For Navidea, Important News Flow Ahead as Trial Results Could Expand Market

Navidea Biopharmaceuticals (NAVB) delivered a surprise to investors with earlier-than expected top-line interim results from the company’s NEO3-06 trial, which demonstrated Lymphoseek’s ability to identify sentinel lymph nodes (SLN) in patients with head and neck cancers with a high degree of specificity. This is an important outcome, with the potential to expand Lymphoseek’s use beyond its current indications (metastatic breast cancer and melanoma) into head and neck cancer, and more importantly, into other cancers where SLN identification can be useful in staging and treating cancer. Based on the interim results, Lymphoseek met the primary efficacy endpoint by accurately identifying SLNs with a False Negative Rate (FNR) of just 2.56%, vs. the current standard-of-care, which is a highly invasive procedure (full lymphadenectomy in the head and neck). The FNR observed is a strong statistically significant outcome (p=0.0205), and led the trial’s independent Data Safety Monitoring Committee (DSMC) to recommend the study be halted early. The recommendation for stoppage was due to: 1) sufficient data collected to demonstrate Lymphoseek’s efficacy in SLN identification; and 2) the safety benefit to patients that can avoid full lymph node excision, which typically requires plastic surgery of the mouth, neck, and face and can cause other long-term health issues. When a DSMC recommends a trial be stopped early due to the benefit of a new diagnostic or therapy, it’s generally good news. As a result NAVB shares should work higher as investors digest the importance of the event, which will become more apparent as: 1) the company makes the official decision whether or not to stop the NEO3-06 trial (expect about a month of analysis); 2) when full study results are released in peer-reviewed journals and at medical meetings (data to be presented at the Joint International Oncology Congress (JIOC) and Society for Nuclear Medicine and Medical Imaging (SNMMI) meetings in late May and early June respectively); and 3) as the company moves to file for approval of the new head and neck indication with the potential to get SLN identification in Lymposeek’s label (filing potentially in 4Q 2013). Should NAVB officially close the study, we expect these events in the next few months, representing significant catalysts for NAVB shares. Additionally, an official announcement of Lymphoseek’s launch from the company and its partner, Cardinal Health (CAH), with details on the program are expected this quarter, and potential EU approval of Lymphoseek in the coming quarters are both potentially stock moving events. The company is actively seeking a marketing partner in Europe, another potential piece of good news for NAVB. With shares falling after the March approval of Lymphoseek, largely on increased short-selling, investors can be opportunistic in taking advantage of a better share price and the opportunity for Lymphoseek to be bigger than the product’s initial approval indicates. As catalysts unfold, we expect NAVB to climb.

NEO3-06 results demonstrate an ability to dramatically reduce surgical trauma when using Lymphoseek. Navidea enrolled 80 patients in the NEO3-06 trial, and 39 subjects were determined to have pathology-positive lymph nodes. Lymphoseek identified 38 of these patients, representing a FNR of 2.56% (p=0.0205). Most importantly, multiple level nodal dissection (involving the removal of a large portion of the head and neck lymph node tissue) of patients in the trial with cancer-positive nodes led to an average removal of 38 lymph nodes per patient. Lymphoseek, on the other hand, led to the removal on average of 4 lymph nodes per patient, highly relevant because the over-aggressive dissection of lymph tissue contributes to long-term morbidities in these cancer patients.

Label expansion for Lymphoseek is key to driving upside. As we wrote in our prior article, SLN identification is the key to NAVB’s long-term story, and these interim results support our thesis that Lymphoseek is a differentiated diagnostic tool for use in SLN identification. Given that there are currently no approved diagnostics that can specifically identify sentinel lymph nodes (SLNs), and that many papers have been written on the desire to do lymphatic mapping in other solid cancers, Navidea may be at the forefront of a key trend, which could reward shareholders nicely. While the company is expected to give more detail on Lymphoseek’s launch in the coming weeks, we note that pricing is set at ~$300, the low end of expectations. This indicates that Cardinal is confident that it can drive significant market share gains with competitive pricing, and that ultimately, the goal is to replace current standard-of-care lymphatic mapping agents. With doctors and institutions making and saving more money on Lymphoseek vs. the current agents, we believe uptake will be strong once doctors understand the agent and the value proposition to their institutions and practices.

