By Jake King
Shares of Navidea Biopharmaceuticals (NAVB) are ready to climb as the PDUFA (FDA action) date for the company's lead product, Lymphoseek, is approaching. This is the second PDUFA date for Lymphoseek, as the FDA delayed its initial decision, previously issuing a complete response letter (CRL) due to questions regarding the manufacture of the diagnostic agent. Impressively, the company was able to respondquickly to the FDA and resubmit its application for U.S. approval less than 2 months after FDA's request for information, and the current PDUFA date, when the FDA could grant approval, is set for April 30th. Lymphoseek is a nuclear imaging agent that has significant advantages over currently used products to determine the presence of metastatic cancer in the lymph nodes. Prior to the last PDUFA date, NAVB shares traded up to a high of $4.77, and we anticipate similar activity on the stock in front of the FDA decision in late April. Should Lymphoseek receive FDA's blessing this time around, the shares could trade through their prior high; analyst price targets for NAVB average $6.25. In addition to the potential for FDA approval of Lymphoseek, the company has submitted an application for European approval and could announce a partnership to sell and market Lymphoseek ex-U.S. later this year. Data for Lymphoseek in other cancers are also expected in the next couple of quarters, and catalysts such as these are expected to make 2013 a big year for NAVB and its shareholders.
Lymphoseek is highly differentiated and offers better patient outcomes. If approved, Lymphoseek will compete with two primary imaging agents, Blue Dye and Sulfur Colloid. These agents are injected into the patient, circulate through the lymph tissue, and help doctors identify lymph nodes that are thought to indicate disease (sentinel nodes) by visual assessment or using nuclear medicine probes. Once suspected lymph nodes are identified, a surgeon removes those nodes through a lymph biopsy and assesses them for metastatic disease. This procedure is used to "stage" a patient's cancer, so that appropriate treatment decisions can be made.
Key issues for the current agents are: 1) they flow too quickly (Blue Dye) or too slowly (Sulfur Colloid) through the lymph tissue; and 2) they do not bind specifically to sentinel nodes. Blue Dye for instance, moves through the lymphatic vessels quickly, with no waiting required for the imaging agent to become useful in visualizing the lymph. However, the short-lived effects can be problematic for accurately identifying sentinel nodes. Based on Navidea's Phase III clinical trials (lymphoseek vs. blue dye), 21% of the time, Blue Dye misses the sentinel node or any cancer-containing lymph node, hence a false negative result. On the other hand, Sulfur Colloid, a radioactive agent, takes significant time to travel through the lymph tissues, therefore patients need to wait as long as 2 hours after injection for the tracer to leave the injection sight. This waiting period is burdensome for patients as well as the medical institution, with underutilized capacity (personnel waiting and the operating room empty) while the imaging agent takes time to diffuse through the body.
Most importantly, because these agents are non-specific imaging agents, there is a high probability of false negative information (not detecting cancerous tissue that actually exists). Lymphoseek is designed to specifically bind to lymph tissues, and as a result, allows more precise identification and removal of the sentinel node for biopsy. Because the currently used agents do not bind specifically to sentinel nodes, there is room for significant error, and nodes can be removed that are further downstream (distal nodes), and more importantly, upstream cancer could be missed; lymphoseek reduces the risk of overly aggressive surgery. If too much lymph tissue is removed, which is not uncommon with other imaging agents, detrimental health effects can result in the long-run, such as lymphedema (fluid in the lymph tissue) and infection. Thus with Lymphoseek, patient staging and subsequent cancer treatment is significantly improved.
According to market research conducted by Navidea, approximately 10-20% of the time, Blue Dye or Sulfur Colloid are used by themselves, but because of their lackluster performance issues, roughly 65% of the time physicians order both imaging agents be used together. Lymphoseek's advantages of pinpointing sentinel nodes and diffusing through the lymph tissue at a reliable pace are the key reasons why the agent is likely to become standard of care for lymphatic mapping in breast cancer and melanoma, the two cancers where this procedure is primarily used and is being reviewed for approval by the FDA and EU.
