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3. Defendants Overhype the Prospects of Kevitrin
During the class period Kevetrin was in the very early stages of development, Phase 1 of
the FDA process. According to the National Institute of Health’s FAQ on clinical trials, in a Phase
1 trial “[r]esearchers test a new drug or treatment in a small group of people for the first time to
evaluate its safety, determine a safe dosage range, and identify side effects.” Declaration of
Jonathan Stern, Exhibit 3. Thus, Phase 1 trials are not meant to test efficacy. In order to determine
whether the drug was having any effect at all, however, the Kevetrin trial measured whether
Kevetrin treatments of different amounts were associated with the activation of a protein called
P21. Defendants, however, could not resist the opportunity to prematurely overhype Kevetrin.
They claimed that activation of P21 would reveal that Kevetrin was treating cancer. Ehrlich
claimed that if P21 activation occurs “we think that we have hit a home run.” ¶30. Defendants
also repeatedly referred to P21 as a biomarker. ¶¶31-32. However, this is a misleading phrase
because the term “biomarker” in a clinical trial refers to a surrogate to a clinically meaningful
outcome. ¶34. Thus, by claiming that P21 activation was a biomarker, Defendants were not merely
suggesting that Kevetrin was having an effect, but that it was effectively treating cancer.
Defendants also claimed during the class period that they had essentially eliminated the tumor of
a Stage 4 ovarian cancer patient. ¶35. In reality, however, that patient’s treatment was discontinued
by their doctor after tests indicated that the cancer returned. ¶36.
4. Defendants hid the Massive Risks created by Purchasing the rights to
Brilacidin
On September 9, 2013, the Company issued a press release announcing the purchase of
Brilacidin from PolyMedix, Inc. pursuant to an asset purchase agreement approved by the
Bankruptcy Court for the District of Delaware. ¶37. However, in the 10-K dated September 30,
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 11 of 36
7
2013, there was no disclosure that the acquisition of Brilacidin created a new material risk of
Cellceutix’s inability to fund expensive clinical trials to get Brilacidin through FDA approval, nor
were such risks ever disclosed during the class period. Id. In reality, this purchase created two new
substantial material risks, both due to the fact that Brilacidin was close to completing Phase II and
entering Phase III of the FDA approval process. Id. First, Brilacidin massively increased the need
for fundraising in the short term. Id. Defendants spent $632,805 and $1,509,881 for research and
development expenses, in the fiscal years ending June 30, 2012 and 2013, respectively. Id.
However, to obtain Phase III approval for Brilacidin, Cellceutix will be required to spend well in
excess of $100 million in research and development expenses over two to four years to complete
the two phase 3 trials necessary for FDA approval. This will require greatly increased fundraising
by Cellceutix, which it is unlikely to be able to complete. Id. Defendants disclosed, in their 10-K
for the period ended June 30, 2015, filed September 11, 2015, that the FDA is requiring them to
conform to its October 2013 guidance regarding approval for ABSSSI treatments. Id. This
guidance indicates that, in order to obtain approval, Cellceutix would be required to perform two
large Phase III trials. Id. In the FDA’s example, these two trials would require 310 persons in each
branch of a two branch trial, for 1240 individuals recruited in total. As Cellceutix admitted, in an
article published by the Boston Business Journal on October 30, 2015, they will be recruiting 1400
patients for their two Phase 3 trials. By contrast, Cellceutix has only completed two clinical trials
to date, with a total of 233 subjects. For purposes of comparison, Durata Pharmaceuticals recently
obtained approval for Dalbavancin, an antibiotic to treat ABSSSI. Id. Dalbavancin is very similar
to Brilacidin and if Brilacidin were ever approved, Dalbavancin would directly compete with it.
Id. The approval process for Dalbavancin, including the phase 3 clinical trials required, was
substantially the same as that required by the FDA for the approval of Brilacidin. Durata, which
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 12 of 36
8
had no ongoing projects other than developing Dalbavancin, spent $145,605,000 over four years
developing dalbavancin, using two Phase 3 studies with a total of 1312 subjects. Id. Since its
inception in 2007, Cellceutix has not been able to raise more than approximately $30 million from
investors in total. Defendants concealed the costs required to develop and obtain approval for
Brilacidin and the substantial risk that Cellceutix will not be able to persuade investors to fund the
$145 million required to complete Brilacidin’s phase 3 trials. Id.
