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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission file number 000-25169
GENEREX BIOTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 98-0178636
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
33 Harbour Square, Suite 202, Toronto, Canada M5J 2G2
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 416/364-2551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at October 10, 2002, based on the closing price as of that date, was
approximately $20,659,926.
At October 10, 2002, the registrant had 20,100,718 shares of common stock
outstanding.
Documents incorporated by reference: Proxy statement to be filed
within 120 days after the end of the fiscal year.
Forward-Looking Statements
Certain statements in the "Business" (Item 1) section, "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" (Item 7) and
elsewhere in this Annual Report on Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements can be identified by introductory words such as
"expects", "plans", "intends", "believes", "will", "estimates", "forecasts",
"projects" or words of similar meaning, and by the fact that they do not relate
strictly to historical or current facts. Forward-looking statements address,
among other things, our expectations concerning the efficacy of our platform
buccal delivery technology, our expectations concerning product candidates for
our technology, our expectations concerning our development and license
agreement with Lilly and other third party collaborations including our joint
venture with a subsidiary of Elan Corporation, our expectations of when
different phases of clinical activity may commence and our expectations of when
regulatory submissions may be filed or when regulatory approvals may be
received.
Any or all of our forward-looking statements may turn out to be wrong. They can
be affected by inaccurate assumptions that we might make or by known or unknown
risks and uncertainties. Actual outcomes and results may differ materially from
what is expressed or implied in our forward-looking statements. Among the
factors that could affect future results are:
o the inherent uncertainties of product development based on a new and as
yet not fully proven drug delivery technology,
o the risks and uncertainties regarding the actual effect on humans of
seemingly safe and efficacious formulations when tested clinically,
o the inherent uncertainties associated with clinical trials of product
candidates,
o the inherent uncertainties associated with the process of obtaining
regulatory approval to market product candidates, and
o adverse developments in our collaboration with Lilly regarding oral
insulin; and
o adverse developments in our joint venture with a subsidiary of Elan
Corporation.
Additional factors that could affect future results are set forth throughout the
"Business" (Item 1) section, including the subsection entitled "Certain
Additional Risk Factors", and elsewhere in this Annual Report on Form 10-K.
2
PART I
Item 1. Business.
Overview
- --------
Generex Biotechnology Corporation is engaged in the research and development of
drug delivery technologies. Our primary focus at the present time is our
proprietary technology for the administration of formulations of large molecule
drugs to the oral (buccal) cavity using a hand-held aerosol applicator.
A substantial number of large molecule drugs (i.e., drugs composed of molecules
with a higher than specified molecular weight) have been approved for sale in
the United States or are presently undergoing clinical trials as part of the
process to obtain such approval, including various proteins, peptides,
monoclonal antibodies, hormones and vaccines. Unlike small molecule drugs, which
generally can be administered by various methods, large molecule drugs
historically have been administered predominately by injection. The principal
reasons for this have been the vulnerability of large molecule drugs to
digestion and the relatively large size of the molecule itself, which makes
absorption into the blood stream through the skin or mucosa inefficient or
ineffective.
All injection therapies involve varying degrees of discomfort and inconvenience.
With chronic and sub-chronic diseases, the discomfort and inconvenience
associated with injection therapies frequently results in less than optimal
patient acceptance of and compliance with the prescribed treatment plan. Poor
acceptance and compliance can lead to medical complications and higher disease
management costs. Also, elderly, infirm and pediatric patients with chronic or
sub-chronic conditions may not be able to self-inject their medications. In such
cases assistance is required which increases both the cost and inconvenience of
the therapy.
Our goal is to develop proprietary formulations of large molecule drugs that can
be administered through the buccal mucosa, primarily the inner cheek walls,
thereby eliminating or reducing the need for injections. We believe that our
buccal delivery technology is a platform technology that has application to many
large molecule drugs, and provides a convenient, non-invasive, accurate and cost
effective way to administer such drugs. We have identified several large
molecule drugs as possible candidates for development, but to date have focused
our development efforts on a buccal insulin product.
Between January 1999 and September 2000, we conducted clinical trials of our
buccal insulin product in the United States, Canada and Europe. In September
2000, we entered into a Development and License Agreement with Eli Lilly and
Company to develop this product. Prior to entering into the agreement with
Lilly, we had not reached a point in our clinical program at which we were
prepared to apply for regulatory approvals to market the product in any country,
and we did not anticipate receiving any such approvals for a number of years.
Under the terms of our agreement with Lilly, Lilly will be responsible generally
for clinical trials and regulatory approvals on a worldwide basis for all
products developed under the agreement. Lilly also will have the exclusive right
to market the products worldwide. Our principal responsibilities under the Lilly
agreement will be to continue development, as required, of our proprietary
formulation and on our RapidMist(TM) device, which is described below.
In January 2001, we established a joint venture with a wholly owned subsidiary
of Elan Corporation, plc. The joint venture will pursue the application of
certain of our and Elan's drug delivery technologies, including our platform
technology for the buccal delivery of pharmaceutical products, for the treatment
of prostate cancer, endometriosis and/or the suppression of testosterone and
estrogen. In January of 2002, the parties expanded the joint venture to include
buccal morphine for the management of pain and selected buccal morphine as the
initial product for development under Generex (Bermuda), Ltd. This expansion of
the joint venture occurred after we successfully completed a proof of concept
clinical study of morphine delivery using our proprietary buccal delivery
technology.
3
The parties will conduct the joint venture through Generex (Bermuda), Ltd., a
Bermuda limited liability company. Generex (Bermuda), Ltd. was granted
non-exclusive licenses to utilize our buccal delivery technology and certain
Elan drug delivery technologies.
We are a development stage company, and prior to the first quarter of the prior
fiscal year had not received any revenues from operations. We have no products
approved for commercial sale by drug regulatory authorities. We have begun the
regulatory approval process for only three products, our oral insulin
formulation, morphine and fentanyl. We believe that our buccal delivery
technology is a platform technology that has application to a large number of
large molecule drugs in addition to insulin. Estrogen, heparin, monoclonal
antibodies, human growth hormone, fertility hormone, as well as a number of
vaccines are among the compounds that we have identified as possible candidates
for product development.
Buccal Delivery Technology
- --------------------------
Our buccal delivery technology involves the preparation of a proprietary
formulation in which an active pharmaceutical agent is placed in a solution with
a combination of absorption enhancers and other excipients classified generally
recognized as safe ("GRAS") by the Food and Drug Administration when used in
accordance with specified quantity and other limitations. The resulting
formulation is aerosolized with a pharmaceutical grade chemical propellant and
is administered to the patient using our proprietary RapidMist(TM) device. The
device is a small, lightweight, hand-held, easy-to-use aerosol applicator
comprised of a container for the formulation, a metered dose valve, an actuator
and dust cap. Using the device, the patient self-administers the formulation by
spraying it into the mouth. The device contains multiple applications, the
number being dependent, among other things, on the concentration of the
formulation. Absorption of the pharmaceutical agent occurs in the buccal cavity,
principally through the inner cheek walls. In clinical studies of our insulin
product, insulin absorption in the buccal cavity has been shown to be very
rapid. We are also evaluating the use of our RapidMist device for the delivery
of both morphine and fentanyl.
Buccal Insulin Product
- ----------------------
Insulin is a hormone that is naturally secreted by the pancreas to regulate the
level of glucose, a type of sugar, in the bloodstream. The term diabetes refers
to a group of disorders that are characterized by the inability of the body to
properly regulate blood glucose levels. When glucose is abundant, it is
converted into fat and stored for use when food is not available. When glucose
is not available from food, these fats are broken down into free fatty acids
that stimulate glucose production. Insulin acts by stimulating the use of
glucose as fuel and by inhibiting the production of glucose. In a healthy
individual, a balance is maintained between insulin secretion and glucose
metabolism.
There are two major types of diabetes. Type 1 diabetes (juvenile onset diabetes
or insulin dependent diabetes) refers to the condition where the pancreas
produces little or no insulin. Type 1 diabetes accounts for 5-10 percent of
diabetes cases. It often occurs in children and young adults. Type 1 diabetics
must take daily insulin injections, typically three to five times per day, to
regulate blood glucose levels.
4
In Type 2 diabetes (adult onset or non-insulin dependent diabetes mellitus), the
body does not produce enough insulin, or cannot properly use the insulin
produced. Type 2 diabetes is the most common form of the disease and accounts
for 90-95 percent of diabetes cases. In addition to insulin therapy, Type 2
diabetics may take oral drugs that stimulate the production of insulin by the
pancreas or that help the body to more effectively use insulin.
If not treated, diabetes can lead to blindness, kidney disease, nerve disease,
amputation, heart disease and stroke. Each year, from 12,000 to 24,000 people
lose their sight because of diabetes. Diabetes is also the leading cause of
end-stage renal disease (kidney failure), accounting for about 40% of new cases.
In addition, about 60-70 percent of people with diabetes have mild to severe
forms of diabetic nerve damage, which, in severe forms, can lead to lower limb
amputations. Diabetics are also 2 to 4 times more likely to have heart disease,
which is present in 75 percent of diabetes-related deaths, and are 2 to 4 times
more likely to suffer a stroke.
There is no known cure for diabetes. The World Health Organization estimates
that there are currently over 1.5 billion diabetics worldwide. It is further
estimated that this number will almost double by the year 2025. There are
estimated to be 17 million people suffering from diabetes in North America
alone, approximately 5 million of whom are undiagnosed, and diabetes is the
second largest cause of death by disease in North America.
We conducted the first clinical trials of our buccal insulin formulation with
human subjects in Ecuador in January 1998. We ultimately conducted a number of
studies in Ecuador in 1998, each of which involved a selection of between 8 and
10 patients. The principal purpose of these studies was to evaluate the
effectiveness of our oral insulin formulation in humans compared with injected
insulin and placebos.
On the basis of the test results in Ecuador and other pre-clinical data, we made
an Investigatory New Drug submission to the Health Protection Branch in Canada
(Canada's equivalent to the United States' Food and Drug Administration) in July
1998, and received permission from the Canadian regulators to proceed with
clinical trials in September 1998. We filed an Investigational New Drug
Application with the Food and Drug Administration in October 1998, and received
FDA approval to proceed with human trials in November 1998.
