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Biotech Stock Mailbag: Navidea, Celsion, Raptor and Threshold

BOSTON ( TheStreet) -- This week's Biotech Stock Mailbag is open for business.

@shakes2222 asks, "Why no follow-up after Navidea's conference call yesterday [Tuesday]? Do you have an opinion on FDA approvability of Lymphoseek? Timeline?"

Lymphoseek would have been approved this week had it not been for an unresolved problem at the third-party manufacturing facility that makes the lymph node mapping agent for Navidea Biopharmaceuticals (NAVB - Get Report). From what I heard Tuesday, FDA doesn't appear to have any issues with Lymphoseek's efficacy or safety, a positive. A rule of thumb is to allow six months for manufacturing issues to be resolved, so Navidea has a shot at Lymphoseek approval in the second quarter of 2013.

Let's discuss the bad news now. Lymphoseek is supposed to be a "better" radio-labeled sulfur colloid that doctors will want to use eagerly during imaging procedures that track the spread of breast cancer and melanoma to surrounding lymph nodes. The problem, however, is current sulfur colloids do this important job just fine today. Doctors aren't clamoring for a better radio-labeled sulfur colloid, which means Lymphoseek is trying to solve a problem that doesn't exist.

Even assuming Lymphoseek does garner significant use, the market is too small to justify Navidea's current $400 million market value. Let's run some numbers:

There are about 300,000 lymphatic mapping procedures done each year in the U.S. -- mostly breast cancer and melanoma with some head-and-neck cancer thrown in. Navidea hasn't announced Lymphoseek pricing but let's assume $400 per patient, which is the high end of the expected range. That works out to a $120 million commercial market for lymphatic mapping agents.

Cardinal Health (CAH) controls about 60% of the U.S. market with its current radio-labeled imaging agents. Cardinal will be selling Lymphoseek for Navidea. If Cardinal replaces all its current imaging sales/market share with Lymphoseek, sales will total $72 million. Of that $72 million, Navidea receives half, or $36 million.

That's the rosiest scenario. What happens if, more realistically, Cardinal doesn't cannibalize 100% of its existing cancer imagine agent sales in favor of Lymphoseek, which it must share revenue with Navidea? If you assume Lymphoseek grabs half of Cardinal's existing market share -- 30% overall -- total end-user sales would total $36 million. That's $18 million to Navidea.

These estimates represent peak sales, so reachable in 2015-2016 but not 2013.

Navidea has 100 million shares outstanding but you really need to add another 50 million shares to account for convertible stock, warrants and stock options. This gives Navidea a market value of $400 million.

Stick a sky-high (and totally unjustified) 10-times sales multiple on Lymphoseek revenue of $36 million and you still can't justify Navidea's current market value. The valuation story deteriorates if you use more realistic Lymphoseek peaks sales estimate and a lower multiple.

Obviously, Navidea paints a far rosier picture of Lymphoseek's commercial potential, mainly by significantly upsizing the number of lymphatic mapping procedures performed annually. The company believes use of Lymphoseek can expand well beyond just breast cancer and melanoma patients into lung, colon and prostate cancers. There are more than 1 million patients with cancers that could benefit from lymphatic mapping, says Navidea.

Reaching a market potential that big, however, will require Navidea and Cardinal convincing doctors to use imaging agents like Lymphoseek in cancer patients where they've never been used before. Large clinical trials will be needed. Not an easy task.

Analysts covering Navidea, as a group, project approximately $48 million in Lymphoseek sales to Navidea in 2013. [This was before the FDA rejection, so this estimate may be lower now.]

This implies $90 million in end-user sales, or 240,000 procedures (still assuming $400 per patient.) If there are only 300,000 procedures performed annually, analysts are implying Lymphoseek captures 80% market share in its first year on the market.

Unrealistic? Seems so.

Pamela L. asks, "You attended a conference in Boston recently but I never saw you write anything about it. Did you see any companies that you liked?"

You're correct. I did spend a couple of days at the Stifel Nicolaus healthcare conference and saw a few promising company presentations. In no particular order:

Sarepta Therapeutics (SRPT): I've written enough about eteplirsen already. This was my first opportunity to see CEO Chris Garabedian present the Duchenne muscular dystrophy data and the overall story in person. I walked out impressed and optimistic about the Oct. 11 presentation of the 48-week eteplirsen data.

Clovis Oncology (CLVS): The CO-101 phase III study in pancreatic cancer is expected to report top-line results before the end of the year. My colleague Nate Sadeghi discussed CO-101 and the study at length last February. He also recommended caution because prior data on CO-101 is thin, making it hard to predict the phase III results with any confidence. I agree with Nate on that point and he was right not with his call not to own the stock since February, down 15%. But I can see the stock running higher into the phase III data (it's already doing so) and I'm more willing than Nate to take the leap of faith necessary to believe in a positive outcome from the phase III study. Clovis has a great management team, too.
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