It has been a fun few weeks here at BuyersStrike! HQ examining Galena Biopharma (GALE). We’ve looked at the lackluster performance of its fentanyl drug Abstral, and Galena’s relationship with fly-by-night stock tout shop DreamTeamGroup.*
Readers may be surprised to learn that, unlike most of the companies discussed on this site that are worth $0.00, Galena has a value. It is not a zero. GALE shares are worth something. Intrigued? Read on…
Today we are going to take a closer look at Galena itself, on a quantitative basis, and answer the question “What is Galena really worth?” It is with sincere hope that by following along and learning how to properly value a company a few sheep will shake off their stupor. The following sell side clowns:
- Vernon Bernardi of MLV & Co.
- Rahul Jasuka of Noble Financial Group
- Chad Messer of Needham & Co.
- Echo He** of Maxim Group LLC
- Joseph Pantginis of Roth Capital Partners
- Edward “Don’t Hassle The” Tenthoff of Piper Jaffray
- Boris Peaker of Oppenheimer & Co.
- and Jason Butler of JMP Securities
should also read along, once they are done giving last night’s earnings to their pimps. They clearly need the lesson.
Introduction:
Valuing Galena is actually a very simple task. We can examine each part on its own and then add them together. Galena consists of the following five parts:
- Cash
- Anagrelide CR (aka GALE-401)
- Abstral
- NeuVax
- FBP Vaccine
Cash:
First, lets look at the balance sheet. At the end of the last reported quarter (9/30/13) GALE had 54.23mm in cash and 9.83mm in debt. This leaves net cash of 44.4mm as of the end of September 2013.
The company has been burning about 8mm a quarter, so as of 12/31/13 we can estimate that they have 36.4mm in net cash.
And, in mid January, just a few weeks ago, they spent $1.6mm upfront to buy Mills Pharma. That leaves 34.8mm in net cash.
Now let’s assume, for the sake of argument, that superstar CEO Mark Ahn and the Galena gang do not waste all of this money, and give them full credit for the cash of $34.8mm
Value of Cash: $34.8mm
Anagrelide CR:
Second, is Anagrelide CR aka GALE-401. How much is Anagrelide CR worth? Well, thankfully we have a very recent transaction, where Galena acquired Mills Pharma, dated January 13, 2014 that pins a pretty exact value on Anagrelide CR, of $1.6mm cash upfront.
As only a month or so has past, it is obvious that Mills is worth what GALE paid for it. If we assume Galena was the high bidder, then in fact Anagrelide CR to any other buyer is actually worth less, but why quibble. Yes, there are some potential milestone payments ($3mm cash and up to 4mm shares) but who knows if they will ever be met? So we will discount the milestone payments, to a very generous $8.4mm. That makes our total value a nice round number.
Value of Anagrelide CR: $10mm
Abstral:
Third, is Abstral. We know that in a recent transaction, not even a year ago, Abstral was sold to GALE in April of 2013 for $15mm. This was 6.17x 2012 revenues of $2.43mm (recall that we examined Abstral revenues here).
We can estimate Abstral revenues, based on prescription data, for 2013 at about $3.75mm gross. and using Galena’s own deal multiple of 6.17x, it is now worth $23.15mm. Please note, this does not take into account the infamous free fentanyl promotion. Net revenues, and thus the value of Abstral, should actually be lower. But we will give Galena credit for the full amount, to err on the side of generosity.
Additionally, there are some royalty payments owed to Orexo, but any new buyer of Abstral would presumably owe them as well, so it is a wash.
Value of Abstral: $23.15mm
NeuVax:
Now for NeuVax. Smart people believe NeuVax actually has a negative value because the company will continually burn cash in development, and it doesn’t work. The following two articles by Adam Feuerstein at The Street.com clearly explain why it will not work:
Breast Cancer Vaccine Doomed to Fail
If you, dear reader, have read the above two articles, and understood them, please skip the next two paragraphs. They are not for your eyes.
If you have not read and understood those articles, go back and re-read them once more. Then please continue reading.
If you are still long GALE after reading those articles twice, you are at least 2 standard deviations to the left of the curve. You need to go back and re-read them yet again. (See what I did there? You were just insulted through statistics. You probably still don’t realize it. That’s also why you are long GALE. Get it now? No? OK, just take your daily Soma.)
At this point everyone should have read each of those articles at least once. Some readers twice, hopefully not many had to read them a third time.
We may proceed.
