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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, 2003
[ ] 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
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(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)
Telephone Number: (416) 364-2551
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Internet Website: www.generex.com
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
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(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 reports), 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at October 14, 2003, based on the closing sales price as of that
date, was approximately $43,889,178.
At October 14, 2003, the registrant had 27,628,593 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) and "Management's Discussion and
Analysis of Financial Condition and Results of Operation" (Item 7) sections and
elsewhere in this Annual Report on Form 10-K of Generex Biotechnology
Corporation for the fiscal year ended July 31, 2003 constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act limits our liability in any lawsuit based on forward looking
statements we have made. All statements, other than statements of historical
facts, included in this annual report that address activities, events or
developments that we expect or anticipate will or may occur in the future,
including such matters as our projections, future capital expenditures, business
strategy, competitive strengths, goals, expansion, market and industry
developments and the growth of our businesses and operations, are
forward-looking statements. 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. Our forward-looking
statements address, among other things:
o our expectations concerning product candidates for our technologies;
o our expectations concerning existing or potential development and
license agreements for third-party collaborations and
joint ventures;
o our expectations of when different phases of clinical activity may
commence; and
o 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 may
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 our new and
as yet not fully proven technologies;
o the risks and uncertainties regarding the actual effect on humans of
seemingly safe and efficacious formulations and treatments 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 joint venture with a subsidiary of Elan
Corporation, plc regarding buccal morphine.
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. Because of the
risks and uncertainties associated with forward-looking statements, you should
not place undue reliance on them. Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
2
PART I
Item 1. Business
Overview
Generex Biotechnology Corporation is engaged primarily 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 1998 and September 2000, we conducted clinical trials of our
buccal insulin product in the United States, Canada, Europe and Ecuador. In
September 2000, we entered into an agreement to develop this product with Eli
Lilly and Company ("Lilly"). To date, over 750 patients with diabetes have been
dosed with our oral insulin product at approved facilities in seven countries.
Lilly did not, however, authorize or conduct any clinical trials or provide
financial support for those trials. We did receive a $1,000,000 up front payment
from Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end
the development and license agreement for the development and commercialization
of buccal delivery of insulin. We are currently negotiating terms for Lilly to
continue to supply a specified amount of insulin for further development of our
product. We will retain all of the intellectual property and commercialization
rights with respect to the buccal spray drug delivery technology, and we will
have the continuing right to develop and commercialize the product.
3
In January 2001, we established a joint venture with a wholly owned subsidiary
of Elan Corporation, plc. We agreed the joint venture would 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. The joint venture formed a company to pursue these
activities, 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. In January
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. While we
have pursued the development of the morphine product, we have had limited
assistance from Elan.
In August 2003, after the end of our most recent fiscal year, we acquired
Antigen Express, Inc. Antigen is engaged in the research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases.
We are a development stage company, and from inception through the end of fiscal
year 2003 had not received any revenues from operations other than the up-front
payment from Lilly. 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
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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 ("FDA") 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.
4
Buccal Insulin Product
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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.
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, between 12,000 and 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.
5
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.
In April 2003, we were granted permission to commence Phase II-B clinical trials
in Canada. In September 2003, we commenced a 90 day study in 80 Type 2 diabetic
patients with poorly controlled blood glucose. The objective of the study is to
determine the metabolic effect of our insulin product. We continue to conduct
limited clinical studies in the United States, and other countries.
Other Large Molecule Drug Projects
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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 breakthrough and postoperative pain
fails 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 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. 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 seek 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.
6
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 2002, we filed an
Investigational New Drug Application for buccal morphine with the Food and Drug
Administration. The buccal morphine product is being developed by Generex
Bermuda 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
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We have had discussions of possible research collaborations with various
pharmaceutical companies concerning use of our large molecule drug delivery
technology with insulin, morphine, fentanyl and other compounds, including
monoclonal antibodies, human growth hormone, fertility hormone, estrogen and
heparin, and a number of vaccines.
Prior to September 2000, 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
continue to develop a buccal delivery formulation for morphine and fentanyl. We
believe we have sufficient financial resources to pursue the development of our
current products and the initial exploration of additional products.
Immunomedicine Technology and Products
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Our new subsidiary, Antigen, is engaged in research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases. Our immunomedicine products work by
stimulating the immune system to either attack offending agents (i.e., cancer
cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self
proteins and allergens). Our immunomedicine products are based on two platform
technologies that were discovered by an executive officer of Antigen, the Ii-Key
hybrid peptides and Ii-Suppression. These technologies are expected to greatly
boost immune cell responses which treat the ailments and conditions.
