LadRx Corp (LADXD)

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SA: CYTR Share Price can hit 50 Dollars

Derivative Action Seeks To Benefit Nominal Defendant CytRx Corporation
Sep. 7, 2017 3:27 PM ET|
29 comments|
About: CytRx Corporation (CYTR)
Strong Bio
Strong Bio
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Summary

A series of discounted share offerings of about 220% in total were made while management allegedly enriched themselves with share awards.

Cancer chemotherapy candidate Aldoxorubicin was awarded broad approval pathway for 17-24 indications for NDA submission under 505(b)(1/2).

Rights to Aldoxorubicin were dealt away at an unusually low valuation, possibly prompting two VP resignations, with potential disregard for cost of development, company security, and ROI.

CytRx management was delivered 29 questions for responses and explanations, which are listed below.

Lead Plaintiff Dr. Scott Patterson via Federman and Sherwood Law Firm seek court-mediated remedy for possible CEO and BOD breaches of fiduciary duty.
Overview

CytRx Corporation (CYTR) is a ~$85 million market cap company focused on research, development, and commercialization of novel serum-linked oncology therapeutics. The company received a broad approval pathway from FDA with up to 24 oncology indications for the first of its albumin-binding drug pipeline lead candidate aldoxorubicin. Current management recently attempted to partner with Nant-Cell, a company under the direction of billionaire Dr. Patrick Soon-Shiong among others, in a potential $340 million milestone deal (not including various double and single-digit royalties depending upon the indication) that seems like a discount to many onlookers, though some of the details are not fully disclosed. As short-sellers gnash teeth to discredit data for aldoxorubicin, actions of management have under-performed (as measured by market response). Key data readouts from several clinical trials have been at least partially withheld (including an entire 135 patient small cell lung cancer (SCLC) phase 2 trial, a phase 2 combination soft tissue sarcoma (STS) trial that has had no updates for nearly a year with 4-month data showing up to 92% disease control, and overall survival data for phase 3 STS reported in an incomplete state while nearly 10% of the patients were still palliative), leaving the company to suffer the consequences. However, CytRx corporation may have a white Knight in the form of Federman and Sherwood Law Firm of Oklahoma City, OK. According to the Firm website, "Federman & Sherwood is a boutique litigation law firm handling securities, business (including energy), and product liability cases. It will handle only those cases that it believes strongly in. The Firm grew out of a largely defense-oriented practice to now encompass one of the fastest growing investor and plaintiff litigation practices in the Southwest".
What is going on?

The law firm has filed a derivative action suit via lead Plaintiff Dr. Scott Patterson (D.D.S., M.S.) to represent CytRx Corporation against its board of directors and CEO, Mr. Steven Kriegsman, to protect it from more potential damage. It is pretty clear why investors in CYTR feel that the $360 million in milestone payments plus undisclosed additional royalties is inadequate, but more about an appropriate valuation for the drug will be described below. During interviews and in an open letter to shareholders Patterson encourages shareholders to vote AGAINST the fifth proposed CEO-sponsored dilutive event of the past year or so, to be sent by proxy sometime around September 5, 2017 with final vote October 17, 2017. The attempted deal with Nant-Cell lacked any payment of money up front, save a small investment by Nant-Cell in the $13 million range, which according to Patterson's complaint combined with milestones is pennies on the dollar relative to fair value. The market seems to regard management's deal as price-destructive, given the ~86% reduction in value of the stock over the last year or so and continued decline. Shorts (who couldn't be more satisfied with management's maneuvers) would argue that there is no evidence for sales for aldoxorubicin despite a clear FDA regulatory approval pathway for aldoxorubicin, and that a market cannot be yet justified. This is certainly possible, but could be said for every blockbuster-producing biotechnology company just prior to FDA approval.

Well known critics and promoters of short positions in CYTR such as Adam Feuerstein also regard the CEO Kriegsman, as one of the worst in all of biotechnology. Out of fairness, maybe Mr. Kriegsman has some grand plan to make good on the lackluster past, but objective onlookers would have to say its doubtful. Shorts point out the only significant product the company has sold over the past few years is its stock, for now (because the Nant-Cell "I owe you's" are only potential revenues). Still, Kriegsman just tools along under the pretense of doing a great job in denial of any damage to the entity of CytRx corporation. When shareholders asked Kriegsman at the annual shareholder's meeting what he had to say for himself given the 95% decline in share price over the past ten years, he replied, "What do I have to say to shareholders? We appreciate your support!" In spite of having almost every item on the recent annual shareholder's meeting proxy rejected by shareholders, including a reverse split proposal, management is trying to reverse split (effectively leading to dilution, explained below) for the second time in less than four months. Patterson refers to Kriegsman's three recent CEO-mediated secondary offerings as "reckless" since these dilutions were timed precisely to when the company stock was recovering in value due to clinical success, and he believes that this was what primarily caused the failure of compliance with listing requirements.
How do things work in a public company?

