Manuel P. Asensio (212) 702-8805
HEMISPHERx BIOPHARMA, INC. (AMEX Symbols: HEB and HEB/WS)(1)
| Closing Price: | $8 | Book Value Per Share:(5) | $0.36 |
| 52-Week Trading Range: | $13 3/16 – 2 5/8 | Aggregate Market Value: | $321 million |
| Shares in Public Float:(2) | 19.4 million | 1997 Net Loss: | $6.1 million |
| Shares Outstanding:(3) | 21.7 million | 1996 Net Loss: | $4.5 million |
| Fully Diluted Shares:(4) | 40.1 million | 1995 Net Loss: | $1.8 million |
| (1) Hemishperx was formerly named HEM Research, Inc. and HEM Pharmaceuticals Corp. (2) Insiders mostly hold below market options and warrants. (3) Does not include at least $5.7 million of stock sold since June 30th. (4) Includes convertibles, options and warrants. (5) As of June 30, 1998. |
SUMMARY AND RECOMMENDATION
Hemispherx Biopharma, Inc. (“Hemispherx” or the “Company”) is a 32-year-old drug company with no sales, just $161,521 in tangible assets, excluding cash, and a $321 million market value. This market value is mostly, if not entirely, based on Hemispherx’s representation concerning Ampligen’s expected Food and Drug Administration (“FDA”) Fast Track approval as a treatment for Chronic Fatigue Syndrome (“CFS”). Ampligen is a toxic, 25-year-old, off-patent drug that failed as a treatment for several cancers and HIV over 10 years ago, and has never been FDA approved to treat any disease. Hemispherx has not filed a New Drug Application (“NDA”) with the FDA for an Ampligen CFS treatment and its CFS Phase II trials did not show that Ampligen was effective. Even if Hemispherx ignores the drug’s failed Phase II trials and proceeds to enroll up to 230 patients for the new FDA required testing, there is no basis to believe the results will change or that the FDA will approve Ampligen for CFS in 1999 or at any time in the future. Even if approved we see no market for a toxic, long term, expensive and ineffective CFS treatment.
Hemispherx has only conducted one, small, placebo-controlled, double-blind CFS trial. This eight year-old trial was unaudited, non-independent, and non-pivotal. Based upon our review of Hemispherx’s published article of this trial, we find that the trial was neither placebo-controlled nor double-blind, did not limit the entries to case-defined CFS patients and was not designed to test if the patients were cured. This leaves Hemispherx’s planned Fast Track NDA filing with no legitimate support, and makes any 1999 approval and profit assertions completely absurd and baseless.
In 1994 Hemispherx was a private company with no sales, $61,000 in cash, $13 million in debt and a history of serious scientific fraud charges. In 1995, Stratton Oakmont, Inc. (“Stratton”), long after its fraudulent activities became widely known, took Hemispherx public. Within months of the IPO, the money was mostly gone and Hemispherx was again a penny-stock shell with 15.6 million shares and 13.8 million warrants outstanding, and no business. Hemispherx remained a broken Stratton deal until, with no new material corporate development, its stock rose from $4 1/4 on July 9th to $13 3/16 on September 9th. We believe that the only possible explanations for Hemispherx’s sharp two-month stock increase are its blatantly false representations concerning the results of its clinical trials, Ampligen’s FDA status and the potential value of an effective CFS treatment. We see no asset, management group or future potential that can support Hemispherx’s $320 million market value. We found no legitimate business purpose for Hemispherx’s Ampligen CFS trials other than their promotional value. As a result, we believe Hemispherx’s shares will soon trade well below $1 per share.
COMPANY BACKGROUND
Hemispherx has reported losses for over 30 years. These losses are not the result of a commitment to a major scientific advancement. Hemispherx is not and has never been engaged in any long-term project to create a new drug. Contrary to many investors’ belief, Hemispherx has never created or patented a modified nucleic acid composition. It does not own a patent on the composition Ampligen or any other double-stranded RNA composition. The Johns Hopkins University in Baltimore, Maryland developed Ampligen in the early 1970s. Dr. William A. Carter, Hemispherx’s President and Chief Executive Officer, is listed as a co-inventor of Ampligen on the Johns Hopkins patent. Dr. Carter joined the Company in 1978. Johns Hopkins received a patent on Ampligen on May 17, 1977 and held it until it expired in May, 1994. Hemispherx merely obtained a non-exclusive license for Ampligen from Johns Hopkins.
