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Accelerate Diagnostics - A Misleading Story Ripe For Decline

By Shareholder Watchdog :

We ended our two-year hiatus from publishing on Seeking Alpha given a unique short opportunity that we think could decline by over 65%. Like our other reports, investors need to be very aware and cautious given the degree of risk we have identified. Over the past five years, we have published our research on companies with unique stock promotions and valuations that had unequivocally disconnected from economic reality. We believe the idea herein will only strengthen our already strong track record. Of the nine shorts on which we have published, five have had significant declines as our research led to more efficient perspective and targeted companies that converged with the facts. PCBC declined by more than 70% in two weeks after our report, and was ultimately acquired for 50% less than the price at which is traded prior to our research publication. Since our other articles, shares of HMPR declined by 75%, and shares of LPHI, HUSA, and REE have all declined by at least 96%. We believe Accelerate Diagnostics ( AXDX ) will be our sixth report about a stock with at least 65% downside.

Incredibly, the tightly managed promotion of AXDX has led to a $1 billion market cap (not a typo) with no revenue today, or potentially in the next few years for that matter. Its purported "crown jewel" of IP was acquired for less than $3 million and was developed by a management team that was previously charged with fraudulent misrepresentation of their software capabilities by the SEC. In a case of the truth being stranger than fiction, the CEO who acquired and developed the IP was a former bull semen peddler . As we discuss in detail below, respected hospitals and medical device / pharma companies have conducted extensive trials on AXDX's core product, BACcel, and without exception passed on the "opportunity" to license or manufacture the product. Acquirers had the chance to purchase AXDX and its technology for next to nothing - and they all passed. In 2012, the prior management team stepped aside from this "too good to be true" technology following an equity recapitalization of the company at $1.03 per share by two seemingly highly respected health care executives, Jack Schuler and John Patience. As we understand it, the marriage was brokered by current AXDX CEO Larry Mehren.

We do believe AXDX is working on a real product; although all investors can see today are hope and a dream, and the all-mighty PowerPoint. Unfortunately, we have found several of these PowerPoints have been selectively removed, which could have been a decision based on the risk from misleading claims (we captured screen shots prior to their removal and include herein). In this report, we highlight a litany of red flags including: a sordid history of legacy management and the IP, numerous pilot studies and partnerships that resulted in nothing, empty promises regarding the technology with no data support, empty promises on FDA approval, no independent clinical studies, and a new management team that appears to have misled investors into thinking it had discovered the "holy grail" which we believe has been highly misrepresented with carefully chosen words and misleading PowerPoints. We believe the retail investors who have been roped into AXDX on the promise that BACcel can discover pathogens in "one hour" may not have read the fine print. Our guess is that most AXDX investors do not realize that BACcel's most likely use case will STILL require a positive blood test (which typically requires 2 to 5 days to get a sample that will run through the diagnostic platform). Amazingly, we have not yet found any proof that BACcel actually works as described. In addition, we found evidence that the new management team may have violated securities laws (inadvertently or directly, we clearly show how millions of shares appear unaccounted for). We believe the independent board members have a fiduciary duty to investigate potential undisclosed insider sales (at least prior to a potential SEC investigation). These findings could suggest that AXDX is indeed an orchestrated promotion. At a generous 75% of market cap and enterprise value of the closest comp that is significantly de-risked relative to AXDX (T2 Biosystems), AXDX would trade at $7.50 to $8.00 per share, which represents roughly 65% downside. If, as we suspect, AXDX's commercialization never materializes, we would expect substantially more downside, potentially towards $0. We have reached out to AXDX Investor Relations to provide management with the opportunity to address our issues. To-date, we have yet to hear back from them. Should management reply to our direct and fair issues, we will provide an update.

$1 Billion Market Cap Unreasonable Under Any Scenario

AXDX's core product is the BACcel system, a diagnostic platform for the diagnosis of infectious pathogens. The goal of the product is to shorten laboratory turnaround time compared to the conventional 2-5 days required today. Hospital-acquired infections are a real healthcare issue, and arguably a primary reason the AXDX story has been so easy to pump to retail and momentum investors.

