On Aug. 15, one of the world's preeminent capital markets investment banks, Cantor Fitzgerald, reiterated its Buy rating and a $4.00 price target on Galena Biopharma (GALE). This comes just two months after the firm's initial coverage on the stock. A $4.00 price for GALE would represent an increase in value of about 140% from its current price. However, the questions investors should ask are: How reliable is a high-price target from Cantor Fitzgerald? What warrants the large increase in value? And how should investors play this rating?
How Reliable Is Cantor?
First, let's address how reliable Cantor Fitzgerald, or any rating firm for that matter, is. Personally, I've always taken upgrades, downgrades, and initiations of coverage with a grain of salt. I prefer my own due diligence, but do acknowledge that these analysts sometimes have access to information and resources that aren't available, or easily available, to the general public -- which is one reason why stocks react so abruptly to ratings. As a result, these ratings can sometimes be used with your own due diligence to aid in the decision regarding an investment, although the quality and accuracy of the firm must be considered.
Financial services firms, such as Cantor Fitzgerald, initiate coverage and upgrades or downgrades on hundreds of stocks per year. Therefore, it would be very difficult to track their overall performance, due to them covering so many stocks and constantly initiating new coverage. As a result, I often Google the performance and read reviews of various firms (in which, I might add, that Cantor appears to be well-respected) and I then track the performance of the first five to seven calls that are shown for a period of six months to one year. Obviously, this strategy is not perfect. It's actually far from perfect, but I believe that by spending too much time researching the performance of firms, you are minimizing your own due diligence into a company and trying to find a firm to choose investments for you. I also ignore the price targets, but rather focus on the performance. That's because the stock reaching the target price is irrelevant, in my opinion -- the direction is what's important.
The Google search phrases I used were "Cantor Fitzgerald upgrades 2011" and "Cantor Fitzgerald initiates coverage 2011." The reason I used these specific keywords is because I wanted to track performance of a stock with a bullish call in 2011. This will give me an idea of Cantor's performance to compliment the positive reviews. The first calls with increased price targets can be seen in the chart below; I have also included the performance of each stock since the call.
Nordic American Tanker
Coventry Health Care
Four out of six isn't bad; however, we must take into consideration that the S&P 500 has increased by more than 10%. But in a way it doesn't matter. When a firm upgrades a stock, it is upgrading the stock from its current price, as almost always the valuation of a company plays a role in the call of an analyst, which can be seen with GALE and Cantor's timing of its upgrade. Therefore, with this very simple strategy, we can see that Cantor has seen success in calling the correct trends of covered stocks -- and in this volatile market, it is not an easy task.
Why Such a Large Premium on GALE?
In regards to GALE, the initial coverage was summarized with Cantor Fitzgerald's comments:
Galena Biopharma is a development-stage company with a clinical candidate, NeuVax, in Phase III testing for prevention of recurrence of breast cancer in women at high risk for recurrence. The concept of using medication to lower recurrence risk is not new (tamoxifen, aromatase inhibitors), but the targeted patient population -- low HER2 expressers -- represents a new paradigm in treating patients. The addressable market is sizable (multi-billion), but Galena and NeuVax's path to Phase III trials has been anything but straightforward. Nonetheless, the shares are modestly valued and incremental news flow combined with NeuVax's market opportunity makes the shares attractive.
In other words, Cantor's coverage and 140% premium is based on the concept that the market for breast cancer is overwhelming in size and that therapies for the treatment of recurrence are common. Yet, the indication for low HER2 expressers would be a new treatment for the recurrence of the disease. In fact, Herceptin, which is used to prevent the recurrence of breast cancer in patients with high levels of HER2, represents only one-third of the market, yet returns revenue of nearly $6 billion. NeuVax, if approved, would control a much larger market share of about 50% of those recovering from breast cancer.
In the Phase II study there were 200 patients treated, and those who received the vaccine saw a 50% reduction in recurrence. The vaccine was even more effective when booster doses were utilized, and also showed impressive initial results in combination with Herceptin leaving open the possibility for several uses of the vaccine. This data and its potential market of billions in annual revenue, combined with a market cap of under $120 million, led to the price target of $4.00, which would be a market capitalization of nearly $270 million (further validating its potential, results, and its Phase III candidate).
On Aug. 15, a little over two months after its initial coverage, the company reiterated its rating/target, and analyst Mara Goldstein stated:
We are updating our financial model to reflect adjustments associated with the separation of RXi. Other than these adjustments, we are not changing our financial projections.
I suppose there are reasons for reiterating a rating. However, the spin-off and dividend payment to shareholders were completed in April of this year. The spinoff was important in GALE separating itself from RXi Pharmaceuticals, as the company is now no longer tied to RXI in any way. Some have pointed to the struggles of RXi as a sign of an underlying problems for GALE, and that its purchase of NeuVax will not result in an FDA approval. The good news is that the results of NeuVax are showing a clinical effect at preventing the recurrence of breast cancer, and the FDA doesn't care that GALE paid less than $10 million to acquire the vaccine. However, shareholders do care, and this fact is perhaps the reason that GALE is not a $400 million late-stage biotechnology company.
If NeuVax would have been developed in-house and not acquired, then I am certain GALE would trade with a much higher valuation to complement its clinical results. It appears that because investors know the price paid for NeuVax, the market puts a value price on its technology. However, keep in mind that several blockbuster drugs were acquired for pennies, such as Cougar Pharmaceuticals acquiring Zytiga for just $1 million, before Johnson & Johnson acquired it for $1 billion. Spectrum Pharmaceuticals (SPPI) has built its entire pipeline and its marketable drugs through cheap acquisitions (which may explain its undervalued price), and Questcor Pharmaceuticals (QCOR) acquired the rights to Acthar in 2001 for just $100,000 (which may be the best). Therefore, value does exist in biotechnology, and some companies are able to find it. Unfortunately, until approved, companies that follow this strategy usually trade below its worth -- and when combined with the negative stigma of RXi, GALE presents an attractive valuation, which is why Cantor Fitzgerald initiated coverage and has already reiterated its price over the last two months, and is also beginning its coverage with such a large premium.
How to Play the Rating
The most important question to consider, after finding a promising biotechnology company that you like, is when to buy, and if it's upgraded, how to play the rating. The answer depends on the investor. Unfortunately, biotechnology stocks in clinical phase are driven by speculation, and all news that could increase its chances of approval cause large movements in its stock. As a result, these stocks are volatile by nature, and often trade in large ranges. Therefore, my suggestion has always remained the same: Never invest large sums of money into any clinical stage biotech company, regardless of its potential; and if you believe in a company, then plan to hold for at least three years.
Also, understand that valuation does not always indicate potential. My personal opinion is that upgrades and downgrades in biotechnology are only useful to help assess clinical data, and price targets should be ignored. In this space the direction can change in the blink of an eye, so prices are difficult, if not impossible, to predict. If you invest small amounts and hold throughout the volatility, you could be rewarded with gains that far exceed the 10%-20% return you may have realized by chasing trends (if the therapy is eventually approved and marketed). Ultimately, the price target is given as a courtesy. What's important is that the potential and valuation of the company demands the attention of well-respected firms, and that you are able to buy at a value presenting price -- because it's the value presenting price that led to the upgrade and, ultimately, attracted the analyst to the stock in the first place.