Atossa Revisited

Atossa Genetics received a warning letter from the FDA back in February in 2013 regarding its breast cancer product. What they had was a suction cup device that would remove an aspirate from the nipple of a breast that would be sent off for breast cancer bio-marker tests. Last Friday, Oct. 4, Atossa announced a voluntary recall of their product. 

I talked about this company back in June of this year. Knowing some of the leadership was my first clue that this was a Cargo Cult Company. The next clue came when Atossa received a Form 483 from the FDA. Later they received a warning letter in response to the CEOs response to the Form 483. The latest action at Atossa Genetics does not contain the snarkiness from previous communications. Something is seriously wrong at Atossa. Let's take a look at what the employees think about working at Atossa, as posted on Glassdoor:

Poor management systems, written procedure is given but always changing that made people confused and frustrated. Anonymous current employee #1 

High salaries to compensate for working with high maintenance management. Poor business leadership and no reliable company plan leads to sporadic projects and mis-handled accounts. Anonymous current employee #2 

Gained good work experience and learned how to work with very difficult personalities. People quit and get fired left and right, there is no company culture and relationships between employees are discouraged because of management insecurity. People are only hired into management positions because they are friends or family of the CEO. VERY poor management structure, product is a lie (does not do what it claims to, cannot detect cancer) and FDA constantly writes letters to company about non-compliance. Anonymous current employee #3

Management is not getting a big thumbs up here. One thing I can add is that the CSO of the company is the wife of the CEO. She was a low level researcher at Nastech when she married Quay the CEO of Nastech and now the CEO of Atossa. This is not the way to hire a CSO. Had she missed out on the Nastech job, which almost happened, she may have gone the way of so many ex-Nastechians who haven't worked in biotech since Nastechs demise several years ago.

Atossa is now being investigated for possible violations of federal securities laws by Block & Leviton LLP and Finkelstein Thompson LLP. Just knowing about the management and the FDA troubles should have been enough to convince an investor to pass on this one. What other tricks could Quay and company have had up their sleeves? It is always a difficult path to try and lead others when you are unsure of what you are doing. According to the disgruntled current anonymous employees, management at Atossa is a problem. The FDA has come down hard on the company. In what other ways could Atossa directors have violated federal securities laws or breached their fiduciary duties to their shareholders?  If these lawyers come to the same conclusions that the FDA did back in early 2013, will that be enough to drive a stake through the heart of Atossa?

Going back to Quays previous Cargo Cult debacle, you can see that he has a talent for getting people excited about a project. Check out this unbridled optimism from Jim Cramers Mad Money. "When it coms to biotech, Cramer has generally stuck with three names: Celgene, Genzyme and Gilead. But he thinks Nastech has more ways to win than any of the others, and he likes it here along with the others." That was April of 2007. Then came October of 2007. Nastech failed to earn a $5M milestone payment from big pharma partner Procter and Gamble. Dr. Quay assured Cramer that everything was okay, not to worry. One month later Procter and Gamble bailed out, Nastech stock lost 40% of its value in a day and Cramer had to face facts. He was wrong. 

This is a blog about the Cargo Cults of Biotechnology and the Pharmaceutical business. In this world we have characters who thrive and make lots of money running fake scientific organizations. The people they fool are investors and more than a few tribesmen. Those who invest a chunk of time from their own careers take a hit as well. Cargo Cults are bad for your career unless you know how to win, like Dr. Quay. He isn't failing at what he does. He makes lots of money. Your money. If you want to make a profit by investing in a biotechnology/pharmaceutical company it must be remembered that this is a highly random business that attracts more than a few charlatans. The CEOs, the VCs, the Xconomists, the Bruce Booths, and many others are doing well in this world. How do they do it? Who keeps funding these organizations and their high paid leaders?

