Meditech Counts on Its Long-Shot Drugs to Bolster Financial Health

Gerald Kern is either a pharmaceutical genius or a mountebank. Kern, a former cosmetics executive with Max Factor, said he has invested “all the money I ever had” in an Encino drug company he founded, called Meditech.

The company, Kern said, has its hands on some drugs that could be effective in treating a broad range of viruses, including herpes simplex, and human immunodeficiency virus, one of the viruses believed to cause the fatal acquired immune deficiency syndrome, AIDS.

“Obviously we’re counting on hitting it pretty big,” Kern said.

But Meditech, which went public as a penny stock four years ago, still has not convinced Wall Street that this is the best buy since Apple Computer. Meditech still has no sales, and its stock has been trading at a fairly consistent 32 cents per share since going public.

Skepticism about Meditech arises in part because the company’s drugs were not invented in Meditech laboratories by Meditech technicians in white coats. The company does not have the resources. The seven staffers at Meditech’s second-story office on Balboa Boulevard handle mostly administrative tasks, trying to find ways to get more money to support more research.

Kern, who is not a scientist, said Meditech’s drugs are based on an agent common to household products, such as soaps, mouthwashes, toothpaste and spray disinfectant.

He will not say what the active agent in the drugs is, citing competitive concerns. The company has applied for patents for its prescribed use of the drugs and is having its products tested in the hope of winning Food and Drug Administration approval.

Meditech is one of those quirky little companies that those in the drug business are quick to chuckle over.

“One can’t say this for certain, but I don’t think the cure for AIDS will come out of Listerine,” said Phil Whitcome, director of strategic planning at Amgen, a Thousand Oaks biotechnology company.

He said Meditech’s methods “sound like oversimplification,” although he had never heard of the firm.

Another reason to be skeptical about Meditech is because its products are essentially anti-virus drugs.

Although scientists have discovered antibiotics that can successfully attack bacterial diseases, drugs that can successfully fight off viruses are rare. Among the few drugs on the market and approved by the FDA are acyclovir, made by Burroughs-Wellcome. Sold under the trade name Zorivax, the pills treat herpes sores.

Meditech’s first drug, Viraplex, is an anti-herpes drug that Kern said is being tested on patients by a Beverly Hills private physician, Milton Gotlib. The drug, Kern added, is in Phase III clinical trials and he expects the studies to be completed by the end of this year.

The other drug, MTCH-24, is at the same stage, and Kern said it holds more promise. Indeed, New York-based Colgate-Palmolive last month agreed to foot the bill for Phase III testing of the anti-viral drug as an over-the-counter ointment for herpes sores. Should the testing prove successful, Colgate would exercise an option to license the drug from Meditech.

But Kern, 49, a loquacious sort, has even bigger plans. He hopes MTCH-24 will fight a wide variety of viruses including influenza, Epstein-Barr and AIDS.

Meditech has contracted Dr. Angus Dalgleish at the Clinical Research Center in Harrow, England, to begin testing MTCH-24 on live AIDS viruses. Testing is to begin this week.

But drug companies with far greater resourses than Meditech are also trying to come up with an anti-AIDS drug.

The route to FDA approval requires extensive testing, first in test tubes and petri dishes, then in various human clinical tests. Thus far Meditech has spent $7.1 million--from its stock offering, bank loans and cash contributed by principal shareholders--to contract outside laboratories to further develop its drugs, both in cream and capsule forms.

‘Leave the World Something’

“I left high-paying jobs for this, to leave the world something,” said Kern, who spent most of his career in the cosmetics business after getting a degree in business administration from Brooklyn College.

He was an executive vice president for Max Factor & Co. for two years, but that ended when he quit Thanksgiving Day, 1979, after receiving 31 work-related phone calls from his boss, Linda Wachner, then the domineering head of Max Factor, now president of Warnaco.

Then Kern heard from a friend in the pharmaceutical business, who had been approached by someone who claimed to have found the cure for herpes in a common household item. So Kern ordered some tests done at private laboratories in Colorado and Los Angeles and said that it indeed attacked the viruses.

From those tests and with some tinkering, Viraplex evolved and so did the company. Kern founded Medical Technology Corp. of America late in 1980, based then in Beverly Hills, with $200,000 of his own money.

In 1983, Kern took the company public and shortened the name to Meditech. The deal was underwritten by Denver-based N. Donald & Co., a penny stock firm that is no longer in business. The initial offering was for 13.2 million shares of common stock, at 30 cents per share.

A second offering in November, 1985, to be underwritten by D. H. Blair & Co. of New York, was canceled because of a lack of interest.

In Meditech’s most recent quarterly report, the company indicated it is “experiencing severe cash flow difficulties and anticipates substantial additional cash expenditures . . . to continue its research and development activities.”

Paid With Stock Options

To keep going, the company has been paying everybody from its public relations and financial consultants with stock options. But Meditech needs more good news so it can have another stock offering to raise enough money to pay for full drug testing.

At the moment, Meditech’s biggest shareholder is Petro-Med, a shell company that is controlled by Kern. He actually owns 18% of Meditech stock.

There are approximately 2,000 shareholders altogether and 74 million shares outstanding, Kern said.