ByNessanb:
By Nessan Bermingham, Patricia Evans and Richard Daifuku
We believe that Navidea Biopharmaceuticals (
NAVB
) has been overbought in the marketplace and that the company
valuation may be nearing a plateau, even should their lead program,
Lymphoseek, gain approval in September (PDUFA date Sept 10, 2012).
Our thesis is driven by 1) current true valuation and revenue
opportunity, 2) the probability of approval and, if approved, the
product label compared to standard of care, 3) reimbursement and
physician uptake, 4) liquidity and finally 5) a lack of additional
near-term stock catalysts beyond Lymphoseek.
Company Primer
NAVB (formerly NeoProbe) is a biotech company focused on the
development of radiopharmaceuticals for diagnostic use. Their lead
program, Lymphoseek, is a diagnostic for lymphatic mapping for use
in the care of cancer patients. Lymphoseek combines the
radioisotope Technetium-99m (99m Tc) with a targeting agent
composed of mannose sugars that is designed to bind to the mannose
receptors located in the lymph nodes. It is thought that this
approach provides a more accurate and faster map of the lymph nodes
and, ultimately, may be an appropriate diagnostic modality for
sentinel lymph node (SNL) mapping. The company has completed two
Phase III clinical trials comparing Lymphoseek to vital blue dye
(VBD) (see below). These data, along with a safety database of over
500 patients, have been submitted to the FDA for approval. A PDUFA
date has been set for Sept 10, 2012, following a 90 day delay from
the prior PDUFDA date due to an FDA request for additional CMC
data.
The company has two additional programs (see chart 1) and is
currently evaluating a third program, Altropane, for which they
have an option to license that expires July 31, 2012.
Target Market
Navidea is seeking approval for Lymphoseek, a
radiopharmaceutical for lymphatic mapping, in the treatment and
care of cancer patients. The initial indications sought are breast
cancer and metastatic melanoma.
What is lymphatic mapping and why is it important? When a cancer
metastasizes to other tissues, malignant cells travel via the lymph
system and can be found in the first node they enter (i.e., the
sentinel lymph node (SLN)). In evaluating the stage of cancer, a
physician needs to biopsy the node(s) to determine whether any
malignant cells are present. A negative SLN biopsy enables the
patient to avoid a more extensive axillary lymph node dissection
and the associated risk of lymphedema, sensory disturbances and
chronic pain.
In the United States, the current approach to map the lymphatic
system and thereby identify the sentinel node is to use vital blue
dye (VBD) and 99m Tc sulfur colloid (or derivative) injection ((
SCI
)). These tracers, when injected at the site of the tumor, enter
the lymphatic system and are subsequently traced either visually,
in the case of VBD, or using a gamma detector (handheld detector or
camera), in the case of SCI or Lymphoseek.
SNL detection is a significant market opportunity. The incidence
of breast cancer is estimated at 230,000 in the US, of which ~80%
will have some form of lymphectomy requiring mapping of the
lymphatic system, while the incidence of metastatic melanoma is
estimated at ~30,000.
Current Standard of Care
Previously, lymphatic mapping was carried out using VBD that
passively moves through the lymphatic system staining the lymph
nodes blue. VBD is cheap but has a number of limitations, one of
which is the requirement for the physician to physically visualize
the location of the dye, another being allergic reactions which
occur in 1-3% of patients. In July 2011(following initiation of
Lymphoseek's Phase III clinical trials), the FDA approved SCI
(Pharmaleucence) for lymphatic mapping in breast cancer. SCI is a
radiopharmaceutical that acts as a tracer for identification of
lymph nodes. The primary difference between SCI and Lymphoseek is
the presence of mannose in Lymphoseek designed to bind the mannose
receptors located in the lymph nodes. Standard of care today
involves the use of VBD and a radiocolloid in combination for
optimal lymphatic mapping.