We have not filed an Investigational New Drug application to begin clinical
trials. Rather, our immunomedicine products are in the pre-clinical stage of
development and trials in human patients are not expected for 12 months.
Development efforts are underway in melanoma, breast cancer, prostate cancer,
HIV and Type I diabetes. We are establishing collaborations with academic
centers to advance the technology, with the ultimate goal of conducting clinical
testing. For more details regarding our acquisition of Antigen, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" (Item 7) below.
7
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.
In August 2003, subsequent to the end of fiscal 2003, we acquired all of the
capital stock of Antigen in exchange for approximately 2,800,000 shares of our
common stock, and Antigen became a wholly owned subsidiary of Generex.
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.
8
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
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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, manufacturing, 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 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. 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.
9
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
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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.
10
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 the Generex Bermuda joint venture, 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. With respect to our
insulin product, we possess the worldwide marketing rights to this product after
they reverted to us upon the termination in May 2003 of the development and
license agreement with Lilly.
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, even though we have not yet actually produced
product at those levels. We will need to significantly increase our
manufacturing capability in order to manufacture any product in commercial
quantities.
We own facilities in Brampton 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.
Our new subsidiary Antigen leases office and laboratory space in Worcester,
Massachusetts, which is sufficient for its present needs. The laboratory is
approximately 820 square feet and has permission to store and use biohazardous
(including recombinant DNA materials) and flammable chemicals.
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.
11
Components suitable for our RapidMist(TM) 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. We also expect to use the
RapidMist(TM) device in connection with our buccal morphine and fentanyl
products. We have also secured supply arrangements with the manufacturers of all
other components and the propellant that we presently use in our RapidMist(TM)
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.
Insulin is available worldwide from only a few sources. However, alternative
supplies of insulin are under development in Europe. The terms of our License
Agreement with Lilly, provide for Lilly to negotiate terms for continued supply
of insulin to Generex after termination of the License Agreement. We are
currently working with Lilly on terms of a supply agreement under which Lilly
will supply a specified amount of insulin for our further development needs,
although we have not yet executed an agreement. We believe Lilly will continue
to supply insulin for further development needs. We also believe future
development and marketing partners under licensing and development agreements,
if any, will provide, or assist us to obtain, pharmaceutical compounds that are
used in products covered under such agreements.
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.
Raw materials for our pre-clinical development stage immunomedicine products
include amino acids (for peptide therapeutics) and oligonucleotides (for genetic
constructs). These materials are readily available from commercial suppliers. We
utilize the services of several commercial laboratories for the manufacturing of
our pre-clinical development stage immunomedicine products.
Intellectual Property
We currently have fifteen issued U.S. patents pertaining to aspects of buccal
delivery technology and covering our oral insulin formulation. We have six U.S.
patent applications and one Canadian patent application pending, which also
relate 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 new subsidiary Antigen currently holds six issued U.S. patents, one
Australian patent, and two pending U.S. patent applications concerning
technology for modulating the immune system via activation of antigen-specific
helper T lymphocytes. Some of these patents are held under exclusive licenses
from the University of Massachusetts. Dr. Humphreys and Dr. Xu, officers of
Antigen, are the listed inventors or co-inventors on all of these patents and
patent applications, including those licensed from the University of
Massachusetts.
12
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.
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 and biotechnology companies, universities, government agencies
and public and private research organizations.
Products developed by our competitors may use a different active pharmaceutical
agent or treatment 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,
needle free (high pressure) injection and pulmonary, may ultimately successfully
deliver insulin to diabetic patients. Some biotechnology companies have also
developed different technologies to enhance the presentation of peptide
antigens. 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 or the same or substantially the same result is
achievable with a different treatment or technology, 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.
13
We consider other drug delivery and biotechnology companies to be direct
competitors for the cooperation and support of major drug and biotechnology
companies that own or market proprietary pharmaceutical compounds and
technologies, as well as for the ultimate patient market. Of primary concern to
us are the competitor companies that are known to be developing delivery systems
for insulin and other pharmaceutical agents that we have identified as product
candidates and technologies to enhance the presentation of peptide antigens.
Buccal Insulin Product
- ----------------------
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.
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.
Buccal Morphine and Fentanyl Products
- -------------------------------------
Cephalon, Inc. currently markets Actiq(R) in the United States and has recently
acquired the rights to the product in Europe. Actiq(R) 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.
14
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.
