U.S. Bioscience's Perilous Path From Class Act To Class Action

Date: April 13, 1992 The orphan drug firm, Wall Street's darling in 1991, now faces fraud charges brought by some of its investors As 1991 came to a close, suburban Philadelphia-based U.S. Bioscience was riding high. In just 12 months the four-year- old biotechnology company had delivered its first anticancer product, Hexalen, to market. Corporate staff had doubled to 100 employees. The firm's much-publicized second product, Ethyol, was in accelerated review at the Food and Drug Administration. And, most notably, U.S. Bioscience's stock had rocketed from $17 to as high as $87 per share on the American exchange. It was a dream come true for company founder and chief executive officer Phillip S. Schein, as his firm made headlines in the business and scientific press. But since the New Year, most of Schein's immediate high hopes for his company have come tumbling down. On January 31 FDA ruled to withhold approval of Ethyol, pending further clinical study. Wall Street reacted violently to the news, and U.S. Bioscience's stock price plummeted 40 percent in one day, the result being that the company lost half its $1.2 billion market value on February 3. (At press time the stock was selling at just under $15 a share.) And throughout February the news only got worse: More than 25 lawsuits have been filed in the United States District Court in Philadelphia by stockholders alleging that U.S. Bioscience executives committed fraud throughout 1991 by misrepresenting Ethyol's chances for approval with FDA, all the while taking personal profits on the stock's dramatic rise. But despite FDA's deferral and pending lawsuits, many Wall Street analysts are still issuing a "buy" on U.S. Bioscience stock. Indeed, if all goes as planned for Ethyol with FDA from here on, Shekhar K. Basu, a vice president with New York-based securities firm Punk, Ziegel & Knoell, predicts, U.S. Bioscience will remain "the preeminent emerging cancer company." John McBride, vice president for business development at U.S. Bioscience, says that identifying the products his company will license is not as difficult as one might imagine. "Basically, it's the contact-driven aspect of the business," he says. He or another corporate officer will hear through the grapevine who may be working on a project of interest, and will put out feelers to determine if there might be a licensing opportunity. He is aided, he says, by the scientific process itself: "By the time a product gets to the clinical stage, the investigator and companies want the results published. So the confidentiality of corporate projects evaporates." Once a deal is made, in return for a licensing fee paid up front and a percentage of eventual sales of the product--royalties that usually range between 2 percent and 7 percent, according to senior vice president for finance and administration Robert I. Kriebel--U.S. Bioscience acquires the patent and full ownership of the compound from the original developers of the drug. Of course, U.S. Bioscience must also cover all expenses of getting the drug through clinical trials and Food and Drug Administration review, a process that can take some 12 years. Two special legal considerations help make these costs more palatable, and the firm's business strategy more feasible. The first is the so-called Orphan Drug Law, passed by Congress in 1988 to help promote development of drugs with a small target market. Under the law, any company developing a drug with a target patient population of fewer than 200,000 is entitled to a period of market exclusivity and certain tax benefits. The second legal remedy U.S. Bioscience has is to get a special congressional extension for a patent. It has currently made such an application for the anticancer drug Ethyol, whose original patent expires this year. While the passage of such an extension is not common, Mc-Bride notes, it is not without precedent. --S.L-JD. Schein's idea for the company was a simple one: to identify, license, develop, and sell products that other pharmaceutical firms had put on hold (so-called orphan drugs). A small company might not have the funds to pursue a project through costly clinical trials; a large company might feel that the target patient population represents too small a market to warrant the cost of developing the drug; or a company of any size might discover a compound that is effective in an area outside of the firm's business strategy. (A firm whose regulatory expertise and manufacturing and sales capabilities are geared toward the cardiovascular market, for instance, would have a difficult time developing a cancer drug economically.) Nonetheless, these compounds do represent promising--and potentially lucrative-- drugs. So Schein proposed to gather a staff that would identify drug candidates, design new clinical trials, usher the stalled compounds through the FDA approval process, and manufacture and sell the resulting product. The company's licensing strategy takes "a lot" of the risk out of the classical equation for drug development, says John McBride, vice president of business development for the company. "The Pharmaceutical Manufacturers Association has data that suggests that if you go back to the stage where the medicinal chemist first synthesizes a compound, there is a 1-in-5,000 chance that that compound will end up as a product. The odds get reduced substantially as you work your way through the development process," McBride says. By the time U.S. Bioscience identifies and licenses a compound, it has usually passed through preclinical animal studies successfully, and at least some phase I clinical data have been collected to suggest that the drug is safe for use in humans. This licensing strategy is not without precedent. Marion Laboratories Inc. was founded in 1950 on the same in- licensing strategy, and it was largely on the strength of two