According to shareholder activist group Veracity Investors (VI), Kriegsman's potential gross negligence (as well as the rest of the CytRx board of directors, Ignarro, Brien, and Caldwell) has brought a lot of public attention to the situation of what can happen when a company's management turns against its corporate entity and fiduciary duties to shareholders. Most investors would think such a situation makes no sense, but to understand simply play detective and "follow the money". One leading activist VI group investor, Preston Todd, stated, "If any public company's management can wash out retail investors with successive dilutions, temporarily undervalue its technology, and self-award multitudes of share options bonuses after retail investors are thoroughly washed out, they can save a potential suitor a lot of cash in a merger or acquisition event designed to reward only colluding management and select placement institutions without having to pay fair value for the corporation to its long-term shareholders." So to Strong Bio it appears that when such a case is true, company management is potentially finding ways to work with suitors to redefine "share of stock" and/or "dynamically tune market share". As George Orwell stated in the book Animal Farm, "all animals are equal, but some animals are more equal than others". This is not acceptable to Mr. Todd. He states that "VI Group works in sole favor of retail shareholders, acting as a watch dog & compliance enforcement group. VI offers in-depth research reports & due diligence into company executives, products or partnerships with honest, dependable & guaranteed unbiased reports based on verifiable facts." Numerous attempts to contact the company regarding its actions were left without reply, so it appears to be necessary to involve the courts to fully illuminate what management was in fact doing. It is a fact that company executives have a fiduciary duty to uphold and protect shareholder interests while conducting business affairs. The derivative action alleges that this was not the case with CytRx executive decisions.
What happened in August 2016 that caused management to change?

In years past optimistic sounding Steven Kriegsman made statements such as "if (aldoxorubicin) data is good, the sky's the limit" as recorded in this 2010 OneMed Forum video (2:40). When researching CYTR it was possible to find other videos including statements that the CEO made such as that the company "stock is worth $50 per share", and it's LADR drug development platform was a "multi-multi billion dollar opportunity" (stated at Roth Capital presentation 2017). There is certainly no shortage of biotechnology CEOs that are optimistic. But in this case, the drug actually succeeded, and the stock is getting destroyed, mostly due to management's decisions since August 2016 (to date). Perhaps in the OneMed video the CEO was referring to the amount of shares that he was willing to dilute into the market, rather than the corporation's value, when stating that aldoxorubicin is a phenomenal drug and the "sky's the limit". So now that the science has succeeded in the lucrative cancer treatment market as a next-generation chemotherapy, the videos constantly emphasizing the importance of shareholders to CytRx corporation and the CEO's predictions of high share value seem to be misleading or fraudulent, because the CEO seems (in shareholder opinions) to have decided to take value-destructive actions. In view of the fact that some of the data promised by the company (in accordance with rules for disclosure) for combination aldoxorubicin plus ifosfimide/mesna and SCLC monotherapy clinical trials were never released to the public, fiduciary duties may indeed have been breached, per Federman via Patterson's complaint. Therefore it will be investigated in a court of law. Again, management may have a stellar buyout all lined up if they get this last washout dilution and investors could end up doing great, but it seems like an unlikely path for the investment given the current direction and recent history. Information reported here is not intended to be criticism but coverage of the actions and how they might impact CYTR investors.

And what about the innocent CytRx corporate entity itself, does it suffer if its share product or drug product value is damaged? The answer can be yes because if it is not respected by the market, suffers threat of delisting from exchange(s), endures a lower market cap, is forced to sell its share product at successively lower values, and/or has to pay damages in court of law for law suits, it can run out of funds and cease to be a functional entity. If Kriegsman had stated in videos that the leadership "plans to deal away rights to phenomenal cancer drugs for up-front payment, some IOUs pertaining to milestones which cover only part of the development cost, an underpayment in cash for a significant market share of the company, plus enough in future royalties after a potential suitor takes billions from CytRx corporation's product in order to perpetuate diluting share counts limited only by the sky", that would not have been misleading at all. It also would not have resulted in shareholders feeling misled or betrayed. The collective point: only if all data is released under conditions that lack inflated artificial supply can Wall Street determine a fair market value for CytRx corporation. This is not the current situation. Period. Analyst targets for an aldoxorubicin approval are in the $3 to $4 dollar range from FBR and H.C. Wainwright (respectively, dilution-adjusted) but this excluded SCLC and stellar combination data, which were specifically earmarked as substantive premiums for the stock. Since the market did not get a chance to make a decision on the value of aldoxorubicin and CytRx Corporation, Strong Bio will here, and the legal arguments can be covered to some extent later again in the article. Market analysis is complicated and it is important the reader understand these are the experienced opinions of Strong Bio, and are described in good faith with an attempt to be accurate and forthright, with the qualification of having done hundreds of market analyses as a Ph.D. scholar and educator. However, actual product sales may vary depending upon successful launch, marketing traction, advertising, variable indication-related responses, physician reception etc.
What is aldoxorubicin and why is it so promising?