Immunomedicine Technology and Products
- --------------------------------------
A number of companies that are engaged in the development of immunomedicines
employ technologies that are competitive to our new subsidiary, Antigen. Zycos
Inc. has developed the Biotope(R) technology, Cel-Sci Corporation has developed
the LEAPS delivery technology and Epimmune Inc. has developed the PADRE(R)
technology. These company have initiated early stage clinical trials for several
products for the treatment of cancer, autoimmune, and allergic diseases. These
companies also have established collaborations with academic centers and other
companies for the development of certain products. We have not initiated
clinical trials with any of our immunomedicine products, nor have we established
commercial collaborations to date. We have established collaborations with major
academic centers for the development of our immunomedicine products.
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.
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, 2003, our expenditures on
research and development were $38,864,948. These included $5,150,075 in the year
ended July 31, 2003, $6,618,820 in the year ended July 31, 2002, and $19,929,799
in the year ended July 31, 2001. The decrease in our research and development
expenses in 2003 compared to 2002 is due principally to contraction of our
15
ongoing research and development activities under our collaboration with Elan
and the collaboration with Lilly, which ended in May 2003. The decrease in our
research and development expenses in 2002 compared with 2001, is 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 (our 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).
Employees
At September 30, 2003, we had twenty-six 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 and including six
employees of our new subsidiary Antigen. Fourteen of our employees are executive
and administrative, nine are scientific and technical personnel who engage
primarily in development activities and in preparing formulations for testing
and clinical trials, and three are engaged in corporate and product promotion,
public relations and investor relations. We believe our employee relations are
good. None of our employees are 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.
16
Executive Officers and Directors
Name* Age Position Held with Generex
- ----- --- --------------------------
Anna E. Gluskin 52 President, Chief Executive Officer and
Director
Rose C. Perri 36 Chief Operating Officer, acting Chief
Financial Officer, Treasurer, Secretary and
Director
Pankaj Modi, Ph.D. 49 Vice President, Research and Development and
Director
Gerald Bernstein 70 Vice President and Director
Mark Fletcher, Esq. 38 Executive Vice President and General Counsel
J. Michael Rosen 52 Director
Peter Levitch 71 Director
John P. Barratt 59 Director
* Mark Perri, our former Chairman and Chief Financial Officer, passed away on
November 6, 2002.
Anna E. Gluskin -- Director since September 1997. Ms. Gluskin has served as our
President and Chief Executive Officer since October 1997. She held comparable
positions with Generex Pharmaceuticals, Inc. from its formation in 1995 until
its acquisition by us in October 1997.
Rose C. Perri -- Director since September 1997. Ms. Perri has served as our
Treasurer and Secretary 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 us in October 1997. Effective
November 2002, Ms. Perri became acting Chief Financial Officer.
Pankaj Modi, Ph.D. -- Director since September 1997. Dr. Modi has served as our
Vice President, Research and Development 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.
17
Gerald Bernstein, M.D. -- Director since October 2002. Dr. Gerald Bernstein has
served as our Vice President since October 1, 2001. Dr. Bernstein acts as a key
liaison for us on medical and scientific affairs to the medical, scientific and
financial communities and consults us 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.
Mark Fletcher, Esq. -- Mr. Fletcher has served as our Executive Vice President
and General Counsel since April 2003. From October 2001 to March 2003, Mr.
Fletcher was engaged in the private practice of law as a partner at Goodman and
Carr LLP, a leading Toronto law firm. From March 1993 to September 2001, Mr.
Fletcher was a partner at Brans, Lehun, Baldwin LLP in Toronto. Mr. Fletcher
received his LL.B. from the University of Western Ontario in 1989 and was
admitted to the Ontario Bar in 1991.
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.
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).
John P. Barratt -- Director since March 2003. Mr. Barratt is Chief Operating
Officer of Beyond.com, a company in which he has been employed since 2000. From
January 1996 to September 2000, Mr. Barratt served as partner-in-residence for
the Quorum Group of Companies, an international investment partnership
specializing in providing debt and equity capital to the emerging high growth
technology sector. From 1988 to December 1995, Mr. Barratt was Executive Vice
President and Chief Operating Officer of Coscan Development Corporation. He
previously held a number of senior-level management positions, including Deputy
Chief Executive of Lloyds Bank Canada. Mr. Barratt also currently serves as a
director of GLP NT Corporation and BNN Split Corporation.
We 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 us, Elan and Elan International Services, Ltd.
("EIS"), a subsidiary of Elan, EIS has the right to nominate one director to our
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, a former director
nominated by EIS, resigned effective August 1, 2002. EIS has not informed us 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.
