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NAVB > SEC Filings for NAVB > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for NAVIDEA BIOPHARMACEUTICALS, INC.


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with our Consolidated Financial Statements and the Notes related to those statements, as well as the other financial information included in this Form 10-K. Some of our discussion is forward-looking and involves risks and uncertainties. For information regarding risk factors that could have a material adverse effect on our business, refer to Item 1A of this Form 10-K, Risk Factors.

The Company

Navidea Biopharmaceuticals, Inc. (Navidea, the Company, or we), a Delaware corporation, is a biopharmaceutical company focused on the development and commercialization of precision diagnostics and radiopharmaceutical agents. We have one approved product in the U.S., Lymphoseek® (technetium Tc 99m tilmanocept) Injection, a novel, receptor-targeted, small-molecule radiopharmaceutical, indicated for use in lymphatic mapping for breast cancer and melanoma. Lymphoseek is designed to identify the lymph nodes that drain from a primary tumor, which have the highest probability of harboring cancer. Additional investigational trials in other solid tumor cancers are anticipated to provide support for expanding the utilization of Lymphoseek into multiple other cancer types. We are currently developing three other radiopharmaceutical agent platforms. NAV4694, is an F-18 radiolabeled positron emission tomography (PET) imaging agent being developed as an aid in the diagnosis of patients with signs or symptoms of cognitive impairment such as Alzheimer's disease (AD). NAV5001, is an Iodine-123 radiolabeled single photon emission computed tomography (SPECT) imaging agent being developed as an aid in the diagnosis of Parkinson's disease (PD) and other movement disorders, with potential additional use as a diagnostic aid in dementia. RIGScanTM, is a radiolabeled monoclonal antibody being developed as a diagnostic aid for use during surgery to help surgeons locate occult or metastatic cancer, with a primary focus on colorectal cancer. All of these investigational drug products are still in development and must be cleared for marketing by the appropriate regulatory authorities before they can be sold in any markets.

Executive Summary

We believe that the future prospects for Navidea continue to improve as we make progress in executing our strategic vision to become a leader in precision diagnostics. Our primary development efforts over the last few years have been focused on the development of our now-approved Lymphoseek product candidate, as well as more recently on our other pipeline programs, including NAV4694, NAV5001 and RIGScan. We expect our overall research and development expenditures to continue to be significantly higher during 2013 as compared to 2012 due to the expansion of our clinical, regulatory, and business development staff and efforts that support the commercialization of Lymphoseek, further development of Lymphoseek, NAV4694, NAV5001 and RIGScan, and the potential sourcing and development of additional pipeline product candidates. The level to which the expenditures rise will depend on how successful we are in commercializing Lymphoseek and on the extent to which we are able to execute on our strategic development initiatives.

Our efforts in 2012 and to date in 2013 have resulted in the following milestone achievements:

Corporate/Financial

· Neoprobe Corporation became Navidea Biopharmaceuticals, Inc. (NYSE MKT: NAVB) reflecting the Company's biopharmaceutical focus on precision diagnostics development and commercialization.

· Implemented a $50 million credit facility with Platinum-Montaur Life Sciences LLC (Montaur) in July 2012, of which $15 million is currently available, to provide flexible financial resources to fund short- and long-term development and growth plans. In December 2012, the Company drew a total of $4 million under the Montaur credit facility. Montaur also exercised certain warrants in December 2012 and March 2013, providing $1.9 million and $1.4 million in proceeds, respectively.

· Completed an underwritten public offering of 1.5 million shares of common stock in February 2013, resulting in net proceeds to the Company of approximately $4.4 million after deducting expenses associated with the offering.

· Appointed pharma industry veteran Cornelia Reininger, MD, PhD, as Chief Medical Officer to lead ongoing development of our pipeline agents, playing a key role in medical strategy, protocol design, product positioning and regulatory direction. Formerly, Dr. Reininger spearheaded development and registration of the neuroimaging agents, florbetaben for Alzheimer's disease and DaTScanTM for Parkinson's disease.

