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Transgenomic Sues Power3 for Libel, Slander, Breach of Contract in Protein Biomarker Deal

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This story originally ran on Feb. 23.

Transgenomic this week sued Power3 Medical Products, alleging breach of contract over a deal to market Power3's biomarker tests for neurodegenerative diseases.

The suit, filed in the US District Court in Nebraska, also accused Power3 of slander and libel, and of making "false representations" about its tests in order to "induce" Transgenomic into its marketing agreement with Power3.

Transgenomic said it has suffered more than $520,000 in damages. According to the company a press release issued by Power3 earlier this month terminating their contract and accusing Transgenomic of breach of contract and breach of confidentiality provisions caused Transgenomic's stock to fall 9 percent and lose more than $2 million of its market capitalization.

Transgenomic is asking the court to prohibit Power3 from continuing to defame it, as well as damages to be determined during trial, attorney's fees, and other expenses.

The lawsuit stems from an agreement Transgenomic and Power3 penned last year that gave Transgenomic exclusive rights to protein biomarkers from Power3, including those comprising its lead test NuroPro for Alzheimer's and Parkinson's diseases.

In return, Transgenomic, based in Omaha, Neb., would pay Power3 upfront licensing fees, milestone payments, and royalties, and provide development funding and resources. The two firms planned to offer NuroPro in Transgenomic's CLIA-certified molecular diagnostics laboratory.

This month, however, Power3, headquartered in The Woodlands, Texas, terminated the deal, saying Transgenomic had failed to complete its first commercial sale of a licensed product within 12 months of the date of the agreement, as required. It added that Transgenomic was in breach of confidentiality provisions of the agreement. The termination would take effect in 90 days.

Power3 officials did not respond to a request for an interview. Transgenomic CEO Craig Tuttle declined to comment but said earlier in the week that the company would be issuing a statement within the next few days.

As of Friday, it had not.

Earlier this month, Power3 announced it was acquiring stem cell technology firm StemTroniX in an all-stock deal. After completion of the deal, StemTroniX, based in Huntsville, Texas, will be a subsidiary of Power3.

It is unclear how or if the litigation would affect the StemTroniX deal.

In its lawsuit, Transgenomic fired back at Power3, alleging it terminated the deal without justification and attempted to license products covered under their agreement to other parties, therefore violating it.

Transgenomic also alleges that when Power3 first approached Transgenomic about a partnership, in late 2008, it provided "fraudulent" data that represented NuroPro's sensitivity and specificity far higher than they actually were at the time.

According to the complaint, in January 2009, less than a week before their deal was finalized, Power3 presented data to Transgenomic touting NuroPro's specificity and sensitivity at 100 percent for Alzheimer's disease. The company achieved those results by using panels of 57 and 33 biomarkers that Power3 had developed.

In addition, Power3 said the test had a sensitivity of 94.9 percent and a specificity of 95.5 percent for Parkinson's, based on 57 of Power3's biomarkers, and a sensitivity of 94.9 percent and sensitivity of 95.4 percent, based on 21 of its biomarkers.

According to Transgenomic's suit, this data "was crucial" to its decision to enter into the agreement with Power3 because "it portrayed the performance of the NuroPro technology as superior to similar biomarker tests available or in development by other companies."

However, Transgenomic alleges that Power3's data were not from cross-validation but from resubstitution results, which are attained by analyzing "each member of the database against the entire database," Transgenomic said in its lawsuit. According to the company, resubstitution "typically underestimates error rates, whereas cross-validation produces an unbiased error estimate of test performance in a clinical setting. Cross-validation results are more clinically relevant than resubstitution results."

When presenting his company's results, Ira Goldknopf, Power3's president and chief scientific officer, had "failed to disclose that the results he reported were, in fact, resubstitution results, not cross-validation results, and thus not a reflection of true test performance," according to the lawsuit.

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Subsequent to the agreement, Transgenomic tried and failed to validate Power3's results. But using Power3's database, Transgenomic was later able to attain a "clinically relevant performance result" of 80 percent sensitivity and 70 percent specificity for Parkinson's and 61 percent sensitivity and 72 percent specificity for Alzheimer's — far below Power3's original figures.

