Diverse Pipeline And Multiple Catalysts Point To Buying Opportunity In NovaBay Pharmaceuticals Print
By Scott Matusow, Contributor   
Wednesday, 05 September 2012 07:21

icon_tradethesisTrading Biopharmaceuticals through a catalyst event can prove to be very rewarding for investors if the outcome from the company's catalyst is positive news.

Of course, a binary event such as clinical trial results can be devastating to the share price if the news proves to be negative. Negative news is often intensified for many small biotechs that have the entire future of their company tied to one drug for a single indication.

This can be particularly challenging when the company is targeting a single disease for which the pathology is uncertain and no indicative animal models exist, such as Alzheimer's disease. Trading companies in the bio pharma sector that have a more diverse pipeline, straight-forward proof-of-concept clinical studies and well-tested predictive preclinical models can help to mitigate some of the inherent risk involved, while still allowing for the potentially large gains that catalysts can offer.

NovaBay Pharmaceuticals (AMEX:NBY) is a company developing two distinct anti-infective product lines: Aganocide compounds, led by NVC-422 and NeutroPhase ®, (also referred to as NVC-101). Both are designed to work by mimicking the body's natural defense against infection. Because the immune system works without ever creating resistance, NovaBay has taken the effective and rapidly acting molecules that function within the body and created stable analogs of these molecules.

NovaBay uses NVC-422 to treat staph infection, which often pops up in hospitals and sports locker rooms. A highly publicized case of this was in 2008 when the Cleveland Browns team had at least six players infected with this disease, all of whom had at least one surgery to treat. This disease can be extremely dangerous and unfortunately shows up where people congregate the most. In fact, staph infection alone kills more people than HIV in its most deadly form and can remain on surfaces for months. This most deadly form of staph infection is called (MRSA), which is a "staph" germ that does not get better with the first-line antibiotics that usually cure staph infections. NovaBay's Aganocides have been confirmed to be effective against MRSA in multiple laboratory and human clinical studies.

Currently, the landscape for anti-bacterial drugs to treat skin infections like these is dominated by some big players. Pfizer (NYSE:PFE) has two drugs that combine for over 1.5 billion in worldwide sales, Zyvox and Tygacil. Zyvox is used to treat infections, including pneumonia, and infections of the skin and blood. It is in a class of antibacterials called oxazolidinones and works by stopping the growth of bacteria. Forest Labs (NYSE:FRX) is also trying to increase market share in this area with an injectable drug called Teflaro, which the company expects to sell $65 million worth of this in 2012. Teflaro is used to treat skin infections and pneumonia (lung infection) caused by certain bacteria. Teflaro is in a class of medications called cephalosporin antibiotics which works by killing bacteria. I feel that NovaBay can differentiate themselves from these huge companies with their unique way of treating the bacteria. Pfizer and Forest Labs look to stop or kill the bacteria while NovaBay looks to remove the toxins released by the bacteria.

Serious staph infections are more common in people with a weakened immune system. This includes patients who:

  • Are in hospitals and long-term care facilities for a long time
  • Are on kidney dialysis (hemodialysis)
  • Receive cancer treatment or medicines that weaken their immune system
  • Inject illegal drugs.
  • Had surgery in the past year

NovaBay believes its drug NVC-422 will provide a treatment option for MRSA as well as other diseases in the dermatology area of its Aganocide drug category.

NovaBay's Aganocide compounds are patented, synthetic molecules with a broad spectrum of activity against bacteria, viruses, and fungi. Mimicking the mechanism of action that human white blood cells use against infections, Aganocides possess a significantly reduced likelihood that bacteria or viruses will be able to develop resistance, which is critical for advanced anti-infectives. Having demonstrated therapeutic proof-of-concept in multiple Phase 2 clinical studies, these compounds are well suited to treat and prevent a wide range of local, non-systemic infections.

Another disease that NovaBay expects to fight with its NVC-422 drug is Impetigo. Partnered with the world-leading Swiss dermatology company, Galderma, the companies are developing this gel formulation for treating this highly contagious skin infection for which approximate 13 million prescription were written in 2009 in developed countries alone. A leading dermatology company, Galderma is a pharmaceutical company specializing in the research, development, and marketing of dermatological treatments and was formed in 1981 as a joint venture between Nestlé (OTC:NSRGY.PK) and L'Oreal SA (OTC:LRLCY.PK).

Impetigo is caused by streptococcus (strep) or staphylococcus (staph) bacteria. In addition, MRSA is becoming a common cause which we looked at previously.

The skin normally has many types of bacteria on it, but intact skin is an effective barrier that keeps bacteria from entering. When there is a break in the skin allowing bacteria in, it can cause inflammation and infection. Common ways this can occur:

  • Animal bites
  • Human bites
  • Injury or trauma to the skin
  • Insect bites

Complications from Impetigo include:

  • Kidney failure (post-streptococcal glomerulonephritis) (rare)
  • Many patches of impetigo (in children)
  • Permanent skin damage and scarring (very rare)
  • Spread of the infection to other parts of the body (common)

In an August 7 blog post by Dr. Ron Najafi, CEO of NovaBay, he comments on recent CBS News coverage of Dr. John Crew's successful treatment of a patient afflicted with "flesh-eating" Bacteria. Dr. John Crew is a vascular surgeon who has worked extensively with NeutroPhase and was the principal investigator on our 54 patient NeutroPhase trial at Seton Medical Center in California.