We began our clinical trial programs in Canada and the United States in January
1999. Between January 1999 and September 2000 we conducted clinical trials of
our insulin formulation involving approximately 200 Type 1 and Type 2 diabetic
patients and healthy volunteers. The study protocol in most trials involved
administration of two different doses of our insulin formulation following
either a liquid sustacal meal or a standard meal challenge. The objective of
these studies was to evaluate our insulin formulation's efficacy in controlling
post-prandial (meal related) glucose levels. These trials demonstrated that our
insulin formulation controlled post-prandial hyperglycemia in a manner
comparable to injected insulin.
5
In September 2000 we entered into a Development and License Agreement with Eli
Lilly and Company covering an insulin product based upon our buccal delivery
technology. Under this agreement, Lilly will be responsible generally for
clinical trials and regulatory approvals for this product on a worldwide basis.
Lilly has not yet authorized the commencement of clinical trials under the
agreement. However, in furtherance of our product development responsibilities
under the agreement with Lilly, we are conducting limited clinical studies in
the United States, Canada, Europe and Ecuador.
Other Large Molecule Drug Projects
- ----------------------------------
We have identified numerous compounds, other than insulin, as candidates for
product development.
Morphine and Fentanyl
- ---------------------
The delivery of morphine and fentanyl by oral formulation (pills) and injection
for the treatment of moderate to severe break through and postoperative pain
fail to provide patients with adequate relief and control. (Breakthrough and
postoperative pain are characterized as being moderate to severe in intensity,
having a rapid onset of action and a short to medium duration.) Not only does
delivery by pills and injection have a slow onset of action, it is often
difficult for patients to adjust their doses, with the result that patients are
either over or under medicated. In addition, injections are invasive and require
an attendant to administer the medication which reduces the patient's control
over the pain and may cause increased anxiety. Often, patients must wait in pain
until an attendant can medicate them.
We are attempting to develop a buccal delivery formulation for morphine and
fentanyl that will have a critical series of attributes well suited for the
treatment of breakthrough and post operative pain and which will be cost
effective and will have a demonstrable improvement over current delivery
methods. These include fast access to the circulatory system, precise dosing
control and a simple, self-administration procedure.
We made an Investigatory New Drug submission for buccal morphine to the Health
Protection Branch in Canada in January 2002, and received permission from the
Canadian regulators to proceed with clinical trials in March 2002. We have
commenced clinical trials in Ecuador and we are in the process of recruiting
investigators to conduct clinical trials in Canada. In January of 2002, we filed
an Investigational New Drug Application for buccal morphine with the Food and
Drug Administration. The buccal morphine product is being developed under our
joint venture with a subsidiary of Elan Corporation.
We made an Investigatory New Drug submission for fentanyl to the Health
Protection Branch in Canada in August 2002, and received permission from the
Canadian regulators to proceed with clinical trials in October 2002.
Other Products
- --------------
We have had discussions of possible research collaborations with various
pharmaceutical companies concerning use of our large molecule drug delivery
technology with these compounds, including monoclonal antibodies, human growth
hormone, fertility hormone, estrogen and heparin, and a number of vaccines.
6
Prior to entering into our agreement with Lilly covering the insulin product, we
had not aggressively pursued development opportunities apart from insulin
because we believed it was more advantageous to concentrate our resources,
particularly our financial resources, on developing the insulin product. While
the insulin product remains our first priority, we believe that Lilly's
involvement will relieve us of a substantial portion of the costs associated
with conducting the clinical program for the insulin product. We believe we have
sufficient financial resources to pursue the development of our current products
and the initial exploration of additional products.
Corporate History
We were incorporated in Delaware in September 1997 for the purpose of acquiring
Generex Pharmaceuticals, Inc., a Canadian corporation formed in November 1995 to
engage in pharmaceutical and biotechnological research and other activities. Our
acquisition of Generex Pharmaceuticals was completed in October 1997 in a
transaction in which the holders of all outstanding shares of Generex
Pharmaceuticals exchanged their shares for shares of our common stock.
In January 1998, we participated in a "reverse acquisition" with Green Mt. P.
S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of
this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Government Regulation
Our research and development activities, and the eventual manufacturing and
marketing of our products, are subject to extensive regulation by the Food and
Drug Administration in the United States (FDA) and comparable regulatory
authorities in other countries. Among other things, extensive regulation puts a
burden on our ability to bring products to market. While these regulations apply
to all competitors in our industry, many of our competitors have extensive
experience in dealing with FDA and other regulators, while we do not. Also,
other companies in our industry do not depend completely on products which still
need to be approved by government regulators, as we now do.
7
If requisite regulatory approvals are not obtained and maintained, our business
will be substantially harmed. In many if not all cases, we expect that our
development partners will control or participate extensively in the regulatory
approval process once a development agreement is in place. The following
discussion summarizes the principal features of food and drug regulation in the
United States and other countries as they affect our business.
United States. All aspects of our research, development and foreseeable
commercial activities are subject to extensive regulation by FDA and other
regulatory authorities in the United States. United States federal and state
statutes and regulations govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of pharmaceutical products. The regulatory approval process, including
clinical trials, usually takes several years and requires the expenditure of
substantial resources. If regulatory approval of a product is granted, the
approval may include significant limitations on the uses for which the product
may be marketed. The steps required before a pharmaceutical product may be
marketed in the United States include:
o preclinical tests;
o the submission to FDA of an Investigational New Drug application, which
must become effective before human clinical trials commence;
o human clinical trials to establish the safety and efficacy of the drug;
o the submission of a New Drug Application to FDA; and
o FDA approval of the New Drug Application, including approval of all
product labeling and advertising.
Pre-clinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the pre-clinical tests are
submitted to FDA as part of the Investigational New Drug application and are
reviewed by FDA before the commencement of human clinical trials. Unless FDA
objects to the Investigational New Drug application, the Investigational New
Drug application becomes effective 30 days following its receipt by FDA. The
Investigational New Drug application for our oral insulin formulation became
effective in November 1998. We filed an Investigational New Drug application for
buccal morphine in January of 2002.
Clinical trials involve the administration of the new drug to humans under the
supervision of a qualified investigator. The protocols for the trials must be
submitted to FDA as part of the Investigational New Drug application. Also, each
clinical trial must be approved and conducted under the auspices of an
Institutional Review Board, which considers, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
Clinical trials are typically conducted in three sequential phases (Phase I,
Phase II, and Phase III), but the phases may overlap. Phase I clinical trials
test the drug on healthy human subjects for safety and other aspects, but not
effectiveness. Phase II clinical trials are conducted in a limited patient
population to gather evidence about the efficacy of the drug for specific
purposes, to determine dosage tolerance and optimal dosages, and to identify
possible adverse effects and safety risks.
8
When a compound has shown evidence of efficacy and acceptable safety in Phase II
evaluations, Phase III clinical trials are undertaken to evaluate clinical
efficacy and to test for safety in an expanded patient population at clinical
trial sites in different geographical locations. FDA and other regulatory
authorities require that the safety and efficacy of therapeutic product
candidates be supported through at least two adequate and well-controlled Phase
III clinical trials.
In the United States, the results of pre-clinical studies and clinical trials,
if successful, are submitted to FDA in a New Drug Application to seek approval
to market and commercialize the drug product for a specified use. FDA may deny a
New Drug Application if it believes that applicable regulatory criteria are not
satisfied. FDA also may require additional testing for safety and efficacy of
the drug. We cannot be sure that any of our proposed products will receive FDA
approval. Even if approved by FDA, our products and the facilities used to
manufacture our products will remain subject to review and periodic inspection
by FDA.
To supply drug products for use in the United States, foreign and domestic
manufacturing facilities must be registered with, and approved by, FDA.
Manufacturing facilities must also comply with FDA's Good Manufacturing
Practices, and domestic facilities are subject to periodic inspection by FDA.
Products manufactured outside the United States are inspected by regulatory
authorities in those countries under agreements with FDA. To comply with Good
Manufacturing Practices, manufacturers must expend substantial funds, time and
effort in the area of production and quality control. FDA stringently applies
its regulatory standards for manufacturing. Discovery of previously unknown
problems with respect to a product, manufacturer or facility may result in
consequences with commercial significance. These include restrictions on the
product, manufacturer or facility, suspensions of regulatory approvals,
operating restrictions, delays in obtaining new product approvals, withdrawals
of the product from the market, product recalls, fines, injunctions and criminal
prosecution.
Foreign Countries. Before we are permitted to market any of our products outside
of the United States, those products will be subject to regulatory approval by
foreign government agencies similar to FDA. These requirements vary widely from
country to country. Generally, however, no action can be taken to market any
drug product in a country until an appropriate application has been approved by
the regulatory authorities in that country. FDA approval does not assure
approval by other regulatory authorities. The current approval process varies
from country to country, and the time spent in gaining approval varies from that
required for FDA approval. The Canadian regulatory process is substantially
similar to that of the United States. We obtained regulatory approval to begin
clinical trials of our oral insulin formulation in Canada in November 1998. In
Ecuador, regulatory authorities approved the limited non-commercial distribution
of our oral insulin formulation in September 1998. We obtained regulatory
approval to begin clinical trials of our buccal morphine product in Canada in
March 2002 and received regulatory approval to begin clinical trials of our
fentanyl product in Canada in October, 2002. We are currently in the process of
recruiting investigators to conduct clinical trials of our buccal morphine
product.
9
Marketing
We intend to rely on collaborative arrangements with one or more other companies
that possess strong pharmaceutical marketing and distribution resources to
perform these functions for us. Accordingly, we will not have the same control
over marketing and distribution that we would have if we conducted these
functions ourselves.
With respect to our insulin product, Lilly has exclusive, worldwide marketing
rights to the product under our development and license agreement. With respect
to the joint venture with Elan, Elan, may, at its option, choose to market
morphine or any other product developed under the joint venture. Except for
these arrangements, we do not have any agreements with any other companies for
marketing or distributing our products.
Manufacturing
To date, we have produced our oral insulin formulation only under laboratory
conditions on a small scale. In December 2000, we completed our pilot
manufacturing facility in Toronto in the same commercial complex in which our
original laboratory is located, and we are in the process of obtaining
regulatory approval for the facility. We believe that this facility will be
capable of producing our insulin product at levels necessary to supply our needs
for late stage human clinical trials of the product and for initial commercial
sales outside the United States. However, we have not yet actually produced
product at those levels.
