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This post is an addition to the my previous post on Generex Biotechnology on January 28th, 2008.

In the news today it was reported that major drug maker Pfizer “reported an increase of lung cancer among patients who used its discontinued inhaled insulin Exubera.” This news lowered the outlook of having an insulin treatment that could be administered via an inhaler. Other companies such as MannKind Corp and Nektar Therapeutics Inc were punished on the market today. MannKind dropped by about 60%, while Nektar fell by approximately 25%.

Generex is another such company who seeks to create an inhaled insulin product. Today their stock skyrocketed 12.15% on two and a half times the average volume. It added an additional 1.67% in after hours trading. The rise is partially due to the news that they released today in regards to the company commencing their screening process for potential testing candidates. Generex is currently in Phase III trials in North America. According to the press release, “the Phase III protocol includes a six-month trial, which is expected to enroll 750 patients with Type 1 diabetes mellitus.” The purpose of the testing is to “is to compare the efficacy of Generex Oral-lyn and the RapidMist diabetes management system with standard injectable insulin therapy.”

A second reason that GNBT rose so much today could be in response to the Pfizer news. Pfizer and Generex are in the process of creating somewhat similar products. One of the major differences between the two is that Generex’s product is designed to never enter the lungs. This feature should eliminate the possibility that a user would develop lung cancer. For Generex, this news means that they have a couple of competitors that are forced to pull their products from development. Fewer competitors means more market share when Generex can finally get through its’ trials.

Currently, “Generex Oral-lyn is approved in India and Ecuador. The company also is studying the product in the Ukraine.” Revenues of only $19,000 in Q2 ended January 31st, 2008 suggests that their product hasn’t exactly been flying off the shelves abroad. One positive is that the company has been steadily decreasing their losses over the past three quarters. In Q2 2008 they reported a net loss of $6.507M on their income statement.

In the short term I think that that stock price should increase a bit more over the next few days to a week in a half while investors have time to digest this information. In the more near future (1-2 months) I see the stock falling to its current resistance of $1.00/share in anticipation of more losses on the quarterly statement. Since Generex (GNBT) finances their operations through the sale of their own stock this will mean a dilution of shares for the shareholders, thus translating into a lower price per share.

In Q1 08 and Q2 08 net income rose by 6.4% and 9.9% respectively. While these gains seem promising, Q2 shows a different story over the past few years. Net losses increased 25.2% when comparing Q2 2007 to Q2 2008. If losses increase like that for Q3, which had the highest losses over the past four quarters, we should be expecting a net loss of about $9.662M. Given a projected stock price of $1/share, the company will need to issue 9.662M shares to pay off its debt. Currently, the company has 111.48M shares outstanding. At the $1/share mark, that would give Generex a $111.48M market capitalization. After the issuance of the new shares the company should have roughly 121.14M shares outstanding. If market capitalization is to be maintained, the price of the stock should fall to roughly $.92/share.

$.92/share is my price target for mid-July. FY 2008 ends July 31st, 2008. At this point, the stock price will be very dependent on what is released in the annual report. I think that these targets will hold barring any sort of groundbreaking news. If this company can someday make it through the Phase III trials it will be a major winner.

Update 8/27/2008:

I decided to check back to see how my prediction turned out. In my opinion I think I was just about spot on. I had predicted a price target of $.92/share by mid-July. On July 22nd and 23rd it closed at $.91/share. All the other days it was lower than that, but two of them were almost exactly what I had predicted. On April 9th when I made this prediction, the stock was trading at $1.20/share.  That is a prediction of a 24% decrease in price over a 3-month period. Looks like my bold prediction turned out right!

Overview: Generex Biotechnology (GNBT) is a pharmaceutical company based out of Toronto, Canada. This biotech upstart is in the process of creating a glucose spray/inhaler for those with diabetes. Presently, people with diabetes have to inject themselves with insulin daily in order to keep their body functioning properly. They are currently in the process of beginning Phase III trials for the FDA. Their product has already been approved for use in Ecuador. According to Generex, they can potentially use the inhalation delivery method to disburse monoclonal antibodies, human growth hormone, fertility hormone, estrogen, heparin, and a number of vaccines. The company has decided that it would be more cost effective if they focused on the insulin product until they develop a steady and reliable revenue stream.

