Coronado Biosciences (NASDAQ: CNDO) is tangled amid a bizarre whipworm therapeutic candidate, jail birds, cozy relationships, crazy financing, decimated companies controlled by a master puppeteer - and just now a brand new $200 million shelf registration.
And it's all precisely timed. The company is rolling out public stock offerings - and filed the new S-3 that will further dilute the stock with millions upon millions of additional shares - just before clinical trial results are released.
Is this because CNDO suspects its key candidate - live pig whipworm eggs - won't work? Does the company suspect that it will never even reach phase III?
Despite several negative study results, CNDO is testing its pig whipworm eggs to treat auto-immune diseases, a medical area populated by fierce pharma companies with deep pockets.
Independent investigators recently conducted trials based on batches of 2,500 parasitic eggs, culled from pig manure, that hatched out in patients' guts. The parasitic egg cocktails caused three to 19 times more incidences of pain and other severe side effects - typically lasting for weeks - than in patients on a placebo.
In fact, the results were so bad that over a dozen patients stopped gulping down their worm egg drinks before the study ended.
Similar risks turned up in three separate studies - all apparently ignored by Burlington, Mass-based CNDO. And even though independent study authors urged fewer eggs per dose in future testing, some patients will slurp down three times more - 7,500 worm eggs - in each dose every two weeks, under a new study that CNDO is resolutely conducting.
Set up for dilution
Despite the negatives, the stock more than tripled over the last year to reach an all-time high of $12.70 on April 23.
Days later, CNDO filed an ongoing at-the-market offering on April 29 to sell $45 million worth of stock at the company's whim.
Was that enough? No. According to the newest S-3, the company amended the ATM offering so it could sell up to $70 million worth of stock.
And was that enough? No, still not enough. This bleeding company with a highly debatable product in fact quietly filed this new shelf registration after market close July 12. Once effective, CNDO will be able to distribute $200 million worth of stock or warrants from time to time over three years, as determined by market conditions. This represents tremendous dilution and overhang for a company with a market cap of about $234 million.
Keep in mind the timing is key: shortly before phase II clinical trial results for Crohn's disease are expected to be announced in the second half of this year.
What if CNDO had expected good study results that justified going into phase III trials? The answer is obvious. It would have waited to raise so much money because it is burning through only about $23 million last year.
Since CNDO execs seem to have serious doubts about their therapeutic candidate's usefulness, they want to grab that money now. We believe the company has to do this now so it will be able to find and buy other therapeutic candidates before investors lose their confidence in the company.
This is the very same pattern that we'll later show was set by Genta and Ventrus Biosciences, decimated companies essentially controlled by master puppeteer Lindsay Rosenwald - the man behind CNDO. Called a "promoter" in SEC filings, he is a director of the CNDO board and majority shareholder who has controlled the company since the beginning.
Rosenwald repeatedly recruits and installs the managers, directors and point men of his biotech ventures. Characters like Morty Davis, Bobby Sandage, Glenn Cooper, J. Jay Lobell, Russell Ellison and David Barrett.
Rosenwald also consistently uses financial institutions under his control to raise money for these ventures that other institutions avoid. He has either solely or largely owned or managed numerous companies under his venture capital firm Paramount Biosciences LLC and holds significant ownership of National Securities Corp. and parent company National Holdings Corp., big players in CNDO and many other Rosenwald companies.
These companies owned or controlled by Rosenwald have managed various convertible debt and stock offerings for CNDO, handing him a total of about $5.3 million in fees through his entities along with about 809,907 shares of common and Series C stock. Associated service fees also made Rosenwald richer. His solely-owned Paramount Biosciences charged the company $25,000 a month plus up to $5,000 monthly out-of-pocket expenses for two years.
So, Rosenwald successfully manipulates the strings of a tangle of managers, directors and financial institutions behind his many promotions.
Unfortunate link: The fen-phen disaster
CNDO character Bobby Sandage, company president until recently, made an unforgettable and highly unfortunate impression as a key manager at Interneuron Pharmaceuticals, a company co-founded and financed by Rosenwald.
Interneuron itself may not be that memorable until one makes the connection between the company and its disastrous anti-obesity drug. Redux (dexfenfluramine) was a chemical compound related to the "fen" in the "fen-phen" drug cocktail that became a weight-loss rage until safety concerns led to it being removed from the U.S. market in 1997.