Under our agreement with Lilly, Lilly may select us, but is not required to
select us, to manufacture products developed under that agreement. In order to
qualify for consideration in this role, we will have to satisfy Lilly that we
can supply such products at the requisite levels of quality, cost and
reliability in compliance with all applicable regulatory requirements. We have
no experience in resolving the staffing, manufacturing, regulatory and quality
control problems that are likely to come up in developing and running a large
scale manufacturing operation. Our failure to solve problems of this nature
would lead to loss of any opportunity to manufacture products developed under
our agreement with Lilly, and could delay or prevent our ability to bring other
products to market and inhibit sales after a product comes to market. In any
event, we will need to significantly increase our manufacturing capability in
order to manufacture any product in commercial quantities.
We own facilities in Brampton, Ontario, and Mississauga, Ontario, all within 25
miles from downtown Toronto, that were purchased with the intention of improving
and equipping them for manufacturing. These facilities are currently leased to
unrelated third parties, however, we believe we can place these facilities into
production of our insulin product or other products within 12 to 18 months lead
time if additional production capabilities are necessary.
Raw Material Supplies
The excipients used in our formulation are available from numerous sources in
sufficient quantities for clinical purposes, and we believe that they will be
available in sufficient quantities for commercial purposes when required,
although we have not yet attempted to secure a commercial supply of any such
products.
10
Components suitable for our RapidMist device are available from a limited number
of potential suppliers, as is the chemical propellant used in the device. We
believe that the components which now comprise the device will be utilized with
the commercial version of our insulin product irrespective of what manufacturing
arrangements are ultimately chosen by Lilly, i.e., whether or not we perform the
formulating and filling function. We also expect to use the RapidMist device in
connection with our buccal morphine and fentanyl products. We have secured
supply arrangements with the manufacturers of all components and the propellant
that we presently use in our RapidMist device for commercial quantities of such
components and the propellant. All such suppliers are prominent, reputable and
reliable suppliers to the pharmaceutical industry. Because we now have a single
supplier for each of these components and propellant, however, we are more
vulnerable to supply interruptions than would be the case if we had multiple
suppliers for each component. We do not believe that the risk of a single source
of supply for proprietary raw materials or device components is unusual in the
pharmaceutical industry.
Lilly will supply the pharmaceutical compounds that are used in products
developed under our agreement with Lilly. We expect that similar arrangements
will be made with future development and marketing partners under licensing and
development agreements covering other products. While morphine is a controlled
substance, it is readily available for use in clinical trials. We currently have
the appropriate licenses and facilities for acquiring and storing morphine in
Canada. Various regulatory issues surround the import of morphine into the
United States and we will need to address these issues prior to commencing
clinical trials in the United States.
Intellectual Property
We currently have fifteen issued U.S. patents pertaining to aspects of buccal
delivery technology and covering our oral insulin formulation, and we have three
U.S. patent applications and one Canadian patent application pending, also
related to aspects of our buccal delivery technology, our oral insulin
formulation and our oral morphine formulation. In addition, we hold one U.S.
patent and two Canadian patents and have one U.S. application pending that
pertains to delivery technologies other than our buccal delivery technology.
We also have an indirect interest in three drug delivery patents held by another
company, Centrum Biotechnologies, Inc., which is 50% owned by us.
Our long-term success will substantially depend upon our ability to obtain
patent protection for our technology and our ability to protect our technology
from infringement, misappropriation, discovery and duplication. We cannot be
sure that any of our pending patent applications will be granted, or that any
patents which we own or obtain in the future will fully protect our position.
Our patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and factual
issues. We believe that our existing technology and the patents which we hold or
have applied for do not infringe any one else's patent rights. We believe our
patent rights will provide meaningful protection against others duplicating our
proprietary technologies. We cannot be sure of this, however, because of the
complexity of the legal and scientific issues that could arise in litigation
over these issues. (See "Legal Proceedings" (Item 3) for discussion of certain
legal proceedings involving intellectual property issues.)
We also rely on trade secrets and other unpatented proprietary information. We
seek to protect this information, in part, by confidentiality agreements with
our employees, consultants, advisors and collaborators.
11
Competition
We expect that products based upon our buccal delivery technology and any other
products that we may develop will compete directly with products developed by
pharmaceutical companies, universities, government agencies and public and
private research organizations.
Products developed by our competitors may use a different active pharmaceutical
agent to treat the same medical condition or indication as our product or may
provide for the delivery of substantially the same active pharmaceutical
ingredient as our products using different methods of administration. For
example, a number of pharmaceutical and biotechnology companies are engaged in
various stages of research, development and testing of alternatives to insulin
therapy for the treatment of diabetes, as well as new methods of delivering
insulin. These methods, including nasal, transdermal and pulmonary, may
ultimately successfully deliver insulin to diabetic patients. Many of our
competitors and potential competitors have substantially greater scientific
research and product development capabilities, as well as financial, marketing
and human resources, than we do.
Where the same or substantially the same active ingredient is available using
alternative delivery means, we expect that competition among products will be
based, among other things, on product safety, efficacy, ease of use,
availability, price, marketing and distribution. When different active
pharmaceutical ingredients are involved, these same competitive factors will
apply to both the active agent and the delivery method.
We consider other drug delivery companies to be direct competitors for the
cooperation and support of major drug and biotechnology companies that own or
market proprietary pharmaceutical compounds, as well as for the ultimate patient
market. Among drug delivery companies, those that are known to be developing
delivery systems for insulin and other pharmaceutical agents that we have
identified as product candidates using our technology are of primary concern.
Oral Insulin
- ------------
Inhale Therapeutics, Inc. is developing a customized insulin formulation that is
processed into a fine, dry powder and administered to the deep lung using a
proprietary inhalation device developed for this purpose. Inhale has announced
successful results using its inhaled product in Phase II clinical trials, and is
now engaged in Phase III trials. Inhale is developing its insulin product in
collaboration with Pfizer, Inc., which in turn has announced agreements to
co-develop and co-promote the use of inhaled insulin with Aventis, a leading
pharmaceutical company which presently manufactures insulin for sale primarily
in Europe. Inhale is also developing pulmonary products with large molecule
drugs other than insulin, and has stated that it is investigating the use of its
inhalation technology with small molecule drugs.
Aradigm Corporation, which has announced a joint development agreement with Novo
Nordisk A/S to jointly develop a pulmonary delivery system for insulin by
inhalation, also may be considered a direct competitor of ours in the insulin
area. Novo Nordisk is one of the two leading manufacturers of insulin in the
world, the other being Eli Lilly and Company. Aradigm began Phase III testing of
its inhalation product in the second half of 1998.
12
Other companies have announced development efforts relating to alternative (to
injection) methods of delivering insulin or other large molecule drugs,
including Alkermes, which announced a collaboration with Eli Lilly and Company
in April 2000 to develop a pulmonary method of administering insulin. Other
companies developing alternative means of delivering insulin and other large
molecule drugs include: Emisphere Technologies (pills taken orally), Nobex
Corporation (pills taken orally), and Nastech Pharmaceuticals (nasal), among
others. These companies are at various stages of clinical development.
In addition to other delivery systems for insulin, there are numerous products
which have been approved for use in the treatment of Type 2 diabetics in place
of or in addition to insulin therapy. These products may also be considered
competitive with insulin products.
Pain Management: Morphine and Fentanyl
- --------------------------------------
Cephalon, Inc. currently markets Actiq(R) in the United States and has recently
acquired the rights to the product in Europe. Actiq delivers buccal transmucosal
fentanyl to the cheek walls through the use of a lollipop. On November 4, 1998
the FDA cleared Actiq(R) for marketing for use in the management of breakthrough
cancer pain. The product was launched in March 1999 in the United States.
Aradigm Corporation is developing the hand-held AERx Pain Management System for
the treatment of breakthrough cancer pain. The AERx Pain Management System is a
pulmonary delivery system to deliver the drug through inhalation. AERx has
distinct advantages over the administration by injection of morphine and similar
opiate-derived pain control drugs. Aradigm has completed Phase II clinical
trials of this formulation.
Nastech Pharmaceuticals is developing an intranasal formulation of morphine that
is in Phase II clinical trials. Results reported to date show the product to be
safe and efficacious in the treatment of episodes of breakthrough pain. Nastech
is currently seeking a licensing partner for this product.
Environmental Compliance
Our manufacturing, research and development activities involve the controlled
use of hazardous materials and chemicals. We believe that our procedures for
handling and disposing of these materials comply with all applicable government
regulations. However, we cannot eliminate the risk of accidental contamination
or injury from these materials. If an accident occurred, we could be held liable
for damages, and these damages could severely impact our financial condition. We
are also subject to many environmental, health and workplace safety laws and
regulations, particularly those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of hazardous biological materials.
Violations and the cost of compliance with these laws and regulations could
adversely affect us. However, we do not believe that compliance with the United
States, Canadian or other environmental laws will have a material effect on us
in the foreseeable future.
13
Research and Development Expenditures
A substantial portion of our activities to date have been in research and
development. In the period from inception to July 31, 2002, our expenditures on
research and development were $33,806,737. These included $6,618,820 in the year
ended July 31, 2002; $19,929,799 in the year ended July 31, 2001, and $3,568,300
in the year ended July 31, 2000. The increase in our research and development
expenses from 2000 to 2001, and the decrease in our research and development
expenses in from 2001 to 2002, are due principally to the accounting treatment
for our joint venture with Elan, which resulted in a $15,000,000 research and
development expense for the license fee paid by Generex (Bermuda) Ltd. to Elan
for technology rights in 2001 (the Company's consolidated net loss, which
includes this expense, however, was partially offset by approximately $2.9
million of minority interest, reflecting Elan's 19.9% ownership interest in the
joint venture). Without the charge related to this license fee, our research
and development expenses would have been $4,929,799 in 2001. This amount has not
been adjusted for minority share of loss.
Employees
At September 30, 2002, we had twenty-three full-time employees, including our
executive officers and other individuals who work for us full time but are
employed by management companies that provide their services. Thirteen of our
employees are executive and administrative, six are scientific and technical
personnel who engage primarily in development activities and in preparing
formulations for testing and clinical trials, and four are engaged in corporate
and product promotion, public relations and investor relations. We believe our
employee relations are good. None of our employees is covered by a collective
bargaining agreement.
We will continue to need qualified scientific personnel and personnel with
experience in clinical testing, government regulation and manufacturing. We may
have difficulty in obtaining qualified scientific and technical personnel as
there is strong competition for these people from other pharmaceutical and
biotechnology companies as well as universities and research institutions. Our
business could be materially harmed if we are unable to recruit and retain
qualified scientific, administrative and executive personnel to support our
expanding activities, or if one or more members of our limited scientific and
management staff were unable or unwilling to continue their association with us.
