This Diagnostic Company May Double in 2013

Although shares of Navidea Biopharmaceuticals (NYSEMKT: NAVB  ) are relatively unchanged over the trailing-12-month period, ask shareholders and they'd probably consider Navidea's performance a major disappointment.

That disappointment stems from a complete response letter, or CRL, received in September for the company's lead diagnostic candidate, Lymphoseek. In that CRL, the Food and Drug Administration noted that there weren't any problems with Lymphoseek's efficacy or safety, but there existed areas that needed addressing with regard to its third-party manufacturer. Following the resubmission of Lymphoseek to the FDA two months ago, I believe now is the time to seriously consider an investment in Navidea for a number of reasons.

To begin with, the technology is not only life-changing, but it's a marked improvement from what's already on the market. In simple terms, Lymphoseek is an injectable agent used in external lymph-node imaging and intra-operative lymphatic mapping, or ILM, procedures to help physicians determine which lymph nodes are infected with cancer and which aren't. Based on numerous comparative trials, Pharmalucence's sulfur colloid injection produced considerably more false-negative responses than Lymphoseek, and is tainted by longer waiting times and site injection pain, as well as more significant adverse events like hypersensitivity and anaphylaxis. Lymphoseek offers uniform preparation and minimal false-negative responses, and it dramatically improved the adverse event profile.

Another important aspect you have to consider is the nature of the CRL -- which was based on manufacturing, not efficacy or safety. Manufacturing snags are actually quite common these days, and rarely do they preclude a drug or diagnostic from eventual approval. MAP Pharmaceuticals' (UNKNOWN: MAPP.DL  ) inhaled migraine medication Levadex and Alexza Pharmaceuticals' (NASDAQ: ALXA  ) inhaled antipsycholtic drug Adasuve were both rejected because of manufacturing deficiencies. For MAP, its CRL was based on manufacturing process controls like product specifications and justification of process controls; however, its PDUFA date is rapidly approaching. In Alexza's case, it was manufacturing deficiencies in its Mountain View, Calif., facility that pushed back Adasuve's FDA approval from what would have been May 2012 all the way to late December.

The approval process may not appear smooth, but I'd project that an approval is coming at some point within the next year for Lymphoseek. Remember, as well, that Navidea has also submitted a Marketing Authorization Application with the European Medicines Agency.

Navidea's commercial partnerships with Cardinal Health (NYSE: CAH  ) can't be overlooked, either. Cardinal Health will ultimately be in charge of Lymphoseek's pricing -- probably a smart move on Navidea's part -- and has the pharmacies and manufacturing capabilities to begin commercial production within weeks of a U.S. approval.

Finally, we have Navidea's remaining diagnostic studies, including AZD4694, which is a late-stage radiopharmaceutical candidate that it in-licensed from AstraZeneca (NYSE: AZN  ) in 2011. AZD4694 binds to beta-amyloid deposits in the brain, which then show up in positron emission tomography scans and help in diagnosing Alzheimer's disease. Alzheimer's is largely a gray area in terms of research, so this diagnostic test could be a significant revenue generator down the road.

Focusing on the present, I'm not oblivious to the fact that heavy dilution due to cash burn does threaten to sack shareholder value. In fact, even if Lymphoseek is approved, it's very unlikely that Navidea would turn a profit within the first year of production. On the flip side, if research firm Ladenburg Thalmann's peak sales projection of approximately $450 million is accurate, then I'd estimate that annual sales of $110 million should be enough to turn Navidea profitable on Lymphoseek sales alone. By my estimates, this means a potential annual profit by as early as 2015, even with further R&D ongoing.

As you might imagine, the next big date is the PDUFA for Lymphoseek on April 30. Assuming it's addressed all of its manufacturing obligations, Navidea could be off to the races in 2013. Whether it's one, two, or three times the charm for Navidea, I like its prospects enough to enter a CAPScall of outperform on this small-cap biopharmaceutical company.

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