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"Necessity," the saying goes, "is the mother of invention." But there's another saying, one I will coin right now. "Simplicity," goes my saying, "is the father."

Since 1999, four new molecular entity (NME) drugs have been approved for use against bacterial skin infection. NME means that the molecule that is the active ingredient of the drug is newly engineered and never used before in any other approved medication. It is effectively invented in a lab. These NME's are Teflaro by Forest Labs (FRX), Tygacil by Pfizer (PFE), Invanz by Merck (MRK), and Vibativ by Theravance (THRX). In ophthalmology, four NME drugs have been approved for use against bacterial conjunctivitis. Zymaxid by Allergan (AGN), Besivance by InSite Vision (INSV), Azasite also by InSite, and Quixen by Santen. Only one FDA approved medication exists for bedsores, and that is Santyl collagenase. There are currently no FDA approved medications for viral conjunctivitis, because no one has figured out how to fight most viruses except by letting the immune system deal with them.

What do all these therapeutic areas - bacterial and viral conjunctivitis, bacterial skin infection, and bedsores - have in common? They can all be dealt with in principle, like most other diseases, by the human immune system, which has been evolving against infection for hundreds of thousands of years, and even longer if you count our pre-hominid ancestors. Every time an NME is produced and approved, sooner or later resistance is developed and the scientists have to create another one. There is a reason that these NME's don't exist in nature and are not produced in house by the immune system. It's because they can never work long term to keep a species safe against microbial threats. They are short term solutions to a long term problem.

Enter NovaBay (NBY), a company that, for 12 years, has been working on a simple idea. The immune system has kept the human race alive for so long because bacteria and viruses have never developed resistance to it. So why not use the immune system itself to create an antimicrobial?

The compound they developed is called N,N-dichloro-2,2-dimethyltaurine. Not exactly a marketable name, so they shortened it to NVC-422, pictured chemically above. The basic chemistry is that when a white blood cell attacks a microbe, it produces HOCl, or hypochlorous acid, to kill it. The excess acid reacts with taurine, which is an amino acid that's part of every protein, and produces N-chlorotaurine, or NCT. The problem is, NCT is highly unstable and does not exist long enough to administer it as a medication. So NovaBay figured out how to stabilize the compound by adding more chloride to it.

NVC-422 and its derivative compounds are currently going through phase II and late stage phase III trials for three different diseases. One is antibiotic resistant impetigo (a bacterial skin infection), which kills 20,000 a year in the US. Another is viral conjunctivitis, for which there is no FDA approved treatment. The third is urinary catheter blockage and encrustation (UCBE). A fourth, bedsores, already has an approved NovaBay treatment called Neutrophase that the company is now teaming up with distributors in China to market. The company just recently received a $1.5M investment from Pioneer Pharma towards that end. (Neutrophase has even been cited in easing the management of flesh-eating bacteria.)

As far as investment goes, NBY has a market cap of just over $38M and at $1.28, it's sitting right between its 52 week high and low points. NovaBay's current trials are like redundant systems in a security net. If one fails, the others take over. Meaning, NVC-422 can fail for two diseases but succeed for one and still make the company profitable. To put this into perspective, let's say only the impetigo trails succeed. Zyvox, the current market leader for treatment against antibiotic resistant impetigo, sold $1.3B last year for Pfizer (PFE). Zyvox is not perfect and though while very effective, it is not 100%, which is why people still die from this disease. NVC-422 for impetigo is in phase III and it has killed every virus, bacteria, and fungi against which it has been tested. Let's make a conservative assumption and say Galderma, NovaBay's partner in the impetigo trials, gives them a 10% royalty on sales, and they conquer just a quarter of the Zyvox market. That puts annual revenues just from impetigo at $32.5M, almost their entire market cap at present, and that's just passively collecting royalties. If any other trials succeed, especially viral conjunctivitis which is a much bigger market and has no competition, then the story changes completely.

Basically, the risk/reward ratio is favorable, but don't expect any meaningful movement until sometime next year at the earliest when word on these trials gets published. Until then, everything is speculative, and there will be gyrations and possible dilutions to continue company funding.

If you're interested in delving into the nitty gritty of this numbers game, Smith on Stocks has released a report analyzing in painstaking detail this company's product candidates, its upcoming phase II and III trials next year, its revenue prospects assuming approval, and possible upcoming stock dilutions. Smith makes projections over a decade and a half out assuming NVC-422 succeeds. Predictions that far out are simply an exercise in multiplication in my opinion, but it's still interesting to look at, bookmark, and come back to in fifteen years to see how close he was.

The quick summary is that the impetigo phase III will be completed next year. The viral conjunctivitis phase III will as well. UCBE treatment is still in phase II and has a while to go.

Financially, considering its near total lack of sales revenue, NovaBay is stable. With infusions of cash from Galderma, its partner in developing NVC-422 for impetigo, and Pioneer Pharma for Neutrophase, NovaBay's bills are being paid. They have no long term debt on their balance sheet, and assets more than double their liabilities. Between now and 2016, Smith sees one stock dilution. But that won't matter at all if NVC-422's trials succeed. Everything will hang on that, and despite encouraging progress so far, nothing is certain with regard to new medications or the company's ability to market them in the future. I don't see the stock moving all that much until word is out on one or more of these trials next year, but even so their simple approach treating infections deserves serious attention.

With antibiotic resistance becoming an ever more complex problem, and the human immune system as a base, NovaBay's invention looks like it has both a mother and a father.

Source: For NovaBay, Simplicity Is The Father Of Invention