Subject: Who's News: A Founder's Flair Has Failed Endotronics Date: Published: 3/24/87 132 lines Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. Who's News: A Founder's Flair Has Failed Endotronics --- By Richard Gibson MINNEAPOLIS -- One wintry evening here last November, hundreds of investors listened enthusiastically as Endotronics Inc.'s 29-year-old founder forecast a dazzling future. The small biotechnology company was pursuing cures for cancer, acquired immune deficiency syndrome, hepatitis and other scourges, Micheal Gruenberg told the rapt audience. The payoff could be enormous. Biotechnology, he said, was a time bomb about to explode. "We know we're close." But now, explosions Mr. Gruenberg didn't predict have shattered Endotronics, stunned investors and shaken Minnesota's blooming medical-technology market. The Federal Bureau of Investigation says it has uncovered evidence of millions of dollars in apparently phony sales -- mainly involving Japanese customers -- of the company's cell-replicating machines. The Securities and Exchange Commission and a federal grand jury are probing Endotronics's operations. The company's auditors, in a rare move, have disavowed its 1986 financial statements. The cost to investors has been huge: Shares that sold for a record $35.50 last summer -- a stock-market valuation of $351.4 million -- now trade for 75 cents each, a market valuation of about $7.4 million. Analysts blame the company's downfall on a combination of Mr. Gruenberg's inexperience and investors' naive expectations. Neither Mr. Gruenberg nor his father, Eugene, 54, had run a business before. Nonetheless, they had a flair for promotion, and they convinced the public that Endotronics was onto something amazing. Many shareholders left the briefing last November ebullient; after hearing Micheal Gruenberg spin his forecast of medical advances -- and handsome profits -- one commented he felt he had attended a religious revival meeting. But now, although neither the company nor its founders have been charged with any illegalities, some investors think that the younger Mr. Gruenberg talked a better game than he played. "Micheal is a very bright young man, but ... his forte was in the sales and promotion end," says David Cohn, former chairman of Endotronics's now-disbanded scientific advisory board. "He's not a scientist." The younger Mr. Gruenberg, who quit last week as president and a director, began the business in college after he invented a machine that mass-produces human cells in a computer-controlled environment. Company documents show that he spent about $2,000 developing the first patent application on the technology; in 1988, Endotronics was to begin paying him as much as $3.3 million for those patent rights. While the machine, called an Acusyst, was viewed by many as superior to mice in replicating cells in the laboratory, the Gruenbergs envisioned much more. They thought the device would lead to therapies for cancer, hepatitis and perhaps even AIDS. Micheal Gruenberg, who his father once said thought about a career in the theater, recently told shareholders: "I can't wait for the day when we will go to the family of a patient treated with our processes and assure them that your loved one is going to be OK. " But rather than simply sell the machines to larger companies pursuing such possibilities, Endotronics's founders decided to tackle the research themselves. Many of the company's scientific advisers opposed such a strategy. "The strength of the company lay in developing the instrument," says Mr. Cohn, now a professor at the University of Louisville, Kentucky. "But the management continued to feel that its forte lay in the pharmaceutical development and treatment of human diseases. Our board felt that while those goals were worthy of consideration in the future, with the company's financial facilities and the realism of the market, such a move was way outside the company's ability." The elder Mr. Gruenberg, who remains a director after last week resigning as chairman and chief executive officer, said recently that Endotronics couldn't wait "for the market to catch up. Our biggest risk is not being able to take advantage of our lead." But conflicts between scientists and managers ensued, and the researchers usually lost, Mr. Cohn indicated. "The marketing and sales people would come in and say what (the Acusyst machine) could do, and the scientists would shake their heads," Mr. Cohn says. "And three months later (the scientists) would be gone." The younger Mr. Gruenberg was a great promoter. He boasted that he was so close to the Japanese prime minister's office that a government bodyguard stood outside his Tokyo hotel room. Investors got caught up in the enthusiasm. Endotronics shares traded as high as 130 times projected earnings last year -- before the company had ever reported a profit. "The stock was trading on promise, not on fundamentals," says Edward Mutsch of Piper, Jaffray & Hopwood, a brokerage here. The Gruenbergs also convinced Hoechst Celanese Corp. to buy 36% of Endotronics and to finance cancer research at the University of Minnesota. (Hoechst Celanese, a unit of Hoechst AG, of West Germany, won't comment on the Endotronics affair.) Endotronics also recently recruited as a director a vice president of International Business Machines Corp., but the man resigned from the board earlier this month amid the breaking scandal. The Gruenbergs also bet their personal fortunes on the company. The latest proxy shows that Eugene Gruenberg owned 12.6% of Endotronics's common stock and his son 10.2%. On advice of their lawyers, neither man would be interviewed for this story. Some scientists think Endotronics's technology eventually may prove out. But results aren't expected for months, and the company's travail casts doubts on the future of its vaccines for AIDS, hepatitis-B or other diseases. A hepatitis antidote was critical to Micheal Gruenberg's game plan. He said last fall that the Japanese government wanted to use such a vaccine as "foreign aid" for Southeast Asian nations, a move that could mean millions of dollars for Endotronics. In Minnesota, the company's problems have turned into a political scandal. Gov. Rudy Perpich gave the Gruenbergs his Entrepreneurship Award last year, and lately he has lobbied hard for a $24 million subsidy to build an Endotronics plant on Minnesota's depressed Iron Range. The subsidy bill since has been tabled, but a state senator has conceded not telling fellow legislators of the FBI probe until after they approved the subsidy. (This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.)