Perhaps in contrast to some well run biotechnology companies, CytRx Corporation might be undergoing damage because it is not clear if company management has done a proper market analysis for its investors regarding its expected sales for aldoxorubicin. Usually biotechnology companies filing NDAs have at least some kind of demographic information about its mature candidates. So we will perform such an analysis here. Predicates and target markets are often used as estimates for emerging biosimilars and biobetters. Models for aldoxorubicin (a biobetter of doxorubicin) use target markets and predecessors as a guide as well, given its phase 3 success and label expansion promise. Early low estimates for Dr. Soon-Shiong's abraxane, a potential parallel predicate drug, were oblivious to its potential in pancreatic cancer. Dr. Soon-Shiong's abraxane later shined in this indication and became his first blockbuster drug eventually bought out by Celgene (CELG) at $2.9 billion via Abraxis acquisition. Subsequent next-generation abraxane candidate biobetters are also being invested in by the billionaire to the tune of $90 million, in what might be parallel moves to next-generation doxorubicin/gemcitabine candidates in the CYTR pipeline. Why CYTR management would not require an equivalent $90 million investment (having only gotten a lower teens investment in millions) for aldoxorubicin from Dr. Soon-Shiong's Nant-cell may reflect lack of research by CYTR management prior to negotiation. It may also reflect inadequate representation of aldoxorubicin for the CytRx Corporation entity. Whether this is dereliction of duty and/or damage to the company product of shares being sold in offerings is up to the reader. Pertinent topics are now matters for the court of law, not the court of investor opinion, since the market was denied a chance to value aldoxorubicin. So abraxane could be used as a model to value aldoxorubicin, but its uses are probably more limited.

Doxorubicin is one of the tools that oncology physicians use in the standard care regimen for some cancer patients for twenty-four indications listed on that link. Although toxic, especially to heart tissue, it can be extremely effective in blasting a cancer and getting it under control in the first round of treatment for many patients. Thus after being used for decades it is still a treatment of choice in some cancers. Mitigation of toxicity via cotreatment with other agents has shown promise, but has fallen short of significant clinical benefit. Enter aldoxorubicin. The market for doxorubicin (studies show that aldoxorubicin is superior to doxorubicin, thus is it's biobetter) is expected to reach $1.4 billion by 2024. Bear in mind, however, that doxorubicin is a generic drug and has been for decades. Drugs under patent protection sell at much higher markups than generics. It has been stated by Patterson that the aldoxorubicin patent has expired, so it is limited to patent-like market exclusivity agreements in the U.S. and Europe, which may be extendable as new indications are added. So using the market for doxorubicin as a place marker model for an aldoxorubicin patent-protected market seems to make more sense than abraxane. Dr. Sant Chawla, principal investigator of the aldoxorubicin clinical trials has said that it is likely aldoxorubicin will supplant doxorubicin if approved by FDA. Now we just need to establish a fair multiple of a dominant component of $1.4 billion per year. But first things first, what did aldoxorubicin cost to develop?

The average cost to bring a drug to market from a study in Journal of Health Economics is in excess of $800 million dollars from the year 2000. More recent estimates are in excess of $1 billion dollars and cover 10 years of preclinical and clinical research. Clearly the patent protection allows the innovator to sell its product exclusively in order to recoup money spent during development and to generate a profit. Once the patent life expires on a brand-name drug product, it is eligible to be made into a "generic drug." It is considered a therapeutic equivalent and has the same approved indications, formulations, etc. as the original drug. For instance, consider the current annual market for gemcitabine, listed at approximately $50 million in 2016. It was first approved in 1996. The drug reached $875 million in sales in 2002, $1.4 billion in 2006, and finally $1.7 billion in 2008. Using gemcitabine as a pricing model for patent protected to generic ratio, the drug sold at nearly 40-fold its generic value before patent expiration. Clearly it would not have been fair to gemcitabine investors to have sold the drug out from under them after paying for its development for pennies on the dollar.

