Thaumaturgical Analysis of Celldex (CLDX) Through March 31, 2015

November 21, 2014 – I think it’s safe to say that I misinterpreted the outcome here in this quarter, but I remain convinced that the cards told an accurate story.  I’m also of the belief that the company pre-released more data from the REACT trial because they feared that waiting another day would have them missing the p value on their primary endpoint (it clocked in at p= 0.048) and thereby creating less of a positive stir.

I’m not going to be buying stock here in Q4 simply because I believe management is still gravely concerned about other issues.  Q1 2015 is a good time to reconsider and possibly buy.

In Defense of CytRx Corporation (CTYR)

Disclosure: I’m long CytRx (CYTR).


The circumstance CytRx (CYTR) Corporation finds itself in epitomizes the power of the blogosphere to shape a company’s fortunes. This concept was not lost on CytRx management which allegedly chose to enlist the support of the Dream Team Group – an advertising agency for public companies, to promote its technology and lead compound – aldoxorubicin.

That strategy seemed to work wonders until Seeking Alpha contributor Richard Pearson came along. Pearson, was apparently solicited by DTG to author promotional articles on behalf of its clients, one of whom included CytRx Corporation. But Pearson decided to forgo the $300 pay per article [3x my average on Seeking Alpha] and instead to conduct his own personal investigation into the practices of DTG on behalf of CytRx in the hopes of exposing a scandal. What he found, and reported to us, has simultaneously become a watershed moment in the history of opinion piece authorship and an inescapable ball and chain around the neck of CytRx and her shareholders.

Amongst other things, Pearson revealed a network of opinion piece authorship that apparently included submissions to various opinion outlets including The Motley Fool, Wall Street Cheat Sheet, The Street and even Forbes. Worse still, the articles were often written by one person under several aliases, edited by company representatives and timed for maximum price tickling effect.

Pearson concludes that the activities of CytRx, in concert with DTG, falsely raised the stock price to levels that resulted in a successful $86M public offering that is now in jeopardy because of this. While he admits to being neither a lawyer nor a securities regulator, Pearson suggests that CytRx may be in violation of Section 17b of the US Federal Securities Law addressing paid stock touting and Section 10b, also known as the anti-fraud provision.

Richard Pearson’s expose ends by encouraging his readers to come to their own personal conclusions. It should be noted that I too have the same deficit of professional acumen as Mr. Pearson, but I did follow his advise and have come to the following conclusion.

Mr. Pearson is Likely Wrong About CytRx’ Forfeiture of the Stock Offering Funds

While I will admit that Pearson exposed CytRx’ activities as overly aggressive and likely in violation of SEC rules, I doubt that the company will incur anything more than a small fine from the regulatory agency. Investors involved in class action suits will likely receive no more than pennies on the dollar in compensation. Why? It’s simple really. If Pearson’s article is the centerpiece of your claim, your case is deeply flawed to begin with.

I’m not here to tell you that I like CytRx management. I don’t. Steve Kriegsman would do well to remain off of any public speaking podium as his delivery has an off-putting effect. The company has a long history of aggressive self-interest that is shareholder unfriendly at best. However, I’m not here to defend CytRx public image. I’m here to defend company shareholders against what I believe to be a false conclusion derived from distorted claims.

To support this opinion, we need to start at the top of the Pearson article.

Pearson Short CytRx

Bloggers write opinion pieces for a variety of reasons. Some people simply like to be heard. Others, benefit from the added income that serves as compensation from the publisher. Readers often suspicion that writers work on behalf of unseen forces desiring to manipulate the stock price. But in most instances, writers have a financial stake in the stock they happen to be covering.

In this particular instance, Richard Pearson was short CytRx which means he stood to benefit financially from a decline in the share price in the wake of his words. And Richard Pearson benefited handsomely from his position.

9-Month Chart

I’m not sitting in moral or ethical judgment of Mr. Pearson. I’m presently long 1,500 CytRx shares at $2.66 each and would dearly love to see them rise. The difference is, it’s easier to shake investor confidence in an equity than it is to build it up. You can think of investment as a relationship. Trust can be all but broken in a few words spoken, but it takes many months – even years to build back that confidence.

And Richard Pearson’s article wasn’t just a few words, it was a voluminous masterpiece of doubt creation presented as much as a legal brief against CytRx as it was pure opining. I want to state from the off that I’m not going to challenge the authenticity of the allegations, nor the regulations upon which they rest, but simply the conclusions Mr. Pearson arrives at.

And this, I believe, is what CytRx’ attorneys will do. In the age of the blogger they will argue that Richard Pearson’s missive was the cause behind the massive share price drop as much or more so than the activities of the company or DTG. Richard Pearson, they will say, stood to profit from his investigation and it colored his method of detection and his presentation of findings. They’ll find no personal or legal fault in his activities, but will simply say that they contributed more to the deterioration of the stock price than anything they or DTG did.

