Is the Market Discounting Galena’s Acquisition of Mills?

Source: http://www.bms.com/news/media_library/rd/Pages/default.aspx

What a battleground stock Galena Pharmaceuticals (NASDAQ:GALE) has been. As a writer and regular follower of the markets, I find the action in the name to be quite intriguing. There are ardent bulls, ardent bears, and swing traders placing bets all over the board on this name. In a recent article here at Wall St. Cheat Sheet, I shared with readers a history of the drama surrounding this stock and laid out some reasons why the company has a promising future, in my opinion.

As I look more at the company, the pipeline of products is captivating. The company is developing innovative targeted oncology therapies that address major unmet needs in the industry to advance cancer treatments. The company’s leading candidate for a blockbuster product in its pipeline is NeuVax, a vaccine for breast cancer.  A very interesting video presentation of the science behind the vaccine can be found here.

While the product is several years away from potentially being brought to market, the stock will trade on news-driven events, data updates, etc. But Neuvax isn’t the only product this pharmaceutical company has in its pipeline. Figure 1 (on the next page) details the product pipeline for Galena. There is GALE-301, which is in trials to test for activity against ovarian and endometrial cancers. It is currently selling Abstral, which is a breakthrough cancer pain treatment that will drive revenues and prevent the company from burning cash.

Then, after an acquisition, the company has GALE-401, which is targeting the treatment of essential thromboycthemial. Despite all of the drama I outlined in my last article and the clear risks associated with the stock, I believe the market is steeply discounting the potential of GALE-401.

Figure 1. Pipeline and status of Galena Pharmaceutical’s treatments

galena figure 1

Why do I feel that the market is discounting GALE-401? I mean, after all, the therapy is in its infancy still, as shown in Figure 1. But companies like Galena trade on possible breakthroughs. And that is what GALE-401 (which chemically is Anagrelide-CR) represents. Why? I will admit, a lot has to go right, but if it does, it could provide massive market share for Galena in the essential thromboycthemial treatment market. Some estimates put the market at about $200 million. That is pretty substantial, given this is a rare condition.

It only has an incidence of about 10 to 30 per 1 million people annually. It is characterized by an increased number of platelets in the blood, which help wounds heal by causing clotting. Abnormal blood clotting is common in people with essential thrombocythemia. Clots that block blood flow to the brain can cause stroke. Abnormal clotting in the legs can cause leg pain, swelling, or both. In addition, clots can travel to the lungs, blocking blood flow in the lungs, damaging tissue, causing chest pain, which can lead to difficulty breathing and possibly death.

Oddly enough, although platelets help our wounds clot and heal, essential thrombocythemia can cause abnormal bleeding. Affected people may have nosebleeds, bleeding gums, or bleeding in the gastrointestinal tract. Currently, treatment is limited. Reduction of the platelet count to the normal range can be achieved using hydroxyurea, interferon alpha or anagrelide medications.

That’s where Galena comes in with GALE-401. This novel compound could greatly decrease the side effects of treatment relative to existing anagrelide products. Current anagrelide products have a moderate side effect profile that includes nausea, diarrhea, abdominal pain, palpitations, tachycardia, and headache. These side effects can be severe in some cases and can often limit dose escalation.

By limiting the ability to increase dosage, clinicians can have poor control of the disease, and patients often will stop taking the medication. GALE-401 has a favorable pharmokinetic curve, which will likely limit these side effects while maintaining efficacy. The data has been established in several phase 1 studies. In these early trials, a dose-dependent reduction in platelet count was observed, and importantly, the safety profile of GALE-401 was no different from placebo.

This is critical to moving to phase 2 trials, which Galena is currently planning. Should these tirals be favorable, prepare for Galena stock to rocket higher. Why? The dosing and tolerability advantages could lead to expanding the treatment market to include younger and elderly patient populations who are often untreated.

Mark Ahn, CEO of Galena, had this to say: ”This acquisition is an excellent fit for Galena’s focused business strategy, adding another novel product to our pipeline which strengthens the depth and breadth of our hematology oncology portfolio. [This] is a serious condition in which current agents often have very debilitating side effects. We believe GALE-401 can enhance the therapeutic index for patients reducing the side effects of anagrelide while maintaining efficacy for these patients. With established guidance from the FDA on the development process, we are excited to initiate a Phase 2 study in mid-2014.”

The market seems to think Galena overpaid here. Galena paid an upfront payment to Mills Pharmaceuticals’ owners. Additionally, Mills Pharmaceuticals owners are eligible to receive onetime payments of up to 4 million shares with the achievement of specified regulatory milestones. The owners of Mills Pharmaceuticals are also eligible to receive $3 million upon Food and Drug Administration approval of a new drug application in respect to GALE-401. GALE-401 possesses a broad patent portfolio and provides intellectual property protection through at least 2029.

I do not think the company overpaid to access a $200 million market. Why? Because GALE-401 is an orphan drug, or should be granted such status. Such drugs often lack profit potential for all of the costs that go in upfront. This is likely why the market is discounting the acquisition.

However, while they follow the same regulatory pathway, orphan drug makers often are given slack on the statistical requirements given the rarity of the conditions. With an incidence of 20 to 30 individuals per 1 million population, finding enough patients to enroll can be difficult. Thus, some leeway is given by regulators on the science end. Further, as it is a lock on a market, orphan drug makers can often generate exorbitant revenues per prescription.

Conclusion

Despite the drama surrounding the stock and the back-and-forth of market pundits, the stock of Galena is down almost 50 percent since this acquisition of Mills Pharmaceuticals and GALE-401. To me, this selloff that has occurred after a favorable acquisition of a potential orphan drug for a condition that desperately needs better therapies is an opportunity. A 50 percent selloff in a month generally leads to bounces in share price. Under $4, with all of the potential, Galena is a speculative but good buy.

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