Could Galena Biopharma, Inc. Be Running Out of Money?

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The biotech sector is, without question, one of the more unique investment opportunities in the market. While businesses in other sectors are typically valued based on their products and services offered, as well as their profits, many biotech companies have little to no products to offer. Instead, biotech stock valuations are predominantly derived from the potential of their drug development pipeline.

Unfortunately, there's one catch with this valuation process: because clinical-stage biotech stocks or early stage commercial biopharmaceutical companies are likely losing money, it means they can run the risk of running out of money. The good news is there are a number of ways for biotech stocks to generate cash, but not all cash-raising methods prove to be good news for investors.

Today, we're going to take a closer look at small-cap biopharmaceutical company Galena Biopharma to get a better bead on what its current cash situation looks like, to determine whether or not it could be running out of money, and to look at ways Galena could reduce its cash burn and/or raise additional funds.

Galena's business focus
Before we dive into Galena's current cash situation and whether or not it's running out of money, it's helpful to first understand the business model of the company.

Source: Galena Biopharma.

Galena's primary focus is to develop immunotherapy vaccines to fight cancer. These are vaccines which stimulate a cancer patients' immune system to better recognize and fight cancer cells. The company's most advanced immunotherapy candidate is NeuVax, which is currently being tested as an adjuvant therapy to prevent breast cancer recurrence in phase 3 studies (the PRESENT trial) with results due out at the end of 2016 or early 2017. In phase 2 studies in patients with low-to-moderate HER2 expression NeuVax resulted in a 78.4% reduction of cancer recurrence relative to the control group after five years.

In other words, NeuVax does have promise. But, does Galena have the resources to make it until early 2017?

Galena's cash position
As of the end of the second quarter Galena Biopharma had $39.2 million in cash and cash equivalents on hand with $10.1 million in debt, for a net cash position of $29.1 million. However, to provide context, this is down from $55.3 million in cash on hand as of March 14, 2014 as noted in the company's fourth-quarter report. 

Where did $14.1 million in cash go over just a few months? Part of that cash went to fund the U.S. licensing rights to Zuplenz, a medication designed to treat chemotherapy-induced nausea and vomiting that Galena expects to launch early next year. The remaining cash was burned through by administrative and marketing expenses, as well as clinical trial costs. Keep in mind, the later stage a clinical trial is the more people it encompasses, and thus the more costly the trial becomes.

Though everything can depend on how tightly Galena controls costs, I'd estimate that Galena could be running out of money as soon as the end of 2015.

How Galena can boost its cash position
But, here's the good news: there are ways for Galena to raise capital and/or lower its rate of cash burn.

Source: Galena Biopharma.

One of the primary ways Galena has been looking to hedge its cash burn is through the acquisition of essentially pharmacy-shelf ready therapies. The acquisition of sublingual cancer pain medication Abstral from Orexo last year and the licensing of Zuplenz give Galena an opportunity to generate revenue now to help offset its administrative and clinical costs. Even though Abstral is looking as if it'll miss Galena's bullish projection of $11 million to $15 million in full-year revenue, combined Abstral and Zuplenz could deliver in the neighborhood of $20 million in total sales in 2015 and perhaps $30 million in 2016. From an EPS loss standpoint this could shrink Galena's net loss in half compared to Galena's full-year results prior to Abstral and Zuplenz.

Source: Galena Biopharma.

It's certainly possible that Galena could also license or partner NeuVax with a larger pharmaceutical company in order to raise cash. However, the prospect of this happening prior to Galena revealing its phase 3 PRESENT results are probably minimal at best. Adjuvant therapies and small-cap cancer drug developers haven't been the most successful combinations over the years, and will likely keep any potential licensing partners on the sidelines for at least two more years.

Finally, Galena can always turn to secondary share offerings in order to boost its cash on hand. This is the type of offering current shareholders loathe because it has the effect of diluting their existing shares. Between 2010 and the end of the second-quarter 2014 Galena's outstanding share count has risen from around 18 million to 118 million. Obviously, Galena's management team has had no qualms about selling its common stock to fund its operations and research and development costs. It's certainly something for current and prospective investors to keep their eyes on.

Could Galena be running out of money?
Now, let's return to, and answer, our original question: Could Galena Biopharma be running out of money?

In the most literal sense of the term I would indeed say that, as of right now, Galena probably doesn't have enough cash to get it through to late 2016 or early 2017 when it's scheduled to report the results of the PRESENT trial. For current investors it likely means Galena will turn to a stock offering once again in order to raise cash. Keep in mind the company does have $4.9 million under a revolving credit facility that it can use as well, but that won't get the company too far from an operations standpoint.

Its true valuation, however, depends on NeuVax. The PRESENT study truly holds make or break potential for this stock, with Abstral, Zuplenz, and even additional share offerings playing only a minor role. While I remain cautiously optimistic on Galena, I also am sticking squarely on the sidelines.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, 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 don't 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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