Navidea Biopharmaceuticals, Inc.
Q3 2014 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Welcome to the Navidea Biopharmaceuticals Third Quarter 2014 Earnings Call. My name is Hilda, and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Ms. Sharon Correia, Associate Director of Corporate Communications at Navidea. You may begin.

[Sharon Correia:]

Thank you, Hilda. Hello everyone and thank you for joining us today. On today's call are Rick Gonzalez, Chief Executive Officer; Tom Tulip, President and Chief Business Officer; and Brent Larson, Chief Financial Officer. At the end of the call, we will hold a brief question-and-answer period. Before we get started, we'd like to remind you that during the course of this call, management may make projections or other forward-looking remarks regarding future events or the future financial performance of the company. It is important to note that such statements about Navidea's estimated or anticipated future results or other non-historical facts are forward-looking statements and reflect Navidea's current perspective on existing trends and information. Navidea disclaims any intent or obligation to update these forward-looking statements. Actual results may differ materially from Navidea's current expectations depending upon a number of factors affecting Navidea's business. These factors include, among others, the inherent uncertainty associated with financial projections, timely and successful implementation of strategic initiatives, the difficulty of predicting the timing or outcome of product development efforts and FDA or other regulatory agency approvals or actions; market acceptance of and continued demand for Navidea's products, clinical and regulatory pathways, the impact of competitive products and pricing, patents or other intellectual property rights held by competitors, the availability and pricing of third-party sourced products and materials, successful compliance with government regulations and such other risks and uncertainties detailed in Navidea's periodic public filings on file with the Securities and Exchange Commission. Now I'd like to turn the call over to Rick Gonzalez, Chief Executive Officer of Navidea.

[Rick Gonzalez:]