Hemispherx did not develop Ampligen to treat CFS. In fact, the Company’s intended treatment claims have evolved over time as its trials have failed. At various times over the last 18 years, Hemispherx has claimed that Ampligen has the potential to be an effective drug for the treatment of venereal warts, hepatitis, HIV infection, herpes, skin-cancer, kidney cancer as well as CFS. The Company has also claimed that Ampligen could be used in certain tobacco, skin care, and diagnostic products. However, Ampligen failed its clinical trials and Hemispherx has never received FDA approval to sell the drug commercially. It has also failed to sell any of its claimed non-pharmaceutical products.
Ampligen is a very early version of a double-stranded RNA drug. This entire class of interferon inducers failed to produce results and was long ago superceded by far more advanced nucleic acid pharmaceuticals such as the promising antisense and triple-stranded technologies, and the FDA-approved interferon.
Even before other drugs superceded Ampligen, none of Hemispherx’s pre-clinical or clinical trials had shown Ampligen to be a commercially viable treatment for any disease. Hemispherx’s 1987 E.I. du Pont de Nemours & Co. (“DuPont”) clinical trials found Ampligen to be of no value in the treatment of HIV. DuPont terminated its partnership with Hemispherx and charged the Company with providing false and misleading clinical, safety and efficacy data. Another study conducted by the highly regarded group of hospitals and institutions called the Eastern Cooperative Oncology Group (“ECOG”) also found double-stranded RNA to have no clinical value in cancer treatment. Yet despite the failed tests and fraud charges, Hemispherx used Ampligen’s HIV and cancer drug potential in its initial public offering prospectus. Most recently, Hemispherx is using its CFS trial claims to promote its stock while insiders sell.
FINANCIAL AND OPERATIONAL HISTORY
After 28 years of operations, on December 31, 1994, Hemispherx was a private company with 5.1 million shares outstanding, $61,005 in cash, over $13 million of debt, $3.2 million of preferred obligations and a $14.6 million negative net worth. Hemispherx had produced a long history of uninterrupted losses, patent and shareholder litigation, and defaults. These were not the only indications of trouble. Ampligen was already over 21 years old. The Johns Hopkins Ampligen composition of matter patent had expired and its medical use patents would expire in December 1995. DuPont had terminated its partnership with Hemispherx and had charged Hemispherx with scientific fraud. (See Section Below.) Hemispherx’s cancer and HIV clinical trials had found that Ampligen provided no clinical benefit over a placebo. The Company had fired, sued and rehired its CEO, Dr. Carter. Dr. Carter had also been accused of extorting $1 million from an HIV patient. (See Section Below.) Despite this long, clear and convincing record of failure and misrepresentation, Stratton took Hemispherx and its bridge investors public in 1995.
After the Stratton transactions, Hemispherx was transformed from a bankrupt, private company with no sales into a public shell with an extraordinary amount of insider owned, below-market free warrants and options. On December 31, 1995, Hemispherx had 15.6 million shares outstanding, 13.8 million options and warrants, and $11.3 million in cash. Most of Stratton’s IPO funds went to repay pre-IPO private investors, many of whom received free stock and warrants. By March 31, 1996, Hemispherx’s cash had fallen from $11.3 million to $3.6 million.
By June 30, 1998, Hemispherx had issued an additional 6.1 million shares at an average price of $2.52 per share. All of these shares were issued either through the conversion of “bottomless” preferred securities or the exercise of granted, below-market options and warrants held by insiders. Hemispherx continues to issue cheap options and warrants to its insiders and private investors. In addition to the 6.1 million shares created by converting and exercising options and warrants, Hemispherx still has 18.4 million options, warrants and convertible shares outstanding. Since its IPO Hemispherx has granted an additional 10.7 million options and warrants. All of these options and warrants have strike prices that are well below market and as low as $0.50 per share. As of June 30, 1998, Hemispherx had approximately 40.1 million fully diluted shares outstanding.