If we apply that model to aldoxorubicin, is a range of 10-38 multiple over time for approximately 75% of the $1.4 billion doxorubicin market (quite a bit larger than gemcitabine). This puts us in the potential range of $10 to $35 billion per year stepping up over time, certainly not $340 million in "I owe you's" as the current "deal" by the attempted to assign. Granted there are a lot of promising cancer treatments with immunotherapies etc., but aldoxorubicin is targeted as well, as it is a serum-binding protein mediated by GP60 receptor uptake. And because it has lower toxicity, it can be treated in combination with a lot of these, or after tumors or cancers escape other therapies. In short, it is a very important piece in the future of cancer treatment. So its market should indeed be quite promising. Decreased cardiotoxicity and a unique safety profile, unique and successful combination therapy efficacy, treatment to progression regimes, and difficult-to-treat indications make potential aldoxorubicin markets larger than gemcitabine as well. Even the abraxane-gemcitabine regimen is expected to remain a strong seller in the pancreatic cancer market at nearly $1.6 billion. At some point it's patent expiration and next-generation drug will step in and supplant that market, as aldoxorubicin shall for doxorubicin. Using this model it is possible that peak market for aldoxorubicin could conservatively exceed $10 billion per year, once all of the indication efficacies are tested and results published. Furthermore it shouldn't damage the value of doxorubicin either, because it can still be used to synthesize aldoxorubicin.

A third model to value aldoxorubicin is to simply look at its total market and estimate its potential share. Aldoxorubicin approval pathway under FDA 505(b)(2) includes broad label approval for soft tissue sarcoma, neoadjuvant use, and as a replacement for doxorubicin. Doxorubicin treats a number of cancers such as acute lymphoblastic leukemia, acute myeloblastic leukemia, bone sarcoma, breast cancer, endometrial cancer, gastric cancer, head and neck cancer, liver cancer, kidney cancer, ovarion cancer, small cell lung cancer, thyroid cancer and transitional cell bladder cancer, plus others (24 or more in all). The total market for solid tumors according to estimates by Luzitin group is $27 billion in the U.S. alone. Because interim efficacy for phase 2 combination of aldoxorubicin and ifosfimide/mesna achieved 95% stable disease, it would be expected that aldoxorubicin would be the chemotherapy treatment of choice for many physicians for solid tumors. Aldoxorubicin as a monotherapy showed significantly better PFS efficacy in phase 3 trials for a majority of soft tissue sarcoma patients. 11,400 new cases of STS are reported each year. The market for small cell lung cancer, which the market was never able to price in data for based on CYTR phase 2 data, is estimated to be about $2 billion per year starting in 2020 and grow at a CAGR of 13.5% per year (15% of total lung cancer market, total market by 2020 expected to reach about $13 billion). Small Cell Lung Cancer, SCLC, is a rapidly progressing devastating disease that comprises approximately 15% of lung cancers. Life expectancy if untreated is approximately 3 months. The public was not given the data for the SCLC trial for aldoxorubicin, as the company web site had stated would be the case in Q2 2017. If the efficacy data was better than for treatment of choice, topotecan, one would expect aldoxorubicin to dominate this market as well. Taken together it is likely the total peak annual market for the chemotherapy space can potentially approach in excess of $50 billion worldwide. Without all efficacy data it is impossible to determine more accurate market share for aldoxorubicin in this space, but based upon existing data, it should play a signficant blockbuster role in the chemotherapy market. To say it will have a peak market less than $5 billion per year is likely unreasonable given the current state of medicine.
How has management handled success in the clinic?

In spite of the achievements of aldoxorubicin in clinical trials, there is still a lot of data missing to the public. This fact is the topic of an abstract of an academic publication made recently in August 2017, stating more studies are needed (or more information from already completed ones). According to Patterson and Todd (and most who listen to the conference calls), a series of discounted offerings were made only days after Kriegsman claimed CytRx had "enough cash for the foreseeable future", diluting CytRx corporation stock product with abnormally high supply in a manner that detrimentally affected its supply and demand curve. This in turn had a negative affect on the current and future balance sheet for the company relative to its potential balance sheet if sold at fair market value, at a premium, or under normal supply conditions. It also seemed to damage the ability of the company to raise future cash relative to industry standards and cancer blockbuster-pipeline convention, not to mention damaging its standing by jeopardizing it's listing with the Nasdaq exchange. Taken together the company has been taken to the woodshed by poor decision-making, in the opinion of most investors. This was reflected by the recent vote to decline all requests by management in its most recent proxy from the annual shareholder's meeting.
What rights does CytRx Corporation have?

