https://www.bizjournals.com/portland/news/2020/09/17/embattled-cytodyn-ceo-is-undaunted-by-losses-setb.html
Nader Pourhassan sniffed an intriguing opportunity in 2012.
At the time, Pourhassan was director of business development at CytoDyn Inc., a Vancouver, Washington biotech startup. He learned that an East Coast company called Progenics Pharmaceuticals was developing an antibody called PRO 140 as a treatment for HIV. Although Progenics had received millions in National Institutes of Health grants, it subsequently changed focus and opted not to move forward with the drug candidate.
“We told ourselves, we are going to hit a jackpot,” Pourhassan, who became CEO of CytoDyn shortly after the Progenics deal, told the Business Journal in 2015.
CytoDyn paid $3.5 million for PRO 140, along with an agreement on sales and royalties, and thus began an eight-year journey — but no jackpot. At least not yet.
CytoDyn is still seeking approval from the U.S. Food and Drug Administration to market PRO 140 as a combination therapy for HIV. Meanwhile, Pourhassan sees PRO 140, now called, leronlimab, as a potential treatment for myriad other indications, including Covid.
Investors seem more than willing to take a gamble, especially since CytoDyn announced its Covid foray earlier this year. A penny stock that trades on the Over-the-Counter market, CytoDyn shares soared from 26 cents in early December to a 52-week high of $10.01 at the end of June, though it was trading for around $4 earlier this week. Its market capitalization, likewise, exploded to $4.55 billion at its peak from $92 million. The company is seeking an uplisting to the Nasdaq exchange.
Yet CytoDyn’s success is far from assured. The company has yet to earn a dime. It more than doubled its annual loss to $124 million in the fiscal year that ended May 31, and it requires “a significant amount of additional capital” to stay afloat, according to its most recent annual report.
CytoDyn is also embroiled in two legal battles. One pits former directors against Pourhassan, whom they describe as a relentless pitchman who is overreaching, overpaid and underperforming, and another in which the former medical officer is suing CytoDyn for breach of contract and defamation.
Critics also question the strategy of bouncing from one “disease du jour” to another before securing a single FDA approval.
Infighting and name-calling aside, Cytodyn’s journey is in many ways not unusual for a biotech company. It can take years or decades to get a promising drug to market, with only one in 5,000 molecules making it through. Pourhassan, so far, has excelled at persuading investors to embrace his vision that CytoDyn is onto something big that could both save lives and produce a big payday.
“Successful companies are a combination of good science and good salesmanship,” said Phil Phan, associate director of the Johns Hopkins Institute for Clinical and Translational Research. “You have to convince people to put hundreds of millions of dollars behind this thing, essentially with a hope.”
The salesmanship
Pourhassan has evolved into something of a one-man publicity machine since taking over as CEO in 2012.
CytoDyn issues a steady stream of press releases — about 100 so far this year — often highlighting “impressive” and “strong” results. Pourhassan frequently appears on Proactive Investors, a public relations website that charges companies $25,000 a year to sponsor promotional content, according to the Wall Street Journal. The day Pourhassan raved about the “spectacular result” of a leronlimab study for Covid in late April, CytoDyn’s shares rose nearly 8 percent.
At least one investor takes a dim view of the nonstop promotion.
“We believe CytoDyn is a press release machine that exists to grossly overstate the clinical potential of its sole drug in every way possible,” says a February post from Culper Research, an investor that has shorted CytoDyn’s stock. Culper calls Pourhassan the “chief promotion officer” and raised questions about his lack of medical or drug development experience pre-CytoDyn.
Born in Iran, Pourhassan moved to the U.S. during the revolution. He earned a PhD in mechanical engineering from the University of Utah and penned three books on religion. Pourhassan has said he turned around his family wholesale import-export business, before friends urged him to save a biotech company from bankruptcy.
The company was CytoDyn.
Originally incorporated in Colorado in 2002, CytoDyn’s first product, an HIV antibody therapy, showed some promise but the company was struggling. Pourhassan says he put in $75,000 of his own money into the company, while deferring his salary. He came on board as chief operating officer in 2008, before becoming president and CEO four years later.
Pourhassan, who is 57 years old, faced his own struggles before investing in CytoDyn. He filed for personal bankruptcy twice, once in Utah and once in Oregon, and was indicted for falsely representing dreamcatchers he was selling as Indian-made, a case that was later dismissed.
“Those are the most ridiculous charges I’ve ever seen anybody get,” he said. “Negative people now, when they have nothing else to say, try to go after my old record and dig up something. I helped my family, my business did great, and when the business went down, I had to declare bankruptcy. It was a mistake, based on wrong advice I got.”
