Ignore the Drama: Here’s Why Galena Is a Good Buy

source: http://printers.iyogi.com/files/2012/07/Chemputer-3D-printer-that-can-print-pharmaceuticals.jpg

Let me start off immediately by saying that I hold no position in Galena Pharmaceuticals (NASDAQ:GALE) and have no plans to invest in the name. I just don’t have the stomach for the volatility. I tell you this because there has been a lot of drama surrounding Galena Pharmaceuticals in the last two weeks, and a full disclosure is warrented. There have been a number of negative ‘hit’ pieces published of late in response to an alleged stock promotion scam involving the company in addition to criticisms over its growth potential. I believe for the long-term speculative investor, Galena actually presents a high risk, but a very high reward play should the company meet its goals. Let me start by recapping the timeline for February.

Galena had risen through 2013 after promising data was released, in addition to positive analyst coverage as well as positive blog commentary. On February 1, an article was published suggesting the stock was overvalued. At the time, Galena was trading at $5.27 a share. Issues raised in the article — which I believe we overblown — included Galena’s potentially blockbuster cancer vaccine, Neuvax, as being unable to generate revenues for the company. It also slammed Galena for being unable to enjoy exclusivity and was facing patent expiration. The latter is true. The author went on to argue that Galena’s pipeline and partnerships were essentially a façade and would add little value to the company.

I disagree. Two major acquisitions — that of Abstral for cancer pain and the purchase of Mills Pharmaceuticals — were completely downplayed despite the growth this would provide Gale. One legitimate issue raised was that of paying for stock promotion (more on this later in the article) and a wave of insider selling. The insiders did sell; Gale had tripled in price and so a wave of selling occurred to lock in gains. It should be noted that options were also exercised. Whether this is a red flag or not is up to the investment community, but fundamentally, I do not view this as an issue with the company. Rather, it harnessed the massive increase in price expecting a pullback.

On February 4, an article in defense of Galena Pharmaceuticals was released. In this piece, the author reached out to an executive, Jason Rando at Tiberend Strategic Advisors, the PR firm that handles Galena. As such, the author was granted an interview with the CEO of Galena, Mark Ahn. This led to some real clarity.

When asked about the insider trades, Mark Ahn stated that, “I’ve been a board member since 2007 and CEO since 2011, and invested my own money in the company at inception and have purchased shares along the way. We’ve grown the company from $20 to $500 million market cap. I sold less than 20 percent of my equity position to diversify for my family. I’m contracted as the CEO and fully committed to the company’s success and building significant further value for all shareholders.”

In response to a question regarding patent protection, Mark Ahn said that, “NeuVax has a broad family of patents that extend our intellectual property protection through at least 2028. In addition, we believe NeuVax is eligible for 12 years of data exclusivity under the Patient Protection and Affordable Care Act.”

I would encourage readers of this article to read that entire interview. The last quote worth sharing is on the growth of the company, a primary reason to buy. Mark Ahn stated, “We have grown from only NeuVax in 2011 to having four products in five clinical studies in 2014. Our strategy is to build value for patients and shareholders by Commercializing Abstral sublingual tablets, advancing our lead product candidate, NeuVax currently in its Phase 3 randomized, multicenter study in 700 patients under the FDA-approved Special Protocol Assessment, continuing enrollment in our ongoing Phase 2b randomized, multicenter clinical trial expected to enroll 300 patients to study NeuVax in combination with Herceptin, [working on] the Phase 2 GALE-301 cancer immunotherapy trials in ovarian and endometrial cancers and initiating our Phase 2 trial with GALE-401 which we acquired through the acquisition of Mills Pharma in Jan 2014, for essential thrombocythemia.”

A second positive article expanded on the growth pipeline for Galena on February 5. In this piece, financials of the company were discussed as well as plans for generating revenue for the company. The author laid out potential market share to be taken and markets where the products could be sold. I encourage you to read this piece, and I fully agree with the conclusion. The author states the following.