Kurt Shilling tried to run a high tech company. He was a baseball player, not a businessman to be put in charge of a multi-million dollar company. He used his own money and now he's broke. Like Shilling, biotech leaders are trained in something other than business and management. They spend years learning one thing then switch to become businessmen. The difference between Shilling and the biotech leaders however is that the latter knows better than to use their own money. Dr. Quay has been at the helm of several companies that lost far more than Shillings company. He keeps coming back. Biotech leaders like Quay pay themselves with other peoples money and hope to get out before the day of reckoning. When they fail you will find them standing right there during the reckoning, denying any culpability. Atossa will be submitting new premarket application by the end of the month, covering the  collection, preparation and processing of breast fluid specimens. Was last Friday the day of reckoning for Atossa? The saga continues but it is more than just Atossa. It is a saga of a leader who creates jobs and builds excitement in the biotechnology business. Once again this leader has directed our eyes to the sky but no cargo came. Just the FDA and the lawyers showed up, wanting to shut the airport down, just like the others before. 

Ginkgo Aquires Seattle Biotech Modulus

A big fish eats a small fish to sustain life. With that in mind let's look at the latest acquisition of Modulus Therapeutics by Ginkgo Bioworks.

A common standard among publicly traded companies is that they must maintain a stock price above one dollar per share. If they drop below one dollar per share for 30 days they receive deficiency notice. From there they have a certain period of time to get their finances back up to compliance. Atossa Therapeutics, another Seattle based biotech (Cargo Cult), recently went through what Ginkgo may soon be facing. On September 26, 2023, Atossa was notified by Nasdaq that it was not in compliance because they failed to maintain a minimum closing bid price of $1.00 per share for 30 consecutive trading days. They were required to go 10 consecutive trading days over the $1.00 per share price, which they accomplished on March 14, 2024, almost 6 months later.

Ginkgo Bioworks is currently at $1.08 per share. Year-to-date they are down over 36% in spite of their acquisitions and new contracts. They recently announced a new contract award of up to $6M from the Defense Advanced Research Projects Agency (DARPA) to develop materials that control the physical properties of ice crystals. They also announced the acquisition of a Seattle based company Modulus Therapeutics which specializes in cell therapies for autoimmunity. What value did they add to the company? More than an "up to" $6M addition?

Modulus lists funding at $3.5M seed money. They were founded in 2020. They have 2 to 10 employees with 11 associated members. Is there an office and a laboratory? Do they lease space? How much of the $3.5M is left and what did Ginkgo pay for the acquisition?

In value investing one has to piece together a picture of a company and it's future earnings. With biotech start ups it is virtually impossible to crunch the numbers because start ups don't make money. They spend it. In order to assess the value, as Ginkgo did, you have to understand the science. We will assume that Ginkgo leadership can at least justify the acquisition by touting the science and it's potential. What we cannot do is assess how much the company was worth monetarily and what Ginkgo paid for it. 

The CEO of Modulus said this about the acquisition:

"I'm excited to announce that Modulus Therapeutics has completed a transaction with Ginkgo Bioworks, Inc. that will further strengthen Ginkgo's presence in the cell therapy engineering arena."

Jason Kelly of Ginko Bioworks said this about the acquisition: 

"Modulus Therapeutics has built an array of incredible cell therapy assets that we are excited to add into the significant cell therapy capabilities Ginkgo has developed to date."

Combined: Ginkgo and Modulus completed a transaction that added Modulus's cell therapy assets to Ginkgo's cell therapy assets. If you want to buy what Modulus used to sell, you have to pay Ginkgo. The question is, how well was Modulus doing? Was anybody buying and how will Ginkgo increase the value of the assets? 

Ginkgo is nearing the $1.00 per share cutoff. They must add value to their company to add value to their share price. While Ginkgo has been acquiring small fish into their system they have not become a bigger fish. The share value has continued to go down. The acquisitions have not led to significant projects or sales to bolster their value. With one block buster partnership they could easily fight off the delisting threat. But for now they must continue throwing spaghetti at the wall and hope it will stick. 

We can't write off scientific efforts. Somewhere within the walls of Atossa and Ginkgo lies science. Yet they do not make money. They will probably fail and no one will remember they we're here. How can it be with all of the PhDs/MDs and VCs? Something is missing. The science that exists is not being put to work properly. 

