The bad news didn't get any better for Viratek Inc. over the summer, but analysts say the stock's strong performance in recent months shows how much impact a company can have when it decides to deliberately shore up its stock price.
A partially owned subsidiary of ICN Pharmaceuticals Inc. of Costa Mesa, Viratek lost nearly 35% of its market value in a single day in April when the Food and Drug Administration rejected a proposal to expand testing of its experimental anti-viral drug, ribavirin, for treatment of early-stage AIDS.
After the FDA decision was disclosed, Viratek plunged $8 a share to close at $15 in over-the-counter trading on April 15. The stock continued to decline before bottoming out at $9.50 a share six weeks later.
But it was a different story earlier this month, when the FDA again refused to authorize expanded testing of ribavirin. Despite the serious setback for the company's principal product, Viratek stock declined only 12.5 cents to close at $30.25 on the day after the decision was disclosed. The stock held steady last week, closing Friday at $31.
Obviously, there's more to Viratek's recent market performance than meets the eye. That extra ingredient, analysts and traders agree, was ICN's decision in August to boost its stake in Viratek from 56% to as much as 73% by buying up to 1 million shares of stock in the open market.
ICN officials said at the time that the proposed purchases were for investment purposes only. But analysts immediately suggested that the program was designed to boost Viratek's stock price, which had plunged over the previous year from a high of $98 to the June 1 low of $9.50.
Additionally, at least one analyst, Eugene Melnitchenko of the Dallas securities firm of Eppler, Guerin & Turner Inc., argued that the purchases were an attempt by ICN to "put the squeeze" on short sellers.
Over the last year, Viratek stock has been a favorite of the "shorts," speculators who attempt to make money when stock prices fall by selling borrowed shares and replacing them later with shares purchased at a lower price.
Stock market records show that the number of Viratek shares sold short in recent months has ranged from 900,000 to 1.4 million, at times exceeding a third of all shares not held by ICN. With ICN's stake included, Viratek has 7.9 million shares outstanding.
By purchasing shares--and, traders say, demanding their immediate delivery--ICN has put upward pressure on the price of Viratek stock and forced some short sellers to close their positions. And when the short sellers scramble to buy shares to replace those they have borrowed, that creates additional upward pressure on the price.
Just look at the numbers:
On June 1, Viratek stock hit rock bottom at $9.50. On June 29, ICN purchased 225,000 Viratek shares held by Eastman Kodak Co., which had bought Viratek stock as part of a diversification move into pharmaceuticals. ICN paid Kodak $10.50 per share under the privately negotiated transaction.
In July, the stock price changed little until the final day of the month, when it jumped to $14.25 per share. A few days later, on Aug. 5, ICN revealed that its board had authorized the purchase of 1 million additional shares. Viratek closed that day at $15.
ICN revealed the bad news about ribavirin's second FDA rejection after the close of trading on Sept. 3. The next day, the FDA action had almost no visible impact on Viratek's closing price of $30.25, just 12.5 cents below the preceding day's close.
But during the day, traders say, the price fluctuated wildly, dropping as low as $25 at one point and spiking as high as $32.25. "It was a difficult day," confided one trader.
The reason for the swings, the trader said, is that individual investors were unloading the shares in the wake of the FDA news, causing the price to plunge, while the company was rapidly buying them, causing the price to recover. ICN bought a total of 250,000 Viratek shares that day, the trader said, paying a variety of prices.
ICN officials could not be reached for comment.
"The company is squeezing the shorts and driving up the price," the trader said. "That's what's going on."