From the Los Angeles Business Journal
BIOTECH: FDA snub pushes Imaging3 into bankruptcy.
By ALFRED LEE
Monday, September 24, 2012
When Imaging3 Inc., a nine-employee medical device maker on a nondescript street near Burbank’s Bob Hope Airport, filed for bankruptcy earlier this month, it was more than just another penny stock quietly running out of cash.
The filing also marked an extraordinary fall for a company that once had a market capitalization of more than $700 million, its hyped shares rising some 6,000 percent in mere months in 2009.
Imaging3’s then-bright promise was based on one product – a medical scanner that was supposed to create 3-D images of the human body. But the company has not been able to get approval from the Food and Drug Administration, which rejected an application in 2010. Subsequent efforts to reapply sputtered, and even before the bankruptcy filing, shares had dropped from a high of $1.95 to around four-tenths of a cent.
Its fall speaks to the risks of the biomedical industry, a business where small companies with technological breakthroughs can provide spectacular returns – but also end up in spectacular blow-ups.
Shares of Valencia’s MannKind Corp., a well-known company backed by billionaire Alfred Mann, have tumbled nearly 80 percent amid setbacks to gain FDA approval for its revolutionary Afrezza insulin inhaler, which the company has sunk at least $1.5 billion into developing.
“There are many of these rags-to-riches stories within biotech – and vice versa,” said Ian Somaiya, an analyst at Piper Jaffray in New York who covers the biomedical industry. “The industry is fairly fragmented, and that’s what creates a lot of excitement that the right company with the right drug (or device) can be a commercial success.”
The company did not return calls for comment. But in its bankruptcy pleading, it stated that it was pursuing a strategy to “emerge from bankruptcy as a stronger company.” It also indicated it would continue to pursue FDA approval of its 3-D imaging technology.
“The potential applications of this technology in the health care market are almost unlimited,” it stated.
Imaging3 went public in 2005 on the OTC Bulletin Board, touting a breakthrough in medical technology that could produce 3-D images of a patient’s body in real time to be used in everything from cardiology to sports medicine.
Prior to that, the company had been privately operating since 1993, primarily as a maker of 2-D, real-time X-ray-imaging systems used in surgery and other applications.
In 2007, it constructed the first prototype of its 3-D device, the Dominion Volumetric Imaging Scanner, and announced it had filed for FDA approval. Years of waiting for approval followed without much attention from investors, with shares generally trading between 3 and 15 cents.
But interest spiked in 2009 when founder and Chief Executive Dean Janes began making paid-for appearances on Money TV, a show carried on cable and satellite networks. He said he expected FDA approval by the end of that November.
“The issues we’re working through are minor,” said Janes in a November 2009 appearance. “This is definitely close to the end, if not the end of this actual process.”
Shares took off from a low of about 3 cents in August of that year to a high of $1.95 in November, pushing the company’s market capitalization from $11 million to some $730 million – or about the same as IPC the Hospitalist Co. or Korn/Ferry International today.
When November came and went without any announcement, shares began sliding.
Then, in October 2010, the FDA sent a rejection letter declining to classify the device as Class II, or medium risk, thus scuttling the application. Imaging3 had attempted to get its device classified as medium risk as opposed to higher risk so that its application process would be less stringent. Its argument to the FDA was that several existing similar products by competitors were classified that way, but the FDA didn’t buy the reasoning.
Since then, the company has hired FDA consultants and met with officials, but according to its last quarterly report, it has not yet reapplied. Though it continues to make more than $1 million in revenue a year from its existing imaging business and selling other medical imaging devices, it has struggled. Last year, it posted a loss of $17.9 million on $1.1 million in revenue.
Janes, meanwhile, appears to have fared better than the company. Since 2007, the company’s annual revenues have totaled $6.7 million, while his personal stock sales and salary during that time have totaled around $9 million in value, according to regulatory filings. In February 2010, notably, he transferred 2.6 million shares at 71 cents each to a lender to pay off $1.9 million in personal debt. Today, those shares would be worth only about $1,800.
Janes, who according to its last annual filing still owns about 5 percent of Imaging3’s stock, did not return calls for comment.
Imaging3 finally filed for Chapter 11 bankruptcy Sept. 13, stating in a pleading that it had about $3.1 million in secured and unsecured debts. It had reported about $450,000 in assets in its last quarterly filing.
Though the company said in its pleadings that it still plans to seek FDA approval, it did not give a timetable. Even if granted approval, there’s no guarantee that it can crack the $25 billion medical imaging market.
Kevin Scanlon, chair of investment group Pasadena Angels, said that seeing through the hype can be difficult when it comes to biomedical companies promising revolutionary products.
“There are always optimists,” he said. “Sometimes the press overhypes (a product), sometimes the scientists overhype it and there’s a lot of risk.”
Scanlon has had big successes, guiding a three-employee Altadena company, Melanoma Diagnostics, into an acquisition by Myriad Genetics Inc. in Salt Lake City. But he’s also had his share of misses.
Local venture capital and angel investors, he said, have had to become more sophisticated in their dealings with such companies, spending more time mentoring and supporting them as well as tightening term sheets.
For casual buyers of penny stocks who don’t have a chance to kick the tires, it’s even tougher.
“I have a background in science and a Ph.D. You would think I would be able to pick a good one,” he said. “But it’s very hard because it’s a long path and there are a lot of hurdles.”
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