Physicians and institutions will have a number of incentives to use Lymphoseek. The primary reason physicians will choose Lymphoseek for the lymphatic mapping of their cancer patients is that patient outcomes will be significantly improved. Lymphoseek's superior specificity and sensitivity enables doctors to more appropriately determine the extent of a patient's metastatic cancer, hence better "staging" of patients means improved approaches to treating their disease. Physicians stand to better preserve healthy tissue in the patient's body while reducing missed cancerous cells, improving patient recovery and survival with regard to cancer surgery. Additionally, drug and radiation therapy can also be tailored more appropriately based on the patient's disease severity. As a result, physicians have significant reasons to utilize Lymphoseek over competing agents for medical reasons, and the major patient benefits of this technology are the key reasons why lymphatic mapping is likely to expand from just breast cancer and melanoma into other larger cancer indications.
From an economic standpoint, there are also several incentives for physicians and institutions to utilize Lymphoseek. Because the drug is more quickly dispersed once injected, Lymphoseek will save providers both time and money, as patients and operating staff will not have to endure the current extended wait-time prior to surgery. Reimbursement for Lymphoseek is also expected to provide direct financial benefits to hospitals using the agent. First, Lymphoseek is expected to be reimbursed initially under a general "pass-through" code, and ultimately under a unique C-code once the Center for Medicare and Medicaid Services (CMS) reviews the agent's specific properties. Current imaging agents for lymphatic mapping, Blue Dye and Sulfur Colloid, are reimbursed under a certain procedure code (a CPT), which means they are billed as part of the overall cost of the procedure. So in effect, physicians are able to submit two bills when using Lymphoseek instead of one with the other agents. When billing for Lymphoseek, doctors will make a 6% profit, as allowed by CMS rules, and can still bill separately for the surgical procedure under the CPT code. As a result, we estimate that hospitals and doctors can profit by an additional $100-$150 when billing for Lymphoseek vs. currently used agents. This should help fuel adoption of this novel agent, as intended by the CMS reimbursement rules for truly innovative products. The pass-through rules for novel agents under CMS can be found in CMS' Billing and Coding Guidelines for Radiopharmaceutical Agents. According to the guidelines, "Payment for drugs, biologicals, and radiopharmaceuticals may be made under the pass-through provision which provides additional payments for drugs, biologicals, and radiopharmaceuticals that meet certain requirements relating to newness and relative costs."
Lymphoseek's peak potential is significant, as the diagnostic agent may gain use beyond breast cancer and melanoma. Navidea is seeking approval of Lymphoseek with a label for lymphatic mapping across all cancers ("pan-carcinoma"). If the product receives this broad label, then right off the bat the market opportunity will be more significant than many expect. However, given that data from breast cancer and melanoma are the only two applications supporting the new drug application (NDA), it is likely that Lymphoseek will only be labeled initially for these indications, about a $100M market opportunity in the U.S. However, providers that focus on cancers other than breast and melanoma have indicated that they would like to use lymphatic mapping if the imaging process was more precise. As the only imaging agent that can more accurately pinpoint sentinel nodes, Lymphoseek is expected to be truly 'enabling' for lymphatic mapping in other cancers. As a result, Navidea plans to quickly move the radiopharmaceutical towards utilization in a variety of cancers, including head & neck, prostate, colorectal, and lung, significantly broadening the market opportunity.
As a first step in expanding Lymphoseek's label, Navidea will report interim data in mid-2013 from the Phase III NEO3-06 trial, which is evaluating use of the agent in head & neck cancer (more below). The data, if positive, will be highly supportive of a broader label, in head and neck cancer, and possibly others. Head and neck cancer alone can increase the Lymphoseek opportunity by about 25%, with 67,000 cases in the U.S. each year, compared to 305,000 cases of breast cancer and melanoma. Should Lymphoseek obtain a broad label that addresses the entire spectrum of cancers that NAVB is targeting, the market in the U.S. alone could be expanded to some 1.2M new patients annually, with another 7.4M worldwide. With expectations that Lymphoseek will be priced in the $300-$400 range per procedure, and peak penetration of roughly 70%, annual Lymphoseek sales could reach over $250M domestically and nearly $2 billion internationally assuming similar pricing. A 50/50 revenue split with Cardinal Health (CAH) and expectations for a similar marketing agreement ex-U.S. mean that NAVB has potential to generate peak revenue of ~$1 billion if backed by a broad "pan-carcinoma" label. Notably, Navidea expects gross margins for Lymphoseek of 75% or higher, a lucrative business model which may drive significant interest from larger cancer diagnostic companies that are seeking acquisitions. While Lymphoseek's launch is expected to start out at a measured pace given the initial label focused on just breast cancer and melanoma, data from new cancer indications and label expansion will provide key catalysts and opportunities for the imaging agent to ramp in an accelerated fashion.