Our Thesis Rationale
We believe NAVB is overbought in the market and that its current
valuation is not supported by the company fundamentals for 5 key
reasons:
1. True valuation and revenue opportunity
At time of writing, NAVB is trading above $4.20 per share. On an
shares outstanding basis (~95M) the company's market cap is circa
$400M, however the company has a series of preferred shares (B and
C) that can convert into over 35M common shares, in addition to
over 17M warrants of which over 95% are priced in the range of
$0.32-0.97 (see Table 1). Given the warrant exercise price and
current PPS, we believe that warrant and preferred holders are
motivated to exercise (at a cost of ~$10M) diluting the existing
common share holders by over 50% (company has disclosed a fully
diluted share number of 151M shares based on conversion of
preferred shares, and exercise of options and warrants). Based on
current PPS, this would give the company a market cap in excess of
$630M, which we believe is unsupportable. In addition as investors
exercise and liquidate, trading volumes are set to increase,
driving the PPS down.
Table 1: Sample of outstanding warrants & preferred shares
(click to enlarge)
Admittedly in a situation where there is a very significant
revenue opportunity, this increased dilution may be less
concerning. However, we believe that the revenue opportunity for
NAVB may be lower than currently envisaged. Under the assumptions
outlined in Table 2, we estimate the market size (both US and EU)
to be around $245M, assuming a 70% penetration into breast and
melanoma markets and a 20% penetration into all other solid tumors.
According to the company, they will receive a 53% royalty rate on
revenues from Cardinal Health, their exclusive distribution
partner. Assuming a 70% peak penetration in year five from launch
(aggressive assumption), NAVB will realize peak annual revenues of
circa $135M (53% of total revenues). On an NPV basis at a 7%
discount, this equates to $1.98 per share on outstanding shares,
$1.27 fully diluted. This assumes no impediments to reimbursement,
which as noted below is a risk.
Table 2: NAVB NPV Assumptions & Calculation
2. Probability of approval and, if approved, the product
label compared to standard of care
In support of their FDA filing, NAVB submitted data from two
Phase III clinical trials: NEO3-05 and NEO3-09. A total of 289
patients were enrolled and targeted to receive both VBD and
Lymphoseek. In both studies, Lymphoseek met its primary and
secondary endpoints. Concordance in SLN identification between VBD
and Lymphoseek was 98-100%. In addition, a safety database of over
500 patients was submitted to the FDA. While there are no publicly
available data on CMC or detailed safety data, the company has
stated that no SAEs attributed to study drug were observed.
It is our view that there is a greater than 50% probability that
Lymphoseek will be approved. However, to date, no head-to-head
studies have been completed comparing Lymphoseek to SCI alone or
SCI in combination with VBD (current standard of care), thereby
making a superiority argument for Lymphoseek vs the standard of
care difficult. Of note, NAVB did perform a meta-analysis comparing
SCI plus VBD to Lymphoseek and found Lymphoseek to be superior to
SCI/VBD (99% vs 94% localization rate per patient). However, given
potential differences in physician practice, patient
characteristics, etc, such historical comparisons are nearly
meaningless.
Since Lymphoseek was tested in both breast cancer and melanoma,
NAVB may get a label for both indications, while the SCI label is
currently limited to breast cancer. The advantage of a dual label
is difficult to ascertain given that SCI is routinely used off
label. NAVB is running an additional study in head and neck cancer
with the focus on exploring Lymphoseek's role in SNL
identification. However, one cannot readily extrapolate success in
the breast and melanoma studies to head and neck cancer, given the
complexity of the lymphatic system in the latter disease. Data from
this trial are expected in late 2012.
3. Reimbursement and physician uptake
Regarding reimbursement, it is not clear if Lymphoseek will fall
into the same coding category as SCI or will receive a separate
code. If treated like SCI, the code depends on which gamma detector
device is used (handheld or camera) and whether the procedure is
inpatient or outpatient. More importantly, the reimbursement for
Lymphoseek is likely to be included in the bundled reimbursement
for the procedure if performed in a hospital outpatient setting or
during a hospital inpatient stay (no separate payment, similar to
SCI where reimbursement is currently under CPT codes 38792 and
78195). If this is the case, our expectations of the pricing
received for Lymphoseek and the related potential revenue may be
significantly diminished.
