Novan Inc (NASDAQ:NOVN) hasn’t been a great stock to hold over the last few months, with the company dipping below the $4 a share mark, and in doing so, carving out fresh 2017 lows, early July. At the end of last week, however, Novan started to run on the back of a PR detailing an upcoming conference call and will open up the week in and around $5.30 a share. That’s still a long way off the circa $30 a share at which the company traded towards the end of last year, but it’s a start and it’s one that we think may be the beginning of a longer term recovery for the company.
Here’s what we’re looking at as supportive of this statement.
For those new to Novan, it’s a development stage biotechnology company that’s trying to bring a product called SB204 to market. The drug was built using a proprietary technology platform that utilizes nitric oxide to go after dermatological conditions and – in this iteration – it’s targeting acne. Novan conducted two phase III trials last year, the combination of which was designed to underpin a registration application with the FDA in the US. One trial succeeded. The other did not. Novan needs two trials’ worth of data to complete its submission and – as a result – the company is almost certainly going to have to undertake a third phase III to try and make up the shortfall. With management suggesting these sorts of dermatology phase IIIs cost anywhere between $9 million and $40 million to complete, and with the company having only around $30 million cash on hand right now, there’s the potential for some near term dilution ahead of the initiation of the confirmatory study.
In a recent business update, the company confirmed this.
So there’s likely going to be an equity raise in the coming months – why are we bullish on the stock?
Well, the equity raise isn’t ideal and it’s probably going to add some near term pressure to the company’s share price but, once it’s in the rearview mirror, there is a wave of catalysts slated to hit press, any one of which could really get the stock moving. Remove the cash concern (which the raise will do) and the impact of these catalysts compounds.
Specifically, then, we’re looking at two things. Well, three, but two of them fall under one umbrella.
The first is the outcome of a meeting with the FDA that should confirm the path forward for SB204 in the acne indication. The company plans to hold this meeting during the third quarter and – once it’s complete – we should know exactly what’s required from Novan as regards to the phase III trial and – by proxy – how much it’s going to cost the company (and shareholders) to conduct.
Second and third, we’re looking at the initiation of two phase II trials set up to investigate the same sort of asset as SB204 (i.e. one rooted in nitric oxide) in two additional indications – psoriasis and atopic dermatitis. The former, the psoriasis trial, is going to initiate first, with the third quarter of this year (so, realistically, any time over the next eight weeks) lasted for trial start time. Atopic dermatitis probably won’t start enrolling before the end of the year (primarily this expectation is rooted in capital constraints as opposed to anything operational) but, when it does, it’s going to further strengthen Novan’s development pipeline and – by proxy – the company’s attractiveness as an investment.
So, bottom line, we may see a very near term dip if Novan decided to raise capital, but beyond that, we expect the company to appreciate into the close of 2017 as it solidifies the path forward for SB204 and deepens its investigative pipeline with the initiation of two phase II studies.
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Image courtesy of Kevin Simmons via Flickr
Disclosure: We have no position in NOVN and have not been compensated for this article.