Cell Therapeutics: Addicted to Reverse Stock Splits

BOSTON ( TheStreet) -- When i it comes to reverse stock splits, I'm willing to give biotech CEOs a single mulligan. We all know drug development is rooted in failure so even well-meaning biotech CEOs land in Wall Street's doghouse.

Generosity ends when a biotech implements a second reverse stock split, particularly if it's done under the same leadership team. Shareholders deserve better, so any CEO manning the helm for two reverse splits should be fired. 

Genta was an unrepentant violator of this rule, which is why the company filed for bankruptcy. Twenty-four years of drug development futility and five reverse stock splits reduced 15 million Genta shares down to one. 

Cell Therapeutics ( CTIC) is a close second with four reverse stocks split totaling 1 for 1,200 shares. Cell Therapeutics went public in 1996 at $10 per share, which equates to a reverse split-adjusted, first-day trading price of $12,000 per share. Today, a Cell Therapeutics' stock trades for $1.08.

I'll do the math for you. In 17 years, Cell Therapeutics has lost 99.991% of its value.

James Bianco, Cell Therapeutics' Chairman and CEO, has been in charge through all four of the reverse stock splits, yet his tenure never appears in jeopardy due to a cowardly, self-interested board of directors. 

Habitual drug-development blowups and an unquenchable thirst for capital are typically the reasons most biotech companies become reverse stock split addicts. Cell Therapeutics certainly fits this mold. Those with good memories will recall the company was founded on the promise of lisofylline, a treatment for oral mucositis. It failed. So did the cancer drug CT-2584. Xyotax, a reformulation of the popular chemotherapy drug Taxol, was a huge failure. Instead of disappearing from its pipeline like CT-2584, Cell Therapeutics merely changed Xyotax's name to Opaxio. Brostallicin is another drug that came and went without a trace.

With $1.8 billion in cumulative losses and drug failure after failure, it's no surprise Cell Therapeutics has become reliant on reverse stock splits. 

Cell Therapeutics did manage to win conditional approval in Europe for the lymphoma drug Pixuvri last year. Consider it a financially insignificant achievement. The drug is still not available commercially a year later. Efforts to get Pixuri approved in the U.S. have been futile, highlighted by a unanimous vote against the drug by an FDA advisory panel and vapid threats to sue the agency. 

Pacritinib, an oral JAK2 inhibitor for myelofibrosis, is the latest drug to leapfrog to the front of Cell Therapeutics' pipeline. The company is pushing pacritinib into phase III studies and recently raised $60 million to fund the new clinical work. 

Pacritinib's mechanism is similar to Jakafi, an approved drug marketed by Incyte Pharmaceuticals ( INCY) and Novartis ( NVS). Cell Therapeutics claims pacritinib is more specific to the JAK2 target, thereby making it potentially more effective and better tolerated. 

Actual data don't yet prove the company's assertions but it should be noted the JAK2 field is very crowded. Among the competitors: Sanofi ( SNY) in pivotal studies and Gilead Sciences ( GILD), which acquired YM BioSciences and its phase III ready JAK2 compound. Good luck to Cell Therapeutics with that competition. 

Pacritinib's provenance should give investors pause. The drug was invented by Singapore's SBio and licensed originally to Onyx Pharmaceuticals ( ONXX). Despite being a good strategic fit, Onyx later decided not to move pacritinib into phase III studies, returning the drug's rights to SBio. 

Later, Cell Therapeutics snagged pacritinib from SBio but for financial terms which were rather paltry for a promising late-stage cancer drug. Cell Therapeutics paid $30 million upfront along with a low single-digit royalty on sales, if approved. By comparison, Gilead paid just over $500 million to acquire YM Biosciences.  

I can't write about Cell Therapeutics without talking more about Bianco and his outsized (and undeserved) executive compensation package. The company hasn't filed its 2012 proxy statement yet, but in 2011, Bianco's salary and bonus totaled $1.4 million. When you add in the value of stock options and other perks, Bianco was paid almost $4.6 million in 2011. In 2009, the total value of Bianco's executive compensation was $12.6 million.

Then, there's the Bianco's use of corporate jets, the ultimate executive travel perk. Longtime followers of Cell Therapeutics remember the company once leased its own private jet. When that proved too expensive and embarrassing, Cell Therapeutics switched to merely chartering a jet.

This perk does not apply just to management, as it also pays well to be a relative of Cell Therapeutics' executives. In 2006, the company disclosed that $220,000 in shareholder money was used to pay for family members' use of chartered planes. More recently, the company stopped disclosing the specific costs for family travel on private jets even while acknowledging it still takes place.

Cell Therapeutics shareholders also pay for tickets on commercial flights for executive family members. From 2008 through 2012, these costs totaled $260,000.

And there are even more corporate perks. Cell Therapeutics shareholders paid $20,000 last year for Bianco's private security; $25,000 for personal travel expenses and a $4,900 annual gym membership. 

All this self-enrichment for a CEO who has destroyed 99.99% of shareholder value, failed four times with reverse splits and has left every long-term Cell Therapeutics shareholder holding an empty bag.  

This is the very definition of chutzpah.

Silverman has no position in Cell Therapeutics.

Jim Silverman is the managing member of RRC Bio Fund LP, a Boston-based hedge fund focused on small-cap biotech. RRC Bio was launched in 2007. Silverman also founded Risk/Reward Capital Management in 1997, a registered investment advisory. He lives in Cambridge, Mass., and received a BBA in finance from The George Washington University.

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