Shares of Galectin Therapeutics (GALT) were punished on Tuesday, July 29, after the company reported phase 1 results of its NASH trial with patients in the 2nd cohort. The stock tanked as much as 60% on the news. Many bearish articles from various writers on Wall Street described GALT's drug as having failed. However, we disagree. 

GALT is targeting a fatty liver disease known as NASH (nonalcoholic steatohepatitis), which is a growing problem. This indication is being pursued by many small cap biotechnology stocks because there are millions of people in the US struggling with this disease.

Going forward, investors should not write off GALT's drug. First, in the pre-clinical trial for GR-MD-02, Galectin used a dose of 8 mg/kg - a higher dose than the phase 1 study reported on Tuesday which used 4 mg/kg. In the phase 2 trial, the company is going to increase the dosage to 8 mg/kg. 

Secondly all biotechnology companies testing drugs have to declare an Independent Data Safety Monitoring Board (DSMB). This is to prevent a biased analysis by the company. Since there were no safety problems, the DSMB concluded that Galectin should continue to its cohort 3 trial using 8 mg/kg.  

Finally the company will be enrolling 20 patients in the 3rd cohort, and they will wait till phase 2 to run the liver biopsy of each patient in the study. GALT will measure the blood biomarkers four different times in the study to account for varying blood levels.

We feel that Galectin is oversold as an incorrect reaction to its phase 1 trial. If Galectin fails efficacy in the phase 2 trial with the higher 8 mg/kg dose, then we might declare it a failure, but this has not happened. 

Investors can now pick up Galectin at a large discount. It's trading at around $5.70 per share and if you have a risk tolerance for biotechs, it may not be a bad idea to dip your toes into the stock. Despite today's declining share price we don't think the company should be passed off as a failure until the cohort 3 is completed. Then we can see if efficacy has improved or not. We need to see whether the company can achieve efficacy with the higher dose of 8 mg/kg. Investors won't have to wait long because patient enrollment has begun already for cohort 3 and results are expected as early as November 2014.

For the company's statement on the results and subsequent stock selloff, please read here. 

Biotechnology drugs rarely perform perfectly the first time around; sometimes doses need to be increased to achieve better efficacy. In this case, we believe that doubling dosage of GR-MD-02 from 4 mg/kg to 8 mg/kg may yield better efficacy. We will wait for the results from the cohort 3 study.