Galena Biopharma (GALE) was recently the subject of scrutiny in a report titled, "Galena: One of Biotech's Most Vulnerable Names," published on Monday, November 14th, 2012. A link to the full report is available here.
The report analyzed Galena, formerly called RXi Pharmaceuticals (but not to be confused with the current RXi Pharmaceuticals (RXII.OB)), and concluded that the company had on numerous occasions engaged in misleading activities or selective disclosure policies. Without so much as a notice, this report was pulled from Yahoo! Finance, where it was widely read by investors who we believe (as is common in biotechnology, and, perhaps, other technical areas) were not fully-informed as to the information available on the company.
As a letter from Galena's attorney (below) on November 14th shows, the company was not pleased to see our research surface. Further, without providing any evidence of our purportedly 'inaccurate' statements, they're demanding we remove our research from the internet.
In line with policies that Seeking Alpha has standardized in financial publishing, we believe information should be freely available, provided it is factually consistent. In this short outline, we will revisit our key findings and allow a community of informed investors to decide for themselves what is true and what isn't.
But first, Galena's letter to our Managing Editor:
There's an odd conviction among many investors who have reacted to our research piece that Galena's stock price somehow correlates with its value. Thus, if the price is performing well everything must be going well, and vice-versa. We believe this is a dangerous trap for investors and a phenomenon readily dispelled by every peak and trough in modern economic history. To this point we grow more and more skeptical as we observe 'articles' published on the topic of Galena that completely ignore its risks (including the explicit, or 'widely' known, ones).
Our first argument, originally under the heading 'incompetent management' analyzes Galena prior to its acquisition of Apthera (which gifted Galena its lead product candidate).
We followed filings by Galena (known as RXi Pharmaceuticals prior to September 26, 2011) made with the Securities and Exchange Commission (SEC) to evaluate management's performance from 2007 to 2011. In that time period, we estimate that at least $52 Million was spent on developing a pipeline of pre-clinical RNAi products. This is indisputable, as Galena's 10Q (or quarterly report) for the period ended September 30, 2011, discloses 'net cash used in operating activities' since inception to be $54.609 Million. We estimated that roughly $2 Million in cash burn was attributed to expenses related to a newly acquired product, Neuvax (unrelated to the RNAi line). A link to the quarterly report referenced is available here.
Galena later acquired a private oncology company called Apthera, which had run out of cash to fund a Phase III study of its breast cancer drug candidate 'Neuvax'. We know the firm was near bankruptcy because its assets, consolidated on Galena's balance sheet, and referenced in its10K report (here) for the period ended December 31, 2010 (see 'estimated allocation of purchase price'), showed a cash balance of $20,000. Further, the consideration given to acquire a product, that the company now touts could be worth 'billions', was $6.33 Million in Galena stock. This is referenced in the same annual report as 'fair value of shares issued at closing.'
With these facts at hand, it occurred to us that we’ve never seen a successful late-stage oncology product acquired for $6M and change. We also observed that almost all of Apthera’s old shareholders offered to sell their stock in a registration statement filed on May 4th, 2011. See this S-3 filing here.*
On September 26th, 2011, Galena decided to spin-off the RNAi assets, which now belong to a separate entity called RXi Pharmaceuticals. Shareholders of Galena were given a dividend in the form of stock in this new entity, but we learned, through RXi's SEC filings, that the structure was highly unfavorable for shareholders. Here's the screenshot we used to illustrate our point:
This information was found in RXi's quarterly report, available here. What we concluded from this was that Galena's share in the company would be diluted because of the implied dilution from Series A Preferred Stock holders (and, to a smaller extent, RXi option holders). We thus estimated that the value of this dividend to Galena's shareholders would be immaterial or close to nothing (and that the book value exaggerated the true value). What we were left with were two facts:
- Galena management spent $52 Million+ on these RNAi assets;
- The RNAi assets were now worth ~$0 to Galena investors.
We summarized, stating that this showed gross incompetence on the part of management. In the end, the project had returned nothing - $52 Million was expended.
We made several references to the way in which management has raised capital to fund ongoing operations. We found several instances where the company engaged in an unnecessary raise that hurt shareholder value. When RXi was spun-off, Galena said institutions agreed to invest $2.5 Million in the company. It closed for $455,000 at a 23.5% discount to market. At the time the company had >$15 Million in cash, which is referenced in its quarterly report for the period ended Sept. 30, 2011 here. Thus, the raise was unnecessary. Secondly, the raise triggered anti-dilution provisions to warrants that were outstanding at high strike prices and re-priced these warrants at the recent offering price (as determined in the $455k raise). This is referenced in the company's 'prospectus supplement' available here.
We raised concern with this transaction because we feel it was absolutely unfavorable to common shareholders, and, as the cash balance at the time shows, probably unnecessary.
Similarly, on December 6, 2011, Galena traded holders of 5.93 Million warrants, 4.151 Million free-trading shares. The warrants were already re-priced because of the anti-dilution provisions, but the price of Galena's common stock was lower. This transaction favored the warrant holders, not common stock holders. A screenshot of this agreement is provided (below).
In our analysis, we also observed selective disclosure policies regarding:
- Various banking agreements, i.e. with 'consultants' or 'bankers' granted large equity compensation, but no clarity was given as to their contribution(s) to Galena;
- Varying description of the market opportunity for Neuvax, the company's lead product candidate;
- Availability of full study results for Neuvax in SEC filings (the company failed to show an overall benefit in Phase II study);
- Lack of institutional ownership in Galena;
- Dilutive offerings with significant warrant coverage;
- Lack of transparency with an at-the-market facility active, but probably long-forgotten by most investors;
- Risk of significant dilution given the company would (and still) need a large infusion of capital to continue development of lead product candidate;
- Risk of significant dilution given aggressive capital raising history.
Today, our conclusion remains the same. We are skeptical of Galena Biopharma. After receiving a letter from Galena's attorney and seeing our research pulled, we are more confident than ever that the company does not want investors reading the fine print. We, however, are indifferent to what the company wants and instead choose to focus on what we believe is the truth. We hope this brings some balance to what has been an overwhelmingly positive discussion of the company for months.
We were notified by Galena of 2 statements within our original analysis which were inaccurate. We apologize for this, and as is our policy, after verifying such claims, we are issuing corrections to the following:
In our analysis of a form S3 filed with the SEC on May 9, 2011, we incorrectly interpreted the registration of approximately 4.97 million shares of Galena stock issued in consideration of the Apthera acquisition as "sell" transactions. The registration effectively removes a "restriction" on the shares and holders are free to sell. However, neither Mark Schwartz or Sanford Hillsberg sold any stock, though they are free to do so at any time. In order to confirm a "sell" transaction by either insider, a form 3/4 would need to be filed with the SEC. We stand by the remainder of the analysis of this topic.
We’ve also retracted the paragraph titled "Management Pulls Hoax" as the registered direct offering was completed in 2010, not 2011. Galena’s website had erroneously dated the page, which led to the confusion (see here, here, and here).
Disclosure: I am short GALE.
Additional disclosure: You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. PropThink was not compensated to publish this article. Our full disclaimer is available at www.propthink.com/disclaimer.