It pays to read the fine print.
Galena Biopharma (NASDAQ:GALE) reported its fourth-quarter results after the market closed on Monday. There were plenty of financial numbers to digest, of course, and a few interesting updates on the company's products and leadership team. The biggest news, though, didn't make the earnings announcement press release at all and wasn't mentioned until the bottom of page 37 of Galena's 10-K filing to the SEC.
What was that big news? Galena revealed that it learned in February that the SEC is investigating "certain matters related to our company and an outside investor-relations firm that we retained in 2013." The biotech stated that it has been in contact with the SEC and is cooperating with the investigation. Galena's shares dropped more than 9% in after-hours trading on Monday.
Postscript from posts
The two sentences in the 10-K seem sort of like a postscript in a letter: "P.S. --By the way, we're under investigation." The federal investigation postscript appears to be related to several online posts made earlier this year.
On Feb. 12, The Street's Adam Feuerstein reported that The DreamTeam Group, a stock-promotions firm, published multiple online articles touting Galena under pseudonyms that made the articles appear to have been written by individual investors. He also noted that insiders with the biotech made millions of dollars in January by selling shares after the stock tripled in value with assistance from the promotions. Galena's stock nosedived on the revelations.
Galena responded a couple of days later in a letter to its shareholders. CEO Mark Ahn stated that Feuerstein "clearly has an agenda when it comes to Galena." Ahn acknowledged that the biotech had previously engaged The DreamTeam Group and that insiders had sold shares in January. However, he said Feuerstein's accusations were "specious and conveniently arranged to create controversy."
This story continued last week when an investor, Richard Pearson, wrote in an article published on the website Seeking Alpha that The DreamTeam Group offered to pay him to promote Galena and CytRx Corporation (NASDAQ: CYTR). Seeking Alpha pulled several articles from its website following Pearson's allegations. Several other online financial websites, including The Motley Fool, have also removed articles related to this controversy.
Signal or noise?
In that letter to shareholders, Ahn dismissed negative articles as "noise" to his company. The question for investors is whether he's right or if the SEC investigation is really more signal than noise.
Galena doesn't appear to be taking the SEC investigation lightly. The company announced the addition of Irving Einhorn to its board of directors. Einhorn is a former regional administrator with the SEC and has served as an attorney specializing in securities enforcement and compliance.
That said, there is at least a partial reason this biotech stock racked up big gains in the fourth quarter of last year. Galena could have a winner with NeuVax, a cancer immunotherapy that is in phase 3 clinical studies.Teva Pharmaceuticals (NYSE:TEVA) acquired the rights to market NeuVax in Israel last December. The financial details of the deal weren't announced, but Teva will pay royalties to Galena if the drug gains approval.
More recently, Dr. Reddy's Laboratories (NYSE:RDY) gained the rights to market NeuVax in India. As with the Teva deal, few financial details were announced regarding the Dr. Reddy's agreement. However, Galena stated that it would "receive development and sales milestones, as well as double-digit royalties on net sales."
Teva and Dr. Reddy's weren't interested in NeuVax for nothing. Earlier clinical results showed promise. At least one analyst, Zacks' Grant Zeng, thinks the drug could easily become a blockbuster if it secures regulatory approval.
I suspect they're all correct in their outlooks. If NeuVax lives up to its potential, the slamming of shares resulting from the SEC investigation could prove to be overdone. However, my investing style tends to be somewhat cautious, so I'll hold off on taking action with Galena. And I'll make sure to read the fine print.
Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.