In the blog entry, Dr. Najafi notes that:

Although flesh-eating bacteria is a commonly used term, it is important to note that bacteria do not actually "eat" the tissue. Instead, they cause the destruction of skin and muscle by releasing toxins (virulence factors). Many types of bacteria can produce toxins that can harm tissue and muscle.

NeutroPhase is an FDA-cleared wound cleanser that consists of a solution of pure hypochlorous acid (HOCl). In numerous laboratory and clinical studies, NeutroPhase was proven to disrupt bacterial biofilm and kill common wound pathogens in solution while leaving healthy living human cells unharmed. In the fifty-four patient clinical study conducted at San Francisco Wound Care Center of Seton Medical Center, NeutroPhase was shown to be superior when compared with wet to moist saline dressing (standard of care) in patients with diabetic ulcers, venous ulcers, and bedsores. NovaBay's research shows there are approximately 6.5 million patients in the U.S. who suffer from chronic non-healing wounds such as pressure, venous stasis, and diabetic ulcers.

NovaBay has begun securing commercial partnerships for NeutroPhase. In January 2012, NovaBay announced it had entered into a strategic marketing agreement with Pioneer Pharma Co., Ltd., a Shanghai-based company that markets high-end pharmaceutical products into China. Pioneer is a very well established company with more than 1,000 sales reps located in thirty-four representative offices across China. They work with over 7,500 hospitals and 40,000 drugstores. NovaBay will also be announcing additional partnerships in the coming months.

NovaBay Pharmaceuticals is focusing its technology on four distinct therapeutic areas: dermatology, ophthalmology, urology and wound care. All four areas present catalyst events over the next 12 months:

Dermatology. In dermatology, the focus is on developing NVC-422 gel for impetigo. NovaBay has the advantage of being partnered with Galderma, one of the leading dermatology companies in the world. Galderma is set to begin a global Phase 2b trial in Q3 2012 for the treatment of impetigo. Galderma is fully funding the program. If approved, Galderma's worldwide manufacturing, distribution, and marketing infrastructure should expedite the process of reaching the global market for this highly contagious skin infection, for which approximately 13 prescriptions were written in 2009 in developed countries alone.

From clinicaltrials.gov:

Condition Intervention Phase
Impetigo Drug: Experimental: CD07223 1.5 % Topical Gel BID
Drug: Experimental: CD07223 1.5% Topical Gel TID
Drug: Placebo Comparator: CD07223 vehicle gel BID
Drug: Placebo Comparator: CD07223 vehicle gel TID
Phase 2
Phase 3

The study will be a multicenter, randomized, vehicle controlled, parallel, group, double blind study. Eligible subjects with a clinical diagnosis of impetigo will be randomized to one of four treatment groups: 1.5% CD07223 Topical Gel applied BID; 1.5% CD07223 Topical Gel applied TID; Vehicle Topical Gel applied BID;Vehicle Topical Gel applied TID. All treatments will be administered for 7 days. Disease activity for the Target Lesion will be evaluated using the Skin Infection Rating Scale (SIRS) Score.

In my phone conversation with Dr. Najafi, I asked him if CD07223 is in fact NVC-422, which he confirmed it is. As mentioned prior, this trial is scheduled to get underway in the current quarter -- which ends this month.

Ophthalmology. NovaBay is currently conducting a Phase 2b clinical trial for the treatment of adenoviral conjunctivitis, an extremely contagious form of pink eye. Currently, there is no FDA approved therapy for this potentially sight-threatening condition. The company believes that it's anti-infective Aganocide, NVC-422 eye drops can be a breakthrough product in the $700 million market.

On May 18, 2011, NovaBay announced that in its first phase 2 study of its lead compound NVC-422 for adenoviral conjunctivitis, the primary endpoint of sustained microbiological success of 20% greater than placebo was not met.

NVC-422 is the lead molecule in the Aganocide class discovered and patented by NovaBay. NovaBay licensed the use of the Aganocide compounds to Alcon - Novartis (NYSE:NVS) for use in the treatment of eye, ear and sinus infections and for use in contact lens solutions.

Alcon - Novartis commenced the original phase II clinical trial of NVC-422 for viral conjunctivitis, a type of "pink eye" in July 2009. The trial enrolled 452 patients who were randomized 1:1 for treatment with NVC-422 ophthalmic solution or its vehicle as placebo. Of the total patients enrolled in the trial, 81 patients were confirmed to have adenoviral conjunctivitis. Some of the patients enrolled in the trial were infected with adenovirus serotypes commonly associated with epidemic keratoconjunctivitis.