The science
CytoDyn has completed nine clinical trials in 800 people for leronlimab as a therapy for HIV. Leronlimab was “generally well tolerated,” with antiviral activity that was “potent, rapid, prolonged … and statistically significant following a single dose,” CytoDyn reported.
Yet leronlimab’s march to market has not moved as rapidly as Pourhassan has always promised.
In March 2019, CytoDyn filed the non-clinical portion of a Biologics License Application, a key FDA approval that would allow it to sell leronlimab as a combination therapy for HIV. Pourhassan told the Business Journal that the company would file the full application by the end of 2019 and the company would have revenue in 2020.
The filing didn’t happen until May 2020 and in July, the FDA requested more information.
“They had the data, they just had to get it in the right form,” Pourhassan said in August. “The FDA is not asking us to do another clinical trial, which is very good news.”
While that process plays out, CytoDyn is preparing for a Phase 3 clinical trial of leronlimab as a single therapy for HIV, a magic bullet that no one has yet achieved. Current HIV therapies entail a cocktail of drugs. The potential market for a monotherapy is $4 to $5 billion.
“Monotherapy changes the paradigm of HIV,” Pourhassan said.
But he sees promise for leronlimab that extends well beyond HIV.
Clinical trials are underway to treat metastatic triple-negative breast cancer, and studies are in the works to evaluate leronlimab as a therapy in 22 solid-tumor cancers, graft-versus-host disease and NASH disease.
But much of the buzz in recent months has focused on leronlimab’s potential in treating Covid-19.
CytoDyn received an Emergency Investigational New Drug authorization from the FDA, becoming one of dozens of candidates in the horse race for a treatment or cure.
It completed a double-blind study of 84 randomized patients with mild-to-moderate symptoms in July. In mid-August, CytoDyn announced “impressive results,” although it did not meet its primary outcomes — improvement in fever, muscle aches, labored breathing and cough. The drug did, however, demonstrate “statistically significant improvement versus placebo” in respiratory rate, systolic blood pressure, oxygen saturation and other measures, the company reported.
“Having that kind of result, we were so excited, we said, wow, the world is going to love us, and we’re going to send it to every country and send it to the FDA,” Pourhassan said.
On a conference call with analysts and investors, Dr. Jacob Lalezari, CytoDyn’s senior science advisor, was equally effusive.
“It’s hard to imagine the outcome of this study being any better,” he said. “I’m stunned at the results we were able to show.”
CytoDyn also announced it has enrolled enough patients to test leronlimab in severe-to-critically ill Covid patients.
Johns Hopkins’ Phan said repurposing leronlimab as a potential treatment for multiple diseases is a clever strategy.
“That’s the golden key for (drug development) companies,” Phan said. “It used to be you would make one drug for one indication and one disease. That’s highly inefficient. Now at the molecular level, companies are figuring out how to create a general-purpose weapon.”
Pourhassan’s multipronged approach also has its skeptics. Richard Trauger, who formerly served as CytoDyn’s chief science officer and led the effort to acquire leronlimab, left the company in 2013.
“You typically wouldn’t take a drug at that late stage and start triple negative breast cancer, graft vs. host disease, or now Covid, because it’s a risky proposition,” said Trauger, who has worked at two other biotech companies since leaving CytoDyn and as an R&D consultant.
He said Pourhassan “tried to dictate everything” and had an unrealistic idea of how quickly FDA approvals could proceed. But mostly what concerns Trauger is a lack of detailed data from CytoDyn, as well as absence of third-party validation, he said.
“There’s a lack of transparency on the data,” he said. “They’ve never published or presented anything. There’s no peer review. All you see are press releases from Nader.”
In Pourhassan’s view, Trauger is the one who was unqualified and didn’t “know jack” about the FDA’s approval process. Pourhassan said he salvaged the HIV trial.
“If I hadn’t done that, we would have lost it,” he said. “I changed it all by myself. I’m not trying to brag.”
As for outside review, both he and CytoDyn board Chair Dr. Scott Kelly said the company has validated all its studies and twice presented at the Conference of Retroviruses and Opportunistic Infections. Three papers are currently under submission for publication, Pourhassan said.
“The science has been verified by multiple clinical trials approved by the FDA as well as outside contract work in animal studies,” Kelly said.
The finances
CytoDyn’s latest annual report portrays a company that has been insolvent since its inception and has required debt and equity financing to maintain its operations. The company has incurred “significant operating losses,” with an accumulated deficit of $354.7 million.
