I've written several bullish articles about Navidea Biopharmaceuticals (NYSEMKT:NAVB) before, but this is the first time that I will undertake a true valuation for their business rather than focusing on a qualitative assessment and stock price action. I believe that shares of Navidea are significantly undervalued at current levels and the stock presents an excellent risk/reward profile.
Crede Comes To The Table
On September 24, Navidea announced the direct sale of about 10.5 M shares to Crede at a price of $2.84 per share, the closing market price of the previous day. This deal was benign to shareholders compared to most capital raising by biotech companies; however, the market reacted extremely and slammed the stock. It is currently trading in a range below $2.30, or about 20% off the price that Crede paid. Below is a chart of NAVB's recent price action.
There is nothing that I can see in the deal with Crede that should raise serious concern from shareholders. My opinion is that many investors saw the headline news and screamed "dilution!" after management had made a point to communicate that they had a sufficient cash position and debt facility with Platinum Montaur to not have to raise more money with equity. The event can be spun to appear as though Navidea's management mislead shareholders, but it's hard to argue that it was truly a misstep considering that Navidea now has a second large institutional shareholder (PM being the first) that bought in at the market price. Selling begets selling, especially in an otherwise low volume stock. Some short manipulation tactics may be at work (NAVB is very heavily shorted and has a tendency to react poorly to any news events), but it's likely frustrated longs and stop-losses being breached that accounted for much of the sustained decline.
Here is my straightforward explanation for why the deal with Crede should not be seen so negatively:
1) The "dilution" from the direct sale is minimal. Yes, earnings per share would be impacted, but because Navidea sold shares at their market value, they theoretically preserved shareholder value -- it just exists as cash on their balance sheet now. We don't know how this cash will be used yet; they make some very value-adding acquisition that will amplify shareholder return or they may burn through it with little show. We don't know yet, but right now it's just cash and has a value equivalent to the dilution sustained.
2) True dilution, that is the devaluing of shares, will not occur unless Crede exercises its warrants to purchase another 3.17 M shares, which it could not profitably do unless NAVB appreciates some 70% or more from its current price -- everybody wins in that case.
3) Another institutional investor represents a win for Navidea for two main reasons (at least in theory). First is that Crede's large purchase demonstrates that they have confidence in the company. Institutions tend to do their research and pick companies with compelling potential. Smaller investors who had NAVB on their radar should be more confident that Crede saw a good investment without having to undercut the market price. Also, institutions tend not to turnover their large holdings frequently. For a biotech prone to volatility, having a greater percentage of shares unlikely to be traded is a boon.
Whatever your take on the Crede transaction, however, the result of the selloff is that Navidea is now meaningfully undervalued even in a base case scenario for Lymphoseek. In fact, I've come to the conclusion that Navidea is on sale right now for the value of Lymphoseek plus cash on hand -- the bold investor could basically get the rest of the pipeline for free, more than compensation enough for the risk. Truly, there is a feast to be had.
Lymphoseek, Navidea's Meat and Potatoes
Navidea's flagship drug, Lymphoseek gained FDA approval and was brought to market earlier this year. LS is a radio imaging agent used to detect and assess the spread of solid tumor cancers. It's Navidea's only commercialized drug to date and is therefore the principle piece to valuating the company.
First, we'll take a look at the size of LS target market. LS is currently approved for use only in the US and only for breast and melanoma cancers. Navidea's management has shown their intent to expand LS's market in the near term by seeking European approval and an expanded label for use in more types of cancers. For simplicity (especially because LS is not priced ex-US) and because I am interested in a conservative valuation, I will only use US numbers. However, in light of the very positive data on other types of solid tumor cancers, I believe it is reasonable to include head and neck cancer and colorectal cancer in the analysis. If you prefer, you can think of my inclusion of an expanded label but exclusion of ex-US sales as a lazy way to discount the unconfirmed market.
All figures in the chart below are sourced from the relevant pages on cancer.net.
|Cancer Type||Estimated new diagnoses in 2013|
|Head and Neck||53,640|
That puts us at a figure of 311,270 cases/ year in LS current market and 507,730 cases/ year in its expected market -- assuming similar numbers of annual diagnoses going forward.
Next we have to determine what percentage of the potential market LS will actually reach. According to Navidea's press release announcing LS's launch, about 70% of breast cancer and melanoma cases make use of lymphatic mapping, for which LS would be appropriate. I will assume an identical rate for head and neck and colorectal cancers as well. I believe that LS is demonstrably superior to its predecessor and will capture a large share of the market, therefore I assign it an 85% peak market share -- this I am hoping is ultimately on the conservative side as well. That get us to 507,730*.7*.85 = 302,099 cases annually.
How much revenue does that produce for Navidea? Well, the same press release cited above, states that the cost for LS is set at $300 per treatment. However, Navidea has a partnership with Cardinal Health (NYSE:CAH) who are responsible for marketing and distribution. Consequently, Navidea will only receive about 50% of the sales revenue it generates. So the expected revenue for Navidea comes out to: 302,099*300*.5 = about $45.31M annually in peak sales revenue.
Time To Slice Up The Revenue Pie
Now that we have a decent estimation for peak LS revenue, we can apply a standard discounted cash flow valuation. The DCF is essentially the summation of the value of cash flows generated (I go out 10 years) divided by a discount rate to take into account lost opportunity cost and risk. The further out into the future expected revenue is, the more it should to be discounted. I'll also take into account that it will take some time to ramp up to peak sales. Those interested in the breakdown can consult the resulting table:
|LS Revs M||27.19||38.51||45.31||45.31||45.31||45.31||45.31||45.31||45.31||45.31|
This comes out to a value of about 268.21 M for LS alone. Adding the 10.56 M shares Crede purchased to the 118.94 M shares outstanding that the company reported at the end of the last quarter gives us a total share count of 120.5 M shares. This makes LS worth about $2.07/ share all on its own -- and that's with taking some very conservative numbers.
This analysis leaves ex-US commercialization and near 100% market capture as possible upsides and uses an aggressive 9% discount -- I don't actually see Navidea warranting such a discount for risk considering all of the positive data collected to date, but perceptions of biotechs being what they are...
Cash, The Icing On The Cake
Let's not forget that Navidea also now has a net cash position of around 27.14 M (thanks, Crede!). That comes out to just about $0.21/ share. I can stop my analysis of Navidea right there if the goal is simply to determine whether or not it is fully valued. Taking expected LS revenue and cash puts the value of the company at $2.28/ share, which is above where it is currently trading (around $2.21 on 10/17).
So never mind ex-US Lymphoseek sales, NAV 4694, NAV 5001, RIGS, the Manocept platform, or the likelihood of being awarded further grant money and the similar positive PR that's been cropping up. All of that comes as a bonus at this point.
That is not to say that there are no risks to this investment. Lymphoseek sales may still fail to materialize or take much longer to ramp up than predicted. A greater concern to me, however, is the risk that NAVB will continue to underperform in the short term as the "sell the news" tactics and high short interest remain. Finally, like all biotechs, the company's pipeline is not guaranteed to ever reach commercialization or may require more than one pass at FDA approval to do so, thus delaying revenue and adding costs for additional studies.
It's difficult and completely counter-intuitive to buy when a stock is stumbling or hold despite an incredibly disheartening chart, but conducting an unemotional analysis of the situation should calm some fears in this case. Navidea is a bargain right now plain and simple, and while the price may fluctuate and/or fall further still, the long-term rationale for investing remains intact.
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.