Large shareholder group calls for a board overhaul at pharma company CytoDyn

Business: CytoDyn is a late-stage biotechnology company. The company focuses on developing treatments for multiple therapeutic indications based on leronlimab, a novel humanized monoclonal antibody targeting the CCR5 receptor. Its leronlimab is in a class of therapeutic monoclonal antibodies designed to address unmet medical needs in the areas of human immunodeficiency virus (HIV), cancer, immunology, and novel coronavirus disease (Covid-19). It has completed a Phase 3 pivotal trial with leronlimab in combination with antiretroviral therapies in HIV-infected treatment-experienced patients, as well as completed a Phase 3 investigative trial with leronlimab as a once-weekly monotherapy for HIV-infected patients. The company is also conducting a Phase 1b/2 clinical trial with leronlimab in metastatic triple-negative breast cancer. In addition, the company targets leronlimab treatment as a therapy for patients who experience respiratory complications as a result of contracting Covid-19, as well as leronlimab for the prevention of graft-versus-host disease in patients.

Stock Market Value: $1.0B ($1.66 per share)

Percentage Ownership:  7.68%

Average Cost: n/a

Activist Commentary: The 13D reporting group consists of 28 retail investors who joined together to reconstitute the company’s board. However, one of these individuals who is leading the group actually has experience in shareholder activism. Paul Rosenbaum is the CEO and chairman of SWR Corporation, a specialty chemical business, but had previously run a very successful proxy fight — leading a group that won a full slate of directors at Rentrak Corporation in September of 2000.

On June 30, 2021, the Rosenbaum Group nominated the following five directors for election to the company’s board at the 2021 annual meeting: (i) Dr. Thomas Errico, MD, associate director of pediatric orthopedic and neurosurgical spine at Nicklaus Children’s Hospital Center for Spinal Disorders and FDA consultant; (ii) Dr. Bruce Patterson, MD, who currently serves as founder and chief executive officer of IncellDx, a leading biotechnology molecular diagnostics company; (iii) Paul A. Rosenbaum, the co-founder and chief executive officer of SWR Corporation, which designs, sells, and markets specialty industrial chemicals; (iv) Dr. Peter Staats, MD, who currently serves as chief medical officer of electroCore; chief medical officer of the National Spine and Pain Centers, the largest pain practice in the U.S.; and president of the World Institute of Pain; and (v) Melissa A. Yaeger, JD, who currently serves as principal for Regulatory Consulting Group, a regulatory affairs and compliance consultant for development-stage biopharmaceutical companies.  

This is a unique filing that further indicates the mainstream acceptance of shareholder activism — 28 retail investors forming a group to reconstitute a company’s board. The company markets leronlimab — a monoclonal antibody therapy for HIV that has potential for multiple other therapeutic indications, including various forms of cancer and Covid-19. The group believes leronlimab is an extraordinary drug and states that CYDY’s growth hinges on the immediate success of leronlimab. 

If the company is successful in receiving U.S. Food and Drug Administration (FDA) approval for leronlimab, the group of investors believes many lives will be saved, and tremendous value will be created for the company’s stockholders. However, they feel that management and the company’s board have mishandled their stewardship of leronlimab, resulting in sizeable losses despite the tremendous potential of the drug. The group believes that this has led to a poor and unsalvageable relationship between CYDY and the FDA and that CYDY needs leadership that can obtain regulatory approval for the drug in an expedient fashion. Accordingly, the group believes the company needs to restore its credibility with the FDA by reconstituting the board and replacing senior management.

The group’s nominees will provide fresh perspective, have relevant experience in the fields of medicine, regulatory oversight and corporate finance, and include candidates with strong working relationships with the FDA who have significant experience navigating the FDA’s regulatory landscape. This is not a short-term, opportunistic shareholder using activism to bump the stock price, but a group that has been patient shareholders for seven years and is only resorting to activism after years of being ignored by management.

Often fights like this come down to the power of the argument, and the group has a strong argument. Furthermore, Rosenbaum has shown he will take a proxy fight to the limit. He should have a good chance of success here and will likely find other allies amongst the shareholder base — at last year’s annual meeting each director up for election received at least 13.8% of withhold shares, 41.8% of shares were voted against the company’s amended and restated 2012 equity incentive plan, and 42.5% of shares were voted against executive compensation.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.