- Latest 8-K filing settles dispute for $7.6 million but paves way for Pestell share repurchase at par
- 13-D Group is outspoken but alienating longs with message
- Ex-Board members and large shareholders fail to impress shareholders as special interests surface
- SEC letter about the Refuse to File has no impact on inventory valuation
- BLA Filing delays ties to last CRO
At the close of business, Friday CytoDyn Inc (OTCMKTS: CYDY) filed an innocuous 8-K that ignited a firestorm of controversy on the message boards. The 13-D group called Advancing Leronlimab seems to be joining the ranks of the shorts. The negative sentiment is very high. The old saying is that it’s darkest before it is dawn applies here. The stock has been under continuous pressure despite the good news of the BLA filing getting back on track and the likelihood of 2 Breakthrough Therapy Designation (BTD’s) shareholders this weekend were getting wrapped up in the he said she said of the latest 8-K that awarded Pestell $7.6 million in damages. What is missing from the dialogue is that this is yet another settlement to clear the path toward an uplisting or drug partner and will ultimately minimize the impact of dilution.
House Cleaning Ahead of Big Pharma
In Pourhassan’s last shareholder update he mentioned that they terminated the American Regent relationship to provide flexibility in a potential big pharma partnership. The deal with Pestell is just another run-of-the-mill housekeeping measure, but the issue regarding the effective cancellation of 8.4 million restricted shares remains in limbo. This housekeeping theme also applied to Amarex who is largely being replaced by more specialized ARO’s such as Einstein. The Company has been systematically clearing out the bad actors since Scott Kelly stepped in as Chairman. They did hire some poor performers like Dr. Maboob Rahman, but they were quickly replaced with all-stars like Dr. Chris Recknor. Those involved with the bad acquisitions, bad trial designs, and the inability to complete FDA submissions have all been removed and seem to have been reincarnated in the 13-D group.
Large Shareholders Backing the 13-D
The 13-D group includes old hands such as Pestell and Carrociolla, the very people that arguably were responsible for a considerable amount of dilution and missteps. They were ex-Directors of CytoDyn. Both Pestell and Caracciolo have been significant sellers of their CytoDyn positions and have profited immensely. Caracciolo had over 6.0 million shares and that position has dwindled to less than 1.4 million. That’s a 77% reduction in shares after he left in January 2019. The irony about this statistic is that Caracciola brought a suit against CytoDyn management after he got ousted for unjust enrichment to the tune of 1.6 million shares versus the 6.0 million he earned for diluting the heck out of the company and executing bad deals.
Pestell was awarded over 10.9 million shares he could sell after his termination in July 2019. What is left is 3.1 million shares not to be confused with the 3.1 million he just won in arbitration. Pestell disposed of 71.6% of his tradeable holdings. Both these shareholders have an ax to grind with existing management for being extricated from the company. Without Pestell’s shares, the Advancing Leronlimab group wouldn’t have been able to achieve a critical mass. The reason Pestell is behind this movement is that 8.342 million shares are restricted and subject to repurchase at $.001. By getting this new board in place Pestell could essentially mitigate CytoDyn’s action against him to recover the shares. CytoDyn is clearly going after Pestell.
Pestell also made strategic mistakes that impacted the trajectory of the cancer trial. He took a very conservative approach with cancer. He moved forward with a Phase 1 instead of a Phase 2 cancer trial with 3 + 3 dose escalation. It was very clear from the theory of the Mechanism of Action (MOA) that blocking the CCR5 receptor had no side effects and that occupying more CCR5 would lead to better and quicker outcomes. This was seen in the first compassionate use patient, but his inability to adapt to a drug development mentality versus a research mentality probably cost shareholders billions in lost opportunity cost and untold lives.
