Last week we saw an early approval for Lymphoseek (technetium Tc 99m tilmanocept) - the diagnostic product that was developed by Navidea Biopharmaceuticals (NAVB). A special conference call was held by Navidea management in reaction to the good news - a transcript can be found here.
Although early approvals are generally rewarded with jumps in share price, we actually saw NAVB fall over 25% from a recent high of $3.59/share. NAVB, currently at $2.67/share, values the company at $280 million. While "sell the news" reactions aren't that uncommon in small healthcare stocks following FDA approval, I think that the market has developed a surprisingly warped view of Lymphoseek that could be reversed quite soon.
Why Lymphoseek Is Misunderstood
Consider Piper Jaffray's initiation of coverage on NAVB as on March 5th 2013 which gave the stock an "underweight" rating and an incredibly low price target of $1.50/share. According to Benzinga's note on the downgrade, Jaffray doesn't expect Lymphoseek to do well at all.
"In our view, its pipeline of radiopharmaceutical diagnostic candidates may offer compelling technical advantages in the clinic. However, our recent diligence on lead candidate Lymphoseek (NDA pending, intra-operative lymphatic mapping) suggests that these advantages are insufficient given projected market size and expected competitive forces -- a risk exacerbated by Navidea's high level of shares outstanding and a near-term need for cash. Should Lymphoseek, which we expect to be approved by the April 30th 2013 PDUFA date, experience robust adoption despite a likely high price vs. competing products, our current risk-averse view could prove overly conservative, although we expect this to take time."
Jaffray is estimating that Lymphoseek will have a peak penetration rate of 30% for breast cancer and melanoma procedures that use lymphatic mapping, and that this will only be achieved after a long struggle by Navidea to simultaneously grow sales and fight off competition (with the limited budget of a small pharmaceutical company). If you combine this with an expectation of share dilution in the very near future a $1.50 price makes more sense. The issue is that the argument has some pretty big holes.
First, we have to consider the implications of the Lymphoseek commercialization agreement between Navidea and Cardinal Health (CAH). Cardinal Health is essentially the "big pharma" partner who will commercialize the fully developed diagnostic for half of the profit. This not only removes marketing-related financial burdens from Navidea, but really incentivizes Cardinal Heath to maximize the adoption of Lymphoseek in its indication. Assuming that Navidea will have a typical "small pharma" launch simply isn't true.
Secondly, I think the market has major misconceptions about Lymphoseek's ability to compete with vital blue dye (the current norm for lymphatic mapping).
Lymphoseek is not only a smaller molecule that is able to penetrate further into the body to provide a better diagnosis, but will be FDA approved specifically for the lymph node mapping indication for breast cancer and melanoma patients. Although there is worry about Lymphoseek's cost of $300 per dose, the reimbursement situation looks ideal for Navidea and Cardinal.
Vital blue dye (combined with a sulfur colloid) is not specifically approved for lymphatic mapping by the FDA. This basically gives Lymphoseek a monopoly over its current indication. While vital blue dye can still be used off label in place of Lymphoseek, it isn't advantageous for anyone except for the insurance companies. I think the notion that Lymphoseek will only take 30% of its target market is overly conservative given what we know.
We are also going to see Lymphoseek expand into the sentinel lymph node biopsy claim, but only after phase III data for the finished trial in head and neck cancer is finalized and bundled into a sNDA. This sNDA would probably be submitted in the second half of 2013, creating a PDUFA catalyst in 2014.
Cumulatively, these indications would give Lymphoseek reimbursement for at least 1.3 million patients in the U.S. alone. The potential grows again with the colorectal cancer lymph mapping indication, which is close to phase III development itself and implies peak revenues from Lymphoseek of $200 million or more within a few years (if not more).
Another often-ignored factor that gives Lymphoseek an advantage over competitors is its low usage of the isotope "technetium-99", which is the most commonly used radioactive isotope in diagnostic procedures. The existing blue dye used in lymph node mapping must be combined with a sulfur colloid that ends up using over ten times the technetium-99 relative to Lymphoseek per dose. This implies that the increasing severity of the technetium-99 shortage will play heavily to Lymphoseek's favor over time, as the resource becomes increasingly scarce.
Where do we go from here?
There is also substantial concern over substantial NAVB share dilution due to the company's quarterly operating losses of ~7 million, although we should expect Lymphoseek to launch in Q2 2012 and begin generating substantial revenue for Navidea by the end of this year. Considering that Navidea has access to $50 million in debt financing from Platinum-Montaur, I find it unlikely that Navidea will find itself strapped for funds before Lymphoseek revenue grows appreciably.
In addition to Lymphoseek, Navidea also offers three pipeline diagnostics that could add valuation in the long run. These include NAV4694, NAV5001, and RIGScan.
While the short term momentum is clearly bearish, I don't see this trend being sustainable given how large the cumulative short interest has become - at ~20.4 million shares (or 18.5% of float). We may see a short squeeze on NAVB when Lymphoseek sales numbers start trickling in, as I think they will be higher than the market expects.
Disclaimer Note: Considering that NAVB has dropped all the way to the level it was when I first covered the company (debunking a slam piece on the stock), I'm considering a long position ahead of Lymphoseek's launch and a favorable chance at a short squeeze.