Realty Woes, Health Care Cuts Hurt Frawley : Hospitals: Troubled times may have hit too hard for the company that specialized in running Schick addiction treatment centers to recover.

Frawley Corp., which claims its Schick tobacco, alcohol and drug addiction treatment centers have restored thousands of patients to productive lives, is itself suffering such a severe financial hangover that its own recovery is dubious.

The company has been forced into a tailspin by the push for cost containment among health care insurers combined with the collapse of the market for Southern California real estate--another of Frawley’s principal holdings.

Since 1988, Frawley’s last profitable year, its total losses have piled up to $12.8 million--including a $689,000 loss on revenue of $1.82 million in the quarter that ended March 31. Meanwhile, its annual revenue has tumbled from $35.4 million six years ago to $9.83 million last year. Frawley’s stock, which traded at $8.50 a share in the late 1980s, was down to 6 a share before it was delisted by the Pacific Stock Exchange in 1992.

And the company’s auditors, Deloitte & Touche of Los Angeles, raised a classic red flag by saying they have “doubt about (Frawley’s) ability to continue as a going concern” in documents filed in April with the Securities and Exchange Commission.

Patrick J. Frawley Jr., the eccentric chief executive, says he will pull his company out of its hole by selling off real estate, jettisoning two of Schick’s three addiction treatment hospitals, and putting smaller Schick units in acute care hospitals across the country.

A millionaire who once chaired the Schick Safety Razor Co., Frawley, 71, may have the wherewithal to succeed, but the odds against him are long. As of March 31, the company owed $4 million in current liabilities--due within 12 months--while its current assets had shrunk to $2 million.

“I think they’re trying as hard as they possibly can to turn things around,” said Frank Hawrylak, an analyst with Tweedy, Browne Company, a New York investment firm that held about 7% of Frawley’s stock before unloading it earlier this year. “Frawley believes he’s got a good product,” Hawrylak said. “I don’t know if he does or not.”

The company’s core business has always been its Schick Laboratories unit, which has a handful of small addiction treatment centers and, until recently, large addiction treatment hospitals in Santa Barbara, Seattle and Fort Worth, Tex. Schick treats addictions by administering small electric shocks or drugs that induce nausea while patients are confronted with the substances they are addicted to. Frawley says Schick has a 70% success rate in treating alcohol and tobacco addictions, and a 50% success rate treating addictions to cocaine and other drugs.

Schick thrived in the 1980s as Americans were becoming more health conscious, and celebrities and athletes seemed to be tripping over themselves to check into addiction treatment facilities such as the Betty Ford Center in Rancho Mirage. At the same time, Nancy Reagan was fervently pushing her “just say no” to drugs campaign.

From 1980 through 1988, Frawley was dependably profitable. But by the late 1980s, insurance companies became increasingly reluctant to pay for expensive treatments. The expansion of cost-conscious health maintenance organizations accelerated the trend. In the past decade, the money HMOs budget for mental health coverage, including addiction treatment, has dwindled from $2 per patient per month to about 50 cents, said John Edelston, president of HealthPro Associates, a consulting firm in Woodland Hills.

Much of the cost savings has been achieved by curtailing inpatient care in favor of cheaper outpatient treatment. Schick has bucked this trend, and it still requires patients to check in for a 10-day stay, followed by a pair of two-day treatment sessions. Patrick Frawley insists that altering the Schick method would reduce its effectiveness.

As a result, Schick’s price of about $12,000 for treatment is more than twice the cost for typical outpatient treatments at other detox centers.

Schick’s high prices have made it difficult for the company to land contracts with HMOs, which provide an ever-growing share of the nation’s medical care. Once able to attract patients by advertising on late-night TV, Schick now finds that it isn’t even an option on “preferred providers” lists of most HMOs.

Increasingly dependent on patients who pay out of pocket for treatment, and facing more competition from nicotine patch treatments and other alternative products, Schick’s business has shrunk. The company treated about 2,000 addicts in 1988, and Patrick Frawley acknowledged the number “has gone down steadily” ever since.

Frawley Corp. has managed to stay afloat largely because it has sold off Southern California real estate that it had purchased with 1980s profits from the Schick division. By 1989, the company owned 713 acres of largely undeveloped land in the Santa Monica Mountains near Agoura that cost about $12.9 million, according to SEC documents. But just when Frawley needed to start selling the land to raise cash, the local real estate market began to slow. Over the past three years Patrick Frawley said the company sold 450 acres in the Santa Monica mountains and suffered a $3-million loss.

Frawley and his son--Michael P. Frawley, vice president of the corporation--have also lent the company $416,000, according to SEC documents.

That Frawley has dipped into his own pockets reflects his obsessive commitment to the business. For Frawley, who admits he is a former alcoholic, curing the nation’s addicts has become a personal crusade.

In the 1940s Patrick Frawley started to make a business name for himself by taking over a failing ballpoint pen parts maker and turning it into the Papermate Pen Co. He later chaired the Schick Safety Razor Co., and Technicolor, a North Hollywood maker of film prints and videotapes.

Frawley also made millions in real estate deals, including the sale in 1987 of a 4.5-acre Holmby Hills property--once owned by Bing Crosby--to television producer Aaron Spelling for $10.25 million. Spelling subsequently demolished the Crosby mansion and built a 56,000-square-foot house.

Frawley’s life took a new turn in the early 1970s, when he was treated for alcoholism at the Shadel Hospital in Seattle. He was so impressed with the hospital that he bought it and launched Schick treatment centers in 1972. Fighting addictions became his life’s mission, and often he seems able to talk about little else.

During a series of lengthy telephone interviews, Frawley expounded on the personal and social costs of addictions. Asked to discuss the condition of his business, Frawley repeatedly resisted. “You’re not interested in the guts of it--saving people’s lives,” he said.

Sketching out his plan to save the company, Frawley said the first step is to “get rid of the bricks and mortar.” So the company shut down its 50-bed detox hospital in Fort Worth in May, and Frawley said the building was expected to be sold this month for $1.6 million.

The 30-bed Santa Barbara hospital was closed in June, and Frawley hopes to sell it for about $2.5 million, he said. The proceeds from the hospital sales will be used to pay off debts, he said.

The hospitals will be replaced by a network of smaller treatment centers within acute care hospitals across the country. One such unit, a 13-bed facility at St. Mary Medical Center in Long Beach, opened in November. Four others could be in place by the end of the year, Frawley said, though he declined to give more details.

Frawley, whose family owns about 70% of the company’s stock, said he hopes the Schick unit can cut its costs by sharing administrative, clerical and maintenance costs with hospitals. And hospitals, Frawley hopes, will welcome the business because the trend to outpatient care has left many hospitals with empty beds.

“We’re trying to lower costs as much as we can,” said Frawley. “I think we’re going to be successful eventually.”

But with revenues on a steep five-year slide, the escape hatch for Frawley Corp. grows narrower by the minute. That is a problem even Patrick Frawley acknowledges.

“Obviously we can’t do it much longer,” Frawley said. “We’ve got to come up with some solutions.”