Older and Wiser? : Chantal Learns Firsthand That Success Often Brings Scrutiny

Chantal Burnison was flying high, hobnobbing with the likes of Tony Curtis, Barbara Eden and Morgan Fairchild at a celebrity-studded bash to promote her company’s anti-wrinkle cream at an exclusive Beverly Hills hotel in November 1994.

Word of the pricey cosmetic cream, called Ethocyn, touted by the company as a “miraculous molecule,” was spreading rapidly among the affluent and aging. And soon Burnison’s firm, Chantal Pharmaceutical Corp., would be basking in favorable headlines: “Skin Care Breakthrough May Be Fountain of Youth,” trumpeted one drugstore trade publication.

Moreover, Chantal stock was on the verge of an eye-popping roll, propelled by breathless forecasts by an obscure investment firm that Ethocyn sales would hit $200 million a year in three years.

But Chantal’s reputation developed a nasty blemish last week when news reports questioned the effectiveness of the company’s product and its ability to compete with a new wrinkle cream from Johnson & Johnson. Burnison, a chemist who feels more comfortable in the research laboratory than at investors’ confabs, was ill-prepared for what followed: a punishing lesson in the ways of Wall Street.

“There’s a lot of disappointment now,” a weary-sounding Burnison said in a phone interview from New York after several days of damage-control with investors, securities analysts and journalists. In two weeks, the company’s stock has lost nearly 75% of its value, plunging from a high of $28 to close at $7.50, up 87.5 cents, in Nasdaq trading Friday.

“We have a company with a product on which we’ve done $17 million in research. . . . I’m convinced the product works,” says Burnison, 45, who uses Ethocyn herself.

If these events weren’t bad enough, Burnison canceled an investors’ meeting in New York on Thursday to return to Los Angeles after her mother became seriously ill. That sparked Wall Street rumors that Burnison had fled the country, a company spokesman said.

On Friday, Burnison denounced what she called “vicious rumors and outright lies” about her and the company. Chantal said it would ask the Securities and Exchange Commission and National Assn. of Securities Dealers to investigate unusually high trading volume in the stock. Company and investment sources blame the rumors on short-sellers, who make money by speculating on stocks whose prices they expect to fall.

With such troubles, it may take more than the New York “crisis management” consultant Chantal hired to shore up the Los Angeles-based company’s reputation.

Chantal’s woes show what can happen when a company is ill-prepared to handle the closer scrutiny that often comes with sudden success. And it demonstrates how marketing hype--especially when it flirts with claims of medical breakthroughs--can backfire when subjected to more scrutiny.

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The trouble came in news reports--including a highly critical article in Barron’s magazine--that questioned the effectiveness of her company’s product and the validity of Ethocyn sales figures. The business weekly also questioned the reputation of Chantal’s chief marketer and distributor, a smooth-talking sales executive who has hawked car-cleaning wands and Wacky WallWalkers, fad toy octopuses that wiggled down walls. Along with that came rumors that federal regulators were investigating Chantal’s marketing claims.

Burnison initially responded to the Barron’s article by denouncing “inaccuracies in the press”--without specifying what they were--and refusing further comment. Later, on the advice of her new publicist, Chantal announced several moves to shore up investors’ confidence.

The company said it will hire the accounting firm Coopers & Lybrand to conduct an independent audit of its distributor, Los Angeles-based Stanson Marketing, focusing on sales figures. The company also promised to convene a telephone conference call for investors with “nationally recognized dermatologists and skin care experts” to vouch for Ethocyn.

Burnison, a chemist and lawyer, founded the company 13 years ago in a small laboratory in a factory owned by her father, Eugene Burnison, inventor of the pneumatic nail gun used by carpenters. Financing for the company’s early research came through a deal Burnison struck with her father: He promised to fund her research if she agreed to go to law school instead of medical school, as she had planned. He hoped that a law degree would help her take over his company when he retired, Chantal Burnison says.

(Last week, Chantal said that a company owned by Burnison’s father and other family members, CBD Pharmaceutical Corp., sold 300,000 of its 1.4 million shares of Chantal stock in December for more than $20 a share. Burnison says the decision was made by her father to raise capital for a new business venture and that she has sold none of the 1.5 million shares she personally owns.)

The company has patented three chemical compounds known as anti-androgens that it has targeted for use on male-pattern baldness, certain cancers and acne and other skin conditions.

