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NAVIDEA BIOPHARMACEUTICALS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 13, 2012]

NAVIDEA BIOPHARMACEUTICALS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, among other things: · general economic and business conditions, both nationally and in our markets; · our history of losses, negative net worth and uncertainty of future profitability; · our ability to successfully complete research and further development of our drug candidates; · the timing, cost and uncertainty of obtaining regulatory approvals of our drug candidates; · our ability to successfully commercialize our drug candidates; · our expectations and estimates concerning future financial performance, financing plans and the impact of competition; · our ability to raise capital sufficient to fund our development and commercialization programs; · our ability to implement our growth strategy; · anticipated trends in our business; · advances in technologies; and · other risk factors set forth in this report and detailed in our most recent Annual Report on Form 10-K and other SEC filings.

In addition, in this report, we use words such as "anticipate," "believe," "plan," "expect," "future," "intend," and similar expressions to identify forward-looking statements.

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.


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 are currently developing four radiopharmaceutical agent platforms. The first, Lymphoseek® (technetium Tc 99m tilmanocept) Injection, is a novel, receptor-targeted, small-molecule, investigational radiopharmaceutical used in lymphatic mapping procedures that are performed to help stage 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. The second, 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). The third, E-IACFT (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 and other movement disorders, with potential use as a diagnostic aid in dementia. The fourth, 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 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.

17 Product Line Overview 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 Lymphoseek product candidate. We expect our overall research and development expenditures to continue to be significantly higher during 2012 as compared to 2011 due to the expansion of our clinical, regulatory, and business development staff and efforts that support the commercialization of Lymphoseek, further development of 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 the extent to which we are able to execute on these strategic initiatives.

Lymphoseek The initial pre-clinical evaluations of Lymphoseek were completed by the University of California, San Diego (UCSD) in 2001. Since that time, Navidea, in cooperation with UCSD, has completed or initiated five Phase 1 clinical trials, one multi-center Phase 2 trial and three multi-center Phase 3 trials involving Lymphoseek. Two comprehensive Phase 3 studies were completed in subjects with breast cancer and melanoma. These pivotal Phase 3 results have been presented at scientific conferences of a number of the world's leading oncology associations and nuclear medicine societies, including the American Society of Clinical Oncology and the Society for Nuclear Medicine. Earlier-phase studies conducted at UCSD through grants from the Susan G. Komen Breast Cancer Research Foundation have been published in leading medical journals including Journal of Nuclear Medicine and Annals of Surgical Oncology.

In June 2012, we published data developed from Phase 3 trials of Lymphoseek demonstrating important performance characteristics of Lymphoseek compared to a commercially available radiolabeled colloid used in intra-operative lymphatic mapping. The analysis evaluated the performance of Lymphoseek to a meta-analysis of published data for 99m-Tc-labeled nanocolloid human serum albumin (Nanocoll®), commercially available and considered the standard of care in Europe. The difference between Lymphoseek and Nanocoll in the parameters analyzed was statistically significant (p < 0.0001). The study, "The efficacy of Tilmanocept in sentinel lymph node mapping and identification in breast cancer patients: a comparative review and meta-analysis of the 99m-Tc-labeled nanocolloid human serum albumin standard of care," can be found in the current online edition of the peer-reviewed journal Clinical and Experimental Metastasis [DOI 10.1007/s10585-012-9497-x]. Data for Nanocoll were derived from a meta-analysis of published literature that reported on the outcomes of localization rate (the proportion of patients with at least one localized lymph node), and degree of localization (the average number of localized nodes relative to the patient population). Data for Lymphoseek were derived from a meta-analysis of two completed Lymphoseek Phase 3 clinical trials. Lymphoseek demonstrated a localization rate of 99.9% whereas Nanocoll showed a 95.9% localization rate. The degree of Lymphoseek localization was 2.16 (CI 1.99-2.36), whereas the colloid standard of care showed 1.67 (CI 0.94-0.98). The difference between Lymphoseek and Nanocoll in both of these parameters was statistically significant (p < 0.0001). In September 2012, we announced the presentation of related data at the European Society of Surgical Oncology annual meeting.