Head and Neck Cancer data later this year holds potential to broadly expand Lymphoseek's label. Should the company report strong results in head and neck cancer (Phase III interim data anticipated in mid-2013), shares of NAVB should react positively on the premise that label expansion is coming. For head and neck cancer patients, use of Lymphoseek may be pivotal, with the potential to accurately evaluate the extent of the cancer and save critical tissue in the neck, face, and mouth areas. In addition to expanding into the head and neck cancer application, the results also have potential to broaden Lymphoseek's label to all relevant cancers. This is because the NEO3-06 trial is set to analyze and confirm Lymphoseek's ability to identify sentinel nodes in a cancer for which sentinel node identification has thus far proven to be impractical. Assuming that the data are positive, and that NAVB can get a "sentinel node biopsy" claim into Lymphoseek's label, then reimbursement would become available for all cancers in which sentinel node identification is important for staging patients. Providing health insurance access to all cancer types that can benefit from lymphatic mapping opens the door for NAVB and its marketing partner to penetrate the market to its full potential. Assuming Lymphoseek receives FDA approval, the approaching head and neck cancer trial results provide another key fundamental reason to own the stock.
Several stock catalysts to drive value. In addition to a low valuation relative to where NAVB is expected to trade in front of and after the approval of Lymphoseek, there are a number of catalysts that can drive the shares higher throughout the year. Upcoming catalysts and milestones for NAVB include:
- Lymphoseek FDA decision: April 30th
- Launch of Lymphoseek by U.S. partner, Cardinal Health: 2Q 2013
- Head & Neck Cancer Trial (NEO3-06) Interim Results: Mid-2013
- EX-US Partnerships for Lymphoseek: Expected by Mid-2013
- Potential EU Approval for Lymphoseek: Late 2013/Early 2014
- Several Lymphoseek Publications (Breast, Melanoma): Throughout 2013
NAVB's pipeline contains three additional imaging agents which may drive future value and should provide several catalysts in the coming quarters. These include: NAV4694, a neuroimaging agent being developed to help diagnose Alzheimer's disease and mild cognitive impairment (Phase III Alzheimer's trial expected to begin in 1H 2013); NAV5001, a neuroimaging agent designed to diagnose Parkinson's disease and dementia (Phase III PD trial to begin later this year), and RIGScan for the detection of metastases (clinical trial expected to start later this year). Based on the company's current valuation and the visibility of Lymphoseek, NAVB is not factoring any meaningful value from these pipeline projects, hence, their advancement is upside to the story.
NAVB has potential to double on Lymphoseek approval. Given that NAVB traded near $5.00 prior to the last FDA decision for Lymphoseek, we expect the stock to trade up towards this level ahead of the April 30th PDUFA data. Recall that when the FDA issued a CRL to the company instead of approving Lymphoseek last September, no safety or efficacy issues were brought up by the agency, only the minor manufacturing issues that are apparently resolved. In December, as part of the Lymphoseek MAA filing, the EMA required a good manufacturing practices (GMP) pre-submission inspections at the Lymphoseek manufacturing facilities, which Navidea passed without trouble. Essentially, investors should feel even more comfortable this time around that Lymphoseek will gain FDA approval. As a result, playing the run-up into approval could net investors a handsome profit in a relatively short period of time. Analysts currently forecast that NAVB will reach the $6.25 level (roughly a $650 million market cap), however, with Lymphoseek's potential to become a blockbuster product on a global basis, the stock may move higher longer-term, as Lymphoseek's label broadens. Expect shares of NAVB to trade towards the $6.00 range or higher upon approval of Lymphoseek.
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