Eugene Melnyk’s battle over sinking upstart Acerus Pharmaceuticals

Share

When Canada's Acerus Pharmaceuticals Corp. won approval from the U.S. Food and Drug Administration for its testosterone-boosting nasal gel treatment, the company's fortunes looked to be brightening.

Within a few months, it struck a U.S. distribution deal and by the summer of 2015, it had generated revenue for the first time. Online news forum Stockhouse published a giddy editorial in September, 2015, that sang the microcap company's praises. "This is huge," Stockhouse said. "This is a group that has barged into a crowd of larger, better-funded industry giants and come out on the other side covered in the blood of their enemies, roaring at the skies like a raging berserker army of good."

Now, six months later, the distribution deal is dead, Acerus stock has tumbled from half a buck to 9 cents a share and it is being sued for several times its market value by its founder and top-five shareholder, Eugene Melnyk, who is raging in his own right against the "gross mismanagement" of people he says have cost him a small fortune.

"The party's over," the Ottawa Senators' owner and former pharmaceutical entrepreneur told The Globe and Mail on Friday in discussing his legal battle against Mississauga-based Acerus. "It is cold-shower time."

In a way, Mr. Melnyk's $145-million claim against Acerus, as well as its chairman and chief executive, is a step toward redemption – an attempt to win back control over a company from which he became detached years earlier, when it was called Trimel Pharmaceuticals Corp.

And yet, the tentacles of this corporate drama stretch deeper than that – to a peace deal between Acerus and two other key shareholders who sought to replace the entire board; and to steps that Acerus and its wealthy chairman, Ian Ihnatowycz, appear to have taken to try to limit Mr. Melnyk's influence. A power struggle is playing out between two rich Ukrainian Canadians. And it will probably get more interesting in the weeks ahead.

In June, 2014, Mr. Melnyk rose to speak at the annual Trimel shareholders meeting and lashed out at the company's senior leadership with a torrent of vitriol. "He chastised the executive team for not advancing the opportunities Trimel had in terms of what they were working on," said one person who was in the room at Toronto's First Canadian Place that day. He also took aim at what he thought was the unreasonable pay for senior management, given the size of the company.

Nobody was surprised by what they were seeing from Mr. Melnyk, the person said. "It came with his persona."

But there was substance motivating Mr. Melnyk's frustration. Trimel shares, which were worth $4.40 in 2012, had collapsed to penny-stock status by 2013 and were still stuck there a year later. Mr. Melnyk lost a bundle and there wasn't much he could do about it.

Mr. Melnyk started Trimel and took it public in a $200-million offering in 2011 that left him with a stake of roughly 60 per cent. But a sanction by the Ontario Securities Commission, related to misleading disclosures when he led drug firm Biovail Corp., barred him from acting as a director or officer of a public company for five years starting in May, 2011. He also can't propose the names of anyone else as director.

At the receiving end of Mr. Melnyk's chiding that day was Trimel chief executive officer Tom Rossi, as well as Mr. Ihnatowycz, a Ukrainian Canadian like Mr. Melnyk who made his wealth through the $325-million sale of Acuity Investment Management Inc. in 2011. Mr. Ihnatowycz, an accomplished pianist, is now focused on First Generation Capital Inc., his private investment holding firm, and several other board appointments.

Life is rarely easy for a pharmaceutical company in its infancy and Trimel was no exception. Documents show that the company had negative working capital of $13.9-million at 2015 year end and racked up losses of $81-million over the past three years. Since inception, the company has experienced negative operating cash flow and it now carries a "going concern" warning in its filings.

Only recently has it started to generate revenue from the commercialization of its products – a nasal spray called Natesto that treats low testosterone levels in men, and Estrace, an oral therapy for relief of menopause symptoms. A third product, Tefina, has been hailed as a promising treatment allowing women to more easily achieve orgasm, but it remains in development.

Mr. Rossi was named as CEO in 2013 to push through the adversity. That same year, Mr. Ihnatowycz joined the board. Mr. Melnyk alleges Mr. Ihnatowycz increased his stake in Trimel through deals that allowed First Generation to acquire cheap stock while the stakes of other shareholders were diluted. Eventually, Mr. Ihnatowycz became chairman. Today, First Generation is Acerus's biggest shareholder with an estimated stake of 24 per cent versus Mr. Melnyk's 15 per cent.

Through a spokesperson, Mr. Rossi and Mr. Ihnatowycz both declined to comment. Acerus says Mr. Melnyk's lawsuit allegations are "without any factual or legal foundation."

Though Mr. Rossi made progress, it wasn't enough for some. Shareholders began to sell.

Mr. Melnyk would sometimes contact Acerus's senior leadership offering advice – advice that was viewed as an unhelpful "distraction" by those who received it, according to one former employee. The person said Mr. Melnyk's criticism of the company's leadership was "totally misplaced."

When revenue-challenged Trimel decided to spend money to change its corporate name and stock ticker symbol last year to Acerus, some wondered how much the friction with Mr. Melnyk had grown.

The name Trimel was hatched by Mr. Melnyk and refers to the three brothers in his family. Changing it for no obvious reason at a time the company was pressed for cash seems like it just wanted to bury all vestiges of Mr. Melnyk from its corporate identity. As one industry source put it: "It's kind of spiteful, right?" Acerus spokeswoman Tiana DiMichele said the name change was made in part to "better reflect our vision and values."

The company also scheduled its annual meeting of shareholders for April 27, 2016, instead of in June as in years past. The April date is mere days before Mr. Melnyk's OSC ban is set to expire and means he can't nominate himself or any one else as directors during this year's meeting. Ms. DiMichele did not respond to a question about the date change.

But Mr. Melnyk doesn't sound deterred, vowing to call a special meeting of investors if necessary. He said he intends to become chairman of the drug maker.

He isn't the only investor unhappy with the company's performance.

According to sources, things came to a head late last year, when two other shareholders, Toronto hedge fund firms West Face Capital Inc. and K2 & Associates Investment Management Inc., threatened to launch an effort to replace the Acerus board. A peace deal was brokered with the disgruntled shareholders, and disclosed in a Jan. 8 securities filing.

Under the agreement, West Face and K2 obtained one board seat each and agreed not to say anything publicly that would undermine the company or its leadership. The parties also agreed to strike a special committee of four independent directors. Sources say its aim is to investigate strategic options for the company.

"I think those options just got even narrower based on [Mr. Melnyk's lawsuit]," one person said.

Mr. Melnyk, who had a liver transplant 10 months ago and insists that he feels great, said he was supposed to be part of the shareholder pact, but he couldn't agree to its terms, including the no-badmouthing clause, which he says is all about shielding Mr. Ihnatowycz's ego. "It's a stupid agreement," he said.

The shareholder deal expires on Sept. 1. By then, Mr. Melnyk said, he expects his legal action to be well under way. He has yet to file a formal statement of claim. Sources say that though Acerus has no means to settle a $145-million claim, Mr. Melnyk might be eyeing stock in the company as compensation. "I don't have any more stature, nor do I expect any more, than the average shareholder," Mr. Melnyk said, adding that he has been squeezed out just like most other investors. "I just want to make sure that the thing doesn't collapse."