In October 2012, we announced peer-reviewed publication of results of Lymphoseek from Phase 3 Clinical Trials in Melanoma in the Annals of Surgical Oncology. In the trials, a total of 154 patients with melanoma from 15 centers received Lymphoseek followed by vital blue dye (VBD) and then underwent sentinel lymph node mapping. Lymph nodes that demonstrated Lymphoseek uptake and/or the presence of blue dye were removed and examined for the presence of tumor. Of the 235 blue-dyed lymph nodes removed from the 154 patients, 232 (98.7%) demonstrated Lymphoseek uptake (p<0.001). The performance of Lymphoseek in intraoperative lymph node identification was also assessed. Of the 154 patients injected with both Lymphoseek and VBD who underwent surgical removal of the lymph nodes, 150 patients (97.4%) had at least one radioactive node due to Lymphoseek uptake, and 138 patients (89.6%) had at least one blue node. This difference was statistically significant (p<0.002). Melanoma-containing lymph nodes were detected in 34 (22.1%) patients; Lymphoseek identified all 45 melanoma-positive lymph nodes found in the 34 patients. Four of these 34 node-positive patients were detected exclusively by Lymphoseek. Blue dye detected 36 of the 45 melanoma-positive lymph nodes, but no melanoma-positive lymph nodes were detected exclusively by blue dye.

18 Clinical research continues with an ongoing third Phase 3 trial involving subjects with head and neck squamous cell carcinoma (NEO3-06). The NEO3-06 clinical study was designed to provide evidence of Lymphoseek performance in a third cancer type and to potentially expand the product label for Lymphoseek.

While we are unable to predict the timing, this trial may reach a patient accrual point that would enable an interim analysis of the trial data in 2013.

Navidea submitted a new drug application (NDA) for Lymphoseek in August 2011, and was notified of acceptance of the NDA by the U.S. Food and Drug Administration (FDA) in October 2011. Following FDA's acceptance of our Lymphoseek NDA filing, FDA established a Prescription Drug User Fee Act (PDUFA) date for Lymphoseek of June 10, 2012. In April 2012, FDA notified us that the Agency had elected to modify the PDUFA date for Lymphoseek by 90 days to September 10, 2012 from the initial PDUFA date of June 10, 2012. On September 10, 2012, we received a Complete Response Letter (CRL) from FDA, denying our initial application for approval of Lymphoseek. We believe the decision was focused on deficiencies in current Good Manufacturing Practices (cGMP) identified by FDA during their pre-approval site inspections of third-party contract manufacturing facilities, and was not related to the efficacy or safety data filed within the Lymphoseek NDA. We have been working diligently with our advisors, contract manufacturers and FDA to address the third party cGMP manufacturing deficiencies noted in FDA's September CRL. On October 30, 2012, we resubmitted our NDA in response to the CRL. While we are unable to predict the timing for FDA review, we believe that the focused scope of the CRL and the corresponding information provided in the Company's response will facilitate a timely evaluation of the resubmission. We continue to believe the review process will not entail a full re-evaluation of the NDA and that the information we have provided will support an expeditious review. Our focus continues to be Lymphoseek approval and launch in the U.S. However, given the nature of the FDA review process, we cannot assure you that we will not experience further delays.

In February 2012, Navidea was also advised by the European Medicines Agency (EMA) Committee for Medicinal Products for Human Use that the Committee has adopted the advice of the Scientific Advice Working Party (SAWP) regarding the Lymphoseek development program and has determined that Lymphoseek is eligible for a Marketing Authorisation Application (MAA) submission based on clinical data accumulated from clinical studies completed to date and supporting clinical literature. While we intend to submit our MAA to the EMA by the end of 2012, our focus on the U.S. NDA for Lymphoseek may cause us to delay the submission of the MAA until early 2013.

NAV4694 NAV4694 is a Fluorine-18 labeled precision radiopharmaceutical candidate for use in the imaging and evaluation of patients with signs or symptoms of cognitive impairment such as AD. It binds to beta-amyloid deposits in the brain that can then be imaged in PET scans. Amyloid plaque pathology is a required feature of AD and the presence of amyloid pathology is a supportive feature for diagnosis of probable AD. Patients who are negative for amyloid pathology do not have AD.

Based on the data accumulated to date, NAV4694 appears to have better sensitivity and specificity in detecting beta-amyloid than other agents in development. Due to its high affinity for amyloid, improved contrast, and enhanced uptake in the amyloid-target regions of interest in the brain compared with low uptake in white matter background, better signal-to-noise ratios have been observed. The uptake in background tissue, referred to as white matter, is low. Greater contrast may enable the ability to detect smaller amounts of amyloid and earlier identification of disease, as well as the opportunity to detect smaller changes in amyloid levels and monitor disease progression over time.