It is possible that Lymphoseek could get a separate unique code
(currently there are two catchall CPT codes for this - A4641 and
A4642 - whereby the reimbursement rate is unset and must be
negotiated on a product by product basis). In this case, it is
usually reimbursed at ASP +6% but NAVB would need to justify its
price. Should NAVB get a new drug add-on to the APC, Medicare will
create an HCPCS code to identify Lymphoseek and allow for
billing/payment. However, these codes can be difficult to get and
typically only last 2-3 years, following which a new APC assignment
is made or the payment for the APC is adjusted.
In our view, Lymphoseek will not command a premium price or be
quickly taken up by physicians. The average wholesale price of
sulfur colloid is only $53.20/treatment, so estimates of
$400/treatment for Lymphoseek are unrealistic (our model assumes a
$200 reimbursement rate) without a label or clinical data
supporting a clear benefit for Lymphoseek versus SCI/VBD in a
head-to-head study. Compounding reimbursement challenges,
physicians' extensive experience with SCI will make market
penetration of Lymphoseek slow.
Interestingly, the FDA did approve another diagnostic for SLNs
named Genesearch (marketed by Veridex, a J&J unit). However ,
Genesearch was withdrawn from the market in 2010 due to low market
penetration; physicians were satisfied with the current standard of
care and were unwilling to pay a premium for Genesearch.
4. Liquidity
At the end of Q1 2012, the company had approximately $22M in
cash, with total liabilities of ~$10M (~$5M of which are current).
The current burn rate is approximately $2M per month. Historically
the company has utilized convertible notes with warrants to access
additional capital. Recently the company has negotiated two credit
lines, the first with Hercules ($7M of which the company drew on
Dec 29, 2011, with access to the remaining $3M being dependent on
approval of Lymphoseek). This week a $50M credit facility with
Platinum-Montaur Life Sciences (Montaur) was announced, of which
$15M can be drawn immediately (10% coupon), and $20M can be drawn
upon approval of Lymphoseek with an additional $15M available under
terms that need to be negotiated. It is interesting to note the
timing of this on the heels of the Hercules deal. In our view, this
credit line is akin to the overused term of kicking the can down
the street as this debt will require repayment that is unlikely to
be covered by revenues from Lymphoseek or any milestone payments
from the sale of GDS (gamma device systems) (NAVB is also eligible
for (1) $20M in additional royalties from their sale of the gamma
device business to Devicor in 2011, to be paid in the event Devicor
achieves revenue from GDS products above $21M during any fiscal
year for up to five years, and (2) a milestone payment of $3M and
royalties on revenues from Cardinal Health).
We believe NAVB will be forced to tap the capital markets to
raise capital in the near to mid term. In our view, the company is
already preparing for such an event following their filing of a
shelf registration in Apr 2012 to sell up to 12.5M shares. We
perceive a risk of additional near-term dilution should NAVB draws
on this shelf to meet their capital needs.
5. Paucity of additional near-term stock catalysts beyond
Lymphoseek
While NAVB has multiple programs in development beyond
Lymphoseek (see Table 3), it is our contention that no near-term
stock catalysts will materialize from these programs. Key near-term
catalysts include the FDA PDUFA date on Sept 10, 2012 and potential
EU approval in 2013 (an MAA filing is expected by year end 2012).
Should Lymphoseek approval be delayed or significant revenues fail
to materialize, we expect long holders will wait some time before
seeing any additional positive stock catalysts.
Table 3: NAVB Pipeline
In summary, while we believe NAVB was an attractive buy below
$3/share, we now believe the stock has been overbought.
Disclaimer:
For disclaimers, please see
Bio
.
Disclosure:
We are currently long NAVB; however, we are unlikely to hold long
term.
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on seekingalpha.com