Even if Novartis ( NVS ) and Becton Dickinson ( BDX ) (described below) were wrong when they chose not to partner with AXDX, and BACcel does have some kind of future, we find it nearly impossible to rationalize a $1 billion market cap for this highly speculative company. First, the microbiology diagnostic market is highly competitive - even though it is a relatively small market. AXDX estimates it is a $2.2 billion globally assuming the inclusion of certain future markets that do not appear to be addressed on today's roadmap and have no discernible timeframe. Markets and Markets estimates that the global microbial identification market will be just under a $900 million market by the end of 2014, growing to just under $1.2 billion by 2019. AXDX's competition is populated with well funded healthcare conglomerates, with massive revenue bases, and large R&D budgets. The table below lists the companies like Bruker ( BRKR ), BioMerieux (BIM FP), Becton Dickinson, and Thermo Fisher ( TMO ) that AXDX cites in its SEC documents and investor presentations as competing products. However, not one "comp" listed by AXDX returns the favor … not one lists AXDX in their financial filings as a competitor. All of the competitors have significant and diversified revenue bases and seven of the eight are highly profitable. One of the more recent entries in the space was a "small company" called Abbott Labs (ABT), who in May 2014 announced positive preliminary data on their IRIDICA testing platform. Abbott's platform "can identify more than 1,000 infection-causing pathogens in less than six hours , versus the current standard of care (culture-based testing), which can take days." Importantly, IRIDICA was designed as a direct approach, which allows it to diagnose "pathogens directly from a patient's sample, without the need for culture." Below, we will highlight how AXDX's management claims of a "direct" approach appears far different than Abbott's or industry convention, and likely requires a positive blood culture. Also, Abbott commercially launched IRIDICA in Europe as a CE-marked device in December 2014 . But hell, AXDX will surely be able to overcome that time to market disadvantage (of time, product, data) against a peanut like ABT.

Two more relevant comps to AXDX are Nanosphere Inc (NSPH) and T2 Biosystems (TTOO). NSPH is a molecular diagnostics company that has developed the Verigene System. The company has received several FDA approvals but has been unable to ramp commercially (we believe due to a combination of less reliable test results than expected / promoted and a very slow ramp due to incumbent competition). NSPH's PowerPoint presentation appears very similar to AXDX's. We expect AXDX to play out similarly to NSPH, whose stock has collapsed as the hyped story failed to generate any meaningful revenue. NSPH has announced it is reviewing its strategic alternatives as cash has dwindled to just a few quarters' left at their burn rate. NSPH is currently trading at an all time low and its market cap is currently $33 million with an Enterprise Value of only $32 million. At the same EV, AXDX would trade at $2.30 per share.

T2 Biosystems is another recent entry in the market that went public in August 2014. There appears to be a large disconnect between T2 and AXDX. While T2 should also be considered a speculative investment, T2 appears to be far more attractive from an investment profile based on every metric we could find (see table below). But AXDX's enterprise value is currently worth nearly 3x that of TTOO. Their stories / PowerPoints are similar, except T2 does not have the laundry list of red flags that we highlight in this report. TTOO published clinical data on their first instrument and panel, applied for FDA approval in May 2014, received FDA approval in September 2014, and received a CE Mark in Europe. Their initial development effort using their T2MR platform will target sepsis. Sepsis is prominently referenced in AXDX's investor presentations, inferring it's one of their main targets. The T2MR platform identifies pathogens directly from whole blood by measuring "how water molecules react in the presence of magnetic fields" and was developed to be used for a broad set of applications. Most other methods including AXDX use cameras and software for POST BLOOD culture analysis (which takes 2 to 5 days). We can't stress enough the importance of being able to direct specimen analysis, which based on the fine print, AXDX may not be able to do (assuming there were an actual product with clinical data, of course). In their clinical trials, T2Candida's average time to result was just over four hours (again, rather than the two to five days typically required for blood-culture-based diagnostics). Similar to every other diagnostics company, TTOO failed to list AXDX as a comp, and state in their SEC filings that they believe they are "currently the only diagnostic company developing products with the potential to identify pathogens associated with bloodstream infections in a variety of unpurified patient sample types." Now with its FDA approval, T2 plans to target the top 450 hospitals in the U.S. , resulting in a potential huge first mover advantage. Our guess is that TTOO will not target Europe initially (despite the CE Mark) since most European hospitals / labs follow the lead of the FDA and U.S. based hospital / labs. Below, we show the side-by-side compare of AXDX and T2. So much for an efficient market.

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Even if AXDX's product opportunity is real (and we have serious doubts), it could take decades for the company to ramp revenue. The diagnostics market is a difficult market to penetrate given well entrenched competitors and significant investment in equipment. For example, BioFire received FDA approval for its diagnostics FilmArray System in 2011. In early 2014 , 3 years after approval was granted, Biomerieux closed their $450 million acquisition of privately held BioFire. Biomerieux disclosed that BioFire had $70 million in revenue in 2013 with only $40 million from FilmArray ... so 3 full years after approval BioFire still only had $40 million of revenue. A few weeks ago , Biomerieux disclosed BioFire contributed €78 million in 2014 - and that was for the entire company. These figures imply the market for diagnostics moves very slowly with new testing technology. According to its January 2015 IR presentation , AXDX appears to believe it will not even start its US clinical trials until mid-2015 - and this assumes all goes well. Ironically, in 2005 the prior management team predicted that they would have three or four research systems installed by early 2006, would file for approval from the FDA in mid-2006 and "hope for FDA approval by early 2007." Is M&A possible for the "optionality" around AXDX's PowerPoint? Sure. But the price at which a strategic would consider AXDX would likely be a disaster for existing shareholders. BioFire was acquired at a gaudy multiple, yet applying the same value to AXDX would result in a price HALF of today's market cap. Further, it could take five years for AXDX to have a chance to generate $70 to $80 million in revenue assuming its ramp is as successful as BioFire's.