We should keep in mind that the purpose of a civil court is not to find one party, or the other, guilty of a crime. Rather, it is to make both parties whole. And while this makes CytRx more accountable for its actions by excluding the provision of reasonable doubt found in criminal venues, it also introduces the idea of weighed and/or shared responsibility. Should investors, for instance, be prepared for sudden loss of their equity value in the age of opinion piece publication? I think the answer to that question is undoubtedly yes.

What Pearson Doesn’t Tell Us

Before we get to Mr. Pearson’s biased presentation and possibly erroneous conclusions, let’s begin by examining the responsibilities of CytRx relative to the Dream Team Group. It should be noted that the only relationship I’m aware of between the two entities was conveyed to me in Richard Pearson’s article. After careful perusal of that document I’ve come to the following conclusions.

  • The Dream Team Group was likely involved in authoring undisclosed, paid promotional articles on behalf of CytRx.
  • CytRx editing of those articles was an emphasis of the Pearson report, but the nature of those edits was deemphasized.
  • CytRx management may not have been made aware that non-disclosure of payment was part of a contractual agreement between DTG and its independent contractors.
  • CytRx, may not have been aware that authors were using multiple aliases to receive multiple payments from DTG and secondary remuneration from publication outlets.
  • CytRx editing of article documents was likely to keep authors from making exaggerated and/or fraudulent claims that would be in violation of SEC regulations. And Richard Pearson’s own submission, with evidentiary edits, is the best example of this contention. More on that later…

Pearson Contradicts His Own Premise That Stock Promotion Was The Central Driver Of Stock Price Appreciation

In his article, Richard Pearson essentially tells us that the dramatic rise in the stock price of CytRx was attributable not to the successful phase 2b data release in Soft Tissue Sarcoma which he admits triggered an 80% assent in the stock price, nor the subsequent granting of a SPA agreement by the FDA covering the pivotal phase 3 trial now underway, but rather, was caused by the published opinions of “small time authors” in the aforementioned financial venues.

To demonstrate the unusual effectiveness of these opinion pieces, Pearson publishes the following graphic to make his point.

CytRx articles by Meyer and Mylant

He then comments on the effectiveness of these 13 now removed articles.

So far I have deliberately refrained from providing any analysis of the fundamentals at CytRx, including the prospects for their compounds in FDA trials. Based on the facts presented above, it is the stock market promotion that has dominated the share price action, bringing the stock to multi-year highs.

The first thing to note, is that Pearson’s chart contains a minor flaw in that it seems to indicate that 4 of the enumerated and removed articles were published in advance of the phase 2b data release in STS when in fact only 3 were. The 4th was published on the day of that news release and may have augmented the effect, but that would be purely speculative.

Pearson later characterizes Meyer and Mylant, the originators of these pieces, as “small time authors” and who could disagree with that assessment when in 9 of 13 instances their work had a negative or negligible effect on the stock price. Only when the publication dates coincide with news events of importance do they have any effect at all. Here’s an expanded chart I’ve constructed that tells the story a bit differently.

1-Year Chart

Here, you can clearly see that a company presentation at LD MICRO and 3 news events in the form of STS data releases appear to be the primary drivers of stock price appreciation. These events are depicted in green squares.

I certainly wouldn’t argue against the fact that two articles may have had significant impact, but that’s not the argument that Pearson was making. Rather, he clearly suggested that the articles “dominated the share price action” which is simply not true.

The Alleged Edits To Articles Made By CytRx Were Designed To Temper Enthusiasm And Not To Create It

It wouldn’t surprise me in the least if after contracting services with DTG that CytRx demanded to edit out any inaccuracies in authored articles in the interest of truthful disclosure before those articles went to print. Should that prove to be true, the case for fraudulent activity on the part of the company falls flat on its face.

Richard Pearson references, and submits for your consideration, a document he prepared and forwarded to DTG for publication that allegedly displays the edits made by CytRx VP of Business Development, David Haen. Given the length of Pearson’s own compilation of aggrievement, I doubt many actually opened and read it. And in the contextual tone of the article, one would presume that David Haen’s edits were part of a conspiracy to elevate the stock price unjustifiably. In fact, that’s the premise of Pearson’s entire article.

Here’s a bold type headline addressing these stock touting missives and how their misuse by CytRx could backfire on them.

That means that any mistake or exaggeration by any of these small time authors could potentially constitute fraud by CytRx management to the extent that the statements were speculative, promotional or incorrect.

Here’s the problem. Haen’s edits of Pearson’s article do just the opposite. Here are a few examples. And please note that Pearson’s text is the one crossed out and Haen’s edits are the replacements.

