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With Its Stock Trading Down, CytRx Issues UMass Statement on Ethics Inquiry

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In a bid to allay concerns about a state inquiry into its RNAi licensing agreements with the University of Massachusetts Medical School, CytRx released this week a statement from UMMS deputy chancellor Richard Stanton stating that the deal in question was not inappropriate in the university’s view.

In May, CytRx reported in its first-quarter financial filing with the US Securities and Exchange Commission that the Massachusetts State Ethics Committee had launched “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” (see RNAi News, 5/21/2004).

As reported by RNAi News, the inquiry centered on CytRx’s April 2003 licensing from UMMS RNAi intellectual property in the areas of obesity, type II diabetes, cancer, and amyotrophic lateral sclerosis. As it turned out, the UMMS-employed freelance technology consultant that helped connect the university with the company was also working for CytRx at the time, a fact known to UMass’ licensing office director Joseph McGuirl.

According to Mark Shelton, associate vice chancellor of university relations at UMass, McGuirl left the university a few months later after the potential conflict of interest became known to others at UMass. To resolve the issue, UMMS and CytRx agreed that the consultant’s fee be placed in escrow until it can be returned to the university, he told RNAi News in May.

The university’s internal conflicts committee approved the settlement and determined that the licensing deals struck with CytRx were fair, McGuirl said, but UMMS decided to take the added precaution of asking the Massachusetts State Ethics Committee to review the situation and approve the proposed resolution.

Shelton told RNAi News this week that as far as the university knows, the ethics committee — which has sought assistance on the matter from a law firm with intellectual property expertise — is still conducting its review. He added that UMMS does not have a time frame for when it expects the committee to make a final decision.

The matter was put before the ethics committee “with the hope, but without an explicit expectation … that some sort of action [would be taken] in a fairly expeditious manner,” he said. “Given that the ethics commission has not, at least as of this time, said anything about this [situation], the university wanted to make sure that it was clear, in its own mind at least, that the agreements we had with CytRx were fair. We wanted to reinforce with CytRx that, from the university’s point of view, the agreements were in full force [and] that the university [wasn’t] disadvantaged in any way,” Shelton added.

As such, UMMS and CytRx agreed that the university would draft a letter to this effect and send it to the company with the understanding that it would be made public, Shelton said. “The [intent] … was to have it be a formal reference by the medical school that this was what our position was,” he said.

The letter from Stanton, released by CytRx in a press release, states in part: “The licensing transactions represented tremendous value in cash, equity, and milestone payments for the university. …

“We at the medical school appreciate the positive, cooperative and productive manner in which CytRx has worked with us to resolve a conflict of interest issue arising from our common employment of a consultant at the time of our original licensing deal in April 2003,” the letter read. “Working together once the problem was identified, we were able to reach a speedy agreement to rectify the situation (placing the consultant’s fee from CytRx of $53,000 cash and 100,000 shares of CytRx stock in escrow pending its forfeiture to the University). …

“Given the complexity of these licensing transactions and their atypical subject matter for a state ethics commission to review, and the commission’s need to obtain competent and experienced independent expertise, it is not surprising that the commission review has taken longer than any of us would prefer,” it added. “We remain absolutely confident that all of the University of Massachusetts Medical School-CytRx transactions provided excellent value for the university and are certain that the expertise retained by the state ethics commission will concur with that judgment. We are also confident that the agreed resolution the University and CytRx reached, as approved by the university’s conflicts committee, appropriately resolved the conflict question and we see no reason the state ethics commission should not concur as well.”

According to Shelton, the university “agreed with CytRx that this would be of interest to people who had seen general references to the ethics commission perhaps looking into this. So, it was appropriate … to make sure interested members of the press and other interested communities would have access to this information.”

When asked if these interested communities included the CytRx investment community — of which UMMS is a member, with roughly 1.8 million shares of CytRx received through its agreements with the company — Shelton said that “virtually everything that they do is of potential interest to the shareholders.”

As of midday Thursday, shares of CytRx were trading around $1.20, having recently fallen to a 52-week low of $0.97.

“Because investors saw the generalized reference CytRx made originally [in its SEC filing] that the ethics commission had this [situation] referred to them, we thought the same community should be aware that there was this reinforcement that from the medical school’s point of view the agreements were appropriate,” Shelton said.

Steven Kriegsman, president and CEO of CytRx, told RNAi News that “the motivation [to issue the Stanton statement] was to update the investment community. The investment community wanted a response and our major shareholders wanted a response, so at the proper time, when things were up to date, we were able to respond as a result of UMass sending us this letter.”

Kriegsman denied that the decision to draft the Stanton letter was made jointly by the university and CytRx, adding that “they put together the letter [and] we’re glad they put it together.” He did confirm that UMass approved CytRx’s press release before its issuance, pursuant to the terms of their agreements.

— DM

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