Thank you, Sharon. Good morning everyone and welcome to our third quarter results earnings call. I am honored to be appointed CEO at such a pivotal time. What stood up to me as I was evaluating the opportunity with Navidea, was that Lymphoseek was in the cusp of achieving a strong, highly differentiated label, that would position it to succeed and make a real difference for surgeons and for patients. This was even more real, when I thought about my dad, and the aftermath he dealt with, after being diagnosed and treated for oral cavity cancer. As a kid I remember, that disfigurement that resulted from the surgery and as an adult, realizing the long term damage that resulted from his treatment, including hearing loss and facial paralysis. As I have come to understand the product, Lymphoseek, what it possesses in its simple elegance, and its ability to determine the spread of cancer to nearby nodes, as proven in extensive clinical studies, informed treatment decisions, and importantly, potentially reduce surgical time, patient disfigurement and morbidity, that is the case with head, neck and oral cavity cancers. As the new CEO, I have begun to devise and deploy a deliberate and fiscally responsible path, to ensure that our organization, number one, realizes the full commercial potential of Lymphoseek throughout the world, and second, advances the Manocept pipeline, which has the potential to not only bring about new detection agents, but also to produce novel therapeutics. Lymphoseek is the greatest urgency to our success. The product was launched mid-2013. It entered a space that had been dormant for decades, dominated by two data products that were ingrained when under practice of surgeons. Breaking this entrenched habit and getting customers to make a switch takes time. However, a lot has been accomplished to affect this change. We are currently observing strong utilization trends, including customer reorders, strong account growth, and strong procedural growth. There are several factors that drive these growth trends. Some of these are the differentiated label from other imaging agents, CMS's coverage that was received at the end of last year; greater visibility amongst Nuclear Medicine physicians, and the positive experience at customer sites. The underlying demand and market penetration accomplished thus far, is something for the organization to be proud of; and while these data and performance are favorable, we find ourselves below our initial 2014 Lymphoseek revenue expectations. As a result, we are revising our Lymphoseek revenue guidance for 2014 to approximately $4 million. This adjustment reflects a limited product profile, and not a lack of confidence in the underlying key performance indicators. In fact, these very indicators give us confidence in Lymphoseek's future. Some of these metrics include, Lymphoseek orders from approximately 470 hospitals, a 34% increase over the prior quarter, with 85 new accounts. Over 6,000 doses dispensed this quarter, an approximate 20% increase over Q2; and we continue to see a high reorder rate in excess of 80%. Encouragingly, these elements required for near and long term commercial success are coming together at an ideal time with the following; a 19% price increase, which will become effective December 1 of this year, and it's for the first time recorded out today. A CHMP positive opinion, and the expected European Commission approval, which opens up a key global market and most importantly, the new U.S. strong label, which establishes Lymphoseek as the only agent approved for sentinel lymph node biopsy in breast cancer, melanoma and head and neck oral cavity cancers. In addition, we can now promote the use of Lymphoseek for lymphatic mapping in all other solid tumors. We believe this changes the commercialization dynamics, and significantly impacts the market potential. We look forward to implementing methodical, cost effective strategies, to take advantages of these circumstances and accelerate revenue growth, and ensure Lymphoseek can play a role in the lives of as many patients as possible. More specifically, our immediate focus will be to enhance promotional efforts to target surgical oncologists, who are treating breast cancer and melanoma patients. As you know, breast cancer and melanoma are the two forms of solid tumors, with sentinel lymph node protection and lymphatic mapping are already standards of care, and thus the largest immediate market. Early in our launch, commercial emphasis was directed to educating nuclear medicine professionals. However, based on my commercial experience and the recent evolution of Lymphoseek's commercial, we will now direct that focus to promotional efforts to key decision makers when the treatment team, that includes surgeons and oncologists, in addition to nuclear medicine physicians. The goal here is to achieve the right reach and frequency, to the right targets, with the right product message. Further, the label also allows us to actively engage surgeons using clinical terms that they commonly use. To discuss how the product fits into the continuum of patient are. Until now, the labels have been restrictive and limited out commercial efforts. We believe this new label will allow us to deploy a more effective commercial tactical plan and become the standard of care in sentinel lymph node biopsy for breast cancer, melanoma, and head and neck and oral cavity cancers. In addition, this new label allows us to expand commercial efforts and drive Lymphoseek's use in lymphatic mapping for additional solid tumors. Our vision is for lymphatic mapping to become the standard of care in solid tumor cancers, recognizing Lymphoseek as the agent of choice. This process has already begun. The migration of lymphatic mapping to other solid tumors is well under way, namely in head and neck oral cavity cancers. As you know, Lymphoseek is the only agent approved specifically for sentinel lymph node detection. It was observed in clinical trials that Lymphoseek has the potential to reduce the number of nodes removed, and potentially, minimize surgical time, patient disfigurement and morbidity. In actual practice, up to 70% of patients are node negative. These patients may directly benefit from our Lymphoseek procedure. As more hospitals and surgeons become aware of this, we believe sentinel node biopsy will routinely be used in head and neck oral cavity cancers, and ultimately displace complete normal dissections and become the standard of care. Complementing these efforts, we will support clinical researchers, performing investigator initiated post marketing studies, intended to optimize Lymphoseek for use in other solid tumors. Several studies are already underway or are being planned, including the recently announced NIH funded cervical cancer study. As the results from these studies get reported, we anticipate greater visibility for Lymphoseek, which we believe will result in greater adoption in these cancer types. Now I would like to comment on Lymphoseek's imminent European approval. As previously announced, in Europe, Lymphoseek was recommended for centralized approval to detect sentinel lymph nodes in breast cancer, melanoma or certain head, neck and oral cavity cancers. While this approval covers all EU countries, our strategy will likely begin in the United Kingdom, Germany, Italy, France and Spain. This will allow us to commercialize in a target fashion across the largest healthcare markets in Europe. We look forward to sharing more details about our commercialization plans in the coming months. Now turning to our pipeline; research and development efforts are focused primarily on Manocepts. The Manocept platform uses the same backbone as Lymphoseek. By switching out the reporter, we can apply the same core molecule, not just in new diagnostics, but also to new therapies. Therapies that target a host of conditions ranging from arthritis to cancer to infectious disease where macrophages are implicated in the progression. We are already making headwind. In July, we formed a partnership to co-develop products with the potential to detect and treat arthritic conditions. By pairing Manocept with a 10 radioisotope, we can deliver payload that selectively detects and destroys damaging macrophages. Another application that is advancing clinically is in Kaposi's sarcoma to detect the spread of the disease. We currently have a 12 patient study at University of California, San Francisco, actively enroll or enrolling patients in this indication. As a final example, we have determined that a Manocept construct may better serve the purposes originally envisioned for our RIGS program. Initial results are sufficiently compelling, that with NCI's approval, we are repurposing our RIGS grant to the use of Manocept to identify cancerous tissue during colorectal surgery. Given the number of conditions in which macrophages are directly or indirectly involved in disease progression, we believe the Manocept platform will continue to produce a rich development pipeline for novel detection agents and therapeutics. Along these lines, I have asked one of our Directors, Dr. Michael Goldberg, to lead an initiative to further explore the therapeutic applications of Manocept and its commercial potential. As discussed earlier this year, the company commenced a restructuring in the second quarter of this year, with the goals of sharpening our focus on Lymphoseek and the Manocept platform, and extending our cash runway. We started to realize the positive effects that the restructuring has had on our burn, as demonstrated by a nearly 20% reduction in sequential research and development expenses, mainly attributed to the Neurotracer program from the second to the third quarter. In parallel, we are actively pursuing partnerships, to enable rapid completion of the ongoing Phase-III studies of our neuroimaging agents. This allows us to minimize what we directly invest in these programs, while retaining the financial upside in the form of potential royalty payments. Based on our pending price increase for Lymphoseek and the effect on product revenues, our existing cash balance, the expected sales growth, the available options to further reduce operating expenses and our access to the existing credit facility, we believe we have the cash resources to attain our immediate goals, and position the organization to realize the full commercial potential for Lymphoseek. With that, I will turn the call over to Brent to review our financial performance.

