Galectin Therapeutics ($GALT) Introductory analysis

*Disclaimer: I am long $GALT with a small position.

Company position: Galectin Therapeutics ($GALT) is a pharmaceutical developer of drugs targeting liver fibrosis and non-alcoholic steatotic hepatitis (NASH), diseases associated with the metabolic syndrome. GALT's main competitor in drugs directly targeting liver fibrosis is ICPT, a small pharma company that recently achieved a wildly successful Phase II clinical trial targeting the farnesoid X receptor; the study was halted early due to the overwhelmingly positive data. ICPT spiked from around $71 per share to around $370 per share, and now holds a market cap of ~ $6B. 

Pipeline: For GALT, the company will be made or broken on the back of its lead compound, GR-MD-02, an inhibitor of galectin-3 proteins, which have been demonstrated to be important in the pathology of fibrosis. 

Recent activity: Today, GALT gave a conference call on the completion of a Phase I trial of GR-MD-02 for the treatment of liver fibrosis in 6 obese individuals. This trial presented some interesting results, which I highlight here, along with the basis of my investment thesis:

• Positives
• Pharmacokinetics look good; dosage could probably be increased 2-4 fold before reaching lowest therapeutic dose that was tested by GALT in mice
• No adverse effects reported
• Indirect score test (FibroTest) improved in patients receiving GR-MD-02
• Hyaluronic acid levels improved in a subset
• General reduction in inflammatory cytokines; improvement of inflammatory milieu
• Fibrosis improvement in patients with worst fibrosis
• Concerns
• Direct biomarker test of fibrosis (ELF Score) not improved with GR-MD-02; company claims a trend to improvement, but this seems to be exaggeration, as p > 0.2; high SD with a not-convincing magnitude of change between the two
• No exploratory cytokines improved; not as concerning, as these are novel and, for the most part, not validated
• No direct measures of liver fibrosis regression, either through biopsy or imaging technique
• One patient was excluded from the FibroTest due to "high haptoglobin which is known for false negative test". As I'm not an expert in liver fibrosis, I can't say if this is commonly done in the field, however exclusions from tests that are only barely significant are typically red flags

Thesis: The Phase I clinical trial was a success. Not a "paging Major Tom, Rockets to the MOON" success, but a success nonetheless: no adverse effects, (seemingly) lots of room to increase dosage of the pharmaceutical, and some of the important biomarkers of fibrosis are improved. Most intriguing is the insinuation by the data that, perhaps, GR-MD-02 will be more effective in treating patients with higher serum ALT. This may be identifying a subset of patients that are likely to be better responders, which may rationalize further statistical wizardry in future trials; this may rationalize the separation of patients into "high" and "low" ALT, allowing for a significant effect in the "high" group, without having a whole-cohort effect. This could be good thing (increases chances of finding positive signal) or a bad thing (reduction in targetable population). Regardless, that's a lot of speculation for a Phase I trial. 

  A new Phase I trial is planned with a doubling of the dosage of GR-MD-02, the results of which should be available around July/Aug 2014. This trial will also use an imaging technique to assess liver fibrosis, which the just-completed trial did not use. It is my opinion that the Phase I trial, with a few more patients and a doubled dosage, should be a fairly binary event, and I outline one of the ways that I'm thinking about playing this below:

Purchase GALT (currently ~ $13.5) in blocks of 100. 

Sell May $17.5 covered calls on GALT. This will give some protection from industry wide frothiness in $IBB. Also, this will give some capital for our calendar collar (I'm not even sure if that's a thing, but it is now).

Sell June $17.5 covered calls on GALT once May calls have expired.

At beginning of July, purchase Sep/Oct $12.5 puts, enough for the entire position (and perhaps a few extra if I'm feeling extra bearish). 

Here are the possible outcomes that I see: 

1) The second part of the Phase I trial is a roaring success; no adverse effects on the higher dosage, large, unequivocal improvements in fibrosis, inflammation, and liver elasticity. Shares spike immediately to ~ $40 pps; still concerns about small  N in phase I trial, and competition with ICPT. Rumors of buyout by other companies (perhaps ICPT?).

2) The Phase I trial is successful; similar reductions in inflammation and various biomarkers of fibrosis in the new cohort, which when combined with old cohort is compelling. One of the measures is flat, such as the imaging technique, leading to rational doubts about the effectiveness of GR-MD-02. Shares float to $22 pps. (I find this result to be most likely)

3) The Phase I trial is a failure; either moderate to serious adverse effects are extant, or the p-values and magnitudes of change are not significant. Any sort of failure should, at this point, send shares down to $1.5 pps.

I really wish I had some more time to talk about this, but I really need to be off to work. Happy investing, and hope to see you again.

JVS

This is a trade analysis, not a recommendation