Last year’s $124 million loss derived in large part from increased R&D, administrative and interest expenses. CytoDyn CFO Mike Mulholland pointed out that nearly half of the loss was driven by noncash-related expenses.
Equity financing has created a dilutive effect on its common stock and hampered the company’s ability to achieve reasonable financing terms, according to the 10K.
Under Pourhassan’s leadership, CytoDyn has raised $245 million from investors and has spent $228 million on operations in the past nine years. Its “cash burn” rate last year was $68.8 million.
Based on CytoDyn’s burn rate and what they owe this year under a manufacturing contract with Samsung BioLogics, one could conclude the company has only four months before it runs out of cash. But CytoDyn has several options available to it, including raising another equity round or issuing debt.
“Bottom line, if investors were highly concerned about the company going bankrupt or running out of cash, the stock would not be up 360 percent year to date and 1,063 percent year-over-year,” said Peter Jones, vice president of equity research and portfolio management at Ferguson Wellman Capital Management.
Serena Morones, a forensic accountant with Portland-based Morones Analytics, said the big questions are whether CytoDyn can continue to raise capital and secure its approvals. The next six months or so could tell.
“Maybe they have nine lives and an uncanny ability to raise money no matter what,” she said. “They appear to be on the precipice of greatness or failure.”
Johns Hopkins’ Phan predicts that “odds are pretty good they will continue to raise money.”
“There doesn’t seem to be any indication of investors losing patience,” he said. “The rounds have been increasing and successful, and with the pivot to Covid, they see the possibilities.”
That said, shares of CytoDyn fell 13.5 percent following news that the Covid trial results fell short on some outcomes, perhaps indicating some skepticism among investors.
Investment banking and research firm H.C. Wainwright said it would maintain a “neutral” rating after CytoDyn announced its Covid results in August, because it’s not clear the FDA will accept them. The firm gives CytoDyn an 85 percent probability of approval for its HIV indications and 50 percent for Covid.
“We believe the risk/reward ratio for CytoDyn has worsened palpably, since many questions remain,” wrote analyst Raghuram Selvaraju.
‘Woefully mismanaged’
As Pourhassan navigates clinical trials, FDA paperwork and a capital chasm, CytoDyn is embroiled in two lawsuits.
In August 2019, Dr. Richard Pestell sued CytoDyn, Pourhassan and Kelly for breach of contract and defamation in U.S. District Court in Delaware. He’s seeking $1.3 million in damages.
Pestell had been CytoDyn’s chief medical officer and a board member. He joined the company in 2018 after CytoDyn acquired the assets of his company, ProstaGene, which was developing a gene-based prostate cancer testing and treatment.
In the lawsuit, Pestell claims Pourhassan “embarked on an effort to retaliate” against him after he raised safety concerns related to a drug application Pourhassan wanted submitted to the FDA. Pestell, who was fired, says in the lawsuit that Pourhassan withheld funding and support for key programs, excluded him from key decisions and supplanted his role by hiring a chief science officer.
Pourhassan called Pestell “the most lying, deceiving person in the world.”
“The reason he’s saying I’m putting lives in jeopardy is because he doesn’t want to work, he just wants to get paid,” Pourhassan said.
The second lawsuit is a stockholder derivative complaint filed in April 2020 in Delaware Chancery Court by a group of six investors, including four former board members: Anthony Caracciolo, Dr. Bruce Montgomery, Gregory Gould and Carl Dockery.
The suit names Pourhassan, Kelly and board members who awarded themselves 21 million CytoDyn shares in December 2019 and January 2020.
Even before the lawsuit, Dockery, in particular, had flagged issues he saw with Pourhassan’s conduct in emails to the board and CytoDyn’s auditors. In a July 2019 email to the board entered as an exhibit in the lawsuit, Dockery described the company as “woefully mismanaged,” with a “dysfunctional environment of distrust, paranoia and backstabbing.”
He also said that Goldman Sachs Partners Fund, Bain Capital and Ziff Capital Partners chose not to invest in CytoDyn because of Pourhassan.
“We are all familiar with the CEO’s background and demeanor,” Dockery wrote. “He also tends to be somewhat of a ‘showman,’ which can tend to turn off institutional investors.”
Pourhassan acknowledged in an interview that the institutional investors declined to invest, but said it was not because of him.
Last November, Dockery and his fellow plaintiffs asked the board to terminate Pourhassan as CEO.
“Over the last several years, it has become abundantly clear that Dr. Pourhassan is not up to this task,” they said in a letter included in court documents.
