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CytRx Files Long-Delayed Q1 Financials, Named in Ethics Probe over UMass Deal

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CytRx released this week its long-delayed first-quarter financial results, apparently having settled the accounting issues that had held up the regulatory filing (see RNAi News, 4/23/2004). And while this would seem to be good news for the Los Angeles-based RNAi drug developer, which has seen its stock face delisting while hovering near a 52-week low, it appears that the company is not out of the woods yet.

According to CytRx’s first-quarter financial filing with the US Securities and Exchange Commission, dated May 17, the company has “recently been notified by the Massachusetts State Ethics Committee that it has initiated a preliminary inquiry into whether [the company’s] previous retention of a consultant who introduced [the company] to [the University of Massachusetts Medical School] constituted an improper conflict of interest under Massachusetts’ ethics laws.”

In April 2003, after merging with Global Genomics and deciding to change its focus, CytRx acquired from UMMS the exclusive rights to RNAi intellectual property in the areas of obesity, type II diabetes, cancer, and amyotrophic lateral sclerosis. Reinvented as an RNAi drugs firm, CytRx later struck a number of research and development deals with the institution and has UMass researchers on its scientific advisory board.

According to Mark Shelton, associate vice chancellor of university relations at UMass, the conflict of interest issue stems from the fact that the “freelance technology consultant” CytRx hired to assist it in identifying technology licensing opportunities had previously been employed by UMass to help find licensees for intellectual property developed at the university. This consultant “was, indeed, the person who connected the medical school with CytRx” in the summer of 2003, he added.

It “was known to the director of our licensing office [Joseph McGuirl] … that this freelance consultant was working for CytRx,” but to no one else at the university, Shelton said. Although the consultant “wasn’t involved in any sort of negotiation [and] wasn’t involved in the agreements or the execution of the agreements,” he said that as soon as it became known to someone other than McGuirl that the consultant had been employed by both CytRx and UMass, the university took several steps to deal with the potential conflict of interest.

“The biggest [step] was that we reached a [resolution] agreement with CytRx that the money that the consultant would be due [from CytRx] would be held in escrow — our position was that he should forfeit it,” Shelton said. He added that the agreement calls for the money to ultimately go to UMMS, but declined to specify the dollar amount of the payment.

UMMS also had the university’s internal conflicts committee — which is empowered by the Massachusetts state legislature with the “statutory authority to manage any potential conflicts [of interest], the disclosure of them, and any sort of sanctions” on the university level — review the decision to stop payment to the consultant and determine whether the licensing deals struck with CytRx were fair, he said.

Shelton said that while the committee determined late last summer “that [the consultant’s employment] didn’t have any impact on the agreement that the university made with CytRx,” the issue was voluntarily brought to the attention of the Massachusetts State Ethics Committee.

“We wanted to make sure that there was no possibility of any sort of added layer of complexity around the ability of the university to license the fruits of the [RNAi-related] research of the scientists here,” he said.

The Massachusetts State Ethics Committee was asked to review the situation and approve the proposed resolution, Shelton said. He said that UMass does not have a date when it expects the committee to render a decision, but noted that the committee has asked for an outside review of certain aspects of the CytRx licensing arrangement.

CytRx president and CEO Steven Kriegsman told RNAi News that he could not comment on the situation beyond what is stated in the company’s SEC filings, but when asked if he was aware of the inquiry said, “I don’t know anything about it.”

In its quarterly report, CytRx states that “since the inquiry is at a very preliminary stage, it is inherently difficult to predict whether the Massachusetts Commission will decide to initiate any formal proceedings, whether these proceedings will be directed at [CytRx], or whether [the company] will be found in any such proceedings to have violated any Massachusetts ethics laws,” CytRx said in the SEC filing.

The company noted that its legal costs associated with the inquiry remain uncertain, as do the penalties and sanctions the commission might impose.

Carol Carson, a spokeswoman for the Massachusetts Commission, told RNAi News that she would not “confirm or deny that we’ve received any allegations or that we’re conducting any investigation.”

A source familiar with the situation told RNAi News that the consultant employed by CytRx and UMass is Rip Grossman, founder and president of Kansas City, Mo.-based Rip Grossman & Associates.

Grossman declined to comment, referring RNAi News to his lawyer, Tim Burke. Telephone messages left with Burke’s office by RNAi News were not returned.

Efforts to contact McGuirl, who Shelton said left the university last year, were unsuccessful. Shelton declined to comment further on the circumstances surrounding McGuirl’s departure, citing university policy.

Separate Settlement Reached, R&D Spending Up

Separately in the quarterly report, CytRx notes that on April 5 it was served with a breach of contract lawsuit filed by a former independent contractor providing the company with public relations services. The suit was seeking damages in excess of $700,000, CytRx noted.

The company said that it reached an agreement in principle this month to settle the suit by issuing the plaintiff 200,000 shares of CytRx common stock and a payment of $50,000. The documentation related to this settlement is being prepared, said CytRx.

As to its financial results — for the first quarter, CytRx reported a surge in research and development spending to roughly $1.4 million from $2,500 in the same period 2003.

CytRx reported a first-quarter 2004 net loss of about $3.8 million, up from $914,000 in the first-quarter a year earlier.

Cash and short-term investments totaled roughly $10 million as of March 31.

— DM

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