Is Collagen Starting To Sag?

With his company buffeted by lawsuits, bad publicity, and regulatory and political attacks, it's no wonder that Howard D. Palefsky, chief executive of Collagen Corp., swigs his coffee these days from a mug emblazoned "Life's a bitch."

Over the past decade, more than 700,000 people have waged war on wrinkles and scars with injections of collagen--the gooey white protein extracted from cow hides that is the company's namesake. Profits from that beauty aid have fueled Collagen's research on treatments aimed at fighting incontinence and cancer. But now, the future of the Palo Alto (Calif.) company is in jeopardy. Some patients charge that collagen may cause disease. And they have caught the ear of John D. Dingell (D-Mich.), chairman of the House's oversight-and-investigations subcommittee. Increasingly, they've also grabbed the attention of the reenergized Food & Drug Administration. And Palefsky's confrontational tone with critics hasn't helped. One Collagen director says it might even cost him his job.

There is no doubt that the company has made mistakes. But Collagen and its allies say that mainly, it has been snared in FDA Chief David A. Kessler's efforts to impress Congress--and get more funding. "Collagen is the victim of a witch hunt," asserts Michael Gordon, who manages Fidelity Select Biotechnology fund, Collagen's largest institutional shareholder. The FDA disagrees, and so does Dingell. He lumps Collagen in with "millionaire pharmaceutical companies whose improper supervision or behavior may be a threat" to consumers.

Selling collagen has always been tricky. It takes slick cosmetic promotions to reach consumers--but the ads can't break strict FDA rules on marketing medical treatments. To win approval in 1981, Collagen convinced the FDA that the product is safe: After it is injected beneath the skin, the body slowly absorbs it. But injections of collagen can cause scarring and abcesses. And now, there are charges linking it to a rare autoimmune condition called polymyositis and related dermatomyositis, or PM/DM. PM/DM causes painful and debilitating muscle atrophy and skin problems.

Collagen concedes that "five or six" of some 400,000 customers studied have developed PM/DM. But experts are divided on whether that incidence is extraordinary or, as Collagen argues, coincidence. Either way, in 1987, in a decision Palefsky calls "the worst of my business career," he settled a suit with a woman who blamed collagen for her PM/DM. A dozen more suits soon followed. Eight were dismissed, two are pending, and Collagen won two in court.

But that didn't halt the damage. After losing her suit, Houston PM/DM sufferer Linda Ramey formed Women Against Collagen Coalition, which claims 100 collagen-damaged members. Ramey and her doctor alerted the Texas Health Dept. In 1989, it declared a statistical link between the injections and PM/DM. TDH and Ramey got Dingell's attention--and added to the FDA's concerns.

'FRUSTRATED.' On June 11, Kessler told a congressional committee that the FDA lacked effectiveness data on collagen for treating wrinkles. And he admonished the company for marketing the treatment to plump up lips, an unapproved use. Then, on Aug. 16, federal marshals acting on FDA orders impounded $5 million worth of Zyderm and Zyplast, the brand names of Collagen's products, because one warning was left off their labels. Palefsky called the error dumb but inadvertent. But because the company had resisted past FDA directives, the agency took a different view. Says Ronald M. Johnson, head of compliance for the FDA's Center for Devices: "Seizing products is a drastic measure that we don't take except when very frustrated."

On Aug. 22, the FDA told Collagen to improve its systems for handling patient complaints and reporting adverse reactions. Then, eight days later, the sky fell. The FDA had always agreed with Collagen that its products had no correlation with PM/DM. But after a closed meeting with the TDH and other government scientists, the FDA changed its mind. It ordered a label change to indicate a "higher-than-expected" incidence of PM/DM in users of Zyderm or Zyplast.

The agency may not be finished. At hearings Dingell held in early September, Johnson accused Collagen of trying to manipulate the FDA for a decade. While Palefsky calls that period one of "relative tranquility" between the two, FDA documents show that Collagen was admonished several times for unauthorized labeling changes and failing to address FDA concerns. Now, the FDA may review Collagen's original safety data.

That's a big marketing setback. Some analysts have halved their 1991 earnings estimates for the $61 million company to $3.5 million, or 40~ a share. And Collagen's stock has plummeted 40% since March, to 17. But Palefsky says he's confident that an independent committee the FDA is convening will disprove the PM/DM link. Several physicians who administer collagen agree.

LONG MEMORY. Part of Collagen's problem may be Palefsky's lightning-rod nature. The 44-year-old executive, who says he gets collagen injections, isn't one to mince words. In June, for example, he issued a press release refuting Kessler's remarks and arguing that collagen is in fact O. K. for plumping lips. "When powerful people take shots at us, they should be corrected," he told BUSINESS WEEK in July. Few companies dare to publicly criticize the FDA--and Collagen has already stretched the agency's patience. "There is an institutional memory in that bureaucracy that endures forever," says a biotechnology executive.

Several Collagen directors say Palefsky has their support, though two question his ability to deal with the FDA. And one says that the company may be forced to make "both substantive and cosmetic changes" that could include finding a new role for the CEO. "Howard is aggressive," says Collagen Chairman Reid W. Dennis, a low-key venture capitalist who is taking more of a role with the FDA these days. But Dennis adds: "If he were to step aside, it would be only because he is worn out--not because he's done anything wrong." Says Palefsky: "I have enough stock 2.8% in this company that if I thought I was part of the problem, I'd get rid of me."To fight back, Collagen has begun arguing that many other products are collagen-based, including surgical sutures and blood-clotting agents. If collagen were unsafe, says Palefsky, autoimmune disease would be "epidemic" among the million or so patients who are exposed annually to these products.

WAITING. That strategy may be crucial to Collagen's future. The company is about to introduce two collagen-based medical products: Contigen, a treatment for incontinence, and Collagraft, which helps fractures heal. Both have sailed through the FDA's initial reviews and appear to be poised for approval. Some analysts think Contigen sales could hit $300 million a year. But few believe the FDA will approve either product until the scientific debate over PM/DM has cooled. So for now, Wall Street is spooked.

Collagen Chief Financial Officer James T. McKinley vows that the company will do "whatever it takes" to make peace with the FDA. It better. Any more negative safety revelations in this charged environment, and Collagen's cash cow could be hobbled for good.