NAV4694 has been studied in rigorous pre-clinical studies and several clinical trials in humans. Clinical studies through Phase 2a have included more than 80 patients to date, both suspected AD patients and healthy volunteers. No significant adverse events have been observed. Results suggest that NAV4694 has the potential ability to image patients quickly and safely with high sensitivity and specificity.

19 We are currently supporting ongoing Phase 2 clinical trials and advancing our development plans for NAV4694. In addition, we initiated a new Phase 2 trial in September 2012, primarily to expand the safety database for the compound. We also expect to initiate a Phase 3 trial in early 2013 to support registration in the U.S. and the EU.

NAV5001 In January 2012, we executed an option agreement with Alseres Pharmaceuticals, Inc. (Alseres) to sublicense NAV5001. Under the terms of the option agreement, Navidea paid Alseres an option fee of $500,000 for the exclusive right to negotiate a definitive sublicense agreement by June 30, 2012. In order to perform thorough due diligence, Navidea extended the option period from June 30, 2012, to July 31, 2012. On July 31, 2012, we entered into an agreement to sublicense NAV5001 from Alseres. Under the terms of the sublicense agreement, Alseres granted Navidea an exclusive, worldwide sublicense to research, develop and commercialize NAV5001. The final terms of the agreement required Navidea to make a one-time sublicense execution payment to Alseres equal to (i) $175,000 in cash and (ii) 300,000 shares of our common stock. The sublicense agreement also provides for contingent milestone payments of up to $2.9 million, $2.5 million of which will principally occur at the time of product registration or upon commercial sales, and the issuance of up to an additional 1.15 million shares of Navidea common stock, 950,000 shares of which are issuable at the time of product registration or upon commercial sales. In addition, the sublicense terms anticipate royalties on annual net sales of the approved product which are consistent with industry-standard terms and certain sublicense extension fees, payable in cash and shares of common stock, in the event certain diligence milestones are not met.

NAV5001 is a patented, novel, Iodine-123 labeled small molecule radiopharmaceutical used with SPECT imaging to identify the status of specific regions in the brains of patients suspected of having Parkinson's disease. The agent binds to the dopamine transporter (DAT) on the cell surface of dopaminergic neurons in the striatum and substantia nigra regions of the brain.

Loss of these neurons is a hallmark of Parkinson's disease.

NAV5001 has been administered to over 600 subjects to date. Results from clinical trials have demonstrated that NAV5001 has high affinity for DAT and rapid kinetics which enable the generation of clean images quickly, beginning within about 20 minutes after injection, while other agents typically have waiting periods from 4 to 24 hours before imaging can occur. In addition to its potential use as an aid in the differential diagnosis of Parkinson's disease and movement disorders, NAV5001 may also be useful in the diagnosis of Dementia with Lewy Bodies (DLB), one of the most common forms of dementia after AD.

RIGScan Radioimmunoguided surgery (RIGS®) is a technique to provide diagnostic information during cancer surgery. RIGS is intended to enable a surgeon to identify and delineate occult or metastatic cancerous tissue "targeted" through the use of a radiolabeled, cancer-specific targeting antibody. The antibody is administered prior to surgery and is identified by pre-operative imaging or during surgery with a gamma detection device/probe, thereby assisting a surgeon in identifying the location of cancerous tissues. Before surgery, a cancer patient is injected with the antibody which circulates throughout the patient's body and binds specifically to cancer cell antigens or receptors. Concentrations of the antibody within affected tissue are then detected using imaging methods prior to surgery or a gamma probe during surgery to direct the surgeon to targeted tissue for removal.

Our RIGScan technology is a radiolabeled murine monoclonal antibody that serves as the biologic targeting agent for intraoperative detection of occult or metastatic cancer. The antibody localizes or binds to tumor antigen called TAG-72 expressed on solid tumor cancers. RIGScan is intended to be used in conjunction with other diagnostic methods for the detection of the extent and location of occult tumor and tumor metastases in patients with such cancers, potentially including colorectal cancer, ovarian cancer, prostate cancer and other cancers of epithelial origin. The detection of clinically occult tumor is intended to provide the surgeon with a more accurate assessment of the extent of disease, and therefore may impact the surgical and therapeutic management of the patient.

