Are Short Sellers On to Something at Navidea Biopharmaceuticals?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below, we take a look at biotech Navidea Biopharmaceuticals (NAVB), whose shares sold short, according to The Wall Street Journal, jumped 6%. That amounts to more than 17% of its float so its short interest ratio is 18 days to cover, or the number of days it would take to completely buy back all the shares sold short. The Motley Fool thinks seven days is a lot so it's always possible we could see a short squeeze, but let's see if the specialty pharma still has the power to make short work of short sellers.

Navidea Biopharmaceuticals snapshot

Sources: wsj.com, FinViz.com. N/A = not available; Navidea does not pay a dividend.

Just because the shorts are piling in doesn't mean you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
Navidea's lead product is Lymphoseek, a marker used to determine the spread of certain solid-tumor cancers into the lymphatic system, which has the potential to be a top-tier targeted imaging agent for lymphatic mapping. Following the disappointment associated with receiving a complete response letter from the FDA last September, Navidea finally has a PDUFA date at the end of next month that should determine once and for all whether it has addressed the regulatory agency's concerns.

Fortunately, those issues centered on its contract manufacturing partners and not the imaging agent's efficacy or safety, so considering it also filed a marketing authorization application with the European EMA, there might be some sense behind investors feeling confident that it has.

If the FDA does give Lymphoseek its imprimatur, Navidea and its U.S. marketing partner, Cardinal Health (CAH 2.07%), plan to hit the ground running. There's a worldwide market opportunity approaching $450 million, depending on who's doing the counting, with the U.S. representing almost half of it at $200 million. The EU is second with $70 million, according to Navidea, and the rest of the world comes in at $180 million.

Of course, Navidea won't recognize all that revenue because that's just the addressable market. It's going to have to split the proceeds with Cardinal, which also has the responsibility for determining what price to sell the agent (analysts have pegged it at around $400 per treatment ). As they're also entitled to half the U.S. sales, it's going to be a much smaller number that ends up on Navidea's top line. Short sellers may agree there's an opportunity here, but it's likely a far smaller one than longs are suggesting.

Burning down the house
Making sure there's enough cash to cross the finish line is another concern, and my Foolish colleague Rich Smith recently noted Navidea has been burning through cash like a house afire. It's had to tap the public equity markets on several occasions recently to give itself a cushion, but at the end of January it issued yet another 1.5 million shares in an effort to raise $4.4 million more.

Investors might be more worried about the dilution their suffering if all Navidea had was just that one marker in its portfolio. But because it is also actively developing three additional radiopharmaceutical agent platforms -- NAV4694 for diagnosing Alzheimer's, NAV5001 for diagnosing Parkinson's, and RIGScan to help surgeons, particularly, to locate colorectal cancer -- they're likely more willing to cut it some slack for the time being. Success with Lymphoseek will give it the wherewithal to finance its other programs, though don't be surprised if after approval and its stock prices spikes Navidea quickly hits the equity market again for more fast cash.

While NAV4694 is probably the next best thing it has with plans for commencing phase 3 studies early this year, it still means we won't see revenues from it until 2016 at the earliest. Worse yet, Eli Lilly (LLY -2.63%) already won FDA approval last year for an Alzheimer's disease imaging agent  and it received the European nod in January.

With NAV5001 and RigScan even further out on the schedule -- RigScan is essentially a backburner project at this point -- Navidea needs Lymphoseek more than ever and the short sellers are betting it will fall short.

Don't sell yourself short
No doubt this moment has been a long time coming and harboring some skepticism isn't exactly unwarranted, but I'm willing to bet it does make it over the top, so I'm rating Navidea on Motley Fool CAPS to outperform the broad market indexes. 

Share your views in the comments box below on whether short sellers should be squeezed till it hurts or if the stock ought to be shorted till the sun don't shine.