Dysfunction 101: The Fate of Zonagen's Impotence Pill

A lesson in the drug that was supposed to best Viagra.
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The

Viagra

hype has claimed a victim.

Zonagen's

(ZONA)

impotence pill

Vasomax

bit the dust in the U.S. Monday as the company said it was expecting a "nonapprovable" letter from the

Food and Drug Administration

. The move has long been

predicted by short-sellers.

Zonagen and marketing partner

Schering-Plough

(SGP)

suggested this was just a delay and that they might only have to get a bit more data on the drug. "Although we are disappointed with this delay, we believe that the additional data from Schering-Plough's studies are important to the long-term success of Vasomax," Joseph Podolski, Zonagen's president and chief executive, said in a press release.

And fans were holding fast. "Schering-Plough put out a joint release that they are still behind it," says Matt Geller, who covers the company for

CIBC World Markets

, which rates the company a buy and has not done banking for Zonagen. "I'm not sure this says the drug doesn't work or the data are bad."

The market, however, handed the stock some saltpeter, trading it off 46%, or 9 1/8, to 10 11/16, leaving the company with a market cap of around $200 million.

So, now what's left? Well, kids, the Zonagen story offers a wonderful primer in biotechnology stock investing. Unfortunately, Zonagen and Schering-Plough can't help. The bigger company declined to comment beyond the press release. The smaller company said its CEO would call, but he didn't.

  • Question One: What's a nonapprovable letter?Jimmy, that's a rejection, a no thank you, call us again real soon, don't let the door hit you on the way out. The FDA never outright rejects something; the agency always asks for more data. But rarely do drugs get approved after they get a non-approvable letter. "It's just a disaster. I think even here, the stock is a short," says one consultant for the company, speaking on the condition of anonymity. He has no position in the stock.
  • Question Two: What about the company saying that this is merely a delay?Unlikely, Jeffy. The drug has been studied in several trials, and it seemed to have only modest benefits. Schering-Plough was supposed to have conducted its own studies and "cleaned up" Zonagen's data. Presumably, this meant that the big drug company was making the application for approval as organized and orderly as possible. The companies said they are conducting additional studies of Vasomax, but those take lots of money and time. Will Schering-Plough stick around? One short-seller for a hedge fund thinks it won't. The companies, the short-seller says, implied on the conference call that a more recent study on Vasomax has promising effectiveness data, perhaps on the order of 70%. That study however was "open-label," meaning it wasn't tested against a control group and isn't rigorously statistical.
  • Question Three: There were many delays for Zonagen and Vasomax. When there are numerous delays, is that a good sign or a bad sign?It's a bad sign, Billy. The Vasomax story always was a moving target and the company hit delay after delay. But it managed, until today, to convince many investors that everything was fine and on track. Lo these many years ago, Vasomax was supposed to be approved and launched before Pfizer's (PFE) - Get ReportViagra, but of course that didn't happen. Nevermind that there had been major problems with the data from the get-go, which the company and its supporters soft-pedaled. For one, the number of patients in certain reports varied, suggesting that the data were being massaged by dropping patients who didn't respond to the drug. Now, the company has around $48 million in cash and is burning about $20 million a year, which means that it would likely have to raise money before launching the drug in the U.S. CIBC's Geller thinks the company will launch in the third quarter of 2000, rather than this year's fourth quarter. But he isn't worried: "In and of itself, a delay doesn't have to mean a problem."
  • Question Four: If the market starts to appear smaller than it did, is that bad for a lesser competitor?Mikey, that's a tough one. Vasomax bulls always conceded that it was never as good as Viagra -- which helps about 80% of men with erectile dysfunction, as the advertisements call impotence. Vasomax supposedly had around a 30% to 40% effectiveness rate. So, bulls were hoping that Vasomax would get a small piece of a big pie. But then a funny thing happened on the way to the foreplay: Viagra's mega-gazillion market disappeared. Last quarter, Viagra only sold $193 million, way under analysts' projections. So, that small slice that Vasomax was supposed to get looks like it'll be even smaller. But investors ignored those larger fundamentals and Zonagen still traded up about 84% from the end of the year to February.
  • Question Five: But wasn't Schering-Plough supposed to take care of me here?I'm sorry, Traci, but In Large Companies We Trust is not the motto investors should have on the back of their stock certificates. When the company signed on with Schering-Plough as a marketing partner in late 1997, supporters hailed it as a positive. Listen up, guys, big companies make mistakes too. And when they do, they're often big mistakes.

And with that, kids, question hour comes to an end.

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