licensed compounds, the heart drug Cardizem and the ulcer drug Carafate, that Marion became the fastest-growing pharmaceutical company of the 1980s. Upon its merger with Merrell Dow Pharmaceuticals Inc. in 1989, Marion had 3,400 employees and more than 40 products, and sales had topped $900 million, according to a Marion official. But many in the industry feel that, despite the recent setback for Ethyol by FDA, U.S. Bioscience will improve on that record. A major factor the company has in its favor, according to some analysts, is Schein himself. "Phil Schein is the Encyclopaedia Britannica of the cancer area," says Basu. "He has published volumes in the cancer area, and they sit on doctors' shelves right next to the Merck Index. He has a tremendous amount of credibility in the oncology community." Schein's reputation enabled him to convince entities like Philadelphia-based Wyeth-Ayerst Laboratories and the United States government's Southern Research Institute in Birmingham, Ala., to sign over commercial rights to promising compounds back when U.S. Bioscience was just an office with a secretary. It also enabled him to build a staff with an impressive record in the pharmaceutical industry. This team has since done a notable job of identifying compounds with potential and getting approved products manufactured and marketed in short order. For Hexalen (an ovarian cancer therapeutic), for instance, the company licensed rights from Wyeth in 1987, redesigned and ran clinical trials and filed a new drug application with FDA in late 1988, got product approval in December 1990, and launched the product--its first--in 1991. But what has really drawn attention has been U.S. Bioscience's ability to speed its products through the normally pitfall-ridden and time-consuming FDA approval process. Ethyol, a drug that protects normal cells from the harmful effects of chemotherapy and radiation, was originally developed by the U.S. Army at the Southern Research Institute in the 1960s and 1970s as a potential method for protecting troops in the field during wartime. But when the compound was discovered to have a half-life of less than 10 minutes and require intravenous delivery, the project was dropped owing to logistical problems. Recognizing Ethyol's potential as an adjunct to cancer therapy--much higher doses can be delivered without side effects to normal tissues--U.S. Bioscience licensed the compound in 1987. Clinical trials were conducted and, in September 1991, a new drug application was submitted to FDA. Analysts didn't expect the agency's Oncology Advisory Committee to consider the application for at least nine months. So when, in early November, the committee announced that it would review the application on Jan. 31, 1992, the price of the stock tripled between the time of the announcement and the committee meeting. FDA's formal mandate, issued in September 1991, to accelerate the review process for drugs that treat life- threatening conditions--in practice, a classification that applies primarily to cancer and AIDS therapeutics--certainly played a role in the speedy attention Ethyol received, and should be beneficial for all of U.S. Bioscience's products. But the extensive experience of Schein, an ex-chairman of the FDA Oncology Advisory Committee, and his team seemed to many to be a prominent factor. Ironically, it is this same strong reputation and experience of the U.S. Bioscience team that may be their undoing in court. On January 31 the FDA Advisory Committee decided to withhold formal approval of Ethyol pending further data from the company. This ruling, in conjunction with Marion Merrell Dow's January 30 announcement that it intended to sell its 17 percent share of U.S. Bioscience, was responsible for the stock's violent plummet on Feb. 3. In scientific circles, such a request for more information is a common one, Bill Mills of the Venture Capital Fund of New England says, and one that is "not necessarily negative. The FDA review process is not intended to be a rubber stamp process. It is a thoughtful review by knowledgeable people outside of the company." But the stockholders suing the firm in federal court are alleging that the public statements issued by Schein and the company throughout the fall of 1991, after the accelerated review of Ethyol was announced but before the com- mittee met, misrepresented the efficacy of Ethyol and its prospects for FDA approval. And at least one of the suits alleges that, based on small sample size and doubts as to the statistical significance of the results, U.S. Bio- science officials knew that FDA approval on the basis of current data was unlikely. The suit points out that during this same period, Schein and other officers of the company sold 1.1 million shares of personally held U.S. Bioscience stock, for a total of $22 million. The suits are being consolidated into one and the stockholders have requested a jury trial. Company officials and lawyers for the stockholders could not be reached for comment on the case. In the meantime, U.S. Bioscience is continuing about its business, meeting with FDA to plot a course for completion of Ethyol trials, planning for a scale-up of manufacturing and sales operations geared toward a potential launch date of Ethyol in 1993 or 1994, and always on the lookout for other orphan drugs. "We are looking to be a company that develops, registers, and sells products on a worldwide basis," says Robert I. Kriebel, senior vice president for finance and administration at U.S. Bioscience. But while Schein's much-admired orphan drug strategy has succeeded in taking a great deal of the scientific risk out of the pharmaceutical game, it is obvious that many pitfalls--legal, financial, and scientific--remain. Susan L-J Dickinson is a freelance science writer based in Philadelphia.

U.S. Bioscience's Perilous Path From Class Act To Class Action

Interested in reading more?

Become a Member of