Generex to Spin Off Antigen Express to Unlock True Value

| About: Generex Biotechnology (GNBT)
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“There is nothing wrong with change, if it is in the right direction” -- Winston Churchill
Last week, I attended Generex (OTCPK:GNBT) Biotechnology's live webcast held at the Nasdaq Marketsite in New York City with a fellow shareholder friend. At the event, the company's CEO, Mark Fletcher, unveiled the company's strategic development plan for the company's future growth. We were also fortunate to sit in on the conference call held later that same afternoon, since the CEO and his top advisor, Joseph Moscato from Seahawk Capital, invited shareholders in attendance to quietly listen in.
Five months ago, I wrote an article detailing my position that approval of the company's previous reverse stock split proposal, while the company's common stock was still listed on Nasdaq, would be preferable to such a proposal while the stock was trading on the board. We are now in the scenario that I once feared. However, Generex's forward-moving plan has me enthused that the company is taking dynamic and prudent steps in placing the pipeline in a better position to be properly funded. As shareholders learned in January, raising capital on the bulletin board is highly dilutive, even when the cash raised is a modest $3 million.
Last year, longtime CEO Anna Gluskin was replaced by then-executive vice president and general counsel Fletcher; shareholders have not heard from him since the last corporate update held in October. I wanted to watch his latest presentation in person, and to look him and his team in their eyes. I arrived at the webcast as a concerned shareholder who was not quite certain that Generex's new management team was on a path that was most beneficial to its large group of shareholders.
Before the webcast began, my friend and I encountered Dr. Gerald Bernstein, Generex vice president of medical affairs, and Dr Eric von Hofe, president of Generex's wholly-owned subsidiary, Antigen Express. Bernstein and von Hofe were the two main figures I hoped to talk with, in an attempt to gauge their sentiment towards the changes that have taken place at Generex. After speaking with them, I noticed their renewed confidence and enthusiasm. During the 15 or so minutes leading into the webcast, I chatted with von Hofe about publicly-known details surrounding the Phase II study of the AE37 HER2/neu peptide vaccine for early stage breast cancer patients, and he expressed his optimism for the new team leading Generex. As we spoke, I had no idea how vital of a role Antigen Express would take in Generex's forward moving plan.
Last summer, while at the company's annual meeting, I told Generex board of directors member John Barratt that, while I was optimistic for the company's pipeline of metabolic drugs and immunotherapeutic vaccines, I would like to have seen greater transparency from management. I again met Barratt before the webcast. Barratt is now chairman of the board, and he took the time to welcome us to the event. As we all walked into the room where the webcast would take place, Barratt told us to get ready to see a new era of transparency for Generex. Transparency is his mandate for the new CEO, and Fletcher also promised us that the company will be transparent on all matters.
By now, it is known that Generex's strategic plan includes a spin-off of Antigen Express as a separate, DTC-eligible, SEC-registered company. According to the company, the spin-off will be accomplished by the issuance of one or more dividends of Antigen Express stock to Generex stockholders. The record dates are yet to be determined. The stock dividends will enable Generex stockholders to directly participate in the promising future of Antigen Express, as well as create a large shareholder base with the potential for substantial liquidity on an immediate basis. As the CEO explained, that liquidity will be further enhanced should Antigen Express be successful in attaining a national stock exchange listing; this should provide it with ready access to the capital markets to finance its ongoing clinical initiatives.
There are many other aspects to Generex's strategy, as well as a subsequent plan to initiate a rights offering of common stock and warrants to its stockholders, in the event Generex receives approval for a reverse stock split. All of this is slated to occur at the next annual meeting of Generex's stockholders, scheduled for June 8, during which time it's expected that whether Generex's common stock will be listed for trading on a national stock exchange will be announced.
During the webcast, Moscato of Seahawk Capital introduced himself as Generex's strategic advisor. I have written about Moscato and his consultancy role with Generex before; he has since grown to play even a more prominent role in designing the company's strategy for the future. Moscato helped Generex attract an impressive array of scientific experts, and he leads its business plannings, while finding accredited investors to fund its initiatives. As Generex's plans were unveiled, I realized I had no clue to what I was talking about as I challenged him. One concern that I had expressed to him was how Medicare's competitive bidding policy may affect the planned acquisition of Global Medical Direct. This concern was eased during the webcast and subsequent conference call.
