Generex: What Happens in India, Stays in India

TORONTO ( TheStreet) -- A little more than a year ago, on March 26, 2009, a directive issued by the Drugs Controller General of India (DCGI) revoked the approval of Generex Biotechnology's ( GNBT) oral insulin spray Oral-lyn in India "with immediate effect till such time final review is taken by this Directorate." Dhiraj Singh, a press officer for India's Ministry of Health and Family Welfare, confirmed via email the revocation of Oral-lyn's approval in India.

After a thorough search of Generex Biotechnology's press releases, SEC filings, and earnings/sales conference call transcripts, it seems that Generex hasn't said anything publicly about the Indian government's action, nor has it warned investors that Oral-lyn is no longer for sale in India, the company's largest market opportunity to date.

The approval in India of Generex's oral insulin spray, known as Oral-lyn, in late 2007 was very much a material event for Generex, given the size of the country and the lucrative commercial opportunity for new diabetes treatments there. And Generex made sure that investors knew about Oral-lyn's Indian approval in press releases, regulatory filings and on conference calls.

Yet Generex went silent about India in March 2009, after the drug regulators there decided that the initial approval of Oral-lyn violated the country's drug laws because the insulin spray had not been tested in local human clinical trials. The Indian government revoked Oral-lyn's approval, stopped new imports and ordered the product removed from Indian pharmacy shelves.

As recently as last October, company executives denied any significant delays or problems with Oral-lyn in India when asked for an update by investors on a company conference call.

Generex CEO Anna Gluskin and General Counsel Mark Fletcher were asked to explain why the company chose to not disclose information about Oral-lyn's problems in India, but neither of them responded to emails or phone calls.

Likewise, Nona Masterson and Brian McGee, independent directors on Generex's board, did not respond to emails or phone calls. A third independent director, John Barratt, could not be located because he no longer works at Caldwell Partners, the last employer listed on his Generex-issued biography.

Generex even raised money from investors on four different occasions following the Indian government's action against Oral-lyn. The prospectuses for those stock offerings are supposed to inform investors of all the risk and uncertainties involved in Generex's business, but none of them include mention that Oral-lyn's approval in India was revoked.

"If a company chooses to trumpet one set of facts, it's important to correct the record if those facts turn out not to be true or the facts change," said Megan Gates, a partner at the life sciences law firm Mintz Levin and a specialist in securities law.

Gates is not privy to the reasons why Generex chose not to update investors about the Oral-lyn situation in India, but "if I was their counsel, I'd have a hard time swallowing an argument that this wasn't material information," she said.

Generex's Oral-lyn is an insulin mist that patients spray into their mouths. The insulin is supposed to be absorbed buccally (through the lining of the mouth) and into the bloodstream, in contrast to standard injectable insulins like those made by Novo Nordisk ( NVO), Eli Lilly ( LLY) and Sanofi-Aventis ( SNY), among others. Drug regulators in the U.S. and Europe have not approved Oral-lyn for sale. Generex is one of a handful of companies, MannKind ( MNKD) most notable among them, which are trying to develop alternative insulin delivery technologies.

Trumpeting Oral-lyn's India potential

A Generex press release dated Nov. 1, 2007 announced Oral-lyn's approval in India after what the company described as a "long and intensive review of the Generex Oral-lyn dossier by the Drugs Controller General India office." The DCGI is the Indian equivalent of the U.S. Food and Drug Administration, in charge of approving new drugs for sale in that country.

"This approval in a market with one of the largest numbers of patients with diabetes comes after the Indian health regulatory agency conducted a rigorous review of clinical data demonstrating the safety and efficacy of Generex Oral-lyn," said Generex CEO Gluskin in the November 2007 press release.

Upon Oral-lyn's approval, Generex entered into a partnership with Shreya Life Sciences, an Indian-based drug company and distributor, to market and sell Oral-lyn in India. Generex said it would spend the rest of 2007 and much of 2008 preparing for Oral-lyn's commercial launch through Shreya Life.

On March 25, 2008, Generex announced receipt of a "commercial order" for 210,000 canisters of Oral-lyn from Shreya.

"We are pleased to anticipate the commercialization of our flagship product in a major market like India and the attendant revenue," said Generex CEO Gluskin in the March 25, 2008 press release.

Generex and Shreya announced the commercial launch of Oral-lyn in India under the brand name Oral Recosulin in November 2008. By January 2009, Oral Recosulin was available for sale and over 50 doctors in India were prescribing the product, according to Generex's 10Q filed with the SEC for the quarter ended Jan. 31, 2009.

