The
principal research of Generex for years has been its buccal delivery
system. The buccal tissue is the tissue
on the inside of the cheek and under the tongue. Generex buccal delivery sprays a solution under
a high gas aerosol formulation containing a drug on to the blood-rich tissue
inside the cheek and under the tongue.
The solution does not go into the lungs.
In 2011 Generex
completed the Phase III trial of its buccal delivery of insulin. The trial was neither positive nor negative,
but the FDA wanted more trials (see more under interview with James Anderson). The company was tapped out on money, and the
company and the stock went into coma.
There was little activity and in 2015 the entire work force was
officially laid off.
The Challenger Deep
Generex’s
stock drifted down, and it ended with a final 1-for-1,000 reverse stock split, at
which point it found itself at the bottom of the Mariana Trench, a place called
the Challenger Deep, and there it sat with thousands of pounds of atmospheric pressure
on top of it, by which I mean a ton of negative sentiment. This is a hard thing
to overcome, and we will address this again at the end of this article. When
the stock finally reached bottom, the stock was within about $2 million of
disappearing. It is a place so low that
it is just a graveyard of whale bones lying on top of the ocean silt. Usually, when stocks reach such a low level
they disappear. Generex did not disappear thanks to the efforts of
Joseph Moscato and his day-by-day efforts to formulate a solid management team,
and by the scientists who wanted to see their technologies through to
realization.
The changes begin
Joseph
Moscato was elected CEO on January 17, 2017.
He came in with the Hema Diagnostics acquisition. But he didn’t just come in out of the blue;
he has been involved with Generex since 2009 as a consultant only, never
management, and never a board member, just a voice sometimes heard above the
din. In the SEC filings you can find
this on his background on the 10K:
Mr. Moscato has over 30 years of
experience in healthcare, sales and marketing, distribution management, and
finance. Mr. Moscato brings his marketing and advertising acumen to drug
discovery and diagnostic & treatment development and
commercialization. Since 2009, Mr. Moscato has been working as an
exclusive consultant to the Company. He has advised on equity financings
totaling over $300 million, and has implemented the broad strategic vision for
the Company. Mr. Moscato has worked and consulted for Pfizer in several
capacities from sales and marketing to new drug discovery & development.
He has worked with other biopharmaceutical companies such as GlaxoSmithKline, Johnson
& Johnson, Parke-Davis, Amgen and others. Mr. Moscato has consulted
for several healthcare focused private equity, hedge funds and family offices.
Mr. Moscato also owned several advertising
and marketing agencies focused on media, entertainment, and healthcare with
clients ranging from Motorola, Chadmoore Wireless, Nextel, Cannon, Sharp,
GlaxoSmithKline, Pfizer, and other biopharmaceutical companies. .
He comes from
marketing side, with experience in financing, a good match for Generex, which
was basically without this kind of talent.
Previous management lacked these kinds of skill sets and connections,
and was not able to bring its important insulin delivery trial to a successful
conclusion.
As I read over
the SEC filings, especially in retrospect, I think you could spot Joe Moscato
behind the scenes even before his election as CEO in certain financing parties,
and acquisitions that went to completion (Hema Diagnostic Systems), and some
that did not (Emmaus, Core Tech). The
deals that did not go to completion went sideways. “Emmaus would have ended up owning Generex,
and Core Tech lost both of its Big Pharma partnerships, rendering both of these
deals undoable.” Joe’s consulting work
for Generex began in 2009. And my first
contact with Joe was when he called me in 2010 to enlist support for a reverse
split. This was not popular with
shareholders, so it wasn’t until 2017 that it was finally accomplished, but it
was a necessary prerequisite before further steps could be taken. Moscato: “A stock with billions of shares and
no revenues and earnings cannot be taken seriously.”
New focus
Joseph
Moscato’s focus is broader than the Generex he took over, which was essentially
a small biotech research firm. As I have
said, he comes from the marketing side of things. He has developed financial connections that
would only be available to Generex through him.
And as was revealed in the January 2018 conference call, he has already
looked at over 100 firms for acquisition.
Joe’s thought was that if firms with existing income could be combined
with Generex’s promising technologies, Generex would not have to keep looking
for funds to finish the research. Those
deals just become more and more onerous and hellish for shareholders. So, the idea arose to create a holding
company to organize the new acquisitions with the existing businesses, hence a
new name for the firm, NuGenerex Biotechnology Holdings, Inc., and a new
mission: direct-to-patient, end-to-end healthcare solutions for patients,
healthcare professionals, and payors.
But let’s give a look at the company’s research.
2018, the year the Nobel Prize
in Medicine goes to cancer vaccine research
This is the year that the Nobel committee
gave the Medicine
award to researchers in cancer vaccines.
It is the year of checkpoint inhibitors. The problem is that cancer cells disguise
themselves as the body’s own cells. And
the killer T-cells will not attack cells it recognizes as those of the body. Checkpoint inhibitors are what prevent
T-cells from attacking “self” cells.
James T. Allison studied one of them, called CTLA-4, which is one of the
checkpoint proteins that brake T-cells. And
Tasuku Honjo discovered another checkpoint inhibitor, PD-1. And if the brakes are put on both checkpoint
inhibitors, even better results can be obtained.
It turns out this is
exactly where the Generex subsidiary, Antigen Express, and its primary researcher,
Eric von Hofe, have been working on lo these many years. It has done studies both against on breast
cancer and prostate cancer with success.