FAILED DUPONT CHEMICAL TRIALS
In 1987, DuPont entered into a partnership agreement with Hemispherx for the clinical study of Ampligen for treatment of HIV. Hemispherx had provided DuPont with results of a small, pre-clinical trial that allegedly showed Ampligen to be an effective HIV treatment. In mid-1988, the AMP101 clinical trials failed to show a difference between Ampligen and a placebo in HIV patients. DuPont officials met in September 1988, with officials of a Congressional subcommittee investigating scientific fraud. According to a July 24, 1989, article in the Philadelphia Business Journal, DuPont told the subcommittee that Dr. Carter and several colleagues at Hahnemann University had fraudulently performed scientific experiments and analyses that ultimately led to the clinical testing of Ampligen. In October 1988, the clinical trials were halted and DuPont terminated the partnership agreement. In 1989, DuPont sued Hemispherx for having made false and misleading representations regarding preliminary clinical data and safety and efficacy data pertaining to Ampligen.
CARTER’S DISMISSAL AND LITIGATION
In October 1988, Hemispherx fired Dr. Carter, who had been serving as the Company’s Chief Executive Officer and Chief Scientist. Hemispherx sued Dr. Carter for his mismanagement of the AMP 101 clinical trials. In 1989, Dr. Carter arranged for an investment group to take control of Hemispherx and reinstate him as Chief Scientist. The new investment group paid approximately $1,453,207 to gain control. Hemispherx paid Dr. Carter $566,500, representing 39% of the proceeds it received from the sale of common stock to the new investor group.
In 1988, Dr. Carter sold 4,272 shares of Hemispherx common stock owned by him to an HIV patient named Peter M. Frost for $1,000,000. Mr. Frost said he entered into the transaction with Dr. Carter in exchange for his and his financial advisor’s admittance into an open label clinical trial of Ampligen for patients infected with HIV, which Hemispherx was sponsoring. In 1989, Mr. Frost sued Dr. Carter for violations of federal securities laws, the wrongful extortion and conversion of Mr. Frost’s money and material misrepresentation. In the Hemispherx suit against Dr. Carter, Hemispherx states that Dr. Carter told Mr. Frost that the money would be used to expand the trial size to accommodate Mr. Frost, but instead Mr. Frost’s money was deposited in Dr. Carter’s personal bank account.
INITIAL PUBLIC OFFERING
A review of Stratton and Biltmore Securities, Inc.’s (“Biltmore”) histories and their transactions with Hemispherx provides an understanding for why these discredited companies disregarded one another’s obvious signs of trouble and joined together to create a public market for Hemispherx shares.
On February 28, 1995, Stratton was enjoined by a permanent injunction and ordered to comply with a March 1992, Securities and Exchange Commission (“SEC”) Administrative Order. This was as a result of Stratton’s second failure to comply in less than one year with the SEC’s order to cease its fraudulent sales practices, making material misrepresentations and omissions, and manipulation of stock prices, amongst other violations. As a consequence of the permanent injunction, sixteen states immediately suspended Stratton’s license to do business. Stratton has subsequently declared bankruptcy and has been ordered liquidated.
In May 1995, Biltmore agreed to a $1 million fine and the appointment of an independent consultant as settlement of a complaint filed by the SEC for securities law violations. The complaint alleged fraudulent sales practices in connection with three initial public offerings.
Despite notification of the permanent injunction, Administrative Order, securities laws violations and the inability of Stratton to sell securities in one third of the U.S., Hemispherx and its Board of Directors chose Stratton to bring the Company public and Biltmore (owned by a former Stratton broker) to act as co-manager. We believe that this well thought out but unquestionably indefensible decision provides clear evidence to judge the nature and character of Hemispherx’s management.