We do not have fixed term agreements with any of our key management or
scientific staff, other than Dr. Pankaj Modi. The fact that we have a fixed term
contract with Dr. Modi, however, does not guarantee his continued availability.
We also use non-employee consultants to assist us in formulating research and
development strategy, in preparing regulatory submissions, in developing
protocols for clinical trials, and in designing, equipping and staffing our
manufacturing facilities. We also use non-employee consultants to assist us in
business development. These consultants and advisors usually have the right to
terminate their relationship with us on short notice. Loss of some of these key
advisors could interrupt or delay development of one or more of our products or
otherwise adversely affect our business plans.
14
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Position Held with Generex
- ---- --- --------------------------
Gerald Bernstein 69 Director
Anna E. Gluskin 51 President, Chief Executive Officer and
Director
Michael Hawke, M.D. 61 Director
Peter Levitch 70 Director
Pankaj Modi, Ph.D. 48 Vice President, Research and
Development and Director
Rose C. Perri 35 Chief Operating Officer, Treasurer,
Secretary and Director
J. Michael Rosen 51 Director
Mark Perri, our former Chairman and Chief Financial Officer, passed away on
November 6, 2002.
Gerald Bernstein, M.D. -- Director since October 2002. Dr. Gerald Bernstein was
elected a Vice President of the Company effective as of October 1, 2001. Dr.
Bernstein acts as a key liaison for the Company on medical and scientific
affairs to the medical, scientific and financial communities and consults with
the company under a consulting agreement on research and medical affairs and on
development activities. Dr. Bernstein has been an associate clinical professor
at the Albert Einstein College of Medicine in New York and an attending
physician at Beth Israel Medical Center, Lenox Hill Hospital and Montefore
Medical Center, all in New York. He is a former president of the American
Diabetes Association. Dr. Bernstein was elected a director of the Company on
October 23, 2002.
Anna E. Gluskin -- Director since September 1997. Ms. Gluskin has served as the
President and Chief Executive Officer of Generex since October 1997. She held
comparable positions with Generex Pharmaceuticals, Inc. from its formation in
1995 until its acquisition by Generex in October 1997.
Michael Hawke, M.D. -- Director since March 2000. Dr. Hawke presently is a
Professor in the Departments of Otolaryngology and Pathology at the University
of Toronto, and is on the staff of the Departments of Otolaryngology at St.
Joseph's Health Center, The Toronto Hospital and Mount Sinai Hospital, all
located in Toronto. He has held these positions for more than the previous five
years. Dr. Hawke has approximately thirty years experience as a medical
researcher, educator and practitioner.
Peter Levitch - Director since October 2002. Mr. Levitch has been President of
Peter Levitch & Associates, an independent consulting firm to health
professionals since 1981. In this capacity, he advises companies through the
various stages of the development of pharmaceuticals, medical devices, biologics
and diagnostics, including clinical evaluation and the FDA regulatory approval
phases. He has served as an advisor to more than 200 leading biotechnology and
biological firms, including Amgen, Genentech, Immunex, DuPont, Baxter and
Johnson and Johnson. Prior to 1981, Mr. Levitch was Vice President, Clinical and
Regulatory Affairs at Oxford Research International Corp. and held senior
positions managing the regulatory and clinical programs at Ortho Diagnostic
Systems (a subsidiary of Johnson & Johnson).
Pankaj Modi, Ph.D. -- Director since September 1997. Dr. Modi has served as Vice
President, Research and Development of Generex since October 1997. Prior to that
time, Dr. Modi was Director of Insulin Research for Generex Pharmaceuticals,
Inc., a position he assumed in October 1996. Prior to joining Generex
Pharmaceuticals, Dr. Modi was engaged in independent research and was employed
as a senior researcher at McMaster University in Hamilton, Ontario from February
1994 through October 1996.
15
Rose C. Perri -- Director since September 1997. Ms. Perri has served as
Treasurer and Secretary of Generex since October 1997, and as Chief Operating
Officer since August 1998. She was an officer of Generex Pharmaceuticals, Inc.
from its formation in 1995 until its acquisition by Generex in October 1997.
J. Michael Rosen -- Director since August 2000. Mr. Rosen has been a principal
in a number of related travel management and hotel marketing businesses since
1978. The principal companies in this group, all of which are headquartered in
Ontario, are Uniworld Travel & Tours, Inc., Nevada Vacations, Inc., Casino
Vacations, Inc. and Casino Tours, Inc. Mr. Rosen presently serves as the
President or a Vice President, and the Chief Financial Officer, of each of these
companies. Mr. Rosen is an accountant by training, and was engaged in the
private practice of accounting prior to 1978.
Generex entered into a joint venture with Elan Corporation, plc ("Elan") and
certain affiliates of Elan in January 2001. Pursuant to a Securities Purchase
Agreement dated January 16, 2001 between Generex, Elan and Elan International
Services, Ltd. ("EIS"), a subsidiary of Elan, EIS has the right to nominate one
director to Generex's Board of Directors for so long as EIS or its affiliates
own at least 1.0% of the issued and outstanding shares of common stock. Dr.
Lieberburg was the nominee of EIS thereunder. Dr. Lieberburg resigned effective
August 1, 2002. EIS has not informed Generex of its nominee to replace Dr.
Lieberburg. Under the terms of the Securities Purchase Agreement, the
EIS-nominated director may not in any event have more than 15% of the aggregate
voting power of the Board of Directors as a whole.
Dr. Modi holds the position of Vice President, Research and Development pursuant
to a consulting agreement that was originally entered into as of October 1,
1996, that was amended and supplemented as of January 7, 1998, and that was
amended and supplemented as of December 31, 2000. An amendment to Dr. Modi's
consulting agreement was approved by the Board of Directors in January 2002.
Under the consulting agreement, Generex must use its best efforts to cause Dr.
Modi to be nominated for election and elected a director of Generex for as long
as the consulting agreement is in force.
There are no family relationships among our officers and directors.
Other Key Employees and Consultants
Slava Jarnitskii is our Financial Controller. He began his employment with
Generex Pharmaceuticals in September 1996 and has been in the employment of the
Company since its acquisition of Generex Pharmaceuticals in October 1997. Before
his employment with Generex Pharmaceuticals, Mr. Jarnitskii received a Masters
of Business Administration degree from York University in September 1996.
Certain Additional Risk Factors
In addition to historical facts or statements of current condition, this Annual
Report on Form 10-K contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our
actual outcomes and results to differ materially from our forward-looking
statements. These factors are in addition to those set forth elsewhere in this
Annual Report on Form 10-K.
16
Our technologies and products are at an early stage of development.
We are a development stage company. We have a very limited history of
operations, and we do not expect ongoing revenues from operations in the
immediately foreseeable future. We have no products approved for commercial sale
at the present time. To be profitable, we must successfully research, develop,
obtain regulatory approval for, manufacture, introduce, market and distribute
our products under development. We may not be successful in one or more of these
stages of the development of our products, or any of the products we develop may
not be commercially viable.
In September 2000 we entered into a development and license agreement to work
with Eli Lilly and Company on the development of our oral insulin product. Under
the terms of the agreement with Lilly, we will receive milestone payments only
if the project reaches specified development milestones and we will be entitled
to license royalties based on product sales only if the product is successfully
brought to market.
Prior to entering into the agreement with Lilly, we had conducted some
preliminary clinical trials of our oral insulin product in the United States,
Canada and Europe. Our clinical program, however, had not reached a point where
we were prepared to apply for regulatory approvals to market the product in any
country. Going forward under the agreement, Lilly will be responsible generally
for clinical trials and regulatory approvals on a worldwide basis. Lilly also
will have the exclusive right to market the product worldwide. Our principal
responsibilities will be to continue development, as required, on our oral
insulin formulation and on the RapidMist(TM) device.
Clinical trials under the agreement have not yet commenced. At this time, we
cannot predict when or if we will reach any of the development milestones under
the agreement and when or if any clinical trials might commence under the
agreement.
We believe that we can use our buccal delivery technology successfully with
other large molecule drugs in addition to insulin. In January 2001, we entered
into a joint venture with a subsidiary of Elan Corporation, plc. The purpose of
the joint venture is to pursue the application of certain of our and Elan's drug
delivery technologies -- including our large molecule drug delivery technology
- -- to pharmaceutical products for the treatment of prostate cancer and
endometriosis and/or the suppression of testosterone and estrogen. In January
2002, we and Elan agreed to expand the joint venture to encompass the buccal
delivery of morphine for the treatment of pain and agreed to pursue buccal
morphine as the initial pharmaceutical product under the joint venture. We
cannot be certain that we can successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market or distribute the buccal morphine
product to be developed under the joint venture with Elan, nor can we be certain
that any buccal morphine product we may develop will be commercially viable.
Similarly, we cannot be certain that we can successfully research, develop,
obtain regulatory approval for and eventually commercialize any product for
which we have completed proof of concept studies. Proof of concept studies are
the very first step in the long process of product development. It can be years
before we will know whether a product for which we might have completed a
successful proof of concept will be commercially viable.
17
We have not, and may not, receive regulatory approval to sell our products.
We have engaged primarily in research and development activities since our
inception. We have no products approved for commercial sale by drug regulatory
authorities. We have begun the regulatory approval process for our oral insulin
formulation, buccal morphine and fentanyl products.
Pre-clinical and clinical trials of our products, and the manufacturing and
marketing of our technology, are subject to extensive, costly and rigorous
regulation by governmental authorities in the United States, Canada and other
countries. The process of obtaining required regulatory approvals from the FDA
and other regulatory authorities often takes many years, is expensive and can
vary significantly based on the type, complexity and novelty of the product
candidates. We cannot assure you that any technologies or products developed by
us, either independently or in collaboration with others, will meet the
applicable regulatory criteria in order to receive the required approvals for
manufacturing and marketing. Delays in obtaining United States or foreign
approvals for our products could result in substantial additional costs to us,
and, therefore, could adversely affect our ability to compete with other
companies. If regulatory approval is ultimately granted, the approval may place
limitations on the intended use of the product we wish to commercialize, and may
restrict the way in which we are permitted to market the product.