On CytoDyn’s last video update, it’s become apparent that a Phase 2 or possible Breakthrough Therapy Designation (BTD) is in the works. Pourhassan decried the data was in and there were responders. This means that at least 9 patients were dosed using the 3 + 3 trial design and that 2 of them were responders. This is a 22% responders rate and assumes the other 5 patients failed. This preliminary number of 22% could be compared to Roche Holdings (RBBHY) TENCENRIQ which had an ORR of 24% and Merck’s (MRK) KEYTURDA which had an ORR of 23.1%. The concept that investors seem to be overlooking is that it is highly unlikely that the other patients failed when the company indicated all patients had zero Circulating Tumor Cells (CTCs). The formal release of the data might ignite the entire oncology sector. The chance of a BTD is very high.
The principal shareholder that organized the Advancing Leronlimab group is Paul Rosenbaum who also wants to be a director. The primary rationale for his involvement is his experience in shareholder activism. He was the CEO and Chairman of SWR Corporation which was a special chemical business that had a successful proxy fight that achieved a full slate of directors at Rentrak Corporation in September 2000. This experience was over 20 years ago and long term the company Rentrak which has now become Comscore (NASDAQ: SCOR) has only a $360 million dollar market cap. Rosenbaum is also an attorney and he has some unfavorable interactions with a plaintiff in a case.
Proposed Directors of the 13-D
The lead director of Advancing Leronlimab group seems to be Dr. Bruce Patterson the CEO of IncellDX. Dr. Patterson is a very gifted orator and a big proponent of leronlimab. Patterson and Pourhassan did multiple video interviews together and the investors loved the interactions. Many on social media have been calling on CytoDyn management to buy IncellDX and bring Patterson into the company. Patterson’s relationship with CytoDyn was actually good until the BLA Refuse to File uncovered Pattersons weakness as a lab along with COVID-19 tests that were not completed in a timely manner. It wasn’t until September 2020 that IncellDX sought validation of their receptor occupancy test through MD Biosciences which is a CLIA certified lab. Not much has been made IncellDX’s patent filing for RANTES as a diagnostic, prognostic, and therapeutic marker, but CYDY shareholders should be up in arms that this intellectual property seems to have been created from a contractor-contracttee relationship. This strained the relationship and seemed to turn after Pourhassan considered Patterson to be no more than a contract lab that did services for the Company that did not ultimately meet FDA clinical trial requirements of a CLIA lab. Much of the strain was evident on Dr. Been’s YouTube interview on July 4th, 2020 when the Bruce Patterson zealots came out in force spamming comments in favor of the purchase of IncellDX. Even after the relationship started to sour Dr. Patterson did a very favorable TedTalk in September 2020.
Patterson is still positive on leronlimab because the science supports his research, but it’s pretty evident that he understands the diagnostics business and no matter how good his intentions would be to develop the drug there would be a constant pull toward the diagnostics path. Patterson supporters think he can do no wrong, but some of his public comments on Long-Haulers were off the mark. His article titled “The Need for Precision Medicine in Active and Post COVID-19” complicated the classification of Long-Hauler patients and came up with a very complicated algorithm to define a Long-Hauler patient. The latest Long-Hauler results indicated that leronlimab had a clinical impact on 18 out of 24 symptoms. These clinical trial results strongly indicate that leronlimab can make a significant impact on the disease and that there was no need to over classify patients. Investors need to consider that if Dr. Patterson was in control of the clinical development of leronlimab for Long-Haulers; this would have been a critical misstep. This is very similar to Dr. Pestells handling of the cancer trial detailed later in this article.
Dr. Yaeger’s resume consists of 3 primary deals after being VP of Regulatory Affairs at Gilead Sciences (NASDAQ: GILD). She landed at Cardeas Pharma as the Chief Operations Officer and eventually was purchased by Savara Inc. (NASDAQ: SVRA). At the time of the acquisition, SVRA was trading at $13 and has recently stabilized at $1.50. Most of the drop in valuation happened after her tenure, and shouldn’t be attributed to her but it wasn’t successful either because ultimately the drug Cardeas developed failed Phase 2. She also worked at Breath Therapeutics which was acquired by Zambon Pharma for $140 million Euros. Her most recent deal was Alder Pharma and it was purchased for $1.95 billion and this was her most successful position. Although she has no shares in the company her track record seems to be a good fit for the company.
