Houston Company Hopes Its Impotence Drug Will Reach Market Soon
Mary Sit-DuVall
05/24/98
KRTBN Knight-Ridder Tribune Business News: Houston Chronicle
May 24--Since its release in mid-April, it's become the hottest-selling drug of all time, the subject of news stories and late-night TV jokes.
It's even gotten the endorsement of a former presidential candidate, Bob Dole.
Everyone, it seems, is talking about the new impotence drug, Viagra.
However, there is a similar drug in development that few have heard about. But the folks at Zonagen hope that will change in the next few months. Its drug, Vasomax, is a fast-dissolving pill to treat male erectile dysfunction. Like Viagra, Vasomax produces an erection if there's also sexual stimulation, the company says.
Zonagen, a small biotech company tucked away on a quiet, tree-lined street in The Woodlands, hopes to submit Vasomax for government approval by the end of June and have it on pharmacy shelves by next summer.
If it is successful, it could help thousands of impotent men and make investors a lot of money. A company official estimates it could bring Zonagen $200 million to $300 million a year in additional revenues.
The question is: Does Vasomax have a chance?
Zonagen is confident its drug will be able to ride the popularity of Viagra. And Zonagen says Vasomax works faster and has fewer side effects.
But before Vasomax even gets a chance at becoming a Pepsi to Viagra's Coke, it has several obstacles in its path:
Charges from a particularly aggressive investment banker that Zonagen is making misleading scientific claims about the effects of Vasomax.
Claims in suits by shareholders that Zonagen doesn't own the intellectual property rights to Vasomax.
The daunting task of going up against Viagra, which controls 95 percent of the impotence drug market.
In one sense, there is nothing new about Vasomax. Phentolamine, its active ingredient, has been around since 1945 and was originally used intravenously to treat hypertension caused by a tumor on the adrenal gland. Later, doctors started using phentolamine in a cocktail mixture that is injected directly into the penis to produce an erection.
But what's novel -- and therefore marketable -- about Vasomax is the way phentolamine is delivered to the bloodstream in a fast-dissolving pill.
The drug works in 40 percent of men, takes 15 to 30 minutes to work and its potential side effects are a stuffy or runny nose, according to final clinical trials.
In contrast, Viagra, Pfizer's new impotence pill for men, takes about an hour to work and has more potential side effects: flushing, heartburn and mild headaches. However, clinical tests showed it worked on 70 to 80 percent of men.
Viagra, the first effective pill to treat male erectile dysfunction, has hit the market with phenomenal success. Physicians have been writing at least 10,000 prescriptions a day, outpacing the popular antidepressant Prozac, one of the best-selling drugs in the United States.
For the one week ending May 8, the number of prescriptions written for Viagra totaled 303,424 nationwide, according to IMS Health, a health care information company in Plymouth Meeting, Pa., which tracks prescription sales.
Zonagen, riding high on the flush of excitement produced by its competitor, says that with next year's expected launch of its own impotence pill, the company is ready to forge ahead with new products in reproductive health.
"The Viagra thing has just been amazing," says Joseph Podolski, the 50-year-old president and chief executive officer of Zonagen. "What it's really done is demonstrate how large the market is. The demand for Viagra has exceeded everything. Men are coming out like crazy. People are beginning to realize that (Vasomax) could be the second product in this market, and it's a very big market.
"Even if Zonagen gets a small piece of the market, earnings per share would be significantly successful. We're riding on the Pfizer tidal wave. All we have to do is hang onto our boards, and we'll be OK."
Zonagen says it expects to submit by the end of June a new drug application to the Food and Drug Administration -- and have its white, triangular pills in pharmacies by next summer.
Investors in Zonagen, which got its financial start in part with a $2.8 million investment by Dallas billionaire Ross Perot, first caught wind of the company when it made its first public offering in April 1993. The offering netted the company $7 million.
But the financial community really began to take notice after the company announced in May 1997 that 40 percent of men achieved erections after taking Vasomax.
With the announcement, serious funding began to roll in. A public offering two months later brought in $72.2 million. Then in November 1997, drug marketer Schering-Plough Corp. and Zonagen signed an agreement worth $57.5 million.
In addition, Zonagen will receive royalties, the amount of which the company declines to disclose. Analysts estimate an initial royalty rate of 23 percent.
"It's going to come down to a marketing thing," predicts Podolski, talking about Vasomax vs. Viagra.
Schering-Plough, by all accounts, is masterful at marketing directly to consumers. It has spent more money on direct consumer advertising of its allergy drug, Claritin, than any other drug company has on a single drug.
By the time Zonagen was ready to form a marketing partnership, it was able to choose among four pharmaceutical companies -- and picked Schering-Plough, the smallest of the four, Podolski said.