Will to Could

In this example, we have Richard Pearson suggesting that adoxorubicin “will” ultimately receive FDA approval which is struck through and changed to “could” ultimately receive FDA approval. The word “will” is certainly the more exaggerative of the two, wouldn’t you agree?

In the next example, Pearson utilizes a universal absolute to describe the investment opportunity CytRx represents.

True to Compelling

The change to “compelling” ratchets down expectations, doesn’t it? True by definition, is an adjective meaning in accordance with fact or reality. Compelling is an adjective meaning to evoke interest.

In the next instance, Haen, once again, turns down the volume of hyperbole by describing the evolutionary growth of CytRx differently than Pearson attempts to do.

Approval Process to Clinical Stage II

Changing “FDA approval process” to “clinical development stage” could hardly be construed as amping up the descriptors in Pearsons dummy submission.

And finally, for the sake of brevity, I’ll give you this last example.

Complete Strike

Here, Pearson cockily claims implicit confidence in aldoxorubicin by writing: “As a result, the fact that CytRx has already performed strongly in FDA trials should never have been much of a surprise in the first place.” That line, is struck through in its entirety without any suggestion of replacement.

Two things become very clear to me by reading Pearson’s article submission and examining Haen’s alleged edits.

  1. Pearson is baiting the company to use the most hyperbolic language to describe the investment.
  2. The company is having nothing of it.

Additionally, if plaintiffs in class action suits are going to use these articles to justify compensation, they’re going to have a difficult time suggesting that the company was complicit in fanning the flames of stock price appreciation when they clearly edited out the kinds of words, phrases and sentences that would have contributed to that end.

Pearson Begins And Ends His Article By Assigning An Extremely Low And Contradictory Target Price To CytRx Shares Based Upon His Findings

In his article, Pearson asserts early on what the effect of his undercover investigation will be on the share price over time. He does this in a bold heading style format, using a font color – red that Seeking Alpha doesn’t support which reads as follows…

Broader awareness of these issues could see the share prices of both CytRx and Galena trade to well below $2.00, back where they were when the promotions began.

He repeats this assertion later in the article.

If the share price drops sharply, investors in this deal could potentially file claim that they were defrauded into buying shares of CytRx near a 4 year high. In fact, the share price has already dropped to well below the $6.50 offering price and even further below the recent high share price of $8.35.

As a result, I view this “cushion” of around $2.00 per share to be at risk, creating the potential for the stock to trade well below any perceived “cash floor” of $2.00.

It’s my belief that Pearson’s absurdly low price target [10x below his own valuation of the company and dismissive of clinical success] was intended to become a self-fulfilling prophesy. Having failed to achieve this, it’s now become a jettisoned sea anchor slowing appreciation back to a reality that embraces corporate achievements which recently included the granting of three orphan indications for aldoxorubicin use.

Please do not think that I’m dismissing the risks inherent in owning this biotech that include not only clinical trial failure, but management misstep and litigation loss. Richard Pearson didn’t add this risk dimension to every individual’s investment consideration. CytRx did.

CytRx Has 2 Unique Aspects To Its Business That Under Normal Circumstances Would Place Its Market-Cap North Of $500M Even At This Early Stage Of Clinical Development

Richard Pearson’s dummy article submission articulates one of these two items beautifully. Aldoxorubicin has an unprecedented opportunity to distinguish itself as unique from its commercially successful parent compound by crossing the blood brain barrier in a human.

Presently, aldoxorubicin is involved in several trials of commercial significance, but one of the strongest opportunities is in glioblastoma multiforme or GBM. Here, the endgame would be to replace temozolomide as the chemotherapeutic agent of choice. Allow me to introduce you to the thoughts of one Richard Pearson on aldoxorubicin in GBM.

For obvious reasons, the STS opportunity is what has grabbed the headlines of late and has therefore been the primary focus of investors a this point. However, CyRx may also be headed towards a compelling opportunity in treating glioblastoma multiforme [GBM], the most prevalent form of brain cancer. In fact, my research leads me to conclude that CytRx’s GBM opportunity is actually much more valuable than the market is giving it credit for. A proper evaluation of this underappreciated opportunity reveals that CytRx could very quickly command a market cap of roughly $1 billion – or approximately $20 per share. For the sake of clarification, this estimated valuation is based on the combined market opportunity in both STS and GBM.

Though I disagree with Richard’s overly optimistic valuation, I concur with his enthusiasm if only because this would be a unique validation of not only aldoxorubicin but of the technology it’s based upon. For a better understanding of CytRx approach to therapeutic development, please see my article entitled; Celldex: The Race Leader In Glioblastoma Multiforme.

This 28-patient pilot study in GBM is set to report results in the first-half of 2015.

