Generex 's Acquisition Into the Direct to Consumer Diabetes Market Provides Synergistic Value

R.J Steffens

Generex Biotechnology's (GNBT) shareholders have read a lot of corporate news as of late, from a management change to the signing of sales and distribution agreements. Last week, Ms. Gluskin was replaced as CEO by VP and General Counsel Mark Fletcher. Generex has a loyal base of shareholders, due to the leadership provided by Ms. Gluskin and Ms. Perri, who have brought the company very close to achieving the success they dreamed of, and Monday another step appears to have been taken to strengthen the foundation of the corporation. Undoubtedly, this could not have come together without the work of the former CEO, since the management change only occurred last week. She should be recognized for her effort, and I begin by doing so.

Generex announced Monday morning that they have reached an agreement to acquire a 51% ownership stake in Global Medical Direct LLC. This news comes after a weekend full of wild speculation, due to an after hours press release by Generex alerting investors that they would be making a key material announcement before yesterday morning's market opening. Many shareholders were guessing partnership news could be brewing between Generex's oncology subsidiary and Pfizer (PFE) for the small biotechnology's immunotherapeutic peptide vaccine that has drawn attention due to the very promising interim Phase II results for early stage breast cancer patients that were last updated at ASCO in June. While news of a partnership nature for Generex waits for a later date, I feel Monday's news, once digested, is a surprisingly smart strategic development that brings synergistic strength most often seen in much larger companies completing channel distribution deals to support product growth.

Typically, such deals seeking turn-key solutions enabling solid growth potential and key competitive advantages come at marked premiums, and the costs associated with setting up such an infrastructure on their own would be well beyond anything Generex could afford. Most microcap biotechnology companies, focused solely on research and development, overlook business development deals with direct to consumer firms, such as Global Medical Direct, as a means to solve packaging and shipping facility concerns, as well as the other numerous handicaps they face while preparing to bring their new drugs to market. Over reliance of relationships with large pharma weakens future revenue potential, and Generex is unique to many of its peers due to an OTC line of products that are already on the market, including a diet spray that is currently sold in CVS stores across the US. In the future, this marriage may put Generex in a stronger negotiating position with large pharma since their own product launches could now be in part handled internally.

Generex's early attempts at generating revenue, while simultaneously navigating their main drugs and vaccines in development through clinical trials, has recently brought in further progress, as sales and distribution agreements were announced with Merck S.A. de C.V. (MRK) in Mexico and Elias Shaker in the US. In my opinion, this strategy of generating sales to offset costs of R and D will now be greatly aided by having direct to consumer access to over 65,000 diabetic patients that make up Global Medical Direct's customer roster. Generex has a line of diabetes related products, including Glucose Rapidspray, GlucoRx test strips, NutriMed diabetic soap, OraSweet drops, Crave-Nx diet spray, and a line of vitamins that will debut through GMD's educated staff and support center. But I think the real value lays in the unforeseen opportunities to support both the current FDA approved Treatment IND program for Oral-lyn buccal insulin spray, as well as its future full label US launch.

Global Medical Direct, beyond providing access to thousands of doctors that can now learn about Oral-lyn and consider their patients for the Treatment IND program, can assist Generex with a staff experienced in overcoming hurdles related to reimbursement policies as the company attempts to make Oral-lyn available to a wider group of diabetics. Education and awareness campaigns to doctors and diabetics is essential for a novel an unique insulin solution such as Oral-lyn, and the synergy found in this business development position Generex in the right place at the right time.

The one aspect of timing that may concern us as shareholders is Friday's upcoming special meeting where the company is again requesting the passing of a proposal allowing the Board of Directors permission to enact a reverse stock split. I speak and communicate with many shareholders that are steadfast in their opinion to vote no to the proposal, but as of late my own mind has shifted where I will change my no vote to yes. This is most likely the part of the article where I am cursed, since that is surely an unpopular stance to take. For the last couple of months, I have been very concerned with the prospect of Generex's stock trading on the bulletin boards, but I had voted no to the proposal because I thought the company can keep Nasdaq at bay as long as they were at least attempting approval of the proposal to enact a reverse split.

