Navidea Biopharmaceuticals Pre-FDA Runup: Here Are The Risks

The first article I wrote for SA discussed then Neoprobe's huge potential as a speculative investment. That was over a year ago, but in addition to the new name, Navidea (NAVB), management has transformed the company from a one-trick pony into a legitimate contender within the late-stage pharmaceutical space.

That being said, investments within the biotech space are unlike anything else. Few are "long-term" investors (which I would classify as those willing to wait to not only reap the benefits from approval, but the subsequent sales growth and ultimate profits), and stocks in the industry are vulnerable to attacks filled with misinformation built by short-sellers.

Furthermore, traders in biotech stocks must have the wherewithal to deal with bear raids, a fairly common phenomenon whereby a market participant floods the stock with sell orders (typically in advance of a big announcement) in order to trigger stop-losses and depress the share price. Events of this sort are well known to NAVB old-timers, and I would assume most experienced biotech traders.

Long-term investments in biotech stocks never made much sense to me. Savvy biotech investors should be using their knowledge to obtain a "variant" view of a particular company, and trade accordingly. In other words, if extensive research and knowledge of the FDA process leads you to a conclusion that is different from that of the market, then you've discovered an interesting, potentially very profitable opportunity.

What biotech investors tend to do, however, is get emotionally attached to the stock and "think" they are long-term investors, when they are really traders looking to make a quick buck, usually on the pre-FDA decision price runup, which is a common occurrence for biotech stocks. As a result, the short-term volatility is too much to handle and the natural growing pains that all new companies have to endure are unattractive to most investors.

The reason I stay away from keeping my capital tied up with any particular biotech post-FDA decision is because of how truly difficult (and expensive) it is to bring drugs to market, and obtain meaningful sales within a reasonable timeframe. The track-record for such investments is not terribly good; think Dendreon (DNDN) and most recently Acura Pharmaceuticals (ACUR). On Monday, Acura tanked more than 30% on news that Pfizer was terminating their deal to develop tamper-resistant painkillers. Even prior to this announcement, ACUR shareholders who didn't sell essentially immediately after OXECTA was approved have dealt with a stagnant share price.

For those who are indeed long-term investors, willing to ride out the pains that every early-growth stage company must experience, the risks specific to NAVB are relatively minimal. The company has a strong balance sheet and enough financial resources to maintain current operations for at least the next 12 months.

That being said, the long-term risks related to all biotechs, including NAVB, are massive and must be significantly discounted in the share price in order for the risk-reward to be favorable.

In terms of approval, Lymphoseek appears to be a solid bet. The main argument for NAVB bears has been that the company never compared Lymposeek to the combination of TC-99 and VBD (more on that below). However, since TC-99 was not approved by the FDA for SLNB procedures when NAVB's trials were executed, the FDA only wanted to see Lymphoseek tested against VBD.

Last July, TC-99 was approved for SLNB procedures, on the basis of its trial vs. VBD. This is exactly what NAVB is attempting to do, and its trial results are far more compelling.

The risk for traders betting on NAVB's FDA decision (September 10th), but I'd like to give some further context on NAVB's pipeline and balance sheet, and conclude with a summary of risks to long-term investors.


Lymphoseek: Without going into too much technical detail, Lymphoseek has been developed for use in SLNB procedures, which help doctors tell if cancer has spread. As noted in my initial article, there are several benefits to using Lymphoseek over the current standard of care, a combination of Very Blue Dye (VBD) and TC-99. The first benefit is that Lymphoseek is much more efficient, as only one node needs to be marked, as opposed to as much as 32. Secondly, Lymphoseek decays much faster than TC-99 in the body. Next, Lymphoseek has a balanced pH level, so patients are less prone to painful and allergic reactions. The market size for the drug is typically quoted at about $450 million. NAVB has a revenue sharing agreement with Cardinal Health (CAH), who will be responsible for distribution. NAVB believes it will obtain 70% gross margins on Lymphoseek.

RIGScan: RIGS binds to cancerous tumor tissue, which the surgeon can then remove. Studies have shown that the usage of RIGS may coincide with longer rates of survival, particularly regarding patients with colorectal cancer. NAVB believes the market potential to be $3 billion. RIGS was recently reactivated.

AZD4694: Alzheimer's imaging drug, in-licensed from AstraZenaca (AZN). Currently in phase 2 trials, and NAVB expects a phase 3 trial in 2013.

Balance Sheet

In order to advance its pipeline, NAVB will need to maintain sufficient capital.

Currently, the company has $15 million in net cash, and it recently obtained a $50 million credit facility from Platinum-Montaur Life Sciences, who has also been a major holder of the common equity (largest institutional owner with over 5 million shares).

The company burned $6.6 million in Q1, but the burn-rate should decline slightly for the rest of the year. The company can draw $15 million of its credit line immediately, and $20 million after approval.

NAVB has enough resources to maintain operations until mid-2013, at which point the company should be accruing revenues from Lymphoseek.

Long-Term Risks

  • Should Lymphoseek not be approved, $20 million of the credit facility would not be obtainable and NAVB could find itself short of cash by mid 2013, assuming a $6 million quarterly burn rate.
  • Lymphoseek could potentially have to go back to trial now that TC-99 is approved for SLNB procedures, though this seems unlikely since Lymphoseek has already been tested against it, just not the combination of Sulphur Colloid and VBD.
  • Should the market uptake of Lymphoseek be more expensive and timely than is currently anticipated, Cardinal Health could kill the distribution agreement. Considering CAH's size, unless market penetration is reasonable (above 50% within one year), it seems unlikely that CAH would stick with it.
  • RIGScan, while promising, will likely not be up for US approval until 2015 at the earliest. Additionally, clinical trials will meaningfully contribute to expenses.


Though selling off a bit recently, NAVB has already begun it's pre-FDA runup. I suspect the share price may stall out a little before the end of August, when the fast-money traders start to really take sides.

Most of the bear case has been slaughtered at this point, so it appears more likely that expectations become very bullish just prior to September 10th.

I advise against a long-term investment in any biotech, but NAVB is one of the better candidates I've seen. Approval appears to be very likely, though I think the best money has been made by those who had the aforementioned variant perception when the bear case took over and pushed the share price down to the $1.60 region.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.