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VLI Has One of Those Up, Down Weeks

September 27, 1987

It was the best of weeks and the worst of weeks for VLI Corp., the Irvine-based personal-products manufacturer. After an unexpected storm washed away 21% of VLI's stock value, puddle-jumping traders began picking up shares at what could be bargain prices.

The week began with sunshine and roses for VLI shareholders. With a planned $7-per-share acquisition of VLI by American Home Products of Melville, N.Y., in the works, VLI stock was trading at about $6.

Besides the anticipated acquisition, investor interest was further fanned by VLI's announcement on Sept. 18 that it would soon enter the growing market for prophylactics with a line of Today brand condoms.

VLI is best known for its Today contraceptive sponges, which have captured 25% of the market for female contraceptives.

Craig B. Dickson, a biotechnology analyst at Interstate Securities in Charlotte, N.C., said Today's name recognition and its national distribution network increase the odds that VLI's new product line will be successful.

Even if VLI captures only a small percentage of the $100-million wholesale condom market, the new product line could have a significant impact on VLI's sales, perhaps enough to make the company profitable, analysts said.

VLI, which lost $4.9 million on sales of $17 million last year, has had only two profitable quarters in its 12-year history.

But the clear skies suddenly darkened after the close of stock trading Wednesday.

In a late-afternoon announcement, VLI disclosed that it had lost its U.S. patent on the Today contraceptive sponge because the company failed to pay a $150 renewal fee. An initial request for reinstatement of the patent was rejected by the government, but the company said it was preparing a second, more detailed request.

The patent is critical for more reasons than one. Not only does it protect the proprietary features of the company's primary product, but VLI's acquisition agreement with American Home Products says that if there's no patent, there's no deal.

When over-the-counter trading resumed Thursday, VLI stock plunged 20% to $4.625 per share. It regained a mere 12.5 cents Friday to close at $4.875, down $1 for the week.

Investors, who had been taking the pending takeover for granted, suddenly began asking questions.

Will American Home Products remain patient while VLI tries to regain its patent? Will it back out of the deal? Will it renegotiate with VLI, which is in a weakened bargaining position?

American Home replied that it was proceeding with its acquisition plans but emphasized that the deal remained contingent on the patent. American Home Treasurer William Emswiler said the company would have to study the situation further before deciding whether to renegotiate.

By week's end, analysts were betting that VLI would regain its sponge patent and that the acquisition would occur. And if it does, they said VLI stock was a bargain at $5.

Jeffrey Kilpatrick, president of Newport Securities in Costa Mesa, noted that at VLI's week's end trading price, buyers could reap a profit of about 40% if the acquisition goes through at $7.

"It's certainly not a riskless situation. But it's an opportunity to get the stock cheap," Kilpatrick said.

"It's become a trading game, not an investing game," said Jim McCamant, editor of the Medical Technology Stock Letter in Berkeley.

McCamant, who had issued a sell recommendation when VLI stock traded recently at $6.375, said he would be reluctant to buy the stock but was advising current holders to hang on to their shares.

He said some of his subscribers were consulting with patent attorneys for advice.

Even if VLI loses its patent, which McCamant considers unlikely, he said the stock probably won't fall too far.

"How low can it get?" he asked. "It was at $4 before the acquisition was announced."

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