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Funding for the development companies that I have followed over the years always have their problems. While the product is being developed, which can take five or ten or fifteen years, the managers have the job of continuing to find funding for the development.

Unfortunately for investors, this process usually sees stock prices in continual decline. Generex is no exception to this. Shares have been sold to new large investors in ever declining prices.

The stock price has declined to the point where Generex (OTCQB:GNBT), in order to avoid being dropped from NASDAQ, sought a reverse split. They reported on Friday that only 60.62% of the shares voted at the annual meeting approved the reverse split. This was less than 50% of the outstanding shares. What Generex did not reveal was how many shares were voted. If the 60% approval of 266 million shares outstanding equaled half of the outstanding shares, that would be 221 million shares or 83% of the outstanding shares. So, the number of shares voted was something less than 221 million shares. R. Steffens reports that 180 million shares were represented. For a report on the annual meeting, check his blog.

For at least some of the existing shareholders, this represents a victory- a delay in further dilution. The CEO, Anna Gluskin, does not appear to own any shares outside of option grants. And shareholders take this badly. To them, CEO's often seem like consultants, hired hands, instead of committed leaders.

But biotech start-ups can move dramatically. We all saw Dendreon (NASDAQ:DNDN) limp along until it finally got its approval, and then the stock soared. I saw it double on its first day of approval. And even though it went up a lot, that was the day to buy. A lesson for start-up investors. (Also, let's not forget that Generex has a prostate vaccine in the works.)

Reverse Splits

I have been part of reverse splits before, and as I recollect one in particular, the stock did collapse after the split, but when the company finally achieved profitability, the stock soared well above the pre-split price. So, there is a loss of hope after the split, but if the company perseveres, this may well be overcome.

Though for now, for existing shareholders, a reverse split looks like an opportunity to further devalue the shares as management seeks new investors.

Management

Looking at the website, I see that Anna Gluskin has Masters degree in Microbiology and Genetics from Moscow State University. What this does not tell us is what her connections are in the industry, what scientists she knows, who she knows at other biotech and drug companies, and what rich folk she knows. On the surface, it is not a particularly impressive resume. Though others working for the company do have impressive credentials. Gerald Bernstein, M.D., is a past president of the American Diabetic Association, and Eric von Hofe, who heads the vaccine effort, has prior experience in the business, a Ph.D. from USC, many published articles, and participated in patents.

Gluskin has found funds to keep the whole thing going, which is a bit of a trick, and for which she should be congratulated. But is she just raising funds to pay her salary? And is her salary high? I am, for now, keeping my mind open as regards her performance.

On the other hand, the product appears to be on track to meet its FDA goal of a non-inferiority test. And my take away from that is that it should ease her job of convincing new investors.

Remember, Generex is not testing a new drug per se. Insulin has been around for a long time, it is only a test to determine if it can be ingested through the buccal tissues inside the cheek. It has already been proven by Pfizer (NYSE:PFE) that it can be ingested in the lung tissue. And buccal tissues, which are blood vessel rich, are already used to absorb nitroglycerin in the treatment of heart patients. There is still a leap to show that this can work for insulin, but perhaps not such a tremendous leap, and so far so good.

Prospects

Now, Pfizer wrote off $2 billion because patients were not comfortable with taking the stuff in their lungs. Novo-Nordisk (NYSE:NVO) wrote off a couple of hundred million. MannKind (NASDAQ:MNKD) is still pursuing insulin in the lung, which certainly looks like a dead-end from the point of view of users. Generex is alone, with patents, pursuing this in-the-cheek method, and of securing a $1 billion a year market for itself.

Has Gluskin failed by not getting $100 million for the licensing rights for the USA? Or are the directors at Pfizer such gamblers that they will lay down $2 billion on insulin through-the-lung, but not get insurance by putting down $100 million on a side bet on through-the-cheek?

Generex can still fail on through-the-cheek, but the interim results are encouraging, and no doubt the people at the FDA, with their focus on patients, will likely want to approve something which will improve the lives of diabetics, and more importantly, will improve compliance, which is the principal problem for diabetics.

If it succeeds, Generex may well be one of the large biotechs of the future.






Disclosure: Long Generex

Source: Generex: Reverse Split Not Approved