Less than a week ago, biotech innovator NovaBay Pharmaceuticals Inc., (NBY) announced the expansion of its phase 2b clinical trial for NVC-422, the company's impetigo treatment, into South Africa. The test will attempt to replicate earlier tests that proved the product efficient and evaluate two different dosage regimens.
It's not a mistake, either, that the company decided to set up one of its four global trials in that country. Impetigo is a highly infectious, bacterial disease whose incidence is known to be particularly high in tropical countries, including the West Indies and sub-Saharan Africa. The move to test in South Africa serves two separate goals, therefore, one medical and one commercial: 1) to test the company's treatment against strains that are active on that continent, and 2) to establish itself in the health care community as a proven treatment option in the fight against high incidence of infection that occur there.
According to global dermatological giant, Galderma S.A., NovaBay's senior partner in the development of its treatment, South Africa represents a potentially very significant market for the product.
Impetigo: Extreme Complications
While many in the West believe the disease to be more nuisance than emergency, untreated cases of impetigo can lead to complications that cause pneumonia, arthritis, osteomyletis and, in rare cases, even toxic shock syndrome. And while antibiotic treatments for the disease have existed for some time, they're increasingly becoming obsolete, as the bacteria responsible for impetigo's transmission, Staphylococcus aureus and Streptococcus pyogenes, develop resistance to the agents used to overcome them.
It was just this development - the obsolescence of traditional treatments - that led Galderma to NovaBay's doorstep in the spring of 2009 and ultimately to ink a long term deal with the company to develop and commercialize the product.
For NovaBay the venture was a slam-dunk win.
Here are just a few of the details of the deal:
- Galderma's commitment to cover all costs of NovaBay's acne and impetigo applications,
- A $62 million incentive package to be disbursed upon attainment of certain regulatory and development milestones,
- Escalating double-digit royalties to accrue to NovaBay on net global sales,
- Reimbursement to NovaBay of all expenses incurred in the collaboration,
- NovaBay to retain all rights to co-market the treatment in Japan and other Asian markets, and
- NovaBay to be the exclusive marketer of the product to hospitals and other health related institutions in North America.
Why the Fuss?
Galderma's excitement over NovaBay's treatment is quite simply based on it not being an antibiotic. NVC-422, which has numerous applications outside the dermatological, operates by mimicking the body's own disease defense mechanisms, obviating the normal resistance that traditional antibiotics generate. Anti-microbial compounds, like NovaBay's, are, in short, 'irresistible'. And Galderma, which is not in the business of chasing after treatments with little chance of succeeding, saw the tremendous commercial potential behind such breakthrough technology.
Brainchild of Two Corporate Giants
Galderma is not a newcomer to projects such as this. The company is a joint venture of French cosmetic behemoth l'Oreal and Swiss multinational, Nestle SA.,(NSRGY.PK). Between those two companies there's nearly $300 billion worth of market cap, and no lack of analytical power in the corporate decision making process. Galderma's choice of partnering with Novabay, therefore, had to pass through the firm's demanding deliberative gauntlet before any decision to back the microcap biotech was authorized. You're not dealing with a bunch of ham and eggers here.
The reason most investors haven't heard of the firm is quite simply it's not publicly traded. Nearly 35 years old, Galderma is based in Fort Worth, Texas, and maintains a strict focus, searching for and developing dermatological products exclusively. Treatments for acne, rosacea, atopic dermatitis (eczema) and psoriasis are among the conditions the company is currently fixed on.
With a research team that numbers over 300, Galderma's R&D team is enormous relative to its niche. It's no surprise that the firm has over 5000 patent applications, 1700 scholarly publications and 500 inventions in its history. And of successful products, it has no shortage, either. Galderma produces the popular Cetaphil line of cleansers and moisturizers and Differin, by far the company's most successful product, for the treatment of acne vulgaris.
Enter NovaBay
To repeat: Galderma's interest in a non-antibiotic line of anti-infectives is driven by the tremendous profit potential behind the proposition. And NovaBay's Aganocide compounds represent the first such foray into that sphere for the treatment of impetigo.
NVC-422 has already passed initial phase tests that secure it as a safe remedy with a reasonable commercial shelf life and large scale manufacturing feasibility. Once it passes through the remainder of the FDA's testing regimen Galderma's global distribution system and 4000 employees stand at the ready to chalk up sales.
For investors, the question is whether to dive in to NBY now, or wait for results of a couple of upcoming trials. The first half of 2013 should see results for both the impetigo treatment and another phase 2b test for the company's conjunctivitis preparation.
NovaBay is already earning revenues from its Neutrophase wound care application and with relatively new partner Pioneer Pharma - a company with a distribution network that includes 7500 hospitals and 40,000 pharmacies across mainland China - should see ramped up earnings on that product in the near term.
Look here:
(click to enlarge)
My feeling is that, with development costs already covered by Galderma and the company moving into a positive cash flow position late last year, there's very little to stop investors today from taking a position in NovaBay stock, with the expectation that sales - also to be managed by Galderma - will produce a significant royalty and revenue stream for the junior partner in years to come.
The only dogging question to consider is whether the market will choose now to discount those future sales, or will wait until the clinical trial is more advanced.
Galderma, it appears, has already made their decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