For primary endpoint analysis, only day 5 or 7 were selected and the predetermined primary endpoint was sustained microbiological success of 20% greater than placebo. In the clinical trial, success was defined as sustained eradication of adenovirus that remained eradicated at all subsequent visits.

According to Dr. David Stroman, Senior VP of Ophthalmology Development, in an interview with Bio Tuesdays:

"What makes NVC-422 an attractive candidate is its broad spectrum of activity. We've already shown in the first conjunctivitis trial that NVC-422 is topically active. In the endgame, after we've done everything, a NVC-422 product will be extremely valuable, because a physician won't need to know whether a patient has either bacterial or viral conjunctivitis − he or she can treat for either."

Dr. Ron Najafi is confident in the design of the 450 patient Phase 2b trial and confirmed that, depending upon clinical outcomes, the trial has all the design elements regarding controls, sample size and endpoints required of a pivotal trial:

"We believe the FDA recognizes the need for a well-tolerated, topically administered therapy in this indication, as there is no current treatment for viral conjunctivitis," Dr. Najafi notes. "We look forward to continuing clinical development of NVC-422 and working closely with the FDA to ensure this product reaches the market as quickly as possible."

NovaBay expects to complete the trial in the first half of 2013, and release top-line the results at that time.

Also mentioned in the Bio Tuesday's article is that in April of this year, Roth Capital Partners analyst Yale Jen initiated coverage of NovaBay with a "buy" rating and 12-month price target of $3.50. Despite recent weakness in the stock, he writes that "potential rapid maturation of the product pipeline in multiple Phase 3 studies represents upside potential for the shares.

If Novabay has redesigned the new phase 2 study correctly, with a potential market of 700M + and very little competition in the space, the current market cap of $35M should grow on speculation alone to over $150M

Urology. NovaBay is also conducting a Phase 2B clinical trial to study the efficacy of an irrigation solution in maintaining catheter patency. According to the NovaBay website, there are over 300,000 patients in the U.S. who need to be chronically catheterized as a result of spinal cord injury, stroke or other neurological problems, and approximately 100,000 of these patients suffer from a potentially serious complication called urinary catheter blockage and encrustation (UCBE). In his company blog, Dr. Najafi says that Part A of the Phase 2 study demonstrated 80% effectiveness. Depending on label claims ultimately granted by the FDA, he estimates the U.S. opportunity, to which NovaBay plans to market directly, to be $100+ million.

Wound Care. NovaBay is currently in the process of selecting marketing partners for the commercial product launch of its FDA cleared NeutroPhase. According to the company website, NeutroPhase will be the only "pure" hypochlorous acid product available to treat the estimated 6.5 million patients who suffer from chronic non-healing wounds, including Stage I-IV pressure ulcers, stasis ulcers, leg ulcers, diabetic foot ulcers, post-surgical wounds, first and second degree burns, abrasions and minor irritations of the skin. The company recently announced a partnership with Pioneer Pharma to market NeutroPhase in China and the announcement of a U.S. partnership for NeutroPhase is another potential near term catalyst.

Possible Buyout Candidate: With the possibility of having three phase III trials ongoing in 2013 and an FDA cleared product for wound care launching in 2012, NovaBay would seem to be a buyout candidate. M&A is up 150% in 2012, as major pharmaceuticals scramble to replace expiring patents and fill their pipelines. In May 2011, Merck (NYSE:MRK) spent $430 million to acquire ophthalmic specialist Inspire Pharmaceutical. The acquisition was primarily for Inspire's lead drug Azasite (aziithormycin) which is used to treat bacterial conjunctivitis. Given the lack of a treatment currently available for viral conjunctivitis, it is possible that success of NVC-422 could attract significant attention.

According to 10Q June 30, 2012, Cash on hand totaled $10.37M with a current burn rate of $700k per quarter as stated to me by Dr. Najafi. Cash is always a concern with small biotech companies, but NovaBay expects license and collaboration revenue from Galderma and Pioneer Pharma, along with their existing capital reserves to be sufficient to fund planned operations for at least the next twelve months. Also worth noting here is that the company carries zero debt, with 28.87M shares outstanding, with a trading float of 22.37M shares.

It's my opinion that a market capitalization of $35.80M is not representative of NovaBay Pharmaceutical's potential. A few factors suggest the share price is headed much higher:

  • The Broad Market Applicability of NVC-422
  • NovaBay Pharmaceuticals Aganocide compounds will potentially be moving into three separate PhaseIII trials in 2013.
  • The company has near term catalysts in the form of license agreement announcements, and the releasing of PhaseIIb trial results.
  • As the Aganocide compounds continue to prove effective against drug resistant bacteria, NovaBay becomes a more likely buyout candidate.

Additionally, it is important to note that anti-infective products have a demonstrated track record as possessing the highest clinical development success rate compared to all other product categories.

A market capitalization of $120M-$150M is more appropriate in my opinion -- therefore my price target opinion for Novabay is somewhere between $3.50 and $4.00 a share in the next 6 months or so.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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