Sam Waksal’s Other Biotech Imbroglio
Prototek Corp. was on the brink of insolvency when businessman Samuel D. Waksal scooped it up it in a 1998 stock swap. The tiny biotechnology company had a stockpile of molecules that showed promise against malaria and other diseases, but no approved drugs.
Four years later, the deal that gave Waksal control of Prototek is a bust. The company’s most advanced project, a malaria treatment developed with an $822,000 government grant, cured the disease in mice but also caused them to bleed to death.
“It was a toxic product,” said Dr. Sidney L. Goldfischer, a retired academic and consultant who oversees the company on Waksal’s behalf. Other compounds developed under the grant face years of testing, he said.
Goldfischer said Prototek “was a terrible investment, an unwise investment.”
Waksal’s problems at Prototek, based in Dublin, Calif., are minor compared with the blowup at ImClone Systems Inc., where he is chief executive. ImClone is under congressional investigation for allegedly misleading investors about a cancer drug that has run into costly delays. Bristol-Myers Squibb Co., a large ImClone shareholder, briefly tried to force Waksal out while the companies work out problems with the drug. This month, Bristol-Myers received more favorable terms on its $1.9-billion commitment to ImClone.
The Prototek saga, unfolding in lawsuits in Alameda County Superior Court, pits Waksal against the enigmatic scientist who founded the company. In the middle are investors, among them wealthy members of a Menlo Park country club who acted on a tip from a former golf pro.
Months after the National Institutes of Health’s malaria grant ended, Prototek dismissed Robert E. Smith, the scientist who started the company and sold out to Waksal. Smith claims in a lawsuit that the company fired him rather than honor promises Waksal made to him, including a commitment to fund a pathology chair in Smith’s name at UC San Francisco.
Prototek, in a countersuit, has accused Smith, 71, of stealing secrets from the company.
Prototek and Smith deny the allegations against them.
Shareholders say they haven’t received a financial statement since Waksal took over, a possible breach of California securities laws. Two investment funds are suing Prototek, accusing the company of stiffing them on unspecified royalty payments and a loan balance of less than $5,000. Frank Kohles, a general partner of the funds, said Prototek is offering stock, which he believes is of little value.
“I won’t live long enough to see a return on this,” said Kohles, a retired real estate investor in Roseville, Calif. In a separate suit, Kohles is trying to recover an $85,000 consulting fee.
In 1989 Prototek Was Poised for Success
In court documents, Prototek claims it owes the investment funds and Kohles nothing, but Goldfischer confirmed that the company is in settlement talks with the parties.
Waksal didn’t respond to a request for comment.
No one seems to have made money on Prototek, which at its height in 1990 had 36 employees. Under Smith, a talented biologist with admittedly weak management skills, the company built a portfolio of 11 patents and isolated a trove of protease inhibitors, enzymes that block cell growth. As of mid-2000, six of the inhibitors showed promise in the laboratory against malaria. Among them was the inhibitor that induced a kind of hemophilia, causing mice to bleed, Smth said.
Prototek appeared poised for success in 1989, when, according to company documents, it entered a collaboration with Marion Laboratories, now part of Aventis. Marion invested $5.25 million in Prototek and a protease inhibitor targeting rheumatoid arthritis. The experimental drug showed “astonishing efficacy” in rats, according to a recent article in the chemistry journal Acta Histochemica.
Marion gave the drug to four arthritic dogs with disastrous results. Two dogs died within 18 hours; tests showed the chemical caused heart, liver and kidney damage. Marion withdrew funding, and by 1991 Prototek was down to four employees.
Such setbacks aren’t unusual in the biotech industry, but they are a challenge for small companies funded by private individuals.
By 1996, shareholders had lost patience with losses at Prototek. A group of them, including golfers from the Sharon Heights Country Club, lent Prototek $100,000 and told Smith to find a buyer, said Ken Anderson, a retired dentist. The lenders took Prototek’s patents as collateral, he said.
