Galena Biopharma's 3rd-Quarter Report Is Nothing Short of Bizarre

By Sean

Image source: U.S. Food and Drug Administration.

Small-cap cancer immunotherapy developer Galena Biopharma is no stranger to controversy. In 2014, allegations emerged that the company may have hired a stock promotion service in an effort to buoy its share price (though these allegations were never confirmed). While hiring stock promotion services isn't illegal, not disclosing the hiring is. Now-former CEO Mark Ahn stepped down just a couple of months after these allegations to "pursue other goals."

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Yet in spite of this controversy, Galena Biopharma operates in the fast-paced immunotherapy space. The ceiling for immunotherapies as single and combination therapies appears limitless at the moment, leading some investors to believe that Galena's lead product, NeuVax, an adjuvant vaccine designed to prevent the recurrence of breast cancer in previously-treated patients with low-to-moderate HER2-expression, could become a lifesaver and profit producer.

Galena's Q3, by the numbers Controversy battles promise on a nearly daily basis at Galena, but all eyes on Monday were focused on the company's earnings release after the closing bell -- a release that I can only coin as one of the most bizarre earnings reports I've ever read.

For the quarter, Galena announced a net loss of $18 million, or an adjusted loss of $0.11 per share. Its net loss practically tripled from the $6.2 million loss recorded in the prior-year quarter, while its EPS loss more than doubled from $0.05 in Q3 2014. Comparatively, Wall Street was looking for Galena Biopharma to lose just $0.07 per share.

Normally, a company's headline numbers (in this case Galena's EPS miss) would be the focus of an earnings report, but Galena's quarterly report made headlines for a far different reason.

Image source: Galena Biopharma.

This is a bizarre move Headlining its report, Galena announced that, following a strategic review, it had decided to divest its commercial business, which consists of breakthrough cancer pain drug Abstral and Zuplenz, a therapy targeted at chemotherapy-induced nausea and vomiting.

Why is this bizarre? Just two and a half years ago, Galena's management team was head over heels regarding the idea of augmenting their pipeline with commercial products to help pave the way for NeuVax and other cancer-focused immunotherapies. Here are comments now-former CEO Ahn made in the press release accompanying Galena's acquisition of Abstral from Orexo for $15 million in March 2013:

Apparently between March 2013 and November 2015, Galena determined that this "cornerstone" strategy was no longer needed, and that building relationships with oncology physicians would be easier sans Abstral.

It's also strange given that Galena just launched Zuplenz as of July 29, after agreeing to license the product for $5 million in cash and stock in July 2014. After just three months on pharmacy shelves, Galena is ready to walk away. Galena announced that its plans to divest its commercial assets should be completed by the end of the first quarter next year.

Current CEO Mark Schwartz had this to say in the press release: "For both patients and shareholders of Galena, there is a much greater opportunity to generate value if we dedicate all of our resources to our clinical programs."

Why make this abrupt change? It would appear Galena is comfortable jettisoning its commercial business for two primary reasons.

First, whether it admits to it or not in its press release, cash conservation is important as a clinical-stage drug developer. Galena Biopharma ended the latest quarter with $34.8 million in cash and cash equivalents, up $11.1 million from Dec. 31, 2014. However, it's burned through much of the $47.4 million raised from a common stock issuance earlier this year, leaving the company's future somewhat clouded. Removing the costs associated with its commercial business should allow it to conserve more of its remaining cash, or at worst redirect its cash toward clinical development.

Image source: Galena Biopharma

Secondly, Galena believes it has a strong enough pipeline that it doesn't need to divert its attention to "small peanuts" such as Abstral and Zuplenz. As I noted, a lot is riding on the success of NeuVax in the PRESENT study. A late-stage success here could be more than enough to push Galena into the black within a couple of years. Full endpoint data isn't expected until 2018. However, two planned interim analyses (one that should yield safety data fairly soon) could give investors some hints of NeuVax's efficacy well before 2018.

Newly published abstracts for GALE-301, a folate-binding protein vaccine designed to prevent the recurrence of ovarian and endometrial cancers, and GALE-302, also a folate-binding protein vaccine, which were presented at the Society for Immunotherapy of Cancer's annual meeting, demonstrate that both therapies were immunogenic and well-tolerated. Galena noted that the optimal vaccination sequence in its studies entailed three inoculations of GALE-301 followed by three inoculations of GALE-302.

Galena's management team aims to push the company's current pipeline from four compounds to as many as eight in the coming years.

Is this the right move for Galena?On one hand I can see why Galena is making the move to divest its commercial business. The move should provide instant cost-savings and devote all of its attention to the development of its cancer immunotherapy pipeline. It's more or less exactly what Galena optimists want to see.

But abandoning a strategy that was so highly touted just two years ago leaves other investors, including me, a bit perplexed. For starters, it doesn't give me much faith that Galena's management team really knows what's best for its shareholders. Just two years ago it believed its commercial portfolio would open doors for its vaccines, and now it's essentially deeming it to have little to no value on its future business. Galena has also liberally sold shares of stock to fund capital raises at the expense of existing shareholders.

Image source: Galena Biopharma.

Even more so, it's odd that Galena would sell its commercial franchise before giving it a true chance to get off the ground. Even though sales of Abstral were regularly coming in below Galena's high expectations at the beginning of the year, they still offered the potential for $30 million to $40 million in annual revenue (in my estimation) by 2018. Along with Zuplenz, Galena could have been generating $50 million or more in sales by 2018. Although $50 million is chicken feed compared with what Galena's immunotherapy pipeline could produce, its upfront investment in both Abstral and Zuplenz would probably have paid dividends in the form of increasingly narrowed cash burn by 2018. In other words, the company will conserve cash now, but it'll still probably be burning a lot of cash two or three years from now that I don't believe it would have been had it kept its commercial products.

As it stands now, I can't guarantee one way or another if Galena's made the right decision, but I stand by my assessment that jettisoning its commercial business so soon after purchasing these two therapies is quite bizarre. This indecisiveness at the top, along with its shrinking cash position, gives all the more reason for investors to wait for tangible evidence of NeuVax's success in late-stage studies before buying into Galena.

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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 servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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