18
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, we must use our best efforts to cause Dr. Modi
to be nominated for election and elected as our director 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 our employ since our
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.
Dr. Joseph V. Gulfo, MD, MBA is Chief Executive Officer and President of
Antigen. Dr. Gulfo joined Antigen in August 1999 as CEO. Dr. Gulfo has over 15
years experience in the management and development of biopharmaceutical
companies and products. He has overseen development of several FDA-approved
products for diagnosis and treatment of cancer including ProstaScint(R) and
Valstar(R), and negotiated numerous licensing arrangements. From 1984 to 1988,
he was Chief Operating Officer and a Director of Anthra Pharmaceuticals, Inc.
and Chairman of that company's UK subsidiary. Dr. Gulfo holds an MD from the
University of Medicine and Dentistry of New Jersey and MBA in Finance from Seton
Hall University.
Dr. Robert E. Humphreys, MD, PhD, is currently Executive Vice-President and
Chief Operating Officer of Antigen. Dr. Humphreys founded Antigen in 1999 and
was its President. He has extensive experience in the National Institute of
Health, arthritis, cancer and diabetes study sections. Dr. Humphreys is the
principal inventor on 6 awarded US patents and has over 150 peer-reviewed
publications to his credit. Prior to founding Antigen, Dr. Humphreys was
Professor of Medicine and Pharmacology at University of Massachusetts Medical
School. He received his MD and PhD degrees from Yale University and
post-doctoral fellow degree in immunology from Harvard University. He also
received his initial training at Bethesda Naval Hospital.
Dr. Minzhen Xu is Vice President - Biology of Antigen. Dr. Xu received an MD
from the Shanghai Medical University in China and a PhD in immunology from
University of Massachusetts Medical School. He has been with Antigen since its
inception and is the company's chief experimentalist.
19
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.
Risks Related to Our Financial Condition
- ----------------------------------------
We have a history of losses, and will incur additional losses.
We are a development stage company with a limited history of operations, and do
not expect ongoing revenues from operation in the immediately foreseeable
future. To date, we have not been profitable and our accumulated net loss before
preferred stock dividend was approximately $76,000,000 at July 31, 2003. 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 research, 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 foreseeable future.
To progress in product development or marketing, we will need additional capital
which may not be available to us. This may delay our progress in product
development or market.
We will require funds in excess of our existing cash resources:
o to proceed under our joint venture with Elan, which requires us to fund
80.1% of initial product development costs;
o to develop buccal and immunomedicine products;
o to develop new products based on our buccal delivery and immunomedicine
technologies, including clinical testing relating to new products;
o to develop or acquire other technologies or other lines of business;
o to establish and expand our manufacturing capabilities;
20
o to finance general and administrative and research activities that are
not related to specific products under development; and
o to finance the research and development activities of our new
subsidiary Antigen. We have agreed to fund at least $2,000,000 of
Antigen expenditures during the first two years following the
acquisition.
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 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.
It is 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.
New equity financing could dilute current shareholders.
If we raise funds through equity financing to meet the needs discussed above, 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.
Our research and development and marketing efforts are likely to be highly
dependent 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 buccal delivery and immunomedicine technologies. Any
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. Therefore, these collaborators may not 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.
21
Risks Related to Our Technologies
- ---------------------------------
Because our technologies and products are at an early stage of development, we
cannot expect revenues in the 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, and/or any of the products we develop may not be
commercially viable.
While over 750 patients with diabetes have been dosed with our oral insulin
formulation at approved facilities in seven countries, our clinical program has
not reached a point where we are prepared to apply for regulatory approvals to
market the product in any country. Until we have developed a commercially viable
product which receives regulatory approval, we will not receive revenues from
ongoing operations.
We will not receive revenues from operations until we receive regulatory
approval to sell our products. Many factors impact our ability to obtain
approvals for commercially viable products.
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. Our immunomedicine products are in the
pre-clinical stage of development.
Pre-clinical and clinical trials of our products, and the manufacturing and
marketing of our technologies, 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. For these reasons, it is possible we will never receive approval for
one or more product candidates.
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.
Due to legal and factual uncertainties regarding the scope and protection
afforded by patents and other proprietary rights, we may not have meaningful
protection from competition.
22
Our long-term success will substantially depend upon our ability to protect our
proprietary technologies from infringement, misappropriation, discovery and
duplication and avoid infringing the proprietary rights of others. Our patent
rights, and the patent rights of biotechnology and pharmaceutical companies in
general, are highly uncertain and include complex legal and factual issues.
