Galena Showing Similarities To ImmunoGen And Looks To Follow Its Path

Includes: GALE, IMGN
by: Brian Nichols

On Monday morning, Galena Biopharma (NASDAQ:GALE) announced that it had been issued a patent in Japan for its Folate Binding Protein (FBP), for use either alone or in combination with its FBP cancer vaccine, E39. The patent provides exclusivity in Japan until 2022, which is a big step to go along with recent developments surrounding additional patents for the company in the U.S. for NeuVax. Galena's CEO, Dr. Mark Ahn, has often explained his goal is to expand the company's intellectual property portfolio. Although I am not sure how this particular patent fits into the strategy, it still adds value to the company, and I am certain that it is part of the bigger picture.

Up until this point, all of Galena's 230% YTD gains have been a result of its Phase III NeuVax vaccine for the treatment of breast cancer. In fact, some often forget about the company's other targeted vaccine, E39. The E39 vaccine targets Folate Binding Protein, which is over-expressed in ovarian, endometrial, and breast cancers. The company's goal is to prove that its E39 vaccine will be effective in treating the recurrence of these diseases, which would create significant upside value. This potential is in addition to NeuVax, a vaccine with great clinical results that is attacking the significant unmet medical need of low and medium expression HER2 tumors in breast cancer patients. If successful, Neuvax could return billions in annual sales.

Galena's strategy as a biotechnology company is much different than most. Over the last couple of years, Folate has become a very popular choice as a cancer target. Yet, Galena is different because it is using its peptide vaccine to prevent recurrence and is currently in Phase I/II studies to prevent recurrence in ovarian and endometrial cancers. Meanwhile, companies such as ImmunoGen (NASDAQ:IMGN) are using a folate targeted monoclonal antibody, which is in Phase I of development for previously treated ovarian cancer, NSCLC or other epithelial malignancies that over-express FOLR1 (folate receptor alpha). There are also countless other companies in early stages using folate, but Galena appears to be the only one using it to prevent recurrence, which gives the company a unique market opportunity moving forward.

I have often called Galena the "little brother of ImmunoGen." Obviously, it would be a much smaller brother, as Galena trades with a market cap of just over $100 million and ImmunoGen typically maintains a valuation of near or over $1 billion. However, there are a lot of similarities between the two companies: Galena's Phase III candidate, NeuVax, is being developed to prevent breast cancer in patients who are HER2 IHC 1+,2+ (low-intermediate levels). Meanwhile, Immunogen has T-DM1 (Transtuzumab Emtansine (T-DM1), a Phase III candidate targeting HER 2 IHC 3+ in patients with metastatic breast cancer that has progressed after treatment with Herceptin. And as I mentioned, both companies have an FBP, for different purposes that treat different indications, with ImmunoGen's being a Phase I candidate and Galena's being a Phase I/II. Therefore, despite the fact that both target cancer in different ways, the technology is somewhat similar -- maybe not exact, but definitely enough to draw a comparison.

My goal has always been to try and put valuations into perspective. It is difficult to compare two biotechnology companies; however, you can sometimes pair companies and determine whether or not a company is undervalued based on its peers. ImmunoGen is a great company, and will most likely earn an approval for its Phase III candidate. At this year's ASCO, the company was considered a big winner after reaching its interim endpoint in the EMELIA study; leaving most to believe that it will achieve an FDA approval. On the other hand, there is Galena, a much smaller company that is slightly behind ImmunoGen in the approval process. Galena is about 18 months behind ImmunoGen, and is not expected to release its interim data until sometime in 2013.

Back on May 1, before ImmunoGen announced its interim data, the company was valued at $975 million, as investors expected strong results. Over the following two months, the stock traded in an uptrend, due to strong clinical data, and reached a valuation of $1.4 billion by the start of July. If the company wouldn't have announced a public offering, it would most likely still be trading with a valuation near $1.5 billion. The reason for the valuation is because investors now expect the company to thrive if approved. After meeting its interim endpoint, investors are confident that its studies will be a success and that ImmunoGen can enter a multi-billion dollar space with an effective treatment.