Defendants also failed to disclose the material risk of their undertaking a Phase 3 study
because none of Defendants’ officers had experience in obtaining Phase 3 approval, until admitting
to it in the Form 10-K filed September 11, 2015, when they stated that “[w]e have not previously
conducted a Phase 3 or later stage clinical trial such as the Phase 3 clinical trials planned for our
most advanced drug candidate.” ¶38. This omission was material and should have been disclosed
in Defendants 10-Ks that were filed in September of 2013 and 2014 because Defendants
inexperience with Phase 3 trials raised a material risk with respect to the hiring of personnel,
Defendants’ ability to realistically budget for, and manage, the clinical trials, the likelihood of
future investors agreeing to raise capital, and whether Defendants would make mistakes in the
drug development process due to their inexperience. Id.
C. The Truth is Revealed
On August 6, 2015, SeekingAlpha.com published a report by the short seller Mako
Research on the Company (“Mako Report”). ¶39. The Mako Report asserts that Defendant Menon
did not earn his PhD in Pharmacology at Harvard University as claimed. ¶40. The Mako Report
asserts that Brilacidin is not effective in treating gram negative bacteria. ¶41. The Mako Report
also asserts that P-21, being used to evaluate the effectiveness of Kevetrin, is not a valid biomarker,
noting that recent evidence has shown that P21 activity does not correlate with cancer prognosis.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 13 of 36
9
¶42. The Mako Report went on to state that “Cellceutix has made misleading claims about cancer
regression from patients who discontinued the trial” and stated that Cellceutix’s claim to have
caused tumor elimination in a patient in the Phase 1 trial appeared to be misleading. ¶43. On this
news, shares of Cellceutix fell $0.73 per share or approximately 30% from its previous closing
price to close at $1.71 per share on August 6, 2015. ¶44.
The following day, Cellceutix issued a press release responding to the allegations in the
Mako Report, but in doing so contradicted, and confirmed as false, several of Defendants’ previous
statements that Mako had identified as false. ¶45. Defendants admitted “Brilacidin is for treating
gram positive infections such as acute bacterial skin and skin structure infections (ABSSSI) caused
by Staphylococcus aureus, including methicillin-resistant strains (MRSA), and was not developed
for the treatment of Gram-negative infections. … [and] Brilacidin is not designed for use against
Gram negatives.” Id. This contradicts prior statements that Brilacidin is effective against both gram
positive and gram negative bacteria. Id. Cellceutix’s press release also stated “While patients with
oral mucositis are at risk of infection through open ulcers, the disease is not caused by infection.
Accordingly, brilacidin’s efficacy in oral mucositis is not based on its antibiotic properties. Rather,
it is based on its immunomodulatory properties. Indeed, positive data from reliable animal models
of oral mucositis (without evidence of concomitant bacterial infection) support an
immunomodulatory2
, rather than antimicrobial, mechanism of action.” ¶46. This contradicts
Defendants’ previous statements that Brilacidin’s efficacy in treating oral mucositis is due in part
to its purported antibacterial properties. Cellceutix’s press release also admitted that a cancer
patient who was earlier described as having achieved significant tumor reduction due to treatment
with Kevetrin was discontinued from the trial at a physician’s recommendation because her cancer
2
“Immunomodulary” refers to the property of altering (i.e. modulating) the immune system’s functioning.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 14 of 36
10
had returned. ¶47.