These are studies in which patients have been treated to the point where
no cancer can be detected; the vaccine is given to prevent recurrence. The breast cancer study was done against
triple negative cancer, the worst. Merck
(MRK), having some luck with its Keytruda, a checkpoint inhibitor, looked
around for drugs that it might use in a combination attack. It found the Antigen Express study on triple
negative breast cancer, and decided in July of 2017 to partner on a Phase II
study.
The stock market
took this news in stride. That is to
say, it reacted not at all.
In January, 2018, Shenzhen Bioscien, a
Chinese biotech firm, announced it is going to test Antigen’s AE37 against
prostate cancer, and paid $700,000 for the right to do a Phase II study, and
will pay more if it decides to do a Phase III study. Moscato said to me, “They pay for
everything. They pay at the given
milestones. And if the data is good,
Generex can use it for partnering everywhere else other than China. It’s a win-win for Generex.”
The
stock market took this news in stride.
That is to say, again it reacted not at all.
A few puffs - revisiting its
drug delivery system
The
happy thing that has occurred since the company's last visit to the FDA is that
the formula for its insulin aerosol has been strengthened so that now what took
6 to 20 sprays can now be accomplished with 2 to 5 sprays. Users will have to test themselves to see how
many sprays inside the cheek they will need, but they will be able to save
themselves from the needle, even if advertisers try to camouflage the pain by
calling the needle a pen.
But
insulin may not be the only drug that can use this buccal delivery system. As the CEO Joseph Moscato told me, it will
depend on the size of the molecule and the taste. He reported that it was tried with opium
based painkillers, but the users found the taste so abhorrent that they would
rather take it with a needle. But for
those situations where it works, Big Pharma may be able to extend the life of
their patents, which could be another boon for Generex. So, the company expects to be finding
applications for its buccal drug delivery system for years to come.
Joe Moscato's 1–2–3 for Investing in
Biotech
1. Look at the science
advisory board. The standard
honorarium is $1500 per year plus expenses.
If that is all the scientist is receiving, then he is in it for the
science, and believes it is a winner. If
the scientists are receiving big honorariums (cash + stock), that's a strike
against because that means they are not convinced and want to paid handsomely
for their valuable time, and if no KOL’s (Key Opinion Leaders) in the area of
the clinical work are on the board, it’s a dog and stay away.
2. Look at the design
of the testing. If the design of the
testing overlooks obvious problems, that’s a killer. If it is designed completely to Big Pharma
specifications, then that is the way to go.
If not, then those problems will inevitably come back to bite you.
Joe tells the story of being approached by a company with
a drug for brain cancer (glioblastoma).
They had conducted a trial of 86 patients. 85 of the 86 patients had frontal lobe
tumors. “Immediately I knew it was a
dog. Why? Because Phase II was designed poorly.” A frontal lobe tumor could grow to 9 inches
and the patient could still survive. And
survival times for a nine inch tumor could be an additional 19 months, which is
significant.
“They were looking for a $100 million Phase III trial
which would require 500 patients, and the FDA would insist that all the other
quadrants be tested in addition to the frontal lobes – top, sides, core, brain
stem, and a one quarter inch tumor in these other areas “means you’re dead in
the first month.”
As Joe says, “Significant positive data, and no Big
Pharma partner, means that it’ a dog.
But if they can convince someone to fund the $100 million trial, they
now have paychecks for four years, knowing full well it would never work.”
The upshot is that trials have to be designed to meet Big
Pharma and FDA expectations; otherwise, you are wasting your time and
money. The average investor cannot make
this kind of determination, but Joe Moscato and his team – Anderson, von Hofe,
Terrell, and Haines – are in a position to make the determination about whether
a trial looks promising.
3. Look at the
investment of the CEO in the company.
Does the CEO have sweat equity in the company? Does he have some of his own cash in the
company? Look at the level of his
commitment. Has he gone above and beyond
the call of duty?
In the example above, Joe saw the CEO was getting a big paycheck
for a trial that Joe felt would not work.
Joe has not been receiving a big paycheck. Quite the contrary, on the December 3 conference
call he says, “…no Generex management team member other than the acquisitions
management teams has to date made any money. We are all committed to Generex.”
Joe
made this additional admission, “I borrowed significant money. I have
personally guaranteed significant money.”
Total
commitment.
Veneto
With
the acquisition of the medical services organization (MSO) of Veneto Holdings
LLC (“Veneto Group”), Generex continues the effort to diversify and locate revenue
and income producing properties begun in January. The Veneto Group will be folded into the
recent created subsidiary, NuGenerex Distribution Solutions, Inc. Veneto is headquartered in Dallas, with
offices in Texas, Oklahoma and Arizona.
A lot of its business comes from a specialized pharmacy, but the
business provides comprehensive support for doctors including – testing, lab
work, scanning, insurance adjudication, strategic planning, marketing,
accounting, and legal and regulatory guidance.
The plan is to take the company from the current 5 states to 27 states
around the country.
Generex
suddenly becomes a company with more than 100 employees and sales in the tens
of millions. Since Generex bought the
meaningful assets, no audits are needed, other than going forward because
Veneto has completed three years of audits.
The company was started in 2014, so growth has been exceptional.
