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Ah, Sweet Mystery of Lifecore

Mar 28, 2003 | Smart Money

INVESTORS WERE LEFT nursing scars of their own on Friday after sales of Lifecore Biomedical's (LCBM) antiscarring gel were abruptly suspended.

Late Thursday, the Chaska, Minn., medical-device maker announced that its partner, Gynecare, voluntarily pulled Intergel off the market. According to Lifecore, sales of its adhesion-prevention product, which is approved for use during certain gynecological operations, would resume following a review of how surgeons employed Intergel, including off-label applications. No timetable was given.

Lifecore's shares plunged nearly 42% to an 11-year low of $3.55 on Friday.

What makes the move so unusual is the absence of a Food and Drug Administration order to stop marketing the gel. In fact, Lifecore said not only does the FDA not have a problem with Intergel, but the current world-wide complaint level for the product is a scant 0.29%. The FDA declined to comment.

"This is a voluntary withdrawal," says Lifecore Chief Executive Jim Bracke. "There was no connection with the FDA asking for this." Instead, Bracke says the regulatory crew at Gynecare, a unit of Johnson & Johnson (JNJ), believed there were potential safety issues with the way physicians were using the product.

Intergel is a liquid gel that coats membrane and organ surfaces during surgery to prevent adhesion, a syndrome when scar tissue makes internal organs stick together. The drug is approved only for women, particularly to prevent adhesions that could make them infertile after gynecological operations. However, doctors have been using the product for off-label purposes, that is, ones that haven't been explicitly approved by the FDA, or in combination with drugs it hasn't been tested with. These include use in men as well as male or female cancer patients. While doctors are allowed to use products for off-label procedures, unintended consequences from such use can present legal ramifications for the manufacturer.

"The biggest concern of a medical company is if your product gets used for procedures other than what you have intended it for," says CEO Bracke. He says Lifecore rewrote the label to combat off-label use, but with little effect. As a result, Gynecare was compelled to take it off the market to prevent its misuse.

"Cancer patients have a tremendous problem with adhesion. It strangles the bowels shut," says Bracke. "As a result, doctors are desperate to help patients, and Intergel is the only thing they can use so they grab it."

But not everyone is swallowing the off-label line.

"Saying it's being used off-label and that's why it's being taken off the market doesn't hold water with me," says Thomas Gunderson, an analyst at U.S. Bancorp Piper Jaffray, who lowered his rating on the stock to Underperform from Strong Buy on Friday. "Plenty of products are used off-label and aren't pulled. Something else is going on."

"Lifecore has a good product that the FDA said was good," says Gunderson, "but when your own distributor takes it off the market and doesn't tell you what the timetable is to get it back to market, that's worrisome. It's the unknown and the uncertainty that says I want more clarity on what JNJ is doing. My investment thesis happens to be this product, Intergel, and that's why people should own the company. When you take it away, you take away the reason for owning the stock." (Gunderson doesn't own shares of Lifecore Biomedical, and Piper Jaffray doesn't have an investment-banking relationship with the company.)

For fiscal 2002, ended in June, Intergel accounted for 12% of Lifecore's total consolidated revenue of $38.8 million. In the current fiscal year, Lifecore said that figure is likely to come to less than 10% of overall sales. Dental implants, a business that CEO Bracke says is growing strongly, make up more than 60% of revenues. Lifecore said profit guidance for its March quarter is unchanged at one cent to five cents a share. Thomson First Call's consensus earnings estimate is three cents.

Because of the terms of Lifecore's supply agreements, the company will still receive $1.1 million in the June quarter for standing Intergel purchase orders. However, it retracted June-quarter profit guidance of two cents to six cents a share, and now expects to incur a noncash charge in the period of about $1.3 million for unused manufacturing capacity tied to Intergel. First Call had been looking for net income of five cents.

"Some things we've seen in the postmarketing experience were mostly adverse events related to off-label use, like laparoscopic and videoscopic surgery," says Gynecare spokeswoman Jackie Jankewicz. "We saw late-onset postoperative pain and repeat surgeries following this onset of pain ensuing in both on-label and off-label use, but more in off-label. Because of this, we decided to do the voluntary withdrawal to do a full and thorough assessment of the information."

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