly covers" the drug. He adds that the second application initially failed because its claims were too broad but that he expects it to be issued soon.
Zonagen's spin-doctoring in its 1996 announcements may have been a matter of survival. Its auditors soon warned that it would need additional capital to continue developing Vasomax and to stay in business. Aided by the upbeat press releases, Zonagen steered away from the brink. Its stock price doubled, reaching $12 a share in mid-1996, and Zonagen raised $16.9 million in a private placement of preferred shares to fund its phase III trials. Investors didn't appear to notice its dubious patent position or the mediocre phase II results.
By the end of 1996, Zonagen had begun telling investors that it was racing to submit a new drug application to the FDA by midyear 1997--a timetable likely to leapfrog Pfizer's submission for Viagra. The early submission would, at least in theory, enable Zonagen to become the first company to market with an oral pill for ED, a critical advantage for grabbing long-term market share.
The company also said that its Mexican trial had yielded statistically significant results: Of 148 men, 62% using Vasomax achieved orgasm during intercourse, vs. 42% who had taken a placebo. The company said it planned to seek marketing approval in Mexico during the first few months of 1997 and that by summer it would be knocking on the FDA's door.
For Zonagen, what happened next was beyond the wildest dreams of most small companies: In April 1997, the Texas edition of the Wall Street Journal, quoting analysts, stated that the company was "six months to a year" ahead of Pfizer in the race to develop an oral impotence drug. Investor's Business Daily also ran a glowing report. Suddenly Zonagen, a no-name startup with 35 employees, was being hailed for whipping one of the world's mightiest drug companies in the high-stakes ED race. Zonagen's stock climbed above $20, more than double its price three months earlier.
Keeping pace with Zonagen's rapid strides on Wall Street, its clinical team completed the two U.S. trials with lightning speed. The first was conducted in a little over six months and yielded more good news: Last May the company announced that 40% of men had responded positively to Vasomax, vs. 17% on placebo. Up went the stock price again.
Zonagen was beginning to seem unstoppable--unless you were paying close attention. The results in its second U.S. trials were less than rosy (some 34% responded positively, compared with 21% on placebo), but that didn't dent investors' fervor. In June the company filed with the SEC to make a secondary stock offering; investors poured in another $72.3 million. By fall they had driven the company's market valuation to more than $400 million. An investor who had purchased stock in November 1996 would have seen his or her investment more than quadruple in value in less than a year.
Investors jumping on the Zonagen bandwagon should have asked a crucial question that ought to be asked about all new drugs: How safe is it? Vasomax raises a burning issue that applies to all impotence pills: How can a drug delivered via the bloodstream dilate penile arteries without similarly affecting blood vessels throughout the body, risking severe side effects? After all, even localized injections of "vasodilating" drugs in the penis occasionally cause sudden bodywide drops in blood pressure, accompanied by dizziness and fainting. Why wouldn't an oral ED pill knock guys out?
In its press releases on its clinical trials, Zonagen said that in the largest trial at the highest dose, 80 milligrams, side effects were "within expectations," including just two "serious" adverse events. At a lesser 40-milligram dose, it said the pill had caused no serious side effects. (Podolski points out that since Vasomax is designed to boost natural erection processes during arousal, rather than induce an erection regardless of sexual excitement, as injections do, blood levels of the drug do not have to be very high for it to work.)
All that was encouraging and about as much detail as any drug company divulges regarding safety at this early stage. But there is more to the story. From the beginning Zonagen and its consultants--along with the FDA--had been concerned about the drug's safety, says Ferguson. The company was clearly mindful of side effects in the way it conducted its U.S. clinical trials. Before they began, its investigators administered doses of Vasomax to patients and disqualified anyone who showed significant adverse effects. According to Ferguson, no fewer than 44 of more than 500 volunteers were eliminated at the outset of the largest trial. The "adverse events" they experienced included a racing heart, dizziness, and low blood pressure.
Asked about that, Podolski acknowledges that the men were dropped from the trial and that a racing heart was the most common side effect. But, contends Podolski, "these weren't serious events." Moreover, he adds, those side effects occurred only at the 80-milligram dose; Zonagen intends to market only lower-dosage 40-milligram pills.
Drug companies usually don't disclose all the details about a medicine's safety until it has been thoroughly reviewed by the FDA. Butsafety concerns can slow a drug's approval and lead to label warnings that could potentially limit its use--factors that can affect a company's prospects and its stock. In fact, when Zonagen approached the FDA last fall with a plan to put Vasomax on the agency's fast track, officials replied that Zonagen would need to submit more safety data. A few weeks later the agency granted Pfizer's similar request for expedited review of Viagra. Now it appears Zonagen's drug won't reach the market until many months after Pfizer's does, if ever.
Zonagen's practice of staying with upbeat news worked for most of last fall. The company saw its stock rise strongly, as the impotence drug play on Wall Street built to a fever pitch. Zonagen's share price climbed as high as $45.75, making the company worth more than $500 million.
But in late October the stock market took a nosedive, hammering ED players along with many other stocks. Soon after, the ED niche was slammed even harder from another direction: Hyperinflation of its stocks had created an irresistible target for shortsellers, who borrow and sell a company's shares, betting they can replace them with cheaper stock bought after a price plunge. Zonagen, in particular, loomed large on their radar screens.
On Nov. 17, Zonagen trumpeted its best news yet: Schering-Plough had agreed to put its deep pockets and marketing muscle behind Vasomax--the drug giant would pay $10 million for licensing rights to the drug, with another $47.5 million to follow as it clears regulatory hurdles. A day later the upbeat announcement was overshadowed by a scathing report issued by New York shortseller Manuel Asensio, who argued that Vasomax "has no commercial value." Shortsellers were soon circling Zonagen like piranhas--by year-end its stock price plunged below $20. Other stock bubbles were soon deflating too--Vivus' share price, for instance, dipped below $10 by year-end.........>>
Dave |
