After an enormous rally that brought shares of Navidea Biopharmaceuticals (NYSE: NAVB) as high as $4.77/share in mid-July, shares of the company fell about 40% to reach their current price of $2.85/share. This article will explain why the stock has dropped so much, and why the 40% drop was an overreaction to a simple delay of Lymphoseek's NDA. This means that NAVB is hypothetically an incredible valued play under the assumption that Lymphoseek was fairly valued prior to the recent drop.
Lymphoseek is an exciting diagnostic compound that has successfully passed all three stages of clinical trials and is now waiting on an NDA submission. Lymphoseek can be used to identify lymph nodes that drain from primary tumors , which has been tested (with success) in breast cancer and melanoma patients.
Some biotech investors may remember Lymphoseek but not Navidea - this could be because the company changed its name somewhat recently (December, 2011) from Neoprobe. Neoprobe sold a device called neoprobe to Devicor Medical Products earlier in 2011, so the company's management decided that it was a good time to rebrand the company as a precision diagnostics-focused biotech company that developed products like Lymphoseek.
We were initially expecting an FDA approval for Lymphoseek on June 10, 2012 based on the timing of Navidea's NDA submission for Lymphoseek, but we saw a 3-month delay announced in April that brought the PDUFA action date to September 10th, 2012. This was because the FDA wanted some extra time to review the Chemical, Manufacturing, and Control (CMC) information that they required Navidea to submit (which they did on March 30th, 2012). The market (and the company) was unsure just how concerned the FDA was about the third-party manufacturing process that Lymphoseek underwent, but it's now apparent that the FDA saw some serious safety concerns in Navidea's. report.
Sure enough, we saw a complete response letter after the closing bell on September 10th, which tanked shares about 25% the next day. In the CRL, the FDA cited specific concerns about cGMP (current Good Manufacturing Practices) at Navidea's third-party contract manufacturers as the reason for the CRL. Shares have yet to recover from the unfortunate outcome of Lympohseek's first NDA submission, but we did see the company resubmit the NDA on October 31st. We didn't see the FDA establish a new PDUFA date, although it's expected to be within a "reasonable" timeframe. In their press release regarding the issue, CEO Mike Pykett states the following:
"We have been working diligently with our advisors, contract manufacturers and the FDA to address the third-party cGMP manufacturing deficiencies noted in the FDA's September CRL. While we are unable to predict the timing for FDA review, we believe that the focused scope of the CRL and the corresponding information provided in the Company's responses will facilitate a timely evaluation of the resubmission."
The market is also expecting a reasonably fast review, because we know that Lymphoseek had no reason to be rejected other than from the third party manufacturing concerns. Assuming that these have been addressed by Navidea (which seems to be the case given how much communication has happened between the company and the administration), the FDA would only have to reexamine the specific problems that had with the original NDA submission. Lymphoseek's clinical trial data demonstrates its efficacy in diagnostics, and a lack of serious risks to cancer patients. This makes the chances of approval of the resubmitted NDA extremely high, since there will be virtually no reason for the FDA to say "no" a second time.
There are many opinions about what NAVB is worth per share, but the consensus among the analysts seems to be that the stock became quite undervalued after the market punished the ticker for a temporary setback that started back in April. I'd be inclined to agree with them. NDA delays are obviously no cause for celebration, but the market's overreaction creates immense value potential in the stock for investors who are willing to enter before a new PDUFA date is set for Lymphoseeks' NDA (which is very likely to result in an approval). If Landenburg Thalmann's estimates of Lymphoseek peak sales of ~$450 million are accurate, NAVB stock could easily be worth double or triple its current value in a few years. This is based on the current market cap of roughly $300 million, which is also including the value of the company's other two developmental programs for AZD4694 (a diagnostic tool for Alzheimer's Disease patients) and RIGSCAN (an investigational cancer-tissue marker).
It's also worth noting that short interest is starting to die down, signaling that bears may be expecting a relief rally. As of 10/15/12, 15.7 million shares remained short. In the event of a major rally in NAVB, short-covering would be particularly noticeable due to decreases in the ticker's trading volume. This means that if these bears get trapped, there will be less bulls (buyers) to absorb their exit from short positions.
The takeaway is that NAVB is favorable on the long side for both value investors (based on estimated sales of Lymphoseek after approval) and traders who want to bet against the 15.8% of NAVB shares that are in short positions. Shorting the stock seems particularly unfavorable at this point.