20 The RIGScan approach has been studied in several clinical trials, including Phase 3 studies. Results from certain of these studies have been published in leading cancer journals including Clinical Cancer Research, Annals of Surgical Oncology and Disease of the Colon and Rectum. In 1996, Navidea submitted applications to EMA and FDA for marketing approval of RIGScan for the detection of metastatic colorectal cancer based primarily on results of a single Phase 3 clinical trial, NEO2-14, but FDA declined approval, indicating that, in addition to identifying additional pathology-confirmed disease, the clinical studies of RIGScan needed to demonstrate clinical utility in enhancing patient outcomes, an endpoint which the completed studies were not designed to address. Navidea withdrew its application to EMA in November 1997.

To resume RIGScan development, we filed a new investigational new drug (IND) request with FDA in late 2010. We held a pre-IND meeting with FDA in February 2011 to define the basic chemistry, manufacturing and control (CMC) requirements needed to resume clinical development efforts on RIGScan. FDA provided guidance regarding enhancing our manufacturing platform, including process improvements to increase manufacturing efficiency and the quality of the underlying biologic antibody and potentially transitioning from a murine-based antibody to a human-based antibody. In August 2011, we also held a meeting with the SAWP of the EMA and received similar guidance. With this collective guidance, we have transitioned from a murine antibody to a humanized antibody. We were recently awarded a grant from the National Institutes of Health to further the development of RIGScan. The first phase of the grant, which has been awarded, is for $315,000; the second phase of the grant, which requires that we meet certain conditions, primarily investigational review board approval, will be for an additional $1.2 million. We have focused on manufacturing the humanized antibody with the aim of completing the necessary manufacturing steps to support the start of clinical development; however, as the scope and required resources for the RIGScan program, particularly in light of other development opportunities such as Lymphoseek, NAV4694, NAV5001, or other agents continues to be assessed, the timing and scope of our plans for RIGScan may be affected.

RIGScan is a biologic drug that has not been produced for several years. We have completed the initial steps in re-characterizing the antibody cell line and are in the process of evaluating the use of our current humanized antibody in future clinical testing. During the third quarter of 2009, we had announced that we executed a Biopharmaceutical Development and Supply Agreement with Laureate Biopharmaceutical Services, Inc. (Laureate Biopharma). This agreement supports manufacturing process development work, evaluation of the viability of the cell line and its productivity, and the initial steps in re-validating the clinical grade and commercial production process for the humanized version of the RIGScan antibody. Laureate Biopharma has made progress in the re-validation of the manufacturing process and has completed certain initial biologic characterization activities. Our development plans for RIGScan also include the consideration of alternative radiolabeling processes. We will need to establish robust manufacturing and radiolabeling capabilities for the antibody in order to meet the regulatory needs for the RIGScan product.

21 Outlook We spent approximately $12.5 million and $8.2 million on research and development activities during the nine-month periods ended September 30, 2012 and 2011, respectively. Of the total amounts we spent on research and development during those periods, 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 charges by program as follows: Nine Months Ended September 30, Development Program 2012 2011 Lymphoseek $ 4,243,933 $ 4,587,488 NAV4694 2,177,007 - NAV5001 2,083,699 (a) - RIGScan 254,721 1,069,906 (a) Amount includes approximately $1.8 million in option and sublicense fees paid in 2012.

Due to the advancement of our efforts with Lymphoseek, NAV4694, NAV5001, RIGScan, and potentially other programs, we expect our drug-related development and commercialization expenses for 2012 to continue to exceed 2011.

With respect to Lymphoseek, until the NDA review is complete, we will continue to support the NDA to the fullest extent possible and to prepare for commercial launch in the U.S. with our marketing partner, Cardinal Health.

During the remainder of 2012, we expect to incur additional development expenses related to supporting the NDA review of Lymphoseek, our preparation for filing an MAA in the EU, our NEO3-06 clinical trial and potentially studies to support Lymphoseek in a post-commercialization setting and support the other product activities related to the potential marketing registration of Lymphoseek in the U.S. and other markets. In addition, we expect to incur significant costs during the remainder of 2012 to support our business development and commercialization activities surrounding Lymphoseek. We cannot assure you that Lymphoseek will achieve regulatory approval in the U.S., the EU or any market, or if approved, that it will achieve market acceptance.

