At the close of business, Friday CytoDyn Inc (OTCMKTS: CYDY) filed an innocuous 8-K that ignited a firestorm of controversy on the message boards. The 13-D group called Advancing Leronlimab seems to be joining the ranks of the shorts. The negative sentiment is very high. The old saying is that it’s darkest before it is dawn applies here. The stock has been under continuous pressure despite the good news of the BLA filing getting back on track and the likelihood of 2 Breakthrough Therapy Designation (BTD’s) shareholders this weekend were getting wrapped up in the he said she said of the latest 8-K that awarded Pestell $7.6 million in damages. What is missing from the dialogue is that this is yet another settlement to clear the path toward an uplisting or drug partner and will ultimately minimize the impact of dilution.
House Cleaning Ahead of Big Pharma
In Pourhassan’s last shareholder update he mentioned that they terminated the American Regent relationship to provide flexibility in a potential big pharma partnership. The deal with Pestell is just another run-of-the-mill housekeeping measure, but the issue regarding the effective cancellation of 8.4 million restricted shares remains in limbo. This housekeeping theme also applied to Amarex who is largely being replaced by more specialized ARO’s such as Einstein. The Company has been systematically clearing out the bad actors since Scott Kelly stepped in as Chairman. They did hire some poor performers like Dr. Maboob Rahman, but they were quickly replaced with all-stars like Dr. Chris Recknor. Those involved with the bad acquisitions, bad trial designs, and the inability to complete FDA submissions have all been removed and seem to have been reincarnated in the 13-D group.
Large Shareholders Backing the 13-D
The 13-D group includes old hands such as Pestell and Carrociolla, the very people that arguably were responsible for a considerable amount of dilution and missteps. They were ex-Directors of CytoDyn. Both Pestell and Caracciolo have been significant sellers of their CytoDyn positions and have profited immensely. Caracciolo had over 6.0 million shares and that position has dwindled to less than 1.4 million. That’s a 77% reduction in shares after he left in January 2019. The irony about this statistic is that Caracciola brought a suit against CytoDyn management after he got ousted for unjust enrichment to the tune of 1.6 million shares versus the 6.0 million he earned for diluting the heck out of the company and executing bad deals.
Pestell was awarded over 10.9 million shares he could sell after his termination in July 2019. What is left is 3.1 million shares not to be confused with the 3.1 million he just won in arbitration. Pestell disposed of 71.6% of his tradeable holdings. Both these shareholders have an ax to grind with existing management for being extricated from the company. Without Pestell’s shares, the Advancing Leronlimab group wouldn’t have been able to achieve a critical mass. The reason Pestell is behind this movement is that 8.342 million shares are restricted and subject to repurchase at $.001. By getting this new board in place Pestell could essentially mitigate CytoDyn’s action against him to recover the shares. CytoDyn is clearly going after Pestell.
Pestell also made strategic mistakes that impacted the trajectory of the cancer trial. He took a very conservative approach to cancer. He moved forward with a Phase 1 instead of a Phase 2 cancer trial with 3 + 3 dose escalation. It was very clear from the theory of the Mechanism of Action (MOA) that blocking the CCR5 receptor had no side effects and that occupying more CCR5 would lead to better and quicker outcomes. This was seen in the first compassionate use patient, but his inability to adapt to a drug development mentality versus a research mentality probably cost shareholders billions in lost opportunity cost and untold lives.
On CytoDyn’s last video update, it’s become apparent that a Phase 2 or possible Breakthrough Therapy Designation (BTD) is in the works. Pourhassan decried the data was in and there were responders. This means that at least 9 patients were dosed using the 3 + 3 trial design and that 2 of them were responders. This is a 22% responders rate and assumes the other 5 patients failed. This preliminary number of 22% could be compared to Roche Holdings (RBBHY) TENCENRIQ which had an ORR of 24% and Merck’s (MRK) KEYTURDA which had an ORR of 23.1%. The concept that investors seem to be overlooking is that it is highly unlikely that the other patients failed when the company indicated all patients had zero Circulating Tumor Cells (CTCs). The formal release of the data might ignite the entire oncology sector. The chance of a BTD is very high.
The principal shareholder that organized the Advancing Leronlimab group is Paul Rosenbaum who also wants to be a director. The primary rationale for his involvement is his experience in shareholder activism. He was the CEO and Chairman of SWR Corporation which was a special chemical business that had a successful proxy fight that achieved a full slate of directors at Rentrak Corporation in September 2000. This experience was over 20 years ago and long term the company Rentrak which has now become Comscore (NASDAQ: SCOR) has only a $360 million dollar market cap. Rosenbaum is also an attorney and he has some unfavorable interactions with a plaintiff in a case.
