Company Struggles to Market 2 Herpes Drugs : Medicine: Meditech Chairman Gerald Kern has overcome many setbacks, but his Encino firm is barely surviving as the necessary FDA research is conducted.

About a decade ago, Gerald N. Kern had a comfortable, high-paying job as executive vice president at cosmetics concern Max Factor & Co. One day, an acquaintance introduced Kern to someone who claimed to have found an effective herpes treatment in a drug commonly used as a laxative.

Kern paid to have some tests done on the drug and, after adjustments were made to reduce toxicity levels, he decided he was on to something. He said goodby to his cushy corporate lifestyle and in 1982 he started Meditech Pharmaceuticals Inc., based in Encino.

Ten years later, Meditech is barely surviving. It has virtually no revenues, a negative net worth of $3.74 million, and Kern is still fighting to get the company’s two anti-herpes drugs to market. Meditech--which went public in an initial stock offering in 1985 and overall has raised about $10 million in public and private offerings--has run out of money “probably 50 times in the last five years,” said Kern, the firm’s chairman, president and chief executive.

Last year, Meditech fended off a petition filed by a law firm, accounting firm Price Waterhouse and a former Meditech employee to have the company placed in federal bankruptcy court liquidation proceedings. The petitioners, who filed the claim in Los Angeles in February, 1990, contended that Meditech was insolvent and owed them a total of about $165,000--which Meditech disputed.

The bankruptcy petition was dismissed by the court in July after Judge Barry Russell ruled that the petitioners failed to prove that Meditech was not generally paying its debts. But Kern said the legal battle cost him a year and a half of lost time. This year, he said, the company will probably have to raise another $2.5 million.

Meditech says it needs the money to finish testing its drugs on humans, a process the company started years ago. Until those human clinical trials are completed, Meditech can’t be sure what the medical results are. In addition, the U. S. Food and Drug Administration requires several complete studies on humans before it considers giving any approval for a new drug to be sold.

Even if Meditech can find more financing, the odds are that its drugs will not be approved by the FDA.

For every 4,000 compounds researched by pharmaceutical companies, only one eventually receives FDA approval, said Jeff Trewhitt, spokesman for the Pharmaceutical Manufacturers Assn., a Washington trade group. If a drug makes it to the human testing stage, Trewhitt said, it still only has a 20% chance of being approved.

While Meditech’s future remains uncertain, there’s no doubt that the potential herpes drug market is huge. More than half of all Americans have the herpes virus that causes cold sores, and between 20% and 40% of the population is infected with the genital herpes virus, said James Rooney, a clinical virologist at the National Institute of Dental Research in Bethesda, Md.

Treatments for herpes are rare, however, because the virus is a parasite and many drugs that inhibit the virus also run the risk of damaging healthy cells. So far, the only prescription drug approved by the FDA for widespread use against herpes is Burroughs-Wellcome Co.’s Zovirax, which had worldwide sales of $838 million in the fiscal year that ended August, 1991.

Also working against Meditech are the staggering costs of developing a new drug. A 1990 study by the Center for the Study of Drug Development at Tufts University estimated that it takes an average of $231 million and 12 years to develop a new drug.

Even for large drug concerns--which are far better equipped to withstand the lengthy process of taking a new drug from a promising idea hatched in a laboratory to a marketable product--the costs can be overwhelming, and have been a key factor driving an industrywide consolidation during the past several years, said Joseph A. DiMasi, a research associate at the Tufts center.

Among the more visible deals was September’s agreement by American Home Products Corp., a drug and medical supply concern, to acquire 60% of cash-starved pharmaceutical biotechnology company Genetics Institute Inc. for $666 million. Also last year, pharmaceutical giant Merck & Co. formed a joint venture with Johnson & Johnson to establish an over-the-counter drug business. And in 1990, biotechnology company Genentech agreed to a $2.1-billion merger with Swiss drug concern Roche Holding.

For small outfits like Meditech, the high costs of developing a new drug are almost impossible to bear. “It’s not to say a small company couldn’t develop a drug and be a success,” DiMasi said. “But things are stacked against them.”

Meditech’s Kern admitted that it’s been much tougher than he ever imagined. “Three years after I was knee-deep in it, I knew it was going to be a lot longer and a lot harder than I ever thought it would be,” he said. “If I had to do it all over again, I’d really have to re-examine my sanity.”

So why has he stuck with it? “I felt a very strong obligation to the shareholders to make it work,” he said. “The other thing that may sound stupid is both drugs work.”

Meditech’s first drug, named Viraplex, is made with bisacodyl, a commonly used laxative. The other drug, MTCH-24, is made with dioctyl sodium sulfosuccinate, or DSS, a stool softener. The company has about six U. S. patents and more than 20 foreign patents on the two drugs.

Kern said laboratory tests show that both drugs, which he hopes to make available in capsule, cream and injectable form, can relieve the symptoms of herpes, reduce the severity of outbreaks and lengthen the time between outbreaks. Kern hopes that clinical tests will show that the drugs work on herpes simplex 1, which causes cold sores; herpes simplex 2, also known as genital herpes, and the related virus that causes chicken pox and shingles.

Based on some laboratory tests, Kern also believes that Meditech’s drugs could be effective against other viruses, such as Epstein-Barr, and in agricultural applications, to inhibit citrus canker and fungus growth in stored grains.

While it might sound odd to suggest drugs long used as laxatives for herpes treatment, it’s not unheard of for old drugs to be studied for completely new uses. For example, minoxidil, a hypertension drug, is now sold as a baldness treatment.

Meanwhile, a much-needed break for Meditech might result from an agreement it recently signed with Sato Pharmaceutical Co. Ltd. of Japan to test one of Meditech’s herpes treatments on humans in Japan.

But for every promising sign, there have been several closed doors for Meditech. Over the years, such big companies as Bausch & Lomb, Colgate-Palmolive and Pfizer have passed on pursuing long-term licensing deals with Meditech, Kern said. He’s now hoping that the clinical trials in Japan will help attract a large U. S. company, and he said he’s talking with one concern--which he would not name--about a possible joint venture.

For Kern, 53, a break would come none too soon. Through his 30% ownership of Meditech’s parent company, Petro-Med, Kern owns about 10% of Meditech’s stock and has options to buy another 5%. His wife, Cynthia, owns 8% of Meditech. The over-the-counter stock trades for a few cents per share.

Over the years, Kern has thrown much of his own money into the company, mortgaging his Encino house that doubles as his office and frequently foregoing a salary. His wife is Meditech’s secretary and his son, Robert, is the company’s attorney. Two employees, a controller and financial vice president, get paid “when there’s enough money,” Kern said. Meditech contracts with outside firms for its laboratory and manufacturing work.

Asked if he now has any regrets about his decision to chuck his Max Factor job and pursue such a risky course, Kern hesitated. “I believe that when I look back from the end of next year, I won’t have any regrets,” he said.