Thursday, September 2, 1999

SafeScience Inc.
(Nasdaq: SAFS)
Phone: 617-422-0674
Website: http://www.safesci.com
Price (9/1/99): $20 9/16


An Internet company that also offers an effective cancer treatment. Whoopeee! Send in your market orders! No price is too high to pay! You've got to own a piece of this action!

Well, that's roughly the sentiment that pushed SafeScience into new frontiers as it ran from just $5 a share at the beginning of the year to an intraday high of nearly $30 by early August.

After climbing slowly for months, SafeScience shares spiked to $16 3/4 following the April 21 announcement that the company would become the exclusive sponsor of the "Healthy Home" section of the Home & Garden area of America Online's (NYSE: AOL) Interest channel. That's not like running a Super Bowl ad, but at least AOL's millions of members would theoretically have easy access to SafeScience's cleaning and lawn and garden products.

The message boards really heated up, though, after the company reported on early stage clinical trials designed to test the safety, but not the efficacy, of its GBC-590, an anti-cancer compound derived from fruit pectin.

June 24 brought news that a Phase I/II trial at M.D. Anderson Cancer Institute in Houston showed that relapsing prostate cancer patients tolerated GBC-590 well. Better yet, the treatment reportedly reduced or stabilized prostate specific antigen (PSA) levels in 18 of the 22 patients. PSA levels are one surrogate marker for a drug's effectiveness in treating prostate cancer.

Clark Springgate, the company's chief medical officer, said in the press release, "We believe this is the first time a well-tolerated compound has shown [sic] to affect PSA levels at this magnitude...." The stock soared to $26 on this news.

As enthusiasm began to wane during a rare period without additional SafeScience press releases, CBS MarketWatch.com (Nasdaq: MKTW) rekindled investor passions with a nod on July 9 to a research report issued by Mark Skousen of the Forecasts & Strategies website.

Skousen was clever enough to write, "Now is the time to get aboard before the train leaves the station. If SafeScience gets FDA approval of its drug, this stock could top $100 a share." Skousen didn't mention that this process could take years, and that the odds are simply against it. He also didn't address that the current GBC-590 formulation is administered intravenously, whereas any long-term market would likely require an as-yet-unformulated oral formulation.

Yet, the stock quickly ran to $28 a share.

Then on July 26, the company announced results of another Phase I safety trial conducted at the University of Pennsylvania Medical Center. The end stage cancer patients (pancreatic, colorectal, lung and esophageal carcinomas, and metastatic sarcoma) in this trial had proved unresponsive to other treatments. All tolerated the drug well, and SafeScience reported that "the quality of life of several end stage cancer patients appeared to improve while being treated with GBC-590."

Between the Internet and cancer, SafeScience has its bases covered for this Double.


SafeScience has two subsidiaries. International Gene Group develops carbohydrate-based pharmaceutical products to treat cancer (GBC-590) and inhibit fungal infections such as Candida (CAN-296).

The SafeScience Products unit develops agricultural, consumer, home and garden, and institutional applications for products that use carbohydrate chemistry and other "safe" technologies. Its lead agricultural product is Elexa Plant Defense Booster, which protects plants against fungi. This unit's consumer line includes safe cleaning products.

GBC-590 is said to work by binding to a cancer cell's lectins, or cell-surface receptors, thus disrupting the metastatic process.

At the end of 1998, insiders owned 5.7 million shares, which then constituted 40.7% of the shares outstanding but would now amount to a 34.8% stake.


Income Statement*
12-month sales: $0.21 million
12-month income: ($8.7 million)
12-month EPS: ($0.61)
Profit Margin: N/A
Market Cap: $337.4 million
(*Reported losses include significant non-cash compensation charges.)

Balance Sheet*
Cash: $7.0 million
Current Assets: $7.3 million
Current Liabilities: $0.6 million
Long-Term Debt: N/A
(*As of June 30. Doesn't account for $0.86 million raised since then from the exercise of outstanding warrants.)

Price-to-earnings: N/A
Price-to-sales: 1606.7


On June 4, George K. Baum & Co. analyst John Boylan issued a "speculative buy" rating on the stock, which then traded for around $14 a share. His main interest, though, seems to have been the company's safe cleaning products, whereas news about the cancer drug has driven the stock since then.

On the other hand, I don't think a rational investor would have found this stock story since "Internet sales plus cancer cure" strikes me as the kind of provocatively dubious combination that merits serious skepticism, especially in a company that's just started to sell products into its distribution channels.


SafeScience has announced that it will soon start a Phase I/II study of patients with cancer of the pancreas at Beth Israel Deaconess Medical Center. It's also planning Phase II clinical trials for prostate cancer at the M.D. Anderson Institute and other cancer centers, which should get under way later this year.

The most one can say at this point is that the initial clinical findings are positive, but there's no compelling evidence yet that GBC-590 is an effective treatment for cancer. That's partly because the drug has not been tested specifically to determine whether it improves the health of cancer patients, much less cure them.

Indeed, a recent article on TheStreet.com indicated that even Christopher Logothetis, the researcher who conducted the trials for SafeScience at M.D. Anderson, is uncomfortable with some of the aggressively upbeat spin SafeScience is putting on the trials data in its press releases.

What's clear is that a number of insiders and folks who own restricted shares have been selling the stock, particularly as it hit the high $20s. Indeed, warrant holders have been cashing out, and why not? They're buying shares at an average price of just $4.75 and immediately selling the stock for four to six times that amount.

It's hard to value what's essentially a development-stage biotech that's also operating a startup cleaning and agricultural products operation with an Internet angle. But the company has an accumulated deficit of $19.5 million over its history, and it's been continually issuing more shares with warrant kickers via Reg S deals and other private placements in order to finance its operations. It sold 1.4 million shares of common stock in the first half of this year alone.

This dilution won't stop any time soon. The lone analyst estimate projects losses will rise from $0.67 per share this year to $1.53 per share next year. The company incurred $3.7 million in operating losses for the first half of FY99, less than the reported net loss of $5.1 million that includes the non-cash compensation charges. Still, the company's latest 10-Q indicates existing funds will last merely through the middle of next year.

What's also worth noting is that SafeScience came public in March 1995 via a reverse merger with a shell company called Alvarada. The stock began trading on the Nasdaq SmallCap market in May 1998. This pedigree alone suggests that SafeScience is an extremely high-risk company.

Though one can hope that SafeScience can provide genuine relief to people with prostate cancer and other cancers, I wouldn't bet on it. And given its $359 million market cap, I'd be more interested in investigating SafeScience as an unsafe investment worthy of a short-seller's interest.

Given that more positive press releases could cause the stock to run higher, that too is a risky bet. But the current price already figures in a lot of good news that's ultimately years away from producing substantial revenues, and that assumes the kind of best-case scenario that so seldom occurs in the biotech arena.

-- Louis Corrigan

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