On the morning of August 6, 2015, an article was published on Seeking Alpha by an anonymous author using the pseudonym Mako Research, taking a hatchet to Cellceutix Corp. (OTC: OTCQB:CTIX). Mako disclosed having a short position in CTIX, meaning a bet was been placed that the stock price would go down. The article, alleged by Cellceutix to be a hit piece integral to orchestrated, illegal stock manipulations directed at small companies, came with a sensationalized headline ("Cellceutix: Empty Office, Unviable 'Science', Misleading Disclosures, 96% Downside") and equally brash statements in the article body asserting that Cellceutix's pipeline of drugs in clinical trials are ineffective and the company is essentially without worth.
Over the next six weeks, Mako published five other articles, including using similar phrases to the CTIX piece ("empty office," "price target $0.00," etc.) in two articles thrashing Ocata Therapeutics (NASDAQ:OCAT), a company that Astellas Pharma (OTCPK:ALPMF) agreed on November 10, 2015 to buy for $379 million in cash. Mako has "gone dark" since the last Ocata piece on September 23, 2015. There have been no more published articles and social media pages have disappeared.
According to its website and SEC filings, Cellceutix is a clinical stage biotech developing drugs for several indications, including an antibiotic (Brilacidin) for acute bacterial skin and skin structure infections ((ABSSSI)) planned to enter Phase 3 studies, an anti-cancer drug (Kevetrin) planned to enter a Phase 2 trial for ovarian cancer, an oral non-biologic drug (Prurisol) for psoriasis that is wrapping up a Phase 2 trial, and an anti-inflammatory oral rinse (Brilacidin-OM) for oral mucositis that is currently in a Phase 2 study. Cellceutix has received for its ABSSSI drug a Qualified Infectious Disease Product (QIDP) designation from the U.S. Food and Drug Administration (FDA). Brilacidin-OM, an oral rinse formulation of Brilacidin, is being developed under a Fast Track designation from the FDA. Its anti-cancer drug has recently completed a Phase 1 trial at Dana-Farber Cancer Institute as a novel treatment for advanced solid tumors. Kevetrin has multiple FDA designations, including Orphan Drug for ovarian cancer and retinoblastoma and Pediatric Rare Disease for retinoblastoma. Its psoriasis drug is in a Phase 2 trial for mild-to-moderate plaque psoriasis and should have top-line data in May 2016.
The Lawsuit Emerges - Shoot First Ask Questions Later
The Mako article "screaming fire" led to a sharp drop in CTIX's share value. Immediately a securities law firm announced an "investigation" into Cellceutix, simultaneously trolling for a lead plaintiff for a class action lawsuit while lending credence to the Mako article, which further propelled the stock lower. In the wake of the storm, NYC-based Rosen Law Firm, a firm with an extensive history of filing press releases on class action cases, was the first to issue such a release. According to public information, Rosen issued its news of investigation on August 6, 2015 at 12:41 PM ET (about 2 hours after the Mako article was published) and had a lead plaintiff (Nicole O'Connell) signed by the end of the day. O'Connell shortly thereafter dropped out of the case and was replaced by Gary Zagami, the lead plaintiff in a previous Rosen lawsuit. Zagami remains the only plaintiff in the class action against Cellceutix. Zagami signed on August 7, 2016 under penalty of perjury that he had read and agreed to the complaint.
The Private Securities Litigation Reform Act of 1995, in particular Rule 11, was put in place to prevent abusive litigation, tasking law firms with performing proper due diligence before initiating a case and mandating sanctions if appropriate procedure is not followed. To wit, the onus fell on Rosen to ensure that the case was not frivolous. On the surface, this still did not seem to transpire. The minimal time frame from the 12,600-word Mako article to a signed lead plaintiff certainly begs the question of how much due diligence was undertaken. For the average reader (250 words per minute), it takes nearly an hour to even read the article, much less properly vet the assertions and write a 6,000-word complaint for a potential lead plaintiff to read and approve. A look at the original complaint, filed on September 11, 2015, shows it was basically a copy and paste of the Mako article.
Why was there a delay of more than a month in filing the case after so expeditiously drafting the complaint for a lead plaintiff to sign? According to court documents, Rosen attorney Phillip Kim explained that "there was a delay between when we issued the announcement and when we actually filed the case. When we filed the case, Ms. O'Connell had reviewed the complaint and had approved it, same as Mr. Zagami when we amended the complaint. We didn't file the complaint right way. We wanted to check it out. That's part of our obligation." (emphasis added.)
Notice in the original complaint filed by Rosen that the crux of the complaint was, "Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (1) Brilacidin is not effective; (2) Kevetrin does not activate the p-53 gene, which is a tumor suppressor; and (3) Defendant Menon did not earn his PhD in Pharmacology from Harvard University." The class period is listed by Rosen from May 10, 2013 to August 6, 2015.
In a section of the complaint titled, "The Truth Emerges," assertions were made regarding Mako's allegations that Cellceutix is "run out of what appears to be an empty office building" and "nothing more than a shell corporation." Further, Cellceutix's science is "demonstrably unviable," management is involved with "Ponzi scheme fraudsters" and the company is "dangerous" and "should be avoided" as its "fair value is 96-99% lower than the current price." Further into the harangue, Mako is quoted in bold as saying, "Brilacidin is simply not effective;" that "Brilacidin is not effective in combating and treating: (1) ABSSSI;" that Kevetrin "does not stop cancer stem cells;" that the Phase 1 clinical trial design of Kevetrin is "ineffective;" and that Kevetrin "does not activate" the tumor suppressor gene p53.