“It may take a little more time to get there, but with three strong drugs in its pipeline (Abstral already to market), the potential revenue base can conservatively be estimated at $160 million between the three.The company appears to be managed well, has minimal debt compared to the industry as a whole and a strong asset to liability ratio which is important for small companies like this. This would make a good long-term growth investment for those who enjoy this industry. Its present drug, Abstral, could potentially bring the company into profitability by itself before the other two drugs are introduced to the market in the coming years ahead.”

This article and the former interview article took the stock back above the $5.00 mark. Then, the massive titanic of a hit piece was released. While it was factual in nature, it implicated Galena, a stock promotion company known as the dream team and Seeking Alpha. The author cites that because of this promotional campaign, Galena shares tripled in value from this summer. I will point out that there have been dozens of pieces published on this company, not just the ones published by the dream team. It turns out that in July 2013, Galena paid $50,000 to a subsidiary of The DreamTeam for eight months of advertising, branding, marketing, investor relations and social media services.

The author contends that, “Galena was promoted on many of the DreamTeam stock-touting Web sites to create market buzz about the company to a new group of investors,” according to an internal document. As part of this campaign, DreamTeam published favorable articles about Galena on Seeking Alpha on August 7, 2013 and November 22, 2013. The articles were published anonymously under two pseudonyms by the same individual. Once discovered, the articles were pulled. News of this story sent shares of Galena plummeting 20 percent – even though it has nothing to do with the future of the company.

After rebounding a bit the last two sessions and stabilizing, a hit piece was released this morning. The title suggests that it would be a deeper looking into the controversy. In the article, it summarizes the situation of the stock promotion, then goes on to lambast the company because it is still in trial stages and will have little revenue. The article cites that Neuvax may not be up for review for another eight years. Rather than discuss the acquisitions and future potential of the company, the author concludes that, “Overall, I think investors are beginning to wake up to the significant problems at Galena and the stock is going to continue to head lower. I personally think that anything over $1.75 is froth, and think the stock might even end the year below $1.”

Please note, there is no basis for this stock target.  It is just based on what the author believes the stock should trade at since the company is growing. Now, with these two recent pieces, the stock is trading at a bargain of $3.40 at the time of this writing.

Why I think it’s a buy

Despite all of the drama surrounding the stock, this is a real company with real drugs. The stock is not a scam. Real stock scams are often of publicly traded companies on the OTC markets that offer no real tangible products, have no revenues to speak of with very few employees, limited SEC filings, an inability to reach anyone at the company with the stock ticker promoted all over every page of the company website, and frequent fluff releases to drive the stock higher. These are the scams to watch out for, and hardly describes Galena. It does have the potential to be a blockbuster stock. In fact, when discussing biotechs around $5.00 with massive upside potential, 24/7’s Lee Jackson stated that Gale “may be the home run that biotech investors are looking for,” and the stock may be an acquisition target.

Further, Galena is morphing from a simple research and development stage company into a revenue generating biotech play. Galena’s revenue in the third-quarter 2013 was padded by Abstral. It can only get better after the recent acquisitions. Even though it is now producing revenue, the company is still a long-term growth investment because it will take a little bit more time for revenue to outgrow expenditures. Galena is in decent shape cash-wise with about $31.5 million in cash and equivalents. According to this recent piece the company spends about $2 million per month. By bringing in revenues from other sources, the cash burn rate will slow, allowing Galena to continue its work without the need to raise cash. I think NeuVax has a great future, even if it is years down the road.

Why this stock should trade over $5.00 now is the Mills Pharmaceuticals acquisition. It alone is an investment in a market that could potentially reach $200 million in the United States alone given it targets a rare condition with little treatment options. Galena is poised to take significant market share when this comes to market. Abstral will continue to pull in revenues. What investors aren’t factoring in are future revenues, future acquisitions, and future research and development breakthroughs. The company’s existing pipeline warrants a buy. The future of the company and possible new developments can propel this stock into the teens by 2015. Investors sentiment will determine this possibility, but unlike most biopharma companies of Galena’s size, this company has multiple promising drugs and sources of revenue.