Drug company is investigated after stock sales.

Drug company is investigated after stock sales

Medco Research Inc., the West Los Angeles-based drug research company, is under an investigation of undetermined scope and nature by the Securities and Exchange Commission, the Business Journal has learned.

"The SEC contacted me and presented me with a voluntary request for information," said Lee Squitieri, a lawyer with the New York law firm Abbey & Ellis, who is representing a shareholder against Medco. "They said they were in the preliminary stages of an investigation, but they were very vague about what they were doing."

The SEC inquiries seem to focus, said another lawyer, on the timing and content of Medco news announcements and heavy selling of the company's stock by officers and directors. "They are in a fact-finding phase," said the lawyer.

The SEC last week said it could neither confirm nor deny that an investigation is under way, the federal agency's standard response to press inquiries.

Medco officials did not return phone calls.

For years the topic of intense speculation and short trading on Wall Street, the tiny, eight-employee Medco ushers little known drugs through the testing process, seeking Food and Drug Administration approval for use. It also attempts to secure U.S. Patent Office recognition for ways of using its drugs. It plans to license the actual manufacturing, marketing and distribution of drugs to others, and to collect royalties. The company is already collecting royalties on one heart drug.

Medco stock, traded Over the Counter, rose sharply in March to $20.75 a share on talk of a bright future for its heart drugs, Adenoscan, Adenocard and MEDR 640. It traded in the $7-a-share range last week.

The FDA has not yet approved Medco's application for Adenoscan, the drug mosttouted by some analysts. The drug MEDR 640 has only been tested on dogs, and is years away from actual use, if ever approved.

Adenocard, used to treat patients with irregular heartbeats, is in use, and Medco received royalties of $365,926 in the first nine months of fiscal 1990 from it.

Helping drive Medco stock down in recent weeks was the denial in August by the U.S. Patent Office of a "use" patent application for Medco's drug Adenoscan, rumors of the SEC investigation, and heavy insider selling by a board member who recently resigned, said short traders.

Adenoscan is derived from adenosine, a substance that occurs naturally in the human body, and for that reason cannot be patented. Medco sought a patent on the way Adenoscan would be used. The company said it would appeal the patent denial. Lack of a patent may mean others could produce the drug and use it without Medco approval.

Medco informed shareholders of the patent nix in a Sept. 21 letter, but did not prepare a news release on the topic until the financial weekly Barron's broke the story in its Oct. 8 issue. Short traders last week said Medco was tardy in informing the market of the patent refusal.

Further spooking the market, Ronald Fischman, M.D., Medco board member since 1985, resigned from Medco on Oct. 18. Prior to resigning, Fischman in October sold 824,270 shares of his 922,470-share holding of Medco stock. Before the sales, Fischman's holdings comprised 10.7 percent of Medco stock and he had been the company's largest shareholder.

Led by Manfred Mosk, founder, chief executive and president, Medco has become a favorite of short sellers on Wall Street all year (short sellers bet a stock will go down).

Back in March, when Medco stock peaked at $20.75, short traders pointed out the research outfit had a market capitalization of $178 million - yet had never reported a quarterly profit in its 5-year public life.

In its latest reported quarter, ended May 31, Medco reported a loss of $83,044 on revenues of $308,818. For the nine-month period ended May 31, the company posted a loss of $609,736 on revenues of $462,793.

Medco's promise lays heavily on its drug Adenoscan, which one analyst, Hemat Shah of the Warren, N.J.-based HKS & Co., has called a "blockbuster," with sales potential of more than $100 million a year. By fiscal 1992, Medco would earn $4.05 a share, or nearly $36 million, predicted Shah, who has also served as an paid consultant to Medco.

Adenoscan dilates the heart, allowing doctors to make certain observations. Running on a treadmill also dilates the heart, but some patients cannot endure the strain of exercise. There are rival drugs to Medco's products in the marketplace or in testing. Various medical studies present mixed evidence on the usefulness of adenosine-related drugs.

The heavy insider sales of ex-board member Fischman mark the fourth time this year that selling by Medco directors or management has raised eyebrows on Wall Street. It is not known whether the sales are the topic of SEC inquiries.

The other three eyebrow-raising episodes:

* On Jan. 17, Medco board member Marvin Hausman sold 60,000 shares of Medco, which should have been reported to the SEC within 10 days, by law. Instead, Hausman did not report the sale until May 24.

* In March, former Medco executive vice president and director of research William Govier sold 43,000 shares of Medco, before a May 17 announcement by Medco that investment banker Oppenheimer & Co. has ended a six-month search for merger candidates. The thought of a buyout had buoyed the price of Medco, said short-traders last week.

The Govier sales provoked three lawsuits, one of which was unilaterally dropped without settlement, which alleged that Govier sold with knowledge that the Oppenheimer search for a merger partner was failing.

New York lawyer Squitieri is representing the shareholder in the two active suits.

Medco has denied that any board member or officer ever sold stock on inside knowledge, but the company did terminate Govier on May 8.

* In July, after Medco insiders Rudolph Nisi, chairman, Mosk and Sanford Hillsberg, director and counsel, sold $1.8 million in stock, The Wall Street Journal reported on the company in its "Inside Track" column.