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Herceptin®, Roche's (OTCQX:RHHBY) leading breast cancer drug, which had revenues of over $6 billion in 2012, will lose its patent protection in 2014. Standing and waiting in the wings are dozens of generic companies looking to capitalize on this very large market potential. This will be a large revenue erosion for Roche, and the company will look to try to extend the life of the drug. The only way to accomplish this is to look for ways to modify the drug. Over the last few years, large pharmaceutical companies have accomplished this by using combination therapies to piggyback on their drugs. In June, Johnson & Johnson (NYSE:JNJ) paid $650m, plus $1 billion in milestones, for privately held Aragon Pharmaceuticals and the company's Phase 2 prostate cancer drug, ARN-509. J&J is planning to use ARN-509 in combination with its blockbuster drug, Zytiga, also facing patent expiration in 2016. Moreover, Reckitt Benckiser (OTCPK:RBGPF) held patent protection on its blockbuster drug Suboxone for over a decade. The company simply changed the delivery from sublingual tablet to film once patent protection began to expire, thus extending the patent. This is a trend that will not go away and, in fact, will only increase as pipeline starved large pharmaceuticals look to extend their drug patent lives. This brings me to Galena Pharmaceuticals (NASDAQ:GALE). As I looked for ways to invest based on this growing combination drug use trend, Galena was the company that grabbed my attention.

Why is Galena Interesting?

Galena currently has five drugs in its cancer pipeline, two each in Phase 1 and 2, and one in Phase 3. Galena also controls the rights to Abstral, a breakthrough cancer pain tablet that the company acquired from Orexo Pharmaceuticals in March. However, it is Galena's cancer pipeline that I want to focus on today. NeuVax, currently in Phase 3 trials for breast cancer, works by stimulating the patient's immune system to seek out and destroy residual cancer cells.

According to the National Cancer Institute, over 230,000 women in the U.S. are diagnosed with breast cancer annually. Of these women, about 75% test positive for Human Epidermal growth factor Receptor 2 (HER2), but only 25% of all breast cancer patients are eligible for Herceptin®. NeuVax is targeting the 50% of breast cancer patients not eligible for Herceptin who have HER2. This is a very large market potential for Galena. However, there is much more to this story and the reason for my interest in Galena as an investment candidate.

Galena's Connection to Roche

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I was very interested when I discovered that NeuVax is also in a Phase 2 trial for combined use with Herceptin. That's right! NeuVax is being studied as a combination use drug with Herceptin. Success in this trial could extend the life of Herceptin for Roche and make Galena a very attractive takeover target.

In a Phase 2 combination study, none of the patients who received NeuVax and Herceptin had a recurrence, versus 11% who relapsed after getting Herceptin alone. NeuVax created a 78% reduction in breast cancer recurrence in patients who were node-positive. Of the 187 patients enrolled in the study, there were 108 in the vaccine group and 79 in the control group. Of the 53 patients who received at least one booster inoculation, a statistically significant disease-free survival rate of 95.9% was seen versus 79.7% in the control group. This strong data might have Roche at least considering Galena as a potential acquisition.(click to enlarge)

Galena as an Acquisition

Zytiga only has $1.6 billion in annual sales and J&J has already moved to solidify its patent life for this drug with a huge outlay. Things are much more dire for Roche with a looming patent expiration for a much larger drug. If I use the $650m J&J figure for a potential price for Galena, we arrive at a price three times what Galena is trading at currently. This does not take into account that NeuVax is much more advanced than ARN-509 in trials, nor the other pipeline drugs Galena has.

Currently, Galena trades at a market cap of $192m with $66m in cash, and an annual cash burn of approximately $24m. With the $6 billion in potential lost sales for Roche, as well as the added market for HER2 patients that is twice the size of the Herceptin market, Galena looks like a good fit. Galena is targeting the prostate and ovarian cancer research market as well with two Phase 2 trials underway. Ovarian cancer occurs in over 22,000 patients per year in the U.S. and is the most lethal gynecologic cancer.

Conclusion

The clock is running out for Herceptin. Patent expiration is just around the corner. Galena currently has a Phase 2 drug that is showing tremendous success in combination trials with Herceptin. With J&J paying $650m for a privately held company to keep its money- making drug alive, Galena has to at least be considered as a potential acquisition target. As a standalone breast cancer drug, NeuVax is targeting a market twice the size of the $6 billion per year Herceptin.

As a result, a valid question might be why Roche hasn't already acquired Galena? If NeuVax could really save Herceptin as a combination therapy, then a $650 million price tag seems quite small considering both the size of Roche and the revenue of Herceptin. The answer is most likely that Roche is wanting to see some data from the combination study and from Galena's Phase 3, 700 patient study for NeuVax as a standalone treatment. Long-term, this benefits Galena shareholders. Because if NeuVax is successful in either study, Galena's stock would be significantly higher than it is today, and would reflect the vaccine's total sales potential. Regardless, Roche doesn't have a lot of time to save its blockbuster drug, and this fact might mean that Galena is poised for a buyout, and Roche is willing to buy.

Source: Will Lost Patents Force Roche Into Acquisition Mode?