The competition going after this market opportunity is not limited to the above examples. Some additional efforts to target this market include:

**A company called MicroPhage had their KeyPath tests approved for sale recently , and they offer rapid Antimicrobial Susceptibility Testing ((AST)) identification much like the claim in AXDX's key patent.

**The VITEK 2 system by Biomerieux offers a complete ID/AST Automation with same day results .

**BDX, who passed on the AXDX technology, received FDA clearance in January 2014 to market the BD MAX MRSA XT Assay. It is also marketing their own BD Phoenix system along with the newer BD Max MRSA system that promises results in just 2 hours.

**Bruker received FDA clearance in 2013 for MALDI Biotyper for the identification of Gram negative bacterial colonies cultured from human specimens.

No "Holy Grail" as Management Appears to Misrepresent the Very Significant Meaning of "Direct"

Given the large cost of hospital borne infections, every major player in the diagnostics industry has focused new product and technology development on early diagnosis and rapid detection that leads to better patient outcomes, with less reliance on redundant antibiotic use. Today, nearly all diagnostic approaches for infectious disease require a positive blood culture. In industry parlance, this means blood culture diagnostic tests are typically referred to as an "indirect approach." There are significant problems with this indirect approach to blood cultures. First, it takes time to grow and identify organisms in a blood culture. A positive culture typically takes 2 to 5 days (and conversely it takes up to 5 days to confirm a negative test). During this time, patients are often fed a cocktail of expensive and likely non-effective drugs as a preventative measure (which drives antimicrobial resistance). Second, blood cultures can be highly unreliable. According to Dr. Jean-Louis Vincent , a professor of intensive care at the Université Libre de Bruxelles, and the head of the Department of Intensive Care at Erasme University Hospital, "more than 50% of blood culture tests come back negative, even when infections are believed to exist."

A "direct from sample" methodology implies that a positive blood culture is not required. Given the limitations and slow pace of blood cultures, it is not a surprise that a direct approach is the "holy grail" of diagnostics. We believe AXDX management has potentially misled investors by repeatedly implying their technology enables direct detection. In fact, AXDX has been making the claim that BACcel is a "direct" approach since the prior management team. As far back as a 2007 SEC filed 8K , management claimed BACcel "eliminates culturing delays by using well-understood analytical principles in a novel strategy to analyze bacteria extracted directly from a patient specimen." In a November 2009 SEC filing , just after BDX passed on the opportunity to license AXDX's technology after a 16 month trial and extensive use in two research hospitals, AXDX claimed that "based on internal lab data" the BACcel system "will identify the organisms present in a patient's specimen and count the number of organisms of each type in less than 2 hours … will then additionally report major categories of antibiotic resistance mechanism present for each type of organism within a total of 4-6 hours after receiving a specimen."

AXDX's current management team has been even more aggressive perpetuating the prior team's claims of "direct." In slide 11 of their June 2014 investor deck, AXDX management claims their "core patented technology" eliminates "the need for culture" and results in a "dramatic time reduction (from days to hours) drives improved clinical outcomes and hospital ROI" (slide 15 in the same presentation). We believe this is highly misleading, and the presentation has subsequently been removed from AXDX's website and we could not find it online. We show the old screenshots of these slides below. The title of their September investor deck is titled "5 Hour AST, Direct From Sample." They claim that their process can eliminate the need for a culture is brazen and appears untrue, in our opinion.

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A slight contradiction in another slide (slide 13 from the June deck below) caught our eye and suggested that we should investigate management's "direct" claims further. This slide includes "positive blood" specimen as one of their inputs. Since AXDX is targeting sepsis and hospital-acquired infections, most of their "specimens" are likely to be blood samples. However, slide 13 suggests a positive blood specimen is required in their most likely use case. As we have mentioned a number of times, a positive blood culture takes 2 to 5 days. So according to AXDX's slide, to produce a "Patient Report" from a blood culture, it could require at minimum two days plus another six hours. This is highly misleading, in our opinion.

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We found further evidence that the most likely use of the BACcel platform is not a "direct" methodology, at least per the definition most investors would expect. In May 2014 , AXDX released seven presentations as a "Research Use Only" launch related to their attendance at two conferences. These publications further suggest that AXDX has misrepresented their ability to provide direct detention. Five of the seven presentations clearly include "Directly from Positive Blood Cultures" in their title, which undoubtedly suggests that a 2 to 5 day culture is required (and thus not a direct approach by industry vernacular). One explanation (that we would find highly questionable) is that like existing methodology, BACcel could work on a "direct" basis with a throat culture or another approach, and management has used this small use case to claim their technology provides for a direct approach. If this were their justification, we would find it highly inappropriate.

