Biological Disaster

Zonagen Inc. took its name from Bonnie Dunbar's groundbreaking research into contraceptive vaccines. Then, when she wasn't looking, the company took her research.

Three months later, McWilliams assured investors that the company's attempt to secure up to $5 million in permanent financing was simply "running behind schedule" -- oh, and by the way, we need another $230,000 to get us by. By the end of 1989, Zonagen's backers would pony up yet another $200,000 in "bridge" financing.

Podolski claims he saw a problem with Bonnie Dunbar's animal vaccine technology as far back as 1990. Did he warn potential investors? To the contrary, the prospectus that accompanied Zonagen's initial public offering of shares in March 1993 projected a "final product definition" for a dog sterilization vaccine by the end of the year. Zonagen's initial public offering raised $7.4 million. A month later, a research report prepared by Reich & Co., which acted as underwriter for Zonagen's initial public offering, urged investors to grab the company's stock while they could: "Zonagen's lead product candidate, an infertility vaccine, has the theoretical potential to become one of the world's largest-selling drugs at some time in the next decade," the report stated.

Similar exhortations from stock promoters helped Zonagen's stock price rise to $11 a share by the end of 1993.

"I told my customers that, if Ross Perot is in this, the man will not involve himself if there's nothing there," recalls Christine Hasslach, a former securities broker for Reich & Co. "There was Baylor College, there was Lloyd Bentsen. And a vaccine to prevent pregnancy? Fantastic! I thought, 'This is going to be the stock of the century.' "

Zonagen traded at around $10 a share throughout 1994, thanks in part to a $2.5 million investment from German pharmaceutical company Schering AG to help develop the vaccine. Podolski also initiated an aggressive public-relations campaign. One month, Zonagen announced the hiring of a "chief scientific adviser, female infertility," and used the opportunity to plug the company's "discoveries about the mammalian egg." Another release touted a collaborative effort in India to carry out a "large-scale primate study" to test the zona pellucida vaccine. In November 1994, Podolski announced that Zonagen had "cloned and characterized zona pellucida gene structures from a variety of mammals" -- the same claim that patent examiners would later reject because of Bonnie Dunbar's previous research.

In January 1995, Christine Hasslach met with Podolski and some investors. Hasslach, a Dutch immigrant with 15 years of experience as a broker, asked the Zonagen president about the contraceptive vaccine.

"He told me that they were going to have to start all over on the vaccine," recalls Hasslach. "He said Dr. Dunbar's work was sloppy, that the work was no good."

By then, of course, Bonnie Dunbar had sued Zonagen, and Podolski was already spinning a new story to investors. He had found his new product in early 1994 during a visit to Adrian Zorgniotti, a New York urologist, who owned a patent for oral phentolamine, a generic medication sometimes prescribed in conjunction with other substances as an injectable treatment for impotence.

Zorgniotti's patent involved phentolamine-soaked filter strips, which were stuck between the cheek and gum. The idea was that this method of delivery, called buccal administration, would eliminate the "first pass" effect and work rapidly enough to cause erections before the drug left the bloodstream. Zonagen paid Zorgniotti $100,000 for the patent in April 1994.

When Dunbar filed suit the following month, Zonagen put the contraceptive vaccine on the back burner and started pouring money into what it now calls "The Vasomax Solution."

That decision caused Christine Hasslach no small amount of trouble. By May 1995, Zonagen had only $1 million or so in cash, and its price per share had sunk to $3.38. Investors began filing complaints with the Securities and Exchange Commission, claiming Hasslach had misled them about Zonagen's potential.

"When customers buy something, and it goes up, everything is fine," Hasslach says. "The stock comes down, it's a bad broker."

But Hasslach had a hard time explaining how a company with Ross Perot and Lloyd Bentsen behind it could have cash-flow problems. Hasslach also couldn't explain why, when Zonagen needed cash so badly, the company rejected a private stock offering she had arranged. Finally, in October 1995, Zonagen announced it had raised $5.3 million by selling 599,000 shares of preferred stock. Zonagen's original investors, The Woodlands Venture Capital Company and Perot's venture-capital firm, The Petrus Fund, picked up about 75,000 shares, which were later converted to common shares at rock-bottom prices.

"It's really hard to believe that the company had a financial crisis, and has to go down from $10 to $3.38 to raise $5 million, when all these big people are involved," Hasslach says.

By the time Zonagen's stock rebounded in 1996, Hasslach was out of a job and embroiled in a series of arbitration hearings with former clients, in which she had to prove she sold Zonagen's stock in good faith. All the judgments -- the final one just two weeks ago -- were in her favor.

"My clients felt I had betrayed them, but there was no reason not to believe that this company was not genuine," Hasslach recalls. "Whatever they said, they said in such a way that you believed them. I suffered Zonagen for the last three years. I lost my customers and I lost my credibility because of Zonagen. Who is going to give me the last three years of my life back?"

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