Pourhassan has made public statements touting the company’s drug, revenue and medical milestones that, “at best, appear to be grossly overoptimistic” and about key dates that are not met, “to the embarrassment and detriment of the company,” Dockery and the others said.
Kelly, in a written response in December to Dockery’s letter included in court documents, said that “CytoDyn denies any and all allegations of wrongdoing.” He said a special committee of the company’s board had been formed to review issues the directors raised.
Then came the December and January stock awards, which would become the focus of the ex-directors’ and shareholders’ derivative lawsuit.
The complaint describes “blatant self-dealing and an egregious abuse of power” related to the CytoDyn shares Pourhassan, Kelly and other insiders awarded themselves. The lawsuit seeks to have the awards rescinded and unspecified damages awarded to the plaintiffs.
The combined value of the December and January awards, according to the lawsuit, was $14.7 million. By July, the value of the shares rose to $125 million. The plaintiffs also contend that Pourhassan is paid "substantially more" than CEOs at peer companies with a total package that rose from $448,000 to around $1 million over a five-year period.
In late April shortly after the suit was filed, Pourhassan and Kelly exercised stock options and warrants worth more than $19 million in combined proceeds.
The sales were “conspicuously timed between two press releases” about CytoDyn’s effort to get FDA approval for its HIV therapy that had “material impacts” on the market price of CytoDyn’s stock, Mark Richardson, the ex-directors’ attorney, said in a letter included in court documents.
“Thus, it appears Pourhassan and Kelly are engaging in a continuing course of self-dealing conduct that takes advantage of material, non-public information for their own personal enrichment,” Richardson wrote.
The board announced that the stock awards were done to align compensation with industry standards and competitors and were approved by the compensation committee. The allegations related to the timing of the sales are untrue, Kelly said.
"The trading window for the company was open, the trades were pre-cleared through company policy, and pursuant to that policy, no one traded on insider information," Kelly said.
Kelly personally came under fire from Richardson this summer.
In a letter to the judge in the case, the ex-directors’ attorney alleged that Kelly contacted one of the ex-directors and “attempted to threaten and intimidate” him and the other plaintiffs into dropping their derivative claims.”
Kelly disputes that story, saying that the former director, Caracciolo, reached out to him and he simply responded.
“In no way did I threaten them, but I told them the lawsuit could potentially hurt the company,” Kelly said.
Pourhassan responds
Pourhassan said he believes the ex-board members are motivated by prejudice because of his accent. They made fun of him at board meetings, he said.
“These people will have to face their own consciences,” he said. “I don’t know how they sleep at night. I work so hard. These guys have no shame. They just say things. I know I’m going to be a winner at the end of the day because I’m doing the right thing and I’m honest.”
As for the press releases, he said, he would "go to jail if it's not 100 percent aligned with the FDA," and all releases are vetted by multiple people.
Kelly lauded Pourhassan’s leadership and CytoDyn’s process.
“The results speak for themselves. Nader has done an exceptional job of leadership, and he has his own form of doing things, but it’s worked remarkably well for shareholders and patients,” Kelly said, adding that “it’s not easy getting a molecule through the process. It’s been an extremely fast process, getting to where we are, and less expensive than most big pharmas would ever do. We think we’re very close on multiple fronts.”
As for the stock sales, Pourhassan maintains that of the $15 million in shares he sold, which presumably included some of the shares he received in December and January, he gave $3.8 million back to the company to cover a manufacturing payment to Samsung Biologics.
“If we were to miss that payment, we would be in a dangerous situation,” Pourhassan said.
Another $7 million went to taxes and he retained $4 million in cash, he said.
“These were my options for 11 years,” he said in an interview. “I didn’t think any shareholder would mind me exercising when it’s a benefit to the company. … I went through hell to get to this point. … Who brought all these other indications? I was the person behind all of this. There is nothing wrong here.”
What’s next
The former directors’ lawsuit is on hold until early December, pending the outcome of CytoDyn's Special Litigation Committee.
The FDA will likely provide more clarity in the coming months on whether leronlimab will be moving forward as a treatment for HIV and Covid.
Pourhassan insists that CytoDyn is on solid ground on the financial and regulatory fronts. He said he’s “very confident” he can get leronlimab over the finish line.
“There is nothing here that has not been spectacular about leronlimab,” Pourhassan said in an interview in August.
Trauger, CytoDyn’s former chief science officer, said he hopes the drug can eventually help people.
“But where that will be and when that will be is up to the company and the veracity and rigor they bring it forward with,” Trauger said. “We can talk about personalities all day long. In the end, the science dictates everything.”