We also expect to incur significant expenses for NAV4694 during the remainder of 2012 related to ongoing additional Phase 2 clinical trials and preparing for the initiation of a pivotal Phase 3 clinical trial in 2013, 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 are in the process of finalizing a regulatory approach and draft of the clinical development plan for NAV5001 by the end of 2012. The timing and extent of expected expenditures related to NAV5001 will be better known following the completion of such plan.

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 FDA or EMA will clear RIGScan for marketing, or that it will be successfully introduced or achieve market acceptance.

22 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 as well as the disposal of the related extended warranty contracts to Devicor Medical Products, Inc. for a net purchase price of $30.3 million.

In 2009, the Company's Board of Directors decided to discontinue the operations of, and attempt to sell, our Cardiosonix subsidiary. This decision was based on the determination that the blood flow measurement device segment was no longer considered a strategic initiative of the Company, due in large part to positive achievements related to our other device product and drug development initiatives. The operations of Cardiosonix were effectively wound down during 2011.

Our consolidated balance sheets and statements of operations have been reclassified to reflect the GDS Business and Cardiosonix as discontinued operations, as required. Cash flows associated with the operation of the GDS Business and Cardiosonix 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.

We recognized Ohio Third Frontier grant revenue of approximately $950,000 through 2011, and expect to recognize the remaining $50,000 as revenue in the next 12 months. During the nine-month period ended September 30, 2012, Navidea recognized an additional $12,000 of miscellaneous grant revenue. Also during the nine-month period ended September 30, 2012, Navidea recognized revenue of $60,000 related to reimbursement of certain Lymphoseek commercialization activities, for which the Company had principal responsibility, by our distribution partner, Cardinal Health, Inc.

Three Months Ended September 30, 2012 and 2011 Revenue. We did not recognize any revenue during the third quarter of 2012.

Revenue of $256,000 during the third quarter of 2011 was related to the Ohio Third Frontier grant to support Lymphoseek development.

Research and Development Expenses. Research and development expenses increased $2.2 million, or 59%, to $6.1 million during the third quarter of 2012 from $3.9 million during the same period in 2011. The increase was primarily due to net increases in drug project expenses related to (i) increased NAV4694 development costs of $1.8 million, including imaging core lab, technology transfer, clinical activities, PET production, manufacturing-related costs, and consulting fees, and (ii) increased NAV5001 development costs of $1.4 million, including sublicense fees of $1.3 million coupled with due diligence and consulting costs; offset by (iii) a net decrease in Lymphoseek development costs of $817,000 resulting from the $1.5 million FDA filing fee and UCSD license milestone payment related to filing the Lymphoseek NDA during the third quarter of 2011 coupled with decreased clinical activities, offset by increased manufacturing-related and regulatory consulting costs related to preparation for filing a MAA with EMA, and (iv) a net decrease in RIGScan development costs of $471,000, 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 $185,000, as well as increased costs related to pharmacovigilance activities, travel and professional services.

23 Selling, General and Administrative Expenses. Selling, general and administrative expenses remained steady at $2.9 million during the third quarter of 2012 and 2011. Increased marketing costs related to the pending commercial launch of Lymphoseek of $597,000 and increased compensation costs related to increased headcount and incentive-based compensation of $168,000 were offset by decreased stock compensation related to the separation of our former President and CEO of $817,000.

Other Income (Expense). Other expense, net, was $29,000 during the third quarter of 2012 as compared to other income, net, of $13,000 during the same period in 2011. Interest expense increased $314,000 to $315,000 during the third quarter of 2012 due to the note payable we entered into in December 2011. Of the interest expense in the third quarter of 2012, $147,000 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 note. During the third quarter of 2012 and 2011, we recorded income of $284,000 and $7,000, respectively, related to the decreases in derivative liabilities resulting from the requirement to mark our derivative liabilities to market.

Income Taxes. An estimated tax provision of $5.7 million related to the gain on the sale of discontinued operations and $1.0 million related to income from discontinued operations was offset by an estimated tax benefit of $6.4 million related to the loss from continuing operations during the third quarter of 2011.

Gain on Sale of Discontinued Operations. Gain on sale of discontinued operations related to the sale of our GDS Business to Devicor was $20.1 million during the third quarter of 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 $2.2 million in legal and other fees related to the sale, $2.3 million in net balance sheet dispositions and write-offs, and $5.7 million of estimated taxes, as noted above.

