The Big Bet on NeoProbe

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Earlier this month, Neoprobe (ASE: NEOP) completed the sale of its handheld gamma radiation detector business to Devicor Medical Products. The company pocketed $30 million up-front with the potential for another $20 million in royalties if Devicor can hit certain sales milestones. If focusing on drugs can work for the big boys -- Bristol-Myers Squibb (NYS: BMY) and Pfizer (NYS: PFE) in particular -- why not a small company as well?

The sale transforms Neoprobe into a pure-play drug developer, although it's sticking with its radiation roots. Neoprobe's lead product, Lymphoseek, is a radioactive tracing agent that helps doctors identify lymph nodes that might contain tumor cells in patients with breast cancer and melanoma that has spread there.

The company submitted its marketing application on Aug 10, so it should hear back from the FDA in the beginning of October about whether the application was accepted. Assuming a standard 10-month review, Neoprobe get a decision in the middle of next year.

How the bet wins, how it loses
With a majority of Neoprobe's eggs in the Lymphoseek basket -- there's only one product in an earlier stage of development -- the company needs an approval to get a win. The data testing Lymphoseek looked good, but there's a question over whether Neoprobe used the right comparator in the trial. The phase 3 trials compared Lymphoseek to vital blue dye, but doctors often use a combination of vital blue dye and a sulfur colloid agent to map out the lymph nodes.

Neoprobe argues that the recent approval of Pharmalucence Sulfur Colloid Injection based solely on comparisons to vital blue dye means the FDA will do the same for Lymphoseek.

That sounds completely reasonable, but the agency isn't known for being reasonable. With a newly approved drug on the market -- albeit just a month before its application was submitted -- might the agency want a comparison to the new standard of care? Crazier things have happened.

If the FDA turns down Lymphoseek, it's clearly a loss for Neoprobe, but there's varying degrees of how much it might fall. At one extreme, anything requiring a new clinical trial would be a major blow. At the other level, a request for data it already has on hand or a minor issue with manufacturing that can be cleared up easily could be considered a win, even though it'll result in a delay getting onto the market.

Management has made its bet (sort of)
After the marketing application was filed and the sale of the detector business was complete, President and CEO Mark Pykett made a purchase of stock -- as did three of the directors.

Normally, I'd say that's an endorsement of the company that should be paid attention to; management at Biosante Pharmaceuticals (NAS: BPAX) , Celgene (NAS: CELG) , and Optimer Pharmaceuticals (NAS: OPTR) all made major purchases of stock during the market downturn earlier this month.

But when you look at the size of Pykett's purchase -- less than $11,500 -- it's not much of an endorsement. And according to the SEC documents, those are the only shares he owns. Two of the directors made larger purchases that brought the value of their ownership over the $100,000 level, so at least they've got some decent skin in the game.

Place your bets (or not)
The way to make money in biotech is to find cases where investors are more worried about an approval than they should be (or less worried, if you're shorting the stock). But for Lymphoseek, it's extremely difficult to determine what the FDA's requirements for approval might be, which makes calculating the risk-reward equation very difficult.

Neoprobe might skyrocket on an approval, but investors would be better off watching from the sidelines than investing blindly. If you've got better insight into why Lymphoseek might or might not be approved, share in the comment box below.

At the time this article was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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