· Augmented management with the addition of key strategic positions to strengthen the Company's global regulatory, commercial and manufacturing functions including William Regan, Senior Vice President, Global Regulatory Strategy; David Pendleton, Vice President, Marketing and New Product Planning; Stephen Haber, Vice President, Development; and David Casebier, Vice President, Chemistry, Manufacturing and Control.

Pipeline

· Lymphoseek

o Lymphoseek was approved and indicated for use in lymphatic mapping for breast cancer and melanoma by the FDA on March 13, 2013.

o Submitted the Lymphoseek Marketing Authorization Application to the European Medicines Agency in December 2012.

o Reached the interim analysis point of the NEO3-06 Phase 3 head and neck cancer study of Lymphoseek with results from the interim statistical analysis and reporting of the findings expected later in 2013.

o Initiated a collaboration with Maimonides Medical Center on an investigator-initiated clinical trial utilizing Lymphoseek for lymphatic mapping in colorectal cancer.

o Presented data from Lymphoseek clinical trials at more than 15 major medical meetings, including: Society of Surgical Oncology, European Society of Surgical Oncology, American Society of Clinical Oncology, Society of Nuclear Medicine, International Conference on Head and Neck Cancer, European Association of Nuclear Medicine, American Society for Radiation Oncology and Radiology Society of North America.

o Published data from the Lymphoseek Phase 3 Clinical Trial for Intraoperative Lymphatic Mapping of Lymph Nodes in Breast Cancer Compared to Sulfur Colloid and Vital Blue Dye in the Journal of Clinical Oncology Online (2012; e21066).

o Published results from the Lymphoseek Phase 3 Clinical Trials in Melanoma in the Annals of Surgical Oncology (DOI 10.1245/s10434-012-2612-z).

· NAV4694

o Initiated a Phase 2 clinical trial of NAV4694 as an aid in diagnosing AD with the goal to compare images from subjects with probable AD with similarly aged and young healthy volunteers.

o Presented data from the NAV4694 studies six major neurological medical meetings including: Human Amyloid Imaging meeting, Alzheimer's Disease Neuroimaging Initiative, Society of Nuclear Medicine and the Alzheimer's Association International Conference on Alzheimer's Disease.

· NAV5001

o Licensed NAV5001, an Iodine-123 radiolabeled imaging agent being developed as a potential aid in the diagnosis of PD, dementia with Lewy Bodies and other movement disorders, thus expanding the Company's neuroimaging pipeline.

· RIGScan

o Awarded a Small Business Innovation Research grant from the National Institutes of Health for development of a radioimmunoguided surgery agent aimed at detecting metastatic cancer, with potential for grant money up to a total of $1.5 million over three years if fully funded.

Our Outlook

With the U.S. approval of Lymphoseek on March 13, 2013, the Company is moving forward with preparations for commercial launch in the U.S. with our marketing partner, Cardinal Health, expected in the second quarter of 2013. As such, we expect to report revenue from Lymphoseek in the second quarter of 2013. However, as we do not yet have experience and insight into the level of potential sales success we may achieve with Lymphoseek, we do not currently expect to provide revenue guidance for 2013.

Excluding the results of our discontinued operations, as discussed below, our operating expenses over the last three years have been focused primarily on support of Lymphoseek and NAV4694 product development, and to a lesser extent, on efforts to restart active development of RIGScan. In addition, during 2012 we paid $1.8 million in option and sublicense fees ($1.1 million of which was non-cash in nature) related to a sublicense agreement with Alseres for the exclusive worldwide license of NAV5001.