Sandage was Interneuron's R&D officer when he told an FDA officer "off the record" in March 1994 that his concerns about the safety of Interneuron's Redux "might be strong enough to consider withdrawing the NDA," or new drug application.
"I asked Dr. Sandage what Interneuron intended to do about the safety issues that they themselves recognized. Dr. Sandage said that withdrawal, from a financial standpoint, was really out of the question because the company would be ruined," the officer continued, according to Alice Mundy's book "Dispensing with the Truth."
A September 1994 FDA memo stated, "Bobby Sandage recently told me that Interneuron had nothing to lose and would stop at nothing to get dexfenfluramine approved."
But in April 1996, the FDA approved the diet drug. Investors eagerly bought up the stock of the blockbuster drug that everyone thought should eventually be worth $600 million in yearly sales. The stock shot to more than $39 per share.
Yet there were indications that all was not quite perfect: "The company that makes Redux, Interneuron Pharmaceuticals, and its distributor, Wyeth-Ayerst Laboratories, contend neurological problems are not a major worry," CNN said in announcing approval of the diet drug.
Everything collapsed about a year later. Under pressure from the Mayo Clinic about safety risks, the diet drugs were voluntarily withdrawn from the market in September 1997 by Interneuron and partner American Home Products (Wyeth-Ayerst), which later indemnified Interneuron. Interneuron stock plunged to the $13 range.
More than 3,000 lawsuits, many of them class action, were filed concerning product liability issues surrounding Interneuron and its partner.
Rosenwald and Interneuron president Dr. Glenn Cooper were individually named in one class action lawsuit that focused on allegations of misrepresented facts about the drug.
Rosenwald ultimately took Interneuron personnel resources Cooper and Sandage with him to CNDO. In terms of financial resources, Interneuron attracted a lot of investment from Rosenwald's relatives. His father-in-law, J. Morton "Morty" Davis, whose firm D.H. Blair and Co. handled private and public stock offerings for Interneuron, owned most of the company. Other significant shareholders included Rosenwald's brothers-in-law, both Blair officers. We'll go into their intriguing biographies later in this article.
Mauled by the diet drug disaster, Interneuron eventually became Indevus Pharmaceuticals. In 2009, Endo Pharmaceuticals acquired Indevus. If any Interneuron shareholders were still holding on, they watched the value of their stock once worth as much as $39 dive to $4.50 under the acquisition.
Rosenwald's boom companies go bust
Those dismal days were a stark contrast to the company's boom time, when Interneuron's chairman Rosenwald was named in May 1996 as one of the nation's top biotech millionaires. The value of his Interneuron stock at that time was estimated at $71.2 million.
In fact, Rosenwald was named a top biotech millionaire numerous times. As such, he was recognized for amassing more than $336 million in Interneuron stock plus stock in these companies:
*Neose: filed a certificate of dissolution in March 2009.
*Genta: a disastrous company that we'll delve into later.
CNDO timing unlike Interneuron for good reason
There is one striking difference between CNDO and Interneuron. Unlike CNDO, Interneuron waited until after big trial results and FDA approval in April 1996 to offer Interneuron shares to the public two months later and a Rosenwald-controlled private placement six months later.
Interneuron execs waited because they knew they had it in the bag. While CNDO is grabbing capital when there's still some hope left in its key product, Interneuron execs saw no need to rush out with financing because they apparently expected positive trial results.
Footsteps of Genta
If CNDO is moving forward with clinical trials, we can assume there's a good chance of positive results - right?
Not when we consider the pattern set by another Rosenwald-supported company, Genta Inc.(OTC: GNTAQ.PK), that rolled out stock offerings just before clinical trials were released.
The Genta cancer drugs disaster took a couple of decades and numerous financial infusions to unfold. One-time majority owner Rosenwald handled a 1997 private stock sale through his solely owned Paramount Capital that generated more than $14 million for Genta. His healthy commission of over $1 million was just a fraction of what he ultimately indirectly pulled in from this dying company.
A few years later those investors must have watched in horror as Genta's clinical studies ended in devastation again and again. Three phase III clinical trials failed in 2003 and 2004. Yet the company insisted on sending the drugs out for FDA approval anyway.