Notwithstanding our development and license agreement with Lilly and the
participation of Lilly in the research and development process, we may not be
able to develop our insulin product successfully. In order to obtain regulatory
approvals for our insulin product, it will be necessary to demonstrate, among
other things, that:
o the product is physically and chemically stable under a range of
storage, shipping and usage conditions;
o the results of administering the product to patients are reproducible
in terms of the amounts of insulin delivered to the oral cavity and
absorbed in the bloodstream; and
o there are no serious adverse safety issues associated with use of the
product.
Under our agreement, Lilly also has the option of developing a number of
additional products using our platform buccal delivery technology. There is even
greater uncertainty and risk related to the regulatory approval process for
other products besides our insulin product that may be developed, whether with
Lilly or independently of Lilly. This is because we have not developed any other
product candidate to the extent that we have developed the insulin product.
For similar reasons, we also cannot be certain that we will be able to
successfully secure regulatory approval or develop a buccal morphine product or
any other product chosen for development under the joint venture with Elan.
We may not become, or stay, profitable even if our products are approved for
sale.
Even if regulatory approval to market our oral insulin product or any other
product candidate is obtained, many factors may prevent the product from ever
being sold in commercial quantities. Some of these factors are beyond our
control, such as:
18
o acceptance of the formulation by health care professionals and diabetic
patients;
o the availability, effectiveness and relative cost of alternative
diabetes treatments that may be developed by competitors; and
o the availability of third-party (i.e., insurer and governmental agency)
reimbursements.
We are in a highly competitive market and our competitors may develop
alternative therapies.
We are in competition with pharmaceutical, biotechnology and drug delivery
companies, hospitals, research organizations, individual scientists and
nonprofit organizations engaged in the development of alternative drug delivery
systems or new drug research and testing, as well as with entities producing and
developing injectable drugs. We are aware of a number of companies that are
currently seeking to develop new products and non-invasive alternatives to
injectable drug delivery, including oral delivery systems, intranasal delivery
systems, transdermal systems, and colonic absorption systems. Many of these
companies may have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than we do.
Accordingly, our competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance more rapidly
than we can.
We may not be able to compete with diabetes treatments now being marketed and
developed by other companies.
Our oral insulin product will compete with existing and new therapies for
treating diabetes, including administration of insulin by injection. We are
aware of a number of companies currently seeking to develop alternative means of
delivering insulin, as well as new drugs intended to replace insulin therapy at
least in part. In the longer term, we also face competition from companies that
seek to develop cures for diabetes through techniques for correcting the genetic
deficiencies that underlie diseases such as diabetes.
We will have to depend upon others for marketing and distribution of our
products, and we may be forced to enter into contracts limiting the benefits we
may receive and the control we have over our products. We intend to rely on
collaborative arrangements with one or more other companies that possess strong
marketing and distribution resources to perform these functions for us. Except
for the agreement with Lilly relating to our oral insulin product and the
agreement with Elan relating to products developed under our joint venture with
Elan, we do not have any agreements with other companies for marketing or
distributing our products. We may be forced to enter into contracts for the
marketing and distribution of our products that substantially limit the
potential benefits to us from commercializing these products. In addition, we
will not have the same control over marketing and distribution that we would
have if we conducted these functions ourselves.
19
If our stock price drops, our stock may be delisted from NASDAQ and become
subject to Penny Stock regulations.
During periods in fiscal 2001 and the beginning of fiscal 2002, our share price
dropped to close to $1.00 per share. The Nasdaq National Market requires our
stock price to be at least $1.00. If we do not meet this requirement in the
future, we may be subject to delisting by Nasdaq. We may also be subject to
delisting by Nasdaq for failure to meet other criteria, which we currently now
meet, such as minimum net tangible assets and net income requirements. If our
stock is delisted from Nasdaq, there will be less interest for our stock in the
market. This may result in lower prices for our stock and make it more difficult
for you to sell your shares. In addition, if our stock is not listed on Nasdaq
and fails to maintain a price of $5.00 or more per share, our stock would become
subject to the SEC's "Penny Stock" rules. These rules require a broker to
deliver, prior to any transaction involving a Penny Stock, a disclosure schedule
explaining the Penny Stock Market and its risks. In addition, broker/dealers who
recommend Penny Stocks to persons other than established customers and
accredited investors must make a special written suitability determination and
receive the purchaser's written agreement to a transaction prior to the sale. In
the event our stock becomes subject to these rules, it will become more
difficult for broker/dealers to sell our common stock. Therefore shareholders
may have more difficulty selling our common stock in the public market.
We will need additional capital, which may not be available to us when we need
it.
We have incurred substantial losses from operations since our inception, and we
expect to continue to incur substantial losses for the immediately foreseeable
future. Under our agreement with Lilly, we expect Lilly to fund a substantial
portion of the costs relating to the clinical program and regulatory approvals
for our insulin product, and for any other products that may be developed under
the agreement should we reach that stage of activity. We have, and may continue
to, incur significant costs to fulfill our responsibilities under the agreement
with Lilly. We also may require funds in excess of our existing cash resources:
o to proceed under our joint venture with Elan, which requires us to fund
80% of initial product development costs;
o to develop new products based on our buccal delivery technology,
including clinical testing relating to new products;
o to develop or acquire other delivery technologies or other lines of
business;
o to establish and expand our manufacturing capabilities; and
o to finance general and administrative and research activities that are
not related to specific products under development.
Our agreement with Lilly provides for us to receive milestone payments if the
project reaches specified development milestones and for us to receive license
royalties based on product sales if the product is successfully brought to
market. Given that these payments are contingent on events that we cannot be
sure will occur, we cannot be certain of when or if we will receive any further
payments from Lilly. In any event, we do not expect to receive revenues under
the agreement with Lilly or under any future development agreements that are
sufficient to satisfy all of our cash requirements.
In the past, we have funded most of our development and other costs through
equity financing. We anticipate that our existing capital resources will enable
us to maintain currently planned operations through the next twelve months.
However, this expectation is based on our current operating plan, which could
change as a result of many factors, and we may need additional funding sooner
than anticipated. To the extent operating and capital resources are insufficient
to meet future requirements, we will have to raise additional funds to continue
the development and commercialization of our products. Unforeseen problems,
including materially negative developments in our relationship with Lilly or in
our joint venture with Elan, in our clinical trials or in general economic
conditions could interfere with our ability to raise additional equity capital
or materially adversely affect the terms upon which such funding is available.
20
Even if we raise funds through equity financing, it will have a dilutive effect
on existing holders of our shares by reducing their percentage ownership. The
shares may be sold at a time when the market price is low because we need the
funds. This will dilute existing holders more than if our stock price was
higher. In addition, equity financings normally involve shares sold at a
discount to the current market price.
It is also possible that we will be unable to obtain additional funding as and
when we need it. If we were unable to obtain additional funding as and when
needed, we could be forced to delay the progress of certain development efforts.
Such a scenario poses risks. For example, our ability to bring a product to
market and obtain revenues could be delayed, our competitors could develop
products ahead of us, and/or we could be forced to relinquish rights to
technologies, products or potential products.
We depend upon proprietary technology and the status of patents and proprietary
technology is uncertain.
Our long-term success will substantially depend upon our ability to protect our
proprietary technology from infringement, misappropriation, discovery and
duplication and avoid infringing the proprietary rights of others. We currently
have fifteen issued U.S. patents pertaining to aspects of buccal delivery
technology and covering our oral insulin formulation, and we have three U.S.
patent applications and one Canadian patent application pending, also related to
aspects of our buccal delivery technology, our oral insulin formulation and our
oral morphine formulation. In addition, we hold one U.S. patent and two Canadian
patents and have one U.S. application pending that pertains to delivery
technologies other than our buccal delivery technology. We also have an indirect
interest in three drug delivery patents held by another company, Centrum
Biotechnologies, Inc., which is 50% owned by us.
Our patent rights, and the patent rights of biotechnology and pharmaceutical
companies in general, are highly uncertain and include complex legal and factual
issues. We cannot be sure that any of our pending patent applications will be
granted, or that any patents that we own or will obtain in the future will be
valid and enforceable and provide us with meaningful protection from
competition. There can be no assurance that we will possess the financial
resources necessary to enforce any of our patents. Patents already issued to us
or our pending applications may become subject to dispute, and any dispute could
be resolved against us. There can also be no assurance that any products that we
(or a licensee) may develop will not infringe upon any patent or other
intellectual property right of a third party.
Furthermore, patent applications are in some situations maintained in secrecy in
the United States until the patents are approved, and in most foreign countries
for a period of time following the date from which priority is claimed. A third
party's pending patent applications may cover technology that we currently are
developing.
21
We have conducted original research on a number of aspects relating to buccal
drug delivery. While we cannot assure you that any of our products will provide
significant commercial advantage, these patents are intended to provide
protection for important aspects of our technology, including our insulin
formulation and the delivery of our insulin formulation as a spray. Because a
substantial number of patents have been issued in the field of alternative drug
delivery and because patent positions can be highly uncertain and frequently
involve complex legal and factual questions, the breadth of claims obtained in
any application or the enforceability of our patents cannot be predicted. The
coverage claimed in a patent can be significantly reduced before a patent is
issued, either in the United States or abroad. Consequently, we do not know
whether any of our pending or future patent applications will result in the
issuance of patents or, to the extent patents have been issued or will be
issued, whether these patents will be subject to further proceedings limiting
their scope, will provide significant proprietary protection or competitive
advantage, or will be circumvented or invalidated.
There can be no assurance that any products that we (or a licensee) may develop
will not infringe upon any patent or other intellectual property right of a
third party. For example, we are aware of certain patents owned by third parties
that such parties could attempt to use in the future in efforts to affect our
freedom to practice some of the patents that we own or have applied for. Based
upon the science and scope of these third party patents, we believe that the
patents that we own or have applied for do not infringe any such third party
patents, however, there can be no assurance that we could successfully defend
our position, if challenged. We may incur substantial costs if we are required
to defend ourselves in patent suits brought by third parties. These legal
actions could seek damages and seek to enjoin testing, manufacturing and
marketing of the accused product or process. In addition to potential liability
for significant damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process and we cannot assure you
that any license required under any such patent would be made available to us on
acceptable terms, if at all. Litigation may also be necessary to enforce our
patents against others or to protect our trade secrets. Such litigation could
result in substantial expense, and we cannot assure you that any litigation
would be resolved in our favor.