This is a board with 3 directors who are MDs, Yaeger, Patterson, and Errico. At this stage of CytoDyn’s development on the verge of commercialization, Doctors seem to be the last thing that is needed. Commercialization or big pharma directors would be better choices but it’s clear that there are agendas driving the Advancing Leronlimab group that appear self-serving and not in the shareholder’s best interests.
BLA Delays Directly Linked to Amarex
CytoDyn’s primary CRO was Amarex. They were responsible for the HIV trial, the cancer trial, and the COIVD-19 trials. What many investors may not realize is that they were for all intents and purposes sold right before the pandemic hit. In October 2019 NSF International purchased Amarex. Although Kazem Kazempour continued as the president and CEO of Amarex it was clear that Kevan Lawlor, CEO of NSF International, was in charge. All future branding like Kush Doty’s cancer talk was branded under NSF. In an Xtalks in June 2021 Kazempour admitted that there were “disruptions in oncology clinical trials.” This resulted in decreased patient enrollment, delayed or missed visits, and the likelihood of incomplete patient data. CytoDyn’s cancer development paid dearly for Amarex’s inability to recruit patients.
There was an SEC letter that focused on the FDA’s Refuse to File (RTF) letter and valuation of inventory as an asset. In the response, CytoDyn cleared up the fact that the drug was an asset and that the formatting of the BLA had nothing to do with evaluating the drug as an asset. The company essentially won the argument with the SEC and had to take out language regarding the safety and efficacy of leronlilmab since the “FDA has not yet commenced their review of your BLA, including leronlimab’s safety and efficacy. They also had to comment on the shelf life of the product which is over 3 years.
During this process, CytoDyn was forced to publicly reveal how ineffective Amarex was in their BLA filing that in February of 2020 they paid an extra $1.5 million to Amerax to put the data in the CDIX format. Here is a summary of the deficiencies outlined in the FDA response.
One of the key hurdles to the BLA filing was cleared on July 1, 2021 when the company submitted its dose justification which is related to the receptor occupancy test. Although it provided the validated receptor occupancy test it is just a checkbox and likely to be irrelevant in the approval process since it doesn’t affect the efficacy of the drug. The company seems to be squarely on a path to BLA submission which could put FDA approval for combination HIV therapy in Q1 2022. The next major internal milestone is around July 15th.
Adherence to this timeline could be a big boost to investor confidence.
Prostagene Debacle on Caracciolo’s Watch
The ProstaGene acquisition was essentially about a prostate cancer diagnostic. The concept of the acquisition was masterminded by Executive Anthony Caracciolo who at the time was CytoDyn’s Executive Chairman of the Board when the deal was initially announced in July 2018. Nader Pourhassan was the CEO, but at the time had no decision-making power with respect to the acquisition. Many investors may not realize, but the executive chairman is higher in rank than CEO and Caracciolo stepped into that role in January 2017. Many thought that his Gilead resume would be instrumental in inking a deal. On closing of the acquisition in November 2018 Dr. Pestell was not only welcomed as the newest board member, but was also the company’s Interim Chief Medical Officer. This was all Caracciolo’s doing until a more balanced board led by Dr. Scott Kelly came to fruition in January 2019. The fact is Caracciolo didn’t resign until January 10, 2019 when David Welch joined the board. So issues that predate January 10, 2019 are on Caracciolo’s watch, not Pourhassan’s. An interesting anecdote is that Caracciolo also presided over the failed receptor occupancy test done by IncellDX.
Pestell’s Power Grab Fails on ProstaGene Due Diligence
When reviewing the chain of events it looks like Dr. Pestell was executing a power grab that ultimately failed saving investors potentially billions. The first mention of Dr. Pestell was on June 26, 2018 when he came forward with research on metastatic breast cancer. Shortly thereafter a LOI to acquire ProstaGene was announced by Caracciolo along with a new focus on cancer and immunological disorders. In August 2018, Caracciolo the ex-Chairman brought in Dr. Pestell as the interim Chief Medical Officer and signed the definitive agreement to acquire ProstaGene. In November 2018 after the acquisition was completed Pestell had the largest insider holding which represented 6.7% of CytoDyn in an all-stock transaction. In January 2019 he was promoted to Vice Chairman of the Board of Directors one step away from full control.
