When rare disease drug developer Arcturus Therapeutics completed its reverse merger with Alcobra in November of 2017, things were looking good.

The company, which has proprietary technology for developing RNA therapeutics, was now a public company. It had $50 million in cash, a pipeline of ten programs, and outside partners funding six of them. The company was pursuing programs in rare liver disease, cystic fibrosis, infectious disease, NASH, and self-replicating RNA vaccines.

“The evolution of Arcturus Therapeutics continues as we embark on a new chapter for the company as a publicly-traded entity with confidence and optimism,” said Joseph Payne, then president and CEO said when the completion of the merger was announced.

Now, things have gotten ugly. The board fired Payne at the end of January. Payne’s lawyers sent a letter demanding he be reinstated because the board acted improperly in firing him. Payne sued the company in Israel. Last week, the company sued Payne in San Diego. And a proxy fight over the company’s auditors and board make-up is underway. The stock is trading about half of what it was when the merged closed in November, which represents about a $45 million loss of market cap.

The lawsuit Arcturus filed against Payne alleges the former CEO violates a confidentiality agreement, breached an employment agreement, shirked his fiduciary responsibilities, interfered with contractual relationships, stymied the company’s efforts to retain new auditors. The company is seeking injunctive relief, damages it believes are in excess of $10 million, as well as the return of salary, bonuses, and other compensation from the period it says Payne was in breach of his obligations.

The lawsuit charges that Payne attempted transfer “substantial amounts” of the company’s intellectual property “for no consideration and for no articulable business reason to the company of his lifelong personal friend and occasional business partner.”

It alleges that Payne operated an “lucrative side business” selling chemical products that the board did not know about and “devoted substantial time and energy to his side business during normal business hours” in violation of his employment agreement.

And, it charges that in an effort to retaliate against the board for his dismissal as CEO, Payne voted his shares against the appoint of Ernst &Young as the company’s independent auditor and suggests that he organized other shareholders to vote the motion down out of “spite,” putting the company at risk of failing to meet deadlines for filing required financial reports, which could eventually lead to its delisting.

Arcturus will hold an Extraordinary General Meeting of Shareholders on May 7. Shareholders will vote on the removal of Payne from the board, the appointment of Ernst & Young as its auditors, and competing slates of directors—one slate advanced by the company and the other by Payne.

In a March 28 letter to shareholders, the company didn’t hold back its incendiary language to stir shareholders to support its position in the upcoming vote. It characterized Payne’s time as CEO a marked with “poor judgment, bad decisions, and ineffectiveness.” It accused him of trying to “deceive, manipulate, and lie” to Arcturus stakeholders. And said that he was a “liability” to the company who sought to “siphon value from Arcturus.”

Payne and his attorneys did not respond to requests for comment as of publication time.

There are many barriers companies face in moving drugs from discovery to market. There are scientific, financial, regulatory, clinical obstacles, but more fundamental ones are often overlooked.

Drug developers are human enterprises, which makes them inherently flawed. Shareholders and the courts will need to sift through competing claims from Payne and Arcturus, but there’s got to be a better way to advance a therapeutic pipeline and get treatments to patients.

To borrow from the poet John Godfrey Saxe, rare disease drugs are like sausages. They “cease to inspire respect in proportion as we know how they are made.”

April 4, 2018
Photo: Joseph Payne, former president and CEO of Arcturus Therapeutics