Review:

The Good: This company has a very novel idea that could potentially change the lives of people with diabetes. Currently, diabetics have to inject themselves with insulin to keep their bodies healthy. Injecting oneself with needles on a daily basis would not be a very enjoyable experience. With the creation of this product a diabetic can get their daily dose of insulin by using a delivery method similar to what people with asthma use. The delivery method that is used is called Rapid Mist. With the Rapid Mist system, the patient sprays the formulation into their mouths. “Absorption of the pharmaceutical agent occurs in the buccal cavity, principally through the inner cheek walls.” The flagship product for the Rapid Mist delivery system is Generex Oral-lyn. According to the company, “Generex Oral-lyn™ is a liquid formulation of regular human insulin that is delivered to the buccal mucosa by way of the RapidMist™ device,where absorption is limited to the mouth with no entry into the lungs. The rich vascularity of the buccal mucosa allows for much faster absorption of insulin and a shorter total duration of activity which makes Generex Oral-lyn™ an ideal prandial insulin as it can be conveniently administered immediately prior to meals with little prospect of hypoglycemia.”

Generex believes that the injection method is not highly accepted by a large amount of patients. Because of this, they feel that patients may not be as likely to comply with the prescribed treatment plan. This could lead to more medical complications and increase costs over the long run as well. The elderly may also have problems injecting themselves properly as they age. Having an inhaler devise like Rapid Mist would likely eliminate many of the above mentioned problems.

Another plus for Generex is that there is unfortunately no cure for diabetes. People with diabetes will remain dependent on insulin products for their entire lives. If Generex can bring this product to market they will have customers for life. If their condition is not treated with daily insulin, “diabetes can lead to blindness, nerve disease, amputations, heart disease and stroke.”

According to the World Health Organization, there are over 180 million people with diabetes world wide. There are approximately 18 million people with diabetes in North America. This gives any company dealing with diabetes medicine a very large and permanent subscriber base.

Institutional investment is currently at 2%. An increase in institutional investment could cause dramatic increases in the company’s stock price. Also, because this figure is so low, and institutional sell off would not likely affect the stock price by much. As of 11/26/2007, Ghi, Inc was the largest institutional investor, holding 1.91 million shares of the company.

The Bad: The company is still a ways away from being able to market this product in the United States. They are just entering the Phase III trials that are vital to the future of this company. If they cannot make it through these trials, then the company will most likely cease to exist. If they can manage to make it through the Phase III trials though, one could profit handsomely.

Generex is burning money like it grows on trees. According to their 2007 annual report, they spent $11.983 million on Research and Development and an additional $12.317 million on General and Administrative expenses. Combine this with $.182 million in revenues and you have an operating loss of $24.994 million. Since 11/2/1995 when the company began operations, they have a total operating loss of $162.466 million.

The company has financed almost all of their operations through the sale of stock. At their current cash burn rates, they will continue to have to issue more and more shares to keep themselves afloat. The issuance of more shares will dilute the share value. At the current stock price of $1.31 per share, the company will have to issue 5,553,073 additional shares to satisfy their current liabilities.

The largest negative facing this company is that they may not be approved by the FDA. If this happens the company will be worthless to investors.

Opinion: I think that Generex is a very speculative company that has a great product. If approved it could change the lives of millions of people around the world. Bringing a pharmaceutical product to market is a very costly venture, and it could be a long time before Generex Biotechnology sees a profit. I see a lot of potential in this company and if they make the right moves they can become very profitable.

I like the fact that Generex is seeking approval in companies outside of the United States as well. Having a product for sale in Ecuador shows that their product has been accepted and leads me to believe that their product can be accepted elsewhere as well. Even if they don’t get approved in the United States they could still have potential access to over 90% of the world’s diabetics. One drawback of this is that people in other countries may not have the funds to purchase Generex’s product.

Rating:

Market Sector: The Biotechnology sector is generally very speculative and volatile. This stock is not exception. This company has little revenue to speak of, so literally all price movements are a reflection of current speculation on the viability of this company. There are many Biotech companies out there, and it is possible that one invents a product superior to what Generex is attempting to produce.

Potential: Generex has an awesome potential. If they can get their product to the market I would imagine that many diabetics would want to switch to it to avoid having to inject themselves. There is really an unlimited potential for this company. At $1.31 it is priced very low which would allow an investor to make significant returns quite easily.

Risk: This is a very risky company and the price definitely reflects that. If you believe in the product that Generex Biotechnology (GNBT) is selling, now would be the time to get in on the stock before a press release pushes the price higher. Alternatively, there is a high potential that the Phase III trials could fail and the product will never reach the market. If you have a little extra cash sitting around, this company could make for an entertaining speculation.

Conclusion: 2.5 Generex Biotechnology (GNBT) is a very promising company with a unique product. I can’t quite rate them a hold (3) because they have been experiencing a steady decline for the past month and a half. On 12/14/2007 the stock closed at $1.90. It has dropped over 31% since. It could have a ways to go until it hits a bottom. I would keep my eye on this stock over the next year or so. If things go right for Generex it could see a nice price appreciation.

Note: As of 1/28/2008 I do not have any sort of financial investment in this company. For a current look at the stocks and options I own, .