On September 11, 2015, Defendants issued a Form 10-K for the period ending June 30,
2015. That form 10-K disclosed that Defendants do not have experience with Phase 3 clinical
trials. ¶48. “We have not previously conducted a Phase 3 or later stage clinical trial such as the
Phase 3 clinical trials planned for our most advanced drug candidate [Brilacidin].” Id. The 10-K
also revealed that during the meeting with the FDA, it was determined that Cellceutix would be
required to perform two Phase 3 ABSSSI studies that met the FDA Guidance issued in October
2013. Id. This guidance requires that each wing of each study have at least 310 individuals, for a
total of at least 1240 individuals enrolled across both studies. Id. Defendants later disclosed to the
Boston Business Journal that in fact the two studies would have a total of 1,400 patients. Id. As
noted above, a similar set of studies cost Durata Pharmaceuticals $145,605,000. Id. Therefore,
when the 10-K was released, investors learned that a Phase 3 trial would require the raising of
drastically more money, and that Defendants were not experienced in conducting such trials. Id.
Over the following three trading days, shares of Cellceutix fell $.29 per share or approximately
15.5% from its previous closing price to close at $1.58 per share on September 15, 2015. ¶49.
III. ARGUMENT
A. Legal Standard
Motions to dismiss are generally viewed with disfavor. Freudenberg v. E*Trade Fin.
Corp., 712 F. Supp. 2d 171, 178 (S.D.N.Y. 2010). When evaluating the Complaint, the Court must
accept all facts alleged therein as true and must draw all inferences in favor of plaintiffs. In re
DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 692 (2d Cir. 2009). The factual
allegations need only “be enough to raise a right to relief above te the speculative level,” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 15 of 36
11
To state a claim under §10(b) of the Exchange Act, a plaintiff must allege that the
defendant, in connection with the purchase or sale of a security, made a materially false or
misleading statement or omitted a material fact, with scienter, and that reliance on defendant’s
statements caused injury to the plaintiff. Operating Local 649 Annuity Trust Fund v. Smith Barney
Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010). As this case arises under the PSLRA, Plaintiff must
specify each allegedly false statement, the reasons why the statement is misleading, and, if made
on information and belief, state with particularity all facts on which that belief is formed.” 15
U.S.C. § 78u-4. Scienter may be established by showing either: “(1) that defendants had the motive
and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior
or recklessness.” Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 586 (S.D.N.Y. 2011) (internal citations
omitted).
3. Defendants Overhype the Prospects of Kevitrin
During the class period Kevetrin was in the very early stages of development, Phase 1 of
the FDA process. According to the National Institute of Health’s FAQ on clinical trials, in a Phase
1 trial “[r]esearchers test a new drug or treatment in a small group of people for the first time to
evaluate its safety, determine a safe dosage range, and identify side effects.” Declaration of
Jonathan Stern, Exhibit 3. Thus, Phase 1 trials are not meant to test efficacy. In order to determine
whether the drug was having any effect at all, however, the Kevetrin trial measured whether
Kevetrin treatments of different amounts were associated with the activation of a protein called
P21. Defendants, however, could not resist the opportunity to prematurely overhype Kevetrin.
They claimed that activation of P21 would reveal that Kevetrin was treating cancer. Ehrlich
claimed that if P21 activation occurs “we think that we have hit a home run.” ¶30. Defendants
also repeatedly referred to P21 as a biomarker. ¶¶31-32. However, this is a misleading phrase
because the term “biomarker” in a clinical trial refers to a surrogate to a clinically meaningful
outcome. ¶34. Thus, by claiming that P21 activation was a biomarker, Defendants were not merely
suggesting that Kevetrin was having an effect, but that it was effectively treating cancer.
Defendants also claimed during the class period that they had essentially eliminated the tumor of
a Stage 4 ovarian cancer patient. ¶35. In reality, however, that patient’s treatment was discontinued
by their doctor after tests indicated that the cancer returned. ¶36.
4. Defendants hid the Massive Risks created by Purchasing the rights to
Brilacidin
On September 9, 2013, the Company issued a press release announcing the purchase of
Brilacidin from PolyMedix, Inc. pursuant to an asset purchase agreement approved by the
Bankruptcy Court for the District of Delaware. ¶37. However, in the 10-K dated September 30,
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 11 of 36
7
2013, there was no disclosure that the acquisition of Brilacidin created a new material risk of
Cellceutix’s inability to fund expensive clinical trials to get Brilacidin through FDA approval, nor
were such risks ever disclosed during the class period. Id. In reality, this purchase created two new
substantial material risks, both due to the fact that Brilacidin was close to completing Phase II and
entering Phase III of the FDA approval process. Id. First, Brilacidin massively increased the need
for fundraising in the short term. Id. Defendants spent $632,805 and $1,509,881 for research and
development expenses, in the fiscal years ending June 30, 2012 and 2013, respectively. Id.