Generex's problem with Nasdaq's minimum bid listing requirement stems from a toxic loan they entered during the financial meltdown. At the time, investment cash was near impossible to find, and many biotechs facing similar situations either sold assets at pennies on the dollar or went bankrupt. Generex's management tried diligently to raise capital in more conventional ways but ultimately were forced to enter an unconventional loan for approximately $20 million. Shareholders like me, who went along for the ride, watched our shares quickly enter a downhill spiral. Generex's founders decided it best to protect shareholders by repaying a couple monthly payments in cash, which temporarily offset dilution. One default was triggered, which was not due to failure to make a payment, but is somehow tied to the amount of cash on hand in relation to the amount of the debt. The creditors did not offer any alternative, and actually, many shareholders are unaware that Generex's cash holdings fell to the point where money owed to Ms. Gluskin and Ms. Perri, from a cash award made by the Board of Directors for failure to pay amounts due from the company's earliest years, was the sole source of cash that held up the company in the final few weeks of the loan.

Nasdaq, due the financial calamity, was quickly becoming the equivalent of the bulletin board. Generex was not alone, stocks for many microcap companies fell below the $1 minimum, and the exchange was forced to extend the time frame for which the companies needed to regain compliance. Many failed, and many were forced to enact reverse stock splits. Today, access to capital is a bit easier, and Generex was able to help the company survive the toxic debt and began raising cash through registered direct offerings off of its conventional SHELF filing. Generex had signed on a new business development and financial consultant, Seahawk Capital, led by Senior Managing Partner Joe Moscato, and together they worked hard to find a new slate of investors and to clean out the toxic warrants from the prior loan. Generex was successful in raising capital a few times at increasing prices in the second half of 2009, but do to the ill effect of the number of shares issued to repay the prior loan, all of the offerings were below $1. However, they were not accompanied by the more toxic forms of warrants, and the pipeline remained intact and in position to better lives.

When Generex entered that 2008 toxic loan, and a decade after being born from an idea jotted down on a piece of paper by its founders, the outstanding share total was near 115 million. Two years and a few months later, the outstanding share total is near 265 million. In my opinion, while the market cap is currently vastly undervalued, the real problem with the stock is the amount of common shares issued as payments towards the 2008 loan, because capital was as hard to find on Nasdaq as it currently is on the bulletin board. In other words, I owned GNBT as if it were on the bulletin board, because I owned GNBT as it raised cash on Nasdaq's Capital Market in 2008. The bulletin board remains as toxic as it ever was for microcap biotechs that have unique needs to raise capital to support costly R and D. That is where the real dilution lays, and I vote no to that possibility.

Undoubtedly, this new agreement signed by Generex, also brings some concern about future dilution to support the acquisition. Dilution to gain something valuable in return, with synergistic opportunities that enhance Generex's metabolic pipeline of OTC items and drugs, is in my opinion a true value proposition. We'll learn more in the next two days. I feel the deal offers exciting mutual beneficial opportunities with a company that has earned double digit growth over the last few years. With Global Medical Direct's proven management team remaining in place, Generex may see impressive levels of revenue gain while completing the studies for Oral-lyn and AE37. The deal creates a stronger Generex, where future terms for raising capital should only improve, as will they for partnership talks involving Oral-lyn or Metcontrol Gum. Turn key solutions will be in place. A stronger corporate structure for Generex is beneficial to shareholders with long term vision. I'm voting yes to this future for Generex. The company's plan to initiate a rights offering of common stock and warrants to its existing stockholders in the event that the stockholders approve a reverse stock split is a nice caveat for existing shareholders who can participate, while my own business efforts will force me to take a pass. The amount of the offering is anticipated to permit an aggregate investment of at least $25,000,000, which I am told would be the high end anticipated for the acquisition. However, my current shares are locked and ready, as we move forward with the company

In this article, I intentionally paid homage to Generex's founders. We welcome the future best by honoring the past, although I hope all of the aforementioned parties continue to work together in some capacity. All of the shareholders share in Generex's dream, and with yesterday's news, I believe that the company is better positioned and the dream is closer to being a reality. I'm voting yes to this future for Generex.

Disclosure: The author is long GNBT