We call these companies Cargo Cults because they operate in that space. Atossa has long struggled to remain listed on the Nasdaq. They have had FDA warnings. They have yet to summon the big metal birds onto their runway. But they still go to work and do things, important things like dealing with the FDA, SEC and NASDAQ.  Ginkgo Bioworks do important and difficult things like acquiring companies and adding assets to their portfolio. They too have yet to demonstrate a cargo operation. When you spend more than you make, you are not in business for long. Unlike Atossa, Ginkgo may be too big to survive. In other words, they are unaware that they are in the Cargo Cult zone. Atossa seems to have a special skill in staying alive in spite of their dubious products and/or services. Ginkgo has spent too much on their CCS Airport.

Now it behooves me, of course to tell you what they're missing. But it would be just about as difficult to explain to the South Sea Islanders how they have to arrange things so that they get some wealth in their system.  It is not something simple like telling them how to improve the shapes of the earphones...

Passion, Dispassion and Pink Ribbons

Raising money has become the priority, regardless of the consequences. 

It's almost as though our disease is being used for people to profit. And that's not okay. 

For people to finally rise up and object, they have to be aware of the lies they are being fed.

One more thing about this Atossa Genetics Cargo Cult. The three quotes above came from the Pink Ribbons Inc. documentary. There is a lot going on here and it's more than just pink ribbons and breast cancer. It represents all of the pharmaceutical industry. Dr. Quay has made himself a millionaire by running biotech/pharma highly questionable companies. He is not a breast cancer specialist. Previously he tried to sell us a nasal spray to fight obesity. He knows that disease is profit and he seeks the most profitable. We as human beings need to guard against profiteers who wish to fill the market with ineffective, poorly researched, poor quality, potentially dangerous products. Open the Atossa Genetics website. Do you see a color similar to the pink used by Susan Koman? Coincidence? The pink ribbon profiteers paved the way for the latest Quay invention. The product is cheap plastic suction cups made in China and a genetic test that the FDA says does not have sufficient quality control. The "National Reference Library for Breast Health" is not federal government institution. It is not a branch of the NIH or the NSF. It is something within the Atossa company. A company that uses the momentum of the money making pink ribbon machine to put more money into the pockets of a few Cargo Cult leaders.

The best way to conduct research is the opposite of what we see with the pink ribbon crowd. The best way to conduct research is to do so dispassionately. If we in the life sciences were to create a manifesto for living the life of a scientist it would have to include the idea of dispassionate research. We can be passionate about our science and our work. We just can't let our passion for anything get in the way of seeing the world for what it really is.

Dispassionate: Devoid of or unaffected by passion, emotion, or bias.

The way in which biotech and pharmaceutical companies get support for their work is by catering to the passion others have in finding cures for disease. At this point of my argument I might be tempted to quote Jonas Salk, "Can you patent the sun". It is a quote often used as the moral impetus to forgo patents and profits from vital medical innovations. To quote from this post from Roy Zwahlen in BiotechNow:

As pointed out by Robert Cook-Deegan at Duke University, “When Jonas Salk asked rhetorically “Would you patent the sun?” during his famous television interview with Edward R. Murrow, he did not mention that the lawyers from the National Foundation for Infantile Paralysis had looked into patenting the Salk Vaccine and concluded that it could not be patented because of prior art – that it would not be considered a patentable invention by standards of the day. Salk implied that the decision was a moral one, but Jane Smith, in her history of the Salk Vaccine, Patenting the Sun, notes that whether or not Salk himself believed what he said to Murrow, the idea of patenting the vaccine had been directly analyzed and the decision was made not to apply for a patent mainly because it would not result in one. We will never know whether the National Foundation on Infantile Paralysis or the University of Pittsburgh would have patented the vaccine if they could, but the simple moral interpretation often applied to this case is simply wrong.”

I used to live close to a Ronald McDonald House and the Seattle Childrens Hospital. Every time I went to the store I parked by the playground next to the Ronald McDonald House apartments. Little children, bald from chemotherapy, would be playing with their families. They just want to have fun and live life but soon you'd see them heading up the street to the hospital for God knows what. Given the opportunity to work in research you could use such an image to passionately pursue a cure. Once you start to look at the data however, you must put your passion aside. You must follow the precepts of the scientific method. It does not allow you to take shortcuts to save that one child whom you've just watched walking to the hospital. Likewise, your desire for fame and fortune should not affect the way you design experiments or interpret the data. It should not effect how you communicate your work.