In addition, intellectual property for our technologies and products will be a
crucial factor in our ability to develop and commercialize our products. Large
pharmaceutical companies consider a strong patent estate critical when they
evaluate whether to enter into a collaborative arrangement to support the
research, development and commercialization of a technology. Without the
prospect of reasonable intellectual property protection, it would be difficult
for a corporate partner to justify the time and money that is necessary to
complete the development of a product.
We also hold some of our technology as trade secrets. We seek to protect this
information, in part, by confidentiality agreements with our employees,
consultants, advisors and collaborators.
22
Enforcement of an arbitration award may result in adverse effects upon Generex.
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On October 2,
1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules. Sands alleged that it had the right to receive, for nominal
consideration, approximately 1.5 million shares of our common stock. Sands based
its claim upon an October 1997 letter agreement that was purported by Sands to
confirm an agreement appointing Sands as the exclusive financial advisor to
Generex Pharmaceuticals, Inc., a subsidiary that we acquired in late 1997. In
exchange therefor, the letter agreement purported to grant Sands the right to
acquire 17% of Generex Pharmaceuticals common stock for nominal consideration.
Sands claimed that its right to receive shares of Generex Pharmaceuticals common
stock applies to Generex Biotechnology common stock since outstanding shares of
Generex Pharmaceuticals common stock were converted into shares of Generex
Biotechnology common stock in the acquisition. Sands' claims also included
additional shares allegedly due as a fee related to that acquisition, and
$144,000 in monthly fees allegedly due under the terms of the purported
agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel
that heard this case awarded Sands $14,070 and issued a declaratory judgment
requiring us to issue to Sands a warrant to purchase 1,530,020 shares of our
common stock pursuant to and in accordance with the terms of the purported
October 1997 letter agreement. On October 13, 1999, Sands commenced a special
proceeding to confirm the arbitration award in the Supreme Court of the State of
New York, County of New York (the "New York Supreme Court"). On November 10,
1999, we moved to vacate the arbitration award. On March 20, 2000, the New York
Supreme Court granted Sands' petition to confirm the award and denied our motion
to vacate the award. We appealed and on January 23, 2001, the New York State
Appellate Division, First Department (the "Appellate Division"), modified the
judgment of the New York Supreme Court that had confirmed the arbitration award
against us. The Appellate Division affirmed the portion of the New York Supreme
Court judgment that had confirmed the granting of monetary relief of $14,070 to
Sands but modified the judgment to vacate the portion of the arbitration award
directing the issuance to Sands of a warrant to purchase 1,530,020 shares of
Generex Biotechnology common stock. The Appellate Division held that the portion
of the award directing us to issue warrants to Sands is too indefinite to be
enforceable and remanded the matter to the arbitration panel for a final and
definite award with respect to such relief or its equivalent (including possibly
an award of monetary damages). The arbitration panel commenced hearings on the
matters remanded by the Appellate Division in June 2001.
On November 7, 2001, the arbitration panel issued an award again requiring us to
issue to Sands a warrant to purchase 1,530,020 shares of Generex Biotechnology
common stock purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion to the
Supreme Court to modify the judgment and to confirm the arbitration panel's
award while we filed a motion with the court to vacate the arbitration award.
On February 25, 2002, the Supreme Court vacated the arbitration panel's November
7, 2001 award to Sands of a warrant to purchase 1,530,020 shares of the our
common stock. The Supreme Court concluded that the arbitration panel had
"disregarded the plain meaning" of the directive given by the Appellate Division
in the Appellate Division's January 23, 2001 decision that remanded the matter
of the warrant for reconsideration by the panel. The Supreme Court found that
the arbitration panel's award "lacks a rational basis". The Supreme Court also
remanded the matter to the New York Stock Exchange on the issue of whether the
arbitration panel should be disqualified. Sands has appealed the February 25,
2002 order of the Supreme Court to the Appellate Division. We filed a
cross-appeal on issues relating to the disqualification of the arbitration
panel. We are not able to estimate an amount or range of potential loss from
this legal proceeding at the present time.
23
Our consolidated financial condition would be materially adversely affected to
the extent that Sands receives shares of our common stock for little or no
consideration or substantial monetary damages as a result of this legal
proceeding.
We face significant product liability risks, which may have a negative effect on
our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to have caused, serious adverse side effects (including
death) or potentially dangerous drug interactions that we may not learn about or
understand fully until the drug has been administered to patients for some time.
Product liability claims can be expensive to defend and may result in large
judgments or settlements against us, which could have a negative effect on our
financial performance. We maintain product liability insurance in amounts we
believe to be commercially reasonable for our current level of activity and
exposure, but claims could exceed our coverage limits. Furthermore, we cannot be
certain that we will always be able to purchase sufficient insurance at an
affordable price. Even if a product liability claim is not successful, the
adverse publicity and time and expense of defending such a claim may interfere
with our business.
The results and timing of our research and development activities, including
future clinical trials, are difficult to predict, subject to future setbacks
and, ultimately, may not result in any additional pharmaceutical products, which
may adversely affect our business.
In developing our products, we may undertake a range of activities, which
include engaging in discovery research and process development, conducting
pre-clinical and clinical studies, and seeking regulatory approval in the United
States and abroad. In all of these areas, we have relatively limited resources
and compete against larger multinational pharmaceutical companies. Moreover,
even if we undertake these activities in an effective and efficient manner,
regulatory approval for the sale of new pharmaceutical products remains highly
uncertain since, in our industry, the majority of compounds discovered do not
enter clinical studies and the majority of therapeutic candidates fail to show
the human safety and efficacy necessary for regulatory approval and successful
commercialization.
Pre-clinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from pre-clinical testing and
early clinical trials may not be predictive of results obtained in subsequent
clinical trials, and we cannot be sure that these clinical trials would
demonstrate the safety and efficacy necessary to obtain regulatory approval for
any product candidates. A number of companies in the biotechnology and
pharmaceutical industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. In
addition, certain clinical trials are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients may
die or suffer other adverse medical effects for reasons that may not be related
to the pharmaceutical agent being tested. Such events can have a negative impact
on the statistical analysis of clinical trial results.
24
The completion of clinical trials of product candidates may be delayed by many
factors. One such factor is the rate of enrollment of patients. We cannot
control the rate at which patients would present themselves for enrollment, and
we cannot be sure that the rate of patient enrollment would be consistent with
our expectations or be sufficient to enable clinical trials of product
candidates to be completed in a timely manner or at all. Any significant delays
in, or termination of, clinical trials of product candidates can have a material
adverse effect on our business.
We cannot be sure that we will be permitted by regulatory authorities to
undertake additional clinical trials for any product candidates, or that if such
trials are conducted, any product candidates will prove to be safe and
efficacious or will receive regulatory approvals. Any delays in or termination
of these clinical trial efforts can have a material adverse effect on product
development.
Our research and development and marketing efforts are highly dependent at
present on corporate collaborators and other third parties who may not devote
sufficient time, resources and attention to our programs, which may limit our
efforts to successfully develop and market potential products.
Because we have limited resources, we have sought to enter into collaboration
agreements with other pharmaceutical companies that will assist us in
developing, testing, obtaining governmental approval for and commercializing
products using our platform technology. Our primary collaboration agreement at
present is our development and license agreement with Eli Lilly and Company. As
is often the case in such collaboration agreements, Lilly has substantial
control over the supply of bulk drugs for commercial use or for use in clinical
trials; the design and execution of clinical studies; the process of obtaining
regulatory approval to market the product; and/or the eventual marketing and
selling of any approved product. In each of these areas, Lilly, or any other
collaborator with whom we may enter into such collaboration agreements, may not
support fully our research and commercial interests since our program may
compete for time, attention and resources with such collaborator's internal
programs. As such, we cannot be sure that either Lilly or any other corporate
collaborators will share our perspectives on the relative importance of our
program, that they will commit sufficient resources to our program to move it
forward effectively, or that the program will advance as rapidly as it might if
we had retained complete control of all research, development, regulatory and
commercialization decisions. Additionally, we may find it necessary from time to
time to seek new or additional partners to assist us in commercializing our
products. It is uncertain whether we would be successful in establishing any
such new or additional relationships.
Third party reimbursement for our products is uncertain.
In both domestic and foreign markets, sales of our potential products depends in
part on the availability of reimbursement for third-party payors such as
government health administration authorities, private health insurers and other
organizations. Third-party payors often challenge the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products. We
cannot assure you that any of our products will be reimburseable by third-party
payors. In addition, we cannot assure you that our products will be considered
cost effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize a profit. Legislation
and regulations affecting the pricing of pharmaceuticals may change before our
products are approved for marketing and any such changes could further limit
reimbursement.
25
We have a history of losses and may incur additional losses.
To date, we have not been profitable and our accumulated net loss is
approximately $63 million at July 31, 2002. Our losses have resulted principally
from costs incurred in research and development, including clinical trials, and
from general and administrative costs associated with our operations. While we
seek to attain profitability, we cannot be sure that we will ever achieve
product and other revenue sufficient for us to attain this objective.
Our product candidates are in research or early stages of pre-clinical and
clinical development. We will need to conduct substantial additional research,
development and clinical trials. We will also need to receive necessary
regulatory clearances both in the United States and foreign countries and obtain
meaningful patent protection for and establish freedom to commercialize each of
our product candidates. We cannot be sure that we will obtain required
regulatory approvals, or successfully develop, commercialize, manufacture and
market any other product candidates. We expect that these activities, together
with future general and administrative activities, will result in significant
expenses for the forseeable future.
The price of our shares may be volatile.
There may be wide fluctuation in the price of our shares. These fluctuations may
be caused by several factors including:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o developments in patent and other proprietary rights;
o public concern as to the safety of drugs developed by us or others;
o results of clinical trials of our products or our competitors'
products; and
o regulatory action or inaction on our products or our competitors'
products.
From time to time, we may hire companies to assist us in pursuing investor
relations strategies to generate increased volumes of investment in our shares.
Such activities may result, among other things, in causing the price of our
shares to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies
with lower market capitalizations and small biopharmaceutical companies, like
us, have from time to time experienced, and likely will again experience
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company.
26
Our outstanding Special Voting Rights Preferred Stock and provisions of our
Certificate of Incorporation could delay or prevent the acquisition or sale of
Generex.
Holders of our Special Voting Rights Preferred Stock have the ability to prevent
any change of control of Generex. Our Vice President of Research and
Development, Dr. Pankaj Modi, owns all of our Special Voting Rights Preferred
Stock. In addition, our Certificate of Incorporation permits our Board of
Directors to designate new series of preferred stock and issue those shares
without any vote or action by the shareholders. Such newly authorized and issued
shares of preferred stock could contain terms that grant special voting rights
to the holders of such shares that make it more difficult to obtain shareholder
approval for an acquisition of Generex or increase the cost of any such
acquisition.