It appears that management has fooled investors into believing they have discovered the "holy grail." As an example, a June 2014 Seeking Alpha article by Jim Ryan (the link behind the Seeking Alpha paywall), the author provides an example where a patient dies waiting for 72 hour "industry standard" lab results, where the deadly pathogen could have been discovered "in one hour" using BACcel. In the same article, Jim Ryan claims to have followed the company for 5 years. Despite his long history following the company, he does not appear to understand the BACcel will most likely only work on a blood sample AFTER a positive culture. In his example, the patient would still have to wait 2 to 5 days for their culture results (so it would not have changed the outcome for our poor hypothetical patient). If the author/analyst was fooled despite following the company for over five years, our guess is that most AXDX investors have also been misled.

Where is the Data?

It is very unusual for a pre-revenue health-care company to trade with a $1 billion cap. However, outside of biotech, it is almost unheard of to find a $1 billion cap company that has seemingly no verifiable independent clinical data. As it sits today, we have found NO PROOF BACcel works as described. Other than cursory descriptions, there is sparse information about how the underlying technology is even supposed to work. What we can verify is that the path to market has been anything but the short and simple path suggested by management. Back in 2004, AXDX's Chief Science Officer Emeritus and former President David Howson outlined a timeline for the company's development . He expected that the company would have "extensive proof of performance on the core technology in 2004." Ten years later we are still waiting on something, anything, let alone "extensive proof." Further, Howson confidently proclaimed he expected to have "licensable technologies in 2005." By the end of 2007, the company did enter into an evaluation agreement that could have led to a license agreement (as discussed below in more detail, it didn't). Howson also expected to enter the "clinical phase of proving the technology for diagnostic use for ultimate submission to the FDA" in 2006 . Finally, Howson claimed at the time the company's approach was "very conservative" with "known principles and known materials that are already acceptable to the FDA" that will result in a relatively short path to market" (again, this was 2004!).

It is our opinion that like its predecessors, current management is again misleading investors. Given the performance of the stock (a 20-bagger relative to the original recap price), we commend management for their excellent performance suggesting a product that will be substantive and commercially viable. However, to our knowledge, the company HAS NOT EVEN STARTED A CLINICAL TRIAL. According to their investor presentation, they suggest a trial will be initiated in the first half of 2015. We have not been able to locate ANY independent peer-reviewed studies that would substantiate management's claim that the BACcel technology works. We did find a 2013 article in Clinics in Laboratory Medicine that mentions BACcel. The diagnostic performance of BACcel was described in " Diagnostic Assays for Identification of Microorganisms and Antimicrobial Resistance Determinants Directly from Positive Blood Culture Broth ."

One passage from this article caught our attention: "A pilot study of 33 simulated blood samples, containing S. aureus at a concentration of approximately 5 CFU/mL, revealed a sensitivity and specificity of 100% compared with nonspiked samples." We find it very strange that "simulated" blood samples were used in this study. If the technology works, why not just use actual blood? However, what is more concerning is the following disclosure that appears in the text of this study: "C.A. Burnham has received research funding from Cepheid, Accelr8, bioMerieux and Luminex Molecular Diagnostics." Can a pilot study be considered independent and substantial if the specimen is simulated and the funding is not arms-length?

The lack of independent verifiable data associated with BACcel and the lack of progress on its prior 'pilot studies' makes it fair to wonder if a commercial product will ever be launched. Both Abbott and TTOO are pursuing actual "direct detection" methods and have produced data on their technology. In Abbott's case , an independent, expert panel of physicians reviewed the RADICAL study. TTOO obviously produced their clinical trial that was the basis of their FDA approval. The recent progress made by these two competitors using direct detection methods is likely to be very troublesome for AXDX unless it is prepared to win an FDA approval for its BACcel technology in the very near term.

Company's Sordid History

Stepping back from where AXDX is, the longer history of the company is relevant given the prior management team identified and acquired the core IP that is the backbone of the $1 billion market cap. AXDX's core IP was acquired for less than $3 million in 2001, and the team that wrote the software around the IP was accused by the SEC of fraudulent misrepresentation. A Seeking Alpha article from 2011 includes salient history of the company, technology, and management that acquired and developed the IP. Another recent report provides some high-level background on AXDX but not much meat (it is worth noting we disagree with the assertion AXDX was mistaken for an Ebola play).

A synopsis of AXDX's path to $1 billion market cap is quite entertaining. Starting in the early '80s, the company attempted to assemble a portfolio of water rights in Colorado to support growing metro-area communities. The second iteration began in 1987 when a board member, Thomas V. Geimer, stepped in as CEO to develop a new business model. Geimer was a former investment banker and a bull semen peddler (not making that up). Geimer turned the company into a software development firm providing modernizing legacy code in VAX/VMS operating systems. The story began to resonate with (or more aptly rope in) investors in 1997 with the introduction of Navig8 2000, which was supposedly a software product created to fix the millennium bug. In February 1997 Geimer predicted the company would ramp to $450 million in revenue within three years.