With that in mind think about the brief history of Atossa Genetics. There is the off-pink color of their website. There is the the fact that 20 days prior to the recall we had this sponsorship of The Third Annual Power of Pink luncheon, fashion show and silent auction. There is also the issues raised in the FDA warning letter. In a dispassionate manner, I would you value Atossas charity towards the pink ribbon money raising movement and more than the quality of the product they intend to sell to women with breast cancer. Would you see their charity as part of their marketing plan? 

That is my passion, seeing the world as it really is. I do not see a negative side to pointing out a negative. A Pink Ribbon Profiteer is a bad thing and pointing that out is good. Poor quality science is a taking all of the money and power out of science. The passion people have towards ending disease leads them to donate money to organizations like Susan G. Koman. It leads them to cheer for the financial success of Dr. Steven Quay. However, we must be careful when dealing with our emotions. Others will use them against us. With science, we have discovered the way around all of this. With Cargo Cult Science the others have discovered a way around science. You can give money to charitable organizations, wear a colorful T-shirt, walk a 5K for the cure and hope something positive happens. You can also watch what they do with the money. Watch out for the Atossas because they want some of that money. 

Breast Cancer Profiteer

I want to revisit the roots of this blog. What made me go crazy and start this thing? I make the claim that my biotech career resembled a Cargo Cult. We only pretended to do scientific research. Our hands were tied by the narratives of our leaders. Here is a specific example of a leader who defines Cargo Cult leadership.

Back in 2007 a little Cargo Cult company called Nastech was almost single handedly dismantled by the leadership of a megalomaniac CEO. Steven Quay can be heard here.

http://video.cnbc.com/gallery/?video=591437325

Nastech went on to tank, giving rise to MDRNA then Marina which is now a penny stock with one employee. Dr. Quay disappeared but came back with a new company Atossa. The company consists of a  breast cancer screening device that sucks fluid out of the breast through the nipple. The fluid is then sent off to test for breast cancer bio-markers. The FDA has a few things to say about the progress of the new company.

The warning letter from the FDA highlighted a few issues that resemble some of the observations I have made regarding Cargo Cult leaders. Take the first issue:

1.      Failure to establish and maintain procedures to control the design of the device in order to ensure that specified design requirements are met, as required by 21 CFR 820.30(a). For example, (b)(4), your firm’s Regulatory Consultant, indicated that you have not established design control procedures for the MASCT System.

 

We reviewed your firm’s response and conclude that it is not adequate.  While a procedure titled SOP-007, Design Control for the MASCT System was submitted in the response, no evidence of implementation or training on this procedure was provided. In addition, you did not provide evidence that you retrospectively reviewed all devices to ensure they had design control procedures in place as required for all devices.

When working for Dr. Quay it was clear that he had little interest in these kinds of details. He was a big picture kind of guy. Yet, as you can see, the very product that is intended to be sold seems to be an afterthought. Start company, get rich, design product as you go along. Maybe someday it will work as advertised. Which takes us to another claim from the warning letter:

Our inspection, and subsequent review of your websites www.atossagenetics.com and www.nrlbh.com determined that your devices are misbranded under Section 502(a) of the Act [21 U.S.C. 352(a)] and within the meaning of 21 CFR 807.97, in that your websites contain statements that create an impression of official approval of a device due to clearance of a premarket notification submission. 

Imagine trying to follow the "bend over backwards" kind of honesty depicted by Feynman while working for this individual. 

One humorous side story related to the FDA warning letter: Dr. Quay was once a heavy set man. He embarked on a weight loss plan that involved the use of Equal in his coffee. He was the only person to use the Equal because people were afraid of him and they didn't want to get caught using up all of the Equal. Dr. Quay used the opportunity to spread fear among his subordinates. He let the Equal run out. He immediately notified several C level executives and their direct reports. Meetings were held and plans were put in place and an SOP was written to ensure that Nastech never ran out of Equal again.