So, back to the legal discussion. Remember, major shareholders have gathered and called for legal action on behalf of CytRx corporation against it's CEO and board of directors. This action is called a "derivative action". Strong Bio is not accusing the board of directors of any misgivings, merely reporting the fact that the company management is being sued for it, again. According to lead plaintiff Patterson, it brings, among other things, alleged demands to the Delaware court that the CEO did not act alone in any wrongful or harmful business decisions towards CytRx corporation or its shareholders (not just the shareholders as some mistakenly believe, which is a separate issue usually handled in what is called a "class action"). Patterson implied at one point that if the board removes the CEO and puts in measures to allow proper monitoring of management (which might include adding neutral members to the board, enabling shareholders to join the board in its responsibilities and oversight, etc) it might enable the board of directors to keep their positions. According to Patterson, if the board chooses to retain the CEO, then the derivative action will seek to have the Judge remove both the CEO and board.

This derivative action does not attempt to have damages paid by the corporation remedy the complaint to the plaintiff, as the alleged actions of the CEO were purportedly too nefarious to forgive by paying a fine. Strong Bio is not aware of any criminal component of the case, but not all of the details of any case would be given away in a complaint. Any deals that were made fraudulently, via racketeering, or in breach of duty to CytRx corporation, including dilutive events and deals regarding inadequate share or drug candidate valuation can, according to Patterson be reversed (if involving fraud by both parties). To confirm the reality to the reader, yes, the number of issued shares can potentially be brought back down to roughly 68 million "if" the shares diluted by management since July 2016 were released into the market for the purposes of management self-enrichment at the expense of the company and shareholders, and "if" such offerings were done for the purpose of defrauding CytRx Corporation by both parties. This potential reversal was confirmed as possible by a neutral legal counsel as well. The money received by the company would have to be paid back to the discounted buyer as well, which would deplete it's cash, leaving it in a potentially dangerous position.

But this would be a remedy for CytRx corporate entity as the shares could be offered into the market at fair value (which would require that all data be disclosed, for better or for worse, and accurate supply and demand conditions exist). Any unearned or ill-gotten executive compensation, bonus options, and acquired shares or profits obtained by price-fixing timing of press releases could also be "undone" according to Patterson. This is not a notification to the reader that there are any, or will be any, only that there has been and is an investigation into the matter as part of the derivative action. The derivative action purportedly seeks or the plaintiff will seek to request court injunction to lock out entities that might be discovered to have manipulated stock prices including short-selling firms etc. from future investing and short-selling of CYTR securities. If any illegal misconduct is identified by the Delaware court authority, either new leadership will be put in place, a proxy to elect a new CEO would be entered, or, per Patterson, strict safeguards would be put in place to prevent future management from damaging themselves or CytRx corporation moving forward.
Is this a Federal court case or a Delaware court case?

There is already a federal derivative action filed against CYTR in California, which is referenced in the complaint by Federman. The management tried to have the case dismissed but it was refused dismissal by the federal court. This may suggest that the Patterson action is unlikely to be dismissed in Delaware court as well. However, Delaware courts can be tricky and require specific law firms well-versed in intricate corporate affairs law. Some regard Delaware law as more than tricky, having turned derivative litigation into an industry in and of its own, and allowing corporations to concentrate derivative law to twisted law clauses and a confusing legal path, which seems to protect corporations from actions against directors relative to other states.

The state of Delaware and corporate law have a symbiotic relationship with biotechnology, which is why a lot of biotechnology companies are Delaware companies (check your portfolios). This brings revenues to the state. Costs for plaintiffs filing complaints are higher than for other states, proving to be a substantial obstacle for justice to corporations held hostage by its managers. In fact there are only a dozen or so law firms willing to take up cases for breaches of duty against a company by management for Delaware corporations. With higher costs, obstacles determining legal value to get a case tried, increasingly complex case law, and fewer options for legal aid, shareholders are left to going through a wealth of information for burden of proof just to present a case to a potential attorney.

Still, when reviewing literature, the Delaware court does not throw away shareholder rights, in fact, it has protected them in many cases, provided there is proper legal pitfall avoidance pathfinding by legal teams. CEO's that do an inadequate job defending corporate valuations can be removed (its not impossible). For an example in cancer treatment read about Immunomedics (IMMU) shareholder activist ouster filed by VenBio. In that case the CEO is still a member of the board and was not completely ousted. Its best when amiable solutions are met and everyone works together for the common good.

