Last week, following the annual ASCO meeting, Galena Biopharma, Inc. (NASDAQ:GALE) opened with gains of 25% as a result of encouraging data from its lead candidate, NeuVax. Like most biotechnology stocks last Monday, Galena Biopharma slid throughout the day to close with gains of just 5%. The same thing happened on Tuesday, when even more encouraging data was released to support the benefits of NeuVax for approval.
In fact, the drug's results were so good at last weekend's ASCO meeting that Cantor Fitzgerald initiated coverage with a buy and a $4 price target due to the clinical results and the potential sales from the drug. Ross Capital Partners reiterated its $5 price target following the data from ASCO. Yet there must be some reason that investors are fearful or that the stock is failing to gain traction. Let's look at the data, and the possibilities, and try to determine why this stock is priced so cheaply.
In all fairness, it may seem a little odd to be talking about Galena Biopharma's lack of performance if you are an investor who has never monitored the stock. After all, the stock has been one of the momentum plays of 2012 with a 170% gain YTD. Even in the last month the stock performed well, trading flat, while the S&P 500 lost 2.5% of its value. However, compared to other companies in biotechnology that have late-stage candidates with solid data, the stock is still cheap.
As the NeuVax trials continue to progress, the data continues to impress. As an investor, I was looking forward to the 60-month booster data. This is data from 187 patients, of which 53 have received at least one booster shot (to offset waning efficacy), with another 79 being part of the control group. Keep in mind, some patients have not completed the program and final data won't be available until 4Q.
The purpose of this study is to keep the levels of E75-specific CD8+Tcells elevated to determine whether NeuVax could be used as a maintenance vaccine. If the vaccine can show a clear statistical benefit over a period of five years, then it is possible that the FDA would approve the vaccine to prevent recurrence as a long-term solution, providing continuous revenue for the company every six months for the patients that it treats. To better explain, let's take a look at NeuVax's survival data over the last five years, with booster shots, and how it compares to the control group:
The above data means that at 60 months, 94.4% of the patients who received booster shots were disease-free compared to 74.1% in the control group, which is consistent with historical averages. Hence, the company achieved its goal of using the booster shots and proved that there is a relationship between NeuVax and DFS (disease-free survival), based on the results of the control group
Regardless of how you feel about Galena or its lead candidate, these are results that are tough to argue with. Of course, the data may change once all patients reach the 60-month completion of the study, but so far, a 20% advantage to the control group is a statistic that I think all breast cancer patients that fit in this category would be willing to accept. The company is now in the process of enrolling between 700-1,000 patients for its Phase III PRESERVE trial. Galena updated at the ASCO that it has 35 sites approved in four countries, and that over 20 sites are now enrolling. Investors expect the company to expand to 100 sites by the end of 2012.
I have always found the valuations of biotechnology companies in the developmental phase to be truly remarkable, and Galena Biopharma is no different. We value a developmental company based on two factors: its likelihood for approval and its potential market if approved. At this point, no one knows with certainty whether NeuVax will be awarded approval. All we know is that it has a clear statistical advantage over standard care, and that more questions will be answered once Phase III starts trickling in.
I think some investors forget that Phases I and II are typically to address safety concerns, find adequate dosing, and collect initial data to develop a Phase III program. Therefore, it is difficult to draw any conclusions or know with certainty whether a drug will succeed or fail. As a result, we can only value a company based on known factors and right now those factors are positive, but could change through the duration of the trial.
The second important factor that determines the valuation of a company is its potential market. The market for breast cancer is quite large, with over 200,000 new cases each year. Although death rates are favorable compared to other cancers, it is the recurrence rates that make a drug such as NeuVax so valuable. At this time, Roche's Herceptin is the largest most revenue-generating drug to address the niche market of recurrence in breast cancer patients. The drug returned U.S. sales of nearly $5 billion last year, while only targeting those patients with IHC scores of 3+. NeuVax is believed to target the remaining 1+ and 2+ patients, in which Galena estimates to be nearly 40,000 patients annually.
If you consider the potential market of NeuVax targeting patients with IHC scores of 1+ and 2+, and then you factor in the booster shots, and finally a potential combination treatment with Herceptin, it is easy to understand why analysts have $4 and $5 price targets on the stock. This would still be a modest valuation at under $350 million, if you consider it is a Phase III candidate. At any given time, we will see biotechnology companies in the developmental phase trade with market caps of $1 or $2 billion, based on speculation alone, and very few have the potential market of NeuVax. Therefore, the cheap valuation must be a result of investors not believing the drug will be awarded an approval. Yet with clinical benefits, such as those announced at ASCO, I am not certain how investors could arrive at this conclusion.
When it is all said and done, only the Phase III results will determine whether NeuVax is awarded marketing approval. The valuation per potential, and data, does not make sense, and is possibly more related to the price Galena paid to Apthera for the rights of NeuVax (roughly $7 million), which is a concern often pointed out by Galena bears. Yet, deals such as this are spread throughout the biotechnology sector, and these drugs often go on to become highly profitable.
For examples of these bargains (as another writer pointed out), one can look at Questcor Pharmaceuticals (QCOR), or the $1 million that Cougar Pharmaceuticals paid to acquire Zytiga before Johnson & Johnson (NYSE:JNJ) purchased it for $1 billion. Regardless of why the Galena Biopharma stock is priced so cheaply, investors will soon be provided with data on a very large scale, and if data is even remotely close to its already-released results, then Galena Biopharma could return market-leading gains for many years.
If not, then the downside is limited, because at this moment, it appears to be a stock with a valuation that is inexplicable. Then again, maybe the stock is in the process of trading higher and will continue for the next several years. After all, it has returned 170% YTD, which is a gain that should satisfy all investors. In the end, only time will tell. Until then, it is definitely worth watching as the company progresses in this late-stage trial. Early entry is the key to large gains for these later-stage biotechs, and time could be waning as Galena's true valuation approaches.
Disclosure: I am long GALE.