Biotech Values

[DewDiligence]

Boston Globe’s expose on Pro-Pharmaceuticals not sugar-coated:

[When investing in micro-cap biotechs, the greatest fear is that a company will turn out to be a sham. If these accusations in the Globe are accurate, Pro-Pharmaceuticals (PRW) would seem to merit such a characterization.]

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David Platt wants to cure cancer. Can his company avoid life support?

By Jeffrey Krasner, Globe Staff, 3/14/2004

On Sept. 22, David Platt rang the opening bell at the American Stock Exchange in New York to signal that the stock of his tiny Newton start-up, Pro-Pharmaceuticals Inc., had begun trading on a major exchange.

For a few tantalizing days, the cancer drug company's shares soared, trading above $6 for the first and only time. It would be a short-lived honeymoon for a company that Platt founded and leads as chairman and chief executive. Less than six weeks later, Pro's chief financial officer and head of business development both resigned, a huge loss in a company with fewer than 10 full-time employees. The Boston office of the US Securities and Exchange Commission launched a probe into allegations by a former company official who claimed that Pro had violated securities laws in its fund-raising. The company has said it's cooperating with the investigation.

Matters worsened when a simmering dispute between Platt and his former employer, a small Boston biotechnology company called GlycoGenesys Inc., boiled over into a legal shouting match this year, including an accusation that Platt stole proprietary technology that's the foundation of Pro-Pharmaceuticals' drug development program. Platt has said the suit is without merit.

In the world of biotechnology, a development-stage company sinks or swims not only on the credibility of its science but also on the credibility of its founder. In the case of Pro-Pharmaceuticals, a Globe investigation has found, Platt and his company repeatedly made exaggerated claims, stumbled in its financial reporting, and made questionable hiring and contract decisions.

Under Platt, the company:

Hired a convicted felon to promote its stock.

Paid consulting fees to four of the directors on its board, creating potential conflicts of interest.

Once claimed it held patents that were still pending before the US Patent and Trademark Office.

In an interview, Platt and other Pro-Pharmaceuticals' executives attribute many of the company's missteps to the fact it is young and small. "We're an early-stage company," explained Anthony D. Squeglia, vice president of investor relations. "We've evolved dramatically in the last couple of years."

Platt, 50, is an imposing figure: a tall, heavyset man who, according to a lawsuit filed in Middlesex County, is prone to shouting at employees. Platt received a PhD in chemistry from Hebrew University in 1988, according to his Pro-Pharmaceuticals biography. The following year, he moved to Michigan and worked as a post-doctorate research fellow at the Michigan Cancer Foundation, now called the Karmanos Cancer Institute, an affiliate of Wayne State University. In 1993, after a year as a researcher at the University of Michigan, he helped found a company that became SafeScience Inc. of Boston.

For most of the 1990s, SafeScience sought to develop medical and agricultural products around Platt's research into carbohydrates. Then, in 1999, the company burst onto the biotech scene when it published promising results from a clinical trial of its cancer drug candidate, GBC-590. Platt and SafeScience claimed to have a valid patent on GBC-590, but the two scientists Platt worked for at Karmanos and Wayne State University when the drug was developed claimed they made the discovery and that the institutions held the patent. At the time, Platt said the two scientists made claim to the patent only after SafeScience's stock rose on the promising results. But 16 months later, SafeScience reversed its position and executed an agreement to license GBC-590 from Karmanos and Wayne State University for $1.93 million, plus stock options, milestone payments, and royalties.

Six months later, SafeScience fired Platt, giving him a severance package that allowed him to keep a company-owned Ford Taurus and an annual salary of $180,000 with stock options and benefits over the next two years, according to his separation agreement.

Less than six weeks later, in July 2000, Platt filed papers with the Secretary of State to create a new company, Pro-Pharmaceuticals, which operated out of the garage of his Newton home.

To get his new venture off the ground, Platt used a technique he had employed at SafeScience. He found a virtually defunct company whose shares still traded on the Over The Counter Bulletin Board, an exchange for microcap stocks that rarely register a blip on Wall Street's radar screen. Then, he arranged for the defunct shell to buy his new start-up.

The reverse merger instantly put Pro shares into the hands of investors, saving the cost of hiring an underwriter and time to go through an initial public offering. By last September, the stock moved to the American Stock Exchange. The closing price Friday, $4.75, gives the tiny start-up a market capitalization of about $108 million.

Rather than hire its own doctors, scientists, and engineers to develop, make, and test its drugs, Pro hires contract laboratories and other third parties to do most of its work. The company recently had only seven full-time employees working out of a small Newton office park. The company has no operating revenues. For the nine months ended Sept. 30, it reported a loss of $3.3 million, or 16 cents a share.

Still, the simplicity and promise of the company's scientific plan appeal to some investors. Many drugs used to treat cancer are highly toxic and kill healthy as well as diseased cells. Pro seeks to modify these existing chemotherapy drugs using carbohydrates that bind with proteins associated with the cancer cells. The drugs -- either tagged with the carbohydrates or encapsulated by them -- thus target the cancer cells in a way that will theoretically make the drugs more effective while producing fewer side effects. Moreover, the firm claims, the approval process before the Food and Drug Administration will be speedier than if it were to develop new anticancer agents.

"It's a strategy of reformulating old drugs," said Platt.

Signs of trouble at Pro-Pharmaceuticals surfaced in May when its former head of investor relations, Sheila Jayaraj, sued the company for wrongful discharge. In the suit, she claims the company violated federal securities laws when it hired an allegedly unqualified stock promoter, and misled investors at a meeting to pitch a private sale of its shares.