Because of this, our pending patent applications may not be granted. These
uncertainties also mean that any patents that we own or will obtain in the
future could be subject to challenge, and even if not challenged, may not
provide us with meaningful protection from competition. Due to our financial
uncertainties, we may not possess the financial resources necessary to enforce
our patents. Patents already issued to us or our pending applications may become
subject to dispute, and any dispute could be resolved against us.
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. 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.
Also because of these legal and factual uncertainties, and because pending
patent applications are held in secrecy for varying period in the United States
and other countries, even after reasonable investigation we may not know with
certainty whether any products that we (or a licensee) may develop will 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, we cannot know for certain whether 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.
Risks Related to Marketing of Our Potential Products
- ----------------------------------------------------
We may not become, or stay, profitable even if our products are approved for
sale.
Even if we obtain regulatory approval to market our oral insulin product or any
other product candidate, many factors may prevent the product from ever being
sold in commercial quantities. Some of these factors are beyond our control,
such as:
o acceptance of the formulation or treatment by health care professionals
and diabetic patients;
o the availability, effectiveness and relative cost of alternative
diabetes or immunomedicine treatments that may be developed by
competitors; and
o the availability of third-party (i.e., insurer and governmental agency)
reimbursements.
23
We may not be able to compete with treatments now being marketed and developed,
or which may be developed and marketed in the future by other companies.
Our products will compete with existing and new therapies and treatments. 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. We are also aware of a number of companies currently seeking to
develop alternatives means of enhancing and suppressing peptides. In the longer
term, we also face competition from companies that seek to develop cures for
diabetes and other malignant, infectious, autoimmune and allergic diseases
through techniques for correcting the genetic deficiencies that underlie such
diseases.
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. We may
not be able to enter into beneficial contracts, and 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.
Numerous pharmaceutical, biotechnology and drug delivery companies, hospitals,
research organizations, individual scientists and nonprofit organizations are
engaged in the development of alternatives to our technologies. Many of these
companies 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.
If government programs and insurance companies do not agree to pay for or
reimburse patients for our products, we will not be successful.
Sales of our potential products depend in part on the availability of
reimbursement by 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. FDA approval of health care products does not guarantee that these
third party payors will pay for the products. Even if third party payors do
accept our product, the amounts they pay may not be adequate to enable us 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.
Risks Related to Potential Liabilities
- --------------------------------------
We face significant product liability risks, which may have a negative effect on
our financial condition.
24
The administration of drugs or treatments to humans, whether in clinical trials
or commercially, can result in product liability claims whether or not the drugs
or treatments 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 or treatment 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 severe negative effect on our financial condition. 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, due to factors in the insurance market
generally and our own experience, we may not 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.
Outcome of an Arbitration Proceeding with Sands Brothers may have an adverse
impact on us.
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 our common stock since outstanding
shares of Generex Pharmaceuticals' common stock were converted into shares of
our 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.
After several arbitration and court proceedings, on October 29, 2002, the
Appellate Division of the New York Supreme Court issued a decision remanding the
issue of damages to a new panel of arbitrators and limiting the issue of damages
before the new panel to reliance damages which is not to include an award of
lost profits. Reliance damages are out-of-pocket damages incurred by Sands.
On November 27, 2002, Sands filed with the Appellate Division a motion to
reargue the appeal, or, in the alternative, for leave to appeal to the Court of
Appeals of New York from the order of the Appellate Division. On March 18, 2003,
the Appellate Division denied Sands' motion.
Despite the recent favorable decisions, the case is still ongoing and our
ultimate liability cannot yet be determined with certainty. Our 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 are not
able to estimate an amount or range of potential loss from this legal proceeding
at the present time.
25
Risks Related to the Market for Our Stock
- -----------------------------------------
If our stock is delisted from the NASDAQ SmallCap Market and/or becomes subject
to Penny Stock regulations, the market price for our stock may be reduced and it
may be more difficult for us to obtain financing.
On June 5, 2003, our common stock was delisted from the NASDAQ National Market
because of our failure to maintain a minimum of $10,000,000 in stockholders'
equity. On June 5, 2003, our stock began trading on the NASDAQ SmallCap Market.
The NASDAQ SmallCap Market has its own standards for continued listing,
including a minimum of $2.5 million stockholders' equity. As of July 31, 2003,
our stockholders' equity was $5,856,965.