Income from Discontinued Operations. The loss from discontinued operations was $221,000, net of $1.0 million in estimated taxes, during the third quarter of 2011 and was primarily related to the operation of our GDS Business, which was sold to Devicor in August 2011.

Nine Months Ended September 30, 2012 and 2011 Revenue. Revenue of $60,000 during the first nine months of 2012 was related to reimbursement of certain Lymphoseek commercialization activities by our distribution partner, Cardinal Health, Inc. Revenue of $592,000 during the first nine months of 2011 was related to the Ohio Third Frontier grant to support Lymphoseek development. Additional revenue of $12,000 and $6,000 during the first nine months of 2012 and 2011, respectively, was related to Ohio Third Frontier grants to support student internships.

Research and Development Expenses. Research and development expenses increased $4.4 million, or 54%, to $12.5 million during the first nine months of 2012 from $8.2 million during the same period in 2011. The increase was primarily due to net increases in drug project expenses related primarily to (i) increased NAV4694 development costs of $2.2 million, including imaging core lab, technology transfer, consulting fees, clinical activities, PET production, manufacturing-related costs, and project management fees, and (ii) increased NAV5001 development costs of $2.1 million, including option and sublicense fees of $1.8 million coupled with due diligence and consulting costs, and (iii) consulting costs related to potential pipeline products of $203,000; offset by (iv) a net decrease in Lymphoseek development costs of $344,000 resulting from the $1.5 million FDA filing fee and UCSD license milestone payment related to filing the Lymphoseek NDA during the first nine months of 2011 coupled with decreased clinical activities, offset by increased manufacturing-related costs, consulting costs related to preparation for a potential FDA Advisory Committee meeting, and regulatory consulting costs related to preparation for filing a MAA with EMA, and (v) a net decrease in RIGScan development costs of $815,000, 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 $546,000, as well as increased costs related to pharmacovigilance activities, travel, recruiting, training, general office expenses and other expenses of $461,000.

24 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $988,000, or 13%, to $8.5 million during the first nine months of 2012 from $7.5 million during the same period 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 related to the pending commercial launch of Lymphoseek of $2.1 million, increased compensation costs of $1.2 million related to increased headcount and incentive-based compensation, and increased travel, insurance, recruiting and general office expenses to support the increased headcount of $421,000 were offset by a decrease in separation costs of $2.7 million related to our former President and CEO which were recorded during the first nine months of 2011.

Other Income (Expense). Other expense, net, was $960,000 during the first nine months of 2012 as compared to $948,000 during the same period in 2011. Interest expense increased $927,000 to $930,000 during the first nine months of 2012 from $3,000 for the same period in 2011, due to the note payable we entered into in December 2011. Of the interest expense in the first nine months of 2012, $407,000 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 note. During the first nine months of 2012 and 2011, we recorded income of $7,000 and charges of $957,000, 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 $5.7 million related to the gain on the sale of discontinued operations and $1.0 million related to income from discontinued operations was offset by an estimated tax benefit of $6.4 million related to the loss from continuing operations during the first nine months of 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 the first nine months of 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 legal and other fees related to the sale, $2.3 million in net balance sheet dispositions and write-offs, and $5.7 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 the first nine months of 2011 and was primarily related to the operation of our GDS Business, which was sold to Devicor in August 2011.

Liquidity and Capital Resources Cash balances decreased to $11.2 million at September 30, 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.

Operating Activities. Cash used in operations increased $10.3 million to $16.6 million during the first nine months of 2012 compared to $6.3 million during the same period in 2011.

Inventory levels decreased to $641,000 at September 30, 2012 from $822,000 at December 31, 2011. Pharmaceutical work-in-process decreased related to reserving or writing off previously capitalized Lymphoseek inventory due to changes in our projections of the probability of future commercial use, and due to the consumption of Lymphoseek inventory for previously unanticipated product development activities. Offsetting these decreases was an increase in pharmaceutical materials related to the completion of a new batch of the Lymphoseek drug substance. We expect inventory levels to remain steady for the remainder of 2012 as we do not anticipate producing additional drug inventory until 2013.