What
seems to be obvious is that the announcement of the acquisition of a company
with significant sales is what has activated the stock.
Diagnostic Products
The
company acquired Hema Diagnostics in 2017, renamed NuGenerex Diagnostics, Inc.,
which has in the pipelines point-of-care diagnostic tests for syphilis,
tuberculosis, HIV, and sepsis. Sadly,
syphilis, which had been pretty much knocked down, is now in a worldwide
resurgence. Sepsis is a very tricky
thing to diagnose since it is an immune response, a syndrome, and not
necessarily caused by a particular bacteria or virus. The tests are cleverly designed to be
inexpensive with relatively easy to use test strips, and management is paying
attention to the matter of how it will be paid.
My
day with Joe Moscato
Early in April I took one of those early flights where
you get up at 3 am for a 4:30 am flight from Chicago to Miami, which gets you
there at like 11 a.m.
Joe
collected me at the airport in Miami, and I listened in the car as he conducted
conversations on his hands-free cell phone.
I caught some of it, but it sounded like Houston to the astronauts - it was
too much work to make out the syllables from the squeaks, but Joe can make it
out – it’s a skill set he needs to get things done. We went to their offices. I expected nothing, since the company had
gone dormant a couple of years ago. I
saw some titles on the doors. There is
no revenue to speak of until now, but I knew the company had very interesting
technologies for drug delivery through the buccal tissue and also a very
interesting vaccine peptide technology, and I wondered who Joe Moscato was, and
if he could breathe some life into them.
Joe drove me in his black Mercedes SUV, and seemed have
mild geographic issues. We got to our
destinations, no wrong turns (as far as I could tell), but getting where we
were going always felt a little in question.
(“This might be the turn.”) We
went to lunch at a local restaurant, and Joe spoke about the design of the new
Generex, and this seemed to have all the direction that his driving
lacked.
His plans are somewhat complicated, making me think of a
Rube Goldberg contraption, as recent transactions seem to bear out. But consider: the company now has revenues
with Veneto, the cancer vaccines are being researched again, so I am giving him
the benefit of the doubt.
How a company with a market cap of only $3 million can
even be thinking of acquisitions seems to require explanation. And that would require some understanding of
the company’s CEO, Joseph Moscato, whose financial and biotech connections are
extensive. He has not only extensive
hedge fund connections, but also connections with the investment arms of
wealthy families.
And
I think you can expect there will be more such transactions. As I said above, in the January conference
call Moscato stated that Generex had looked at more than 100 companies. Judging from that statement, I think it would
be fair to say that more acquisitions will occur. Joe is a planner, but as with all leaders,
ultimately you have to roll the dice. As
Akio Morita of Sony has said, he bet the company on Trinitron technology. Generex has two important unrelated
technologies, so there is some safety in numbers. And the company’s current value lies solely
in the company it has just purchased, which has healthy earnings and growth
prospects. So, one can buy the company at
this point without relying at all on its development business.
Joe is a vision guy, a master plan guy, or, as his wife
suggested at dinner, a symphony conductor.
There is a lot to coordinate. Business
owners, scientists, lawyers, accountants, bankers, hedge fund managers,
employees. I got a sampling when I
overheard conversations in his car. Joe
is probably not a hands-on guy, but as part of his master plan, he had a
solution for the hands on stuff: a Chief Operating Officer. He told me he had a candidate for the COO,
and it was Terry Thompson. This part of
the plan was announced on June 27th, when Thompson was hired. He needs a very effective man, because my
take is that the to-do list will reach into the next decade, there is a lot to
coordinate now, and as I have indicated, it seems a safe bet like there will be
a lot more to coordinate. Thompson has
had relevant experience at Medco, and other concerns.
I had more material here, but when we met for a second
time in Chicago, I asked him to read for accuracy, and he crossed out a couple
of paragraphs, and said, “It’s not about me.
It’s about the team. I’ll get you
contact info.”
The team
Chief Operating
Officer
I
begin with Terry Thompson, Joe’s COO, and the man to head the medical services
organization Veneto, just acquired, with its pharmacy and ancillary services
company, now called NuGenerex Distribution Services, Inc., where all the stock
market value lies at present. Terry has
really, really extensive experience, and that lies beyond the scope of this
piece, but I invite readers to check out his resume on LinkedIn, and be sure to open all the "see more" buttons to appreciate
the full bouquet of this seasoned operating executive. But to be sure, he
has a long history of experiences making him ideal to lead Generex’s new pharmacy
initiative. Here are the highlights:
He spent fifteen years at FedEx,
starting at 17 years old in Memphis when the firm had less than 100 employees, before
any IPO, in a company everyone today knows changed the way the world did
business. This early bird was there for the explosive growth, and that led to
good jobs in Chicago, Boston, and Memphis where he led some of the largest
mission critical day-in-and-day-out operations in the industry.
After FedEx, he was recruited into a
long second career in healthcare, where he experienced a second explosive
growth situation when Paid Prescriptions and National Pharmacy were acquired to
form Medco Containment Services, Inc., which grew like wildfire, and got sold
to Merck for $6 billion. He was happy to move on post-acquisition because he
felt he been working in a world class company to help lower and contain the
cost of healthcare in a transparent way but then felt that being bought out by
Big Pharma “clouded the appearances of the mission.”
