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I watched the NOVA National Geographic special "Mystery of a Masterpiece" last week in the wee hours when my insomnia usually strikes. Art collector Peter Silverman found a picture of a young woman in a Christie's catalogue described as early 19th century German. He thought: might be Renaissance or might be fake, but probably not 19th century German. It turns out odds are pretty good that it might be a Leonardo da Vinci. At least someone was willing to offer him $80 million, which he turned down. He paid only $22,000. Ah, to find that diamond in the dirt. I wonder if I have one...

I don't like asset plays. The main problem being: what are the assets in question worth? Can they be unloaded (i.e. can the asset value be realized)? Only good management can unlock the value. Warren Buffett talks wistfully of missing out on the great value in Disney's film library, which was just lying there in the vault doing nothing during the 1970s. But he didn't miss out altogether. He got his piece of it later on when Disney merged with Cap Cities.

But the question remains: how much gold is there in that there hill? And so on. And further, who knows what the research is worth in some small start-up?

The problem with start-ups is how do you know if the thing they are working on is worth any money. In this case, I think there is a prima facie case for that, but we are putting the cart before the horse.

The company in question is Generex (OTC:GNBT), a company that formed over a clever idea. That idea is what I would call the nitroglycerin principle. Heart patients put a nitroglycerin tablet under their tongue, and the nitroglycerin is absorbed quickly into the bloodstream through the mouth, and the patient gets pain relief.

It turns out that the mouth is awash in blood vessels, and absorption (with the proper agents) is so quick that sometimes it is faster than injection. At least that is a claim Generex is taking up with the FDA.

The company tried the nitro-through-the-blood-vessels-in-the-mouth concept on 160 different drugs, and it seemed to work. So, they narrowed down the list of prospective drugs, and decided that insulin would be the perfect candidate. The market for diabetes is huge, and it would be a much easier way for diabetics to get their insulin. A few puffs inside the cheek (in the buccal tissues), as opposed to sticking a needle in your abdomen.

Eli Lilly (LLY) seemed interested, and put $1 million into it, but then withdrew their support and moved on to other prospects. But one employee of Eli Lilly did not lose interest; more about that later.

Proof of Value

Meanwhile, Pfizer (PFE) was attracted to this very same insulin market for the profit appeal of illnesses which require constant "disease maintenance and symptom control." If a course of antibiotics vanquishes an illness, then after a week or two no more money is spent on drugs. Better is a disease which requires a lifetime of drugs, which is why cholesterol drugs are so appealing to the pharmaceutical business, and Lipitor is so attractive to Pfizer (PFE). Diabetes is perfect.

Pfizer decided that a lung-absorption aerosol technology developed by Nektar Therapeutics (NKTR) was the way to go, and so they spent $2.8 billion to do the testing required by FDA, and brought it out as the product Exubera. Problem was, if they had done just a bit of market research, they would have learned that patients did not want to put anything in their lungs, and their doctors pretty much felt the same way.

Pfizer released the drug for a short time, and then wrapped the project and wrote it off in October of 2007. Novo Nordisk (NVO) followed suit, and dropped their research into lung absorption aerosols in 2008.

Also attracted to the diabetic area was Alfred Mann, the head of MannKind (MNKD). MannKind also went the lung absorption route. In their case, they have pursued this approach long after Pfizer put the kibosh on their program, and Novo Nordisk dropped out. Is this block-headedness taken to the power of x? Or is this stubbornness that finally wins in the end? My bet is on consumers - they don't want to put stuff in their lungs. I wouldn't, especially if there were a less offensive way of getting the insulin. And there is.

Generex's problem is that they have never had the kind of leadership that they have needed. For years the company was led by Anna Gluskin. She was the victim of a lot of shareholder unhappiness which came to a head over the need to do a reverse split, which would dilute and disenfranchise the existing lot of shareholders, and greatly favor any new investors. And why shouldn't they be unhappy? But this is the great pitfall of farsighted investors. They are in way too early. They're too idealistic. Especially if their leader lacks financial resources of his own to prop up a company like Alfred Mann did.

Leadership Qualities Needed for a Biotech Start-up

A really resourceful leader might have a work history that included both the FDA and a couple of huge pharmaceutical companies. Such a person might have found financing from the pharmaceutical companies and pushed the process through the FDA. Generex never had anybody like that. When Anna Gluskin was pushed out of the CEO job, the corporate attorney on the board, Mark Fletcher, took over. It doesn't appear that he has any important connections of his own because the company has since drifted into obscurity.

