Trovagene Inc. has fired and sued two of its top executives — CEO Antonius Schuh and CFO Stephen Zaniboni -- alleging breach of fiduciary duty.
The actions caught both seasoned biotech executives by surprise.
Schuh said he intends to file a wrongful termination suit against Trovagene, and expects that Zaniboni will join him in the lawsuit. He also challenged the validity of Trovagene’s claims.
“We believe there are no merits to the actions the company has taken against us,” Schuh said in an interview Tuesday, the day after he was fired. “It’s a very bizarre situation, and I am shocked and saddened by it.”
The dispute appears to hinge on how Trovagene defines itself: as a diagnostic or a therapeutic endeavor.
According to a Trovagene statement released Monday night, Schuh and Zaniboni allegedly failed to present a lucrative corporate opportunity to Trovagene, and instead took advantage of the opportunity for their own personal benefit.
Schuh and Zaniboni are managing partners of an investment firm called Global Source Ventures.
“Our engagement with the investment firm has been well known to Trovagene from day one,” Schuh said. “They agreed to it. It was in our employment agreements and known to the public on our LinkedIn profiles. We’ve been doing this for four years.”
Global Source Ventures was approached by a therapeutics company developing a very early-stage cancer drug, Schuh said. The investment firm became engaged with the drugmaker as advisors and angel investors.
Trovagene, which currently makes liquid biopsy tests to screen for cancer mutations, announced March 28 that it had filed a complaint against the two executives in San Diego Superior Court. The complaint asks that Schuh and Zaniboni be required to turn over their interests in the cancer drug opportunity to Trovagene.
“The acquisition of new therapeutics in the field of precision medicine presents an exciting opportunity for Trovagene and we intend to bring that opportunity to Trovagene where it rightfully belongs for the good of our shareholders,” Trovagene Chairman Thomas Adams said in a statement.
In a follow-up conference call with analysts, Adam was asked how long the board knew about Schuh and Zaniboni’s side activities. Adams said the issue came to the board’s attention in the past few weeks.
“Like Hillary, it was an email,” Adams said.
Diagnostics or Therapeutics?
Adams, now acting as interim CEO, said that Trovagene, a diagnostics firm founded in 1999, had long-held intentions of expanding into therapeutics, and that experts in the field had advised Trovagene that a drug/diagnostic combination would be a very powerful line of business for the company.
Schuh and Zaniboni’s “lucrative opportunity” could be complementary to Trovagene’s diagnostic products, though no details of the cancer drug have been disclosed.
During the conference call, Cantor Fitzgerald financial analyst Bryan Brokmeier asked if the company had always considered itself a therapeutics company as well as a diagnostics firm, pointing out that Trovagene’s website and regulatory filings describe the company solely as a diagnostics firm.
“The company has always viewed our business as precision medicine, which includes both diagnostics and therapeutics,” Adams said. “We’re obviously focused on establishing the diagnostics business first, but we’ve always been looking at the possibilities down the road.”
Schuh said he and Zaniboni were surprised that the board at Trovagene considered the company both a diagnostics firm and a therapeutics firm.
“I cannot remember the slightest hint I would have given to an investor — not even a bullet on a slide — that would indicate that Trovagene was developing, executing or promising upside from therapeutic opportunities,” he said. “I do not believe there is a single employee at Trovagene who has expertise in developing oncology drugs. Not a single person on the board who has experience developing oncology drugs. So you would ask yourself, on what basis is Trovagene making this claim?”
Schuh added, “It’s a cancer drug, and I’ve always viewed developers of cancer drugs as potential customers of Trovagene, not competitors.”
Search for New CEO
Schuh, who served as CEO since October 2011, is temporarily being replaced by Adams until the company can find a permanent replacement. A veteran of San Diego’s biotech sector, Adams has been an executive at Hybritech, San Diego's first biotech company, and founded Gen-Probe and Genta.
Adams said the company will hire a search firm to look for candidates outside the company, but he also suggested that there are already several strong executives within the firm that could fill the position. Matt Posard, the company’s chief commercial officer, was mentioned repeatedly as a top candidate.
“Posard is one of the top commercial people in our business,” Adams said.
Prior to joining Trovagene last year, Posard served nearly a decade on the executive team at Illumina Inc., the third-largest public company in San Diego with a market cap of $23.5 billion. Most recently, he served as senior vice president and general manager of Illumina's new and emerging market opportunities business. Posard also previously held leadership roles at Biosite and Gen-Probe.
No replacement has been announced for Zaniboni, who served as Trovagene’s CFO since January 2012.
A ‘Buy’ Rating
After the conference call, analyst Brokmeier indicated that he’s not concerned that the leadership shakeup at Trovagene will affect the company’s stock.
“Although Adams has assumed the role of interim CEO, we anticipate a relatively short CEO search, particularly given the potential to fill the post with Chief Commercial Officer Matt Posard, who has been a key decision maker for the company since joining from Illumina last year,” Brokmeier told financial news site Smarter Analyst. “Assuming a suitable choice is made, we believe that the differentiated approach to cancer detection and monitoring offered by Trovagene’s urine-based technology positions it to be a key player in the cancer diagnostics market.”
Brokmeier reiterated a “buy” rating on shares of Trovagene with a $10 price target, nearly two-fold from where the stock was currently trading after the conference call.
‘Prospects Remain Intact’
Trovagene, which specializes in noninvasive urine tests for diseases, launched its first product in 2013: a urine test for human papillomavirus. The test uses Trovagene's technology to detect disease-related genetic sequences in urine. The company also sells urine tests to detect DNA from various cancer mutations.
Trovagene is early in commercialization, and is still reporting minimal revenues and a significant net loss, according to its latest financial statements. The company reported $313,000 in revenue last year, up from the prior year but missing analysts’ expectations. The company also reported a hefty $27.5 million net loss for 2015.
But the company is investing in research and development, and is still highly regarded for the potential of its technology. Most analysts are bullish on the stock, with four analysts ranking TROV as a “strong buy,” and only one recommending a “hold.”
“Trovagene's prospects remain intact, its strategy and vision continue as planned, and we have a strong bench of leaders at the company," Adams said. "We don't see any business disruption — the company's well financed, we have technology that works, we have papers coming out, and we have a strong commercial team."