The company offered stock and convertible notes worth about $10 million in July 2009, while investors still hung on to fruitless hopes for success in some of its clinical trials. But the following October, sure enough, poor results were released for a second round of its drug trials, having already failed in a previous trial in melanoma. Rosenwald had already sold 10 million shares of stock under his control for about $49.6 million in May 3, 2004, the final stock sale day noted in a Genta class action lawsuit.
CNDO investors might wonder: Why would Genta keep trying again and again, even after disastrous trial results? Money.
Genta couldn't seem to produce a successful product. Yet, somehow, optimistic investors apparently kept thinking phase III trials would surely lead to success. All Genta needed was more money ... and more to get yet another shot at success.
The whole mess led to a chapter 7 bankruptcy filing last year.
Just like CNDO, the beleaguered company got a ton of financial support from Rosenwald's businesses and a couple of Genta's characters moved on to occupy powerful positions at CNDO, too. The Aries fund managed by Rosenwald designated to Genta's board both Bobby Sandage, until recently CNDO's president and director, and Glenn Cooper, until recently CNDO's chairman of the board.
Here's how the Genta chart looks:
CNDO look-alike Ventrus Biosciences: Rosenwald-founded, study failure and current lawsuit target
VTUS wasn't a proper cocktail party topic but it certainly got some major respect in May 2011. That's when high hopes for its hemorrhoid treatment candidate, VEN 309, shot the stock price to the $20- $21 range, more than three times its IPO price.
But the company's lead product suddenly blew up. In 24 hours, the stock collapsed from $12 to $5 when the pivotal phase III VEN 309 clinical trial failed in June 2012. The hemorrhoid drug that VTUS had spent $55.8 million acquiring, researching and developing was suddenly gone for good.
VTUS today trades at just over $2.
Among the slew of recent pending lawsuits, allegations seem to center on whether VTUS suggested the FDA would approve VEN 309 and whether VTUS made false and misleading statements that artificially inflated the stock.
Rosenwald and company used a head-spinning shuffle of money and people to build up VTUS. These include CNDO director David Barrett, former CFO of the delisted Neuro-HiTech, who is currently chief financial officer for VTUS. Barrett serves there with VTUS president/CEO/CMO/chairman Russell Ellison, who's also held key positions in a couple of other Rosenwald companies.
Companies wholly owned, largely owned or managed by Rosenwald - including a slew of companies under his venture capital firm Paramount Biosciences LLC (where CNDO director J. Jay Lobell was also Paramount president and has held various positions in numerous Paramount companies) - made arrangements to float VTUS millions of dollars through notes, securing bank loans (one personally guaranteed by Rosenwald in exchange for his right to attend board meetings and appoint board members) and then paying off a line of credit with proceeds from a note issued by another bank.
Throw in promissory notes issued to Rosenwald-managed Paramount Credit Partners resulting in 287,570 warrants.
Under the heading "potential conflicts of interest," add a cushy $25,000 per month consulting fee for Rosenwald's Paramount Corporate Development.
Throw in several follow-on offerings, including the July 2011 offering co-underwritten by Rosenwald-beneficially owned National Securities Corp. (adding a six-figure cash boost to its coffers and warrants for tens of thousands of shares). The public offering generated $51.75 million for VTUS mostly to waste on that failed hemorrhoid treatment.
Though other investors may have lost out, it appears that, through his companies, Rosenwald established a pattern of walking away from biotech deals with pockets full of cash and equities.
Here's the Ventrus chart:
Prison sentences for associates
Several jail birds have touched the extended family business.
It was just in May that David Blech was sentenced to four years in prison for stock fraud. The judge said there'd be no mercy for the "serial stock manipulator" who pleaded guilty last year for a second time.
In 1980, Blech was a 24-year-old stockbroker who created a healthcare company called Genetic Systems Corp. with his 30-year-old brother, Isaac. The brothers read about a technology to churn out monoclonal antibodies, found an expert scientist and began putting together financing for their company. Finally, they approached D.H. Blair and Co. about underwriting a public offering. Several years before Rosenwald joined Blair, the Blair-underwritten offering hit the market at $2 apiece in June 1981, pulling in $6.6 million.
D.H. Blair and Co. is the once-struggling brokerage firm Rosenwald's famous father-in-law, J. Morton "Morty" Davis joined. Davis invested in it and turned it into a raging success as the underwriter of small cap companies steeped in the kind of risk that other firms just couldn't stomach. Before he began building his biotech empire, the serious, curly-locked Rosenwald worked as the Blair finance director from 1987 to 1992, alongside two brothers-in-law.
