La Jolla Pharmaceutical can't shut down

After an agonizing wait of more than 40 years, science may come up with a treatment for lupus. But the two companiesworking together on the promising development are not based in San Diego County. At the same time, a local company, La Jolla Pharmaceutical, which has failed to create a lupus drug, wants to shut down but can’t get its shareholders to approve the dissolution.

Lupus is a life-threatening autoimmune disease afflicting up to a million people in the United States, 90 percent of whom are women, mainly in their childbearing years. The disease can attack the skin, joints, heart, lungs, blood, brain, and kidneys.

On November 2, it was announced that Maryland-based Human Genome Sciences and Great Britain’s GlaxoSmithKline may have a drug to relieve symptoms. It could get regulatory approval next year and reach a billion-dollar market. Human Genome’s stock leapt 26 percent the day the news was announced.

Sadly, La Jolla Pharmaceutical has failed in its 20-year effort to develop a lupus drug, but its shareholders won’t vote on a liquidation proposal. It set a special meeting of shareholders for October 30 to vote on the board’s recommended dissolution. It was reset to November 6, November 13, and again to November 24, as more than 90 percent of shareholders still have not cast their votes. The company needs a majority.

In February of this year, La Jolla got the devastating news that its lupus treatment had failed. A month later, Massachusetts-based Biogen Idec got similar news. Its San Diego wing had been developing a lupus treatment that also struck out.

Since 1989, La Jolla Pharmaceutical has been working on a treatment, named Riquent, to combat renal flares, the sometimes-fatal inflammations of the kidneys of lupus patients. This was a potentially lucrative market, because 40 to 45 percent of lupus patients develop kidney disease.

It has been a roller-coaster ride. Early on, the company got a $4 million boost from Abbott Laboratories, a prestigious maker of health-care products. La Jolla Pharmaceutical stock got as high as $61.25 in 2000, before the tech stock crash. It also hit highs of $53.75 in 2001 and $47.10 in 2002 during a tough bear market.

Investors and speculators kept gobbling up the stock, even though La Jolla’s revenues were essentially nil. In its most recent quarterly filing to the Securities and Exchange Commission, the company pointed out, “We have never generated revenue from product sales.” Indeed, from its beginning, the company built up a staggering cumulative deficit of $423 million.

Initially, La Jolla intended to work on autoimmune-related health problems afflicting people suffering strokes, heart attacks, deep vein thrombosis, recurrent fetal loss, and other diseases. But it put substantially all its resources behind the development of Riquent. The company became a one-trick pony.

This made the biotech more vulnerable. In 1999, Abbott pulled out. Beginning in 2003, La Jolla stock gradually declined in a sawtooth pattern. In 1999, 2003, and 2004, when Riquent experienced problems, the stock took big tumbles, but it gradually recovered some of the losses. In early 2007, it spiked up on seemingly good news, then receded.

In early January of this year, La Jolla was tossed what seemed like a lifeline: Novato’s BioMarin Pharmaceutical signed a development and commercialization pact with the company that over a long period might produce as much as $289 million. In one day, La Jolla stock jumped from 75 cents a share to $1.36 on very heavy volume. As euphoria rose, the stock moved up to $2.31. But BioMarin gave investors a warning: its chief executive stated, “The development history of Riquent has been long and challenging.”

A month later came the disastrous news. An independent data-monitoring board that had been analyzing results of a Riquent clinical trial concluded that continuing study of the drug was futile. La Jolla stock had closed February 11 at $2.31 and closed February 12 at 20 cents, a swoon of 91.3 percent on volume of 37.7 million shares — far, far more than normal. A few days later, the company said it would reduce its workforce, to no one’s surprise. La Jolla lamented, “Riquent was our sole significant asset.” Other drugs in the pipeline were of minimal value.

In September, La Jolla issued a proxy statement. It had considered other strategies, such as selling the company, but they had been unsuccessful. “We have terminated substantially all of our management and employees,” as well as breaking contractual relationships, said La Jolla. The company looked for “a complete redemption and cancellation of all outstanding shares of stock.” If the shareholders approved liquidation, there would be no more trading of the stock anywhere.

After all debts were paid and obligations wound down, the stock was worth somewhere between 2.8 and 4.5 cents a share, and, partly because of possible lawsuits, the stock’s value ultimately could even be “substantially less” than that paltry sum, the proxy warned. The stock drifted down from 25 cents to 8 cents but still traded much higher than the company said it was worth. On Monday of this week, it was changing hands at 7 cents. “Sometimes [stock trading] doesn’t make sense,” says Gail Sloan, vice president of finance.

In a way, this puts La Jolla stock in the same category as Motors Liquidation Company, which is the old General Motors. It contains the unwanted assets and unsecured claims of the former General Motors. “Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios,” warns Motors Liquidation on its website. The government also states that the shares have no value. But they have been trading at close to 60 cents.

“Some people might think there is some residual value in the [La Jolla] technology,” says David Allen of Fallbrook’s Palomar Equity Research. More likely, though, is that “it is being played by a small number of speculators.” Unscrupulous brokers may be peddling it at these prices to the naïve. Or those who have shorted the stock (bet on its decline) may have to buy the stock to cover their shorts for some technical reason. Globally, there is a “huge asset binge” around the world as countries, particularly the United States, spend like drunken sailors and keep interest rates around zero. Commodities, bonds, currencies, and stocks all float upward, buoyed by the liquidity. That permits stocks such as La Jolla Pharmaceutical to trade well above their value, says Allen. “There will be a blow off,” he warns.