When a company's product gets embroiled in controversy, howdo the company and its stock weather the storm?

Collagen Corp., which sells injectable collagen products, in thepast year has faced congressional and FDA hearings andnegative media publicity questioning the safety of its products.According to the company, the controversy has cost $11 millionin lost annual sales and $3 million in added spending, mainly inlegal fees.

In an interview with BioWorld, President and CEO HowardPalefsky discussed how the Palo Alto, Calif., companyresponded to the crisis and whether it was able to protectshareholders in the process.

About half of the $3 million went to lawyers to meet requestsfor documents by Rep. John Dingell's House Subcommittee onOversight and Investigations. The rest went for public relations,of which Palefsky said the most important expenditure --though not the largest dollar amount -- was for mailings tophysicians.

Palefsky had no doubts that shareholders benefited from the$3 million outlay. "It wasn't an issue of promoting shareholdervalue, but of defending your investment. The FDA can put acompany out of business. The key for a company like ours is tocommunicate with customers, then with employees, then withshareholders. If you take care of the first two, then the thirdare fine.

"Analysts and people on the buy side were a secondaryconsideration," he added. "Even though we were mindful of thevalue of our shares, the first thing you have to take care of isyour customers."

Kurt Kruger, an analyst at Hambrecht & Quist who follows thecompany, agreed that the money was well spent. "If there'sgoing to be a shareholder who sticks with it, that person needsthe company to stay in business," he said. "I think theyresponded and behaved as any quality company would have."

The company's problems began in October 1989, when Dingell,D-Mich., appeared on a TV program that questioned the safetyof injectable collagen.

The period of highest intensity and expenditure, said Palefsky,began on June 11, 1991, when the House Subcommittee onHuman Resources and Intergovernmental Relations, chaired byRep. Ted Weiss, D-N.Y., discussed collagen. The turning pointwas Oct. 25, 1991, when an expert panel convened by the FDAsaid it found no convincing relationship between injectablecollagen and two rare autoimmune diseases, polymyositis anddermatomyositis (PM/PD).

The stock price reflected the events. Prior to the Weisshearings, Collagen shares (NASDAQ:CGEN) were trading in the$26-29 range. The shares hit a low of $14.25 in earlySeptember, when the FDA considered a label change on thecompany's products to suggest an association between collageninjections and PM/PD.

But by Jan. 24, the stock had rebounded to $28.25 beforedeclining with the rest of the bioscience group. It closed Fridayat $18.50, up 25 cents.

Palefsky attributed the stock's performance to the promise ofits Contigen implant for urinary incontinence, which is awaitingFDA approval.

H&Q's Kruger shared that assessment. "It's become completelya Contigen play. The worldwide cosmetics business willcontinue to generate sales with no growth."

Kruger, who has a "neutral" rating on the stock, said thatthere's no reason to buy the stock until Contigen is approved."But we've reached the bottom of the valley," he said, whichmight make Collagen an attractive play for investors willing togamble.

Palefsky told BioWorld he learned that it's impossible to fight atide of negative publicity.

"When you're in that kind of storm, the only thing to do is stoptalking," he said. "You can't be proactive. The FDA and Congresshave unlimited access to the press, and the press has unlimitedaccess to unhappy patients, served up by plaintiff's attorneys.The only mistake we made was not going underground sooner.We should have just put out written statements."

That, in fact, had been Collagen's policy since late September.

Another lesson was to change the terrain on which the battle isfought. "The thing we realized we had to do was get into anarena where we could deal with science and data, notinnuendo," Palefsky said. "Things began to turn around for uswhen the FDA held that panel on October 25."

Despite the controversy surrounding bovine collagen, cosmeticimplants will continue to have a future, Palefsky said. "TheDavid Kesslers and John Dingells of the world come and go, butthe desire to look and feel good is a fundamental human trait."

-- Karen Bernstein BioWorld Staff

(c) 1997 American Health Consultants. All rights reserved.