NovaBay Pharmaceuticals: Undervalued Potential

NovaBay’s (NBY) 10-year development of novel anti-infective agents is entering a potentially transformational 12-month period, which could break through stubborn resistance in its stock since it's IPO in 2007. Phase IIb trial read outs for lead compound NVC-422 in three significant unmet needs and potential development/commercial partnerships offer multiple catalysts. We believe the potential in NovaBay’s Aganocide compounds, with demonstrated ability to overcome and avoid resistance issues that plagues the anti-infective market, is at odds with an EV of $24.2m.

Seeking clear vision
A Phase IIb study of NVC-422 (eyedrop) in 450 patients with viral conjunctivitis (‘pink eye’) started in May 2012 and should render results in Q213. A Phase IIa trial conducted by previous partner Alcon failed its primary endpoint (≥20% greater sustained microbiological success vs placebo), but mainly due to low patient numbers (just 81 of 451 screened patients were adenoviral-positive). The Phase IIb will use a more effective 10-minute eyelid swab test to screen patients and will also assess effectiveness against EKC viruses. Positive data could lead to a new deal.

Catheter blockage relief
Part B of a two-part Phase IIb of NVC-422 (irrigation solution) for urinary catheter blockage and encrustation (UCBE) in patients with spinal cord injury should report in Q113. Positive results – reducing catheter irrigations from 3x/day to 2x/week and potentially a lower incidence of urinary tract infections – could attract partners.

Galderma on board
A partner since 2009, Galderma will start a Phase IIb study of NVC-422 (topical gel) in 300+ impetigo patients in Q312 and positive data in Q313 would deliver a high single $m milestone. NovaBay is also seeking a US commercial partner for NeutroPhase, a pure hypochlorous acid-based wound care product with FDA 510(k) clearance.

Valuation: $24.2m EV undervalues potential
Based on Q112 cash and equivalents of $11.4m, we believe NovaBay’s EV of just $24.2m undervalues the significant potential in its novel technology. NovaBay claims the US markets for pink eye ($300m), UCBE ($120m) and impetigo ($130m) have no treatment option or existing therapies are ineffective and prone to resistance. The current cash runway is expected to last through 2013 (excluding deal revenue).

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