Northfield Laboratories Inc. is running out of money, and its survival depends on federal approval of the blood substitute it has tried to market unsuccessfully for more than two decades.
It’s looking grim, and with an April 30 government deadline looming, its shares closed last week at a mere 50 cents.
So what a surprise to see a stock analyst pick up coverage of the Evanston-based company with a “buy” rating.
Well, maybe not a surprise: In the fine print, the upbeat report discloses that Northfield Labs paid $15,000 for it.
This is just one example of company-sponsored research, which took off amid a crackdown on Wall Street analysts during the tech bust some years ago. Research departments at fee-hungry investment banks got in trouble for downplaying their doubts while urging the public to buy anything with “dot-com” in its name. Regulators took aim at hidden conflicts of interest, and the rent-an-analyst movement was born.
The paid-for research of today is usually more upfront about its cheerleading. Companies fork over a commission — generally disclosed — and pray for some buzz among would-be investors.
As Northfield spokeswoman Sophia Twaddell explained, “We hope to increase visibility for our story.” It’s “too early to tell” if the weeks-old gambit is working, she added.
Doubts about this lightly regulated practice are nothing new. But enough data has emerged to show empirically what most people assumed anyway: The companies get what they pay for.
According to a report from the College of Business at Florida State University, company-sponsored analysts have been far more favorable than their un-paid-for counterparts. They issued “strong buy” recommendations 29 percent of the time, compared with 11 percent at traditional firms.
“They’re more likely to gloss over the negative points,” said report author William Buslepp.
At Northfield Labs, the obvious negative is its likely demise, after 24 years devoted to solving a life-and-death medical problem.
Trauma victims often fail to receive desperately needed blood transfusions until they arrive at a hospital. Determining blood type and keeping the product fresh can be tricky, so paramedics at accident scenes typically give saline solution — better than nothing, but not as good. A bunch of companies, including Baxter International, have tried to produce blood substitutes over the years.
Northfield’s PolyHeme is among the last of its type left standing, but its crucial Phase 3 clinical trial didn’t deliver. Compared with saline, PolyHeme caused more heart attacks and other bad side reactions, resulting in a higher death rate.
There’s still a chance that federal regulators will approve it for limited use, in emergencies far from hospitals. But that long shot became even less likely in recent weeks when it was left off the agenda for a key committee meeting.
In its March 26 research report, RedChip Cos. of Florida acknowledges the risks, even as it issues a “speculative buy” rating. When evaluating companies, its research director explains, RedChip does change its ratings to “sell” as the facts require, and at least one time initiated coverage with a less-than-rosy “hold.” It also performs separate, independent research.
RedChip’s 13-page report on Northfield is lucid and loaded with data. But it goes out on a limb to forecast a 20 percent chance of approval and a target price of $4 per share. “We consider the stock a lottery ticket,” wrote analyst David Webber.
Buslepp figures that most of the companies paying for analyst coverage aren’t overlooked or under-covered, but rather just unhappy with their stock price.
“These companies are probably correctly valued,” he said.
When it comes to the stock market’s lottery tickets, buyer beware.
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gburns@tribune.com
Burns knows business: To read more columns by Greg Burns, go to chicagotribune.com/burns
