Generex's New Plan: Spinout, Reverse Stock Split And Continued Focus On Oral Insulin

The firm believes buccal delivery of oral insulin will succeed where inhaled insulins have failed or stalled in development.

Financially troubled Generex Biotechnology Corp. is making risky bets to stay in the game. The Toronto biotech, focused on lead candidate Oral-Lyn, an oral insulin in Phase III for type 1 diabetes, announced plans March 30 to spin out its immunotherapy subsidiary Antigen Express Inc. and then seek investor approval to perform a reverse stock split that will let Generex again be traded on a national stock exchange.

With Generex's hopes now pinned on oral insulin - a product area all but abandoned by big pharma amid regulatory and marketing travesties - shareholders expressed significant doubts about the company's strategic development plan during a testy conference call March 30. Earlier in the day, Generex had announced that interim CEO Mark Fletcher had been appointed to the position permanently by the Board of Directors.

Currently trading in the $0.20-$0.25 per share range, Generex was dropped from the NASDAQ last year and currently trades as a bulletin board, over-the-counter stock. To keep operating, the company has had to rely on dilutive, registered direct offerings with significant warrant coverage. After four such transactions in 2009, it raised $3 million this January but had to sell 12 million shares at $0.25 per share to do so, along with five-year warrants for another 12 million shares exercisable at the same price.

Generex hopes a reverse stock split will enable it to restore its share price to $1 or above and place it on a more favorable footing in the financial markets.

In an interview, Fletcher said Generex has about $5.5 million cash on hand, enough to see it through to its June general meeting, when shareholders should vote on the spin-out of Antigen Express and the reverse stock split. Generex plans to retain a majority stake in AE and also give shares in the newly independent company to shareholders as a dividend.

Hopes Hinge On 500-Patient Trial

Currently, both Generex and AE's programs are stuck in neutral. Generex initially planned a 750-patient Phase III program for Oral-Lyn in type 1 diabetes, but last year stopped enrollment with hopes that FDA would find safety and efficacy data from an enrollment of about 500 patients sufficient for approval.

Its scientific advisors said the smaller population, which saved the company "millions of extra dollars," would be sufficient, said Fletcher. The company is awaiting FDA's decision, which it hopes to have by its June meeting.

"We don't know whether FDA will ask us to do an additional trial or not," Fletcher said. "That will govern our budgeting and our plan for Generex on a go-forward basis."

Fletcher said Generex would also do an additional trial in type 2 diabetes.

Generex and its investors believe Oral-Lyn's buccal delivery system will avoid the safety problems seen with inhaled insulins such as Pfizer's withdrawn Exubera and MannKind's oft-delayed Afrezza. But getting to the finish line may be beyond the company's capacity and as of yet, no deep-pocketed marketing partner has signed on.

While inhaled insulins present a cancer risk because of the potential for deposits of insulin, a growth hormone, in the lungs, Oral-Lyn, a spray that is absorbed into the mouth's inner lining, avoids the lungs altogether, Fletcher said.

"We've done a radio label study where the path of the insulin is tracked and it showed some residual deposition in the gastrointestinal tract," he said. "Some of it just goes down the throat and is destroyed in the stomach, but there is no deposition in the lungs whatsoever."

FDA accepted Oral-Lyn for a treatment IND last year, which means it is deemed safe enough to be given pre-approval to dangerously ill patients, such as long-term patients whose veins no longer can support injected insulin.

Generex also believes in Antigen Express's potential to develop immunotherapeutic vaccines for cancer. Its lead candidate, AE37, is in Phase II for both breast and prostate cancer. AE also has five other candidates in cancer, infectious disease, allergies and autoimmune diseases, all of which harness the use of CD4-positive T cell helper stimulation.

Existing AE President Eric Von Hofe will continue to run the company, with a focus on science, while an executive search firm has been hired to find a business-side CEO, a business development manager and a CFO. Von Hofe and all 12 existing employees will remain with AE after the spinout.

Generex will hold a controlling interest in AE, and Generex shareholders will receive share in proportion to their current holdings in the parent. The situation will make fundraising tricky for AE. Fletcher hopes AE will draw interest as a platform technology company and that it will be able to access venture capital through a PIPE (private investment in public equity) deal.

"At one point, we were thinking of doing an IPO but the conclusion is that if we go with a private deal, we can get much more favorable pricing and therefore it will be ultimately less dilutive," Fletcher said. "The timing of that and how much we raise will depend on market conditions come June."

-Joseph Haas ([email protected])