Galena Biopharma: Case For A Value Investment

Apr. 2.12 | About: Galena Biopharma, (GALE)

Galena Biopharma, Inc (GALE) has gained a lot of attention lately and thus has brought varying degrees of opinions about the stock to light. Upward price action since early January 2012, however, seems to underscore a fairly obvious one: the investor community is convinced that GALE is a value buy. And it is not just the share price that is reflecting this sentiment, the institutional ownership of the stock has also jumped to nearly 6.37%.

We will discuss and attempt to calculate the fair price of GALE stock at present and determine what is behind all this excitement.

Galena is a small biotech based out of Oregon that is primarily involved in development of a late stage breast cancer vaccine NeuVax (E75). NeuVax, which is an immunogenic peptide of HER-2/neu that stimulates Cytotoxic T Lymphocytes (CTLs) to recognize and kill HER-2/neu-expressing cancer cells (in plain English NeuVax attempts to prevent recurrence of breast cancer), was acquired by Galena through the acquisition of Apthera, Inc.

Phase III trials ((PRESENT)) of NeuVax have just begun their enrollment of 700 patients, preceded by promising results announced from Phase II trials, in which NeuVax demonstrated statistically significant DFS (Disease Free Survival). As a result Galena has been assigned an SPA (Special Protocol Assessment) for NeuVax by the FDA for 36 month DFS endpoint. For more in-depth analysis of Phase II trials you may read the latest investor presentation here. Galena in its recently filed 10-K has stated that it expects the drug to be brought to market by 2017 (in 5 years - two years for enrollment and three years for trial). However, if the past is any indication, this is probably a case of under-promising and over-delivering. Although there is always a risk of the FDA throwing a curve ball, the likelihood of that seems minimal at best given the stellar results from the Phase II trials and SPA designation.

For our analysis of the fair price of the stock, we will use the conservative estimate of 2017 as the year when NeuVax will be brought to market.

To begin our analysis we will have to first estimate the potential revenue NeuVax can bring to Galena in 2017. According to Galena's investor presentation, Herceptin of Roche (OTCQX:RHHBY)/Genentech, which targets 20% to 25% of HER2+ breast cancer patients, earned nearly $6 billion in revenue in 2011, while Galena with NeuVax is targeting the majority of the rest. For our analysis we will conservatively assume:

  1. The size of this market remains constant.
  2. NeuVax will have earnings of only $100 million in 2017.
  3. Rate of 6% over 5 years to calculate the present value of earnings.
  4. A low P/E ratio of 3.

The above assumptions give us $74.7m as the present value of the estimated $100m earnings in 2017. In turn, when present value is divided by shares outstanding and multiplied by a P/E of 3, it gives us a share price of $4.44. Thus a price below this level in the current year should be considered undervalued.

Following is a table that presents the fair value of GALE shares given varying levels of estimated earnings in 2017.

Est. Earnings in 2017 (in USD billions) Net Present Value in 2011 (in USD millions) Shares Outstanding (in millions) Share Price (in USD)
$0.1b $74.7m 50.49m $4.44
$0.2b $149.45m $8.88
$0.3b $224.17m $13.32
$0.4b $298.90m $17.76
$0.5b $373,62m $22.20
Click to enlarge

Needless to say, as we move along closer to 2017, a shorter amount of time to market, reduced risk factors and additional positive data on NeuVax will propel the share price estimates progressively higher.

Disclosure: I am long GALE.