Galena Biopharma (NASDAQ:GALE) has seen an 80% gain in its stock during 2013, and if we trace its performance back to January 2012, it has risen a whopping 485%. The $230 million biotechnology company's price performance suggests long-term success, an eventual FDA approval, and great potential on behalf of the company for solidifying its presence in the industry. If one were to review the past year, a reason for the rally is not evident. The company has announced data from a previous study that took place back before RXi acquired Apthera and became Galena Biopharma; but aside from this controversial data, the stock's performance has been more a result of excellent execution on behalf of the company's ability to market itself.
In the last year, some writers have attempted to provide the bearish side of the trade. Yet an overwhelming flock of retail investors-- and letters from company attorneys-- have often crushed these words. Consequently, I consider GALE to be a "stock first and science second" company. First of all, I wish to present a collection of risks that should be considered before buying at these high levels. Secondly, you can take these factors into consideration and compare my view with those that are long or bullish on the stock. After all, it does not seem hard to find a positive outlook on Galena, but finding a negative one can be a bit more difficult. Lastly, I am neither long nor short the stock, I have no financial interest in the performance of the stock whatsoever. I am in no way telling you to sell Galena nor am I predicting that NeuVax will fail in clinical trials. I am rather addressing questions that I cannot answer, most of which have not been answered by the company, to my knowledge.
The Data from NeuVax is Very Tough to Explain
"Galena cherrypicks a subgroup of patients where it claims NeuVax works, but ignores another equally large subgroup of patients where NeuVax actually hurts patients, even though the vaccine should work better for these latter patients."
The statement above is a direct quote from The Street's Adam Feuerstein in an April 2012 article entitled "Galena's Breast Cancer Vaccine Doomed to Fail." In the article, Feuerstein explains step-by-step why the story Galena is selling doesn't make sense. Feuerstein's case is very compelling, and most of his questions have never been answered.
According to Feuerstein, Apthera (the original developer of NeuVax that was purchased by Galena) was trying to study NeuVax as an adjuvant treatment to reduce the risk of breast cancer. Yet the study was not statistically significant. To compensate for this, Galena "cherrypicked" the results to find any subset of patients where the vaccine may have shown any hint of effectiveness. Fortunately, the company found it in those expressing low to intermediate levels of HER-2; but according to Feuerstein, "Logic and science dictates that NeuVax should work really well in breast cancers that express high levels of HER-2." If you read his article, and also take into account the success of Roche's Herceptin, then you have to admit his belief should ring true.
Galena Biopharma executives have made many attempts to explain that NeuVax wasn't utilized on the more advanced stages of the disease, and even retail investors will go through and explain how patients weren't properly dosed or how these patients did not receive "boosters." Regardless, if NeuVax was successful in treating low to intermediate levels, it still doesn't explain "why" it would have been ineffective at treating the higher levels of expression. This is a valid question that has not been answered. If NeuVax does attack the protein HER-2, then it shouldn't matter what level of expression is present; the vaccine should still have an effect. It would seem logical that even bullish investors have to explore the obvious questions (as part of their due diligence), ponder the reliability of the "cherrypicked" patients, the difference between the control and vaccinated groups, and wonder if the company will ever address these concerns publically.
Another problem I have with the NeuVax data is that it contradicts data found in an UPenn study. If you review UPenn's success rate, the university is among the very best in clinical research and is almost always right in its analysis. I find it somewhat worrisome that UPenn and Galena have such conflicting results in what appears to be a very similar study. In the UPenn study, 27 breast cancer patients expressing HER-2 were targeted with a vaccine using dendritic cells, and it was found that additional tumor-associated antigens and pathways were needed in order for the approach to work. The UPenn study proved that such vaccines are safe and well tolerated, but ineffective when only targeting the one antigen. This is highly damaging to Galena and other vaccines that target HER-2, and has widely been an area of caution for those who are bearish or short on the stock. Yet such studies are often kept quiet and I have yet to hear contrarian developers of similar vaccines rise to the occasion and explain, step-by-step, why this study should not be considered sufficient in predicting a similar vaccine's success.