Which brings us back to what a Cargo Cult is. If the issue is about a product that is of value to the leader, that issue will be dealt with in great detail. Much ado will be made. But if the product is the cargo promised by the Cargo Cult, not much happens. The leaders don't need the product as much as they need the narrative. In this case, Atossa has what the FDA considers to be a fairly flawed breast cancer testing device. The understanding of what goes into such a company, (engineering and FDA regulation issues...) is about as complete as the understanding the Cargo Cults have regarding airports. 

We jokingly referred to the Equal incident as Equalgate. It became an example of the emphasis placed on silly things, while research projects received little attention. It is not surprising then for me to read the FDA warning letter and see that some things never change. Dr. Quay started a new company with a new narrative. The FDA pulled the curtain back on the Great Wizard of Atossa. Behind that curtain was a man who knew very little about his breast cancer product, but at one point in his career had an SOP written, distributed among the highest ranking members of his staff, and followed to the letter, so that he would not run out of Equal. It's not clear what motivates such a man but his tactics are predictable. There is little pride in the quality of the product but great pride in the power of running your own cult. 

Biotech Royalty

David Blech earned the title "The King of Biotech". Armed with a Masters degree in Music Education, he became a member of the Forbes 400 investing in companies like Genetic Systems Corporation, Icos, and Celgene. In 1990 he founded D. Blech and Co., a registered broker-dealer involved in underwriting biotechnology issues. On September 22, 1994 the company was deep in debt and ceased operations due to net capital rule violations. The day is known as Blech Thursday.

The uniform net capital rule is a rule created by the U.S. Securities and Exchange Commission ("SEC") in 1975 to regulate directly the ability of broker-dealers to meet their financial obligations to customers and other creditors. Broker-dealers are companies that trade securities for customers (i.e., brokers) and for their own accounts (i.e., dealers).

Blech was given a five year probation sentence in 1998 for criminal fraud. In May 2012 he pleaded guilty to manipulating shares of biopharmaceutical companies Pluristem Therapeutics Inc and Intellect Neurosciences Inc in 2007 and 2008. 

The Cargo Cult message of the story is that success in biotech financial matters does not require a PhD from MIT. It does not require bend-over-backwards scientific honesty. It requires the mind of a gambler. Remember the successes, but not the failures. Remember random events around your successes and tout them as skillful tricks of the trade you are in. 

In Seattle there is a building with four numbers in front. 

Inside this building are people who have chosen the same career path as David Blech. Carl Weissman and Steven Quay have been at the helm of several costly biotech investment decisions. Neither has found themselves on the Forbes 400 but they have had lucrative careers in biotechnology. The investments they have attracted have not been lucrative. Weissman is now the former CEO of Accelerator and Quay is in charge of a sinking ship known as Atossa Genetics. 

I don't want to go into further details about these investment opportunities. I've written about them before. Each man is a leader, as defined by the terms of a CEO. You are investing in them and the decisions they make with your money. Like David Blech, they are not scientists, as defined by the terms of a CSO. They seek money and use it to build biotechnology companies. The science is none  of their  business. Their careers have seen hundreds of millions come and go. They want you to focus in their ability to make the money come, never mind how it goes away.

The takeaway from  Blech, Weissman and Quay is that leadership matters. What makes a good biotech leader? In 1992 David Blech would have been considered a great leader. In their rise, Weissman and Quay were considered worthy of stewardship over millions and millions and the careers of many very smart people. In the ruins of their management is the loss of that money and the ruined careers of too many scientists. True, Blech (the music education master) started companies that made money and continue to do so. But he did not do the work that made these companies long term successes. These three individuals are prime examples of the short term mentality. Start company, get out before the fall. They are prime examples of why we need standardization, certified laboratories with certified lab workers. We need to create an career path for scientists who have the power of science to help investors avoid the song and dance of these three men. One of these men is in prison, one is looking for work, and one is draining $600,000 per year (CEO and CSO salaries for he and his wife) until the latest round of financing is depleted. Be assured that all three will continue to fight for their livelihood and raise money to spend on short term money making biotechnology companies.  