We spent approximately $16.9 million, $15.2 million and $8.9 million in total on research and development activities in the years ended December 31, 2012, 2011 and 2010, respectively. Following the sale of the GDS Business, our entire organization is focused on the development of radiopharmaceutical agents that fulfill our vision of becoming a leader in precision diagnostics. Of the total amounts we have spent on research and development over the last three years, excluding costs related to our internal research and development headcount and our general and administrative staff which we do not currently allocate among the various development programs that we have underway, we incurred out-of-pocket charges by program as follows:

Development Program      2012            2011            2010
Lymphoseek            $ 5,632,183     $ 5,286,395     $ 5,854,703
NAV4694                 3,339,592       5,018,490               -
NAV5001                 2,159,483               -               -
RIGScan                   253,325       1,302,851         940,435

Due to the advancement of our efforts with Lymphoseek, NAV4694, NAV5001, RIGScan, and potentially other programs, we expect our total drug-related development and commercialization expenses for 2013 to increase significantly over 2012. The specific levels to which each program's expenditures may rise will depend in part on how successful we are in commercializing Lymphoseek and on the extent to which we draw on the other financial resources we have at our disposal. In general, development expenses in 2013 for Lymphoseek are expected to decrease as compared to 2012 while expenses related to NAV4694, NAV5001 and RIGScan are all currently expected to increase in 2013 over 2012.

During 2013, we expect to incur additional development expenses related to supporting the Marketing Authorization Application (MAA) review of Lymphoseek in the EU, our NEO3-06 clinical trial and studies to support Lymphoseek in a potential post-commercialization setting, and support the other product activities related to the potential marketing registration of Lymphoseek in other markets. In addition, we expect to incur significant costs during 2013 to support our business development and commercialization activities surrounding Lymphoseek. We cannot assure you that Lymphoseek will achieve regulatory approval in the EU or any other market outside the U.S., or if approved, that it will achieve market acceptance.

We also expect to incur significant expenses for NAV4694 during 2013 related to ongoing additional Phase 2 clinical trials and the initiation of a Phase 2 clinical study in subjects with mild cognitive impairment and a pivotal Phase 3 clinical trial in subjects with AD, as well as costs for manufacturing-related activities required prior to filing for regulatory clearance to market. NAV4694 is currently not expected to contribute revenue to the Company until 2016 at the earliest. We cannot assure you that further clinical trials for this product will be successful, that the agent will ultimately achieve regulatory approval, or if approved, the extent to which it will achieve market acceptance.

We expect to incur significant expenses for NAV5001 during 2013 related to initiation of Phase 2 and Phase 3 clinical trials, as well as for manufacturing-related activities required to support clinical activities and to prepare to file for regulatory clearance to market. NAV5001 is not expected to generate revenue for the Company until 2016 at the earliest. We cannot assure you that clinical trials for this product will be successful, that the agent will ultimate achieve regulatory approval, or if approved, the extent to which it will achieve market acceptance.

We are in the process of evaluating the business, manufacturing, development and regulatory pathways forward with respect to RIGScan. We believe that the time required for continued development, regulatory approval and commercialization of a RIGScan product would likely be a minimum of five years before we receive any significant product-related royalties or revenues. We cannot assure you that we will be able to complete satisfactory development arrangements or obtain incremental financing to fund development of the RIGS technology and cannot guarantee that such arrangements could be obtained on a timely basis on terms acceptable to us, or at all. We also cannot assure you that further clinical development will be successful, that the FDA or the European Medicines Agency (EMA) will clear RIGScan for marketing, or that it will be successfully introduced or achieve market acceptance.

Finally, if we are successful in identifying and securing additional product candidates to augment our product development pipeline, we will likely incur significant additional expenses related to furthering the development of such products.