On March 11, 2009, Generex provided investors with a sales update on Oral Recosulin (Oral-lyn) in India, announcing that Shreya had "procured Oral Recosulin orders from more than 60 doctors for over 100 patients."

Gluskin, in the same press release, stated, "We believe that the rapid progress that our licensee has made in India reflects the demand for a pain-free insulin product."

That "rapid progress," however, wasn't generating any Oral Recosulin revenue for Generex. While Generex claimed in early 2009 that Indian doctors were prescribing Oral Recosulin to their diabetes patients, as of the company's last quarterly financial update in March, Generex has not shown any record of sales from Oral Recosulin in India, nor any of the other three countries -- Ecuador, Lebanon and Algeria -- where the product is allegedly approved for sale.

Oral-lyn yanked in India

The most probable reason for why India was not generating any Oral-lyn revenue for Generex was that the Indian government revoked Oral-lyn's approval soon after the product's launch.

On March 26, 2009, the Drugs Controller General of India (DCGI) ordered Generex and Shreya to halt the importation and sale of Oral-lyn.

The Indian government took action against Oral-lyn after an investigation by Mint, an Indian business newspaper, alleging that Generex and Shreya violated Indian drug laws by seeking approval without conducting mandatory human clinical trials in India.

"We are investigating how the marketing approval and import license were granted to Generex Biotechnology and then later transferred to Shreya Life Sciences," DCGI's Surinder Singh told Mint in an April 15, 2009 story.

Surinder, who was not at DCGI at the time Oral-lyn was approved in 2007, further told Mint, "What was the basis on which the approval was given to the company? Until the investigation is complete and a decision is taken, the product cannot be sold."

Ram Shelat, director of domestic business at Shreya, told Mint, "Based on DCGI's letter, we have stopped sales and dispatches of the product. We have not placed any further order to Generex for import."

By April 2009, less than four months after Generex and Shreya began selling Oral Recosulin (Oral-lyn) in India, the diabetes treatment was yanked from the market. Yet it seems that Generex didn't disclose to shareholders or investors that its Indian business had unraveled.

Investors question Generex

Searching SEC filings for the 8-K form that Generex should have filed disclosing the Indian government's action against Oral-lyn on March 26, 2009 doesn't turn anything up. Subsequent quarterly and annual reports filed by Generex with the SEC do not contain any disclosure about the halt to Oral-lyn sales in India. And if the company issued any press releases discussing the India news, they're not posted to its Web site.

On an Oct. 19, 2009 conference call, a private investor asked Generex CEO Gluskin for an update on Oral-lyn sales in India.

"Are you seeing more doctors prescribing the medication there now as opposed to, let's just say, three months ago?" he asked, according to a transcript of the conference call.

Gluskin replied, "Our progress in India is monitored by our partner, Shreya Biotech. And as you know, a condition of our approval was Phase IV, so that Phase IV trial we just marked as surveillance is continuing. We do not have specific numbers on sales yet, but we certainly are working towards getting an update and we certainly would be continuously monitoring that situation."

The investor then asks a follow-up question about Oral-lyn in India, which prompted Generex Vice President for Finance Stephen Fellows to respond:

"Sure, so we haven't recognized any revenue from India, so we did send them some shipments, but those were for the clinical trials, so went to expense rather than revenue right now. So once we get through the Phase IV marketing trials, we can begin to recognize revenue."

Despite what Gluskin said on the Oct. 19, 2009 conference call, there is no record on the company's Web site or on a conference call transcript from 2007 or 2008 saying that a clinical trial in India was a "condition" for Oral-lyn's approval.

And Generex's own press release of March 25, 2008, which describes the 210,000 canisters of Oral-lyn as a "commercial order" intended for an "Indian product launch," contradicts Fellows' claim on the same conference call that the shipment of Oral-lyn was intended for use in a clinical trial.

It also seems that Generex didn't disclose the halt to Indian Oral-lyn sales in SEC documents relating to the sale of more than $32 million in company securities in four separate financing deals from May-September 2009.

None of the four prospectuses filed with the SEC outlining the sale of Generex common stock and/or warrants in these four deals disclose information about the Indian government's actions with regards to Oral-lyn.

Of course, even though Oral-lyn was pulled from the market in India, the drug could get reapproved there if subsequent trials are performed and Generex reapplies for approval.

But in the meatime, for Generex, it seems like whatever happens in India, stays in India.

-- Reported by Adam Feuerstein in Boston

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