[Brent Larson:]

Thank you, Rick. Total revenue recognized for the third quarter of 2014 was $2.25 million compared to $400,000 for the same period in 2013. For the nine months ended September 30, 2014, Navidea total revenue was $4.1 million compared to $596,000 for the same period in 2013. Product revenue derived from net sales in the third quarter of 2014 was $1.1 million, compared to $1 million for the second quarter of 2014. Excluding the impact of approximately $145,000 in revenue during the second quarter, related to the transfer price adjustment on inventory restocking at our distributors' radial pharmacies, adjusted third quarter product sales increased sequentially from approximately $900,000 to $1.1 million. This represents an increase in sales revenue of over 22% quarter-on-quarter. In addition, we received a $300,000 upfront payment from our Chinese distribution partner for Lymphoseek, Hainan Sinotau, which brought overall revenue generated by Lymphoseek for the quarter up to a total of $1.4 million. Grants and other revenue for the third quarter rose $848,000 compared to $257,000 for the same period in 2013. Grant and other revenue for the nine months ended September 30, 2014 rose $1 million compared to $324,000 for the same period in 2013. Third quarter operating expenses were $6.8 million compared to $10.3 million for the third quarter of 2013. Operating expenses were $26 million for the nine months ended September 30, 2014 compared to $25.8 million for the same period in 2013. While total operating expenses remained essentially flat for the nine months ended September 30, 2014 compared to the same period in 2013, the reprioritization announced in May 2014 to focus our efforts and resources on Lymphoseek in the Manocept pipeline, and lessen our burden related to our neuro assets, began to be realized in the third quarter of 2014, resulting in reduction of nearly 20% in research and development expenses for the third quarter of 2014, from the second quarter of 2014. Our third quarter net loss attributable to common stockholders were $6.9 million or $0.05 per share compared to a net loss attributable to common stockholders of $11.3 million or $0.09 per share for the third quarter of 2013. For the nine months ended September 30, 2014, Navidea's net loss attributable to common stockholders was $28.9 million or $0.19 per share, compared to a net loss attributable to common stockholders of $28.9 million or $0.25 per share for the same period in 2013. We ended the quarter at $10.4 million in cash and cash equivalents and expect to receive the $1.1 million related to the refund of the USFDA filing fee some time here in the fourth quarter. The FDA previously has agreed to refund that filing fees as a part of Lymphoseek being granted orphan drug status, in head and neck cancer. We believe we can effectively continue to manage our available cash and resources with our expected growth from revenue and gross profit from Lymphoseek. Our ability to continue to lower our program costs related to our neuroimaging assets, and when or if needed, access to some portion of the remaining $32 million available under our line of credit from our largest investor. In recent discussions with these investors, they have reiterated their enthusiasm for the gross prospects for Lymphoseek and their support for our business. We are confident that if we continue to maintain our fiscal discipline and have sufficient -- that we have sufficient capital resources available to achieve our strategic development and commercial milestones. I will now turn the call back over to Rick.

