Lawsuit: Investors bet big on Washington firm’s potential COVID-19 treatment as CEO cashed out

(CytoDyn Photo via investor webcast)

Investors in a biotech startup developing a COVID-19 treatment claim the firm’s leaders cashed out as stock prices surged during a publicity blitz for a drug that has yet to show any value as coronavirus medicine.

CytoDyn, a 19-year-old company headquartered in Vancouver, Wash., saw its share price spike after the company announced during the pandemic’s early days that it’s drug, leronlimab, would undergo trials for use as a COVID-19 treatment. The months that followed saw rumors – false ones, it turned out – surface that the drug was being considered for Operation Warp Speed, the U.S. government push to fast-track COVID-19 treatments and vaccines.

CytoDyn CEO Nader Pourhassan. (CytoDyn Photo)

CytoDyn’s stock usually traded for less than a dollar until the pandemic. The hype saw it skyrocket to $10.01 a share by June 30, and then tumble to near $2 as testing failed to show leronlimab actually worked as a COVID-19 treatment.

In lawsuits filed in federal court at Seattle, some shareholders now claim they were misled about leronlimab’s prospects as a COVID-19 treatment and that CytoDyn leaders including CEO Nader Pourhassan sold millions of shares during the stock price spike.

“After CytoDyn’s pivot to hyping leronlimab as a treatment for COVID-19, CytoDyn’s stock price rose exponentially,” attorneys for one shareholder said in court papers. “While CytoDyn’s stock price was sufficiently pumped with the COVID-19 cure hype, [Pourhassan and others] dumped millions of shares at artificially inflated prices.”

Asked to respond to the allegations, Arian Colachis, CytoDyn general counsel, said there is “no merit to the claims and the company intends to defend vigorously.” The company has yet to substantively respond in court.

A statement by the Food and Drug Administration issued May 17 further fueled the shareholder displeasure. The FDA noted that, following two small clinical trials of leronlimab, “it has become clear that the data currently available do not support the clinical benefit of leronlimab for the treatment of COVID-19.”

Taking questions from investors the following day, Pourhassan defended the FDA — several investors appeared to take issue with the regulator’s statement — and CytoDyn, noting that the company hopes to begin COVID-19 related drug trials in Brazil, the Philippines and India in an effort to secure emergency authorization for the drug’s use. The company is also undertaking a 50-person “exploratory trial” of leronlimab’s use in treating “long-haul” COVID.

“Shareholders perhaps are upset because the timing isn’t what they’d like, and I apologize,” Pourhassan said on the May 18 conference call. “But we’re doing everything we can to get to the next level as fast as we can.”

Founded in 2002, CytoDyn’s sole product is leronlimab, an antibody meant to block hazardous viruses and DNA from entering cells that has yet to receive FDA approval.

While the drug is being tested as treatment for cancer and several viral infections, it’s most often garnered attention as a treatment for HIV, publicity that saw Pourhassan join HIV-positive actor Charlie Sheen on the Dr. Oz Show to promote the drug in 2016.

CytoDyn CEO Nader Pourhassan (far right) and actor Charlie Sheen appeared on the Dr. Oz show in 2016.

CytoDyn, like any biotech startup still developing its product, has essentially no revenue. During its last full fiscal year, which ended May 31, 2020, the company lost $124.4 million, $68.2 million more than it lost the prior year, according to filings with the Securities and Exchanges Commission. Additional losses are expected to continue unless leronlimab receives regulatory approval.

To cover those expenses, CytoDyn sold shares on an over-the-counter securities market while taking on debt. Until recently, those shares rarely sold for more than $1 and once sold for 5 cents-a-share in February 2019.

The coronavirus changed that. Shortly after the pandemic began, CytoDyn “made an about-face,” attorneys for the shareholders currently suing CytoDyn said in court papers, and began “to aggressively tout leronlimab as a treatment for COVID-19.” The company publicized its use as a COVID-19 treatment “to pump up the stock price of CytoDyn while executives aggressively sold shares,” the attorneys continued.

In a March 2020 news release, the company touted the results of test that saw leronlimab administered to seven COVID-19 patients in New York City. Pourhassan described himself as “very hopeful that leronlimab can help reduce the rate of mortality among COVID-19 patients,” while Dr. Jacob Lalezari, then interim-chief medical officer for CytoDyn, struck a similar note.

“These preliminary results give hope that leronlimab may help hospitalized patients with COVID-19 recover from the pulmonary inflammation that drives mortality and the need for ventilators,” Lalezari said in that statement.

The announcement made CytoDyn a hot stock, becoming the most heavily traded stock on the exchange on which it is listed for June 2020, the month its price passed $10 a share.

In August, the company announced it was seeking emergency use authorization for leronlimab from medical authorities in the U.S., the United Kingdom, the European Union, the Philippines and Mexico. The announcement included claims that the drug was being considered for treatment of low-to-moderate COVID-19 and for “long-haulers.” Pourhassan described it as a “very exciting period of the company,” and an advisor to the company sat for an interview with TV host Dr. Drew Pinsky.

CytoDyn’s boom began to fade shortly after that Aug. 20 interview. Six days later, The Wall Street Journal reported that leronlimab would not be part of Operation Warp Speed. Company leaders soon acknowledged they hadn’t formally sought FDA authorization for leronlimab’s use in treating COVID-19.

During the PR blitz, Pourhassan and Michael Mulholland, who was serving as CytoDyn’s chief financial officer at the time, dumped millions of shares, attorneys for the shareholders contend.

CytoDyn’s stock price over the past year.

On April 30, 2020, after exercising options to purchase millions of CytoDyn shares at prices less than $1 per share, Pourhassan sold more than 4.8 million shares of CytoDyn stock, 85% of the stock he held, according to the lawsuits. The total proceeds were more than $15.7 million. Months later in late December, Mulholland is said to have sold 1.8 million shares for more than $10.2 million.

Attorneys for the shareholders also claim CytoDyn issued shares to an unregistered securities dealer during the early days of the stock price spike. The dealer then sold the shares at a profit, in a move the shareholder’s attorneys contend violated federal securities laws. The Securities and Exchanges Commission sued that lender in early September, making claims unrelated to CytoDyn.

By March 8 of this year, after CytoDyn disclosed the results of a study finding that leronlimab did not measurably lower the mortality rate among COVID-19 patient, its share price had fallen to less than $3.

While CytoDyn continues to trade at more than double its pre-pandemic norm, recent investors claim to have lost hundreds of thousands of dollars each and appear poised to pursue a class action lawsuit against CytoDyn, Pourhassan and Mulholland.

Two lawsuits filed this spring in U.S. District Court at Seattle are in the process of being consolidated into a single action, and a seven shareholders have indicated they’ll pursue their claims. That number is certain to rise once the court appoints a lead law firm to represent the plaintiffs; several of the nation’s largest class-action firms are already seeking the position, and the court is expected to choose one in early June. The court would then have to decide whether a class action can be pursued.

Facing that legal pressure, Pourhassan, on the call with investors, encouraged patience while cautioning shareholders not to bash the FDA. He said CytoDyn would continue to try to get leronlimab into trials overseas.

“We want them to hurry up and save patients’ lives with leronlimab, if that is possible. If leronlimab can really do that. We don’t know,” Pourhassan said on the May 18 call.
Asked about the FDA statement, Pourhassan declined to blame regulators.

“If there’s a failure here,” he said, “it’s my failure.”

See the full class action complaint, filed March 17, below.

Tags
Health/life sciences Startups Covid Cytodyn