In 1995, Stratton officers and its investors entered into numerous private transactions with Hemispherx before taking it public. These transactions included a $1.5 million loan that was repaid with proceeds from the public offering at the closing of the sale. The lenders were granted an option to buy one million Units (each Unit consisted of one share and one $4 per share five year warrant) for $0.50 per unit. The Hemispherx Units were sold at $4 to the public. Separately, Jordan Belfort, (Stratton’s former Chairman) and his Trust purchased 250,000 Hemispherx shares for $0.50 per share. The NASD obligated Mr. Belfort to sell his Hemispherx shares before the IPO. Mr. Belfort sold his shares privately for $2.00 per share.
DESCRIPTION OF CHRONIC FATIGUE SYNDROME
According to the Centers for Disease Control and Prevention (“CDC”), Chronic Fatigue Syndrome (“CFS”) is a condition or illness that causes unexplained chronic fatigue. There are over 28 symptoms associated with unexplained cases of chronic fatigue (“CF”). CFS is a long-term, reoccurring medical condition with no known cause and many symptoms. There are no diagnostic tests that can be used to detect CFS. It can only be diagnosed through default. This makes designing a trial to show CFS treatment efficacy highly difficult, if not impossible.
The CDC’s current CFS case definition requires a full battery of medical tests and a mental status examination before a CF case can be identified as a CFS case. Many patients that suffer from clinically evaluated, unexplained chronic fatigue do not meet the CDC’s established criteria for CFS. The evaluation, classification and study of individuals with CF or CFS conditions are extremely difficult. It requires a complex system that subdivides CF and CFS patients by underlying medical and psychological conditions present at the onset, the patient’s history, the nature of the chronic fatigue and their symptoms. CFS’ symptoms, their seriousness and duration vary widely from patient to patient. CFS causes both mental and physical dysfunction, also in varying degrees. As a result, the selection of CFS patients for a trial and the clinical end-points that the trial measures can render a CFS trial useless in determining a drug’s efficacy. This makes the study of CFS or any potential CFS treatment highly susceptible to scientific fraud.
CFS is a disorder of unknown cause or origin. Studies have found evidence that suggests CFS is associated with a wide range of abnormal medical conditions. These include irregularities in body fluids, abnormal cell division, viruses, emotional and psychological conditions, and diminishment or dysfunction of the immune and metabolic systems. However, all of these claims are unproven theories. No viruses or medical conditions have been established as the cause of CFS. No diagnostic test exists for CFS. This includes diagnostic imaging, blood, molecular and immunological testing. The diagnosis of CFS can only be made by ruling out other well-defined causes of the patient’s chronic fatigue and related symptoms. It is only by this process of elimination (called “default or exclusion diagnosis”) that a CFS case diagnosis can be made.
POTENTIAL CFS DRUG MARKET
Hemispherx claims that there are 500,000 to 2 million cases of CFS in the U.S. Hemispherx has not published data on any survey of CFS cases, local or national, that supports this estimate. CFS cases are costly and time consuming to diagnose. Any estimate of the number of CFS cases in the U.S. would require a random, national sampling of individuals in diverse geographical and social conditions. Individuals who state they have CF or CFS symptoms would all have to be tested. Only those individuals who are tested and found to comply with the CDC’s CFS case definition could be included as CFS patients in the survey.
Hemispherx represents that its 500,000 U.S. CFS case estimate is based on a CDC prevalence rate. We found five surveys conducted by the CDC on the prevalence of CFS cases in the U.S. The studies were limited to Grand Rapids, Michigan; Wichita, Kansas; Reno, Nevada and Atlanta, Georgia. The CDC has not conducted a national study. The CDC has estimated the minimum prevalence rate of CFS in the United States at 4 to 10 cases per 100,000 adults 18 years of age or older. If one uses the entire population of the United States, the range of cases is between 10,400 and 26,000.
Counting CFS patients is made difficult by the complexity of the case identification task, by its unknown cause, and the wide variances of symptoms. This makes an accurate estimate of the number of CFS cases and the cost of treatment difficult to calculate. We found no reasonable basis for Hemispherx’s claim that an effective CFS treatment could generate $1 billion in U.S. sales. However, this discussion is merely academic since there is no study that shows that Ampligen cures CFS or any other disease.