In addition, for continued listing on both the NASDAQ National Market and
SmallCap Market, our stock price must be at least $1.00. During periods in
fiscal 2002 and the beginning of fiscal 2003, our stock price dropped close to
$1.00 per share. If we do not meet this requirement in the future, we may be
subject to delisting by NASDAQ.
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 us to obtain financing.
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 Securities and Exchange
Commission'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. Additionally, 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, it may be more difficult for
us to obtain financing.
The price of Our Stock may be volatile.
There may be wide fluctuation in the price of our stock. 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 or treatments 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.
26
From time to time, we may hire companies to assist us in pursuing investor
relations strategies to generate increased volumes of investment in our stock.
Such activities may result, among other things, in causing the price of our
stock 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.
Our outstanding Special Voting Rights Preferred Stock and provisions of our
Certificate of Incorporation could delay or prevent the acquisition or sale of
our business.
Holders of our Special Voting Rights Preferred Stock have the ability to prevent
any change of control in us. 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 our business or increase the cost of any such acquisition.
27
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 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 we purchased an additional 23,500 square feet of property at the same
location 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 could be used by us for expansion of our facilities. It is
currently leased to third parties.
We have mortgages on our Toronto properties totaling $1,895,475 at July 31,
2003. These mortgages require the payment of interest, with minimal principal
reduction, prior to their due dates. These mortgages currently require an
aggregate $13,850 in monthly debt service payments. Aggregate principal
maturities for these mortgages will be $426,767 in fiscal 2004, $1,296,386 in
fiscal 2005 and $172,322 in fiscal 2006.
We lease approximately 1,710 square feet of office and laboratory space in
Worcester, Massachusetts that Antigen uses for its research and development
activities. We assumed the lease in August 2003 when we acquired Antigen. The
lease is for a term of 2 years with an annual rental of $103,500. This space is
sufficient for Antigen's present activities.
We do not expect to need manufacturing capabilities related to our insulin
product 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.
We could use our other properties to expand research, development or testing of
our buccal and immunomedicine products if current facilities prove inadequate
for our needs.
28
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 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 of us that was acquired in late
1997. In exchange, 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 our common stock since outstanding shares of Generex
Pharmaceuticals' common stock were converted into shares of our 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 our
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 our 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 and 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 award. 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.
29
On October 29, 2002, the Appellate Division issued a decision and order
unanimously modifying the lower court's order by remanding the issue of damages
to a new panel of arbitrators and otherwise affirming the lower court's order.
The Appellate Division's decision and order limits the issue of damages before
the new panel of arbitrators to reliance damages which is not to include an
award of lost profits. Reliance damages are out-of-pocket damages incurred by
Sands. The Appellate Division stated that the lower court properly determined
that the arbitration award, which had granted Sands warrants for 1,530,020
shares of our stock, was "totally irrational."
On March 18, 2003, the Appellate Division of the Supreme Court of New York
denied a motion by Sands for re-argument of the October 29, 2002 decision, or,
in the alternative, for leave to appeal to the Court of Appeals. At the present
time, we are not able to predict the ultimate outcome of this legal proceeding
or to estimate a range of possible loss from this legal proceeding. Therefore,
no provision has been recorded in the accompanying financial statements.
Subash Chandarana et al. v Generex Biotechnology Corporation et al. In February
2001, a former business associate of our Vice President of Research and
Development ("VP") and an entity called Centrum Technologies Inc. ("CTI")
commenced an action in the Ontario Superior Court of Justice against the VP and
us seeking, among other things, damages for alleged breaches of contract and
tortious acts related to a business relationship between this former associate
and the VP 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 the former business associate 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 plaintiffs' cross motion without prejudice to the former business
associate to seek leave to bring a derivative action in the name of or on behalf
of CBI. The former business associate 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 the VP and us. In September
2003, the Ontario Superior Court of Justice granted the request and issued an
order giving the former business associate leave to file an action in the name
of and on behalf of CBI against the VP and us. We intend to continue our
vigorous defense of this legal proceeding. 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
30
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. The parties have now signed Minutes of
Settlement resolving all outstanding issues in the action. The settlement is
presently in the process of being finalized.
We are involved in certain other legal proceedings in addition to those
specifically described herein. Subject to the uncertainty inherent in all
litigation, we do not believe at the present time that the resolution of any of
these legal proceedings is likely to have a material adverse effect on our
consolidated financial position, results of operations and cash flows.
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.
31
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, 2003. We have called a meeting of stockholders to
be held on November 4, 2003 to vote on three matters.
