Ottawa Senators owner Eugene Melnyk says that while he was extremely ill and in need of a liver transplant early last year, the chairman and chief executive of Acerus Pharmaceuticals Corp. were "destroying the company" through various actions that have now left the firm he founded in disarray.
In a 23-page statement of claim filed Monday in Ontario Superior Court, the Canadian hockey magnate and former pharmaceutical executive details his version of what went wrong at Acerus, setting off a judicial process and seeking a trial on the matter in Toronto.
"Through ego and bravado, a power trip" to demonstrate that they could do better than Mr. Melnyk, the defendants took steps to benefit personally from their actions and to cause financial harm to Mr. Melnyk, as well as to his profile and reputation, the statement of claim says. "All while the plaintiff was gravely ill, unable to know about their actions" and address them sooner.
Mr. Melnyk is claiming damages worth $145-million, characterizing the story as a deliberate and failed attempt by the CEO and chairman to steer away from the business strategy he helped devise. Although the company in question is small, with a current market capitalization of barely $30-million, the case has exposed a rift between two prominent Ukrainian-Canadian businessmen –Mr. Melnyk and Acerus chairman Ian Ihnatowycz.
It touches a nerve for Mr. Melnyk personally in part because he put his reputation on the line when encouraging his friends and family to invest in Acerus only to see the value of that investment wither away. Trading above $4 as recently as 2012, the stock closed Tuesday at 15 cents on the Toronto Stock Exchange.
Known until last year as Trimel Pharmaceuticals Corp., a reference to the three brothers in the Melnyk family, the company was founded in 2008 by Mr. Melnyk and others with the aim of bringing to market unique formulations and dosing methods of existing and approved products through one-of-a-kind drug delivery technology. The first product developed was Natesto, an intranasal gel used as a testosterone replacement therapy.
Named as defendants in the case are Acerus, its CEO Tom Rossi, Mr. Ihnatowycz, as well as six unnamed current or former directors or senior officers of the company. Formerly the controlling investor of Acerus, Mr. Melnyk remains a top-five shareholder now with about 15 per cent of the shares.
Acerus has been "grossly mismanaged" under the leadership of Mr. Rossi and Mr. Ihnatowycz as well as the other unnamed executives and its business has been conducted in a way that is "oppressive, unfairly prejudicial" to Mr. Melnyk, according to the statement of claim. Among the actions denounced in the lawsuit, Mr. Melnyk alleges that the defendants issued misleading press releases and misleading disclosures, completed "non arm's length transactions in grossly negligent circumstances" with known associates, and did a related-party deal that "questionably complied" with securities laws.
The non arm's length transaction was the distribution agreement that Mr. Rossi negotiated for Natesto in the United States. Based on market value and performance precedents, the CEO should have been able to secure upfront fees in excess of $100-million (U.S.) with a partner, Mr. Melnyk says. Instead, he struck an agreement with a former colleague of his, who'd since joined Endo Pharmaceuticals as CEO. Endo, which had a competing product, paid Acerus $25-million upfront and eventually cancelled the deal. The whole transaction was a catastrophe for Acerus for which the defendants must be held accountable, Mr. Melnyk alleges.
In the related-party deal, Acerus in July of 2014 bought the Canadian rights to Estrace, a product that relieves symptoms of menopause. To finance the purchase, the company negotiated a credit facility and a term note from First Generation Capital, controlled by Mr. Ihnatowycz. Mr. Melnyk alleges that the company failed to provide proper disclosure required for the borrowing under securities regulations and did not disclose in the press release that the interest rate being paid was above 10 per cent. Meanwhile, a private placement of shares was engineered to pay back some of the note, which resulted in the dilution of Mr. Melnyk's stake while Mr. Ihnatowycz's shareholding emerged unscathed, according to the statement of claim.
"The company spent time and money to design a transaction that literally squeezed by the extensive related party shareholder rules, to protect against against the plaintiff and other minority shareholders becoming involved," the statement of claim says.
None of the allegations have been proved in court.
Tiana DiMichele, a spokeswoman for Acerus, said Tuesday the company had not been served with the statement of claim and so could not comment beyond what it has already said.
When Mr. Melnyk filed an initial "notice of action" against Acerus last month, the company said it considered the allegations to be "without any factual or legal foundation."