During the day, we were told how the plan will protect Generex stock from shorting and selling pressure after a reverse stock split is implemented. Generex shareholders will earn another dividend in Antigen Express stock, providing it still holds its Generex stock after a certain date. I asked if the company could still offer Generex shareholders the free dividends of the new Antigen Express stock if the reverse split proposal was denied, or if there could still be a rights offering. I was told that free dividends of Antigen Express stock would no longer be practical, and there would then be no rights offering. I was told that such tactics would lead to huge dilution for both Generex and the new Antigen Express. However, without the reverse stock split proposal being approved, the company would still spin off Antigen Express. In such a scenario, shareholders would gain no free dividend in the new company; the only benefit they would see is the new value of a publicly-traded Antigen Express being on Generex's books, as Generex will have controlling interest in the new company.
In other words, if Generex's shareholders vote down the reverse stock split proposal, they will be shooting themselves in the foot. Reverse stock splits are very unpopular, and usually for good reason, but the steps Generex has taken in planning an additional dividend award after a certain time period will protect against the company's stock from being shorted. Since Antigen Express is highly popular among Generex shareholders, I feel most would want to hold onto their Generex shares to win that second free dividend, which will help support Generex's stock.
Later in the day, we joined the Generex team at the conference call. Many shareholders that called into the conference call expressed concern about the developmental status of Oral-lyn. I was watching the team members as they responded; they looked poised and eager to take as many callers as possible. They waited until the caller queue was empty before ending the event. During the conference, I also asked Dr John Anderson if the company could provide results for the number of patients that are enrolled. He explained that this would compromise the data, and that he needs to gain the guidance from the FDA before mapping out the company's next developmental steps. The company expected this guidance in December, but recently learned it will arrive in another couple of weeks.
After the call, I questioned Anderson about a concern that the company may not be as confident in Oral-lyn as it was in the past. He reminded me that he was the person at Eli Lilly (NYSE:LLY) that brought Generex into an earlier partnership for buccal insulin. He said he believed in Oral-lyn then, and he does more so now. I asked Fletcher a similar question regarding Oral-lyn, and he said if he was concerned about Oral-lyn, he would not spin off Antigen Express. He said the opposite is true: That the company is only planning the spin off because it's very confident in Oral-lyn and in the RapidMist delivery system. Once the company receives guidance from the FDA, he promised transparency in alerting the investment community of what it's learned and how it will proceed. It is possible that another study will be required; the company is also planning a study with Type 2 diabetics.
In any scenario, Generex will need to conduct clinical studies; access to less diluting funds is most beneficial to the company's shareholders. While the company ultimately failed to gain continued listing on a national exchange last year, this is a new Generex, and Barratt explained that this is why the special committee of Generex's board, formed in September of last year, executed bold changes. Barratt stated that many steps have been taken to maximize shareholder value.
I did look them all in the eyes during the course of the day, and what I saw was confidence and commitment. Fletcher, along with Moscato, told us that the day's unveiling of the company's new strategic plan is only the start. Over the next 60 days, leading into the annual meeting on June 8, more will be announced, including what Moscato termed "meat being added to the bones." The details of the continued developments will be exciting to learn, as the known elements of the plan are surprisingly transformational.
Von Hofe appeared quite at ease with the new team, as I was still watching as he relaxed after the conference call with Pfizer's (NYSE:PFE) Dr. Craig Eagle. During that time, my friend and I interacted with them all, and they appeared excited as they talked about the new Generex and Antigen Express. Fletcher and Moscato were most accommodating to shareholders in attendance; Barratt held court with the team's group of scientists and finance experts, and he had a distinct look of great satisfaction on his face.
Beyond all of this, both of the company's top pipeline assets will be featured at industry events this week. The 4th International Congress on Prediabetes and the Metabolic Syndrome will take place in Madrid, Spain, on April 6-9. There is an abstract that will be presented on April 7 entitled "A New Way to Treat Subjects with Impaired Glucose Tolerance: Buccal Spray Insulin," which reports the Phase II study results for Oral-lyn with IGT patients. Also, the 102nd AACR Annual Meeting starts April 2. During the "Late-Breaking Poster Session," two abstracts will be presented detailing immunological and safety findings for Antigen Express' AE37 HER-2/neu peptide vaccine from a Phase II study with early stage breast cancer patients.
Generex and Antigen Express have significant IP, with a pipeline that is full of potential. Generex belongs on a national exchange, its pipeline deserves access to adequate funding, and the new team deserves support, so it can complete its goals. I'm voting for Generex's new plan, for my free dividend shares in the new Antigen Express and for a better future for the new Generex Biotechnology. I believe that this is change in the right direction, and a change that benefits Generex's current shareholder base.
Disclosure: I am long GNBT.