Long-term sufferers of CFS are desperate for any hope of a cure. We believe that Hemispherx has an obligation not to disseminate its inconclusive data to these vulnerable patients who have no means of determining the efficacy of Ampligen.
DESCRIPTION OF AMPLIGEN CLINICAL TRIALS
Hemispherx claims that its Phase II clinical trials have shown that Ampligen increases the physical performance and perceived cognition of treated CFS patients. Hemispherx has conducted three Ampligen CFS Phase II clinical trials. Hemispherx’s Ampligen CFS efficacy claims are not approved, supported or authorized by any U.S. medical association or regulatory agency. Hemispherx has not filed the results or analysis of any clinical trial with the FDA as part of an NDA for Ampligen as a treatment of CFS.
According to Hemispherx, a total of 130 CFS patients enrolled in its three Phase II Ampligen CFS treatment trials. Excluding the patients who dropped out of the studies and those who received the placebo, the Hemispherx trials administered Ampligen to only 79 CFS patients. Of this total, 23 patients were involved in Hemispherx’s Study B. This is the Belgian study. (Studies A and C were conducted in the U.S.) No paper has ever been published on Study B, but Hemispherx still distributes selected data from this study. Study A included only 15 patients. Both Study A and B were open-labeled and not placebo-controlled. The FDA normally does not accept efficacy claims based on trial results from labeled trials and without a placebo control group. Only Study C was claimed to be double-blind and placebo controlled. This leaves only 41 treated patients in Study C to support any safety or efficacy claims. Study C was concluded over seven years ago in 1991. It was published in 1994.
The studies were inherently biased by Ampligen’s known side effects. Ampligen causes sweating, nausea, severe swelling and itching of the extremities. (See section below) In addition to these symptoms, patients who received Ampligen also experienced many other readily noticeable reactions that made it impossible for the Ampligen Phase II trials to be double-blind. Ampligen’s side effects are very serious. In fact, the infusion rate has to be tailored to each patient according to their individual reaction. Even with this bias where doctors and patients know who is getting the placebo and the drug, the Ampligen CFS trials failed. Only severely debilitated patients with long-term affliction were admitted. Study A’s 15 patients had CFS for an average of over two and a half years. Studies A and C’s authors include Hemispherx shareholders, officers and related researchers and were not independently conducted. Simply stated, the patients selected were very ill with an unknown disease and the alleged improvements very small.
The studies’ end-points are not indicative of a recovery or cure. They based their efficacy claims on relative improvements by investigator-assessments and patient self-assessment scores on tests given during the treatment period. All the studies were conducted over six months with no follow-up data. The studies’ data did not include any tests given at intervals after treatment was terminated. Neither the test design nor the end-points measured have been proven to be effective in assessing the efficacy of CFS treatments. The studies only included CFS patients who met the 1988 CDC case definition. The CDC modified its CFS case definition in 1994 after all of Hemispherx’s trials were concluded. This makes the studies obsolete.
AMPLIGEN’S CLAIMED EFFECT ON CFS
Hemispherx claims that Ampligen has demonstrated “significant antiviral activity against human herpes virus type 6 (HHV-6).” It also claims that this virus is associated with a general viral reactivation witnessed in CFS. Hemispherx uses these unproven claims to support its thesis of how CFS patients derive clinical benefits from Ampligen therapy. To substantiate these claims the Company refers to two studies.
The first is “A Chronic Illness Characterized by Fatigue, Neurologic and Immunologic Disorders, and Active Human Herpesvirus Type 6 Infection” published in the January 15, 1992 edition of Annals of Internal Medicine. However, contrary to Hemispherx’s claim the paper states that the study “did not directly address whether HHV-6, a lymphotropic and gliotropic virus, plays a role in producing the symptoms or the immunologic and neurologic dysfunction seen in this illness.” The authors also acknowledge their inability to determine whether the illness they witnessed during the 1984 to 1986 study was CFS simply because at the time of the study the CDC’s case definition for CFS had not been developed.
