Tech Transfer eNews Blog

Fraud allegations after biotech start-up’s IPO put university in a tough spot

By Jesse Schwartz
Published: August 18th, 2021

A detailed article on the implications of the Athira fraud allegations for not only WSU but also for other TTOs in how they structure license agreements with faculty start-ups appears in the August issue of Technology Transfer Tactics. To subscribe and access the complete article, or for further subscription details, click here

The allegations of research fraud by the chief executive of Athira Pharma, a Washington State University biotech spinout developing treatments for Alzheimer’s and other neurodegenerative diseases, are raising questions about how a university can protect itself when a company using its licensed IP faces class action lawsuits and a potential investigation by the Securities and Exchange Commission (SEC).

And it’s not just reputational issues at stake — the company went public a year ago and has a market cap of more than $360 million, some of which is held as equity by WSU. Milestone payments and royalties are also at risk. The stock price of the company plunged dramatically after the fraud allegations surfaced.

Athira Pharma, based in Bothell, WA, placed former WSU researcher Leen Kawas, PhD, who is Athira’s CEO, on temporary leave as it investigates claims that as a graduate student she published several papers containing altered images.

The company is facing three class action suits alleging SEC violations on the behalf of shareholders. They allege that the company made false and misleading statements to the SEC in its filings in preparation for its September 2020 IPO, which raised about $204 million.

And according to a report by STAT, the company also faces potential trouble over a federal grant application, which cited the allegedly doctored papers. If so, the government could force the company to repay the $15 million grant it received as well as additional penalties.

Documents filed with the SEC indicate that WSU would receive payments at multiple milestones during the company’s development of its Alzheimer’s drug. Athira Pharma’s S-1 form filed days before the IPO says the company will pay the university $300,000 at the start of Phase 3 trials and $600,000 when the drug receives FDA marketing approval.

WSU also will be paid a royalty “in the mid-single digits of net sales,” the documents show. WSU received a $50,000 payment at the start of Phase 2 trials in 2020, according to an SEC report made in March 2021.

WSU’s tech transfer office did not respond to a request for comments, but the university issued a statement that it is reviewing the claims of research misconduct and confirmed that it owns stock in the company.

WSU’s equity has already taken a big hit. The stock price dropped 38% the day after Athira Pharma announced it was placing Kawas on leave. In the first week of August, the price was down 65.87%, to $10.16, from its $29.77 share price in the first week of January.

One of the lawsuits claims that Athira’s SEC filing failed to note that Kawas “had published research papers containing improperly altered images while she was a graduate student.” It goes on to claim that Athira Pharma’s intellectual property and product development were based on invalid research.

The lawsuits maintain that Kawas’ graduate research was foundational to Athira’s efforts to develop new treatments. One suit notes that a key SEC document filed by Athira claims Kawas was “essential in creating our innovative translational development strategy.”

The impact of the allegations on the company and WSU will depend on how important the work in question was to the drug’s development, says Jay P. Kesan, JD, professor of law and director of the Program in Intellectual Property and Technology Law at the University of Illinois College of Law in Urbana. If fraud occurred, it might not mean the end of the company if it involved research that was not crucial to developing the drug, he says.

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