At this point, I don't think anyone doubts that T-DM1 will be approved or that ImmunoGen is a great company with a breakthrough technology; however, valuation can often hurt a stock, and investors. Most likely, T-DM1 will be a breakthrough drug; it could reach sales in excess of $5 billion, perhaps even $6 billion. The problem is that it could take four to five years to reach the peak sales, and ImmunoGen only earns a royalty rate of 5% through its partnership with Genentech. Therefore, $300 million is ImmunoGen's max in terms of revenue from sales (most likely). Although it will have particularly high margins, it will be important that the drug expands into first-line breast cancer, and that the company develops its folate candidate so that it can create additional revenue, which I believe, is where the true value lies for this company.

I believe ImmunoGen could reach a valuation of $4.5 billion at some point in the next five years, based on net income of $180 million, trading at 25x earnings, which would be expensive, but should be expected in an overvalued biotechnology space. Hence, over a period of several years, the stock could present significant long-term upside. If it meets such high expectations, and can reach profit margins between 50%-60%, the valuation is most likely attainable. A lot of questions still remain. If T-DM1 does not live up to high expectations, and only reaches sales of $3 billion, then ImmunoGen would be significantly overvalued, and would not be presenting much in terms of upside from its current price.

Right now, it's difficult to predict the strength of sales for T-DM1, as we must also account for competition with other drugs, such as GlaxoSmithKline's (NYSE:GSK) Tykerb, and any newer drugs that may come behind it, or currently approved drugs that may seek second-line breast cancer therapy as an indication. Galena, on the other hand, is in Phase III studies with its candidate NeuVax and is not competing with these drugs, as its vaccine is aimed at preventing recurrence -- and so far, it has been effective.

In Galena's Phase II study of nearly 200 patients, the company met its primary endpoint of disease-free survival. In the vaccinated group, at both 24 and 36 months, the recurrence rates were 0% versus 22% for the control group. And at 60 months, the vaccinated group reflected a recurrence rate of 5.6% compared to 25.9% in the control group. Now, the company will more than triple the size of its study in the Phase III PRESERVE trial, but its endpoint of disease-free survival will remain the same. This is a major win for the company, as its goal is to have comparable numbers on a larger scale.

If approved, Galena's NeuVax has the potential to reach sales comparable to ImmunoGen's T-DM1, or perhaps even more because of the additional uses of NeuVax. It is currently being tested alone in the Phase III trial, in combination with Herceptin, and as booster shots, which could provide significant long-term revenue if approved. In all three studies, the group with NeuVax showed significant progress in terms of disease-free survival. Now, with the Phase III clinical in full swing, the company is expected to announce interim data sometime in 2013. If the data is positive, this $100 million company could continue its rally, to a large degree, as it's already traded higher by 230% in 2012.

The bottom line is that T-DM1 is all but a guaranteed FDA approval, but still faces challenges due to a wide range of revenue possibilities. The stock could very well be significantly overvalued and never post revenue in excess of $100 million, or it could reach sales of nearly $300 million, yielding upside potential of 300%. The range is wide. Galena is a bit riskier, as its FDA approval is not a guarantee. However, it did have positive results in a large Phase II trial, and I see no reason to suggest that its Phase III trial will not produce similar results; and if so, then an FDA approval may be imminent. As a result, it's a situation of risk vs. reward; and considering its current valuation and its clinical results, the risk is small, but the reward could be significant.

As for now, Galena is still behind ImmunoGen in the clinical process, but with all things considered, I don't believe it's so far behind that it validates a market capitalization of roughly 10% of ImmunoGen's. Both companies are attempting to aid in the fight against breast cancer, and both show significant advantages over standard of care treatments. ImmunoGen's interim results were very impressive, and Galena is looking to nicely complement ImmunoGen as it enters a space with a large unmet medical need.

Despite the questions, there is a lot of potential for Galena in the space. When you consider that both companies have a folate candidate, the potential for ImmunoGen to enter first-line therapy, and Galena to market NeuVax alone or in combination with Herceptin, the sky looks to be the limit. And because of valuation, and ImmunoGen's partnership, I'd say that most upside would be speculative, and will occur in the next year in anticipation of an FDA approval. However, Galena could very well trade with significant gains if it continues to meet its endpoint (which was met in Phase II), and close the gap over the next year as the company updates investors on the trial and prepares to release interim data that will forever change its future, one way or the other.

Disclosure: I am long GALE, and may initiate a long position in IMGN over the next 72 hours. The material in this article is intended for entertainment and educational purposes only, and should not be used in making any investment decisions