While Navig8 2000 was marketed as a wide application Y2K remediation tool, it was actually "specifically designed for a computer system manufactured by Digital Equipment Corp." The software allegedly did not work as suggested by the company. Management was brazen enough to target selling its busted software to the U.S. Department of Energy software for fixing nuclear power plants. "The stock, trading under the ticker ACLY, at one point had reached $27 per share, but was finally halted by NASDAQ on November 17, 1999 at $1.31 as the company came under suspicion of fraudulent activities." The stock was subsequently delisted by NASDAQ. An accounting scandal and the abrupt departure of their auditor Deloitte & Touche followed.

The sworn testimony to the SEC by three Accelr8 employees highlighted the extent of the misrepresentation by management.

1) An internal memo from the company's VP of Engineering and Development: "While Visual BASIC (on Windows/NT) and the C++ engine (on UNIX) are on our list of 'supported' tools, they are extremely immature (not even completed), very buggy, and have never been used in real life. Since testing, debugging, and enhancements have been driven by the squeaky-wheel theory, there is currently no testing or development being performed on those engines. The use of Navig8 2000 on applications written for the UNIX or the PC platforms is a crapshoot."

The same employee under oath: "the only mature tool [Accelr8] had were the VAX/VMS environment and that anything else, if it did work, was a matter of luck, but it...had not been officially sanctioned by engineering as working in...other environments." He also testified that "as of March '98, we did not have a C++ engine that anyone could use. We did not have a Visual Basic engine that anyone could use."

2) Dr. Franz Huber, Accelr8's Chief Scientist and the chief architect of the Navig8 2000 toolset was responsible for the design and development of the company's software. On July 6, 1999 Huber testified under oath that Accelr8's software was only designed to operate on DEC hardware and DEC specified software. Huber testified that "[i]f you want to analyze a FORTRAN program that was written on that Sun machine with the Sun FORTRAN then our product is no good."

3) Albert Wallace, who had been Accelr8's Vice President/director of sales at the time, testified under oath that "In the last five years, the state of the art languages that are used are C++ and Visual Basic;" and "C++ and Visual Basic never existed as a product on any platform [for Accelr8]." Wallace had also testified at the time that Accelr8's claim that the Y2K bug software analyzers (Navig8 2000) supported all languages and platforms was false, stating "it became obvious to me that there were many product capabilities that we were advertising that we did not have... the only mature products the company had, ran on Digital VMS environments."

In November 1999 , the SEC filed a complaint for fraudulent misrepresentation against the company and their Chairman, CEO Geimer and CFO:

the Commission today charged a Denver software development company, Accelr8 Technology Corp. (

In July 2001 , the SEC entered orders of permanent injunction against Accelr8's management and accessed fines:

Securities and Exchange Commission announced today that on July 12, 2001... entered orders of permanent injunction against Accelr8 Technology Corporation, Thomas V. Geimer, Harry J. Fleury, and James Godkin. The defendants consented to the entry of the orders without admitting or denying the allegations of the Commission's complaint. The injunctions, among other things, prohibit the defendants from making, or aiding and abetting the making of false filings with the Commission. The Commission's complaint alleged, among other things, that Accelr8 made misleading statements about the capabilities of its Year 2000 software and filed false financial statements in certain of its annual and quarterly reports with the Commission in 1997 and 1998.

The stock and story turned out to be all hype and no substance. The company produced total revenue of less than $12 million from 1997 through 2000, obviously far short of Geimer's $450 million annualized goal. Following the turn of the century the company shifted gears again and exited the software business, ultimately selling the software assets in July 2004 for a measly $500,000.

They say penny stock promotions don't die, they just change their stripes. Today, AXDX is onto its third iteration (although history is not favorable for trilogies where the first two movies were duds). The next reinvention began with the January 2001 acquisition of OpTest Technologies from DDX Inc. The acquisition transitioned Accelr8 (ticker was AXK) into a medical diagnostics company. Accelr8 paid $500,000 cash and 1.81 million common shares valued at $1.38 for a combined value of less than $3 million. Accelr8 employees took OpTest's technology and built the BACcel system, which was described at the time as a microscope with a specialized slide and computer software. Management now had another chance to overhype another story, which is amazingly the foundation of today's billion dollar market cap.

