Why Hemispherx Could Take Sick

At a time when many other biotech companies have seen their shares pummeled, Hemispherx BioPharma (HEB) has been a standout. The company's shares, traded on the American Stock Exchange, have risen 140% so far this year, as investors have laid bets that the company has an effective treatment for Chronic Fatigue Syndrome.

But in recent days, the shares have pulled back a bit. A number of short-sellers are betting that the company's potential has been vastly overstated by the market. At issue is a drug called Ampligen, which the company believes is effective against chronic fatigue. Among the short-sellers is Manuel Asensio, head of investment boutique Asensio & Co. Asensio is shorting the stock with a target price of zero, having taken the view that Ampligen is neither safe nor effective. Asensio calls Ampligen "a highly toxic, obsolete drug that is ineffective in the treatment of any disease." Hemispherx' CEO, Dr. William A. Carter, calls such assertions "frivolous and wrong" and says the drug's safety and effectiveness have been well established.

Other shorts note that the company was brought public by Stratton Oakmont, a notorious penny-stock house whose two former principals, Jordan Belfort and Daniel Porush, recently pleaded not guilty to federal money-laundering charges. Carter maintains, however, that Hemispherx was never tarnished by Stratton's numerous run-ins with regulators.


The shorts maintain that the company's shares are subject to substantial dilution from as-yet-unexercised warrants, options, and convertible preferred stock--most of them eventually exercisable at well below the current stock price. Asensio calculates that, when exercised, they will boost the number of shares outstanding by more than 80%. A Hemispherx spokesperson confirmed Asensio's contention and conceded that the 23.6 million shares outstanding will swell to 41 million on a fully diluted basis. Carter, however, asserts that Hemispherx "doesn't believe there will be a substantial dilutive effect." But if the short-sellers are right, Hemispherx is setting itself up for a severe case of Shareholder Fatigue Syndrome.

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