He led several other ventures since
and did a lot of consulting, and among other things, he visited Generex and met
with a previous CEO, Anna Gluskin, in Toronto, as a possible acquisition or
investment opportunity for one of his clients, but decided "there was nothing
there." It was during this time
that he met Joe Moscato. And he would hear from Joe from time to time.
"And I would think: Joe is still there. Why is he still interested?" Joe would ask if he would like to join him,
but Thompson demurred, though it should be noted that he admired Joe’s
persistence. And finally, one of Joe's calls found Thompson's situation
changed, "Talk about timing. My
first wife had just died from triple negative breast cancer at a very young age,
which, of course, is what Generex's drug AE37 is being tested for together with
Merck's Keytruda. Joe laid out his whole
plan and I liked it."
I asked: there is no money, is
anyone being paid? "No. That's one
of the amazing things."
He is keen on the Veneto acquisition
because with his Medco experience he is comfortable in the pharmacy area. Veneto is focused on alternative pre- and
post-operative pain management in the face of an opioid epidemic. It is a timely business to be in. Inventory is not large, “only 30 to 40 sku’s,
and there will be many turns.” Meaning:
the inventory will turnover rapidly. “Physicians
and patients are operating with a lower risk of addiction by limiting opioid
days’ supply and providing alternative therapies to relieve pain. The model is
compliant with all laws and regulatory issues and I had not seen a private
company to this date that had spent so much on its legal opinions and
compliance programs.” They are only operating in five states now, but he is
gearing up for a national footprint with internal growth, acquisitions and
sales initiatives all in the mix.
= = =
=
Jason
Terrell, M.D. University of Texas at Austin, resides in Austin, TX
Chief
Science Officer, Chief Medical Officer
Jason
Terrell met Joe Moscato on a road show for a small biotech start up over six
years ago. "Joe was the only one I spoke with who told me the truth
- that we would never get funding the way we were going about it. I
greatly appreciated his honest, direct approach and we got along really
well. So, I kept in touch with Joe, and he would run this idea by me and
that idea." Moscato needed a medical sciences expert to bounce off
of when he came across new technologies.
Jason
is an unabashed supporter of the company's technologies. He thinks James
Anderson, who heads the buccal delivery for insulin, is one of the "world
leaders" in diabetes and insulin. When I said, "It's a miracle
to have such a team." Jason came back, "Miracle. I think
that's a good word."
Jason
and Joe have looked over 200 different companies (or technologies). And
they have some in mind to pursue, if circumstances permit. So, if
acquisitions happen, and note recent acquisitions at the end of this piece, it
should be no surprise to anyone.
I
expressed my dismay that such a promising technology as the Ii-key peptide
cancer vaccine adds no value whatsoever to the stock market valuation. He
was similarly dismayed, but he said, "The trial with Merck will produce
the first new data in years and I expect this will reinvigorate
interest.” When I told him I was having difficulty assigning a value to a
research business like this without revenue, he brought up Juno Therapeutics
bought by Celgene (CELG) for about $9 billion and Kite. "Last year
Kite Pharma was acquired by Gilead (GILD) for around $12 billion. But it
reached a value of a billion dollars years before their first drug received FDA
approval. So in the immuno-oncology space of research and development, a
lack of revenue isn’t the hindrance one would expect."
Jason explained that Juno and Kite are CAR T technologies,
where they take an individual's cancer cells, do some work in the lab and then
put them back in the patient's body. He said it was a very expensive
process. So, naturally, I asked if Generex's Ii-key peptide technology
would be less expensive than those, and he said that the Ii-key technology was
different, but in many ways should be much more specific and more
powerful. And yes, he felt it would be far less expensive.
"Could it supersede the CAR T technologies?" Jason responded,
"Ii-key is a beautiful technology, and with that I think anything is
possible.”
But
like all scientists, he will not say anything absolutely, positively
definitive; he's waiting for the data like everyone else. Though he does
feel the team at Generex is 100% world class. "On the medical side
with me we have people like Craig Eagle. James Anderson. Gary
Lyman. For example, Dr. Lyman, currently at Fred Hutchinson [Cancer
Research Center], is one of the most respected and accomplished oncologists in
the country. He helped steer the field as a leader on the board of
directors for ASCO." What's that? "American Society of
Clinical Oncology." When I looked Lyman up I found that he had
chaired the Guideline Methodology Committee, which harkens back to point #2 of
Joe Moscato's 1-2-3. So, if a top notch team counts for anything, Generex
has it.
= = = =
James Anderson,
M.D., Lousiana State University School of Medicine, resides near Indianapolis
Director
I had already spoken
with James Anderson in 2014 during the Ebola scare. I knew that Generex's
peptide vaccine technology could be ramped up relatively quickly, and that was
what he confirmed. He is in a singular position to know such
diseases. Anderson was one of the last of the drafted doctors in 1971.
Ultimately, he became Chief of Medicine at the U.S. Army's biological defense
facility at Ft. Detrick (think The Hot Zone). I asked him
about that book, and he felt it was pretty accurate, the movie Outbreak he
felt was less so. He has been involved in designing the equipment to
contain these virulent diseases. Addressing the issue of the length of
time needed to make vaccines, he informed me that the flu vaccine takes about a
year and a heck of a lot of eggs. He disabused me of the fear of vaccines.
But what of the mercury used in vaccines, I asked? "I don't like the
term fake news. But that is fake news. They haven't used mercury
since the 1950's."