BDX Passes On BACcel

Fast forward several years and the story was gaining momentum. In December 2007, Becton Dickinson agreed to pay $100,000 for the exclusive right "to negotiate for a business relationship to develop Accelr8's BACcel rapid diagnostic platform." More encouragingly, in May 2008, the company signed a formal research and licensing option agreement with BDX "with respect to Accelr8's BACcel rapid pathogen diagnostics platform." Under the agreement, BDX agreed to fund a 16-month research program with the option "to exclusively license Accelr8's intellectual property in the field of infectious diseases diagnostics." We suggest readers review the 2007 press release (which ultimately led to nothing), as it is eerily similar to the story being pitched by the current management team

According to David Howson , Accelr8's then president and Chief Science Officer Emeritus:

This agreement demonstrates serious interest in our rapid diagnostic platform by a leader in the clinical diagnostics market. BD recognizes the potential value of the BACcel system as a `fast front end' that complements their automated culturing systems and gene analysis products. The BACcel system uniquely addresses a critical need in hospital ICUs that no other technology now addresses. We target hospital acquired infections (HAI) and antibiotic resistance in pathogens that include the worst multi-resistant so-called `superbugs' such as MRSA, Acinetobacter, Pseudomonas, and emerging strains of Klebsiella and E. coli.With life-threatening infections, physicians need guidance for initial therapy within a few hours of a patient's first presentation of symptoms. In the best of cases, culturing requires at least a full day to produce results, and that is too late to affect patient outcomes. The physician cannot wait that long to begin therapy and must proceed without specific guidance. Because of widespread and increasingly complex antibiotic resistance, approximately 20% to 40% of attempts with initial therapy prove inadequate.The BACcel system has unique capabilities. It eliminates culturing delays by using well-understood analytical principles in a novel strategy to analyze bacteria extracted directly from a patient specimen. We have presented data to the scientific and medical communities that support our objective of reporting pathogen identity and quantity within two hours of specimen access, and major antibiotic resistance mechanism identification within six hours. This will help the physician to rule out antibiotics that are most likely to fail, leaving those that are most likely to prove adequate.

In September 2009, Accelr8 disclosed that the technical development project with BDX had concluded and "BD advised the Company that it has decided to decline an associated exclusive technology license option." At the time, BDX was one of the largest incumbents in the diagnostics market with nearly a third of their revenue from diagnostics, had a $16.5 billion market cap and was flush with nearly $2 billion of cash and investments on its balance sheet. The incremental spend on commercializing BACcel would have been immaterial relative to their $6.6 billion annualized expense base AND WOULD HAVE BEEN A NO-BRAINER HAD THE TECHNOLOGY HAD EVEN A SCINTILLA OF COMMERCIAL POTENTIAL. The agreement expired with BDX, declining to pursue the technology, instead choosing to cut its losses and walk away after $1.4 million of sunk costs.

Novartis Passes On BACcel (Strike Two)

In the wake of the BDX disappointment, in June 2010 , the company entered into an Evaluation Agreement with Novartis so they could "evaluate the results of the Company's BACcel system in identifying the type and quantity of bacterial pathogens in clinical specimens." The agreement between the two companies "granted Novartis the exclusive right to evaluate and negotiate a license to the Company's intellectual property for a period of three months after the submission of the final research report."

In a deal nearly identical to BDX, NVS spent 16 months testing and evaluating the BACcel system. Given how hot diagnostics has been, there was little risk and real upside should BACcel work. In a similar "free look, but we'll still pass" - Novartis declined its option to license the technology in September 2011 . At the time, NVS had a $145 billion market cap and was publicly searching for products to reinvigorate growth. For the second time, a highly sophisticated company passed on BACcel after having a long look under the hood of the technology.

Recapitalization By New Management

With two highly sophisticated investors passing on licensing its technology after extensive testing and research, in October 2011 the company announced it was "now seeking another strategic partner to assist in the development and marketing of the BACcel system." It is our understanding Larry Mehren, AXDX's current CEO and the former CFO of Ventana Medical Systems, identified the potential opportunity to invest in AXDX. It is unclear the level of due diligence Larry was able to conduct on the BACcel system, but given the 16 month trial and resources of BDX and NVS, it is probably fair that his diligence was not as comprehensive as the two conglomerates that passed on BACcel. It is our understanding that Larry Mehren approached Jack Schuler and John Patience, both also formally involved in Ventana, regarding a potential investment. In April 2012, the three partners agreed to invest a total of $35 million in Accelr8's common stock, comprised of 14 million shares of Accelr8's common stock at $1.03 per share, 7 million warrants with an exercise price of $1.03, and 7 million warrants with exercise price of $2.00. The three (and three alone) formed an entity called Abeja Ventures that held their investment . With only 11.1 million shares outstanding prior to the recap, the new 28 million fully converted shares SHOULD have resulted in the three owning a combined 71.6% of shares.