In the case of CytRx, according to Patterson, the derivative action is not demanding monetary compensation in the form of damages, if certain conditions are met. It is possible that the Judge would award damages, however, depending upon certain discoveries, including potential under-the-table deals, inappropriate insider information, or even the deal itself as disclosed in plain sight if it violated certain kinds of law pertaining to securities fraud, racketeering, or management self-enrichment. However this may be not be the case, so concerned investors should be forewarned, and this article is not an accusation. Patterson seems to be more concerned about getting the company headed the right direction than his own personal loss recovery, which is substantial. It is a disclosure that such things are being investigated. If the court finds that management sought to enrich themselves in a manner that is not protected by law, the derivative action will seek to disgorge those resources as well as profits connected in manipulated timing of private and public offerings. If RICO or racketeering is discovered, all resources will be sought to be recovered. These processes undoubtedly take time, but Strong Bio is intrigued because these types of activities are becoming more common in today's biotechnology investor landscape.
Other Risks for investing in CYTR

As if investing in CYTR doesn't sound risky enough... Risks for investing in CytRx include discounted dilutive events, of which there have been three attempts in approximately the last year to the tune of raising OS from 65 million range to 230 million range, including a failed attempt to raise authorized shares to a WHOPPING half a billion! How this could possibly benefit the corporation or its shareholders is impossible for Strong Bio to imagine. Dr. Patterson indicated that the Nasdaq and SEC have a 20% dilution limit for private offerings, which appears to have been violated by management in the April 2017 offering, when it purportedly damaged CytRx Corporation by selling its share product (only project at that time) at such discounted value. The 20% rule is a Federal issue, not a Delaware issue. Violation of the Dodd-Frank act via self-enrichment would also be covered in a Federal hearing, not a Delaware hearing. However, Delaware law does have self-enrichment coverage. Now obviously a company's employees should be able to benefit themselves, so the law will investigate whether management exploited the company and its shareholders in an exploitative manner, so it may boil down to a degree of what is reasonable. Investors beware, for now, there is no evidence that current management will follow federal rules governing dilutive limits, and most are at a discount to what was already an obscured and unfair market value. One offering to Nant-Cell was at a "premium" to the market to be fair ($1.10 per share), but the damage to the market had already been done from three prior discounted dilutions. Plus after an FDA approval pathway was generated for aldoxorubicin, it is somewhat de-risked and should have been higher given its potential. The most damaging event was when the stock had recovered to about $1 per share range when a whopping 30 million shares (nearly 25% of the outstanding share count) were offered at about $0.50 per share. As we all know, Adam Feuerstein announced the dilution to the public on twitter before it was filed, a fact that will be investigated in the derivative action.

Additional risk lies in approval of aldoxorubicin by FDA, which has been a major concern of Adam Feuerstein, in that the CEO may not have been honest about it's data. Assuming this allegation is unfounded, which is likely, then regulatory risks of large scale manufacturing delays and legal delays are still fair game. However with Dr. Soon-Shiong validating the technology, such fears of aldoxorubicin failing in trials have been dashed upon the rocks of reality. Perhaps there are some short-sellers at work trying to dig out of trouble, but after an entire year surely they would have paid their debts to society by now in the free market. But if they chose a way that exploited management to self-enrich while damaging CytRx corporation, and fiduciary duty to CytRx corporation or its shareholders could have been breached if management chose to self-enrich. Thus, investors risk potential mismanagement to egregious levels if that is the case. To give the reader an idea of how the value of the CytRx corporation's share product was damaged over the past 10 years, the following figure is presented (taken with permission from Bullish_Nick informational post, StockTwits):

Market cap has not grown, in fact it is reduced, and the share price is currently down 97%. Moreover, in order to regain value, shareholders have to overcome a 220% dilution in a little over a year, and more in the future if management is allowed to do so. Reverse split is another dilutive risk to investors, and the management is now asking for a second time in two months to do one after recently being voted down in the first proxy, with a laughable attempt to raise the authorized shares to half a billion common. Calls to the company IR yielded a reply that preferred shares would be reverse split as well, but the company has adjusted the ratio of preferred to common before, and it could occur again. The company may also be lacking some transparency, though it is not uncommon in some biotechnology companies. When investor relations is called, there is often no reply. When there is a reply, sometimes a confusing circular conversation ensues leaving callers feeling uninformed or questions seem unanswered as previous information is restated. Another risk to investors is the fact that its pre-trial management tried to vote for shareholders who didn't or couldn't vote for themselves, calling the first reverse split a "routine event" in order to try to gain control of the vote. There are also legal questions surrounding the definition of "public offering", as evidence suggests that the most recent offering was really a private offering based upon the participants. Perhaps management is unaware of the 20% rule requirements. It may have been a failure to aggregate dilution totals or misreporting of data surrounding the share structure maneuvers. At one point company bylaws stated that the corporation could not dilute more than 33% in a year if the market cap was under $75 million, but investors should know that didn't prevent further dilution either, as some of the bylaws seem to be adjusted on the fly by this management. Whatever ramifications of the collective legal battle arguments, understand that Delaware courts or future Federal court remedies might not be favorable to investors, and that is a risk for CYTR.

