Generex to Spin Out Antigen Express to Unlock True Value

“There is nothing wrong with change, if it is in the right direction” ~ Winston Churchill

Last week, I attended Generex (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 their 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, Mr 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 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 bulletin board. We are now in the scenario which I once feared. However, Generex's forward moving plan has me enthused that the company is taking dynamic and prudent steps 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, long time CEO Anna Gluskin was replaced by then Executive Vice-President and General Counsel Mark Fletcher, and 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 for 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. Drs 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 Dr 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 am optimistic for the company's pipeline of metabolic drugs and immunotherapeutic vaccines, I would like to see greater transparency from management. I again met Mr Barratt before the webcast. Mr Barratt is now Chairman of the Board of Directors, and he took the time to welcome us to the event. As we all walked into the room where the webcast would take place, Mr Barratt told us to get ready to see a new era of transparency for Generex. Transparency is his mandate for the new CEO, and Mr 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 out of Antigen Express, as a separate DTC-eligible SEC registered company. According to the company, the spin out 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, and this should provide them with ready access to the capital markets to finance their 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 their 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 the Generex's stockholders scheduled for Wednesday, June 8, 2011, and if Generex's common stock is listed for trading on a national stock exchange.

During the webcast, Mr Joseph Moscato of Seahawk Capital introduced himself as Generex's strategic advisor. I have written about Joe and his consultancy role with Generex before, and he has since grown to play even a more prominent role in designing the company's strategy for the future. Joe helped Generex attract an impressive array of scientific experts, and he leads their business plannings, while finding accredited investors to fund their initiatives. I've had quite a few vibrant debates with him over the last few months. 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 Joe was how Medicares 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 they still hold their 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 out Antigen Express. In such a scenario, shareholders would gain no free dividend in the new company, and 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 as they responded, and they looked poised, and eager to take as many callers as possible. They waited until the caller que was empty before ending the event. During the conference, I also asked Dr Anderson if the company could provide results for the amount of patients that are enrolled. He explained that this would compromise the data, and he needs to gain the guidance from the FDA before mapping out the companies next developmental steps. The company expected this guidance in December, and they recently learned it will arrive in another couple of weeks.

After the call, I questioned Dr John Anderson about a concern that the company may not be as confident in Oral-lyn as they were in the past. He reminded me that he was the person at Eli Lilly 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 Mr Fletcher a similar question regarding Oral-lyn, and he said if he was concerned about Oral-lyn, he would not spin out Antigen Express. He said the opposite is true, that the company is only planning the spin out because they are very confident in Oral-lyn, and in the RapidMist delivery system. Once the company receives their guidance from the FDA, he promised transparency in alerting the investment community of what they have learned, and how they will proceed. It is possible that another study will be required, and the company is also planning a study with Type 2 diabetics.

In any scenario, Generex will need to conduct clinical studies, and 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 Mr Barratt explained that this is why the Special Committee of Generex's Board of Directors, formed in September of last year, executed bold changes. Mr Barratt stated that many steps have been taken to maximize shareholder value.

I did look them in the eye during the course of the day, and what I saw was confidence and commitment. Mr Fletcher, along with Joe 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 8th, more will be announced, including what Joe termed as "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.

Dr Eric 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 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. Mr Fletcher and Joe were most accommodating to shareholders in attendance, as Mr 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 7th, titled "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 2nd. 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, their pipeline deserves access to adequate funding, and the new team deserves support, so they can complete their 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.