Government Contracts: No Garden of (Hollis) Eden

Hollis Eden (HEPH) Pharmaceuticals blew up last week - it should have! - and the blogs and message boards were hot with information as to why and whether this is temporary, etc. Stay away HEPH, whatever you do.

The stock was down 40% and more last week on news the Department of Health and Human Services was not going to grant the company a contract for a product, Neumune, to counter radiation exposure, and is down more than 50% in the past month. HHS actually said they were not going to give a contract to anyone, it was canceling the procurement and might begin a similar procurement later in the year.

As you might expect, the company went nuts because HHS sent them a letter saying the product was "technically unacceptable." The very same agency told HEPH in October that Neumune was within the parameters specified for competitors under the department's request for proposal (RFP) and this RFP was being managed under Project Bioshield -- an umbrella program for the development and procurement of products related to Bioterrorism and pandemics. The program was overhauled based on legislation passed late last December and that may have prompted this decision.

The company may appeal to Congress, HHS and respond to the next procurement. None of this should interest investors. What should you should focus on is a company with losses of almost $185 million dollars since its inception, that's been renamed, and is one-product dependent on a government procurement.

Yes, the country needs other forms of protection against radiation exposure for the population, and if that is too large a target then at a minimum for first responders and the military. But we are talking about the same people who can't seem to get food to hurricane survivors or communications gear to poor cities six years after 9/11. Do you want to make an investment based on the competence of the Department of Health and Human Services and the Department of Homeland Security? The agency also nuked VaxGen (VGEN), which had been awarded a near-$900 million contract for an anthrax vaccine that was later cancelled - as was the company's listing on the NASDAQ!

Hollis Eden is all over the place, using a second-generation steroid platform to treat everything in sight, without a focus on a particular marketplace. It has nothing in late-stage trials and no hope of generating revenue for several years based on this HHS rejection. It is in no danger of going bankrupt - it has roughly two years of cash based on the current burn - but the lawsuits will soon be coming since the company sold shares at $6.50 in November. The current market cap is just a bit more than its cash, so many investors are saying you can get the company for nothing. Maybe so, if that is what it is worth.

If you think HEPH might come back, look at Vaxgen (VGEN), look at Biopure (BPUR), look at Northfield Labs (NFLD) - companies whose success is dependent on a government procurement. Then look at other companies, such as BioCryst (BCRX) and Lomai (IOMI) and see how companies can be lumped together with this group, but instead have a broad product line and diverse partnerships and sources of funding.