2023-04-18 19:01:14 ET
Summary
- Galecto (GLTO) is a clinical-stage biopharmaceutical company focused on small-molecule antifibrotic and anticancer agents.
- GLTO has upcoming data readouts in 2023 that could add more evidence to the potential of their therapies, including top-line IPF data.
- Thesis: 1) Clear IPF catalyst in mid-2023, 2) Robust balance sheet and negative EV valuation, and 3) Exciting novel platform with scalability potential.
- The most significant risk is low liquidity; investors would need to put multiple limit buys and buy in small quantities to avoid moving the market.
Company background
Galecto , Inc ( GLTO ) is an underfollowed, European, clinical -stage biopharmaceutical company specializing in developing small-molecule antifibrotic and anticancer agents. The company was established in 2011 by biotech executives and leading scientists in galectin research from Sweden, the United Kingdom, and Denmark. Although it is now incorporated in the U.S., the company operates from its headquarters in Copenhagen, Denmark. The company's primary focus is on Galectin-3, a protein that has been linked to activated myofibroblasts, leading to scarring and high expression in tissue-resident macrophages.
GLTO's small-molecule antifibrotic agents targeting Galectin-3 have shown promise, with early proof-of-concept data demonstrating their efficacy. These include significant reductions in biomarkers associated with fibrosis in the lung for IPF, statistically significant findings for ALT, AST, and GGT in liver fibrosis, and penetration of fibrotic bone marrow in myelofibrosis. Additionally, early pre-clinical data shows reduced tumor growth when targeting Galectin-3 in combination with immune checkpoint inhibition in oncology.
Excellent risk reward with an upcoming clinical catalyst in mid-2023
We believe that 2023 is a crucial year for GLTO, with several upcoming data readouts that could add more evidence to the potential of their therapies. We are especially excited about the top-line IPF data guided for mid-2023, which we believe drives most of the value of the stock and can lead to x2-3 upside considering the negative EV valuation of the company at the moment; the market is ascribing zero value to GLTO's pipeline, and any positive news can drive the stock price meaningfully similar to what happened to Pliant therapeutics (PLRX), 370% gain, after their phase 2a IPF data. Please read our recent initiation article for a more detailed analysis of Pliant therapeutics as a benchmark.
To give more background, IPF is a progressive lung disorder with no known cause that leads to the thickening and scarring of lung tissue. This makes breathing difficult, causing symptoms such as shortness of breath and coughing. The disease can progress at varying rates and can lead to complications such as respiratory failure, pulmonary hypertension, and lung cancer, with a low five-year survival rate. Risk factors for IPF include smoking, family history, and age. While there is no cure for IPF, FDA-approved therapies like nintedanib and pirfenidone can slow the decline in lung function. Other treatment options include antacids, oxygen therapy, mechanical ventilation, and lung transplants. However, the severe side effects of current therapies limit patient compliance leading to a high discontinuation rate, and the unmet need for a novel therapy is extremely high.
In IPF, the company is conducting the GALACTIC-1 study , a randomized, placebo-controlled, 52-week Phase 2b study involving 144 patients across >100 centers. The primary endpoint of the trial is the annualized rate of forced vital capacity ((FVC)) decline over 52 weeks (powered 75% to reach 100mL difference at the once-sided a of 10%, and other key outcome measures include safety, diffusing capacity for carbon monoxide (DLCO), six-minute walk test (6MWT), and quality of life.
Of note, DSMB recommended in March 2021 to stop enrollment of the original 10 mg arm and to stop enrollment for GB0139 3 mg if patients are concurrently taking pirfenidone or nintedanib, which does raise some concern around the safety of the candidate, albeit, seems like the high dose (10mg) and combination with SOC seems to be the key driver of DSMB's concern. Even though 3mg comes out to be safe, if the drug cannot be used with SOC treatments, we are unsure how the drug can be positioned as most patients with IPF are currently on two SOC drugs.
In our view, the fact that the trial was completed without the whole trial being halted is a positive sign; the enrollment completion was announced on August 26, 2022. The company believes this study could be a good starting point for discussions with authorities and that the 3 mg dose could be proven safe given eight subsequent DSMB reviews on trial. If the trial comes out positive, we believe Galecto will be able to jump into a large-scale phase 2b and then one or two large-scale phase 3 studies (with higher powering), which will take ~2 years each trials making us believe that the launch will likely happen post-2027 at the earliest (if things go well).
GLTO has three other ongoing Phase 2 studies already showing early signs of evidence. GB2064 targets LOXL2 in myelofibrosis and has a 4Q23E Phase 2a data readout. End-of-study regulatory discussions for liver fibrosis for GB1211 are expected in 1H23E. While IPF is the primary focus, the management team is also enthusiastic about the potential in oncology. As Galectin-3 plays a significant role in driving anti-tumor responses, and macrophages are a critical driver of this response, we believe it makes logical sense for the company to explore oncology, albeit we do not ascribe too much value until we see at least phase 2 data on oncology and should be considered as an option value.
Financials: negative EV, downside is fairly limited
The company currently holds $ 60M cash (with <$1M debt) and is trading at a negative $12M enterprise value. The company's cash burn ($25-50M per year) would be enough for the company to finish all of its phase 2 trials and enough cash runway for 1-2 years. Also, considering that the stock is trading in the negative EV territory, we believe it is unlikely that the company to raise capital and dilute in the near future unless the data readout is positive and the stock rallies 100-200% from here. Furthermore, even in the worst-case scenario, even if some of the trials don't work out, we believe the downside is fairly limited since the company is already in negative EV territory.
Risks
- Low liquidity: the trading volume for GLTO is tiny, meaning that investors will have a hard time buying and selling the stock and will need multiple days' volume if the position size gets larger.
- Clinical Trial Results: The success of GLTO's clinical trials is not guaranteed, and negative results could significantly impact the company's valuation and future prospects.
- Competition: The biopharmaceutical industry is highly competitive, and GLTO may face competition from other companies with similar products.
- Regulatory Approval: GLTO's products may not receive regulatory approval, which could limit the company's ability to bring its products to market and generate revenue.
- Intellectual Property: GLTO's success is highly dependent on its intellectual property, and any failure to secure and defend patents or trade secrets could result in a loss of competitive advantage and revenue.
- Dilution risk: the company is not cashflow positive; if they exhaust the $60M cash balance they currently hold, we expect the company may need to raise additional capital to finance its operation.
Conclusion
We are initiating Galecto with a speculative buy and holding a small optioned-sized position. Our thesis is threefold, a) a clear IPF catalyst expected in mid-2023 targeting IPF, which is a lucrative blockbuster indication with only two approved drugs; b) robust balance sheet ($60m cash) and negative EV valuation offering good risk/reward set-up (limited downside even if some trials fail, and significant upside if any of the trials come out with any sprinkle of positive data), and c) exciting (yet unproven) platform that can be highly scalable if things work out, with some degree of early stage pre-clinical validation. We believe the risk-reward is highly compelling and plan to increase our position moving into the IPF data readout in mid-2023. Besides clinical trial failure, the biggest risk factor includes low liquidity (low trading volume), which can challenge some investors who want to establish a meaningful position (or exit) without moving the market. For investors who want to establish a position on GLTO, we recommend buying in small tranches with a limit buy.
For further details see:
Galecto: Promising Pipeline And Excellent Risk-Reward