Does Navidea's Recent Offering Make It A Buy Or Sell?

Navidea Biopharmaceuticals (NYSEMKT:NAVB) is a promising biotech company with a newly approved product line called Lymphoseek. With a recent offering of $30 million worth of registered common stock, it is a good time to reconsider NAVB.

Financial Fundamentals

NAVB recently announced a registered direct public offering of 10,563,381 shares of common stock and warrants to purchase up to 3,169,015 shares of common stock for $2.84 per unit, resulting in a net of around $28.8 million. A quick glance at the purchase price of $2.84 makes NAVB desirable, as well as the fact that Crede Capital Group, an accredited institutional investor, owns a considerable amount of this stock. Another item to note is that the warrant exercise is $3.83, which is roughly a 35% premium. From an investment standpoint, that shows great strength.

For the quarter ending June 30, 2013, NAVB achieved $195,000 in revenue. Since Navidea is still in its infancy stage we cannot weigh too heavily on the $195,000 revenue of the last quarter. NAVB had cash and cash equivalents totaling approximately $25.6 million before the deal with Crede. The first question that should pop up in an investor's head is why does NAVB need additional cash if it already had $25.6 million on hand? (See below in the Wild Card section for a possible explanation.)

Short Activity/Institutional Holdings

Short activities and institutional holdings are important elements in anyone's investing strategies. The good news for long-term holders is that the short interest looks to be dying down very slowly. Once at a peak of 24,954,312 down to 19,982,522 currently, the short activity has slowed down slightly. One can only presume the shorts are exiting and covering their shares due to possible game changers. Analyzing the numbers, it seems as if the shorts are slowly covering to obtain the highest profit and preventing a short squeeze (yes, I had to use that word).

An interesting item to note when looking at the institutional holdings is the steady uptick with established and well-known institutions such as Platinum Management, Blackrock, JPMorgan, General Electric Capital, and now Crede.

Product Line

Lymphoseek was approved in March by the FDA after a few delays and hiccups. Lymphoseek is mainly targeting an unmet need and will most likely become the new standard, overcoming decades-old technology. The market for breast cancer and melanoma patients is estimated to be over 300,000 new U.S. patients each year, of which 210,000 undergo some kind of lymphatic mapping procedures today. An important thing to note is that Lymphoseek is currently approved for only a limited number of patients, but if submitted and approved it can spread to a possible 1.2 million patients for label extension (that does not include the global market).

Additional product lines in the works for this young commercialized company is its NAVB4694, a diagnostic imaging agent that may aid physicians in earlier identification of Alzheimer's, a RIGS Program to identify cancerous cells during surgery, and finally NAV5001 to aid in the diagnosis of Parkinson's syndromes, motor disorders, and Lewy body dementia.

Wild Cards

In my opinion, wild cards are what make the world of investing fun and exciting. I relate it to playing poker in which you can have all the calculations and percentages of winning on point, but an unsuspected river card can demolish your chances of winning, leaving you wondering what the heck just happened to your money.

In the world of NAVB I would put this warrant deal in the same category. Do you view this deal as adding another institutional investor, or do you see it as another broke biotech company scrambling for money to move itself forward another year? In my opinion, this can go both ways. The recent offering provides a nice infusion of $28.2 million cash to NAVB to fund it for quite a bit longer than two years with the current cash burn. On the surface, the warrant exercise is at 35% and was at the current PPS with no discount involved like other biotech companies.

Referencing the agreement, the creative snippet below caught my eye. I personally didn't like this portion as this is a win-win situation for the holder, but is not clear in the recent press release. At one point, the company is talking about a 35% premium exercising point, but then includes a way out at the same time. I personally would like the company to be a bit more transparent.

As an alternative to exercising the Warrants in whole or in part, beginning six months after the date of issuance, if the Common Stock is then trading at a price at or lower than the Warrant Share exercise price per share, a holder may, without the payment of additional consideration, exchange all or any portion of the Warrants based on a formula for a number of shares of Common Stock equal to the negotiated Black-Scholes value as defined below divided by the closing bid price of the Common Stock as of two trading days prior to such exchange (provided that if such closing bid price of the Common Stock is less than $2.00 per share, it shall be deemed to be $2.00 for purposes of this calculation).

The negotiated Black-Scholes value is defined as the value of an option for the number of shares equal to the portion of the Warrants being exchanged at the applicable exchange date as such value is calculated using the Black Scholes Option Pricing Model obtained from the (OV) function on Bloomberg utilizing an underlying price per share equal to the closing bid price of the Common Stock as of the trading day immediately preceding the date of issuance of the Warrants, (ii) a risk-free interest rate corresponding to the Five-Year U.S. Treasury Note Swap Rate, a strike price equal to the exercise price in effect at the time of the applicable exchange, (iv) an expected volatility equal to 135% and a deemed remaining term of the Warrants of five years (regardless of the actual remaining term of the Warrants). The negotiated Black-Scholes value would only change based on changes in the risk-free interest rate corresponding to the Five-Year U.S. Treasury Note Swap Rate at the time of an exchange.


At some point you have to look at all the pros, cons, and facts on the table. We must take into account the potential EU partnership, Lymphoseek approval, label extension (early closing of H&N), recent institutional holdings, progressing product lines in clinical trials, current (and potential) revenue, recent gold standard designation by the scientific community, strong partnerships, and excellent management.

I personally see these factors as overpowering the negative aspect of the recent direct public offering. I would recommend the purchase of NAVB as it appears to be undervalued by the market. If you scan hundreds of biotech companies, there are very few companies that have the revenue and potential to be a power house in the biotech world. On the other hand, this company is very volatile and can drop at any given moment due to safety issues or a rejection letter by the EU. It is a very risky investment that I would recommend makes up less than 5%-20% of your overall portfolio.

Disclosure: I am long NAVB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.