Discontinued Operations

From our inception through August 2011, we developed and marketed a line of medical devices, the neoprobe® GDS gamma detection systems (the GDS Business). However, following an analysis of our strategic goals and objectives, our Board of Directors authorized, and our stockholders approved, the sale of the GDS Business to Devicor Medical Products, Inc. (Devicor) in August 2011 (the Asset Sale). Under the terms of the Asset Purchase Agreement (APA) with Devicor, we sold the assets and assigned certain liabilities that were primarily related to the GDS Business. In exchange for the assets of the GDS Business, Devicor made cash payments to us of $30.3 million, assumed certain liabilities of the Company associated with the GDS Business, and agreed to make royalty payments to us of up to an aggregate maximum amount of $20 million based on the net revenue attributable to the GDS Business over the course of fiscal years 2012 through 2017. We did not record any royalty revenue in 2012 as Devicor did not achieve the minimum sales of gamma detection devices required to trigger such payment. In December 2011, we entered an agreement to transfer potential liability related to extended warranty contracts related to the GDS Business, which were outstanding as of the date of the sale of the GDS Business but which were not included in the August 2011 transaction. In exchange for transferring the liability related to the extended warranty contracts to Devicor, we made a cash payment to Devicor of $178,000.

Our consolidated statements of operations have been reclassified to discontinued operations, as required. Cash flows associated with discontinued operations have been combined within operating, investing and financing cash flows, as appropriate, in our consolidated statements of cash flows.

Results of Operations

This discussion of our Results of Operations focuses on describing results of our operations as if we had not operated the discontinued operations discussed above during the periods being disclosed. In addition, since our radiopharmaceuticals are not yet generating commercial revenue, the discussion of our revenue focuses on the grant and other revenue we have received and our operating variances focus on our radiopharmaceutical development programs and the supporting general and administrative expenses.

Years Ended December 31, 2012 and 2011

Revenue. Revenue of $60,000 during 2012 was related to reimbursement of certain Lymphoseek commercialization activities by our distribution partner, Cardinal Health. Revenue of $592,000 during 2011 was related to an Ohio Third Frontier grant to support Lymphoseek development. Additional revenue of $19,000 and $6,000 during 2012 and 2011, respectively, was related to additional Ohio Third Frontier grants to support student internships.

Research and Development Expenses. Research and development expenses increased $1.7 million, or 11%, to $16.9 million during 2012 from $15.2 million during the same period in 2011. The increase was primarily due to net increases in drug project expenses related primarily to (i) increased NAV5001 development costs of $2.2 million, including option and sublicense fees of $1.8 million ($1.1 million of which was non-cash in nature) coupled with due diligence, consulting and manufacturing-related costs, (ii) a net increase in Lymphoseek development costs of $346,000 resulting from increased manufacturing-related costs, regulatory consulting costs and filing fees related to preparation and filing of a MAA with the EMA, and consulting costs related to preparation for a potential FDA Advisory Committee meeting, offset by the $1.5 million FDA filing fee and UCSD license milestone payment related to filing the Lymphoseek NDA in 2011 coupled with decreased clinical activities, and (iii) increased license fees and consulting costs related to potential pipeline products of $192,000; offset by
(iv) a net decrease in NAV4694 development costs of $1.7 million, resulting from the $5.0 million initial license fee incurred in 2011, offset by increased clinical activities, technology transfer and manufacturing-related costs, project management and consulting fees in 2012, and (v) decreased RIGScan development costs of $1.0 million, primarily related to manufacturing. The net increase in research and development expenses also included an increase in headcount and related expenses required for expanded development efforts of $1.0 million, as well as increased costs related to travel, pharmacovigilance activities, consulting, training, recruiting, general office and other expenses of $737,000.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.7 million, or 17%, to $11.2 million during 2012 from $9.5 million in 2011. The net increase was primarily due to our formation of a marketing and business development team during the second half of 2011 to prepare for the commercial launch of Lymphoseek. Increased marketing costs primarily related to the pending commercial launch of Lymphoseek of $2.5 million, increased compensation costs of $1.2 million related to increased headcount and incentive-based compensation, and increased travel, insurance, taxes and general office expenses to support the increased headcount of $538,000 were offset by a decrease in separation costs of $2.7 million related to our former President and CEO which were recorded in 2011.