Other than funds from the equity market, Zonagen's revenues come from its subsidiary, Fertility Technologies Inc., which markets and distributes products related to in-vitro fertilization. Forty percent of the products sold are catheters, said Tom L. Lee, vice president and general manager of FTI.
Last year FTI, housed in the same building as Zonagen, sold $3.4 million and projects $4 million in sales this year, Lee said. All its products are manufactured in California.
The company is searching for ways to make proprietary and exclusive products. For example, currently it is harvesting, freezing and selling mouse embryos for infertility clinics to use in testing devices. It also is running tests on pregnant women's blood to see if it contains an embryo toxic factor, which shows up when there are unexplainable, recurrent miscarriages. FTI has licensed this technology from Harvard University and Brigham and Women's Hospital in Boston, Lee said.
All of this has resulted in strong financial health for Zonagen. It has spent $28 million so far on the development of Vasomax and estimates that will grow to just under $50 million by the time the pill debuts in the market next summer.
Zonagen says it has $60 million in the bank, a market capitalization of $385 million and milestone payments coming from Schering-Plough.
"We're in excellent financial shape," says Louis Ploth, Zonagen's chief financial officer. "Before it was: 'Who is Zonagen?' Now it's: 'Oh, that company in Texas.' It's a whole different ballgame these days."
But the path from laboratory to licensing rights for its premiere drug has been a long and bumpy ride for Zonagen.
When the company went public in April 1993, the stock sold for $5.50 a share. The day after Zonagen announced its partnership with Schering-Plough last November, an investment banking and securities broker-dealer in New York issued a report on his Web page, charging the company with misleading statements and patent fraud.
Manuel P. Asensio, chairman, president and chief executive officer of Asensio & Co. in New York, recommended "a strong sell" on Nov. 18, 1997, saying Zonagen did not have a patent on a phentolamine pill and that clinical studies showed phentolamine was not effective in treating erectile dysfunction.
"We believe that Vasomax will never be approved by the FDA as an oral treatment for organic erectile dysfunction. We believe Vasomax has no commercial value," Asensio wrote. "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. There is no legitimate support for Zonagen's market value and (we) expect the shares to soon trade well below $5 per share."
A day after Asensio's report, the stock fell to 28 1/2 from 34 7/8 two days earlier when the Schering-Plough deal was announced.
On Jan. 8, Asensio issued another news release on his Web site, saying that Zonagen's Vasomax contains nothing secret or new, is not mixed or manufactured in any new way and is not fast-acting.
The next day, Zonagen stock plummeted to a low of 13.
Asensio said in a telephone interview last week that his firm specializes in shorting stocks where the stock price is based on false information provided by management. He said his firm owns a large position in Zonagen but declined to say how much. Asensio, who has sold Zonagen shares short, betting they would decline, said his firm would profit if the stock price drops.
Asensio maintains Vasomax simply does not cause erections, and that the final clinical data has been presented in a convoluted manner to confuse people.
"Zonagen is benefiting from public relations and paid-for investigators," said Asensio. "The patent means nothing. Anyone who owns the stock should sell it."
A Fortune magazine article in March criticized the company for courting investors with news releases that left out disappointing clinical results and misled them about patent protection.
In the next two weeks, investors filed eight lawsuits against Zonagen. They charged that the company did not have the intellectual property rights to Vasomax it claims it has, and they questioned the company's test data in its clinical trials.
Zonagen's first patent -- called the Zorgniotti patent -- was issued in October 1996.
Named for New York urologist Dr. Adrian Zorgniotti, who developed the delivery technique, Zonagen's patent covers the use of such vasodilators as phentolamine when used to treat sexual dysfunctions in men and women and when transmitted through the oral mucosa -- or mucous membrane.
At issue in the lawsuits is the definition of where the "oral mucosa" is located. The plaintiffs say the first patent does not specifically mention "tablet," the form in which Vasomax comes. But Zonagen maintains a tablet starts in the mouth -- and that's an oral membrane.
A lawsuit filed on March 26 in the federal Southern District of Texas, accuses Zonagen of issuing false or misleading statements on the effectiveness and market potential of Vasomax.
The company received its second patent -- the Lowrey patent -- on March 25. This patent covers the method of delivery of phentolamine in a fast-dissolving tablet for the treatment of sexual dysfunctions.
Thirty-five years ago, scientists tried to use phentolamine to treat hypertension by using a standard-release tablet, explains Jean Anne Mire, Zonagen's investor relations vice president.
With a standard-release tablet, the drug would trickle into the body. But since the drug is metabolized quickly in the body, it would clear out before it had a chance to act. But in a fast-dissolving tablet such as Vasomax, phentolamine can enter the bloodstream quickly enough to act, dilate blood vessels and cause an erection with sexual stimulation, Zonagen says.
Company officials dismiss the plethora of lawsuits as frivolous.
