In early August, I wrote an article discussing the investment thesis for Navidea Biopharmaceuticals (NAVB). My main warning to prospective and active investors in the stock was to make sure emotional attachment to the company's "story" was left at the door. I felt this advice was prudent given the tendency for retail investors to get swept up in the massive sales potential of pipeline drugs, and totally ignore the difficulties in both the approval and market penetration process.
While I certainly did not foresee manufacturing issues being the cause of a rejection, this event definitely reinforces the idea that investments in biotech companies are, at some level, gambles.
Admittedly, I felt that Navidea's most notable product, Lymphoseek, had a very good shot at receiving FDA approval. For those who are unfamiliar with Lymphoseek's story, here's some context:
Lymphoseek - Climbing The Wall Of Worry
Lymphoseek was developed for a procedure called a Sentinel Lymph Node Biopsy, which allows doctors to check if cancer has spread. The current standard of care is a combination treatment of TC-99 and VBD - Very Blue Dye.
This treatment is fairly undesirable. 32 nodes must be marked in order for the procedure to be successful, whereas only one node needs to marked with Lymphoseek. Secondly, TC-99 takes three times longer to decay compared to Lymphoseek; the time that radioactive material is active in the body is obviously an important factor for patients. Thirdly, the use of TC-99 is known to have adverse side-effects, including allergic reactions to the sulfur, and burning at the injection site due to its unbalanced pH level; Lymphoseek has a balanced pH. Lastly, the injection clearance site is eight times faster, so surgery room costs are kept to a minimum and the patient spends less time in the hospital.
On June 1st, 2011, a Seeking Alpha contributor argued that the market potential for Lymphoseek is limited and that Lymphoseek wasn't compared against the standard of care.
Both of these arguments were incorrect. Conservatively, the market is no smaller than $450 million. As for the concerns regarding the trial set-ups, they were put to rest when TC-99 was approved for SLNB procedures; it was compared to VBD alone, not the "standard of care." NAVB initially dove on the news, until investors realized it actually confirmed that NAVB used the right comparisons.
The stock took an immediate dive from its then multi-year high of $5.48, and didn't find a bottom until $2. After realizing the core of the bear case was incorrect and the PDFUA date grew closer, NAVB ran up over $4.
Another Bump In The Road
On September 10th, NAVB shareholders received yet another blow as the FDA sent the company a complete response letter indicating rejection of Lymphoseek as a result of manufacturing issues.
Navidea is using a third party manufacturer for the production of Lymphoseek, and apparently this plant does not comply with FDA's guidelines. Fortunately for shareholders, the issues outlined in the FDA letter have historically been relatively easy and quick to rectify, so NAVB is still looking at a possible late 2012-early 2013 approval of Lymphoseek.
Cash-burn is of some concern here, but continuing status quo operations until mid-2013 appear very manageable. NAVB recently obtained a large line of credit, and won't be low on cash until mid-2013, assuming a $6 million quarterly burn rate.
Navidea Is Worth Another Look
With shares having dropped well below $3 as of Monday (currently at $2.69), biotech investors and traders alike should be considering initiating a position in NAVB in order to play a share price rebound as a result of positive news flow.
While I'm not a big advocate for investing in biotech companies past approval, I definitely recommend NAVB as an event-driven trade. Lymphoseek is a huge improvement over the current standard of care; the FDA likely realizes this, but the manufacturing issues obviously must be addressed first. I'm expecting a substantial run-up into positive news from the FDA, and subsequent price appreciation leading up to actual approval.