Obviously, the only people who still think NeuVax will work are the ones who have opened up, said “Ahhhhn”, and swallowed Mark’s Kool-Aid. But for the sake of this valuation exercise let’s give the Galeeediots the benefit of the doubt and pretend NeuVax just might work. What is the value of NeuVax?
Surprisingly NeuVax is very easy to value because there happens to be an almost perfect comparable out there. There is a stand alone, single product public company that is an amazing “comp” to NeuVax. Why? Because the company’s product is a Her2 targeted peptide based vaccine….almost exactly like NeuVax, just targeting a slightly different peptide.
In fact, if you actually believe in the science behind peptide vaccines and NeuVax, then this other vaccine is the superior candidate. It targets the correct peptide to generate an immune response. NeuVax targets p369-377 (aka E75), this other vaccine targets p373–382. It is in trials at the Mayo Clinic right now.
So we have a company with a peptide vaccine almost like NeuVax (but better, if you believe peptide vaccines will work).
A company with a superior Her2 peptide vaccine to GALE’s must be worth more than Galena, right?
Spoiler alert……..it’s not.
The mystery company with the cancer vaccine? It is TapImmune (TPIV) and it sports a monstrous market cap of $3.8mm. Yes folks, that is all a peptide-based Her2 vaccine, in trials at a major institution in the US, is worth. $3.8mm***…which is actually less than the $5.8mm that Galena paid for NeuVax in 2011.
Value of NeuVax: $3.8mm
FBP Vaccine:
Finally we come to the Folate Binding Protein vaccine. This product is another peptide based vaccine, like NeuVax, but targeting E39. Since we just figured out that NeuVax is only really worth $3.8mm based on the comp, let’s assign an equivalent value to FBP.
Value of FBP Vaccine: $3.8mm
Conclusions:
Together we have just valued Galena using their own recent deal multiples and an almost perfect industry comp. Let’s total it up.
$34.80 Cash +10.00 Angrelide CR +23.15mm Abstral +3.8mm NeuVax +3.8mm FBP =75.55mm Total
Galena has 105.2mm shares outstanding. That yields a value of roughly $0.72 per share.
The difference between that value and the market price is what is called here at BuyersStrike! the “promotion premium”.
Perhaps a GALE bull would say we are being unkind, and undervaluing GALE’s assets. That somehow Abstral deserves a higher multiple, equal to that of Insys (INSY)****, which trades at an absurd 11x estimated 2013 revenues of its fentanyl product Subsys.
OK, lets give Abstral a 11x multiple and see how it changes our equation.
11 x 3.75 = 41.25mm. Our new, we-love-Galena-it-is-the-bestest equation is:
34.8 + 10 + 41.25 + 3.8 + 3.8 = $93.65mm. This yields a value of 89c per share.
If one still does not want to accept that Galena’s value is mostly hot air, the only other way to justify GALE’s insane over-valuation (by about 300mm) is to believe that our peptide vaccine comp, TapImmune, is insanely undervalued, and should be worth $150mm. (Recall that we use TPIV’s value twice in our equation).
But even the most cursory examination of TapImmune will show it is clearly not worth $150mm, and therefore….
“So,” you ask, “what does that mean?”
You’re smart. You’ll figure it out.
*This is not the first time Galena has been involved with shady folks on the fringes of the investment world. GALE paid bucket shop Legend Securities for “services” for many years. Read more about Legend in a great piece by Roddy Boyd here. More detail can be found here, as well.
**We’ve missed Echo He. So nice to see her again.
***There is another vaccine in development known as AE37, by lowly Generex (GNBT) but this is not purely a peptide vaccine. It consists of a peptide paired with the Ii-Key protein. Therefore it is not really as good of a comp as the TapImmune vaccine.
****Insys markets a somewhat different fentanyl product, Subsys. Subsys is a sublingual spray formulation of fentanyl base, whereas Abstral is a sublingual tablet of fentanyl citrate. Insys recently received a nastygram from the Feds related to their marketing practices for Subsys.
PHOENIX, AZ–(Marketwired – Dec 12, 2013) – Insys Therapeutics, Inc. (NASDAQ: INSY) announced today that it has received a subpoena from the Office of Inspector General of the Department of Health and Human Services (“HHS”) in connection with an investigation of potential violations involving HHS programs. The subpoena requests documents regarding Subsys®, including Insys’ sales and marketing practices relating to this product. Insys intends to cooperate with the investigation.
Which marketing practices would those be? Possibly similar to these?