Item 2. Properties.
Our executive and principal administrative offices occupy approximately 5,000
square feet of office space in the Business Centre at 33 Harbour Square in
downtown Toronto, Ontario, Canada. We own the Business Centre, which comprises
approximately 9,100 square feet of usable space. The space in the Centre that is
not used by us is leased to third parties.
We also own a laboratory facility in Toronto that we have used for limited
production of our oral insulin formulation for clinical purposes, and have
completed a pilot manufacturing facility for our insulin product in the same
commercial complex. Our laboratory facility is approximately 2,650 square feet.
Our pilot manufacturing facility, which also includes laboratory facilities, is
approximately 4,800 square feet. We also own two additional spaces at this
location one of which is currently leased to third parties and one of which is
used for storage. Both of these spaces could be used for manufacturing
facilities if necessary. We have obtained regulatory approval for the laboratory
facility, and we are currently in the process of obtaining regulatory approval
for the pilot manufacturing facility.
In August of 2002, we purchased approximately 23,500 square feet of property
located at 11 Carlaw Avenue in Toronto for $2,400,000 CAN, or approximately
$1,525,000 US for investment purposes. The property is located adjacent to our
current laboratory facility and is currently leased to third parties.
Any additional properties that we own could be used for research, development
and tests related to our current and anticipated drug indications as well as
potential acquisitions if our current facilities prove inadequate for our needs.
We have first mortgages on our Toronto properties (excluding the property
purchased in August 2002) totaling $663,313 at July 31, 2002. Our mortgages
require the payment of interest, with minimal principal reduction, prior to
their due date (November 1, 2002 with respect to $166,032 and May 25, 2005 with
respect to $497,281).
At this time, we do not expect to need manufacturing capabilities beyond our
pilot facility before the end of the current fiscal year. We own an 11,625
square foot building in Brampton, Ontario, which is approximately 25 miles
outside Toronto, and a 13,500 square foot building in Mississauga, Ontario,
which is about 20 miles from downtown Toronto, for ultimate use in
manufacturing. We have done preliminary work on these facilities, but we do not
expect to make a substantial investment in improving and equipping them for
manufacturing operations until our requirements in this area are better defined.
Both properties are currently leased to third parties.
27
Item 3. Legal Proceedings.
Sands Brothers & Co. Ltd. v. Generex Biotechnology Corporation. On October 2,
1998, Sands Brothers & Co. Ltd., a New York City-based investment banking and
brokerage firm, initiated an arbitration against us under New York Stock
Exchange rules. Sands alleged that it had the right to receive, for nominal
consideration, approximately 1.5 million shares of Generex Biotechnology common
stock. Sands based its claim upon an October 1997 letter agreement that was
purported by Sands to confirm an agreement appointing Sands as the exclusive
financial advisor to Generex Pharmaceuticals, Inc., a subsidiary that we
acquired in late 1997. In exchange therefor, the letter agreement purported to
grant Sands the right to acquire 17% of Generex Pharmaceuticals common stock for
nominal consideration. Sands claimed that its right to receive shares of Generex
Pharmaceuticals common stock applies to Generex Biotechnology common stock since
outstanding shares of Generex Pharmaceuticals common stock were converted into
shares of Generex Biotechnology common stock in the acquisition. Sands' claims
also included additional shares allegedly due as a fee related to that
acquisition, and $144,000 in monthly fees allegedly due under the terms of the
purported agreement.
Pursuant to an arbitration award dated September 22, 1999, the arbitration panel
that heard this case awarded Sands $14,070 and issued a declaratory judgment
requiring us to issue to Sands a warrant to purchase 1,530,020 shares of Generex
Biotechnology common stock pursuant to and in accordance with the terms of the
purported October 1997 letter agreement. On October 13, 1999, Sands commenced a
special proceeding to confirm the arbitration award in the Supreme Court of the
State of New York, County of New York (the "New York Supreme Court"). On
November 10, 1999, we moved to vacate the arbitration award. On March 20, 2000,
the New York Supreme Court granted Sands' petition to confirm the award and
denied our motion to vacate the award. We appealed and on January 23, 2001, the
New York State Appellate Division, First Department (the "Appellate Division"),
modified the judgment of the New York Supreme Court that had confirmed the
arbitration award against us. The Appellate Division affirmed the portion of the
New York Supreme Court judgment that had confirmed the granting of monetary
relief of $14,070 to Sands but modified the judgment to vacate the portion of
the arbitration award directing the issuance to Sands of a warrant to purchase
1,530,020 shares of Generex Biotechnology common stock. The Appellate Division
held that the portion of the award directing us to issue warrants to Sands is
too indefinite to be enforceable and remanded the matter to the arbitration
panel for a final and definite award with respect to such relief or its
equivalent (including possibly an award of monetary damages). The arbitration
panel commenced hearings on the matters remanded by the Appellate Division in
June 2001.
On November 7, 2001, the arbitration panel issued an award again requiring us to
issue to Sands a warrant to purchase 1,530,020 shares of Generex Biotechnology
common stock purportedly pursuant to and in accordance with the terms of the
October 1997 letter agreement. Thereafter, Sands submitted a motion to the
New York Supreme Court to modify the judgment and to confirm the arbitration
panel's award while we filed a motion with the court to vacate the arbitration
award.
On February 25, 2002, the New York Supreme Court vacated the arbitration panel's
November 7, 2001 award to Sands of a warrant to purchase 1,530,020 shares of
Generex Biotechnology common stock. The New York Supreme Court concluded that
the arbitration panel had "disregarded the plain meaning" of the directive given
by the Appellate Division in the Appellate Division's January 23, 2001 decision
that remanded the matter of the warrant for reconsideration by the panel. The
New York Supreme Court found that the arbitration panel's award "lacks a
rational basis". The New York Supreme Court also remanded the matter to the New
York Stock Exchange on the issue of whether the arbitration panel should be
disqualified. Sands has appealed the February 25, 2002 order of the New York
Supreme Court to the Appellate Division. We filed a cross-appeal on issues
relating to the disqualification of the arbitration panel. We are not able to
estimate an amount or range of potential loss from this legal proceeding at the
present time.
28
Subash Chandarana et al. v Generex Biotechnology Corporation et al. In February
2001, Subash Chandarana, a former business associate of Dr. Pankaj Modi, and an
entity called Centrum Technologies Inc. ("CTI") commenced an action in the
Ontario Superior Court of Justice against us and Dr. Modi seeking, among other
things, damages for alleged breaches of contract and tortious acts related to a
business relationship between Chandarana and Modi that ceased in July 1996. The
plaintiffs' statement of claim also seeks to enjoin the use, if any, by us of
three patents allegedly owned by the company called CTI. On July 20, 2001, we
filed a preliminary motion to dismiss the action of CTI as a nonexistent entity
or, alternatively, to stay such action on the grounds of want of authority of
such entity to commence the action. The Plaintiffs brought a cross-motion to
amend the statement of claim to substitute Centrum Biotechnologies, Inc. ("CBI")
for CTI. CBI is a corporation of which 50 percent of the shares are owned by
Chandarana and the remaining 50 percent are owned by us. Consequently, the
shareholders of CBI are in a deadlock. The Court granted our motion to dismiss
the action of CTI and denied the plaintiff's cross motion without prejudice to
Chandarana to seek leave to bring a derivative action in the name of or on
behalf of CBI. Chandarana subsequently filed an application with the Ontario
Superior Court of Justice for an order granting him leave to file an action in
the name of and on behalf of CBI against Dr. Modi and us. We have opposed the
application which is now pending before the Court. We intend to defend this
action vigorously. We are not able to predict the ultimate outcome of this legal
proceeding at the present time or to estimate an amount or range of potential
loss, if any, from this legal proceeding.
Hope Manufacturing, Inc. and Steven Wood. In July, 2002 Hope Manufacturing and
Steven Wood commenced actions against certain defendants, including us and
certain of our officers, in the Ontario Superior Court of Justice claiming
compensatory damages, punitive damages and various forms of injunctive and
declaratory relief for breach of contract and various business torts. We believe
the claims against us are frivolous and completely without merit. We are not a
party to any agreement with the plaintiffs. Most of the requested relief relates
to restrictions on the use of patents and information allegedly owned by the
plaintiffs, and an accounting for the use of such items. We have not used any
patents or information owned by the plaintiffs. All of the patents and
information claimed to be owned by the plaintiffs are completely unrelated to
any product or technology we are currently developing or intend to develop.
Therefore, even if the court were to award some declaratory or injunctive
relief, we would not be affected. We are defending this action vigorously. We
are not able to predict the ultimate outcome of this legal proceeding at the
present time or to estimate an amount or range of potential loss, if any, from
this legal proceeding.
We maintain product liability coverage for claims arising from the use of our
products in clinical trials, but do not have any insurance that covers our
potential liability in any of the legal proceedings described above.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of stockholders in the fourth quarter of
the fiscal year ended July 31, 2002.
29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
"Bid" and "asked" prices for our common stock were quoted on the Nasdaq OTC
Electronic Bulletin Board from February 1998 to May 2000. On May 5, 2000, our
common stock began trading on The Nasdaq National Market (the "Nasdaq National
Market"). Prior to February 1998, there was no public market for our common
stock.
The table below sets forth the high and low sales prices of our common stock
reported by The Nasdaq National Market for the calendar quarters beginning
January 1, 2001.
- -------------------------------------- -----------------------------------
Sales Prices
(actual transactions)
- -------------------------------------- --------------------- -------------
High Low
- -------------------------------------- --------------------- -------------
- -------------------------------------- --------------------- -------------
2001
- -------------------------------------- --------------------- -------------
First quarter $11.50 $4.25
- -------------------------------------- --------------------- -------------
Second quarter $11.60 $4.58
- -------------------------------------- --------------------- -------------
Third quarter $10.00 $2.91
- -------------------------------------- --------------------- -------------
Fourth quarter $7.76 $3.55
- -------------------------------------- --------------------- -------------
- -------------------------------------- --------------------- -------------
2002
- -------------------------------------- --------------------- -------------
First quarter $7.40 $3.86
- -------------------------------------- --------------------- -------------
Second quarter $5.24 $2.62
- -------------------------------------- --------------------- -------------
Third quarter $3.20 $0.85
- -------------------------------------- --------------------- -------------
Fourth quarter (through $1.55 $1.05
October 10, 2002)
- -------------------------------------- --------------------- -------------
The closing sales price for our common stock reported on October 10, 2002, was
$1.41.