The happy thing is that the drug is not the problem because in this case, insulin is not the issue. Insulin is a hormone used by the body, and is especially required by diabetics. The issue is the process, the compounds used to get the insulin past the skin barrier in the cheek. Are they safe? How much gets into the system and when?

The testing done by the company has gone pretty well. The FDA does not seem overly concerned about safety, patients can get the product through the FDA's IND (Investigational New Drug) program.

Recent Research

Generex's has a licensee in India, Shreya Life Sciences Pvt. Ltd. which has recently completed a Phase III trial of Oral-lyn. This was a non-inferiority study, which was designed to see if Oral-lyn was as effective as an injection. Apparently, it works as well. Non-inferiority has been established.

So, on January 23, 2013, Shreya announced that it had submitted a dossier to the Indian government with the results of this study which was conducted at 14 sites in India with 209 subjects. Shreya expects approval from the Indian government by summer 2013, when it will commence commercial distribution.

If Shreya gets approval, well then, I suppose it will help Generex start up the research machine again.

Scientific Advisory Team

Even though current and past CEOs of the company don't seem to have very good connections, Generex does have some connections on their Scientific Advisory Board:

Dr. Gerald Bernstein is a past president of the American Diabetes Association. He has made a few useful videos about Generex's insulin product Oral-lyn. Here is a video he made on the scope of the diabetes problem (or market size, if you will).

Bernstein himself is a Type 2 sufferer, and he has been an Oral-lyn guinea pig for years.

Here is yet another video in which Dr. Bernstein explains Generex's insulin product Oral-lyn through the mouth.

Dr. James H. Anderson, Jr., was the employee who worked at Eli Lilly during their short sponsorship of the Generex product, Oral-lyn. He was the Medical Director at Lilly. He liked the idea so much that he has circled back after his retirement and come back to GNBT years later to serve on Generex's scientific board, and is helping to supervise the testing.

Also on the Advisory Board is Dr. Joseph Rubinfeld, who is one of the co-founders of Amgen (AMGN). On joining the board he voiced his thinking: "I am convinced that what is unique to Generex is that its delivery method can be applied to a host of drugs already on the market. Its Generex Oral-lyn™ diabetes product just scratches the surface of the potential benefits for patients, by providing a simple pain-free alternative to injectable drugs..."

Craig Eagle, M.D., from Pfizer is overseeing the company's anti-cancer drug studies on AE-37. So, he must know what is going on in the insulin area.

What are its prospects as an investment? Are they really as poor as the stock price suggests? Is everything built into the price (a theory I hate)? Maybe, but maybe not.

If a drug company were awake to the possibilities, I can see some CEO munching on his cigar, thinking, "Well, this is going to work a hell of a lot better than the inhaled product. Nobody wants to put junk in their lungs" (the irony of the tobacco smoke he is breathing in will not even occur to him). "And, I get 15 years of research, and patents, and millions of dollars worth of FDA approval work. Young Skywalker, it's not so much the money as the time." Chomp, chomp. "And this will work with other drugs. We'll have to get someone to tweak the patents to extend its life-span..."

So What's This Seeming Turkey Worth?

How can a new means of getting insulin in the system be worth $2.8 billion one day, and now is only worth $24 million? I'm not buying it. I'll buy that the lung route is probably worth nothing, that's what Pfizer and Novo Nordisk decided, but a new method that does not involve needles, and doesn't put anything in the lungs, might still be worth that $2.8 billion investment. On the face of it, this is a fantastic opportunity for some drug company.

Novo-Nordisk seems pretty keen on their Pen, and you never see a needle in their commercials, but when I did a Google search on "Novo Nordisk pen," it prompted "Novo Nordisk pen needles." So, the problem of needles has not gone away at all. And so the opportunity is still there for Generex in spades. There would be good incentive for a company like Novo Nordisk, the largest maker of insulin. You have the prospect of users not skipping, which has to be a plus. More insulin will be consumed. And if that is the carrot, here is the stick: whoever gets the mouth absorption technology will make the Pen disappear.

Pfizer has problems of bigness and in-fighting that go beyond the scope of this article, but interested readers would find Fortune's article "Inside Pfizer's Palace Coup" immensely interesting, and I highly recommend it.