According to the suit, filed in Middlesex Superior Court, Platt told Jayaraj to work with consultant George Miles Mottel, who would solicit investors for an anticipated private sale of the company's shares to raise working capital. Jayaraj told Platt she wasn't comfortable working with Mottel, because he wasn't affiliated with a registered broker-dealer, and therefore wasn't qualified to help bring investors to the deal. Her lawsuit alleges such an arrangement violates securities laws.

Platt responded by yelling at her, the complaint claims. "Why do you have to question everything I say? Just do what I said. I want the stock to trade. Right now it is trading zero. I know what I am doing."

Mottel had other problems besides his lack of securities industry certification. A Globe investigation found Mottel has a felony conviction for mail and wire fraud for his role in a California precious-metals scam. In March 1992, he was ordered to repay $55,000 to victims and received a five-year jail sentence and five years of supervised probation. The terms of his probation required him to "notify third parties of risks that may be occasioned" by his criminal record. The probation ended in March 2000, according to court records.

Mottel could not be reached for comment. Pro-Pharmaceuticals referred questions to a lawyer in California who said he didn't represent Mottel.

Platt, in an interview, said he didn't know about Mottel's criminal record until a Globe reporter brought it to his attention. Still, Platt stands by his decision to employ Mottel. "He knows a lot of money managers, brokers, and investment bankers," said Platt. "The impression he left is a good one."

The lawsuit remains pending. It has sparked two investigations: the one at the SEC and a separate probe by the Massachusetts Division of Securities, according to a person at the state regulatory agency.

A review of Pro-Pharmaceuticals' corporate filings reveals a record of misstatements and potential conflicts of interest, raising some concerns for investors amid the current wave of corporate scandals.

Though the 3-year-old company hasn't yet generated any operating revenues, it has had to restate its financial results for its first two fiscal years.

The company also told prospective investors that its chief scientist, Anatole Klyosov, works at Pro full-time, according to Jayaraj's complaint. Also, Klyosov's biography on Pro's website gives the impression that he is an employee, referring to him as "joining" the company. The five-page biography makes no mention that he works full-time at Kadant Inc., an Acton materials company that serves the paper industry. Klyosov, in an interview, denied he ever said he was an employee of Pro-Pharmaceuticals. He downplayed his involvement saying, "It's not a formal title. I help out on the side, on weekends and evenings." [LOL --I couldn’t make up stuff this good if I tried.] Klyosov owns 1.23 million shares of Pro, or 5.4 percent of the total, according to the most recent proxy statement.

On its website, Pro also claimed that it held four patents relating to its drug development program. In fact, the company only had patent applications pending before the US Patent and Trademark office. After an inquiry from the Globe last fall regarding its patents, the company changed the website to reflect that the patents hadn't yet been issued. Some of those patents have since been awarded.

In another exaggeration, Pro issued a press release in December stating that "Once the results of the Phase I human trials are reported to the Food and Drug Administration, the FDA will decide whether Davanat-1 should be added to the arsenal of cancer fighting drugs."

But the FDA does not evaluate new drugs after Phase I trials, which only look at the safety of the compounds, not whether they are effective against disease. Davanat-1 will need to undergo two more trials, which often take years, before it can be submitted for FDA approval.

Kenneth Kaitin, director of the Tufts Center for the Study of Drug Development, said the wording in the release gives the impression that the drug is about to be submitted to the FDA. "I've never heard of a drug being approved solely on Phase I trials," he said.

The company also pays consulting fees to four of its directors, which corporate governance experts say can compromise their independence.

James C. Czirr, the executive vice president of business development and director who resigned in October, earned at least $194,000 in consulting fees paid to a company he controls in exchange for "financing and business development services," according to company filings. Burton Firtel, a director since May 15, 2001, signed a consulting agreement with Pro last year that gives him 2,000 stock options a month at an exercise price of $3.50. David H. Smith, a venture capital fund manager based in Connecticut, joined the board in January 2002. In January 2003, he signed a consulting agreement giving him an option to purchase 100,000 shares, also exercisable at $3.50.

When asked about the contracts and potential conflicts of interests, Pro executives said they hope to phase out such arrangements. "The goal of our company will be to eliminate this cross-over and to have a truly independent board," said Pro's chief financial officer, David Christopher, in an interview before he resigned in October. "For right now, it's cheaper for us" to work this way. [I love that “cross-over” euphemism.]

Last week, executives at Pro-Pharmaceuticals didn't respond to questions regarding its press release on Davanat-1 and consulting arrangements with its directors.

As if troubles at his own company weren't enough, Platt is fighting again over intellectual property. Last month his former company, SafeScience, now called GlycoGenesys, sued Platt in Suffolk Superior Court claiming he stole its cancer-fighting compound GCS-100 and violated a noncompete agreement he signed when he was fired. According to the lawsuit, Pro-Pharmaceuticals has been working on a drug "remarkably similar" to one that was under development at GlycoGenesys when Platt was there. Both firms are researching the use of carbohydrates that bind with a specific receptor site on cancer cells. That would appear to put the two companies on a scientific collision course.

Platt and Pro-Pharmaceuticals said in a press release the suit is "without merit."

Who actually owns the drug in question? For now, it seems GlycoGenesys does. On Feb. 18, the company said it won the patent for GCS-100 and similar sugars that make cancer cells more vulnerable to chemotherapy and surgery.

Jeffrey Krasner can be reached at [e-mail].
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