On the Federal front, reverse stock splits can be used to force out minority shareholders, according to recent rulings by Washington Supreme Court. To be clear, reverse splits basically count as a dilutive event, because issued shares are split, but the number of authorized shares, according to this article by Zack's, do not. This is a risk to investors because most believe that reverse splits are not dilutive events. This means that when companies run out of shares to dump into the market for operating cash, they can reduce everyone's share counts (and market share) by a ratio matched by increase in stock price. In this case management can continue to issue even more shares, potentially damaging the company repeatedly, until the authorized share component, which remained constant, is exhausted. To put this in a mathematical perspective Strong Bio builds a hypothetical table approximated to a similar share structure for the reader of the implications of a 1:6 reverse split below, including approximately 220% more dilutive potential:

Current Outstanding Shares (OS)


Authorized Shares (AS)


Shares for Dilution


Price Per Share

235 million


250 million


15 million


$0.50

OS after 1:6 Reverse Split


AS after proposed 50% reduction


Shares to be Sold after 1:6 Reverse Split


Price Per Share after 1:6 Split

39 million


125 million


86 million


$3.00


Corporate society has created an alarming system when in the wrong hands, such as pre-trial CytRx management, with dilutions at a discount to the market amplified to exponential levels with each successive event, especially after a series successive reverse splits. This is a risk to investors. If the courts do not defend innocent corporations such as CytRx from hostile behaviors of it's own management, not only will its share product value take a beating, but democracy and the free market will take a pounding as well. When management chooses to self-enrich at the cost of a company and its shareholders, it undermines the definition of "share". That in turn, undermines the definition of "fair". Why have "shares" in the first place if it is not a "fair" constant. Companies left in the wake of this damage are often left without a source of revenue for its damaged balance sheet, and with cancer patients suffering waiting for product, this is a tragedy.

According to Patterson, he hopes the company can "tweak" or renegotiate the deal so as to be fair to all of those invested. Recouping the cost of development for the drug plus a premium, would require about $650 million in up-front cash, or 2 billion total plus royalties. This is certainly a good value for an acquirer, and at least gives shareholders of CytRx something of a ROI, but it might be necessary to get aldoxorubicin approved before finding a fair taker. Because Nant-Cell may be strapped for cash, a 50:50 deal would be potentially acceptable as well, but Patterson says whatever the case, he is not satisfied with the current deal. Reverse merger has been proposed, but given the potentially devious nature of underlying forces, might be avoided now without adequate compensation for assets. All actions have a reaction, and Dr. Patterson and the 25 million in shares represented in Mr. Todd's petition will want to hold perpetrators of any wrongdoing responsible in future negotiations. New management would be tasked with cleanup work, launching new clinical candidates, finding appropriate takeover targets, and obtaining non-dilutive funding to carry the project forward under fair terms.
Questions for Steven Kriegsman and CytRx management:

Out of fairness to CytRx management and at the request of Seeking Alpha editors, Strong Bio contacted the company and was able to get two calls: one from IR and one from VP of Business Development David Haen, who suggested a possible interview of Mr. Kriegsman. For simplicity and to conform to the authorities of Seeking Alpha, only written responses will be reported in a follow-up article, should the company reply. Below are the 30 questions:

