Smith Collins Pharmaceutical Inc. wants to raise $3.2 million to develop an herbal ointment to treat skin cancer.

The Silver Spring company, formed in April, hopes to develop and market a drug called KC-101, a compound of zinc chloride and natural herbs, which the prospectus says has been used clinically to treat skin cancer in Portugal for more than seven years.

Smith Collins also plans to develop and sell a form of that drug, called KC-404, which it says has been used to treat periodontal disease in France.

"None of the KC-101 compounds have been approved by the Food and Drug Administration for marketing or use in the United States, and there can be no assurance that such approval will be granted," the prospectus warns.

KC-101 is described as a combination of zinc chloride and extracts of roots of two plants found in the United States. The drug is produced as a paste that is applied to cancerous tissue and covered with a bandage.

The prospectus says the paste causes the cancerous tissue to atrophy, form a scab and slough off, precluding the need for additional surgical treatment.

KC-101 has also been used to treat sores "such as those found on the feet of diabetics," the prospectus says. A synthetic derivative, KC-404, can be applied to diseased gums to treat periodontal disease, it adds.

Zinc chloride has been used for at least 100 years as a skin cancer treatment, said Dr. Richard Bennett, a professor at the University of California-Los Angeles School of Medicine. The substance kills skin tissue upon application, but it "died out" as a medical treatment "because there are problems with it," he said.

If not applied carefully, zinc chloride can kill healthy skin, while too little zinc chloride might not penetrate deeply enough to kill all of a tumor, Bennett said. "I don't see it as more useful than what we have already," he added, calling it "imprecise" compared to techniques such as surgery, freezing, chemosurgery and radio therapy.

Conducting clinical trials and obtaining federal approval of a cancer drug requires about $7 million over and above the costs of other corporate operations, said Nelson M. Schneider, a biotechnology analyst with E. F. Hutton & Co. Inc.

The prospectus acknowledges that the proceeds of the stock offering "may not be sufficient to fund the testing necessary to attempt to obtain" FDA approval.

The prospectus also notes that "the manner of testing of KC-101 in Portugal precludes any scientific conclusions being drawn regarding the effectiveness of KC-101 in treating skin cancer."

Because of the financial and scientific obstacles to obtaining U.S. approval, the company intends to start by establishing initial operations in Portugal and marketing the drug abroad.

Smith Collins is offering 13.5 million shares of common stock at 28 cents per share, which would raise a maximum of $3.8 million, or $3.2 million after underwriting commissions and expenses.

The prospectus lists unaudited total current assets of $412,572 and current liabilites of $89,534 as of June 30. Net losses since the compant's founding total $53,828.

The company has patented the drug in the U.S., Canada and Europe, but its U.S. patent relates to its use as a periodontal treatment and not as a skin cancer ointment.

Smith Collins has no full-time management; officers and directors serve the company on a part-time basis.

One of the company's vice presidents is Keith Collins, whose private firm developed KC-101 and tested it in Portugal, Egypt, Iran and France over the last seven years.

Smith Collins's founder and chief executive officer is Eli D. Bebout, president of Nupec Resources, an oil, mineral and gas exploration firm.

A Portugese firm, Quatrum-Empressa Nacional de Quimica S.A.R.L., has manufactured the substance for Keith Collins and has tentatively agreed to produce it for the new company.

One risk factor listed by the prospectus is the high cost of conducting development, production and marketing efforts abroad.

Another risk factor is the legal troubles surrounding the offering's underwriter, Nielson & Clark Inc. of Las Vegas, which was formed in July. The Securities and Exchange Commission has filed suit against Norman Vance, chairman of the firm, alleging that he and others offered and sold unregistered shares of stock from 1975 to 1980 and operated as an unregistered broker-dealer, in violation of federal securities laws.

Vance has denied the charges, the prospectus says, adding that the case "could have an adverse effect upon the business of the underwriter and its ability to manage the underwriting of this offering."