To illustrate the benefit of the new trial results, we note that Lymphoseek’s current label for lymphatic mapping is just for breast cancer and melanoma, an addressable market of about $100M in the U.S. However, providers that focus on cancers other than breast and melanoma have indicated that they would like to use lymphatic mapping if the imaging process was more precise. As the only imaging agent that may accurately pinpoint sentinel nodes (we’ll know details with the full data set), Lymphoseek could be truly ‘enabling’ for lymphatic mapping in virtually any tumor that spreads primarily through lymphatic channels. Assuming that Lymphoseek can obtain a SLN claim in its label, Navidea has the potential to move the radiopharmaceutical towards utilization in a variety of cancers, including head & neck, prostate, colorectal, and lung. An SLN claim and broader adaptation of SLN mapping could expand the market opportunity in the U.S. to the 1.2M new cancer patients annually, with another 7.4M worldwide. With Lymphoseek’s net price at $300 per procedure, and peak penetration of 70%, annual Lymphoseek sales could reach over $250M domestically and $1.5B ex-U.S assuming similar pricing. A 50/50 revenue split with Cardinal Health and expectations for a similar marketing agreement internationally mean that NAVB has potential to generate significant peak revenue if backed by a “pan-carcinoma” label. Given, this relies on adaptation of SLN identification as a standard in solid cancers, but we believe the interest and demand is there. Navidea expects gross margins on the product of around 75%, an important facet of the story which may drive interest from larger cancer diagnostic companies. While we fully expect Lymphoseek’s launch to start out at a measured pace given the narrow initial label, data from new cancer indications and label expansion to include SLN identification provides an opportunity for the imaging agent to ramp to significantly higher levels than most expect.

New data from NEO3-06 trial should help Lymphoseek’s initial launch ramp. Lymphoseek was approved in March to assist in the localization of lymph nodes draining a primary tumor in patients with breast cancer and melanoma. While the March FDA approval was good news, it was fully expected by the market, and the real upside in the stock will come from broader use of Lymphoseek in other cancers to diagnose mestastases. Importantly, the head and neck results may just be what the company needs to expand Lymposeek’s label such that the agent will be reimbursed in a multitude of cancer indications. In addition to market expansion for Lymphoseek, the NEO3-06 trial results also add more current data to Lymphoseek and its superiority to existing lymphatic mapping products. These data should be very helpful to Cardinal Health’s sales force (the U.S. commercial partner) when rolling out Lymphoseek to physicians later this quarter. With the recent results from the NEO3-06 trial in hand, Navidea said it expects to fully analyze the mature data set once available, present details at a medical meeting this year, and will consider submitting a Supplemental New Drug Application (sNDA) to the FDA for an expansion of Lymphoseek’s labeling by year-end. Notably, a new indication for head and neck cancer to Lymphoseek’s current label expands the current addressable population by an incremental 25%. Including SLN identification in Lymphoseek’s label would pave the way to a much broader market, essentially opening the addressable population up to all solid cancers; this would be a key event for Navidea.

Better prospects for Lymphoseek, cheaper price.  Navidea is seeking an ex-U.S. partner and has indicated that it hopes to secure a collaboration in mid-2013. The company submitted a Marketing Authorization Application to the European Medicines Agency (EMA) in December of 2012 and expects a decision late this year. In addition, Lymphoseek is being tested as a mapping agent in colorectal cancer and enrollment in this investigator-initiated trial should begin soon. Since Lymphoseek was approved in March, NAVB has traded off 25% on the back of a 17% short interest, but we believe the stock has put in its bottom around $2.50. With the new data creating the potential to substantially expand Lymphoseek’s target market, short sellers may take leave and new buyers are likely to find Navidea attractive, sending the shares back into the $3.00 and possibly $4.00 range as several catalysts materialize over the coming months.