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Only one of those compounds, Ethocyn, has developed into a product. Ethocyn is sold as a nonprescription cosmetic at 14,000 drugstores nationwide, and the firm will soon announce deals with two major drugstore chains to carry the product, company officials said.

Chantal’s sales reached $7.2 million for the year ended June 30. For the three months ended Sept. 30, sales rose sharply, to $10.9 million.

William Gibson, an analyst at Cruttenden Roth in Santa Barbara, whose forecasts of $200 million in annual revenue by 1997 have helped propel Chantal stock, says he has checked with retailers around the country and been told that Ethocyn is selling well. At the 328-store Longs Drugs chain, Ethocyn sales are “exceeding our original projections,” spokesman Clay Selland says. “It’s something our customers are asking for.”

A two-month supply of Ethocyn costs $75. But the product faces competition from Johnson & Johnson’s Renova, which last month received FDA approval for sale as the first prescription medication to help reduce wrinkles. Renova, which will cost only $25 to $30 for a two-month supply, is a version of Retin-A, the prescription acne medication.

Chantal has promoted Ethocyn through a costly marketing campaign that includes television spots and magazine advertisements in Vogue, Ladies Home Journal and Town & Country. The ad campaign is highlighted by a testimonial from Karen Phillips, a 57-year-old accountant at Chantal who says she personally tested Ethocyn by applying it to only half her face and neck for nearly one year. The magazine ads show an unretouched photograph of Phillips in which significantly fewer wrinkles are visible on the side of her face and neck that she says was treated with Ethocyn.

The ad touts the product as “a molecule so miraculous we patented it.”

Chantal’s claims for Ethocyn’s anti-aging effects rely primarily on clinical trials conducted by Richard Strick, a clinical professor of dermatology at UCLA. After four years of research, funded by Chantal, Strick presented his findings at the American Academy of Dermatology in 1994.

In a study of 29 patients age 40 or older, Strick reported that Ethocyn increased elastin content in the skin an average of 100%, and sometimes as much as 500% in patients with an already low elastin content. As people age, the skin loses its elastin, which frequently causes wrinkles or sagging skin, Strick explains.

“There is no doubt whatsoever in my mind that this works,” said Strick, who has made public appearances on behalf of Chantal but says he has no financial interest in the firm.

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Other dermatologists report seeing positive effects on patients who have been using Ethocyn.

Ronald Bronow, a West Los Angeles dermatologist who has about 50 patients using Ethocyn, says roughly 60% are pleased with the results.

Bronow says he has “never seen these kind of changes with moisturizers” or other skin-care products. “I think this product is probably for real.”

Some doctors, however, are skeptical.

Peter Goldman, a Los Angeles dermatologist and associate clinical professor at UCLA Medical School, says 10 to 20 of his patients have used Ethocyn and most “have not been particularly thrilled that it’s done as much as promised.”

Goldman says Strick’s findings should be considered “very preliminary” because his research did not use a control group. “It was surprising to many of us how, based on such limited data, there was so much hoopla created by Chantal,” he says.

Stephen Tucker, a dermatology professor at the University of Texas Medical Center in Houston, has completed a three-month placebo-controlled study of 20 patients using Ethocyn. The data will be analyzed by Strick, he says. Noting that Strick also conducted the first study, Tucker said the purpose of the “blinded” study is to eliminate any possibility of researcher bias.

But if the new study shows Ethocyn is effective, it could create more problems for Chantal. If Ethocyn really has an effect on the structure or function of the skin, FDA officials might require that it be approved as a drug--a lengthy and costly process.

In fact, Chantal sought FDA approval to begin clinical trials for Ethocyn in 1988 but put the application on hold because it did not want to spend the money, says Robert Pinco, a Washington attorney who represents Chantal in FDA matters and is a Chantal director. Chantal makes no medical claims about Ethocyn, Pinco says, adding: “We don’t say how it works or what happens.”

The company wasn’t always so cautious. In an October 1994 press release, Chantal claimed that Ethocyn “dramatically affects the elasticity and resiliency of the skin.”

The FDA, meanwhile, is aware of the controversy involving Ethocyn and has begun a “fact-finding” review of Chantal’s marketing claims, not a formal investigation, said John Bailey, director of the FDA’s Office of Cosmetic and Colors.

Bailey says companies are not permitted to sell products as cosmetics while promoting their drug-like effects. “You can’t have it both ways,” he says.