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Monday, June 16, 1997
Epitope HOW DID IT FIND TROUBLE? Tainted strawberries have left Epitope investors wondering if these shares will ever bear fruit. The year began well for Epitope, with the respected Journal of the American Medical Association (JAMA) reporting that the company's non-invasive oral test for HIV antibodies worked as well as traditional blood tests that require a needle. SMITHKLINE BEECHAM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBH)") else Response.Write("(NYSE: SBH)") end if %>, which is marketing the EpiScreen/Orasure test to doctors and clinics, then rolled out the PR. Good press and acceptance of Orasure by some leading medical facilities sent the stock soaring 60%. But in early April, the U.S. Department of Agriculture (USDA) traced an outbreak of hepatitis A among Michigan schoolchildren to frozen strawberries distributed to the U.S. school lunch program by Andrew & Williamson (A&W), an agricultural products distributor that Epitope acquired in December to complement its Agritope subsidiary. To make matters worse, A&W management had lied about the source of the strawberries. The berries came from Mexico not the U.S., violating USDA rules. Epitope stock dropped to $6 1/4. Yet Epitope seems to have distanced itself from legal fallout from the debacle. On May 4, the merger with A&W was officially rescinded. Unfortunately, Epitope has millions of dollars still tied up in A&W. The episode has also sullied Epitope's reputation and led the board to relieve Chairman and CEO Adolph J. Ferro of his duties so he can concentrate on the Agritope subsidiary he co-founded, which will almost certainly be spun-off or sold. BUSINESS DESCRIPTION Based in Beaverton, Oregon, Epitope has developed a novel FDA-approved diagnostic test for the detection of HIV, the virus believed to cause AIDS. The Orasure/Episcreen test requires one to place a special cotton pad in one's mouth for two minutes, collecting mucous that contains antibodies. This test pad is then sent to a lab for analysis. The product is marketed to insurance companies, doctors, and clinics, with SmithKline paying a per unit fee plus royalties. Epitope will soon seek FDA approval for an over-the-counter home test. The company's Agritope subsidiary works on genetic engineering of plants. FINANCIAL FACTS Income Statement* 12-month sales: $8.6 million 12-month income: ($3.2 million) 12-month EPS: ($0.33) Profit Margin: N/A Market Cap: $106.2 million (*Continuing operations only; also excludes a $8.4 million charge in second quarter for disposal of A&W) Balance Sheet Cash: $12.8 million Current Assets: $17.9 million Current Liabilities: $4.6 million Long-term debt: $0.01 million Ratios Price-to-earnings: N/A Price-to-sales: 12.3 HOW COULD YOU HAVE SEEN IT COMING? Good times appeared to be just around the corner given the JAMA article, SmithKline's marketing muscle, and some small January purchases by insiders at $11 a share. The hype around the new anti-HIV drugs also pointed toward new demand for antibody testing. But the strawberry fiasco surprised everyone. On the other hand, Orasure sales have been slow to materialize considering the estimated 60 million HIV screening tests performed each year in the U.S. Plus, broad-based screening for HIV antibodies remains of dubious value since nearly all positive results on people outside the risk groups are false positives. WHERE TO FROM HERE? The uncertainties have kept the analysts away, and even some of the best-informed bulls in the Fool message folder seem to have lost faith. Epitope may have escaped the liabilities associated with the tainted strawberries, but even voiding the A&W acquisition has cost over $8 million, not including legal expenses. Epitope shareholders will probably want to see Agritope jettisoned, regardless of any potential long-term value. Prudent investors might want to consider it nearly worthless, particularly since former CEO Ferro accepted a one-time cash payment of just $590,000 to relinquish his rights to Agritope's principal technology. The question, then, is whether sales of Epitope's HIV antibody tests and the additional uses of this technology (it can already detect cocaine and nicotine) justify the current stock price. Product sales for the second quarter were just $2.2 million, down from $2.4 million in the first quarter, though sales doubled year-ago levels. Gross margins also soared to 61% from 35% during the second quarter, thanks to the increased volume. Despite this good news, the company still lost $0.10 a share from its main division over the last six months. Firm orders for the third quarter stood at $2.1 million at the end of March, but that was before all the bad press. With no earnings in sight and management on the ropes, the June 17 shareholders' meeting should be eventful. -Louis Corrigan ([email protected])
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