According To Inside Owner Dr. Scott Patterson The Phase III STS Trial Is Enrolling Faster Than Originally Anticipated

The second unique aspect of CytRx, is that its lead therapeutic offers reduced risk in that it’s based upon the commercially successful – doxorubicin. A pegylated version, named Doxil, has flirted with blockbuster status, but doxorubicin annually achieves billions in sales anyway due to its ubiquitous presence throughout oncology treatment locales. You’ll find it, for instance, under the brand name Adriamycin in the chemo cocktail ABVD.

Two things become clear when ruminating upon this relationship.

  1. It’s easier for the FDA to approve a compound it’s approved before.
  2. It’s easier for CytRx to target successful applications in which to conduct clinical trials.

Dr. Scott Patterson, an inside and major owner of CytRx shares [830k of them as of December of last year] published an overly optimistic assessment of the company’s fortunes in this blog dated October 22, 2014. I say “overly optimistic” because it virtually ignores the elephant in the room – potential fallout from stock promotion. However, Dr. Patterson does give added color to the clinical possibilities that may serve to diminish any financial loss relative to this scandal.

According to recent corporate presentations, faster-than-expected enrollment is occurring in the two trials which are large enough, if successful, to be submitted to the FDA for new drug approval – the pivotal Phase 3 soft tissue sarcoma study (STS) and the second-line Phase 2b small cell lung cancer study (SCLC). Some trial sites have already met their enrollment quotas, and have requested to be permitted to add additional patients to their site. I view this as an encouraging sign, since it may imply that the researchers are seeing positive results. It also suggests that, if enrollment continues at this pace, results in one or both trials may read out considerably sooner than expected, possibly even before year end 2015. Given that good news usually spreads fast, I think it likely that enrollment will continue to pace ahead of expectations during the coming months.

And that would be good news indeed.

Some Concluding Thoughts

I have great admiration for the courage of Richard Pearson in his undercover investigation of CytRx and the Dream Team Group stock promotion. Each opinionator, throughout the blogosphere, is biased in their presentation because each and every human being is biased despite some protestations to the contrary. My presentation here is skewed towards my vision of this situation. I therefore ask the readers indulgence and forgiveness where necessary.

The outlook for CytRx continues to be bright on the clinical side of the equation. Overall survival numbers in the Phase 2b STS trial will be reported later in the quarter and I expect them to be impressive based upon a few outliers keeping the books from being closed in this regard.

Investor sentiment appears to be taking a turn for the better as well but the vulnerability of this stock to short critique is palpable still and investors should be ever mindful of this added dimension of risk.

Should GBM results be positive, I would expect the sea anchor from the stock promotion scandal to be cut free in a massive short squeeze. Should the trial fail, however, I would expect the stock to remain range bound for some time.

And finally, on a personal note, I’ve made the conscious decision to contribute less of my time and energy to publishing for Seeking Alpha primarily because the financial reward of doing so doesn’t meet with the allocation of resources involved. I therefore can understand how writers might be tempted to take offers made by various other entities to more justly reward their considerable efforts. To date, I’ve flatly refused requests to write for hedge funds, companies and other unsourced parties who’ve expressed interest in my abilities. For me, this won’t change, as I value above all else my independence of thought.

That said, I can understand how individuals make other choices and sell their autonomy out to the highest bidder. What I don’t understand, and can’t condone, is why anyone would falsely represent themselves under various aliases in order to dupe any publisher into paying them excessive fees. Doing so at once compromises one’s own integrity and damages the reputation of all parties concerned.

These acts of deceit harm authors, publishers, companies and most of all – shareholders.

Always be well…

Additional Disclosure; Any information or opinion expressed herein may not be true, accurate or correct and it does not constitute any suggestion to buy, sell, hold or adopt any investment strategy for this stock or any stock that may be mentioned. Reliance upon information in this article is at the sole discretion of the reader. The sole purpose of my article is to entertain by providing information, the accuracy of which is as good as the public sources it was derived from. Do not act on anything I have written. Rather, do your own due diligence and consult an investment professional before making any investment decision. Acting on what any one writer, including me has imparted to you is foolish at best. I have no better access to resources or gift of opinion formulation than you do. I sometimes make mistakes. There are a myriad of things, which can happen in lieu of any forward-looking statement I have made. Any stock featured or mentioned in an article I compose is subject to all manner of influences, which can change its value in dramatic fashion upwards or downwards. These events can be of a wide variety not limited to news-related occurrences, managerial decisions, trial failures, stock manipulations and so on. I make every effort to declare positions I have in stocks I cover or mention in an article but reserve the right to move in and out of said investments at my own discretion based upon the wisdom of doing so. I implore you to do your own due diligence, invest at your own considerable risk attaining the just reward your efforts have wrought.