NovaBay Pharmaceuticals: Galderma Partnership Suggests Untapped Value

Dec. 9.11 | About: NovaBay Pharmaceuticals, (NBY)

Prescribing medication that has no toll on a patient’s ailment burdens our healthcare system – and to those inherently concerned with what that means: it costs you more for less in return. The antibiotics that treated microbial infections for generations have led to mutation of bacteria, and ultimately, resistance to common treatment. To quote a recent issue of Journal Drugs of the Future:

Microbial resistance is emerging faster than we are replacing our armamentarium of antimicrobial agents.

The implications of this growing problem have been well-documented in a myriad of applications, from common dermatological indications to issues in the fields of ophthalmology and urology, among others.

For example, Impetigo, a contagious, superficial skin infection, is treated using antibiotic ointments, such as commonly prescribed Generic Bactroban Ointment or GlaxoSmithKline’s (NYSE:GSK) Altabax. 13 million scripts are written annually for this indication1. And yet it’s estimated that as many as 30% of impetigo infections are methicillin-resistant Staphylococcus aureus (MRSA)2 , where these treatments fall victim to drug resistance – at an accelerating rate (a recent study3 suggests that Johnson & Johnson's (NYSE:JNJ) over-the-counter ointments, bacitracin and neomycin are also giving rise to resistance).

In this underserved indication (and others), NovaBay Pharmaceuticals (NYSEMKT:NBY) has developed a class of anti-infectives that they call ‘Agonocides®’. They’re fast-acting, broad-spectrum agents with demonstrated activity against multidrug resistant bacteria (such as MRSA) and fungi4. In other words, they treat the same Impetigo as generic bactroban or Altabax, without encountering resistance.

The patented compound NovaBay calls an Agonocide is designed to mimic the active antimicrobial molecules generated within white blood cells – nature’s killing agent – which explains why they’re unlikely to encounter resistance, and still resolve the problems antibiotics are proving less and less capable of doing.

Untapped Value

The investment aspect in NovaBay Pharmaceuticals is quite novel in itself. NovaBay landed dermatological giant Galderma S.A. to develop an Agonocide for acne. Years later, extraordinary clinical results (85%, 87% and 92% response rates at 3 different doses) from a Phase II trial with NVC-422 in Impetigo led Galderma to believe NovaBay was sitting on a dermatologic goldmine. So the company exercised its option to partner with NovaBay in this indication, committed $62 Million in milestone payments, and agreed to cover all development costs, besides.

But to truly understand the significance of this relationship one needs to take a step back and understand what made Galderma the leader in dermatology that it is today. Here’s a brief timeline5:

· 1981: Galderma is formed as a joint venture between Nestle (OTCPK:NSRGY) and L’Oreal

· 1988: Galderma acquires Alcon’s (NYSE:ACL) dermatology unit

· 1993: Galderma acquires MetroGel / Rozex to include rosacea treatments in the product portfolio

· 1997: Galderma acquires Basotherm, a subsidiary of Boehringer

· 1998: Galderma acquires Darrow’s dermatology portfolio

· 1999: Galderma acquires Loceryl (fungal nail infections), developed by Laboratoires Roche (OTCQX:RHHBY), together with the Scandinavian dermatology portfolio developed by Nycomed

· 2000: Galderma acquires Capex Shampoo (seborrheic dermatitis).

· 2004: Galderma acquires Tri-Luma

· 2008: Galderma acquires CollaGenex Pharmaceuticals and its product Oracea (rosacea).

There’s no need to second-guess that acquisition is an imperative growth strategy for Galderma. Since its inception, the firm has grown by acquiring products that are marketable and address large, underserved needs, like the one in Impetigo.

Inefficiencies exist in a broad spectrum of markets that lead investors astray, and create opportunities for those that uncover them. So it goes without saying that something is afoot when an expert in the field of dermatology (Galderma) is explicitly stating that NVC-422 in Impetigo is likely worth well over $62 million, at the same time that the market has valued the company and its portfolio of products at close to half of that. Even a net-present value calculation (Roth Capital partners has a NPV of $1.70 for NVC-422 in Impetigo alone6) would have to be computed at an alarmingly-sharp discount rate to suggest NovaBay is worth what it is being valued at, today.

The folly in forming an opinion of a small biotechnology company on the premise of its financial statements is that neither the balance sheet, income statement, nor cash flow summary can account for the invaluable relationships companies like NovaBay share with a dermatological giant like Galderma. Capturing the future value of technologies being developed today is another issue.

According to NovaBay Pharmaceuticals, Galderma is finalizing preparation to launch a Phase 2b clinical study of NVC-422 for the treatment of impetigo during the fourth quarter (Q4), with data expected in the second half of 20127. Positive data could lead to a Phase III trial, which triggers an additional milestone payment from Galderma.

References

1. World-wide prescriptions, according to IMS Health

2. According to consultants for NovaBay Pharmaceuticals

3. Medscape publication: J&J's bacitracin/neomycin give rise to resistance

4. 2010 Annual Report, NovaBay Pharmaceuticals

5. Galderma website: ‘Our History’

6. Roth Capital Partners Research Report, Sept 16

7. News Release, Nov 7

Disclosure: I am long NBY.