An important part of any investment decision is determining what specific events are likely to affect a stock's price in the near term. Catalysts alone are insufficient to provide a rational thesis for investing; however, they can provide excellent opportunities to enter or close positions to get the most financial benefit. With that in mind I'd like to take a look at a company with a promising catalyst coming up in a few months.
Navidea's FDA Decision
Navidea Biopharmaceuticals (NAVB) is a small biotech company with a market cap just over 300M. As you can see in the chart below, Navidea had a very volatile 2012. It is presently in the development phase with no profitability or products on the market, although that may change soon.
Trials have shown that Navidea's diagnostic radiopharmaceutical agent for lymphatic mapping, Lymphoseek, has a great safety profile and a statistically significant improvement in accuracy over current standards of care. The company also has a partnership with Cardinal Health (CAH), a leading distributor of pharmaceuticals, to market and distribute Lymphoseek once approved. The road to FDA approval, however, has been a very bumpy one so far.
On September 10, 2012 Navidea received a Complete Response Letter from the FDA rejecting approval of its flagship drug that "focused on issues with third-party Lymphoseek contract manufacturing, and was not related to any efficacy or safety data filed within the Lymphoseek NDA," according to a company press release. This setback, though likely only temporary, sent the share price plummeting. From trading in a range over $3.50 for the previous two months, the stock hit a low of $2.28 on September 11 and closed at $2.64.
On October 31, 2012 Navidea resubmitted Lymphoseek to the FDA. Coupled with management's statements about the CRL, this quick turnover suggests that the issues with Lymphoseek were indeed minor and quick to fix. Additionally, Navidea has recently submitted a Marketing Authorization Application for Lymphoseek with the European Medicines Agency. This is a very telling development because the EMA required third-party manufacturing facilities to be inspected by independent auditors pre-submission, meaning that their manufacturing facilities have passed European inspection since receiving the CRL from the FDA.
The company now has an upcoming PDUFA date for April 30, 2013 and I believe that Lymphoseek will gain approval on or before that date. This should serve as a positive catalyst for the stock to make significant gains. Despite receipt of CRL, analyst opinion seems to agree that NAVB is a worthy buying opportunity:
|Strong Buy||$9 → $7|
|11-Sep-12||Reiterated||Rodman & Renshaw||Mkt Outperform||$7 → $6|
|11-Sep-12||Reiterated||Ladenburg Thalmann||Buy||$6.25 → $7.50|
Now to Capitalize
As I mentioned above, NAVB was trading well above its current range in anticipation of Lymphoseek approval before it received its CRL. Not only is its stock now cheaper, but Lymphoseek's probability of approval is that much greater because of the FDA's feedback. Now here's where things get really interesting: NAVB still has a relatively high short interest with over 17% of its shares sold short. If the stock price recovers and moves closer to where it was before the CRL, then the short holders will be forced to cover their positions at a loss, thus fueling further gains. Those looking to invest in Navidea should plan to buy well in advance of the PDUFA date at the end of April to capitalize on these factors that could be the recipe for a big gain.
In the worst case scenario, should Lymphoseek fail to gain approval, it is still very likely that NAVB will have a run up in anticipation of the PDUFA date, allowing one to then trade it away for a gain. Even the bear side can make a buck on a quick trade. The stock's price is already recovering quite nicely and I expect the upward trend to continue. I would recommend putting a stop loss in place as well though, just in case the short sellers have it right after all.
Those interested are encouraged to do their own research but should also understand the particular risks involved in investing in small cap biopharamaceutical companies. Whether NAVB represents a good trading opportunity, a long term buy and hold, or an outsized risk is up to each individual investor.
For those interested, more information about Lymphoseek can be found on Navidea Biopharmaceuticals website.
Disclosure: I am long NAVB.