Articles
See All
ON AUGUST 9, THIS LATE – STAGE BIOTECH COULD BE A BIG SMALL-CAP WIN
Late stage biotechs—companies waiting on FDA approval for a drug or drug delivery—or a Phase 3 trial result—can be huge wins or investors.
Galera Therapeutics (GRTX-NASD) is one of those companies, and is typical of what I’m showing my subscribers right now. They have a drug that can potentially combat not only Head and Neck Cancer (HNC) but also chronic kidney disease.
After figuring how and why they failed a previous FDA approval, management and investors are on tip-toe again with an FDA date of Aug 9 for their drug, called Avasopasem.
After failing the first time, in mid 2021, the stock was crushed from $9 – $1. If they miss again with the FDA this August, the stock will likely go lower as they are low on funds. But if they get FDA approval…brave shareholders have an opportunity to make a lot of money very quickly.
Here’s their story:
GALERA THERAPEUTICS (GRTX – NASDAQ)
QUICK FACTS
Trading Symbols: GRTX
Share Price Today: $2.72
Shares Outstanding: 42.9 million*
Market Capitalization: $117 million
Net Debt: -$47 million
Enterprise Value: $70 million
* Does not include 14.3 million warrants exercisable at $1.97 per share
POSITIVES
so many
– Imminent FDA approval decision on lead candidate
– Their drug addresses a $1.5 billion potential market
– Big, big unmet need with no current treatment options
– Small market capitalization
– Phase 3 trial met primary endpoint showing efficacy against placebo
NEGATIVES
– Less than a year of cash on hand
– If the FDA does not approve they will have to raise cash into a vacuum
SUMMARY
I read a while back that one in ten drugs in phase 1 or 2 trials get approved. That is a poor prognosis.
It’s why sometimes the best strategy is simply to bet on a ramp into results.
Biotech stocks, not always but a lot of the time, tend to move up into the release of important clinical trial results or FDA decisions.
That’s what investors look for — to catch that rise and not get caught holding the bag if the trial fails, or the approval does not come to pass.
Of course, if the trial goes your way, you will leave A LOT on the table.
That is the choice investors have here with Galera Therapeutics (GRTX – NASDAQ).
A SIMPLE BET ON APPROVAL
OR
A SIMPLE BET ON THE FOMO
OF POTENTIAL APPROVAL
Galera lead candidate is a small molecule drug called avasopasem. The drug has already had a positive Phase 3 trial (they call this the ROMAN trial) in patients being treated for locally advanced head and neck cancer (HNC).
Avasopasem is used to combat a condition that comes with treatment called severe oral mucositis (SOM). This is horrible side effect of radiation that can even lead to patients discontinuing therapy.
In the ROMAN trial, Avasopasem reduced the incidence of SOM from 18 days to 8 days versus the placebo arm. They also found that severity of SOM was lower, and the onset came later.
A one-year follow-up found that patients also had a greatly reduced incidence (10% vs 20% in the placebo arm) of chronic kidney disease.
In December 2022 Galera submitted a new drug application (NDA) for avasopasem. The NDA is supported by the results of both the ROMAN trial and a Phase 2b trial.
That NDA was accepted by the FDA. It was granted a priority review with a target date of August 9th.
Barring an unforeseen event (that would be bad for Galera’s stock price) we should have an outcome on avasopasem on August 9th.
That means there is about a month and a half for the market to digest the upcoming event.
A few weeks ago I thought that I had missed out on this one. The market ran the stock up from $1.50 to $3.50 over the last few months.
Source: Stockcharts.com
I hesitated buying into that strength, so I waited. My patience has been rewarded. This week the market gave us a buying opportunity with the stock selling off to $2.75.
THE MARKET MAY NOT BE VALUING
THIS ONE CORRECTLY
Even though Galera has run up from the stocks bottom back in August, the market may still not be fully appreciating the data here.
There’s a story here.
Galera was a $9 stock in October of 2021. That month they released their Phase 3 ROMAN data. To just about everyone’s surprise, the data was negative.
Management didn’t have an answer. They highlighted the statistical analysis done by the clinical research organization (CRO) that had dealt with the data. They basically shrugged their shoulders as they were as surprised as anyone.
Time passed and the stock got KILLED in late 2021. Galera traded down to a buck ($1!!) from that $9 level of just weeks before.
Then management came out with a press release.
Source: Galera Therapeutics Press Release
Long story short the CRO screwed up. The data analysis was wrong. The trial had actually met the endpoint.
I have been assured that this is not a taint on Galera management. They trusted their CRO. Everyone trusts their CRO. In this case, the CRO made a mistake. That mistake was corrected and now Galera filed the NDA.
Of course, the stock… well, it has never totally recovered. Once you lose the market’s confidence it is hard to get it back.
But herein lies the opportunity.
THIS IS BINARY
Galera isn’t really a one-trick pony, but for all practical purposes this is a one trick pony.
I’ll explain.
Galera has a pipeline of indications they are targeting with avasopasem. They have some other earlier stage trials with a second molecule, rucosopasem.
Source: Galera 10-K Filing
If the NDA is rejected, Galera does have other irons in the fire to fall back on. There are other ways this drug can succeed and there are other drugs in the hopper.
But as an investor, that is not going to matter. The FDA rejects the drug and the stock is going to get killed.
It comes down to cold, hard cash.
Galera already raised money in February. They issued 14.3 million shares with attached warrants for $30 million.
This was a very dilutive financing. Full warrants attached and the warrants were priced below the shares ($1.93 vs. $2.09) which is always a sign of desperation.
But it gave Galera a bridge. With the cash from the financing Galera had cash and short-term investments at the end of Q1 of $47 million. They are burning cash at a rate of $11 million a quarter.
It’s enough – but only barely. Galera isn’t going to run cash down to zero so for practical purposes we can say they have the cash to get them through the NDA ruling but not much more.
That means that if the NDA is rejected, the market is going to pounce on the stock. It has already seen one very dilutive raise. Another will be assured. I suspect you will be lucky to get out at $1.
BIG UPSIDE IF APPROVED
Galera estimates that the total market opportunity for SOM in patients with HNC is more than $1.5 billion in the United States. This is based on branded supportive care price analogs.
There are currently no FDA-approved drugs for SOM for these patients. If its approved avasopasem will almost certainly become the new standard-of-care (SOC), meaning it will be prescribed regularly.
If approved, other Galera trials with avasopasem get momentum. For example, there are no FDA-approved drugs and no established guidelines for the treatment of radiotherapy-induced esophagitis, which is in Phase 2.
SOM is not just an HNC phenomenon. More trials will follow for other types of cancer.
The picture I’m trying to paint is one with a lot of upside if the NDA is approved.
Which leaves investors with a choice. If you buy the stock, do you wait for the result or take gains off the table ahead of it.
That is going to depend on your risk tolerance. And how much you’ve made.
I can make the case for both. I’ll probably do a little of both.
But let me reiterate, if the drug is not approved, the stock is going to be a mess. So don’t play with any more money than you can lose.
EDITORS NOTE—I have two other biotech stocks in my portfolio — with FDA dates this year (one happening just over a month from now!) Get my full research on these U.S.-listed small cap companies – RISK FREE–by clicking HERE.