The second study is titled “Ampligen Inhibits Human Herpesvirus-6 in Vitro.” This 1994 study’s co-authors include a Hemispherx shareholder. The study acknowledges that a great majority of children and adults in all societies are permanently infected with HHV-6 virus. The study makes no representation and provides no data that supports any claim that HHV-6 causes or is related to CFS. There is no study or evidence to support Hemispherx’s claim of a correlation between Ampligen’s alleged HHV-6 inhibiting properties and an effective treatment for Chronic Fatigue or CFS. Furthermore, in a trial conducted by Hemispherx itself titled “A Controlled Clinical Trial with a Specifically Configured RNA Drug, Poly (1)-Poly (C12U), in Chronic Fatigue Syndrome” it is stated that the clinical relevance of HHV-6 reactivation in CFS is unknown.
According to the CDC, HHV-6 is extremely common, infecting at least 95% of persons older than 1 year. As a result of its ubiquitous nature, the CDC specifically concludes that HHV-6 cannot be used to diagnose CFS. The CDC also states that claims that CFS is characterized by some underlying immune dysfunction are simply unsubstantiated theory.
AMPLIGEN’S SAFETY PROFILE
The Ampligen safety profile found in Hemispherx’s 1995 IPO prospectus states that adverse side effects included: “liver enzyme level elevations, diarrhea, itching, urticaria, bronchospasm, transient hypotension, photophobia, rash, bradycardia, transient visual disturbances, arrhythmias, decreases in platelets and white blood cell counts, anemia, dizziness, confusion, elevation of kidney function tests, occasional temporary hair loss and various flu-like symptoms, including fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and vomiting.” Approximately 15% of patients treated in the Ampligen studies experienced a mild flushing reaction. This was “occasionally accompanied by erythema, a tightness of the chest, tachycardia, anxiety, shortness of breath, subjective reports of “feeling hot,” sweating and nausea.” Furthermore, according to the Company these symptoms typically lasted several months.
In February 1992, the FDA advised the Company of its concerns regarding side effects of Ampligen including severe liver toxicity, severe swelling and itching of extremities, severe chest pains, severe muscle cramps and severe flu-like symptoms. In February 1993, the FDA also raised concerns about Ampligen after its review of a 1987 animal study of beagle dogs which suggested a possible association between Ampligen and focal epicarditis (a small localized area of inflammation of the outer lining of the heart). As a result, the FDA asked the Company to revise its informed consent forms for patients enrolling in its clinical trials to include the findings of the 1987 beagle dog studies as well as other toxicities observed during other toxicology studies in rabbits, rats, dogs and monkeys.
CONCLUSION
Ampligen had been researched for years, decades ago and found medically useless in treating various diseases even before Hemispherx’s Stratton Oakmont-led 1995 IPO. It is an off-patent, 25 year old composition available to anyone who cares to pay for its production. We found absolutely no legitimate medical or business purpose for Hemispherx’s continuing attempts to test Ampligen for treatment of CFS and other diseases. In fact, even the theory behind all Ampligen-like composites is now obsolete. The failed drugs were supposed to work by stimulating the body’s production of interferon. Today, commercially produced interferon is available. There is no need to risk the toxic side effects of Ampligen to gain some unpredictable quantity of possible interferon production. For this reason, and because Ampligen failed to show it was an efficient HIV, cancer or CFS treatment, after 32-years Hemispherx still has no FDA approved commercial drug products.
Hemispherx has issued over 18.4 million well-below-market warrants and options to insiders and private investors, and has over 21.7 million shares outstanding. Current management has been in control for approximately 20 years and has been unable to create a business. Instead, we believe management has focused its efforts on fraudulently promoting futile projects that have enabled insiders to sell their otherwise worthless stock to the public. This misguided focus has left the long troubled company with little residual value in excess of its less than $1 per share “shell” value to penny stock promoters. However, the consequences of its unauthorized use of certain copyrighted material and its aggressive promotion of non-FDA approved CFS treatments may eliminate this small residual value.
Short selling involves a risk not associated with the purchase of stock including, but not only limited to, unlimited loss and stock borrowing risks.