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Sunday, December 9, 2007 - Page updated at 12:00 AM

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CellCyte shares ride a wave of hype

Seattle Times business reporter

CellCyte timeline

2003-2005: The company raises $1 million from early investors.

January 2007: CellCyte agrees to combine with Shepard, a B.C.-based shell company that trades in the over-the-counter (OTC) market.

March 2007: Merger is completed and CellCyte raises $6 million from private investors including Canadian stock promoter G. Brent Pierce. Shares begin trading on OTC and the Frankfurt Stock Exchange.

Summer 2007: Company enters several research partnerships and leases a new facility in Bothell.

October 2007: Glossy paid promotional newsletter, James Rapholz's Economic Advice, is sent out to potential stock buyers.

November 2007: CellCyte receives a patent for its technology. Trading of stock intensifies as readers on German discussion boards ask questions about promotional spam faxes.

Source: Securities and Exchange Commission, Bloomberg News, Seattle Times

CellCyte ranks high among the region's public biotechs in total market value

ZymoGenetics: $1,017 million

Seattle Genetics: $842 million

Dendreon: $465 million

CellCyte Genetics: $441 million

Northstar Neuroscience: $229 million

Trubion Pharmaceuticals: $190 million

Cell Therapeutics: $134 million

Nastech Pharmaceutical: $99 million

Targeted Genetics: $38 million

Sonus Pharmaceuticals: $20 million

Source: Bloomberg News

For years, the founders of CellCyte Genetics relied on infusions from angel investors to keep their tiny startup afloat. But after Kirkland-based CellCyte combined with a moribund public company, its shares caught fire this fall in the loosely regulated over-the-counter (OTC) market and on Germany's Frankfurt Stock Exchange.

A wave of glossy brochures and spam faxes, touting CellCyte with lofty claims, has helped propel the company's total market value to more than $440 million. That's greater than many local biotechs that are far more advanced in developing therapies. Suddenly, the two founders each have a stake worth about $137 million.

The barrage of hype has been bankrolled, to the tune of hundreds of thousands of dollars, by an outside stockholder — a man whom British Columbia securities regulators have barred from their industry for 15 years.

CellCyte Genetics Chief Executive Gary Reys says he is not concerned about that history, and insists he has no role in the promotional push.

He says the skyrocketing trading volume is simply an "amazing" show of investor confidence in his company's technology for manipulating stem cells, which is still a year away from its first early-stage clinical trials.

A former mining stock

CellCyte bought an inactive B.C. mining company whose stock trades in the OTC market in the U.S., and completed a private placement that let a well-known Canadian promoter of penny stocks acquire millions of shares. A few months later, the spamming began.

That's a pattern familiar to the B.C. Securities Commission, which is trying to crack down on stock-promotion schemes. It "is not untypical of the problem we're facing," said Martin Eady, head of corporate finance at the B.C. Securities Commission.

The commission is writing new rules to restrict what Eady calls a "subculture" of pump-and-dump stock promoters that have thrived in B.C. by taking a large position in an inexpensive stock, hyping it, and unloading it onto unsuspecting investors.

Reys maintains that the acquisition of a shell company is a legitimate way of tapping investors while the firm prepares to enter a major regulated market such as Nasdaq. He said CellCyte isn't a fly-by-night company, it's a "brick-and-mortar organization" with experienced researchers and patented technology.

As for the spam activity, he said, "We have no control over it."

Spammed

Last month, investors participating in German stock message boards began asking questions about an unsolicited fax they'd received promoting CellCyte. The fax reproduced a positive story about the company from the weekly newsmagazine Focus Money, based in Offenburg.

There was also a handwritten note in German: "This is the stock that's about to take off! Greetings, Paul."

In a copy of the fax obtained by The Seattle Times, dated Nov. 19, the fax sender is identified as Stockgroup AG. That's a stock-promotion firm based in Zurich, with offices in Bellingham, according to Swiss government records.

The firm's president, G. Brent Pierce, is a Canadian citizen barred by the B.C. Securities Commission from trading shares or acting as an officer of any B.C. public company until 2008. In the 1993 settlement that led to the ban, he acknowledged presenting false documents to the commission and diverting funds from a small public stock offering to his own use.

Pierce controls about 1.66 million shares of CellCyte through a company called Newport Capital Group, according to a regulatory filing with the Securities and Exchange Commission. Those shares were worth about $12.2 million as of Friday, and his wife, Dana Pierce, owns shares worth an additional $2.5 million.

Pierce's firm is also behind a colorful 12-page mailer distributed since early October to potential U.S. buyers of the stock.

Titled "James Rapholz's Economic Advice," the brochure says CellCyte shares "could be the chance of your lifetime to turn $10,000 into $4 million, maybe even $15 million!"

"This could be the most astonishing investment opportunity since the microchip," it says elsewhere. "This truly could be the most astonishing and important medical breakthrough in your lifetime!"

The fine print at the back of the brochure discloses that Stockgroup AG, Pierce's company, paid Rapholz $445,000 to produce and distribute the mailer. Rapholz, who is based in Florida, didn't return several calls seeking comment.

