Davstar Stock Price Plunges After Critical Magazine Story : Finance: The Barron’s article alleged that the Newport Beach firm issued misleading press releases touting a medical device.
Shares of Davstar Industries Ltd. lost almost a third of their value Monday after Barron’s, a weekly business journal, accused the medical device company of having pumped up its stock price through misleading press releases.
Shares of the Newport Beach-based medical device maker dropped $3.13 to close at $7.13 on the American Stock Exchange.
And Davstar has been forced by the plunging price to start the clock over on the waiting period for raising $7.5 million in new capital.
The Barron’s article was characterized Monday by Davstar and by an analyst whose company has done business with Davstar as a boon to speculators who have been selling Davstar stock in anticipation of a price decline.
Officials at Barron’s could not be reached for comment, and Davstar officials would not comment beyond issuing a statement Monday criticizing the magazine report.
“The article questioned certain Davstar press releases, but it did not refute the technical accuracy of such releases,” the company said in its statement. “Davstar fully stands by the accuracy of its past press releases.”
Davstar obtained a temporary suspension of trading Friday because its stock price had been falling all week in sales fueled by rumors that a negative article would be published in Barron’s.
When trading closed Nov. 9, Davstar common stock was at $12.88 a share. It was $10.25 per share on Friday.
Monday’s price plunge robbed the company, at least temporarily, of its ability to exercise warrants to raise $7.5 million in capital. Davstar can only exercise the warrants after its common stock closes at $7.50 a share for 30 consecutive days. The company was five days short of the mark Monday.
In the article, Barron’s staff writer Edward A. Wyatt questioned Davstar press releases about government and academic approvals of its Cen-Slide, a urinalysis system designed to guard lab technicians against infection.
The Food and Drug Administration has approved the product for marketing.
But Davstar has been promoting Cen-Slide since July as a system that helps employers comply with federal Occupational Safety and Health Administration rulings that they must protect workers against various infectious diseases, including the AIDS virus and hepatitis.
The Barron’s article said that the OSHA regulations do not include urine in the list of “potentially infectious materials” and that technicians studying urine samples already protect themselves with gloves.
Wyatt quoted an OSHA spokeswoman who said the agency’s regulations would apply to urine only if there was blood in it.
The Davstar statement Monday said that “OSHA has specifically identified blood-borne pathogens in urine as potential carriers of the HIV virus. . . . Davstar contends that its . . . Cen-Slide system offers the maximum level of protection to technicians handling urine.”
The Barron’s article also questioned a Sept. 24 press release that said the federal General Services Administration approved Cen-Slide “for purchase by federal government-related hospitals, medical facilities and agencies, including the Veterans Administration.”
Wyatt’s piece charged that the release “exaggerated” the relationship and quoted a GSA official who said the agency does not have a purchase agreement with Davstar. But Davstar is on a broad list of companies that are notified when GSA is seeking bids on equipment and supply contracts, the official said.
The article also questioned an Oct. 16 press release that West Virginia University’s Center for Industrial Research Applications “found the Cen-Slide to be the only system it researched that offered maximum protection against infection to laboratory technicians.”
Center director James Smith was quoted by Wyatt as saying that he had made the statement, but only in a letter that was not for general publication. Smith said that the center never compared Cen-Slide with any other system and had not tested the product in actual lab conditions.
In its statement Monday, Davstar said that it has submitted a request to the American Stock Exchange to investigate the source of rumors about the Barron’s article last week.
The statement also questioned the timing of the article in light of a recent wave of “short” selling of about 700,000 shares of Davstar stock. “Short sellers” make money by selling stock for future delivery in expectation of a price decline and then buy the shares when the price falls. They lose money if the price doesn’t decline.
Advance word of the article apparently leaked out through the Prodigy computer network bulletin board, where information about a company can be posted by anyone with access, the Barron’s article said.
Lorraine Maxwell, a research analyst for Paulson & Co. in Portland--which underwrote a recent secondary offering that raised $9.7 million for Davstar--said it is common for Barron’s and short-sellers to target stocks that have skyrocketed even though sales and profits have yet to take off.
“They target the small capital stocks that are not accompanied by fundamentals” like a history of profitability, Maxwell said. “The short-sellers like that.”
Davstar has posted losses totaling $4.7 million in its past five fiscal years. It lost $2.8 million on sales of $4.6 million for the fiscal year ending June 30.