What was the rationale behind the stock dilutions?
What was the rationale behind the stock splits?
How did the stock dilutions benefit the company?
How did the stock splits benefit the company?
What is your relationship with Sabby? Have you done business with Sabby in the past? If so, what?
What is your relationship with CVI? Have you done business with CVI in the past? If so, what?
How long have you known Dr. Earl Brien? Have you worked with him before? Why bring in a director with no experience?
How long have you known Caldwell? Have you worked with him before? Why bring in a director with no experience?
What are your thoughts on the shareholder revolt?
How does the NantCell deal benefit CytRx as opposed to developing Aldoxorubicin on its own?
10a. When was the decision made to license the product instead of develop it (it's a relatively easy small molecule project)?
How much do you expect aldoxorubicin to gross in annual sales for STS indication if approved? Has this changed since Patterson was told $400 million a couple of months ago. If so why was the Nant-Cell deal partnered out at such a low value?
Why was the decision made to partner out Aldoxorubicin now, rather than after FDA approval when the risk is lower and the price would be higher? Did Dr. Levitt and Dr. Wieland and the other Vice Presidents including David Haen support this approach?
Why did Levitt leave if he supported the decision?
Why did Wieland leave if he supported the decision?
Why did Haen stay?
Is it true that you referred to Wieland and Levitt as "deadwood"?
Why have so many directors resigned in such a short period of time?
How do you plan to defend the charge that withholding the SCLC results (after receiving the data nearly 6 months ago) is a violation of your fiduciary duty to disclose all material events? Was it done to defend short-sellers with which you have previous relationships? If so what are those relationships?
Why did you release the incomplete and immature STS interim data on time when it was so likely to destroy the share price being so misinterpreted by the market?
What is Nant-Cell's legal commitment to begin FDA approval process by a certain date? How much money will be paid to CytRx up through and including FDA approval?
What is the reason that your compensation package is 6-7-fold as high as the average CEO of emerging biotechnology companies ($300,000) with similar market caps? Are you leading CtyRx to greater success than others?
Does the Nant-Cell deal include any outline of a complete buyout plan or reverse merger for CytRx?
Are you expecting to receive any personal benefit as part of the deal with Nant-Cell, including a position on their board or executive team?
Did you or any of your family receive any personal benefit as a result of any of the three recent secondary offerings, including short-selling profits or selling shares in advance of news and rebuying later? Was BlackRock one of such firm?
Do you have any foreign banking relationships?
Concerning the PRE 14A filed prior to annual meeting 2017, as it purported to change the designation of most of the proposals to "routine", allowing brokerage voting, yet at the meeting the brokers did not vote, why the change?
Why do you again claim that the upcoming reverse split proposal is a routine matter? Do you think this claim will attempt to frustrate the owners of the company?
You purportedly told Patterson, lead plaintiff in the DE derivative action, that Russian billionaires had decided to buy up CytRx shares, beginning right after the annual meeting. Why hasn't that happened?
Considering how low the Nant-Cell offer came in why did you say that there were three offers on the table that you were considering?
Why was Adam Feuerstein announcing the last CytRx dilution on Twitter of 30 million shares that were done at a 45% discount to the market on the day of his tweet before it was filed with the SEC? Did the company pay for this service or work with someone connected to Mr. Feuerstein during the process?

Ironically, some of the lower exchanges, such as OTC and pink sheets, have different rules for dilution that are even more strict than the 20% rule. Pink Sheets does not allow margining of positions or short-selling, which is actually a better system, and parallels what has happened in some European countries, where all short-sales have been banned. They had to do so to keep their entire market from being scammed into the Nasdaq zone (which for investors feels a lot like the twilight zone), and these anti-short-selling mandates are becoming more coordinated. This being said, it might be possible to sell shares short even if it's not allowed if it is a computer hack or fraud action that enables it in the first place. Furthermore the number of shares backing up options and warrants leverage disproportionately (in some cases).

All of this is nice and complicated, so as to be shrouded from fairness and democracy, passing by even diligent investor scrutiny. No wonder Europe got smart and outlawed shorting, as all of these convoluted and inbred deals reek of the feudal system that kept Europe in the dark ages for 1000 years.

The investment thesis here is that in spite of the risks of management before the Delaware derivative action, if new management is put in place this stock could ride a very strong bullish sentiment as proper business action is put into motion. Aldoxorubicin seems to have a solid approval path and greatly underestimated potential market, and the company has about 50 million in cash on hand to ride out the FDA decision on its NDA. The company could be in a cash crunch if the dilutions are reversed by the court, but because the issued share count would shrink considerably, the value of the shares would increase substantially. There could be additional regulatory delays if Nant-Cell hands back over the FDA approval reigns to new management, but the shareholder action may force in a new CEO with more pertinent biotechnology and/or regulatory experience than a one-trick dilution pony that by now appears to be cantering towards the sidelines.

DISCLAIMER: Strong Bio has done the best that could be done for objectively conveying opinions of the shareholders and plaintiffs, but there can be no guarantee that the end results will be good for CYTR shareholders. Some details could be misstated, overstated, or understated. The court system and market is a complex environment, and some details could be somehow described in an unintentionally inaccurate or misleading context. Any legal allegations should be treated as alleged or potential, and any estimated markets should be regarded as potential or possible. Each shareholder should vote their own opinion regarding future reverse splits. No attempt will be made to persuade shareholders one way or another by Strong Bio. Strong Bio is long CYTR since $3.28 per share.

Disclosure: I am/we are long CYTR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

https://seekingalpha.com/article/4105068-derivative-action-seeks-benefit-nominal-defendant-cytrx-corporation