It's presumable that Rosen deemed all of the allegations and statements were factual and important in the case, as aforementioned, Rosen "wanted to check it out" before filing the original complaint with the court.
Mako's Charges Get Walked Back
Rosen has since filed two amended complaints, in some cases modifying the allegations, omitting sections in others and even posing some new allegations, but ultimately still relying upon the Mako article as the cornerstone of the complaint.
In the second amended complaint, filed on January 11, 2016, which attempts to widen that class period by more than a month to between May 10, 2013 and September 11, 2015, many of the brash statements no longer exist. While there are similarities in some of the allegations, the core of the complaint shifted to more blunted allegations of misrepresentations with respect to Brilacidin for treating Gram-negative bacteria, Brilacidin as an "antibiotic" for oral mucositis, the structure of the Kevetrin clinical trial, costs associated with seeking FDA approval of Brilacidin for ABSSSI, Phase 3 trial experience and irresponsible actions by Dr. Menon and Cellceutix CEO Leo Ehrlich.
The Mako report is referenced for the purpose of arguing that:
"1) Brilacidin was ineffective against gram-negative bacteria, and was ineffective as an antibiotic oral rinse; 2) that Kevetrin's Phase 1 trial did not establish Brilacidin's efficacy, contrary to Defendants' misrepresentations; 3) that Menon lied about receiving a PhD from Harvard; 4) that Menon was not the inventor of the blockbuster drugs as he had claimed."
Point number two is presumably a typographical error and intended to state, "Kevetrin's Phase 1 trial did not establish Kevetrin's efficacy…"
There are no longer statements that Cellceutix is a shell and run out of an empty office building. Gone are the direct statements about the broad ineffectiveness of Brilacidin and that Brilacidin doesn't work against ABSSSI. Vanished have allegations that Kevetrin doesn't activate p53 or impact cancer stem cells. There is no longer commentary about Ponzi scheme fraudsters or about the company being essentially worthless.
So, what has happened is that all of the topics in Mako's eye-catching headline that started the whole fiasco have been removed.
It seems reasonable to deduce that these assertions of Mako simply weren't true. Certainly a law firm specializing in securities class actions that has been researching the Cellceutix case for at least five months would not have omitted such damning statements if they could be supported by scientific and fundamental evidence.
As for the rest pertaining to the second amended complaint, Rosen is still trying to present cloudy allegations, presumably in a bid to survive a motion to dismiss. Some of the allegations are perplexing, to say the least, as, even after months of investigation and supposed consultation with experts, Rosen still confuses Brilacidin (an intravenous antibiotic for ABSSSI) with Brilacidin-OM (an oral rinse anti-inflammatory treatment for oral mucositis) and doesn't appear to understand disease/condition pathogenesis, scientific terms or clinical trial protocol, amongst other things.
Rather than dissect these matters, interested parties can learn more via the dismantling of the case by Cellceutix lead counsel Mike Sullivan in support of a motion to dismiss the complaint. A fascinating read. As Sullivan states in the court document, it is "unsurprising that Plaintiff [Zagami/Rosen] profoundly misunderstands Defendants' [Cellceutix] leading drugs in clinical trials, the underlying biological properties of those drugs, and the operation of the clinical trials themselves."
"Defendants will not and need not engage in a back and forth with Plaintiff about the efficacy of its drugs or the parameters of its clinical trials. As courts have long recognized, that is up to research scientists and the Food and Drug Administration ("FDA"), with any future safety and efficacy determination based upon, among other things, the results of multiple clinical trials. Nor will Defendants address each instance of unsubstantiated "smoke" Plaintiff attempts to create by alleging a history of bad acts by Company officers. No matter how hard Plaintiff's counsel may try to dress up the third complaint filed in this matter, there is no "fire," and the SAC falls woefully short of stating any actionable securities fraud claims against Defendants."
No matter how cleverly the Mako article was written to make it look like it was an expert opinion, the facts now show it was misleading. The court documents plainly demonstrate this.
Mako did a number on the share price of CTIX and the stock hasn't recovered… yet. First, it seems most plausible that the lawsuit will get dismissed with prejudice, which will relieve pressure on the stock. Second, at $1.08, Cellceutix commands a market capitalization of less than $130 million, arguably an extremely low valuation for a company with such a diversified pipeline of drugs in clinical development. Wall Street will not continue to look past Cellceutix and its novel drugs at these discount prices. The current price puts CTIX down more than 70% from its 52-week high in July in spite of the company's pipeline growing stronger and stronger, including the latest p21 data showing Kevetrin is activating p53 to fight cancer. Shares are down by 56% from the day the Mako piece was released, equating to a 127% upside from $1.08 to resume trading at a pre-article level.
Historically, stocks that are victimized by someone yelling "fire" when none exists turn out to be a great investment decision as the stock makes a strong comeback. This seems the most likely future for CTIX's stock, followed by an uplist, more clinical data and even more upside, should the trials continue to impress as they have so far.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
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