At October 10, 2002, there were 634 holders of record of our common stock.
30
Existing Stock Compensation Plans
The following table sets forth information regarding our existing compensation
plans and individual compensation arrangements pursuant to which our equity
securities are authorized for issuance to employees or non-employees (such as
directors, consultants and advisors) in exchange for consideration in the form
of services:
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
(a) (b) (c)
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation
plans approved by
security holders
1998 Stock Option Plan
1,292,500 $5.12 0
2000 Stock Option Plan
1,924,500 $7.70 75,500
2002 Stock Option Plan
1,665,159 $8.73 2,334,841
--------- ----- ---------
Total
4,882,159* $8.68 2,410,341
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation
plans not approved by
security holders 0 0 0
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
Total 4,882,159 $8.68 2,410,341
- ------------------------------- ----------------------------- ----------------------------- -----------------------------
*Does not include 125,000 options granted to consultants in 2001 that were not
granted pursuant to a stock option plan.
Dividends
We have not paid dividends on our common stock in the past and have no present
intention of paying dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In the period from August 1, 2001 until July 31, 2002, we did not offer or sell
common stock and other securities in transactions in reliance upon exemptions
from the registration requirements of the Securities Act of 1933.
31
Item 6. Selected Financial Data.
The following selected financial data is derived from and should be read in
conjunction with our financial statements and related notes, which appear
elsewhere in this Annual Report on Form 10-K. Our financial statements as of
July 31, 2002 and for the years ended July 31, 2002 and 2001 have been audited
by Deloitte & Touche LLP. Our financial statements for the year ended July 31,
2000 were audited by WithumSmith+Brown.
In thousands, except per share data Year Ended July 31
------------------
2002 2001 2000 1999 1998 2002*
---- ---- ---- ---- ----- -----
As Restated**
Operating Results
Revenue $ -- $ 1,000 $ -- $ -- $ -- $ 1,000
Net Loss $(13,693) $ (27,097) $ (8,841) $ (6,240) $ (4,664) $(62,706)
Net Loss Available to
Common Stockholders $(14,414) $ (27,097) $ (8,841) $ (6,240) $ (4,664) $(63,328)
Cash Dividends per share $ -- $ -- $ -- $ -- $ -- $ --
Common Stockholders
Loss per Common Share:
Basic and diluted Net loss
per common share (.70) (1.44) (.58) (.47) (.46) --
Financial Positions:
Total Assets $ 28,161 $ 42,666 $ 10,341 $ 8,890 $ 5,456 --
Long-term Debt $ 663 $ 693 $ 772 $ 996 $ 1,324 --
Stockholder's Equity $ 12,863 $ 27,307 $ 8,415 $ 7,310 $ 2,642 --
*Cumulative from November 2, 1995 (Date of Inception) to July 31, 2002.
**See Note 17 to the Consolidated Financial Statements included in Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
Corporate History. We were incorporated in Delaware in September 1997 for the
purpose of acquiring Generex Pharmaceuticals, Inc., a Canadian corporation
formed in November 1995 to engage in pharmaceutical and biotechnological
research and other activities. Our acquisition of Generex Pharmaceuticals was
completed in October 1997 in a transaction in which the holders of all
outstanding shares of Generex Pharmaceuticals exchanged their shares for shares
of our common stock.
32
In January 1998, we participated in a "reverse acquisition" with Green Mt. P.
S., Inc., a previously inactive Idaho corporation formed in 1983. As a result of
this transaction, our shareholders (the former shareholders of Generex
Pharmaceuticals) acquired a majority (approximately 90%) of the outstanding
capital stock of Green Mt., we became a wholly-owned subsidiary of Green Mt.,
Green Mt. changed its corporate name to Generex Biotechnology Corporation
("Generex Idaho"), and we changed our corporate name to GBC Delaware, Inc.
Because the reverse acquisition resulted in our shareholders becoming the
majority holders of Generex Idaho, we were treated as the acquiring corporation
in the transaction for accounting purposes. Thus, our historical financial
statements, which essentially represented the historical financial statements of
Generex Pharmaceuticals, were deemed to be the historical financial statements
of Generex Idaho.
In April 1999, we completed a reorganization in which we merged with Generex
Idaho. In this transaction, all outstanding shares of Generex Idaho were
converted into our shares, Generex Idaho ceased to exist as a separate entity,
and we changed our corporate name back to "Generex Biotechnology Corporation".
This reorganization did not result in any material change in our historical
financial statements or current financial reporting.
Business History. We are engaged in the development of proprietary drug delivery
technology. Our principal business focus has been to develop a technology for
buccal delivery (absorption through the inner cheek walls) of large molecule
drugs, i.e., drugs composed of molecules with molecular weights above a
specified level. Large molecule drugs historically have been administered only
by injection because their size inhibits or precludes absorption if administered
by oral, transdermal, transnasal or other means.
Our first product is an insulin formulation that is administered as a fine spray
into the oral cavity using a hand-held aerosol spray applicator. Between January
1999 and September 2000, we conducted clinical trials on this product in the
United States, Canada and Europe. In September 2000, we entered into an
agreement to develop this product with Eli Lilly and Company. Under this
agreement, Lilly is responsible for conducting clinical trials of the product,
securing regulatory approvals and marketing on a worldwide basis. Lilly also has
the option to develop certain additional products using our buccal delivery
technology depending on the success of the initial product. We received
$1,000,000 in connection with our entry into the agreement and will receive
certain other initial fees and milestone payments subject to the attainment of
certain product development milestones, as well as royalty payments based on
product sales should any products be approved for commercial sale. Lilly also
has the option to develop certain additional products using our buccal delivery
technology depending on the success of the initial product.
In January 2001, we established a joint venture with Elan International
Services, Ltd. ("EIS"), a wholly owed subsidiary of Elan Corporation, plc (EIS
and Elan Corporation, plc being collectively referred to as "Elan"). The joint
venture will pursue the application of certain of our and Elan's drug delivery
technologies, including our platform technology for the buccal delivery of
pharmaceutical products, for the treatment of prostate cancer, endometriosis
and/or the suppression of testosterone and estrogen. In January of 2002, the
parties expanded the joint venture to include buccal morphine for the management
of pain and selected buccal morphine as the initial product for development
under Generex (Bermuda) Ltd. This expansion of the joint venture occurred after
we successfully completed a proof of concept clinical study of morphine delivery
using our proprietary buccal delivery technology.
33
In connection with the joint venture, EIS purchased 1,000 shares of a new series
of our preferred stock, designated as Series A Preferred Stock, for $12,015,000.
We applied the proceeds from the sale of the Series A Preferred Stock to
subscribe for an 80.1% equity ownership interest in Generex (Bermuda), Ltd. EIS
paid in capital of $2,985,000 to subscribe for a 19.9% equity interest in
Generex (Bermuda), Ltd. While we initially own 80.1% of the joint venture
entity, EIS has the right, subject to certain conditions, to increase its
ownership up to 50% by exchanging the Series A Preferred Stock for 30.1% of our
interest in the joint venture entity. In January of 2002, pursuant to the terms
of the agreement with EIS, EIS received a 6% stock dividend of Series A
Preferred Stock.
Generex (Bermuda), Ltd. was granted non-exclusive licenses to utilize our buccal
delivery technology and certain Elan drug delivery technologies. Using the funds
from its initial capitalization, Generex (Bermuda), Ltd. paid a non-refundable
license fee of $15,000,000 to Elan in consideration for being granted the rights
to utilize the Elan drug delivery technologies.
EIS also purchased 344,116 shares of our common stock for $5,000,000. We may use
the proceeds of this sale for any corporate purpose. If the joint venture
achieves certain milestones, we may require EIS to purchase an additional
$1,000,000 of our common stock at a 30% premium to the then prevailing fair
market value of our common stock.
We do not expect to receive any revenues from product sales in the current
fiscal year. We expect, however, to satisfy all of our cash needs during the
current year from capital raised through prior equity financing.
Restatement
Subsequent to the issuance of its financial statements for the year ended July
31, 2001, management determined that its Series A Preferred stock should be
reclassified from stockholders' equity, in accordance with Emerging Issues Task
Force Topic D-98, "Classification and Measurement of Redeemable Securities,"
because the redemption feature of the Series A Preferred stock is beyond the
control of the Company. This restatement did not affect net loss for the year
ended July 31, 2001, nor did it affect total assets. The Series A Preferred
stock should have been included outside the statement of stockholders' equity
from the date of its issuance in January 2001.
Results of Operations - - 2002 Compared with 2001
We had a net loss of $13,693,034 for the year ended July 31, 2002 (FY 2002)
compared to a loss of $27,097,210 in the year ended July 31, 2001 (FY 2001). The
net loss for FY 2002 excludes $720,900 in preferred stock dividend on preferred
shares. The decrease in our FY 2002 net loss resulted from:
o decreases in research and development expenses (to $6,618,820 from
$19,929,799) and
o decreases in general and administrative expenses (to $7,911,626 from
$12,507,740).
The decrease in our expenses was partially offset by a decrease in interest and
other income. Our interest and miscellaneous income (net of income expense) in
FY 2002 decreased to $784,852 from $1,355,329 in FY 2001 due to decreases in our
cash and short-term investments. We did not receive any revenues in FY 2002. In
FY 2001, we received $1,000,000 in revenue from our agreement with Lilly.
The principal reasons for the decrease in our research and development expense
from 2002 to 2001 resulted from the accounting treatment for our joint venture
with Elan, which resulted in a $15,000,000 research and development expense for
the license fee paid by Generex (Bermuda) Ltd. to Elan for technology rights in
2001 (the Company's consolidated net loss, which includes this expense, however,
was partially offset by approximately $2.9 million of minority interest,
reflecting Elan's 19.9% ownership interest in the joint venture.).
34
Our general and administrative expenses decreased due to reductions in various
categories of these expenses, including:
o a reduction of approximately $4,000,000 in financial services
expenses, principally due to a decrease in the number and value of
compensatory warrants and options issued; and
o a reduction of approximately $700,000 in the amount of consulting
fees paid.
Our expense reductions were partially offset by an increase in executive
compensation of approxima