NovaBay Pharmaceuticals Offering Should Help Support Pivotal Year

NovaBay (NBY) has raised $7m in a public offering of common stock and one-year warrants in advance of a pivotal year – 2013 will see three Phase II trial read-outs for its topical anti-infective, NVC-422, offering re-rating potential and further financing/partnering opportunities. NovaBay’s estimated FY12 cash reserve of $17m now extends to mid-2014 and enables accelerated enrolment in the ongoing viral conjunctivitis trial and new pipeline developments such as the start of a Phase IIa study in bacterial conjunctivitis. NVC-422 could therefore become a one-product treatment for both viral and bacterial conjunctivitis, a significant commercial opportunity.

$7m cash injection, with possible $6.6m from warrants
NovaBay sold 5.9m shares of common stock through a public offering at $1.25 per share (10% discount), as well as one-year warrants to purchase up to 4.425m shares (strike price $1.50/share). Net proceeds from the offering was $7m, while a further $6.6m could be received if the newly issued warrants are fully exercised.

Catalysts in sight
NVC-422, a so-called Aganocide compound with disruptive potential, is being studied in three Phase II studies that should read out in 2013. Data from a 450-patient trial in viral conjunctivitis in H213 is a major potential share price and partnering catalyst, while positive results from a 300-patient impetigo study in mid-13 would trigger a further single-digit, $m milestone (c $3.5m) from partner Galderma. Data from 20-40 patients in the proof of concept Phase IIa study for urinary catheter blockage and encrustation should be available in H113. Global partners are also being sought for NeutroPhase, a wound-cleansing agent with FDA 510(k) clearances – Pioneer Pharma is a strategic partner (5.6% shareholder) in China/South-East Asia.

Valuation: Increased to $66m from $60m
We have increased our sum-of-the-parts DCF valuation of NovaBay to $66m (previously $60m) to include the equity offering, although the per share value drops to $1.79 (vs $1.96) based on 36.9m shares now outstanding. This represents upside to NovaBay’s market capitalisation of $42m and $1.13 share price. We also note further upside potential from successful development of NVC-422 for bacterial conjunctivitis, a ~$1bn global market opportunity which we do not currently include in our valuation model. FY12 net cash is estimated at $17m and should reach to mid-2014, enabling key clinical milestones in 2013 to potentially re-rate the stock. Further injections of cash could be receivable from issued warrants and development milestones/options exercised by existing partners (Galderma and Pioneer Pharma).

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