But it turns out his
training was in endocrinology, and principal among endocrine diseases is diabetes.
He is at the top of his field. He was one of the first to use DNA to make
insulin. I asked him how that was accomplished, and he said, "The
DNA is implanted in E. coli, and the E. coli bacteria produce the
insulin. The E. coli is then killed and the insulin harvested."
It is hardly surprising
that he was a founding editorial board member of two journals for diabetes, and
serves as a reviewer for 5 other diabetes or endocrine journals.
He said his first
exposure to Generex was in 1984. "I went to New Haven with Bruce
Frank, who was the best insulin chemist in the world, also at Lilly. We
were intrigued by buccal delivery. At that time, only a little insulin
got into the blood stream, but it was something." So he kept tabs on
the technology and Generex. Later, he set Generex up with Eli Lilly in
the early 2000s for a study, but then left for Japan for three years to
complete work on human analogs of insulin. When he came back from Japan,
the deal with Lilly had been terminated. He was drawn back to Generex years
later by Joe Moscato who met him at an ADA Conference. Afterwards, he had called Anderson to see if
he would be interested in working with Generex, he passed the lead over to Mark
Fletcher, who had taken the reins from the founders, and Anderson came back to
work on buccal delivery.
Anderson said one of
the concerns with Pfizer's Exubera was that it went into the lung where it was
difficult to see if tumors were developing. Although there have been no
tumors with Ora-lyn, an advantage of Generex's Ora-lyn is that it is easy to
inspect the inside of the mouth for problems, and it can’t go in the lungs.
We discussed the
problems of the trials of Ora-lyn that led the FDA to require more
testing. He reported that testing was done in the European Union, and
there were language problems, incomplete surveys by patients, a weak drug that
still required as many as 20 puffs, and it was not a well-designed study, which
failed to meet statistical requirements. And that was what led to
the FDA requiring more testing.
Since that FDA review,
studies in Toronto had shown that the number of puffs can be reduced to 2 to 5,
and that in dog studies, it appeared that the insulin was getting into the
blood stream.
When I said I suspected
that fear of needles resulted in poor compliance by patients, he said,
"Fear of needles results in the delayed start of insulin, and the 1/7th of
all medical costs in the past year are due to complications of
diabetes."
He reminded me that the
main product was not insulin, but a delivery system that could be used with
other drugs. A timely possibility he
noted would be the use of the delivery system with cannabis oils, which may
have neurological possibilities – pain reduction.
I said that I felt that
Big Phama was missing an opportunity by not funding studies, he agreed, and
suggested it might take another safety study with the new concentrated formula
to entice them. Anderson brightened up at the thought that the
current leadership under Joe Moscato might be able to find the money to do that
study.
= = = =
Eric von Hofe, Ph.D.
University of South California, post-doc University Hospital of Zurich, Switzerland, post-doc Harvard
President, Antigen
Express, Inc.
Eric von Hofe has spent his whole career in cancer oncology,
potentially a depressing area to be in. While
he was an Assistant Professor at the University of Massachusetts Medical
School, "I became acquainted with Bob Humphreys, who also did a post-doc
at Harvard, who was making key discoveries." Eric then moved on to
biotech, first at an antisense company in Worcester and then moving on to Millennium
Pharmaceuticals. Meanwhile, Humphreys was continuing to get by with SBIR
(Small Business Innovation Research) grants, and making progress. Eric
consulted with him for a while in 1999, and kept in email contact.
Eventually, Humphreys went on to start Antigen Express, and Eric joined
Humphreys. In 2003 Antigen Express was bought out by Generex.
Eric informed me
that Merck with its Keytruda drug had made progress with checkpoint inhibitors,
which stop the immune system from going after the body's own cells. If
you can get past the checkpoints, then you can kill the cancer cells, which
employ a human disguise. He said, "It's a blunt tool. Merck
noticed that it only worked in about 25% or 30% of patients, so they started
looking around for other drugs that could work with it." Merck
culled the studies, and found that Antigen Express had had some luck in triple
negative breast cancer. AE37 vaccine stimulates the immune system to
recognize a protein expressed on cancer cells (HER2); more importantly, the
immune system can recognize this protein at lower levels than even the very
successful drug Herceptin, which targets the same protein. And a key
advantage of AE37 is that it is practically non-toxic. And this was the
basis for the partnership with Merck. It was similar story with Shenzhen
and the trial for prostate cancer. Antigen Express had done a Phase I
study on prostate cancer that looked promising.
As Jason Terrell
explained above, a lot of the work in the immune space has been in the CAR T cell
area, where T cells are taken from the patient's body and tinkered with.
Then they grow a lot of them, and then re-introduce them into the body.
Von Hofe explained to me that this was a very expensive procedure that can cost
as much as half a million per patient per year.
Source: Dana-Farber Cancer Institute
I asked him if
the Ii-key would be any less expensive, and this is what he told me: “Yes, the fragment of the protein or pathogen only needs to be
around 15 amino acids long, to which the Ii-Key (4 amino acids) are added. This
peptide can be produced synthetically by a machine that is fed the appropriate
amino acids; it simply adds one amino acid after the other to produce the
peptide. When produced in bulk it’s very cost effective. Anything that is not an
off-the-shelf product and needs to be biologically produced, like CAR T cells,
are much more labor intensive and costly.”
