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Do Low Expectations Set the Stage for Large Post-Launch Gains?

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Some of the best performing biotechs of the year have come as a result of product launches. Consequently, product launches in biotechnology have also created some of the biggest losses. Companies with low expectations tend to perform better, and for this reason, investors are closely watching Galena Biopharma (NASDAQ: GALE  )  and its drug launch of Abstral.

Low expectations equal big gains?
Last Thursday, shares of Galena Biopharma rallied more than 6% after the company announced its official launch of Abstral, a drug for breakthrough cancer pain. Abstral was found in pharmacies last month, but only recently were the commercial team, reimbursement program, and distribution network all assembled.

Now, expectations for Abstral are virtually non-existent, and investors should like that. For example, Aegerion Pharmaceuticals (NASDAQ: AEGR  ) launched its drug Juxtapid earlier this year, which treats a rare cholesterol disease called homozygous familial hypercholesterolemia.

Exactly one year ago, Aegerion traded with a market cap of $400 million, thus showing the low expectations for Juxtapid. Yet, one year later Aegerion has 215 people on its drug, as of July. The company had only guided for 200-300 patients for the entire year. Therefore, shares have exploded, and Aegerion now trades with a market cap near $3 billion.

Another example is Santarus (NASDAQ: SNTS  ) and its drug Uceris, which treats mild forms of ulcerative colitis. While there are 700,000 annual cases of the disease, expectations for Uceris were very low.

Prior to its launch in the first quarter, Santarus was very hesitant to give any guidance, speak of expectations, or even discuss future indications. In fact, not many analysts had peak sales estimates on the drug, but some were below $300 million and only $20 million was expected for the entire year.

Now, after six months, sales have topped $22 million and peak sales estimates are higher, even reaching $500 million, according to some analysts. To put Uceris' performance in perspective, it launched the same time as Ariad Pharmaceuticals' Iclusig, a leukemia drug with peak sales over $1 billion, but Iclusig has produced sales of just $20 million in its first six months and the drug's safety issues could halt future growth.

As a result, shares of Santarus have rallied 110% in 2013, and many are optimistic of its long-term outlook. Now, I am not suggesting that Abstral will become either Juxtapid or Uceris. However, the expectations for Abstral appear to be far lower than either of the other noted drug launches.

Why can Abstral outperform?
Abstral is a fentanyl-based product, which is a $400 million market in the U.S., according to Galena. The company has guided for sales of $1.5 million, $10 million, and $40 million-$60 million in 2013, 2014, and in peak sales, respectively. While this seems very mediocre, there is reason to believe that actual performance will be far greater than expectations and that Galena is cutting itself short.

First off, Abstral has the fastest absorption and relief of pain compared to other drug in its class, in just 5-10 minutes. For cancer patients with breakthrough pain, rapid relief is the sought benefit. Next, Abstral has already had some commercial success.

In Europe, where Abstral is marketed by ProStrakan, the drug achieved full-year sales of $54 million. In the fourth quarter of 2012, it saw year-over-year growth of 42%  and continues to see 30% growth in 2013. Therefore, Abstral has a 30% market share in Europe and continues to grow. Galena is guiding for just 10%-15% of peak U.S. market share.

The final point to be made is the success of competitor Insys Therapeutics (NASDAQ: INSY  ) . Insys markets Subsys, which is a fentanyl spray used to treat the same indication as Abstral. The only difference is that Abstral dissolves under the tongue and is absorbed faster. 

In regards to Insys, its stock has traded higher by more than 400% in the last 12 months. The reason is because of Subsys: In the second quarter, its sales grew 90% to $18.5 million compared to the first quarter. Hence, Subsys has grown rapidly, beyond low expectations, and Insys has returned incredible gains. This fact further adds to the belief that a fentanyl product can perform well in the U.S. market, which is good for Abstral. 

With that said, Galena has set the bar extremely low in my opinion, and with a market cap hovering around $200 million, the stock looks relatively cheap to me. If Galena can replicate the performance of its European peer and come close to the performance of Subsys, then peak sales of $120 million with a 30% market share is possible.

Final thoughts
Ironically, Insys was a $200 million company prior to its first-quarter results with Subsys, which is near to where Galena is valued at the start of its launch of Abstral.

Right now, Galena is estimating conservatively and looks to be priced cheaply. However, it is important to remember that Abstral is icing on a larger cake. The company still has its phase 3 breast cancer drug, NeuVax, which prevents recurrence and did so by nearly 80% compared to the control group in its phase 2 trial.

Looking ahead, Galena will be presenting interim results in the next six months and has a launch that could outperform conservative expectations. Over the past year, we have seen companies with low expectations upon launch, such as Aegerion and Santarus, performing significantly better than the likes of Arena Pharmaceuticals, Amarin Corporation, and Ariad Pharmaceuticals.

Originally, the launch of Abstral was just seen as a way that Galena could raise extra money to prevent further dilution while developing NeuVax. However, as the launch begins, Abstral now looks like a future driver of stock performance.

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