The investors’ frustration subsequently rose when a prospective buyer they had recruited walked away. Biotechnology entrepreneur Robert F. Butz, intrigued by Prototek’s research, had lined up investors willing to put $5 million into the company. But his group insisted that Smith, then president, leave the company.
Butz said Prototek had isolated as many as 100 protease inhibitors that were protected by company patents, but the company functioned as little more than a scientific boutique. Smith had “lots and lots of molecules, but not a clue on how to take them into the clinic,” Butz said.
Smith retorts that Butz, who went on to launch a gene therapy company, “didn’t have the cash” to bail out Prototek.
Shareholders privately became concerned that Smith wouldn’t step aside. A 1990 report on Prototek by consulting firm Sage Group called Smith an “instinctive scientist ... ineffective in business affairs” who “should be insulated from business activities.”
But Smith, who with his wife held a 52% stake in Prototek, controlled the firm.
Meanwhile, the company’s finances continued to deteriorate. According to an internal memo, Prototek had “no funds to pay overdue accounts payable [and] to fully fund continuing operations.”
Behind the scenes, Goldfischer, a scientific advisor to Smith at Prototek, told Waksal about the company. Goldfischer had Waksal’s ear; his son, Dr. Carl Goldfischer, worked for Waksal as ImClone’s chief financial officer.
“I told him the science was interesting,” said Sidney Goldfischer, professor emeritus at New York’s Albert Einstein College of Medicine.
Waksal negotiated a deal that, on the surface, gave everyone what they wanted. The company got new management--Waksal became chief executive--and an infusion of cash to pay some bills.
Smith gave up a management title, but received $200,000 a year in consulting fees and an invitation to stick around as an advisor. Waksal told Smith in a 1997 letter that his continued involvement in the company was “a major requirement” to the deal.
“It is important that you, Robert, stay involved as a member of both the scientific advisory board and a close consultant to the company in order for us to feel comfortable about moving forward,” Waksal wrote.
Smith said he regrets listening to Goldfischer--”a friend of 30 years”--about Waksal. “It is loyalty versus money,” he said.
During negotiations, Smith said, Waksal promised him “more money than you’ll ever need.... You’ll never want for research funds again.” Instead, “he has not paid Prototek’s [pre-acquisition] bills,” Smith said.
Smith shouldn’t complain, Goldfischer said. For years, a second company owned by Smith and his wife, Judith Kinder Smith, sold a product under license from Prototek. Enzyme Systems Products posts about $1.2 million in annual sales on a chemical product used in laboratory research while Prototek receives royalties of $60,000, Goldfischer said. (Enzyme Systems and Judith Smith are named as defendants in Prototek’s countersuit against Smith.)
Prototek Acquisition Gave Waksal Control
Waksal also structured a deal between companies he controls. As part of the Prototek transaction, a second company controlled by Waksal licensed a Prototek patent--the one that covered the failed arthritis drug--in return for stock that was paid to Prototek shareholders.
The value of those shares is a mystery to shareholders.
“We haven’t received one iota of information” since Waksal took control of Prototek, said Anderson, the retired dentist. “I got the feeling it was the patents he wanted, nothing else.”
California law requires companies with more than 100 shareholders--Prototek had 113 at the time of the stock swap--to issue annual reports. But stockholders must sue to enforce the law and violators face a maximum fine of just $1,500.
Terms of the Prototek acquisition gave Waksal almost complete control of the company.
According to a 1998 offering memorandum, Waksal and his investment partner, New York financier Arthur G. Altschul, control Prototek through a special class of voting stock.
When the deal closed, their combined 12.4% of common equity controlled 77.9% of the votes.
Other shareholders ended up with less power than before.
Pistachio grower Samuel Webster, whose family sank $140,000 into Prototek, isn’t happy but he’s holding his fire.
“I’d like to have more information about what is going on.... I want to be careful about what I say,” he said. “I don’t count it as an asset on my financial statement. But, as far as I am concerned, [Waksal] is the last chance of getting my money back.”