The article reproduced in the German spam faxes, meanwhile, cited a research report by an analyst named Matthias Redenbach of Midas Research.

The report itself discloses that Midas was paid to write it by Michael Drepper Communications, of Mannheim, Germany. Drepper's name appears alongside that of Brent Pierce as an investor-relations contact in many Frankfurt-traded companies.

Reys said he was aware of Rapholz's newsletter, but had never seen the fax in German, though it is easily found on the German chat boards discussing CellCyte stock.

His lawyers investigated Pierce and found nothing wrong, Reys added.

A review of regulatory filings shows Pierce's Stockgroup AG has also promoted other U.S. companies with low-priced shares where he controlled a large block of stock.

One was oil exploration firm Lexington Resources, whose worth plummeted from about $40 million in the summer of 2006 to less than $1 million as of Friday. Another, Morgan Creek Energy, saw its share price drop to 32 cents after trading as high as $5.30 in October 2006. Both companies traded on the OTC and in German stock exchanges.

Pierce did not respond to messages left at his company's Bellingham office.

On a separate front, CellCyte's auditor also has regulatory issues. Just months after the firm, Williams & Webster of Spokane, signed off on CellCyte's 2006 financial statements, the national Public Company Accounting Oversight Board in June took the unusual step of barring one of its two name partners from associating with any accounting firm, and suspended the other for a year, over inadequate scrutiny of a different public company.

Formed in 2003

CellCyte was co-founded by Reys, a onetime executive at big pharmaceutical firms who later headed two biotechs that fizzled out. His co-founder was Ron Berninger, a biochemist who in the 1990s was a senior scientist at the public company CellPro.

Reys and Berninger launched CellCyte in June 2003. Each of them owns a 31 percent stake, which became 18.6 million shares of the public company.

One of their top recruits was Theresa Deisher, a former Amgen scientist who joined CellCyte as vice president of research in September 2006. She quit the company this past October.

CellCyte has licensed discoveries from the U.S. Department of Veterans Affairs, and has obtained a patent for what it describes as a way to harness adult stem cells into regenerative therapies for the heart, and other organs.

Reys calls it a "Microsoft operating system" for stem cells, because instead of focusing on how to create stem-cell lines, the company is working on a system to deliver them where they're needed.

Before merging with the shell company, CellCyte had raised only about $1 million since its founding, including a loan from GBR Investments, a fund set up by George Rathmann, the founder of Amgen and Icos.

Rathmann's son, Rick, who runs the fund, said the technology CellCyte had licensed looked interesting, and "my father always had an interest in stem cells."

What's more, he said, part of the fund's mission was to help out starting biotechs, and CellCyte's founders were "desperate" for funding.

This past February, CellCyte paid $1 million to acquire a Vancouver, B.C.-based shell company called Shepard Inc. as a vehicle for attracting funding, Reys said. He said that venture capitalists either wanted too much control over the firm or were unwilling to invest in stem cell research. "We wanted to control our own destiny," he said.

Simultaneously with the merger, the company raised nearly $6 million through a private sale of stock to Pierce and other investors, including two firms based in the Turks and Caicos Islands.

These two firms, run by the same person, also appear alongside Pierce in other penny-stock investments. Together with Pierce they control about 10 percent of CellCyte's nearly 60 million outstanding shares.

Reys said these investors "liked the company, they made big investments."

The money served to expand CellCyte's staff to 16 employees, ramp up the company's preclinical research and lease a new facility in Bothell. It also covers annual salaries of $350,000 for Reys and $205,000 for Berninger.

CellCyte in April brought in an outside director — John Fluke Jr., the former CEO of publicly traded Fluke Corp., who's been a board member at such companies as Paccar, Cell Therapeutics and Tully's Coffee.

Reys said the company is looking for two more directors and beefing up its accounting and software systems as it prepares to seek a listing on Nasdaq next quarter.

He says listing a company and selling shares on the OTC market and in Germany is a way to raise capital, and run a debt-free operation while getting there.

"I think you're going to see this route we took become more common," Reys said.

But the company's eye-popping market value, at such an early stage, has raised some eyebrows.

CellCyte hasn't begun the process of testing its technology in humans, and getting Food and Drug Administration approval for any new drug will take many years.

The value "is a little high considering not a lot has happened yet," said Alan Leong, an analyst with Seattle-based Biotech Stock Research. He said companies focusing on early-stage technology such as stem-cell research tend to polarize investors: their valuations are either "really low, or really high," he said.

Reys said the German market reacted favorably to CellCyte because "Germany is well ahead of the U.S. in stem-cell research." Interest also picked up after the company presented its research at a scientific meeting early last month.

He said the founders aren't poised to benefit from the frenzy around CellCyte because their stock can't be traded yet.

"It doesn't do me a lot of good," he said.

Ángel González: 206-515-5644 or agonzalez@seattletimes.com

The information in this article, originally published December 9, 2007, was corrected December 25, 2007. A previous version of the story incorrectly referred to George Rathmann as the "late" founder of Icos and Amgen. Mr. Rathmann, who established an investment fund that is a minor stockholder in CellCyte, is very much alive.

Copyright © 2007 The Seattle Times Company

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