Other Income (Expense). Other expense, net, was $1.2 million during 2012 as compared to $943,000 in 2011. Interest expense increased to $1.2 million during 2012 from $13,000 in 2011, due to the notes payable we entered into in December 2011 and December 2012. Of the interest expense in 2012, $545,000 was non-cash in nature related to the amortization of debt issuance costs and debt discounts resulting from the warrants issued and conversion features embedded in the December 2011 note. During 2012 and 2011, we recorded income of $32,000 and charges of $952,000, respectively, related to the changes in derivative liabilities resulting from the requirement to mark our derivative liabilities to market.

Income Taxes. An estimated tax provision of $6.7 million related to the gain on the sale of discontinued operations and $1.2 million related to income from discontinued operations was offset by an estimated tax benefit of $7.9 million related to the loss from continuing operations during 2011.

Gain on Sale of Discontinued Operations. Gain on sale of discontinued operations related to the sale of our GDS Business to Devicor was $19.5 million during 2011. The sales price of $30.3 million included a cash payment of $30.0 million and an accrued net working capital adjustment of an additional $254,000. The proceeds were offset by $2.8 million in investment banking, legal and other fees related to the sale, $1.2 million in net balance sheet dispositions and write-offs, and $6.7 million of estimated taxes, as noted above.

Income from Discontinued Operations. The income from discontinued operations was $3.3 million, net of $1.0 million in estimated taxes, during 2011 and was primarily related to the operation of our GDS Business, which was sold to Devicor in August 2011.

Years Ended December 31, 2011 and 2010

Revenue. Revenue of $592,000 during 2011 was related to the Ohio Third Frontier grant to support Lymphoseek development. Revenue of $602,000 during 2010 was related to Ohio Third Frontier and Qualifying Therapeutic Discovery Project grants. Additional revenue of $6,000 and $15,000 during 2011 and 2010, respectively, was related to additional Ohio Third Frontier grants to support student internships.

Research and Development Expenses. Research and development expenses increased $6.3 million, or 70%, to $15.2 million during 2011 from $8.9 million in 2010. The increase was primarily due to net increases in drug project expenses related primarily to (i) the $5.0 million initial license fee for NAV4694, (ii) increased Lymphoseek development costs including the $1.5 million filing fee for the Lymphoseek NDA, regulatory consulting costs of $452,000, and license fees of $70,000, (iii) increased manufacturing, and regulatory project costs of $457,000 related to RIGScan, and (iv) project costs of $355,000 related to various potential new product candidates; offset by (v) decreased process development costs of $1.7 million and decreased clinical activity costs of $956,000 related to Lymphoseek, and (vi) decreased process development costs of $76,000 related to RIGScan. The net increase in research and development expenses was also due to increased compensation of $914,000 due to increased headcount required for expanded development efforts and increased related expenses such as incentive-based compensation, travel and supplies.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $5.1 million, or 119%, to $9.5 million during 2011 from $4.4 million in 2010. The net increase was primarily due to separation costs of $2.3 million related to the separation of our former President and CEO, David Bupp; increased compensation costs of $1.4 million related to net increased headcount and incentive-based compensation; increased professional services and consulting costs of $850,000 that supported preparation for Lymphoseek commercialization, listing on the NYSE MKT, and various corporate governance and investor relations issues; and increased Board of Directors costs of $217,000 due to increased meeting fees related to the number of transactions considered during 2011 and stock-based incentive compensation. The net increase in selling, general and administrative expenses was also due to increased headcount-related costs such as travel, recruiting and space costs.

Other Income (Expense). Other expense, net decreased $42.6 million to $943,000 in 2011 from $43.6 million in 2010. During 2010, we recorded a non-cash loss on the extinguishment of debt of $41.7 million related to the exchange of our outstanding convertible debt for convertible preferred stock. During 2011 and 2010, we recorded charges of $952,000 and $1.3 million, respectively, related to the increases in derivative liabilities resulting from the requirement to mark our derivative liabilities to market. Interest expense decreased $542,000 to $13,000 during 2011 from $555,000 in 2010, primarily due to the June 2010 exchange of our then-outstanding convertible debt agreements for convertible preferred stock. Of this interest expense, $403,000 in 2010 was non-cash in nature due to the payment or accrued payment of interest on our convertible debt with shares of our common stock. In addition, $4,000 and $16,000 of interest expense during 2011 and 2010, respectively, was non-cash in nature related to the amortization of debt discounts and issuance costs resulting from warrants and conversion features related to our convertible debt. Interest income increased $17,000 to $26,000 during 2011 from $9,000 in 2010, primarily due to increased cash balances.