Schuler & Oracle Penny Stock Investors

We have no reason to believe Jack Schuler and John Patience are not high integrity health care executives. Both had notable success in management roles at their prior companies, including Stericycle and Ventana. However, the executive suite is very different than penny stock investing. The investment group became even more incestuous with the involvement of Larry Feinberg of Oracle Partners. In its June 30, 2012 13F, Oracle disclosed an initial position of 2.18 million shares of AXDX. This initial disclosure would represent a shocking 55% of the total volume AXDX traded in the second quarter 2012 (according to Bloomberg volume figures). We have trouble reconciling how this is plausible.

Larry Feinberg has a very long history of co-investments with Jack Schuler. Feinberg and Schuler teamed up to file a joint 13D filing on the controversial Quidel (QDEL) as far back as 1997. Oracle was also a large owner of Ventana stock. In a Forbes article from 2008 , the entire cast of characters from AXDX was prominently mentioned (with Mehren opposing sides of his three current partners).

Roche Holding's $3.4 billion acquisition of Ventana Medical Systems was just announced today, but it might already be falling apart. Though Ventana's board has approved the deal it was over the objections of Chairman Jack Schuler Jack Schuler and Vice Chairman John Patience John Patience. Neither have agreed to sell their shares to Roche. That's 12% against the deal. Larry Feinberg, manager of the $1 billion Oracle Partners hedge fund owns another 8% of Ventana's stock. He started buying in 1999 and says:

Jack Schuler's SEC ownership filings (form 4s and 13D/A including the Schuler Family Foundation) show that he has investments in nine public companies currently. Eight of the nine are micro or small cap companies. Schuler is on the board of directors for his lone large cap investment. All eight of the small and micro cap companies owned by Schuler are also owned by Oracle Partners, which simply says the two are very familiar with one another. The investments include some highly controversial companies (like QDEL, HNSN, TTH CN) as well as several penny stocks .

Undisclosed Sales By Management?

We take no issue with buddies investing together, assuming proper disclosure requirements are met. And herein lies a potential problem. In a 13D filed on March 6, 2013 , Abeja Ventures disclosed it had exercised its warrants to purchase 7 million shares at $1.03 per share and exercised its warrants to purchase 6.428 million shares at $2.00 per share (Larry Mehren elected to keep 571,160 unexercised warrants). This disclosure suggested that a total of 27.4 million shares had been issued to date related to the recapitalization. If the warrants were a cashless exercise, with a $5.03 stock price on March 6, 2013, around 24 million shares would have been issued. Interestingly, unlike every other Abeja Ventures filing, there was no mention of Jack Schuler in this filing : "Abeja's managers are John Patience, a citizen of the United States ("Patience"), and Lawrence Mehren, a citizen of the United States ("Mehren")." Every previous filing of Abeja's included prominent mentions of Schuler. We wonder what changed… where did Schuler go in this mandatory filing?

In the same filing dated March 6, 2013, Abeja disclosed it distributed all of its AXDX shares to "its members" and "no longer holds any warrants or shares of the common stock." Prior to this filing, as shown earlier, the only three disclosed members of Abeja Ventures were Schuler, Patience and Mehren. The filing disclosed 38.8 million shares outstanding following the exercise of the majority of the warrants, which is 27.7 million shares higher than the 11.1 million disclosed prior to the investment (38.8 - 27.7 = 11.1). Therefore, it is straightforward confirmation that the individuals responsible for the recap owned the new shares that bridged the current outstanding share count at the time of 38.8M and the original share count prior to the recap of 11.1M (So 38.8M current less the original 11.1M shares out = the recap partners ownership of 27.7M shares). In concert with the Abeja Ventures filing, Schuler, Patience and Mehren each filed individual 13D's, which included 8 million shares for Schuler, 5.7 million for Patience and 4.3 million for Mehren. Mehren's ownership included 2.2 million options with a $1.04 exercise price that was issued to Mehren independent of the recapitalization. All three of these individual filings, including Abeja Ventures filing showing zero interest held, were dated March 6, 2013.

To summarize, at March 6, 2013 Schuler, Patience and Mehren disclosed ownership of roughly 15.9 million shares related to their original investment (8.0M + 5.7M + 4.3M - 2.2M options issued separately to Mehren = 15.9M), significantly below the 24 million to 28 million they should have held . The 27.7 million share increase in common shares since the investment verifies that shares were issued (38.8M - 11.1M = 27.7M), but somebody else somehow owned them. We could not find any other offerings disclosed during this time period. We also could not find any filing where Schuler, Patience and Mehren disclosed selling shares - which they would obvious need to do given ownership percentage and insider requirements.

It is probably not a coincidence that Larry Feinberg of Oracle filed a 13G disclosing a 3.972 million share position in AXDX with a March 6, 2013 date - the same date the three other insiders responsible for the recap filed their respective 13D's.