[Rick Gonzalez:]

Thank you, Brent. This has been a very active year, marked by tremendous progress. In the second half of this year alone, we have achieved several milestones as an organization which include the following; recommendation for approval in Europe; receipt of NIH brand to fund a multi-center study of Lymphoseek and cervical cancer; orphan drug designation for Lymphoseek and head and neck cancer, ensuring seven years of market exclusivity and providing us a $1.1 million refund of filing fees; development and commercialization agreement for Lymphoseek in China and most importantly, to our near and long term success, a differentiated label, which allows us to optimize our commercial performance. We will now open the call for questions.

[Operator:]

(Operator Instructions). The first question comes from Kevin DeGeeter from Ladenburg Thalmann. Please go ahead.

[Kevin DeGeeter:]

Hey good morning guys. Thanks for taking my question. Really two questions here I guess to begin with; with regard to the repositioning of the commercial missed call on surgical oncologists, do you anticipate that the current field sales force, which is, I believe, really kind of focused more towards medical sales liaison, kind of skill set is the appropriate sales force that you anticipate needing to bring in, perhaps some new personnel with new skills to execute on this transition?

[Rick Gonzalez:]

Kevin, thanks for the call. This is Rick -- I mean for the question. Based on my initial assessment of the current situation, both commercially with the product and the team that has been deployed with -- to promote Lymphoseek in the marketplace, and the new focus into surgical oncology; there are several things that play into that. Number one is, the redeployment and refocusing of existing personnel. As you know, we have MSLs and sales representatives; and before, when the label was as restrictive as it was, there was a need for medical science liaisons to educate professionals, that the questions beyond the boundaries of the label. However, with the recent change in label, it opens up our ability to compliantly promote directly to decision makers, which go beyond nuclear medicine physicians to include surgical oncologists, and even in some cases, medical oncologists, as the treatment teams are formed per institution. So I anticipate, not only redeploying what currently exists today to a new target audience, with a new product message; but also, I am looking forward to enhance the core competencies of the commercial team, to bring a level of experience that would help us in executing that plan. Primarily looking to professionals that have had experience in the oncology marketplace, us actively selling. That is what I believe, together with a team that exists, the label that we have, and the commercial focus that now Navidea has, to have that in place by the beginning of the year, and I look forward to updating everyone on what those plans will be for the years coming.

[Kevin DeGeeter:]

Okay, great. Fair enough. And I guess sort of my related follow-up, a lot of us are sort of looking out towards 2015 at this point. I am not going to ask you for a specific guidance; but in terms of the continued ramp in Lymphoseek, is there anything you can point to at this point that would suggest a particular inflection point within 2015, with regard to the adoption path? Or should we continue to think about the -- call it 10% to 20% sequential growth is sort of being the appropriate trajectory for this product for the foreseeable future? Thanks.

[Rick Gonzalez:]

Yeah, and as we shape our operations to capitalize on the existing opportunities, that exist with Lymphoseek, I would expect a continued growth pattern. What I am unable to share with you at this point, is where the inflection point will come. However, with what we have with the label, the new leadership, the enhanced commercial infrastructure that will be deployed and based on my short, three week tenure with the organization, I am very confident that we will continue to see a growth pattern through 2015 and beyond. There is other aspects that I am looking at, beyond the boundaries of the U.S. and to the European market as well, and that gives me high level of confidence that beyond 2015, we will continue to see those growth patterns. But at this time, I would not be more specific until I have a completed plan that can be communicated to the marketplace.

[Kevin DeGeeter:]

Fair enough. Thanks for your help.