Years of dodging securities investigators ended with Blair and its top brass hit by a 173-count indictment. Prosecutors called it "a massive scheme of securities fraud" and "price manipulation" allegedly conducted from 1989 until Blair shut down in 1998. The mess later undoubtedly generated rapt attention during testimony before Congress on organized crime infiltrating Wall Street.
Neither was Davis - a former Brooklyn ragamuffin who once somberly told conference visitors,"I can't think of anything nice to say about myself." Davis had been the key figure at Blair for two decades until he broke up the company to give the retail brokerage part to relatives in 1992 and retain the investment banking part for himself.
Rosenwald moved past those difficult years and continued to work his business deals, ultimately moving on to CNDO and its bizarre key product.
Take 7,500 parasitic eggs and call me in the morning
Strange though it may sound, CNDO's key candidate is thousands upon thousands of whipworm eggs.
That would be a dose of thousands of viable whipworm eggs down the hatch every two weeks.
These parasitic worm eggs collected from pig feces are cleaned up and placed in a clear liquid so the patient can slurp down thousands of them in each tablespoonful.
The idea - actually hypothesis - is that thousands of parasitic larvae hatch in the patient's gut and affect the immune system to help keep the body from mistakenly attacking itself to produce diseases such as Crohn's and psoriasis.
The company says the whipworm treatment is likely safe and effective. Yet, a couple of independent studies indicate that the treatment could pose risk to patients, including persistent diarrhea and severe pain, the same issues associated with inflammatory bowel disease.
Published in August 2011, one study sought to detail adverse reactions found in an earlier trial.
"In conclusion, during the first two months, ingestions of 2500 T. suis eggs caused frequent episodes with moderate to severe gastrointestinal reactions lasting up to two weeks," investigators wrote.
Investigators wrote, "... we detected a significantly higher rate and duration of more severe (i.e. moderate to severe) gastrointestinal symptoms, which we therefore interpreted as side effects ..."
CNDO chief executive Harlan Weisman said in the recent earning call, "... we remain on target to announce topline results from this trial in the second half of the year.
Biotechnology is highly competitive and packed with numerous large companies with much more money and people working on the very diseases CNDO targets with its two products - the "TSO" whipworm technology and the product derived from cancer cells designed to activate natural killer cells or NK in the human immune system that seek and destroy cancer.
We're focusing on the whipworm eggs that the company considers its key product. CNDO paid $20.7 million in 2011 to Asphelia Pharmaceuticals for exclusive rights to the parasitic pig eggs or "CNDO-201." Asphelia was founded in 2007 by Rosenwald through his Paramount BioSciences (why create a second company if the first company already had a product believed worth commercializing?) Also, current CNDO director J. Jay Lobell was Asphelia's chief executive and director. Both are also affiliated with Paramount Credit Partners, whose loan to Asphelia was assumed by CNDO.
Those eggs are facing biggies fighting Crohn's, including Johnson & Johnson (NYSE:JNJ) subsidiaries that sell Remicade and another increasingly popular drug called Symponi, while UCB S.A. and Abbott Laboratories (NYSE:ABA), respectively offer Cimzia and Humira, both of which are already approved to treat Crohn's and several other diseases.
Some competitors' drugs are so good that even CNDO-hosted experts can't resist talking about their effectiveness. A CNDO expert commented during a recent analyst day that drugs by Merck, Novartis, Lily and Amgen are "extremely effective."
Additionally, an estimated 80 new therapies exist in the pipeline for Crohn's treatment and numerous research avenues exist for scientists to pursue toward treating Crohn's and similar diseases.
For multiple sclerosis, another CNDO targeted issue, competitors include Biogen Idec Inc. (NASDAQ: BIIB), Bayer Healthcare Pharmaceutical, Teva Pharmaceuticals Industries (NYSE: TEVA) and Novartis (NYSE: NVS).
During the recent earnings call, an analyst asked the CEO how the company plans to move forward.
Weisman said they will look at several factors, including, "what is the likelihood that TSO (the whipworm therapeutic) is going to work?"
No one can be more anxious to learn the answer to that question than the folks who've bought into this puppet show. No investor will want to miss the final act.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in CNDO and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.
Disclosure: I am short CNDO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.