Galena Biopharma Inc. Imploded in March -- Here's Why

What: Shares of Galena Biopharma , a predominantly clinical-stage biopharmaceutical specialist focused on developing novel cancer vaccines, sank 23% in March (according to data from S&P Capital IQ) after the company reported fourth-quarter earnings results and announced a common stock offering.

So what:Generally speaking, clinical-stage biotech stocks usually get a pass around earnings time, but Galena's purchase of breakthrough cancer pain drug Abstral in 2013 was intended to generate revenue and reduce its cash flow burn. Abstral generated $9.3 million in total sales for the year. Although this was "in-line with estimates," per Galena's fourth-quarter earnings press release, it was well below the $11 million to $15 million in sales outlined in its fourth-quarter 2013 press release. The implication here is Abstral sales are expanding far less rapidly than expected, and thus Galena's cash burn might not lessen as quickly as originally projected.

The other, more prominent drag on Galena's shares last month was the sale of approximately 24.4 million shares of common stock alongside roughly 12.2 million shares worth of warrants with an exercise price of $2.08. The offering raised $35.4 million in net proceeds, which the company will use to finance operations, but it was another dilutive offering to existing shareholders.

Now what: The $64,000 question here is whether the 23% stock drop is a glaring buy opportunity or a red warning flag to keep your distance.

Source: Galena Biopharma.

On one hand, the clinical data from its midstage study involving lead drug NeuVax was stunningly good. NeuVax, a cancer immunotherapy designed to work as an adjuvant to prevent cancer recurrence in breast cancer patients with low-to-moderate HER2-expression, provided a 78.4% clinical benefit in its phase 2 study. Cancer recurred in only 5.6% of NeuVax-treated patients over a five-year period compared to 25.9% of the control group that didn't receive NeuVax. If successful in its ongoing phase 3 PRESENT study (where top-line results are due in 2018), Galena could quickly become profitable and would be an incredible bargain here.

On the flip side, Galena does not have many catalysts over the next three years, and what catalysts have emerged have been of the unpleasant variety. Even with Galena's recent common stock offering, it will likely need to hit the market again in search of additional financing before its 2018 data reveal. Additionally, Abstral isn't living up to management's expectations thus far. Lastly, small-cap biotech stocks have a very bad track record both in phase 3 trials and when trying to gain FDA approval for cancer drugs.

I believe the uncertainties outweigh the rewards at the moment, and would suggest even risk-tolerant investors stick to the sidelines until we have a better read on NeuVax.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. 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.

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