A bruised Castle Rock biopharmaceutical company that plummeted from the fast-rising darling of Colorado’s publicly traded companies to one of its biggest losers is fending off a new foe: shareholders who say executives intentionally misled them with undeliverable promises about a groundbreaking test for appendicitis.
Investors from California and Colorado allege in a trio of federal lawsuits that the power brokers at AspenBio Pharma Inc. pulled the ultimate financial head fake with claims they were on the verge of a medical breakthrough so good that investors couldn’t help but throw money at it.
And they did, pushing the company’s market value to nearly $420 million over a few months, all because of a blood test shareholders now say isn’t what they expected.
Not long after the surge, though, the company’s value nose-dived to just under $23.5 million — a 94 percent collapse — taking investor dollars with it, the lawsuits say. Once trading at $15 a share, AspenBio, listed on the Nasdaq as APPY, closed Friday at 65 cents.
Shareholders allege the breakthrough is little more than a glorified — though patented — version of a well-known medical process that isn’t so unique. Company executives deny the accusation.
“We’ve been very clear as we can be with investors in terms of what we’ve found and what the risks are,” AspenBio president Stephen Lundy said in an interview. “The allegations are baseless. Unfortunately, you have to put time and resources into defending against them.”
The company also has other products. All are within the realm of animal reproduction — such as bovine fertility — and hormone therapy, as would be used to increase milk production among cows.
Two of the lawsuits were filed in Los Angeles in September and October and a third in Denver on Jan. 4, all of them in federal district courts and all claiming basically the same thing.
The invention that caught everyone’s attention was a blood test that — depending on how you read the company literature and securities filings — was expected to determine whether emergency-room patients suffered from appendicitis, a potentially lethal affliction if misdiagnosed, according to the lawsuits.
Shareholders say the test was to detect appendicitis; lawyers for AspenBio say the test rules it out.
Called AppyScore, the test was to be a new and better way for doctors to determine whether patients suffering from lower abdominal pain needed immediate surgery. It works by identifying a specific protein in the blood that appears when a patient suffers from an inflamed appendix.
Trouble is, the protein also appears amid other maladies where inflammation exists — from gingivitis to AIDS.
“The test is so broad that you can’t test for appendicitis unless you exclude the other conditions,” said Saied Kashani, a Los Angeles attorney who filed the first case. “We allege they took an off-the-shelf generic test and claimed it for a specific application.”
Shareholders — the lawsuits were filed by Mark Chipman and John Wolfe in Los Angeles and Frank Trpisovsky in Denver — say they were never told about this and, as a result, paid for stock they would not have bought otherwise.
The stock rose in late 2007, surging from about $5 a share in August that year to $15 two months later.
The reason: the company reported in late September 2007 that its test was finding success in a hospital study it was conducting. As a result, company officials said they expected that more than half of all needless appendicitis surgeries could be avoided. The lawsuits say it was all a smokescreen.
Still, nearly 1.5 million shares of APPY traded on the news that day and it climbed steadily.
Though it had hit an all-time high of $15 per share, the price started to cool again, dipping below $10 within weeks.
Then, in November 2007, company officials announced they would seek approval by the Food and Drug Administration to put AppyScore on the market.
More than 3 million shares changed hands that day and the price went up again, though it did not hit the $15 high.
And compensation, including stock options, was as handsome as the stock price, according to one lawsuit, with base salaries starting at $100,000. Though officers received stock options valued as high as $1.80 per share at the time they were awarded in 2009, according to SEC filings, the value of that stock is considerably less today, preventing them from cashing out.
With options, chief financial officer Jeffrey McGonegal’s total compensation in 2009 was valued at $281,000.
Similarly, vice president Gregory Pusey got $261,000 and chief scientific officer Mark Colgin got $236,000. Former CEO and current executive chairman Daryl Faulkner received $991,258.
Even former Colorado Lt. Gov. Gail Schoettler, the company’s non-executive chairman of the board, got nearly $67,000 last year, most of it in options.
Hired in March 2010, Lundy can make about $400,000 in salary and bonuses, not including any stock options.
None of the lawsuits allege any executive or director cashed out lots of stock as prices jumped, though director Douglas Hepler’s wife sold more than 20,000 shares as the price neared the $15 high, SEC filings show.
The FDA tests, though, didn’t go so well and AppyScore didn’t quite measure up to the hype, the lawsuits allege. Share prices dropped throughout 2010, ranking among the top five losers in Colorado stocks for the year.
Company executives pressed on, convinced they had a winner.
“We had issues around the trials and we learned from that,” Lundy said, noting the company is producing the next phase of testing despite a lack of information that the test performs as hoped.
AppyScore could be an important tool if it works, not just for the diagnostic value, but its economic value.
Currently, hospitals will have patients undergo a CT scan if appendicitis is suspected. Those can cost $2,000.
The AppyScore can cost about $200, though an exact figure is yet undetermined, Lundy said.
The catch is that hospitals can also detect the possibility of appendicitis through a blood test — the same thing AppyScore requires — that looks at white blood cell counts. Elevated counts would mean inflammation consistent with appendicitis. The costs are similar for each of the blood tests, Lundy concedes.
Lundy said his team of researchers are convinced the protein they’re isolating appears before the white blood cell count starts to go up. If true — and they’re testing the theory now — that would mean AppyScore could detect the possibility of appendicitis sooner.
In a letter to shareholders this month, Lundy said testing continues, but financial barricades loom. “We anticipate having sufficient cash to fund the company until late 2011,” he wrote.
David Migoya: 303-954-1506 or dmigoya@denverpost.com