32
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been listed on the NASDAQ SmallCap Market since June 5,
2003. From May 5, 2000 to June 4, 2003, our common stock was listed on the
NASDAQ National Market. From February 1998 to May 2000, the "bid" and "asked"
prices for our common stock were quoted on the OTC Bulletin Board operated by
the National Association of Securities Dealers. Prior to February 1998, there
was no public market for our common stock.
The table below sets forth the high and low, intra-day sales prices of our
common stock reported on the NASDAQ National Market for each fiscal quarter (or
portion thereof) in the prior two years ended July 31, 2003. The table below
also sets forth the high and low closing "bid" prices for our common stock
reported on the NASDAQ SmallCap Market for the period from June 5, 2003 to July
31, 2003.
Sales Prices
(except where indicated)
High Low
---- ---
Fiscal 2002
-----------
First Quarter $8.75 $2.91
Second Quarter $7.76 $5.26
Third Quarter $6.20 $3.31
Fourth Quarter $5.24 $1.75
Fiscal 2003
-----------
First Quarter $2.63 $0.85
Second Quarter $2.60 $1.00
Third Quarter $1.42 $0.65
Fourth Quarter
05/01/03 - 06/04/03 $1.72 $0.87
06/05/03 - 07/31/03* $2.63 $1.35
* High and low closing "bid" prices, which represent prices between dealers and
do not include retail markup, markdown or commission and may not represent
actual transactions.
The closing sales price for our common stock reported on October 14, 2003, was
$2.05.
At October 14, 2003, there were 720 holders of record of our common stock.
33
Existing Stock Compensation Plans
The following table sets forth information as of October 14, 2003 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 995,500 $6.68 0
2000 Stock Option Plan 1,774,500 $8.90 225,500
2002 Stock Option Plan 3,825,159 $3.78 174,841
--------- ----- -------
Total 6,595,159 $4.38 400,341
- ------------------------------------------------------------------------------------------------------------
Equity compensation 0 0 0
plans not approved by
security holders
- ------------------------------------------------------------------------------------------------------------
Total 6,595,139 $4.38 253,341
- ------------------------------------------------------------------------------------------------------------
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 fiscal year ended July 31, 2003 and the subsequent interim period ended
October 14, 2003, we sold common stock and other securities in transactions in
reliance upon exemptions from the registration requirements of the Securities
Act of 1933 as follows:
o In November 2002 and March 2003, we issued an aggregate of 100,000
shares of common stock to two financial consultants as compensation for
services rendered. We recognized an aggregate expense of $133,000 in
connection with these shares. The expense amount was determined by
attributing to each share the market price on the date of issuance. We
relied on Section 4(2) of the Securities Act of 1933 in issuing these
shares. The issuances were not part of a public offering, the shares
bore restrictive legends, and each of the financial consultants had
sufficient sophistication in financial affairs so as to not require the
protection of the Securities Act of 1933.
34
o Effective May 13, 2003, we offered all holders of our outstanding
warrants the opportunity to exercise their warrants at a reduced price
of $1.50 per share on or before June 12, 2003. After June 12, 2003 the
exercise price on all of the unexercised warrants reverted to the price
stated in the original warrant. In addition, any holder exercising a
reduced-priced warrant was entitled to receive a new warrant with an
exercise price equal to the greater of one half of the original
exercise price of the prior warrant or the market price on the day the
prior warrant was exercised. We received gross proceeds of
approximately $2,300,000 from this offer as holders elected to exercise
warrants for 1,531,001 shares within the reduced price period. We
issued new warrants exercisable for 1,635,121 shares, with exercise
prices calculated in the manner stated above, to holders who exercised
their original warrants within the reduced price period. The exercise
price of the new warrants ranged from a high of $6.50 to a low of
$1.25. The number of new warrants exceeds the number of shares issued
on exercise of old warrants because some old warrants included
"cashless" or "net" exercise provisions. We relied on Section 4(2) of
the Securities Act and Rule 506 of Regulation D promulgated thereunder
in issuing the shares and warrants without registration under the
Securities Act of 1933.
o On May 29, 2003, we completed a private placement sale of 2,926,301
units of securities ("Units") for cash at a price of $1.15 per Unit to
9 accredited investors. Each Unit consisted of one share of our common
stock and a warrant to purchase four tenths of one share (0.4 shares)
of our common stock at an exercise price of $1.71 per share, with a
three-year exercise period. We raised $3,365,250, with net proceeds to
us of approximately $3,100,000, in the private placement. The Shemano
Group, a San Francisco investment banking firm, acted as the placement
agent and received an aggregate commission of $235,568 and warrants to
purchase 99,000 shares of our common stock at an exercise price of
$1.71 per share. We relied on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder in issuing the Units,
shares and warrants without registration under the Securities Act of
1933.
o On June 10, 2003, we completed the private placement sale of 666,667
units of securities ("Units") for cash to one accredited investor at a
price of $1.50 per Unit. Each Unit consisted of one share of our common
stock and one warrant to purchase one share of our common stock at an
exercise price of $1.80 per share, with a three-year exercise period.
