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Why Hemispherx Could Take Sick

At a time when many other biotech companies have seen their shares pummeled, Hemispherx BioPharma (HEB)has been a standout. The company's shares, traded on the American Stock Exchange, have risen 140% so far this year, as investors have laid bets that the company has an effective treatment for Chronic Fatigue Syndrome.

But in recent days, the shares have pulled back a bit. A number of short-sellers are betting that the company's potential has been vastly overstated by the market. At issue is a drug called Ampligen, which the company believes is effective against chronic fatigue. Among the short-sellers is Manuel Asensio, head of investment boutique Asensio & Co. Asensio is shorting the stock with a target price of zero, having taken the view that Ampligen is neither safe nor effective. Asensio calls Ampligen ``a highly toxic, obsolete drug that is ineffective in the treatment of any disease.'' Hemispherx' CEO, Dr. William A. Carter, calls such assertions ``frivolous and wrong'' and says the drug's safety and effectiveness have been well established.

Other shorts note that the company was brought public by Stratton Oakmont, a notorious penny-stock house whose two former principals, Jordan Belfort and Daniel Porush, recently pleaded not guilty to federal money-laundering charges. Carter maintains, however, that Hemispherx was never tarnished by Stratton's numerous run-ins with regulators.

The shorts maintain that the company's shares are subject to substantial dilution from as-yet-unexercised warrants, options, and convertible preferred stock--most of them eventually exercisable at well below the current stock price. Asensio calculates that, when exercised, they will boost the number of shares outstanding by more than 80%. A Hemispherx spokesperson confirmed Asensio's contention and conceded that the 23.6 million shares outstanding will swell to 41 million on a fully diluted basis. Carter, however, asserts that Hemispherx ``doesn't believe there will be a substantial dilutive effect.'' But if the short-sellers are right, Hemispherx is setting itself up for a severe case of Shareholder Fatigue Syndrome.

By Gary Weiss


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Updated Sept. 10, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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