Generex: Do Development Drug Companies Have No Value?
by: Thomas Barnard September 27, 2010
The valuation of small development companies is always a bit of a challenge. While I am not necessarily surprised by the low share price of Generex (GNBT) because of the things managements of small development companies have to do to raise money to continue the research, I submit the prospects of small companies, in this case Generex, are not nothing, which is close to market's recent valuation.
For the stock market, there appears to be no continuum to valuations, which seems a bit irrational.
The day before the FDA announcement, Dendreon (DNDN) was worth $400 million at its low point in 2009, and now currently bears a market cap of $6 billion. Next to this valuation Generex's little over a hundred million market cap (a measly 2% of DNDN's) is, in any practical discussion, nothing, or next to it. Perhaps there was not enough information prior to make more of a continuum evalutation in Dendreon's case, but I think there is such a case to be made for Generex. But even so, Dendreon's pre-event valuation was three or four times Generex's current valuation.
Generex has a market cap of only $126 million. It is working on a prostate vaccine, which worked so well for Dendreon, but also a vaccine for breast cancer, avian and swine flus, ovarian cancer, and melanoma.
But this is not even their main push, which is a drug delivery system in which drugs are passed to the blood system via the buccal tissue inside the mouth. Their test case is insulin. Recent testing demonstrated that insulin passed to the blood system through the inside-the-mouth route did not generate antibodies. Antibodies are the body's way of rejecting a substance and in diabetes this is called insulin resistance. Good news for this start-up.
If the test case works, then this technique may be applied to many other drugs. The message boards were rampant with the notion that Pfizer (PFE) might want to buy Generex just to develop a spray for Viagra that would become effective much quicker than the half hour it takes now, and give them some additional patent protection time.
Certainly, Generex deserves to be rated at the $400 million of the pre-approval Dendreon. I would argue it deserves to rated at considerably more, perhaps twice as much.
Mannkind (MNKD) is working on many of the same kinds of things as Generex, but it has a market cap of $690 million. That's five times the market cap of Generex. It is also working on the problem of insulin delivery. But theirs is a much, much riskier proposition. First, Mannkind must get FDA approval of its drug Affreza, Generex does not need any drug approval, it is using regular insulin. But even more risky than this is that Mannkind's scheme uses absorption through the lung. Pfizer had a drug for lung absorption, Exubera, but they shelved it, and wrote down a staggering $2.8 billion because patients were not inclined to use it. Generex's offering Ora-lyn does not go in the lungs.
Mannkind is also working on cancer vaccines. I cannot speak to their program, but I can say that the head of cancer drugs for Pfizer, Dr. Craig Eagle, has begun to advise Generex on its cancer vaccine program.
To be fair, we sometimes get fooled. I had invested in Northfield Labs because it had a blood substitute based on the hemoglobin molecule, the base blood molecule, but it failed to meet a non-inferiority test of blood plus saline. It worked pretty well, but it did not meet that test. (I'm not going to get into a discussion of the FDA's methods. But what if blood plus saline is not available? Then "pretty well" might be a good thing to have.)
If Ora-lyn fails, this will be a horrible day for diabetics, and horrible day for Generex stockholders, though at current levels, not that horrible. They still have the vaccines. And if the vaccine fails for cancer, it may still work for avian flu or swine flu, and that may still make the company more valuable than Mannkind.
And that's my contention, Generex is worth at least as much as Mannkind, which would make Generex worth $2.60 per share. Now. Today. And I think it's worth more. To reiterate, its risk on the insulin product is one third of Mannkind's (no drug approval needed, and not going to the lung). By rights, it's worth a good deal more than Mannkind.
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