There is a little bakery on the bottom floor is 1616 Eastlake called Grand Central Baking Company. They are the most profitable company that has ever done business out of 1616 Eastlake. They have outlasted all of the Accelerator companies. They have a passion for what they do. 

More than two decades after our founder Gwen Bassetti introduced the Como loaf in Seattle’s historic Pioneer Square, we are still locally owned, led by a unique mixture of family and friends, and dedicated to the craft of artisan baking.

Biotech royalty, like Bech, Weissman and Quay, have a passion for the deal. They love being the biggest boy at the big boy table. But this isn't the craft that makes biotech success stories. The craft of "the deal" has led to many a lawsuit, jail time, and high unemployment. What makes any technology company succeed is a dedication to the science and technology behind the product. For this, you need someone outside the royal families. 

The Narrative These Days - Theranos

We all live by a narrative. Our narrative is the reality that we perceive. It is the explanation we have for why things happen. It is the world we think everyone is experiencing just like us. The only difference between us and our neighbors narrative is that ours is correct and theirs is not.

Take for example, how people behave "these days". My aging relatives often talk about how the kids today are rude. Apparently things were not so back in the day. In my narrative that is exactly what older people said about my aging relatives when they were young.

Take for example, our political turmoil "these days". In the first half of last century we experienced two world wars. There must have been turmoil. The leaders managed to get the people behind the idea of fighting an enemy. Currently we are breaking down internally. We see our fellow Americans as enemies. We are also breaking down in our relations with Iran and North Korea. Are we any worse or better than previous generations on how we live in peace? Are we marching towards war overseas or even here in our own country?

The place to be intellectually is in between or off to the side of the battles. We need to be on the outside looking in. We need to witness events as if a Martian studying planet earth. Are you a Trump fan or a lefty? What if there were a third option where you stand back and watch the two sides make their arguments? What if you took note of the arguments, not the conclusions? Where is that place where you are a journalist gathering information to tell a story.

That is the subject that I have been working on. Before we can present our narrative to the world however, we have to learn how to make the presentation. Anyone, these days, can share their narrative. YouTube, Twitter, and Facebook are a few ways of annoying people with your thoughts. Rarely does someone intrigue you enough to make you take notice. I certainly never went viral. But I still think of my narrative here on the CCS. I think about the bad science that goes into the life sciences and how it effects our lives. I think how food is our medicine yet we still cling to pills. I think of the scientific method and it's counterpart, the cargo cult scientific method. I think of how to present an argument against it.

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George Shultz was a life long "fan" of science. When he heard the arguments presented by Theranos' Elizabeth Holmes he was sold. Once Shultz was on board Theranos took off financially. It turns out that G. Shultz was a life long fan of the cargo that science provides. Nonetheless, a man with his power can make a cargo cult airport into a hub as well funded as LaGuardia. He was not aware of the simple tests one could do to verify Holmes' story. See here for a link to the simple test, second to last paragraph.

Theranos is an interesting story. It has been told, will continue to be told and may even one day made into a Hollywood movie. The CCS version will not be the same. It is not a story about a perceived scam by one or a few people. It is about an industry based on promising the cargo. It will be about leadership who promise anything under the sun because they honestly think they can facilitate the landing of the planes. They know what the cargo should be and they will assemble their airport just right... some day. Yet they are missing something. The shape of the antenna on the coconut headphones. The arrangement of fire along the runway perhaps.

Theranos has the same problems all cargo cults have. The narrative is too simple. The explanations of how it will all work are too complex. The complicated pieces can be sussed out by low paid highly educated nerds with no power within the organization. The leadership has all of the power, but no real technology solutions. They specially in the narrative.

Before I end we must remember Atossa, a small breast cancer biotech in Seattle. They did exactly what Theranos did. They promised a simple test. They did not have one. They lied. They are still in business. The leadership are from the finest schools. They make wonderful promises about the best cargo we can hope for. The planes do not land.

The narrative these days continues to pile up the loss of billions of dollars in investments. Just as the narrative did in 1985, 95, 05 and 15, the planes have not landed. We need to get to the heart of the matter. We need to talk about why we fail. How does one present the argument that our great leaders are merely Cargo Cult Scientists?