[Rick Gonzalez:]

You're welcome.

[Operator:]

The next question comes from Stephen Dunn from Life Tech Capital.

[Stephen Dunn:]

Good morning. Thanks for taking my questions guys. Just a little housekeeping then; so we are looking at an average selling price with Cardinal of $357, that's a 90% increase, is that right?

[Rick Gonzalez:]

That is correct.

[Stephen Dunn:]

Okay. I guess, this one might be for Brent. On the cost of goods sold, I understand transfer price adjustment for Q2, basically sales -- I guess you wrote down sales, about $144,000 down from Q2. But the cost of goods sold for Q3 looks abnormally high for me. So could you give me a little color on what your actual gross margin is on the Lymphoseek?

[Brent Larson:]

Steve, and one thing I guess it wasn't highlighted in the press release exactly, we will put that in the 8-K that gets filed with the press release today. There was an inventory obsolescence write down that occurred during the third quarter, of about $600,000. We had to do a number of runs related to the validation of this product, to get it qualified for FDA, and we had hoped that we would see sales that would eat up most of that. But at the end of the day, we are now at a point where I think we recognized the expiry of the product that's coming out, that's not going to allow us to use all the inventory that was built for the validation purposes. So we will make sure to highlight that in the 8-K, it's actually a good question. The margins I think that we have always talked about historically are about 75%, and I think we are getting pretty close to that on an actual, as-adjusted basis.

[Stephen Dunn:]

Yeah, I think you should hit that with the price increase there, going forward. I guess one more and I will jump back in the queue; what should we expect as the running rate of loss in RNAV? Because it was first reported, Q with that operation in there. Is it going to be about that same level going forward, or is there some inception costs in the quarter?

[Brent Larson:]

There were -- I am sorry, Rick.

[Rick Gonzalez:]

Go ahead Brent.

[Brent Larson:]

There were some inception costs in the quarter, but the other thing to keep in mind here Steve is that, RNAV is just kind of getting started with their clinical activity, so their expenses are going to go up somewhat. There is a plan put in place to use the capital that was raised of about $4 million in total from the investors over the course of the next three years, is kind of the general plan on that. But the other thing to realize is, you won't see all of that in our financial statements, because we are about a 30% equity owner in RNAV, so we are adjusting our equity basis accounting accordingly, and once we get our equity basis accounting down to zero, you won't see those additional losses falling through. So the RNAV piece, from a reporting standpoint is going to be one that we are going to have to report on the progress of, as events happening, and certainly we will do that. But I don't know if the financial impact to that is going to be felt directly in our financial statements, because of the way the company is financing and structured.

[Stephen Dunn:]

All right. And then just one last one, this one for Rick I guess; on Europe you are going to launch the big five. Do you have a feel for the pricing then, because it works a little different? You are looking at roughly $100 a unit there in Europe?

[Rick Gonzalez:]

Thanks Steve. We don't know yet there is -- right now it’s the analysis phase looking at what the pricing could be in Europe, but that determination has not been yet finalized. We have had a lot of interest from partners, as we get closer and closer to the final approval to be granted, and we will be in a position to commercialize, once that process is completed. But the pricing has not been yet established. As you know my prior role, I was heading commercialization in Europe, so I am very intimately familiar with the market access process, pricing negotiations in these particular markets and beyond. So I am carefully and closely keeping oversight over what is going on, to ensure that we can maximize the value of Lymphoseek as we launch in Europe.

[Stephen Dunn:]

Are you planning on launching in those countries in order, because it's going to be difficult to do a big bang in all five, at the same time?

[Rick Gonzalez:]

Correct, that is a sequential -- it will be a sequential approach. Each country has its own nuances, as it pertains to market access. So we will contemplate those one at a time. I mean, one country is one market. Although it will be a centralized approval. So they are not -- if they were not listed in a priority order, it's just an aggregate, we will target those five markets to begin with.

[Stephen Dunn:]

Okay, thanks. I will jump back in the queue.

[Rick Gonzalez:]

Thanks Steve.

[Operator:]

The next question comes from Steve Brozak from WBB Securities.

