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NOVN: NO Better Way to Treat Molluscum

06/17/2020

By John Vandermosten, CFA

NASDAQ:NOVN

READ THE FULL NOVN RESEARCH REPORT

Initiating Coverage

Novan, Inc. (NASDAQ:NOVN) is currently pursuing an indication in molluscum contagiosum (MC), a contagious skin condition that generally affects young children. Novan recently completed two Phase III trials for their lead candidate in the disease; however, while the results were directionally favorable, the primary endpoint was not statistically significant. We believe that a new trial with more observations, a modified design and better training can generate a statistically significant result for this unmet need.

Novan’s NITRICIL technology is able to suspend NO in a macromolecule consisting of a silicone-based polymer and alcohol gel until it is ready for use. When combined with its companion hydrogel, the water in the mixture cleaves the nitric oxide from the macromolecule and distributes the active ingredient to act as an anti-bacterial, anti-viral, anti-fungal and anti-inflammatory in target tissue. Preclinical and clinical work has demonstrated efficacy against acne vulgaris, MC and tinea pedis, among other indications. It is thought that NO’s mechanism of action is able to exact its anti-microbial action through the inhibition of DNA replication, disruption of viral protein production, and nitrosative and oxidative damage. The diatomic molecule is also recognized as a signaling molecule that promotes growth of immune cells and can reduce inflammation through inhibition of cytokines.

Of the US population, 2% to 6% are estimated to present MC each year, conservatively estimated to be about 6 million cases. There is an incidence of 6 to 7 million in key European countries and an incidence of about 2 million in Japan. While most cases of MC resolve on their own in a year, some poxvirus lesions can last for multiple years. MC is unsightly, contagious and can be itchy, sore and swollen in which case treatment may be sought. When patients seek relief, treatment consists of mechanical removal, home remedies and off-label approaches. We anticipate that the population afflicted with the virus will be receptive to a safe and effective approved treatment when available.

Novan is planning to launch an additional Phase III study in MC that will serve as a confirmatory trial for the work already completed. The FDA has indicated that an additional successful pivotal trial may be sufficient to support approval for SB206. To pursue this route, Novan will raise sufficient capital to launch and complete the study. With a relatively short treatment and observation period, we believe this trial could provide a full data set within one year of launch. In addition to the company’s primary focus on MC, there are other early stage preclinical efforts underway developing NO therapies, which are funded (or expected to be funded) by government grants. We do not include a valuation component for these activities; however, we see them as complementary to the primary effort the company is pursuing in MC.

On 31 March 2020, Novan held $21.8 million in cash on its balance sheet after raising an additional ~$14 million in gross proceeds from a public, direct offering in March 2020. The funds have enabled Novan to prepare for a path forward for its Phase III MC trial and work with an investment bank to secure the necessary capital to complete the trial. The company currently holds no debt. We expect Novan to consume ~$2 million in cash per month for approximately a year following the launch of its Phase III program in MC.

We anticipate that pivotal data will be available for MC by 2Q:21 followed shortly after by a new drug application (NDA) to the FDA and partner submission to the Japanese Pharmaceuticals and Medical Device Agency (PMDA). While there are no current plans to do so, Novan may also pursue European and other markets through a partner. US and Japanese approval is anticipated in 2022. If successful, Novan’s SB206 will address an unmet need with a safe treatment for MC helping parents and children address a communicable disease.

Key reasons to own Novan shares:

‣ Phase III asset to address an unmet need in molluscum contagiosum (MC)

‣ MC presents a large addressible market with no approved therapies

‣ Nitricil presents multiple mechanisms for therapeutic effect

◦ Anti-viral

◦ Anti-bacterial

◦ Anti-inflammatory

◦ Anti-fungal

‣ Broad portfolio of dermatology indications in clinical development

◦ Acne Vulgaris

◦ Tinea Pedis

◦ Genital Warts

◦ Others

‣ Favorable drug safety profile with no reported drug-related adverse events

‣ Intellectual property protection until 2035 for SB206

‣ North American rights to intellectual property

‣ Partner pursuing commercialization in Japan

◦ Rights to milestones and royalties

See our initiation for our target price, additional details on Novan and our investment thesis.

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