"The stuff on the Internet says we're frauds, scams. The Fortune article says we misled investors. Down in Texas, there are these slick folks who know how to scam people," says Podolski, Zonagen's president, who was instrumental in developing NutraSweet and Simplesse when he worked for Monsanto. "We're just scientists who work out of the lab -- you see Ph.D.s, chemists. That's what we're all about. We're not into scamming people."
The lawsuits are without merit, says Martin P. Sutter, Zonagen's chairman and managing partner of Essex Woodlands Health Ventures and Woodlands Venture Fund, the original lead investor in Zonagen.
"They were inspired by an underhanded short-trader who had a position betting against the company. He made statements against the company negatively to drive the stock down for his profit," says Sutter. "We took the attitude as a board not to dignify a lot of this stuff, and just go out and deliver the goods. The proof is in the pudding. It's not what you say, it's what you do. And we're focusing on the 'do' part."
One industry source said Zonagen is being investigated by the Securities and Exchange Commission. The SEC in Washington said it could neither confirm nor deny any investigation. Zonagen said it is not aware of any investigation.
"The company has not been contacted by the SEC," said David Sterling, an attorney with Baker & Botts, which represents Zonagen.
Zonagen's stock soared more than 50 percent in the two weeks in April that Pfizer's Viagra entered the market. On Friday, Zonagen's stock closed at 35, down
"The larger Viagra is, the larger Vasomax will be," says Sutter. "If this drug does anything remotely close to what Viagra is selling, it's going to be so much money coming to Zonagen. It should help drive us to achieve $1 billion in market capitalization. If it's a $1 billion drug, that's $200 to $300 million a year -- free of cost -- for little, tiny Zonagen in The Woodlands. It should allow us to accomplish all our goals in the next five years."
Vasomax vs. Viagra
There's a saying in the pharmaceutical world: The first drug to hit the market may not be the best drug -- but it's always a successful one. Pfizer's football-shaped blue pills already have made history as the fastest-selling new drug.
But Zonagen -- along with analysts -- say there's room for more than one impotence pill.
"We can't say we're glad (Pfizer) is ahead of us. On the other hand, we're resigned to that fact," says Sutter. "We're going to have the opportunity to learn from them to see how they manage the good, the bad and the ugly. What is going to happen when the first person takes eight of these? They are not performance enhancers, but you know people are going to do it."
Sutter concedes Pfizer has, up to now, done a marvelous job.
"And we've noticed that, too," he said.
Analyst David Steinberg of Volpe, Brown & Whelan in San Francisco, says Zonagen has an excellent partner in Schering-Plough and should eventually get a nice percentage of the market.
"Viagra is an excellent drug. But there could be potentially an advantage with Vasomax. It acts more quickly," points out Steinberg, who gives the stock a one-year price target of $45.
Dan Ramsey, analyst with Harris Webb & Garrison in Houston, says no one therapy will dominate the market.
"All Zonagen has to do is get a small piece of it, and it will do very well," says Ramsey. "There's room at the table for more than one player. Vasomax will work well for a significant percentage of this multibillion market."
Ramsey says the stock is worth $60 a share.
Dr. David Kim, a urologist at Baylor College of Medicine, warns that since Vasomax dilates all blood vessels -- not just those in the penis -- it could potentially have more serious side effects than Viagra when given to unhealthy patients with cardiovascular problems.
All things being equal, which drug would he prescribe to his patients? "Hands down: Viagra," says Kim. "Mainly because of its efficacy, well-known safety and its mechanism of being very specific in the penis. Men will converge on what works better, and physicians will converge on what works safer."
But Dr. Harin Patma-Nathan, director of The Male Clinic in Santa Monica, Calif., and an investigator in Zonagen's final clinical trials, says side effects for both Vasomax and Viagra are minimal.
"I think if approved by the FDA, it will definitely have a marketplace, without question," says Patma-Nathan. "Any drug that is effective will have a marketplace. And a pill will have a first-line marketplace. The potential for Vasomax is very promising."
Vasomax and beyond
In the first week of June, Zonagen's pivotal Phase 3 clinical trial results are expected to be presented at the annual meeting of the American Urological Society in San Diego. This will be the first time the data are shared publicly among peers.
If Zonagen's pill gets approved by the FDA and hits the drugstores by next summer, what happens next for the little company in The Woodlands?
"Somebody will buy us, or we'll be growing up to be a pharmaceutical company here in Texas," predicts Podolski. "Guys using Viagra today are not dying. This is an area not typically sought after by big pharmacies. It's wide open for opportunity. We can build a very solid, strong business around reproductive health."
Podolski smiles when he thinks of the unbelievable impact Viagra has already made on men's lives -- and what could happen when the second impotence pill hits the market.
"People experimented with sex since the time they were kids. You think they'd want to give it up when they are in their 50s?" he says with a grin.
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