2013 is coming to an end, and investors will now take time to reassess their portfolios and find the best opportunities in the New Year.
Much like consumers seek the best deals for Christmas, investors also seek value on their Christmas lists. Like merchandise, the best deals often change from year-to-year. Yet despite this fact, Galena Biopharma (GALE) has been a top performer for both of the last two years. However, with 2012 and 2013 now a thing of the past, the real issue is whether or not Galena is still offering investors a Christmas value.
A Value Shopper's Paradise
To fully understand whether or not Galena has reached fair value and if more upside exists, investors must understand where it has been and where it hopes to go. Therefore, let's take a look at the last two years and the post-holiday magic that GALE created for value shoppers.
2012: The unknown Becomes Known
2012 was a transformational year for Galena Biopharma: It was this year that Galena went from unknown to one of the year's best performers.
From Christmas of 2011 to 2012 shares of Galena rallied an incredible 300%. This post-Santa Claus rally begun on January 5 as the company's lead product, NeuVax, forced investors to take a long hard look at its data. On this date, Galena announced an investigational new drug approval for the Phase 2 trial of NeuVax combined with Herceptin.
Herceptin is Roche's best-selling breast-cancer vaccine - earning almost $7 billion in the last 12 months - targeting those who express high levels of a protein called HER2. Galena's NeuVax targets those with low to intermediate levels of the same protein, a patient population twice as large with no treatment options. Thus, if Herceptin can earn $7 billion with half the population, then conventional wisdom suggests NeuVax could earn large sales if successful. At the time, Galena was a $40 to $50 million company, making the risk/reward ratio very favorable, especially considering the data that followed.
Then, Galena initiated its Phase 3 PRESENT trial with NeuVax on January 20, signaling to investors that NeuVax successfully passed the first two stages of testing and was nearing clinical completion. In June Galena presented 60-month data from its Phase 2 trial, showing that NeuVax reduced the recurrence in 78.4% of patients who were optimally dosed and received boosters. It was this patient population that would be treated in the Phase 3 study, thus increasing optimism surrounding the vaccine's likelihood of success.
While the above catalysts highlight the bulk of what drove shares higher in 2012, there were other developments that also created some momentum. The company did obtain a patent on NeuVax until 2028, thus eliminating what could be a future overhang. Moreover, Galena completed its first two partnerships, one with Teva (TEVA) to market NeuVax in Israel and another with Leica Biosystems to utilize its technology in screening HER2 -qualifying patients.
Overall, it was an eventful year for Galena, one that put the company on the map.
2013: Not a One-Trick Pony
After 2012, not many dreamt that 2013 or the following Christmas-to-Christmas period could be as good - or better. However, Galena has soared more than 150% in that period, driven by a number of new catalysts that no one saw coming.
The big shocker of the year was definitely the acquisition of Abstral, which is a fentanyl product for breakthrough cancer pain that dissolves under the tongue.
For the most part, clinical stage biotechs dilute stock to fund operations and progress clinical studies. The only exception is if there's a partnership or if the company in question is one of the newer IPOs of 2013 that have raised 100s of millions before ever producing human data. In the case of Galena, it had a very interesting philosophy, and acted on that philosophy when it acquired Abstral to sell and earn revenues while developing NeuVax. The sales from Abstral might not prevent all future dilution, but its earnings will at least limit dilution - that is if sales are strong.
When Galena purchased Abstral, there was every reason in the world to be bullish. In 2012, Abstral had sales of $54 million, growth of more than 40%, and Galena had set the bar extremely low with average estimates of just $2 million in 2013. Abstral then officially launched at the start of the fourth quarter, but surprisingly earned $1.2 million in the third quarter before the drug was officially launched. This means that sales are progressing far faster than the company anticipated, and that Galena is on track to crush its $2 million annual goal. This fact alone served as a major catalyst and is the primary reason that Galena has soared more than 100% in the last three months.
Additionally, financing is no longer a short-term fear, as Galena now has around $65 million on its balance sheet, or enough to fund operations for two years. The company also presented data on an early stage product called FBP, which targets patients at high risk of recurrence for endometrial and ovarian cancers. In a small study, patients treated with FBP had a recurrence rate of 13.3 while the control group saw a 25% recurrence rate.
This data combined with the acquisition and launch of Abstral suggests that Galena might be more than a one-trick pony.
2014: What Comes Next?
As we reflect on the last two years, and the consistent performance, the biggest question is whether or not Galena is presenting "Christmas value" like in years past.
Unfortunately, there is no way to know for certain the answer to that question. However, what really strikes me as interesting is that news regarding NeuVax was very quiet in 2013. Now, with enrollment being two years in the process, it's very likely that we could see NeuVax-related catalysts, which could move the stock significantly if positive.
Like I said, we won't have to worry about dilution, and clearly sales of Abstral will move the stock one way or the other. With that said, investors might want to note the stock performance of Insys Therapeutics (INSY). This is a company that markets and sells a fentanyl-based product called Subsys. In 2013, all of its 420% gains have been in relation to the sales of this one product. Hence, Insys supports a $1 billion market cap due to its fentanyl product, meaning if sales of NeuVax are real strong, Galena could be a $1 billion company without any regard for NeuVax or its pipeline. This fact is one potential catalyst to monitor.
Furthermore, as the Phase 3 trial progresses, it is possible that we see additional partnerships. While partnerships or acquisitions are 100% speculative, Galena is likely gaining some interest or attention due to its stock performance, data and the sales potential of NeuVax.
With that said, investors will anxiously await interim data on the Phase 3 study along with any other trial updates. These will serve as huge catalysts, as will any updates on Galena's trial in combination with NeuVax and Herceptin. Strangely, due to the excitement surrounding Abstral not many have mentioned or discussed the implications of a successful NeuVax/Herceptin trial, which of course would create significant gains.
As with the Teva partnership and the data itself in 2012 or the Abstral acquisition in 2013, there will likely be a catalyst that we don't see coming. Yet based on those catalysts we can predict and expect 2014 might be setting up to be Galena's best and most transformational year to-date.
Therefore, keep in mind the unprecedented upside that's present if in fact NeuVax works. Oppenheimer recently initiated coverage of GALE with an "Outperform" rating and a $6.00 price target, saying data is encouraging and that NeuVax has a $5 billion global commercial opportunity.
With that said, consider valuations and premiums in biotechnology, such as Pharmacyclics (PCYC), another company with a single-drug (expected) blockbuster in oncology. Its lead drug, Imbruvica, has peak sales estimates of $6 billion. Yet because of a partnership with Johnson & Johnson (JNJ), Pharmacyclics can only realize up to $3 billion of that revenue. Moreover, Pharmacyclics is yet to realize one dollar of revenue, but already trades with a price-to-peak sales ratio of 2.6.
If we use Pharmacyclics' valuation as a guide, then Galena might be fairly valued with a market cap of $13 billion if NeuVax is proven successful - or a price over $120.00. While this might sound absurd, the implications of a successful NeuVax are tremendous. But keep in mind that there are still many bridges to cross. Still, given this upside and the data that's known, Galena still seems like a great risk/reward investment at $4.00, which is reason to be bullish into next year.