Is there Really A Connection to Roche?
If you invest in a company the size of Galena Biopharma, then you can pretty much guarantee that there will be some lingering questions. There are very few, if any, "sure things" in biotechnology, especially with such low market capitalizations. Accordingly, the questions with Phase 2 data (above) should be expected, and it only makes a long-term investment have a greater risk-to-reward ratio. However, one thing investors shouldn't have to encounter is shady management or misleading press releases.
A misleading press release or management that intentionally leads investors to believe something that is not true can drive the price of a stock higher, and there are countless biotechnology "companies" that have a pipeline full of products that will never materialize, but who have teams of excellent sales people. This means that when you are exploring an investment in biotechnology you not only have to find a great product, but also a management team that puts science first and the stock second. My question to Galena is, "Which are you?"
One thing that's always concerned me is the lack of transparency with the company's connection to Roche and its drug Herceptin. The company has issued a number of press releases, likening the sales success of Herceptin to the potential of NeuVax (it can even be seen on the company's website), and has initiated a Phase 2 study that is testing both Herceptin and NeuVax in combination. These headlines could lead an investor to believe that Galena has partnered with Roche (OTCQX:RHHBY) or inferring that there is a close connection (that could possibly lead to an acquisition).
In the same article from Feuerstein he tackles this topic by writing, "Galena has issued many press releases claiming Roche/Genentech's involvement in this small Phase II study, but that's misleading because Roche/Genentech's participation is limited to a small amount of funding and the donation of Herceptin supplies to the investigator so he can conduct the study, says company spokesman Ed Lang." Moreover, if Roche had any level of interest in Galena, wouldn't they just buy it? Roche is a $200 billion company, so acquiring Galena would be but a decimal point on its balance sheet. This is a bit alarming, especially considering the knowledge and the clinical success of Roche. If Roche is in fact working closely with Galena, and company analysts believe that NeuVax has even the smallest chance of success, then it doesn't make sense that the medical giant wouldn't try to bid for an acquisition. Galena's "connection" to Roche raises more questions. Simply put, if the drug worked, Roche would be quick to snatch it from the market.
Teva is a Huge Deal… or Is It?
Back in December, Galena announced a partnership with Teva Pharmaceuticals (NYSE:TEVA) for Teva to sell, market, and distribute NeuVax in Israel assuming approval is obtained. This news sparked immediate excitement within the retail community; after all, it's Teva, a multi-billion dollar, worldwide pharmaceutical industry. In spite of this good news, two questions present themselves. First of all: Why only Israel? Sure, there is a market in Israel, but Teva is in a global market…so why not Europe, Asia, or the Americas?
It is rare that a giant pharmaceutical entity would approach a company such as Galena for a deal of this size. In fact, Galena most likely marketed this deal hard and put its best foot forward. And still, the only thing Teva would give Galena is Israel, even though NeuVax alleges to be a multi-billion dollar product. To me, this doesn't add up, nor does the fact that no financial information was disclosed sit well. When there is "serious" interest from large pharmaceutical corporations, a sizeable upfront "good-faith" payment is made; but Galena received none, or very little.
The second question: Why did Galena emphasize so heavily in press releases entering into a partnership with Teva? On all headlines following the news, Teva's name was used and a partnership stated; yet on the 8-K it clearly says that Galena entered into a license and supply agreement with ABIC Marketing Limited, a subsidiary of Teva Pharmaceuticals. Cleverly, the company didn't lie… it simply stretched the truth. Galena knew that "Teva" was much more attractive than "a subsidiary of Teva." Hey, I'm not judging Galena on this one; I can only imagine how tough it can be to create revenue in the clinical space. However, Galena has done just fine at creating excitement and raising money over the years, and this seems to be yet more proof that Galena is a "stock first and science second" company, more worried about appeal than the truth.