I asked him if it would be more
effective, and he replied that it would probably work better on solid tumors
than for leukemias and lymphomas, where CAR T has been “amazingly”
successful.
For in-depth
investors, I recommend that they look for the October 2011 issue of Scientific America and Eric von Hofe’s
article there entitled “A New Ally Against Cancer.” I would create a link, but Scientific America
insists, perhaps rightfully so, that you must have a subscription. In the article von Hofe gives a history of
cancer and immune response, and brings it from the 19th century all the way up
to the date of the article.
I had spoken with James Anderson about how AE37 vaccine
technology (Ii-key) might work against Ebola and other potentially life
threatening viruses like a pandemic flu strain, and I got clarification from
von Hofe. He said the company could make a vaccine, and relatively
quickly. The main difference from a
traditional viral vaccine is that the Antigen Express technology is more of a
cellular immune response than an antibody response. So, while one may not get total protective
immunity, someone who contracted a potentially lethal virus like a pandemic influenza
or some other disease might still get sick even with the vaccine, "but
they probably won't die." I suggested that this might allow the body
time to produce a proper anti-body that would bring the patient to
health. He said, "Yes, that's it."
Eric is not put off by the disappointing response of
investors to the announcement of two Phase II studies, he said, “it was clear to investors that it would take more than
these deals to resurrect Generex and Antigen Express after their period of
extended dormancy and low valuation. In the meantime, Generex has entirely
reorganized its corporate structure, business model and demonstrated that it
has an exciting future ahead; to which the markets have reacted
enthusiastically.”
= = = =
Harold Haines, Ph.D. Tulane University,
resides in the Miami area
President,
NuGenerex Diagnostics, Inc.
Hal is a long
time Floridian with the bruises to go with it. He lost a house to Hurricane
Andrew in 1992 and lost part of house and a roof to Katrina before she made her
way over to New Orleans. Hal came with Hema Diagnostics, which is now re-named
NuGenerex Diagnostics (NDG). He was consulting for it before taking over its
management.
The idea was to
make tests that could yield results while the patient is still in the office,
or while the nurse is in the room with the patient, and thus initiate or
modulate treatment in a more timely way. Tests have already been
developed for:
HIV
Hepatitis-B
Hepatitis-C
Malaria
A test for
syphilis is before the European Union awaiting the CE mark of
authorization. This could be a real seller because syphilis is staging a
comeback. Interestingly, it has become prevalent in the retirement
homes. This test could be the first real money-maker for NGD.
Hal is
particularly keen on a test for sepsis. Sepsis is particularly hard to
diagnose. In sepsis there is a trigger, infection or injury, and that generates
an immune response, and that's the problem. He explained to me, "In
influenza, and in other diseases, you die from the immune response, not from
the virus."
"Most of our
tests are qualitative. They tell you if someone has a disease or not, but
in sepsis we will be able to tell whether the condition is increasing or
decreasing." He explained there is a real need for such a test
because it is hard to diagnose, and a patient can die in 48 to 72 hours.
He thinks that
after they get going in Europe, even more sales may be generated in
China. "In Europe and the U.S., you can only administer these tests
in a doctor setting, but in China tests can be conducted in the home."
The
New Generex – NuGenerex Holdings, Inc.
NuGenerex
Immuno-Oncology, Inc.
Generex’s wholly-owned subsidiary Antigen Express’s cancer vaccine
business
NuGenerex Medical
Marketing, Inc.
Team
that will do sales of medical diagnostics and drugs
NuGenerex Distribution
Solutions, Inc.
Veneto Group - $100’s of
millions in sales since inception in 2014
NuGenerex Diagnostics,
Inc.
Hema Diagnostics Systems
NuGenerex Drug Delivery
Solutions, Inc.
Generex’s insulin buccal spray
business
What you can expect
You can expect
dilution. There will be option grants to
employees for services that have been rendered over the years, and option
grants to incentivize new employees.
There are and will be warrants and options in the deal-making, perhaps
with limited use for now by requirements to maintain the net operating
loss. And although some of the share
stuff in the 10K has been explained to me, it is still has not come into bold
relief, and it remains to be seen how all of that will play out, so I am
confining myself to market cap as opposed to share price.
You can expect
deal-making (witness the deals of the last fews days at the end of this piece). You can expect Joe to pick up some new
technologies, and to expand the pharmacy-medical services business. You can expect that some of these
technologies to be great, but others to be a drag on earnings. Expect ups and downs. I feel Generex might be like Cisco, which
grew from one acquisition to the next.
The motivations of the employees
It
is not just the kids who want to improve our lives. James Anderson talks about 1/7th of all disease
coming from diabetes. Eric von Hofe was
motivated to improve cancer outcomes even when Generex went into suspended
animation. Terry Thompson left Medco
when he couldn’t get the lowest price for his customers, and is motivated to
improve opioid addiction outcomes, and to avoid waste and corruption. Hal
Haines wants to detect disease as early as possible for as little as
possible. And Joe Moscato has wanted to
see patients benefit from all of these improvements since he first began
working with the firm. And not to
forget, it’s all an all-volunteer army at this point. There is no money for salaries. Maybe they will get paid something eventually. It’s not guaranteed. But working to solve big problems motivates
people.