Feinberg's filing represented a 1.8 million share increase relative to Oracle's position disclosed on December 31, 2012 . According to Bloomberg, only 716,617 shares of AXDX traded between December 31, 2012 and March 6, 2013 - the day of Oracle's revised filing. So how exactly could Oracle/Feinberg increase its position by 1.8 million shares when only 716,617 shares traded in TOTAL during the period in question when he supposedly bought stock? There were no options and we do not believe there were any other shareholders outside of the 13D filers that were large enough to bridge the difference versus the public volume. The most logical explanation is that one of the three original sponsors sold shares to Oracle (and potentially others). If this were the case, which seems to be the only explanation considering the "disappearance" of shares in their own filings, it is perfectly fine if the consortium wanted to include Feinberg/Oracle in another penny stock. However, SEC requirements stipulate that the appropriate disclosures would have needed to be filed.

More forensic evidence exists that suggests other shares may have been reallocated without legal disclosure requirements. Matthew Strobeck's share acquisitions seem very difficult to reconcile. On July 2, 2012, Matthew Strobeck, Ph.D. was appointed to AXDX's board of directors. His Form 3 dated 7/2/2012 (see below) states "no securities are beneficially owned."

Later that year, the confirmed that Strobeck did not own any shares as of 10/14/2012.

Later that year, the company's Proxy confirmed that Strobeck did not own any shares as of 10/14/2012.

(click to enlarge)

Mysteriously, on 3/6/13, Strobeck filed a Form 4 that disclosed he owned 1.9 million shares of common stock based on his "connection with Abeja Ventures," which he was now a "non-managing member of" and his 1.9 million shares represented a pro-rata share of this membership interest. We point out that this was the first reference to Strobeck as an owner in Abeja Ventures (at least that we could find). In subsequent SEC filings referencing Abeja Ventures, the disclosure changed the ownership attribution, "Abeja Ventures, LLC, which is owned by, among other individuals and entities, Lawrence Mehren, John Patience, Jack Schuler and Matthew W. Strobeck, each of whom is a director of the Company." The addition of Matthew Strobeck as an owner in Abeja first appeared in a June 2013 S3 filing, also suggesting Strobeck acquired AXDX interest from the original three investors.

The following table provides a timeline from the recap to the apparent undisclosed sales of shares:

Schuler, Patience, and Mehren were all executives or board members of AXDX during the dates above. If they sold shares to Feinberg and/or Strobeck without disclosing the sale, we believe this would constitute a violation of securities law. Their own filings suggest they were aware of this prospective violation based on the standard warning that "Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a)." We found the highly coordinated moves questionable and impossible to reconcile. The share and ownership inconsistencies reinforce our own belief that AXDX may be set up as a promotion. We believe the independent board members of AXDX have a fiduciary duty to investigate these potential undisclosed insider sales.

Funding the Business

Since the equity recapitalization and change in control in April 2012, management has funded the business through the issuance of controlled rights offerings - which are is not generally inconsistent with a stock promotion in our opinion. A study," Investor Protection and Choice of Share Issuance Mechanism ," conducted by MIT and University of Alberta professor R. David Mclean, found rights offerings are typically issued to "preserve ownership concentration and control" at the cost of investor protection. To date, AXDX has completed two rights offerings raising a total of $45.5 million. In the first rights offering that closed in August 2013 at an $8.04 per share, Abeja Ventures provided a standby purchase agreement to acquire all shares not subscribed by existing investors. As referenced above, Abeja had already distributed all of their shares, but now publicly committed to providing a backstop. The second rights offering closed in May 2014 at a price of $16.80 per share. Originally Jack Schuler agreed to backstop the deal (the first filing disclosure), but with a much lower subscription participation rate from current shareholders (57% versus 75% in the first deal), Larry Feinberg and Oracle joined Schuler in backstopping the deal.

Rights offerings can absolutely be seen as shareholder friendly, and management was putting fresh capital to work at higher prices. However, elements of the rights offerings were questionable. A controlled rights offering allows management to maintain a tight control on the float of the company. The top five insiders (of which we include Oracle) control 25.9 million shares, or over 58% of the company. Only four institutional investors own more than a 0.75% stake in the company (and two of those are large index / ETF funds). With that profile, rights offerings allow the small group of parties to further control a possible promotional story. While apparent that retail investors and momentum investors viewed Schuler's May participation as a bullish statement that helped drive AXDX to an irrational market cap, Schuler's average cost basis on his shares still remains just $4.21 per share.

AXDX appears to be a well hyped PowerPoint. Yet there remains no data support, no independent clinical studies, no FDA approvals, no sales force, a failed IP history, broken promises regarding the timeline of their commercialization, and a management team that appears to have misled investors and potentially violated securities law. Given that set of circumstances, we see zero fundamental justification for AXDX trading at a premium to TTOO. At a generous 75% of TTOO's market cap and EV, AXDX would trade at $7.50 to $8.00 per share, which represents roughly 65% downside. If, as we suspect, AXDX's commercialization never materializes, we would expect substantially more downside.

See also 7 Stocks With A Strong Cash To Dividend Coverage on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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