Generex: A Stock Suitable Only For Its Officers And Directors Or Carl Icahn

Dec. 2.13 | About: Generex Biotechnology (GNBT)

Editors' Note: This article covers one or more micro-cap stocks. Please be aware of the risks associated with these stocks.

I have owned Generex (OTCQB:GNBT) for years. I like the technologies. But the company has always had leadership problems, and those problems continue to the present. Upwards of $350 million has been invested in this company, and the current market cap is only $17.5 million.

Stockholders probably shot themselves in the foot when they failed to approve a reverse split a few years ago, which was preparatory to doing another private stock sale, but they were tired of the dilution. Then there was a boardroom coup and Anna Gluskin, the CEO, was out, and Mark Fletcher, whose only qualification appears to have been that he was the company's general counsel, was in.

There was never a search for a CEO with appropriate qualifications, and the stock and funding for its projects, has been in a slow, but inexorable decline. A proper CEO would have some scientific background, probably would have worked for major pharmaceutical companies and the government, and hopefully would have had some business smarts, and made lots of connections in his or her previous employment.

As it is, Warren Buffett would call this another case of a company's management running the company for itself. The principal document I would bring before the investment community is this:

http://biz.yahoo.com/e/131101/gnbt8-k.html

The officers, in lieu of cash compensation, have been granted stock equal to 7.5 million shares out of 599 million shares outstanding, or they have just given themselves 1.2% of the company. As a shareholder and a journalist, I find myself in a state of ineffable disgust and exhaustion. I am stunned by the greedy grab of these officers. My fellow journalists who have tracked the stock have dropped out in disgust a year or two ago. Imagine how many shares officers will be able to scoop up if the stock falls to $.01 or $.001. It calls to mind W.C. Fields - never give a sucker an even break.

Okay, there are too many shares outstanding. I cede that, no problem. Probably there should be a 1 for a 100 reverse split.

An honest and above board management would have combined some kind of combination of debt and stock at perhaps the average price of the stock over the entire history of the company to pay the officers. Remember, it used to be that options were always granted at some price above the current price to encourage officers to strive to improve the stock price and the fortunes of the company.

Perhaps there would be justification for a deal this rich if they had performed at the level of that kind of pay, but I fail to see any such performance. There are no product sales, there have no new collaborations, or licensing deals. They have even failed to bring about a promised update of their primary product, Ora-lyn.

Apparently, a licensee in India, Shreya, at their own expense conducted a Phase III trial, where their product, Ora-lyn, an oral insulin product, is marketed as Oral Recosulin. That Phase III trial went well: "Generex Ora-lyn significantly lowered the HbA1c at 6 weeks and 12 weeks compared to a baseline (p less than 0.05) while injected human regular insulin did not significantly lower the HbA1c until 12 weeks. Generex Ora-lyn resulted in a significantly lower HbA1c at 6 weeks than did injected regular insulin (p less than 0.05). At 12 weeks the HbA1c for both groups were statistically comparable." This was a non-inferiority test, which showed that the oral insulin product worked as well as the injected variety.

Actually, that is a very significant showing. If India comes on stream, then Generex might actually have an income stream, and so this will make the officers' grab for stock even more lucrative.

In a world of 'shoulds', there should be a governmental body to bat down such egregious officer enrichment schemes. As it is, it looks like it might just work for the officers. The only kind of buyer that would be appropriate for a company like this would be a Carl Icahn, who could buy it for a song, complete any research they need to get past the FDA, pay to get their primary product out the door, and bag the fortune that Pfizer was looking for with its inhaled product, Exubera. (Instead of succeeding, Pfizer, wrote down a loss of $2.8 billion). And he may not even have to go to all the trouble. Once he has acquired it, he can probably flip it because it does have good technology.

Investment Advice

Steer clear unless you are Carl Icahn (or have similar resources), or unless you have the stomach to wait for the word from India, and can breathe without using your nose, because this management stinks. My most recent Seeking Alpha article, which recited the possible upside of Generex's prospects is this:

http://seekingalpha.com/article/1145681-generex-research-for-sale-on-the-cheap

Disclosure: I am long OTCQB:GNBT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.