25 Accounts payable increased to $2.0 million at September 30, 2012 from $682,000 at December 31, 2011 primarily due to fluctuations in timing of receipt and payment of invoices. Accrued liabilities and other remained steady at $2.1 million at September 30, 2012 and December 31, 2011. Our payable and accrual balances will continue to fluctuate but will likely increase overall as we increase our level of development activity related to NAV4694, NAV5001 and other programs.

Investing Activities. Cash used in investing activities was $624,000 during the first nine months of 2012 compared to $27.1 million of cash provided during the same period in 2011. The sale of the GDS Business to Devicor in August 2011 provided $27.2 million, net of related expenses. Capital expenditures of $618,000 during the first nine months of 2012 were primarily for drug production equipment, software, computers, and furniture and fixtures for the new branch office in Andover, MA. Capital expenditures of $95,000 during the first nine months of 2011 were primarily for computers, software, and drug production equipment. We expect our overall capital expenditures for 2012 will be higher than in 2011. Payments for patent and trademark costs were $6,000 and $53,000 during the first nine months of 2012 and 2011, respectively.

Financing Activities. Cash used in financing activities was $204,000 during the first nine months of 2012 compared to $4.5 million of cash provided during the same period in 2011. The $204,000 provided by financing activities in the first nine months of 2012 consisted primarily of principal payments on the note payable we entered into in December 2011 of $620,000, payments of debt issuance costs of $154,000, payment for common stock repurchased from executives of $101,000, payment of preferred stock dividends of $75,000, payment of tax withholdings related to stock-based compensation of $9,000, and payments of capital leases of $4,000, offset by net proceeds from the issuance of common stock of $759,000. The $4.5 million provided by financing activities in the first nine months of 2011 consisted primarily of proceeds from the issuance of common stock of $7.1 million, offset by payments of tax withholdings related to stock-based compensation of $2.4 million, including costs related to the net exercise of stock options by our former President and CEO of $2.1 million, and principal payments on notes payable of $62,000, preferred stock dividends of $75,000, and capital leases of $7,000.

In December 2011, we executed a Loan and Security Agreement (the Loan Agreement) with Hercules Technology II, L.P. (Hercules), providing for a maximum borrowing of $10 million by the Company in two advances. Pursuant to the Loan Agreement, we issued Hercules: (1) a Secured Term Promissory Note in the principal amount of $7,000,000 (the First Advance), bearing interest at the greater of either (a) the U.S. Prime Rate as reported in The Wall Street Journal plus 6.75%, or (b) 10.0% (effective interest rate at September 30, 2012 and December 31, 2011 was 10.0%), and (2) a Series GG Warrant to purchase 333,333 shares of our common stock at an exercise price of $2.10 per share, expiring in December 2016 (the Series GG Warrant). Additionally, the terms of the Loan Agreement provided Navidea with the option to draw a second advance in the principal amount of $3,000,000 if certain conditions were met by June 30, 2012. Such conditions were not met and Hercules no longer has an obligation to provide the additional $3,000,000. The Loan Agreement provided for an interest-only period beginning on December 29, 2011 and expiring on July 1, 2012. The principal and interest is to be repaid in 30 equal monthly installments, payable on the first of each month following the expiration of the interest-only period. As such, a portion of the principal, net of related discounts, has been classified as a current liability as of September 30, 2012. The outstanding balance of the debt is due December 1, 2014. Navidea has the option to pay up to $1.5 million of the principal amount of the debt in stock at a fixed conversion price of $2.77, subject to certain conditions. In addition, Hercules has the option to elect payment for up to another $1.5 million of the principal amount of the debt by conversion at a fixed conversion price of $2.77.

In July 2012 and May 2011, Platinum-Montaur Life Sciences, LLC (Montaur) converted 3,063 and 917 shares, respectively, of their Series B Convertible Preferred Stock (the Series B) into 10,016,010 and 2,998,590 shares, respectively, of our common stock under the terms of the Series B. As of September 30, 2012, there were 6,020 shares of Series B outstanding which are convertible into 19,685,400 shares of our common stock.

26 We filed a shelf registration statement in 2011 to provide us with future funding alternatives and flexibility as we execute on our plans to achieve our product development and commercialization goals, as well as evaluating and acting on opportunities to expand our product pipeline. In July 2012, we entered into an agreement with Montaur to provide us with a credit facility of up to $50 million. Under the terms of the agreement, Montaur committed to extend up to $15 million in debt, which is available immediately, to the Company at a prime-based interest rate currently at approximately 10% per annum. Montaur has committed an additional $20 million upon FDA approval of Lymphoseek on consistent terms, with another $15 million potentially available on terms to be negotiated. No conversion features or warrants are associated with the facility.