[Unidentified Analyst:]

Hi this is [indiscernible] on behalf of Steve Brozak. Rick I just have a question that I have for you on the refocusing on the decision-makers -- on the surgical decision makers at hospitals. Exactly, what kind of tactics are you planning to employ, and can you kind of characterize and talk about your revised approach to those decision makers and the types of things that you can be doing as you pursue them? And I have one more follow-up question after that?

[Rick Gonzalez:]

Good morning Steve. Thanks for your question. Without going into tactical specifics, the general direction is that, these patients, breast cancer, melanoma, head and neck patients are usually handled by a treatment team. The treatment team, although each professional has a role to play within that treatment continuum, most often decisions are made, discussed for example in tumor boards and others. The integration of cancer care is an important phenomena for us to understand and be able to communicate the Lymphoseek benefits to the treatment professionals involved in the patient's care. With that in mind, that is how we will shape our commercial infrastructure, our commercial deployment, our messaging and everything that we do to interface and ensure, that at the end of the day, the patients benefit from Lymphoseek treatment. Sometimes, we just look at products from -- as an outsider. But when you are within the cancer care continuum, and you position your product to be part of that process, it makes it that much more compelling for an end user to create demand for that specific product. That is the intent that we will have moving forward, and what the strategy will entail. But tactics around it, at this point are in the formation stages. We are looking as to what has been done, and what will need to be done, but that's a general direction that I would like to go in.

[Unidentified Analyst:]

And the follow-up to that is, essentially it seems as if the FDA has given you guys, more or less, a pan-tumor designation. How does that play into any sort of revised approach or can it -- you guys would know better how you can use that, and so -- how does that play into a revised approach and how do you think that would play with these decision makers on the surgical teams? And then I have one last question after that, and then I will hop off?

[Rick Gonzalez:]

Yes. As it pertains to the broad label, the broad label presents a formidable opportunity. However, there are some very real challenges to overcome. However, my excitement, when I was looking at Navidea, came from just precisely this. In my career, at least in the commercial space, very rarely do you get the opportunity to get a label brought in, to a point that Lymphoseek's label, by the FDA, recently. However, we have to be very methodical and very premeditated in the way we capitalize on that label. So the way that I see this and as I commented in my prepared remarks, as we see that sentinel node biopsies are a standard of care in breast cancer and melanoma, not so much in other tumor types. So we have to make sure that Lymphoseek is positioned appropriately within this spacing, which is already a standard of care. Now presenting it as the best alternative approved -- alternative for the care of those patients, followed by the market dynamics that are unfolding in the establishment of sentinel lymph node biopsy as a standard of care in other tumor types. That will be more of a mid-range type of process, which has worked simultaneously, while we position the product commercially in this space, and which I believe, it should replace the standard of care and become the product of choice, moving forward.

[Unidentified Analyst:]

Okay. And the final question, and thank you very much for answering both of those questions is, the effective revenue revision was $4 million for 2014. That was because of the profile of the product. Obviously, the types of things that you have been discussing -- these first two questions will hopefully adjust the profile of the product. Once that's done, or you have accomplished that, when can we expect to hear about 2015? And that's the last question.

[Rick Gonzalez:]

Yes so right now, we are in the finalization of the 2014 year, looking into the 2015 planning. I will be in a position to share more details around the 2015 expectations in our beginning of the year conference call, where I look forward to updating all of you on the plans, the commercial plans, and everything that has to do with my anticipated performance of the product, looking at 2015.

[Unidentified Analyst:]

Well thank you very much.

[Rick Gonzalez:]

Thanks Steve.

[Operator:]

We have no further questions at this time. I would like to turn the call back over to Mr. Rick Gonzalez, for any final remarks.

[Rick Gonzalez:]

Yes, thank you. I want to reiterate that I am very honored to serve as a CEO. I have an acute appreciation for the responsibility and accountability this role has to you as shareholders, and the patients, who like my dad, who could benefit from Lymphoseek. The work that went into bring in Navidea Lymphoseek, to where it is today, has been tremendous, and as a result, I am inheriting the reins of the organization at an ideal time. With that, we look forward to keeping you updated in our progress and future calls. Have a fantastic day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.