2 Surging Biotech Stocks: Ariad and Galena

Source: http://www.flickr.com/photos/amadika/

Source: http://www.flickr.com/photos/amadika/

Although it seems like every biotechnology stock is surging to new highs in the current environment, investors should still try to identify stocks that have significant potential in their respective niches. Two stocks that stand out as having a great chance for continued success include Ariad Pharmaceuticals (NASDAQ:ARIA) and Galena Biopharma (NASDAQ:GALE). Below are several reasons why investors should consider both of these stocks.

Ariad Pharmaceuticals is an integrated global oncology company focused on transforming the lives of cancer patients with breakthrough medicines. The company is working on new treatments for various forms of chronic and acute leukemia, lung cancer, and other difficult-to-treat cancers. The company’s research and development process focuses on developing small-molecule drugs that can overcome resistance to the available treatment options available to cancer patients.

Ariad Pharmaceuticals has been one of the most highly followed and actively traded stocks over the past two months. Back in the fall, shares of Ariad were trading in the 20s. Unfortunately, in October, the FDA placed a clinical hold on all new patient enrollments in clinical trials of Iclusig. Iclusig is a kinase inhibitor that targets abnormal tyrosine kinase that is expressed in Philadelphia chromosome positive acute lymphoblastic leukemia and T315I-positive chronic myeloid leukemia.

Shares of Ariad were crushed after the announcement and eventually reached a 52 week low of $2.15. This was a shocking outcome for a company that had been performing so well. Fortunately, shares of the company have bounced back hard since the low. Shares have now surged by several hundred percent on a few extremely positive developments:

  • October 29 – Sarissa Capital Management LP, a hedge fund run by Alex Denner (Carl Icahn Protégé), announced that it had purchased around 11.5 million shares of Ariad Pharmaceuticals.
  • November 22 – CHMP of the European Medicines Agency gave a positive opinion regarding the continued availability of Iclusig in the EU for use in patients for its authorized indications.
  • December 20 – The FDA approved revised U.S. Prescribing Information and a Risk Evaluation and Mitigation Strategy for Iclusig that allowed Ariad Pharmaceuticals to immediately resume its marketing and commercial distribution.
  • January 24 – There was a report issued by the UK’s Daily Mail that suggested that several larger healthcare companies may have some interest in acquiring Ariad. Jim Birchenough, an analyst at BMO Capital Markets, confirmed that Ariad’s assets are likely to attract large pharma interest.

There have been some reports issued since then suggesting that a takeover isn’t likely. However, the company is still substantially undervalued compared to where it should be. Additionally, Sarissa Capital Management, the fund that owns approximately 11.5 million shares of Ariad, is an activist hedge fund. This means that they are likely pushing for takeover as well.

Another company that is generating substantial investor interest is, as mentioned previously, Galena Biopharma. This biotech develops innovative, targeted oncology treatments that address major unmet medical needs to advance cancer care. The company already has an FDA approved product called Abstral. Abstral is a sublingual (under the tongue) fentanyl tablet indicated for the management of breakthrough pain in patients with cancer. Commercially launched in October 2013, Galena hopes to generate significant revenue through this product, which can be used to fund the company’s extremely promising clinical trials.

The company has built a pipeline that is pursuing treatments for several unmet areas of medical need. The trials in progress include:

  • NeuVax — Breast Cancer — Phase 3 Trial Ongoing
  • NeuVax + Herceptin Combination — Breast Cancer — Phase 2 Trial Ongoing
  • NeuVax — Gastric Cancer — Phase 2 Trial Planned
  • Gale-401 — Essential Thrombocythemia — Phase 2 Trial Planned
  • Gale-301 — Ovarian and Endometrial Cancer — Phase 2 Trial Ongoing

Given that pipeline and those major areas of unmet medical need, it shouldn’t come as a surprise that Galena shares have increased by more than 205 percent over the past year. Shares were actually much higher a few weeks ago, but the general market concerns have caused shares to slide. That recent slide represents an excellent opportunity for new investors to get in at an attractive valuation.

There are several reasons why the recent slide presents an attractive value point for new investors:

  • Pipeline Market Potential
  • Partnerships
  • Balance Sheet

When evaluating a small-cap biotechnology company such as Galena, investors should look at the potential market size of the pipeline, the partnerships that the company has struck, and the balance sheet strength. Galena is excelling at all three of those components.

The market potential of Galena’s pipeline is staggering. Among all of the company’s indications, the combined market size is $27.1 billion. That includes the following estimates:

If Galena can take just one of its candidates through the approval process, investors are looking at a potential billion dollar biotechnology company. With the company currently valued at just $555 million, investors could be looking at a substantial return on positive results.

In addition to the potential market size, the partnerships that Galena has reached are intriguing to say the least. The three notable partnerships are:

  • Teva Pharmaceuticals (NYSE:TEVA) — This partnership will allow Teva Pharmaceuticals to commercialize NeuVax in Israel. Teva will assume responsibility for registration in Israel and also provide financial support for local development and commercialization. Galena would generate significant royalty payments under this agreement.
  • Roche Pharmaceuticals (OTC:RHHBY) — Although not technically a partnership, Roche did provide partial funding to the clinical study involving the combination of NeuVax + Herceptin. This is intriguing because if the trials prove successful, Roche may be interested in an official partnership that would likely result in hundreds of millions coming to Galena.
  • Dr. Reddy’s Laboratories (NYSE:RDY) — Galena Biopharma and Dr. Reddy’s announced a strategic partnership for NeuVax in India. Under the agreement, Galena is going to license the commercial rights of NeuVax to Dr. Reddy’s in breast and gastric cancers. Dr. Reddy’s will also lead the development of NeuVax in gastric cancer.

While these partnerships don’t guarantee positive results, they certainly are a positive foreshadowing of what’s to come.

The third aspect that makes Galena Biopharma stand out as a strong investment opportunity, as mentioned, is the company’s balance sheet strength. As of the end of the third-quarter, the company had $51.5 million in available cash. With a current monthly burn rate of approximately $3.1 million, the company should be in strong financial shape for at least the next 15-18 months.

Both Ariad Pharmaceuticals and Galena Biopharma represent strong companies that investors should certainly consider. Both companies have their set of risks, but the potential rewards that could come in the future are certainly attractive.

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