We raised $1,000,000 in the private placement. No commissions or
similar fees were paid in connection with this transaction. We relied
on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder in issuing the Units, shares and warrants
without registration under the Securities Act of 1933.
o On August 8, 2003, we acquired all of the outstanding capital stock of
Antigen Express, Inc. pursuant to an Agreement and Plan of Merger.
Pursuant to the merger agreement, Antigen became our wholly-owned
subsidiary. We issued approximately 2,800,000 shares of our common
stock to the former shareholders of Antigen in exchange for the all of
the outstanding shares of capital stock of Antigen. No commissions or
similar fees were paid in connection with this transaction. We relied
on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder in issuing these shares without registration
under the Securities Act of 1933.
35
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 for the
year ended July 31, 2003 were audited by BDO Dunwoody, LLP. Our financial
statements for the years ended July 31, 2002 and 2001 were audited by Deloitte &
Touche LLP. Our financial statements for the year ended July 31, 2000 and 1999
were audited by WithumSmith+Brown.
In thousands, except per share data
Year Ended July 31,
-------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Operating Results:
- ------------------
Revenue -- -- $ 1,000 -- --
Net Loss $(13,262) $(13,693) $(27,097) $(8,841) $(6,240)
Net Loss Available to $(14,026) $(14,414) $(27,097) $(8,841) $(6,240)
Common Stockholders
Cash Dividends per share -- -- -- -- --
Common Stockholders
Loss per Common Share:
- ----------------------
Basic and Diluted Net Loss (.67) (.70) (1.44) (.58) (.47)
Per Common Share
Financial Positions:
- --------------------
Total Assets $ 22,639 $ 28,161 $ 42,666 $10,341 $8,890
Long-Term Debt $ 1,895 $ 663 $ 693 $ 722 $ 996
Series A, Preferred Stock $ 13,501 $ 12,736 $ 12,015 -- --
Stockholder's Equity $ 5,857 $ 12,863 $ 27,307 $ 8,415 $ 7,310
36
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.
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.
In August 2003, we acquired Antigen Express, Inc. Antigen is engaged in the
research and development of technologies and immunomedicines for the treatment
of malignant, infectious, autoimmune and allergic diseases. For details about
the this acquisitions, See "Developments Subsequent to Fiscal 2003" below.
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.
37
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 limited clinical trials on this product in
the United States, Canada, Europe and Ecuador. In September 2000, we entered
into an agreement to develop this product with Eli Lilly and Company ("Lilly").
To date, over 750 patients with diabetes have been dosed with our oral insulin
product at approved facilities in seven countries. We have conducted several
clinical trials with insulin supplied by Lilly under our agreement. Lilly did
not, however, authorize or conduct any clinical trials or provide financial
support for those trials. We did receive a $1,000,000 up front payment from
Lilly. On May 23, 2003, we announced that we had agreed with Lilly to end the
development and license agreement for the development and commercialization of
buccal delivery of insulin. We are currently negotiating terms for Lilly to
continue to supply a specified amount of insulin for further development of our
product. We will retain all of the intellectual property and commercialization
rights with respect to the buccal spray drug delivery technology, and we will
have the continuing right to develop and commercialize the 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 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.
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 2002 and 2003, 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.
38
Our new subsidiary Antigen is engaged in research and development of
technologies and immunomedicines for the treatment of malignant, infectious,
autoimmune and allergic diseases. Our immunomedicine products work by
stimulating the immune system to either attack offending agents (i.e., cancer
cells, bacteria, and viruses) or to stop attacking benign elements (i.e., self
proteins and allergens). Our immunomedicine products are based on two platform
technologies that were discovered by an executive officer of Antigen, the Ii-Key
hybrid peptides and Ii-Suppression. Our immunomedicine products are in the
pre-clinical stage of development and trials in human patients are not expected
for 12 months. Development efforts are underway in melanoma, breast cancer,
prostate cancer, HIV and Type I diabetes. We are establishing collaborations
with academic centers to advance the technology, with the ultimate goal of
conducting clinical testing.
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 f