On September 10, 2012, we received a CRL from FDA, denying our application for approval of Lymphoseek. We believe the decision was focused on cGMP deficiencies identified by FDA during their site inspections of third-party contract manufacturing facilities, and was not related to any efficacy or safety data filed within the Lymphoseek NDA. Our most significant near-term development priority is to continue our regulatory and pre-commercialization activities related to Lymphoseek. We continue to expect Lymphoseek-related research and development expenditures to decline following our resubmission of the NDA for review by FDA; however, we expect marketing expenses related to Lymphoseek to increase in preparation for the commercial launch. We continue to assess timelines and development costs for development of NAV4694, NAV5001 and RIGScan.

We are also actively evaluating a number of different product licensing and/or acquisition opportunities. Costs related to in-licensing, acquiring and developing other late-stage radiopharmaceutical candidates that we are evaluating, coupled with development costs related to our existing product candidates, may result in the use of a material portion of our available funds.

Our future liquidity and capital requirements will depend on a number of factors, including our ability to complete the development and commercialization of new products, our ability to achieve market acceptance of our products, our ability to monetize our investment in non-core technologies, our ability to obtain milestone or development funds from potential development and distribution partners, regulatory actions by FDA and international regulatory bodies, the ability to procure additional pipeline development opportunities and required financial resources, and intellectual property protection.

We believe that our credit facility with Montaur and our access to capital markets through our shelf registration provides us with adequate financial resources to continue to fund our business plan through the point where we would start to generate positive cash flow following FDA approval and the commercialization of Lymphoseek. However, we cannot assure you that Lymphoseek will achieve FDA approval, or if approved, that it will generate our expected levels of sales and cash flow. If Lymphoseek is not approved, or its approval is further delayed, we will need to revise our financial, operating and development plans.

We will continue to evaluate our timelines and strategic needs, and although we have not decided whether, when or how much capital might be raised under the shelf registration statement or the credit facility, we will continue our efforts to maintain a strong balance sheet. Even if we decide to attempt to raise additional capital, we cannot assure you that we will be successful in doing so on terms acceptable to the Company, or at all. We also cannot assure you that we will be able to gain access and/or be able to execute on securing new development opportunities, successfully obtain regulatory approval for and commercialize new products, achieve significant product revenues from our products, or achieve or sustain profitability in the future.

27 Critical Accounting Policies We consider the following accounting policies to be critical to our results of operations and financial condition.

Revenue Recognition. We currently generate revenue primarily from grants to support various product development initiatives. We generally recognize grant revenue when expenses reimbursable under the grants have been incurred and payments under the grants become contractually due. We also recognize revenue from the reimbursement by our partners of certain expenditures for which the Company has principal responsibility.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base these estimates and assumptions upon historical experience and existing, known circumstances. Actual results could differ from those estimates. Specifically, management may make significant estimates in the following areas: · Stock-Based Compensation. Stock-based payments to employees and directors, including grants of stock options and restricted stock, are recognized in the statements of operations based on their estimated fair values on the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model to value share-based payments.

Compensation cost arising from stock-based awards is recognized as expense using the straight-line method over the vesting period.

· Inventory Valuation. We value our inventory at the lower of cost (first-in, first-out method) or market. Our valuation reflects our estimates of excess and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value. Write-offs are recorded when product is removed from saleable inventory. We review inventory on hand at least quarterly and record provisions for excess and obsolete inventory based on several factors, including current assessment of future product demand, anticipated release of new products into the market and product expiration. Our industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of product approvals, variability in product launch strategies, regulations regarding use and shelf life, product recalls and variation in product utilization all impact the estimates related to excess and obsolete inventory.

· Fair Value of Derivative Instruments. Derivative instruments embedded in contracts, to the extent not already a free-standing contract, are bifurcated and accounted for separately. All derivatives are recorded on the consolidated balance sheets at fair value in accordance with current accounting guidelines for such complex financial instruments. Unrealized gains and losses on the derivatives are classified in other expenses as a change in derivative liabilities in the statements of operations. We do not use derivative instruments for hedging of market risks or for trading or speculative purposes.

28

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