Cellceutix (CTIX) CEO Leo Ehrlich got a bit unhinged last week railing against Mako Research, an anonymous investor who's been using the DIY investing website Seeking Alpha to post critical articles about the small-cap drug company.
Mako is also shorting Cellceutix while publishing negative stories about the company, which is why Ehrlich is angry. Last Tuesday, Ehrlich responded with a statement issued by Cellceutix, topped with this clickbait headline:
"Cellceutix Strongly Denounces Criminal Enterprise Mako Research, Who Published 'Fake News' Full of Lies and Innuendo."
Most CEOs don't like short sellers, for obvious reasons. In my many years covering Wall Street, I've seen good CEOs deal effectively with short sellers by executing on their business strategy and proving the bear thesis wrong.
CEOs of troubled companies with something to hide, on the other hand, tend to launch public tirades against the "evil" shorts, just like the one Ehrlich threw against Mako (whoever he or she is). The rants are often a smokescreen, meant to divert investors' attention from real problems.
Investing in biotech stocks is hard work even under the best circumstances with good companies run by credible, trustworthy management teams. The task is near impossible when companies bend the truth, spin the news and omit essential information about the drugs they're developing. Differentiating between the good companies and the bad requires a finely tuned biotech bullshit detector and the know-how to use it.
I have not written about Cellceutix previously, but Ehrlich's outburst--accusing Mako of being part of a "criminal enterprise"--piqued my curiosity. Cellceutix has no approved products but has three drugs in its research pipeline. I spent a day digging into Prurisol, the company's experimental pill to treat psoriasis.
What I found was a cavernous disparity between how Cellceutix describes the Prurisol efficacy and safety data collected to date in psoriasis patients and what the actual data show. (Cellceutix doesn't make it easy to find the real Prurisol data, not surprisingly.)
Cellceutix says a Phase 2 study of Prurisol in psoriasis patients was a success and achieved its primary endpoint. The actual data show Prurisol study failed, unless your threshold for success is met by throwing a dart against a wall and then drawing the bullseye around it.
To get retail investors excited about Cellceutix, Ehrlich compares Prurisol to Otezla, Celgene's (CELG - Get Report) psoriasis pill, expected to deliver $1 billion in sales this year. There is no legitimate comparison to be made between Prurisol and Otezla.
Last September, after Allergan (AGN - Get Report) spent $639 million to acquire Vitae Pharmaceuticals, developer of another experimental psoriasis pill, Ehrlich sent Cellceutix shareholders a letter in which he said the deal, "... exemplifies the premium that the industry is placing on new, oral psoriasis drugs, even those in mid-stage development. I'm not in the business of analysis, but it seems to me that Allergan values VTP-43742 at more than our total market capitalization."
What Ehrlich fails to mention, naturally, is that Vitae collected mid-stage efficacy and safety data on its oral psoriasis drug that blows the doors off everything Cellceutix has on Prurisol.
A simple act of due diligence I like to perform on every drug company is to examine how clinical trial results are characterized. What I'm looking for are discrepancies between what a company says in its press release and its SEC filings. I also make sure companies aren't playing games with the trial design. I want to see reported data match the prospectively defined primary and secondary endpoints.
Cellceutix set off alarm bells almost immediately.
The company's May 24, 2016, press release stated the Phase 2 study of Prurisol in mild to moderate psoriasis patients met its primary endpoint but only at the 200 mg dose.
Odd, because the study was designed with three Prurisol dose groups -- 50 mg, 100 mg and 200 mg -- all compared against a placebo arm.
Here's how Cellceutix reported the Prurisol study results in its press release:
The Phase 2 Prurisol trial, while not powered to demonstrate statistical significance, was conducted to inform any future fully-powered Phase 3 trial(s) that might be merited. As a result, the study's main goal was to provide indications of efficacy, safety and tolerability upon treating patients with mild to moderate plaque psoriasis via oral delivery...
Evaluating the primary endpoint at 84-days (week 12) in the 200mg arm, 35.0% of the patients receiving that dose of Prurisol demonstrated clinically significant improvements compared with 16.7% of patients on placebo only.... Patient responses in the 50mg and 100mg arms were statistically comparable to the placebo arm.
Notice how Cellceutix is spinning the Prurisol data right off the top. The study was not powered for statistical significance? That's the excuse offered by companies that want to declare victory with data that fails to reach statistical significance. Cellceutix also provides response rate data for the 200 mg arm versus placebo but omits the comparable data for the 50 mg and 100 mg Prurisol arms.
My next stop was the SEC's website. Cellceutix did not file an 8-K on the Prurisol Phase 2 data results in May. That's a concern. If the results were material to the company, an 8-K should have been filed.
Cellceutix did manage to file several 8-Ks in the weeks and months following the May 24 Prurisol trial announcement. These included a notice that the company's newly hired chief medical officer had conducted an interview with a contributor from Seeking Alpha. Cellceutix prioritizes stock promotion over clinical data transparency.
The next significant SEC filing from Cellceutix was its 10-K filed on Sept. 13. The annual report characterized the Prurisol Phase 2 study data differently:
On May 24, 2016, the Company released top line data on its Phase 2a FDA trial for orally-administered Prurisol in the treatment of mild to moderate chronic plaque psoriasis. The trial enrolled 115 patients with mild to moderate plaque psoriasis, graded at a score of 2 ("mild") or 3 ("moderate") on the 5-point Investigator's Global Assessment (IGA) scale. The IGA scale ranges from a score of 0 ("clear") to a score of 4 ("severe"). The 12-week trial was structured with four arms, three receiving different dosing regimens of oral Prurisol (50mg, 100mg, 200mg) and one placebo arm. The primary endpoint was a 2-point reduction in the IGA score at Day 84.