However, to obtain Phase III approval for Brilacidin, Cellceutix will be required to spend well in
excess of $100 million in research and development expenses over two to four years to complete
the two phase 3 trials necessary for FDA approval. This will require greatly increased fundraising
by Cellceutix, which it is unlikely to be able to complete. Id. Defendants disclosed, in their 10-K
for the period ended June 30, 2015, filed September 11, 2015, that the FDA is requiring them to
conform to its October 2013 guidance regarding approval for ABSSSI treatments. Id. This
guidance indicates that, in order to obtain approval, Cellceutix would be required to perform two
large Phase III trials. Id. In the FDA’s example, these two trials would require 310 persons in each
branch of a two branch trial, for 1240 individuals recruited in total. As Cellceutix admitted, in an
article published by the Boston Business Journal on October 30, 2015, they will be recruiting 1400
patients for their two Phase 3 trials. By contrast, Cellceutix has only completed two clinical trials
to date, with a total of 233 subjects. For purposes of comparison, Durata Pharmaceuticals recently
obtained approval for Dalbavancin, an antibiotic to treat ABSSSI. Id. Dalbavancin is very similar
to Brilacidin and if Brilacidin were ever approved, Dalbavancin would directly compete with it.
Id. The approval process for Dalbavancin, including the phase 3 clinical trials required, was
substantially the same as that required by the FDA for the approval of Brilacidin. Durata, which
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 12 of 36
8
had no ongoing projects other than developing Dalbavancin, spent $145,605,000 over four years
developing dalbavancin, using two Phase 3 studies with a total of 1312 subjects. Id. Since its
inception in 2007, Cellceutix has not been able to raise more than approximately $30 million from
investors in total. Defendants concealed the costs required to develop and obtain approval for
Brilacidin and the substantial risk that Cellceutix will not be able to persuade investors to fund the
$145 million required to complete Brilacidin’s phase 3 trials. Id.
Defendants also failed to disclose the material risk of their undertaking a Phase 3 study
because none of Defendants’ officers had experience in obtaining Phase 3 approval, until admitting
to it in the Form 10-K filed September 11, 2015, when they stated that “[w]e have not previously
conducted a Phase 3 or later stage clinical trial such as the Phase 3 clinical trials planned for our
most advanced drug candidate.” ¶38. This omission was material and should have been disclosed
in Defendants 10-Ks that were filed in September of 2013 and 2014 because Defendants
inexperience with Phase 3 trials raised a material risk with respect to the hiring of personnel,
Defendants’ ability to realistically budget for, and manage, the clinical trials, the likelihood of
future investors agreeing to raise capital, and whether Defendants would make mistakes in the
drug development process due to their inexperience. Id.
C. The Truth is Revealed
On August 6, 2015, SeekingAlpha.com published a report by the short seller Mako
Research on the Company (“Mako Report”). ¶39. The Mako Report asserts that Defendant Menon
did not earn his PhD in Pharmacology at Harvard University as claimed. ¶40. The Mako Report
asserts that Brilacidin is not effective in treating gram negative bacteria. ¶41. The Mako Report
also asserts that P-21, being used to evaluate the effectiveness of Kevetrin, is not a valid biomarker,
noting that recent evidence has shown that P21 activity does not correlate with cancer prognosis.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 13 of 36
9
¶42. The Mako Report went on to state that “Cellceutix has made misleading claims about cancer
regression from patients who discontinued the trial” and stated that Cellceutix’s claim to have
caused tumor elimination in a patient in the Phase 1 trial appeared to be misleading. ¶43. On this
news, shares of Cellceutix fell $0.73 per share or approximately 30% from its previous closing
price to close at $1.71 per share on August 6, 2015. ¶44.
