Neoprobe on verge of launching game-changing cancer-seeking drug

Updated 11:20 a.m., July 2, 2010.

Neoprobe Corp. (OTCBB: NEOP) is closing in on that transformative moment when a company launches its first game-changing product.

The Dubin, Ohio, company last week won a $1 million Ohio Third Frontier grant to speed additional development of its first commercial radiopharmaceutical — Lymphoseek, which is a tracing agent that identifies cancerous lymph nodes in patients with breast cancer and melanoma.

Neoprobe hopes to launch that drug in mid-2011 after filing a new drug application with the Food and Drug Administration (FDA) this summer.

“We would expect somewhere around mid-year next year to initially launch the product with Cardinal Health (NYSE: CAH), which is our marketing, distribution and sales partner for the United States,” said David Bupp, Neoprobe’s president and chief executive. “That would transform Neoprobe into one of the biotech success stories for Central Ohio and the state.”

The company plans to use its Third Frontier grant to accelerate a third Phase III trial of Lymphoseek — expected to begin in a few weeks — to support additional clinical claims for the drug. The third trial could open the door to using Lymphoseek to locate head and neck cancers. Eventually, the radiopharmaceutical could be used to locate prostate, colon, gynecologic and gastrointestinal cancers, said Brent Larson, the company’s chief financial officer.

The additional claims could enable Lymphoseek to realize a more robust commercial potential (more revenue for Neoprobe and its community) and clinical potential (better outcomes for cancer patients).

The company also has picked up where it left off in the late 1990s on a promising real-time tumor detection system called RIGScan.

It’s been a long journey to the radiopharmaceuticals market for Neoprobe. Incorporated in 1983, the company did an initial public offering in 1992 and launched its first gamma detection device six years later. Neoprobe sells systems, probes and accessories that detect gamma radiation in tracing agents injected in the body to identify lymph nodes. Surgeons use the systems to evaluate the spread of cancer.

But the company’s first try at launching its own tracing agent within the RIGS system failed in 1998.

“The low point occurred when the original biologic license application for the RIGS technology was rejected by the Europeans, and FDA asked for additional information,” Bupp said. “That’s when I took over as CEO and restructured the company as a medical device business.”

Neoprobe scaled back, closing subsidiaries overseas and its Dublin, Ohio, corporate headquarters to refocus on the medical device business, he said. The company’s stock was delisted by the NASDAQ National Market. It now trades on NASDAQ’s Over-The-Counter Bulletin Board, which is not considered a stock exchange but a listing service for stocks that trade between brokers.

In 2004, Bupp and his colleagues at Neoprobe  — then a bare-bones staff of about 10 people — began working on Lymphoseek. In late 2007, the company received a $16.5 million investment from Platinum-Montaur Life Sciences LLC, a private investment fund in New York City. The investment was “in the form of secured debt and perpetual convertible preferred” shares, Bupp said.

The investment enabled Neoprobe to do clinical trials for Lymphoseek, but it also weighed on the company’s balance sheet as complicated debt securities. A year ago when Neoprobe shares were trading for just over $1, Platinum-Montaur encouraged the company to find other ways to enrich shareholders.

“Neoprobe has represented an excellent investment opportunity; however, we believe the company’s current market value significantly undervalues its portfolio of assets,” said Dr. Michael Goldberg, Montaur Capital Partners principal and portfolio manager, in a Neoprobe release. “We have encouraged Neoprobe management to assess its strategic options with an investment bank to better explore ways to enhance shareholder value.”

Around that time, the company made several financial and operating changes to advance its two leading drug candidates. For instance, it struck the marketing and distribution partnership for Lymphoseek with Cardinal Health . With more positive clinical trial results in hand, the company pushed toward its clinical and commercial goals.

In the last month, Neoprobe completed a conversion of the Montaur investment to preferred shares. “What’s happened here is $11 million of debt has vanished from my balance sheet,” CFO Larson said.

Now, Montaur is a 40 percent equity holder in the company. “They are still a very important investor,” Larson said. “We value their assistance in getting us to where we are through the funding.”

That new equity position — and a clean, nearly debt-free balance sheet — “will help us get closer to qualifying for a listing on a major stock exchange,” he said. “We’re very close to both a $2 stock price and to a $4 million positive shareholders’ equity, which are the milestones that we need to get past to qualify for AMEX.”

A listing on the NYSE Amex Equities exchange, formerly known as the American Stock Exchange (AMEX), or the NASDAQ National Market would lend some stability to Neoprobe’s stock price and assure institutional investors that their investments are liquid, Larson said.

The Third Frontier grant already has enabled Neoprobe to create two clinical research positions, Bupp said. In all, the company plans to add about a half-dozen employees because of the grant, Larson said. Neoprobe employs 35 people now.

In the meantime, Neoprobe continues to develop RIGScan, a gamma detection and tracing agent system that enables surgeons to locate tumor tissue during surgery. This technology offers the potential of more thorough cancer removal, as well as preservation of non-cancerous tissue.

“We have, particularly now with the Third Frontier grant, sufficient capital to handle the Lymphoseek development and commercial launch,” Bupp said. As for RIGScan, “we will hopefully use revenues from Lymphoseek and a development partnership to bring that product forward.”

Which technology — Lymphoseek or RIGScan — does Bupp find more exciting?

“They’re equally exciting” he said. “Lymphoseek is the near-term opportunity. When you start thinking about what we’ve done previously, in terms of diagnosis and treatment of breast cancer and melanoma, and now, if we are successful with this head and neck trial, it is a paradigm-shifting technology.”

But while the head and neck cancer market that Lymphoseek is initially aiming at is worth $42 million, and the entire Lymphoseek market is likely to be $370 million, the RIGScan market could be worth $3 billion, Larson said.

“RIGS is unique, in terms of allowing the surgeon to perform a better cancer surgery,” Bupp said. Neoprobe is trying to get both European and U.S. regulators to agree to a harmonized Phase III trial for RIGScan. Neoprobe is prepared to start enrolling patients for this trial in the first half of 2011.

“So if we can replicate … what we saw in the previous trials, that really changes things,” he said. “It means not an extension of life as measured by some cancer therapies today of months, but it would mean measuring survival in terms of years. We think that could be significant.”