But one of the things that seems pretty clear is that Big Pharma is great at spending money on research, but they never seem to do as well as small start-ups do on getting results. So, while it may be worth it to spend some money on research, clearly their strategy should be partnering, sponsoring, and licensing the start-ups.

And the Fortune article spells it out. Pfizer spent $60 billion on new drugs between 2000-2008, and this only produced nine (9) drugs that got past FDA. That works out to $6.7 billion per drug.

Big Pharma Has Trouble Making Good Decisions

So, the idea that Generex's research has been passed over by super-intelligent Big Pharma managements is utter nonsense. The decision-making of Big Pharma can be as lousy as any investor's. Their own research produces only a very few drugs, and only at great expense.

It's not a Drug, It's a Method of Drug Delivery

But wait, wait, wait, just to remind you again, Generex's Oral-lyn is not a drug, it's a method, a technique, a way of getting drugs into the blood system in the mouth (the buccal tissue), so only mouth enzymes get in the way. The company does not have to establish that a diabetic needs insulin; that was established in the 1920s. It only has to establish that it can get it past the skin barrier inside the cheek, and a patient has to figure out how many puffs he needs.

As I pointed out above, the company has tried it out on over 100 substances, so maybe it would work with vaccines or antibiotics, as well as hormones like insulin. Or how about for Viagra and Generex's mouth absorption technique? That sounds like a happy marriage.

There's a Kicker

Then there is also their subsidiary Antigen Express, which is developing vaccines for improving immune responses. This product may turn out to be useful against viruses and cancers. They are currently having some luck in preventing relapse in breast cancer patients (reduction of 42% in the risk of relapse). How wide-spread would its use in cancer would be? They are also testing it against prostate, but it's early. And would it work against HIV or the next big virus wave? The stock woke up during the last bird flu epidemic. Hard to know, or put a price tag on. But okay, a possible price tag: $0 to $10 billion. It could be a hell of a kicker.

The company has proposed spinning off Antigen Express. The following link is a company press release, which speaks to its cancer research.

The present case is nearly the worst case, the company is worth from zero to $24 million, where it is now. Best case could be made for $12.8 billion - Pfizer's write off of $2.8 billion plus $10 billion for the vaccine technology. There are 372 million shares. So, I'm saying the company is worth anywhere from $0.06 to $34 per share.

This is Not a Bet on Management

Management has not been able to raise enough money to finish the testing on the cheek absorption process, and so the company is in sleep mode. Perhaps Mr. Fletcher likes being CEO of a biotech startup. Unfortunately, nothing in his resume suggests that he has the qualifications we would be looking for in the head of a biotech. All we see is his legal experience which substantiates his role as General Counsel. We see no biological research or patent research or FDA experience. His predecessor, Ms. Gluskin, had more relevant experience. We think he would do shareholders and diabetic sufferers (and himself) the most good by either: (1) searching for a CEO with the kinds of connections and experience that can do Generex some good, or (2) to put the company up for sale, and see what Wall Street and a new owner can do with this technology.

So, to be clear, I believe management is drag on the progress of what we see as very significant research. But overall, I don't believe this is a turkey at all. Another way to value the research is to look at the balance sheet. It shows retained earnings at a negative $357 million, which could be taken to represent the money that has been spent on research. But there is a time value to this stuff, so I think this research is worth half-a-billion minimum. It could be argued that even this number ($500 million) represents a hugely discounted price (after all, it is 83% less than the $2.8 billion Pfizer spent). The insulin market has not gone away. Generex's current market cap of $23.44 million is absurdly, ridiculously low.

Okay, you say I'm crazy, on the lunatic fringe, but I owned Alza at $3 per share in the mid-1980s. I sold at $18, a good profit. But it went on to be bought by Johnson & Johnson (JNJ) in 2001 for $10.5 billion, and if my calculations are correct, $280 per share. I sold early. And what business, you ask, was Alza in? Drug delivery. Sound familiar?

Fellow Seeking Alpha writer Rich Steffens has written many intelligent pieces about Generex over the years, and I would refer any new and existing shareholders to his articles.

But except for a few brilliant minds, this information has passed through the collective investment consciousness like a neutrino, unheeded. Bet only your casino money on this one because you'll probably leave it at the tables. But it is very, very far from a stupid bet, just one that may or may not work out in the end.

Source: Generex: Research For Sale On The Cheap