The following day, Cellceutix issued a press release responding to the allegations in the
Mako Report, but in doing so contradicted, and confirmed as false, several of Defendants’ previous
statements that Mako had identified as false. ¶45. Defendants admitted “Brilacidin is for treating
gram positive infections such as acute bacterial skin and skin structure infections (ABSSSI) caused
by Staphylococcus aureus, including methicillin-resistant strains (MRSA), and was not developed
for the treatment of Gram-negative infections. … [and] Brilacidin is not designed for use against
Gram negatives.” Id. This contradicts prior statements that Brilacidin is effective against both gram
positive and gram negative bacteria. Id. Cellceutix’s press release also stated “While patients with
oral mucositis are at risk of infection through open ulcers, the disease is not caused by infection.
Accordingly, brilacidin’s efficacy in oral mucositis is not based on its antibiotic properties. Rather,
it is based on its immunomodulatory properties. Indeed, positive data from reliable animal models
of oral mucositis (without evidence of concomitant bacterial infection) support an
immunomodulatory2
, rather than antimicrobial, mechanism of action.” ¶46. This contradicts
Defendants’ previous statements that Brilacidin’s efficacy in treating oral mucositis is due in part
to its purported antibacterial properties. Cellceutix’s press release also admitted that a cancer
patient who was earlier described as having achieved significant tumor reduction due to treatment
with Kevetrin was discontinued from the trial at a physician’s recommendation because her cancer
2
“Immunomodulary” refers to the property of altering (i.e. modulating) the immune system’s functioning.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 14 of 36
10
had returned. ¶47.
On September 11, 2015, Defendants issued a Form 10-K for the period ending June 30,
2015. That form 10-K disclosed that Defendants do not have experience with Phase 3 clinical
trials. ¶48. “We have not previously conducted a Phase 3 or later stage clinical trial such as the
Phase 3 clinical trials planned for our most advanced drug candidate [Brilacidin].” Id. The 10-K
also revealed that during the meeting with the FDA, it was determined that Cellceutix would be
required to perform two Phase 3 ABSSSI studies that met the FDA Guidance issued in October
2013. Id. This guidance requires that each wing of each study have at least 310 individuals, for a
total of at least 1240 individuals enrolled across both studies. Id. Defendants later disclosed to the
Boston Business Journal that in fact the two studies would have a total of 1,400 patients. Id. As
noted above, a similar set of studies cost Durata Pharmaceuticals $145,605,000. Id. Therefore,
when the 10-K was released, investors learned that a Phase 3 trial would require the raising of
drastically more money, and that Defendants were not experienced in conducting such trials. Id.
Over the following three trading days, shares of Cellceutix fell $.29 per share or approximately
15.5% from its previous closing price to close at $1.58 per share on September 15, 2015. ¶49.
III. ARGUMENT
A. Legal Standard
Motions to dismiss are generally viewed with disfavor. Freudenberg v. E*Trade Fin.
Corp., 712 F. Supp. 2d 171, 178 (S.D.N.Y. 2010). When evaluating the Complaint, the Court must
accept all facts alleged therein as true and must draw all inferences in favor of plaintiffs. In re
DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 692 (2d Cir. 2009). The factual
allegations need only “be enough to raise a right to relief above te the speculative level,” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 15 of 36
11
To state a claim under §10(b) of the Exchange Act, a plaintiff must allege that the
defendant, in connection with the purchase or sale of a security, made a materially false or
misleading statement or omitted a material fact, with scienter, and that reliance on defendant’s
statements caused injury to the plaintiff. Operating Local 649 Annuity Trust Fund v. Smith Barney
Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010). As this case arises under the PSLRA, Plaintiff must
specify each allegedly false statement, the reasons why the statement is misleading, and, if made
on information and belief, state with particularity all facts on which that belief is formed.” 15
U.S.C. § 78u-4. Scienter may be established by showing either: “(1) that defendants had the motive
and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior
or recklessness.” Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 586 (S.D.N.Y. 2011) (internal citations
omitted).
