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Shares of Galena BioPharma (NASDAQ: GALE ) have climbed more than 65% over the last month. In regards to its lead product NeuVax, there has been no news to push the stock higher. Instead, it's a change in perception that Abstral might in fact be a strong product that's leading to these gains. Therefore, is Galena a good investment opportunity?
What is Galena?
Galena surged on data last year for its breast cancer vaccine NeuVax, and the initiation of a phase 3 trial, along with news of a partnership with Teva Pharmaceutical.
In 2012, some comparisons to Roche's (NASDAQOTH: RHHBY ) Herceptin began to surface. Herceptin prevents breast cancer recurrence in patients who express high levels of a protein called HER2, and it's the best-selling breast-cancer drug in the world with nearly $7 billion in annual sales.
Hence, Herceptin is very important to Roche, accounting for more than 13% of its annual revenue. This also means that Herceptin is very important to the valuation of Roche, or in supporting its $236 billion market cap.
With Galena's NeuVax targeting patients who have low and intermediate levels of the same protein, NeuVax would actually treat a larger patient population than Herceptin. NeuVax decreased the risk of recurrence by 50% in its overall phase 2 study and 78% in the subgroup being studied in its phase 3 trial. So, it's easy to see why Galena has traded higher in recent years.
NeuVax: The main value driver
On March 18, Galena acquired Abstral, which is a fentanyl product for breakthrough pain that dissolves under the tongue. It has the fastest uptake of any fentanyl product, meaning it delivers breakthrough pain relief faster than similar products.
At the time of the acquisition announcement, Galena traded at $2 per share, or a market cap of $210 million. This market capitalization is what the market had given to Galena based on catalysts and gains in 2012, thus suggesting that all was in relation to NeuVax.
On Nov. 6, Galena announced third-quarter earnings, and was trading around $2.25. Now, given Galena's large gains last year, it makes sense that Galena would see some stock gains as its phase 3 NeuVax study moves forward. Hence, none, or not much, of the stock's gains or valuation was in relation to Abstral or its sales potential.
Abstral: The new valuation creator
Since Nov. 6, Galena has seen its valuation increase 60%, or nearly $150 million. But the big question is: Why?
As with all clinical-stage biotechs, speculation and perception drive value. If a company's product produces good data, its likelihood of an FDA approval increases, which then drives value. Thus after Galena's third-quarter earnings, it now appears that Abstral is going to be a real driver of fundamental growth, which then changed the perception of the drug.
For example, Abstral didn't even launch until the fourth quarter. The company announced on Oct. 3 that the commercial team, manufacturing, and reimbursement support was all in place to launch. The company had set the bar extremely low for Abstral, guiding for sales below $3 million in 2013 and peak sales between $40 and $60 million.
However, in the third quarter, net revenue totaled $1.2 million, or half of the company's full-year goal prior to its official launch. This signals that Abstral might exceed the conservative estimates that have been placed. And since Galena's valuation was hardly accounting for the success of Abstral, the market has quickly revalued the company for the pleasant Abstral surprise.
The Insys connection
The final element to Galena's recent rise is the success of Insys Therapeutics' (NASDAQ: INSY ) Subsys, which is a fentanyl spray to treat breakthrough cancer pain. Insys has seen significant gains after total sales have been $9.7 million, $18.8 million, and $29.2 million for the first, second, and third quarter of 2013 respectively. Hence, Subsys has been a fast-growing success. With that said, many speculate that Abstral could see similar success due to its fast uptake, but still, there was no fundamental proof prior to the third quarter.
With all things considered, it's just as important to note risks with any biotechnology investment. The company is in a phase 3 trial that will take at least two more years to complete. If successful, Oppenheimer predicts that NeuVax's market would be $5 billion globally. However, if the drug fails, Galena's stock would fall significantly, as NeuVax is the key driver of value.
In the last year, we've seen the outcome of clinical trials significantly alter the valuation of a company. We've seen the likes of Vical and Oncothyreon decline more than 50% in a single session on bad data, while others like Acadia Pharmaceuticals are up more than 1,000% since presenting strong data. Clearly, this fact presents both a great amount of risk and reward, thus must be considered.
It's tough to argue that Galena's recent rally is not in connection to sales of Abstral. When you consider the $900 million market cap for Insys, then the $150 million gained for Galena is not unreasonable as it relates to Abstral.
Moreover, Galena's valuation is still allowing just $235 million for NeuVax. This is a product with strong data that could earn billions if successful, using Herceptin's sales as a guide. Therefore, despite Galena's recent run higher, I believe there could be more upside given NeuVax's potential and also taking into consideration the sales potential of Abstral.
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