The problem of valuing a new biotechnology
Cancer vaccines are a hot area. The question is: what is a cancer vaccine
company worth before the Phase III trial and FDA approval? It apparently depends on market
sentiment. When the market is really hot
as was the case with Juno, an untested company could be worth as much as a
billion. Other times, the market can be
more skeptical. Then, suddenly, a
company can open its pocket book, witness the move by Bristol-Myers
Squibb (BMY) in February 2018, which paid $1 billion cash and made an $850
million stock purchase from Nektar (NKTR).
The Ii-key peptide technology has been
tested, and it has shown good safety and efficacy. And if Generex stock were not in the Mariana
Trench, the announced trials with Merck and Shenzhen might have added millions
to the stock market cap, but as it is, it added nothing at all. As Jason Terrell has suggested above, new
data might do the trick. But ultimately,
high values are possible as the sales of Juno Therapeutics to Celgene for $9
billion and Kite Pharma to Gilead for nearly $12 billion shows.
We’ll know when the market approves because
the stock valuation will expand suddenly by hundreds of millions, or a
billion. In the meantime, this makes
Joseph Moscato’s plan of diversification into medical services - pharmacy and
opioid management - looks both timely and very sensible indeed. The feelings of the leader of that
initiative, Terry Thompson, will not be hurt if things suddenly improve for the
cancer vaccine end of the business, as per his personal experience cited
above. He will rejoice. No matter what, he will see his end of the
business through to growth and profit.
Let’s discuss the case
of insulin. The formulation has always
worked to some extent, but initially the formulations were weak, sometimes
requiring as many as 20 puffs. In 2015 research had improved the formulation to the point where only 2 to 5 puffs were
required, and research in dogs had established its efficacy, and again its
safety. It’s my take that this good news
in the improvement in potency is not built into the stock. Generex needs, of course, to test this in
humans, but that requires money, and that is the current stumbling block. James Anderson thinks maybe a new study will
stir up interest.
What I don’t understand
is that one of the big insulin players – Eli Lilly (LLY), Novo-Nordisk (NVO),
or Sanofi (SNY) have not ponied up to get that research completed. Do they really think needles or pens (again,
a needle) are really satisfactory?
Unfortunately, you
cannot necessarily count on the drug companies to act in the interest of their
patients. In 2017 a suit was brought by
a group of diabetes patients against the big three insulin makers for collusion.
If 60 Minutes were to run a story about how diabetic patients could be
saved a lot of pain, and then interview doctors on how patients would be much
more compliant with doctor’s recommendations, and how their outlooks would be
so much better, I’m not sure even that would move the insulin makers. They would say to interviewers that the
technology is not ready yet. Then I
suppose the interviewers would have to be clever enough to ask a second
question, why aren’t you funding such a study?
And a third question: Don’t you care about the pain needles cause
patients?
Well, my job is not to
foment a revolution; my job is to shine a light on a promising technology. But if patients can sue over collusion, they
might also use their weight to let their fellow users know that the drug
companies are slugs again. There is
something around that could save them a lot of pain. All I know is that my diabetic neighbor
downstairs has injected himself for decades, but my take is that he would
change in a day if he could just puff a little insulin inside his cheek.
Investors must be
patient. Generex’s buccal delivery will
own the insulin market. I am personally
satisfied that it will work out at the 95% confidence level. Why?
It has been tested for years and years and has been found to be
safe. Insulin is something the body
produces on its own. I don’t expect a
lot to go wrong. The fact that the
company has had problems with a poorly designed test (as per James Anderson
above) doesn’t mean it won’t work. It
means the study was poorly designed (see point #2 under Joe Moscato’s 1-2-3 for
Investing in Biotech above). All of that
came before Messrs. Moscato and Anderson.
Gerald Bernstein M.D., a former VP of Generex, and a former President of
the American Diabetic Association, told me in a telephone interview that he had
personally used the product for a long time.
And the FDA in 2009 had given approval under its IND program for
patients “with serious or life-threatening Type 1 or Type 2 diabetes who have
no satisfactory alternative treatments.”
Pfizer (PFE) had an idea
about the delivery of insulin, and that was through the lungs. The product they developed was called
Exubera. It turned out patients and
doctors were not comfortable with the continual ingestion of insulin into the
lungs. Pfizer decided to discontinue the
product, and wrote off $2.8 billion. But
Pfizer wasn’t in it for the write-off; they were in it for a successful product.
So I am valuing Ora-lyn, Generex’s product, at twice the write-off. I think they had the right idea but the lung
was the wrong target for the drug.
Mannkind (MNKD) had the
same idea. Insulin in through the lung
with a product called Afrezza. There is
no way to describe them (after Pfizer walked off the field) but as madly
persistent. They did develop a product
and got it through the FDA. They made a
deal with insulin maker Sanofi for $150 million, but ultimately they discovered
what Pfizer had already found out.
Patients don’t want to put stuff in their lungs, and the agreement with
Sanofi was terminated on January 5, 2016.
As far as I can tell, this technology should
be worth hundreds of millions even as things currently stand. The idea that all information is built into
the stock price is hogwash. But that can
be an advantage for astute investors.
Zample: those of us who invested in DSL (digital
subscriber lines) technology because it would provide the bandwidth necessary
for streaming video through telephone lines - we had to wait a long time. Meanwhile, we were out there chatting on the
bulletin boards: What’s taking the Baby
Bells so long? Then sentiment changed,
and my DSL stocks started to climb. I
remember one of my winners, Aware, made a ten times move. Given the architecture of the telephone business,
DSL was inevitable.
