Last Thursday, Needham & Company initiated coverage on shares of Galena Biopharma (NASDAQ:GALE) with a "Buy" rating and a $3.50 price target. According to streetinsider.com, Galena has "Buy" or "Outperform" ratings by all of the analysts who cover the stock. Yet, certain bloggers and retail investors have been quite cynical about the company's future. Thus, let's look at both the best and worst case scenario with Galena Biopharma to determine if the risk is worth the reward.
Abstral: Now Available
Abstral is a rapidly-dissolving sublingual tablet for the management of breakthrough pain. The drug is a best-in-class fentanyl product, with plasma concentrations of fentanyl seen within 10 min. This rapid absorption is what separates Abstral from other breakthrough pain and fentanyl drugs and is why many believe it will be a successful product.
According to Galena's recent quarterly report, Abstral is now available at nationwide pharmacies. Galena will now market the drug, and hopes to create a profit by next year.
In Europe, Abstral produced sales of $54 million in 2012. In Q4 2012, Abstral sales grew 42% year-over-year, thus showing that it could be a success in the U.S.
In the U.S., the market for fentanyl products is $400 million annually, and Galena believes that it can control 10%-15% of the market within five years. This means that Abstral could generate annual sales of $60 million.
If Abstral is viewed as reliable and efficient, it is highly likely that Abstral could command an even larger share of the fentanyl market, or expand the market in size. At first glance, it appears as though Galena is being conservative with their guidance, as Abstral continues to grow and maintains a 30% market share in Europe.
If Galena can control a 30% market share in the U.S., sales could rise to $120 million. If we use a four times sales ratio then we arrive at a market capitalization of $480 million, or $5.75, and that's only accounting for Abstral.
The worst case is that Abstral is a dud and never reaches $60 million in sales. Currently, Galena is trading with a market cap of $150 million. On March 18, when Galena announced the acquisition of Abstral, it traded with a market cap of $166 million.
Due to Galena being cheaper today than it was in March, we can conclude that none of Galena's valuation is tied to Abstral's success or failure. This means that any upside will be viewed as a bonus, also suggesting that a failed Abstral campaign should not alter the stock.
NeuVax: Blockbuster Potential
NeuVax is a Phase 3 vaccine that is being tested to prevent breast cancer recurrence in the 50%-75% of patients who are not eligible for Herceptin. The vaccine targets those who have low to intermediate levels of HER2, while Herceptin targets those who have high levels of HER2.
In a Phase 2, 187 patient study, NeuVax reduced the risk of recurrence by 78% in patients who were node-positive. Compared to the control arm of the study, only 5.6% of patients recurred after 60 months compared to 25.9% of those who were not vaccinated with NeuVax. In the company's ongoing Phase 3 study, the company hopes to prove that NeuVax can keep patients from redeveloping the disease.
As of now, we have no way of knowing how much revenue NeuVax can produce if proven successful in its Phase 3 study. NeuVax is being tested alone, with Herceptin, and as a booster. If all three studies are successful, then we know that NeuVax will be a blockbuster product.
In comparison, Herceptin generates $7 billion annually by targeting just one-fourth to one-third of breast cancer patients. If NeuVax is successful, it will target at least one-half of patients. Hence, it is not unreasonable to estimate $2 billion in peak sales, which is most likely conservative.
At $2 billion in sales, adding a four times sales multiple, Galena could be worth $8 billion long-term. After approval, and awaiting an FDA decision, if Galena trades at 0.5 times peak sales then it would support a $1 billion valuation. In other words, Galena has upside of 700% short-term, and over 5,000% long-term if NeuVax is proven successful.
If NeuVax fails, then Galena would fall sharply. Right now, all of the stock's valuation is tied into the potential of NeuVax, not quite accounting for any success or lack thereof in marketing Abstral.
If unsuccessful, a 50% loss should be expected, or a market cap of $75 million. The unknown piece of the puzzle will be sales of Abstral. If Abstral is successful and generates sales between $60 and $120 million, then Galena's market capitalization will likely carry a 100% to 300% increase from its current price.
This means that if Abstral is successful, Galena should trade higher as data progresses. Then, if NeuVax fails, Abstral's success should still carry a stock price that is greater than its current price.
In bringing this discussion back down to earth, let's pretend that you invest $7,500 in Galena, or purchased 4,000 shares. Below I have included a table to show how each of the discussed scenarios could play out in stock performance.
Abstral fails + NeuVax fails
$0.90 or less.
Abstral $60m + NeuVax fails
Abstral $120m + NeuVax fails
Abstral $60m + NeuVax @ 0.5x peak sales
Abstral $60m +NeuVax @ 4x peak sales
As charted, there aren't too many scenarios where an investment returns a loss, which may be the driving force behind positive sentiment from analysts. Granted, this is speculative and theoretical in using standard price times sales ratios, but given each situation it's reasonable that the noted stock price should follow.
Like I explained, the wild card is Abstral. We don't know how it will perform. But NeuVax looks to be a very compelling product, that when used on the appropriate patient population, produced significant results. After assessing the company, including its risk and reward, it is difficult to determine why some could be overly bearish, as the downside is extraordinarily minimal. The decision of whether to invest is then determined on your own assessment of risk: Is the risk worth the reward