Dr. Pestells ambitions started fraying in June 2019 after CytoDyn requested and was granted a face-to-face meeting with the FDA regarding its 510(K) for the ProstaGene Prognostic Test. Shortly after the FDA meeting was solidified for August 28, 2019, the company must have learned that “the technology would require a sizable amount of incremental capital and development time to advance towards a possible monetization.” Pestell represented in many instances and interviews almost a shovel-ready project on the verge of approval. These inconsistencies regarding the tests claims may have ultimately led to his termination. The last 10-Q outlined the massive write-off of the ProstaGene acquisition from $15.126 million to $2.926 million with an estimated $1.369 million more to go through 2025.
Dr. Pestell sent a letter resigning as a director on July 22, 2019 and then was terminated for cause on July 25, 2019. In an ironic twist of fate, and actually in the same press release IncellDX, Bruce Patterson’s diagnostic company, announced a licensing agreement of the PA-14 test which was eventually referred to as the receptor occupancy test. Now the two diagnostic partners with failed tests according to the FDA want to team up to run CytoDyn.
Little Bad News Left for Shorts
The current stock price has factored in NO BLA, NO PHASE 3 RESULTS, NO FOREIGN EUA, NO FDA APPROVAL, NO REVENUE, NO UPLISTING, NO LONG-HAULERS BTD and NO BTD IN CANCER. Negative sentiment is an epic high so it’s important to look at what remaining catalysts the shorts have left in their box of tricks. The shorts also believe the FDA statement that leronlimab has no efficacy and that the BLA has zero chance of ever getting filed. The only thing left are 2 class-action lawsuits against lead plaintiffs with 300 shares (Schedule A) and 1000 shares.
The major premise of the 13-D group called “Advancing Leronlimab” is that the FDA hates management and there is no chance of approval without a change in management. They said
“The Group believes that this has led to a poor and unsalvageable relationship between CYDY and the FDA and that CYDY needs leadership that can obtain regulatory approval for the drug in an expedient fashion. Accordingly, the Group believes the Company needs to restore its credibility with the FDA by reconstituting the board and replacing senior management.”
The shorts are stoking the fire with the 13-D groups negative outlook on management and converting many long-term longs into sellers. Failure of the 13-D group is even factored into the stock because the stock failed to rally that new management was going to help the situation. At this juncture, there are no short-term or medium-term catalysts left for the shorts.
CYDY stock is clearly under an intense amount of pressure. The level of negative sentiment is so high it’s actually bullish. This contrarian indicator means that long-term investors have reached their breaking point and have for the most part exited. There could be a selloff based on the recent 8-K filing regarding Pestells settlement, but it should be clear that this was a mediated settlement negotiation that couldn’t be challenged and was done under Caracciolo’s watch. What this news highlighted is that there is a bigger prize which is an unwinding of the 8.342 million if current management stays in place.
The 13-D group seems ill-equipped to manage the Company and had very blatant ulterior motivations that would undermine shareholder equity. There are a lot of sour grapes in the group that seemingly want to enact revenge in their grudgematch for control of the company. While the 13-D group is very vocal they have gained no traction and have managed to irritate the longs that see them no better than the shorts. There appears to be a risk-based on their choice of leadership and supporters that the 13-D group could repeat many of the mistakes of the past that lead to more delays and more dilution.
Pourhassan raised over $191.2 million with 33.7 million shares and did it without an investment banker offsetting a significant amount of dilution in placement fees. His predecessor Caracciolo took 3 years to raise $129.6 million at a cost of 472.8 million shares. When investors think in these terms dilution has come to a standstill as the drug development continues. Patience seems to reward the long-term investors and positive catalysts are more likely to shape the landscape going forward than negative ones. The latest 8-K is a non-event and the stock is poised to rise on any good news.
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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.