The inside of the cheek is rich in blood
vessels. For a means of getting insulin
inside the body without the pain of a needle, it’s a natural. Investors need to stay the course.
Business/Technology
|
Range of possible market cap values from now to 5
years out
|
||||||||
Buccal delivery technology
|
$0 - $5.6 billion
|
||||||||
(2x Pfizer write off of Exubera of $2.8 billion)
|
|||||||||
li-key Cancer vaccine technology
|
$0 - $11.9 billion (Kite purchased by Gilead for
$11.9 billion cash)
|
||||||||
Diagnostics
|
$0 - $100 million
|
||||||||
Pharmacy pain management &
|
$150 million to $1 billion
|
||||||||
ancillary medical services, DME
|
|||||||||
Total estimated market cap
|
$150 million to $18.6 billion
|
||||||||
The On-Going IPO of Veneto
Veneto was privately
owned, so the acquisition is, in effect, a sort of IPO. An IPO would produce an instant value for the
company that might reasonably put the stock at 20 times adjusted EBITDA of $7.6
million, or $152 million. And the stock
did rise very quickly in near IPO style to the $20 million level, but it still
feels light, and I’m not convinced that the IPO of Veneto is over.
A Trip to the Dark Side
Looking at the pitfalls, in the case of the
vaccines, I read 25 years ago about a trial where scientists were able to
resolve brain cancer in mice 21 out of 21 times. I thought:
this is not chance. I think this
must have been before the internet, and I cannot find this article
anymore. But as I recall, my research
led to Immune Response Corporation, a company founded or co-founded by Jonas
Salk. A lot of Ph.D.’s on staff. Salk had developed a vaccine for HIV called
Remune. Eventually, funds ran out. They, too, were on a mission. They had a peptide vaccine for rheumatoid
arthritis, psoriasis, and multiple sclerosis.
They had gene therapy for lowering cholesterol, hemophilia, hepatitis
C. They, too, wanted to change the
world. In trying to find out what became
of them for this article, I looked up their website, I got the message that the
domain may be for sale. I had sold my
shares for peanuts years ago.
And the Bristol-Myers Squibb
collaboration with Nektar mentioned above is looking a little iffy
after new data came in, though more data is needed to clarify effectiveness.
Buccal delivery. The non-inferiority tests required by the FDA
can be devastating. I owned shares in a
blood substitute maker Northfield Laboratories.
It had to show that its product performed no less well than blood or
blood plasma. It performed pretty well,
but not quite as well as blood or blood plasma.
The company’s shares fell precipitously, and in 2009 it was liquidated
under Chapter 11. Generex is under a
similar non-inferiority burden, though it is not a test of insulin. Insulin is insulin. The body makes it. No, it was a test of how well the insulin
gets into the blood stream as compared with a needle. And the formula has been improved since its
Phase III of 2011.
As regards the Veneto acquisition,
the owners accepted a promissory note from Generex. In January that has to be replaced by cash
(or perhaps another note). I put it to
Moscato, and he did not think it was an insurmountable problem, and he has
raised millions for Generex research.
The Summing Up
I
figure Generex has three (3) chances to achieve a market cap of $1 billion in
five years. One - is the buccal delivery
business, of which insulin is the test case. It could be worth at least a
billion. Two - is the Ii-key peptide vaccines, which are being tested on breast
cancer and prostate cancer, and where Jason showed me that Juno and Kite
achieved billion dollar valuations even before their cancer vaccines proved
out. And three, the pharmacy/medical
ancillary business is being programmed for rapid growth of a kind that may well
result in a billion dollar sales in five years all by itself. I only need one of these three to succeed to
hit my target.
For
now, I am assigning a market cap of $150 million to NuGenerex Distribution
Solutions (NDS), which holds Veneto. We
were told in the conference call that Veneto will likely generate millions of
EBITDA, and they paid a little over four times adjusted EBITDA, or $35 million. If you assign a multiplier of 20, you get
$152 million. But the new entity NDS also includes the new acquisitions,
Regentys and Olaregen, the Puration (PURA) deal, and a pharmacy which has been
conducting audits prior to inclusion. I
have no way to assign numbers to these things.
$150 million is just a ballpark figure, and it could be a very minimum
figure. Stay tuned.
Alpha to spare
I don’t believe it will ever be possible for me
to deliver more alpha to investors than I will with this piece. (To refresh – the excess return of an
investment relative to the return of a benchmark index is an investment’s alpha.) In part, this is because the value of
Generex’s technologies drifted to ridiculously low levels, and even after the recent
run-up, still remains remarkably low. And
in part it is because prospects of these three businesses appear to be
remarkably good. As I have stated above,
I’m setting a five year market cap target of $1 billion.
=
= = = = =
Breaking news
There have been acquisitions just announced that I have
not been able to completely assimilate. Nothing
I have read so far appears to detract from what I have outlined above. Serious investors should read the conference
call transcript. Press releases and
other pertinent links and information can be found at Generex’s investor site. Also, Generex had only a little over 1 million
shares outstanding after the 1-for-1,000 reverse split. The company decided that was too few shares,
so to increase the number of shares outstanding and they paid a stock dividend
to shareholders in November of twenty (20) shar
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