The trial achieved its primary endpoint in patients treated with 200mg of oral Prurisol. Among the most severe psoriasis patients participating in the study, those having a baseline IGA score of 3 ("moderate"), the primary endpoint was met in 46.2% of patients who received Prurisol 200mg. These data were derived from analyses of all patients randomized across all 9 participating study sites. [Emphasis mine.]
Hmmm. In the 10-K, Cellceutix claims again that the primary endpoint was met with the 200 mg Prurisol arm, but the actual data reported comes from a subset of these patients, those with baseline IGA scores of 3. [The study enrolled psoriasis patients with baseline IGA scores of 2 and 3.]
When companies report data from the same study in inconsistent ways, start asking questions.
In this case, what was the actual study design? Most importantly, what was the study's primary endpoint? To find out, I checked ClinicalTrials.gov, the government's database of clinical trials. Searching for Prurisol brings up the Cellceutix Phase 2 trial design reported by the company on May 24. Except, here's how the real primary endpoint is described:
The primary efficacy endpoint will be the percentage of subjects with [greater than or equal to] 2 point improvement in IGA rating as defined by visual inspections of patient lesions. Time Frame: 84 days.
In others words, the study was designed to compare the efficacy of all Prurisol patients, pooling the three doses, against a placebo.
Cellceutix never reported that result. The company only disclosed the data from the Prurisol 200 mg arm. I asked Cellceutix CEO Ehrlich for the missing data encompassing all Prurisol-treated patients. He responded but didn't provide me with the information. I asked Chief Medical Officer Arthur Bertolino. He also responded to my request, but like Ehrlich, didn't answer my question.
The Phase 2 study was designed to assess the efficacy of each Prurisol dose group individually as secondary endpoints, although interestingly, measuring the 200 mg dose at 84 days, which is what Cellceutix reported as the primary endpoint, is not even listed as a secondary endpoint.
At this point, I'm pretty sure Cellceutix has been caught blowing smoke to cover up bad Prurisol trial results, but it would be helpful to have the actual data from the study to confirm. I spent some time clicking around Cellceutix's website--and found the data!
Unbeknownst to just about everyone--because the company never publicized it--a presentation of the Prurisol phase 2 data was made on Sept. 19, 2016, at a medical conference in Boston. The slide deck from that presentation was available for download on Cellceutix's site.
That slide deck confirmed my suspicions. I believe Cellceutix withheld important, negative data from the Prurisol Phase 2 study from investors. And the data the company did report was exaggerated, in my opinion.
Cellceutix told investors on May 24 that the study achieved its primary endpoint because 35% of the 200 mg Prurisol patients reported a treatment response compared to a 16.7% response for placebo patients.
But the company failed to explain that this result was calculated only after excluding 29% of the patients from the 200 mg Prurisol arm and 40% of the placebo patients, according to the study presentation made on Sept. 19.
When the missing patients were included in the analysis, the response rate for the 200 mg Prurisol arm fell to 26% versus 13% for placebo. The 13 percentage point difference missed statistical significance by a wide margin, with a p value of 0.3179.
The Sept. 19 presentation slides also explain why Cellceutix was reluctant to report on the response rates for the 50 mg and 100 mg Prurisol arms--both failed to beat placebo.
The response rate for all three Prurisol dose groups pooled together are not spelled out in the Sept. 19 presentation, but it is possible to calculate the number based on the information provided.
The overall response rate for Prurisol-treated patients was 15% compared to 13% for placebo. Obviously, a minuscule difference of two percentage points is meaningless and disappointing, which explains why Cellceutix has avoided providing investors with a complete reporting of the study results.
This lack of transparency extends to Prurisol's safety as well. Here's what Cellceutix told investors on May 24 about the drug's safety data, reported from the Phase 2 study:
Regarding Prurisol's safety profile, only a single Serious Adverse Event (SAE) was reported in the study, that being in the 50mg arm, with the type and the rate of occurrence of additional Adverse Events (AEs) similar and evenly distributed across all the three dosing arms and the placebo arm.
Sounds innocuous? No, it wasn't. That single serious adverse event was actually a serious increase in liver enzymes (a sign of liver toxicity) in a patient treated with the 50 mg dose of Prurisol, according to the data presented by the company on Sept. 19.
Additional patients treated with the higher doses of Prurisol also reported increases in liver enzymes, some greater than two times the upper limit of normal, according to the Sept. 19 presentation of the Phase 2 study results.
Cellceutix has not told investors about the Prurisol-related liver toxicity seen in its Phase II study. This is especially concerning because the company is using higher Prurisol doses (300 mg and 400 mg) in its next Phase 2 study. Prurisol is a prodrug of abacavir, an old HIV drug known to cause serious hypersensitivity reactions in some patients.
I asked Bertolino, Cellceutix's chief medical officer, to explain why the company hasn't disclosed the details of the Phase 2 study more broadly than just dropping a slide presentation onto its website. He responded by sending me links to company press releases that don't include any of the pertinent Prurisol data. He also repeated Cellceutix's claim that the Prurisol study, which enrolled 115 patients, compares favorable to two Phase 3 studies of Celgene's psoriasis drug Otezla that enrolled 1,255 patients.Cellceutix and its CEO have far more pressing issues to deal with than an anonymous Seeking Alpha contributor. When CEOs rant against short sellers, smart investors start digging for hidden problems. More often than not, they'll find some.