Galena Biopharma (GALE) has been one of the top performing biotechnology stocks of 2012, with a near 400% return. Galena began the year valued at just $32 million, but after clinical data, several analyst upgrades, and the issuance of patents, the company has seen its worth skyrocket to over $150 million. Regardless of how you feel about Galena, there is one fact you can't deny: it has been a great year for investors. But will the rally continue into 2013? I believe it will.
Recent Announcements and Their Meaning
After a very volatile month, Galena Biopharma returned large gains on news that might be viewed as company-changing. The stock soared last Tuesday to $2.30 after announcing a deal with Teva (TEVA) for the commercialization of its lead product NeuVax in Israel. Then, on Thursday, the company announced yet another partnership with Germany s Leica Biosystems to use its Bond Oracle HER2 IHC System to aid in selecting patients for the company's Phase 3 trial. Finally, on Friday, Galena announced final landmark 60-month data for its Phase 1/2 trial, with a 78.4% reduction in the recurrence of breast cancer against the control arm, which might give you a clear picture of why the stock has seen such a record year.
If you are interested in an investment in this company, then it would not be difficult to find both pro and con opinions. Like all biotechnology stocks, the opinions run high, with both sides very passionate regarding their beliefs. One of the more boisterous concerns among bears is in regards to institutional ownership and partners. The bears have often proclaimed that if NeuVax has billion-dollar upside then why wouldn't larger companies be willing to invest in the company, or partner to develop the product? I feel that Mara Goldstein of Cantor Fitzgerald said it best when she said that the lack of reported institutional investors reflects why the company could be a good opportunity. The recent partnerships announced with Teva and an ongoing research relationship with Roche's Herceptin in conjunction with NeuVax, further validates the science behind Galena.
Due to the early results of NeuVax, and the near $6 billion in annual revenue from Roche's Herceptin, bulls make a case that Galena will outperform the market as the next big biotech return. The Teva partnership is based in Israel, giving Teva the rights if NeuVax is effective and providing Galena with royalties on future sales. Israel will be the location of at least four sites for the company's Phase 3 trial, or 5% of its total sites. Thus, the partnership will help to eliminate costs associated with the study, as costs for a foreign study would no doubt be higher than the costs for a study in the U.S. And if successful, Galena will not need to employ and train a sales team in Israel or worry about manufacturing. The company will have a consistent provider of sales that will produce high margins with Teva.
In regards to eliminating costs, the partnership with Leica Biosystems should also add long-term value because Galena can use the system to identify patients who qualify for NeuVax quickly and efficiently. The company can avoid more expensive and extensive tests, which will ultimately save the company money and may prevent excessive dilution. The more Galena is able to save with development costs reduce the financing dilution risk, as that is always a concern to biotech investors. If the company can continue to add partners throughout the globe and find further licensing agreements, then less financing will be required to effectively develop the product.
Galena: A Look Ahead
I think that with Galena we are seeing a transition in the company's operational strategy. The stock has received numerous bullish outlooks and price targets over the last six months, and bears have continued to argue that the company does not have any upcoming catalysts for 2013. However, the catalysts that we saw last week are the ones that are possible in the year ahead, that is if the company executes properly.
In this last year the company has had to focus all of its energy on collecting data, presenting data, developing a Phase 3 trial, and enrolling the Phase 3 trial, which has all been priced into its stock. But in 2013 the company will be on autopilot. The company will be opening additional sites for its Phase 3 study, but will also be able to seek partnerships with other companies, such as Teva, throughout the world. The company's Phase 3 trial is large and is extensive. Therefore the company might be strategically attempting to partner with several companies in various regions, rather than one large partnership. It makes sense that large pharma companies would want to partner with Galena, due to its small risk and large reward ratio. And now that it has final data and 70 sites in place, it has solid data for potential partners to review.
In addition to concerns regarding a lack of partnership interest, there have also been questions about its mere 6% institutional ownership. There have been many to present the same argument for institutional ownership as presented with partnerships. Well, looking at the performance of the stock and how quickly it has rallied, there does appear to be an easy answer to that argument: Galena hasn't qualified for 99% of the requirements set forth for funds to buy in 2012. For example, back in Q2 when the Russell index rebalanced, Galena had a market cap under $100 million, therefore it would not have qualified to be included in any of the funds. However with a $150 million market cap and a stock that is trending upward, it is very likely that the stock will be included in various funds throughout 2013, and if so it will add significant value to its stock.
I, like many, have looked at many of the "buy" ratings followed with $4, $5, and $6 price targets and wondered how the stock could reach such prices. I think the answer might rest in expectations and the value of the company. Galena is in no way priced as a company that just announced a near 80% reduction in the recurrence of breast cancer presenting HER2. It is not priced like a company that will see billions of revenue if data holds in a larger phase study. But it is priced as a company with risk, where investors remain on the edge, expecting significant dilution.
Finally, I will conclude by saying that Galena is a speculative play, but one that is showing all the signs of promise. All of the company's announcements in the last week have given us an indication of what to expect in 2013, and if the company can stay close to its Phase 2 study results, continue to add licensing agreements, and find additional partners in other regions around the world, then 2013 might be another 2012 for this stock. Looking ahead into 2013 I think the upside comes from institutional ownership, partnerships, licensing agreements, and finally the attractiveness of a potential buy out from large pharma.
Disclosure: I am long GALE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.