The PropThink Ordeal
One of the best-written articles that I have seen on Galena was from PropThink; it was written incredibly well and thoroughly. Up until that point, I had actually considered an investment in the company. Yet PropThink offered a great short case in "Galena: One of Biotech's Most Vulnerable Names," with an immediate follow up piece in "The Other Side of Galena Biopharma."
In PropThink's original article, the firm highlighted countless discrepancies from various SEC filings over a period of four years, and their outcome was quite powerful. Here were a few of the highlights from this piece:
- Galena (previously known as RXi Pharmaceuticals) spent $52 million on developing a pipeline of pre-clinical RNAi products, none of which came to the market, and all of which were paid for by investors.
- After the RNAi experiment failed, RXi purchased a near-bankrupt biotechnology company, Apthera (NeuVax), for just $6.33 million in Galena stock. The point of this was desperation on behalf of the company to stay in business, and PropThink writes never seeing a successful drug in oncology purchased for such a low price. PropThink conveniently mentions that Galena "touts" the drug to be worth billions (stock first and science second).
- Also connected to Apthera, an S-3 filing showed almost all Apthera shareholders offering to sell their stock in a registration statement filed on May 4, 2011. The point being, if NeuVax is so good, then why would the original developers be so anxious to unload their investment in this billion-dollar product? This might be the most important point of all. It is a great question!
- PropThink highlighted several instances where Galena unnecessarily diluted shares, which hurt the common stock price.
- Finally, other issues that were raised include: Inconsistent description of market opportunity for NeuVax; NeuVax failed to show an overall benefit in Phase 2 studies; lack of institutional ownership; aggressive capital raising interest.
You can see that while PropThink's case may be damaging to the stock, everything was backed with SEC filings, and all opinions were presented as such. Since 2012, I have read several Galena and oncology-related articles, and this one was by far the very best. Yet because of the article's bearish stance, Galena's attorney sent PropThink a letter (can be seen in the cited article above) and demanded that the article be removed. In the letter it states, "We currently count nearly 50 statements that are obviously false or at a minimum misleading."
When I saw the letter from the attorney (and the 50 incorrect statements referenced), I viewed it as a win for the company, and was happy to see them being aggressive. I figured that PropThink simply held a short position on the stock. While PropThink may have very well been short, an "Editor's Note" was issued, saying that "two statements" within the original analysis was incorrect. My question is, "What happened to the 50?" This means that for the most part, PropThink was correct, and that Galena's "stock first and science second" mentality was evident in both the PropThink article and Galena's letter to PropThink in an attempt to stop the bleeding. Furthermore, I have never heard Galena defend any of the points made in the PropThink article, but instead simply tried to dismiss it.
Always look at an investment as a skeptic, and if you determine the upside is greater than the downside then buy stock. With a $230 million market cap, I am not sure that Galena is a buy right now. I believe there are far too many obvious questions that are yet to be answered. I also believe that judging by its history over the last five years, Galena is, without question, a company that focuses on its stock first and then science second (or third). The company has done great at staying in business, and acquiring products that create some level of excitement in the retail investment community. But the most important question of all: Will this strategy ever create a long-term return for shareholders?
Lastly, I'd like to say that NeuVax was a great acquisition. The company was able to cherrypick data and find one area in which it appeared to show some effectiveness. It has since been able to build off this excitement with "billion-dollar potential" and its low off-shelf cost. The same can be said for its recent acquisition of Abstral. The company has done well at showing ProStrakan's success in Europe and boasting its $400 million U.S. market. But what Galena forgot to mention was that ProStrakan had rights to sell Abstral in the U.S. in Q1/2011, but has since switched focus to Europe. And according to the press release in 2011, the potential market was $550 million. So does this mean that the U.S. market is declining for this product, or does it mean that it has been misjudged? Either way, there are questions at every corner, and there are only answers to those questions that can be swung in the company's favor.