Income Taxes. Estimated tax liabilities of $6.7 million related to the gain on the sale of discontinued operations and $1.2 million related to income from discontinued operations were fully offset by an estimated tax benefit of $7.9 million related to the loss from continuing operations during 2011. Estimated tax liabilities of $2.1 million related to income from discontinued operations were fully offset by an estimated tax benefit of $2.1 million related to the loss from continuing operations during 2010.

Gain on Sale of Discontinued Operations. We recognized a gain on sale of discontinued operations related to the sale of our GDS Business to Devicor and subsequent disposition of our extended warranty contracts of $19.5 million during 2011. The sales price of $30.3 million was offset by a cash payment to Devicor of $178,000 in exchange for transferring the liability related to the extended warranty contracts, $2.8 million in investment banking, legal and other fees related to the sale, $1.2 million in net balance sheet dispositions and write-offs, and $6.7 million in estimated taxes which were allocated to discontinued operations, but were fully offset by the tax benefit from our net operating loss for 2011.

Income from Discontinued Operations. Income from discontinued operations decreased $815,000, or 20%, to $3.3 million during 2011 from $4.1 million in 2010, primarily due to the sale of our GDS Business to Devicor in August 2011. Total revenues from discontinued operations were $7.7 million and $10.1 million in 2011 and 2010, respectively.

Liquidity and Capital Resources

Cash balances decreased to $9.1 million at December 31, 2012 from $28.6 million at December 31, 2011. The net decrease was primarily due to cash used to fund our operations, mainly for research and development activities, coupled with $1.3 million of principal payments on our notes payable, offset by $4.0 million of cash received as proceeds from our credit facility and $2.7 million received for the exercise of warrants and stock options. The current ratio decreased to 1.7:1 at December 31, 2012 from 9.0:1 at December 31, 2011.

Operating Activities. Cash used in operations increased $7.9 million to $23.9 million during 2012 compared to $16.0 million during 2011. Cash used in operations increased $10.8 million to $16.0 million during 2011 compared to $5.2 million during 2010.

Inventory levels decreased to $298,000 at December 31, 2012 from $822,000 at December 31, 2011. Inventory decreased primarily due to the reserve or write-off of Lymphoseek inventory as a result of changes in our projections of the probability of future commercial use and the consumption of materials for previously unanticipated product development activities. Offsetting these decreases was an increase in pharmaceutical materials related to the completion of a new lot of the Lymphoseek drug substance. Inventory levels increased to $822,000 at December 31, 2011 from $632,000 at December 31, 2010 related to the finishing and vialing of a new lot of Lymphoseek, offset by some usage for research and development. We expect inventory levels to increase during 2013 as we produce additional drug inventory in preparation for commercial launch and establish normal stock levels for Lymphoseek.

Prepaid expenses and other current assets increased to $1.2 million at December 31, 2012 from $555,000 at December 31, 2011, primarily due to prepayments to our third party manufacturers of Lymphoseek inventory and increased insurance premiums paid during the fourth quarter of 2012. Prepaid expenses and other current assets increased to $555,000 at December 31, 2011 from $258,000 at December 31, 2010, primarily due to income tax receivable related to the overpayment of estimated 2011 taxes due to the estimated gain on the Asset Sale and increased insurance premiums paid during the fourth quarter of 2011.

Accounts payable increased to $1.4 million at December 31, 2012 from $682,000 at December 31, 2011, primarily due to increases in NAV4694 development and Lymphoseek manufacturing activities, offset by decreases in Lymphoseek regulatory activities, coupled with normal fluctuations in timing of receipt and . . .

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