The difference in results is important because based on Transgenomic's results, NuroPro may not have any clinical use. According to the company, the "gold standard" for dementia and cognitive impairment is the Mini Mental Status Examination. Using MMSE, neurologists can diagnose Alzheimer's and Parkinson disease with an accuracy of 80 percent, and for clinicians to be interested in any new test, such as NuroPro, its sensitivity and specificity would need to exceed that accuracy, Transgenomic said.

Transgenomic added that it showed data to Power3 this past January indicating it was ignoring cross-validation results in favor of resubstitution figures. About a week after presenting its data, though, Goldknopf "denied knowledge of the cross-validation results" to Transgenomics' chief scientific officer.

"This statement was contrary to Goldknopf's statement on Jan. 5, 2009, [made] in a weekly meeting" with Transgenomic officials "that the Transgenomic database could not be used for a commercial launch of NuroPro because it produced poor cross-validation results."

Transgenomic's suit also accuses Power3 of at least downplaying any cross-validation results because it claims the company knew those figures painted a different picture of the NuroPro test.

In its suit, Transgenomic said it had asked Power3 for an explanation of the discrepancies between the results, but had received none.

Last October, Power3 sent an employee to Transgenomic's offices to perform a statistical analysis on Transgenomic's database and to train Transgenomic personnel in Power3's protocols.

According to Transgenomic, the employee "reported several sets of statistical results for Transgenomic's database, all showing greater than 90-percent sensitivity and specificity using resubstitution results," it said in its complaint.

Additionally, the employee told Transgenomic employees to use only the resubstitution results and "ignore the cross-validation results because 'the results are worse, so we ignore those.'"

Spot the Flaw

In its suit, Transgenomic also cited other problems it encountered with the NuroPro technology. It said that in order to validate the technology, it needed to resolve conflicting information from Power3 about eight spots in 2D gels that represent protein biomarkers.

Proof of spot locations, identification of all biomarkers, and "the exact panels of biomarkers and algorithms used to perform" the tests that Transgenomic licensed are necessary in order for it to develop standards, validate protocols, and "establish a clinical test for the Reference Laboratory Services," the company said.

Power3, however, "has failed and refused to provide the data," Transgenomic said in its suit.

On one 2D gel spot, "5302," Transgenomic said it pointed out to Power3 discrepancies in the location of the spot as described in a standard operating procedure document published by Power3, in manuscripts published by the company, and "in the routine analysis of datasets" conducted by Power3 employees.

Transgenomic said it has repeatedly asked for the original experiments and spot analyses "as proof of the indisputable locations of all of Power3's biomarker spots," but has received none from Power3.

As of the filing of its lawsuit, Transgenomic said it has paid Power3 a license execution fee of $100,000; development fees of more than $107,000 to support clinical validation of Power3's tests; and a $15,000 milestone payment. It also has spent more than $300,000 "in connection with obligations" under the agreement.

In addition to saying Power3's results as originally presented to Transgenomic were clinically irrelevant and misrepresentative, Transgenomic is alleging Power3 has slandered and libeled the company.

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As part of the two companies' agreement, Banner Sun Health Institute was to provide Transgenomic clinical blood samples for validation and further development of Power3's tests. Power3 had earlier contracted with Banner for such services.

Some time before terminating Power3's agreement with Transgenomic, Goldknopf and Helen Park, Power3's interim CEO, separately called a Banner representative and "told him that Transgenomic was not conducting scientifically sound research, it did not know what it was doing, and other derogatory statements and falsehoods," Transgenomic claimed in its lawsuit.

As a result, Banner has stopped sending clinical samples to the company "and Transgenomic's progress to continue development of the NuroPro assay is completely halted," Transgenomic said.

On Feb. 3, Power3 also posted a press release on its website and filed a document with the US Securities and Exchange Commission announcing the termination of its agreement with Transgenomic. In both documents, Power3 said it ended the deal because Transgenomic did not sell the first licensed product within a 12-month period as required, and had therefore violated confidentiality agreements.

Transgenomic denies both allegations.

The day Power3 posted its press release and filed its SEC document, Transgenomic's stock fell 9 percent. As of the close of market on Feb. 23, its share price was up nearly 8 percent at $0.70, compared to its $0.65 close on Feb. 2, the day before Power3 made the documents public.

"Power3's actions in publishing [its SEC document] and press release, falsely and wrongly accusing Transgenomic of breaching the agreement by not making the first sale and disclosing confidential agreement were done intentionally and maliciously to harm Transgenomic's reputation and goodwill," Transgenomic said in its complaint.

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