Nuvo Research Offers Low-Risk With Big Upside

| About: Nuvo Pharmaceuticals (NRIFF)
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Nuvo Research, Inc. is a specialty pharmaceutical company with a diverse portfolio of marketed products (Pennsaid®, Pennsaid® 2%, Synera®, Pliaglis®).

Beside the marketed products, the company also has an immunotherapy treatment (WF10) for allergic rhinitis in Phase 2 testing.

We feel that Nuvo has tremendous upside. We believe investor should ‘Buy’ the shares today, and our target is $7.50 per share.

(Editor's Note: Investors should be mindful of the risks of transacting in illiquid securities such as NRIFF. Improved liquidity can be found on the Toronto Stock Exchange under NRI.TO.)

Nuvo Research, Inc. (NRI.TO) (OTCQX:NRIFF) is a specialty pharmaceutical company with a diverse portfolio of products and technologies. The company has two separate business units: Topical Products and Technology (TPT) Group and the Immunology Group. The TPT Group has four marketed products and a pipeline of products at various stages of development along with four topical and transdermal drug delivery platforms. The Immunology Group has two commercialized products, a developmental program for the treatment of allergic rhinitis, and a potential immune modulating platform.

TPT commercial products include four FDA-approved drugs, Pennsaid®, Pennsaid® 2%, HLT Patch (Synera®), and Pliaglis®. The company's Immunology group is focused on the development of WF10, a composition for the treatment of immune related disorders. Below we discuss each of these compounds in greater detail and provide a greater look at our valuation model.


Knee Osteoarthritis

Osteoarthritis (NYSE:OA) is the most common form of arthritis that affects approximately 250 million adults worldwide (Vos et al., 2006). It results in a slow degeneration of the joint through a gradual wearing away of the joint cartilage. It mostly affects weight-bearing joints (i.e., the hips, knees, and ankles) and results in their progressive deterioration. OA affects articular cartilage, which is the smooth, white tissue that covers the ends of bones where they come together to form a joint. Articular cartilage is characterized by a very low friction and a high resistance to wear; however, it also has poor regenerative properties. In addition to articular cartilage, the knee joint contains a second type of cartilage called menisci that act as shock absorber pads while joint fluid adds lubrication to the joint.

In patients suffering from OA, there is a cartilage failure that leads to a limited range of motion, bone damage, and severe pain. Knee OA starts as the lack or loss of articular cartilage and progresses to involvement of the surrounding bone, tissues, and joint fluid. It results in progressive loss of function including: gait, stair climbing and other physical activities that involve the lower limbs such as walking.

There are approximately 27 million people in the United States who suffer from OA, with the knee being one of the most common areas affected in older individuals. While it has been known to occur in young people, it typically affects those aged 45 and over and is considered as one of the leading causes of lower limb disabilities among the elderly. In addition, as a result of the major loss of function and, due to how it limits activity, OA can also result in depression and a loss of independence. There is also a considerable socioeconomic burden on societies and families due to disabilities brought about by OA.

As there is no cure for OA, treatment is focused on controlling symptoms and preserving physical function. This is accomplished through a combination of pharmacological and non-pharmacological therapies and ultimately joint replacement therapy.

Current Treatment Options for Knee OA

Treatment options for Knee OA can be divided into two groups: Nonsurgical and Surgical. Nonsurgical treatment options include exercise and weight loss, braces, nutritional supplements, viscosupplementation, cortisone injections, and medications. Surgical treatment options include chondroplasty, abrasion/microfracture, osteochondral autograft (or allograft), osteotomy, and knee replacement.

The American Academy of Orthopedic Surgeons (AAOS) published newly revised guidelines for the treatment of knee OA in 2013. The most significant change from the previous guidelines issued in 2008 was a strong recommendation against the use of hyaluronic acid viscosupplementation. The reason for this was that a meta-analysis of 14 studies assessing HA injections did not have enough evidence to meet the minimum clinically important improvement thresholds. Another important point from the newly published guidelines was a strong recommendation for the use of NSAIDs.

…Pennsaid® is a topical NSAID treatment for knee OA…

NSAIDs are often used for the treatment of OA, particularly for knee OA. They block cyclooxygenase-1 and -2 (COX-1, COX-2) enzymes, thereby inhibiting the production of prostaglandins, which are known inducers of pain and inflammation. When administered orally, NSAIDs are effective in reducing pain and decreasing inflammation; however, they have well documented side effects related to systemic administration.

The dose-related gastrointestinal side effects are a result of the inhibition of the COX-1 enzyme, which is responsible for the normal gastro-protective processes (Roth, 1988). Dyspepsia, abdominal pain, and nausea are all common side effects of oral NSAIDs (Makris et al. 2010). While these adverse events are manageable, more serious events are known to occur with oral NSAID use including upper gastrointestinal bleeding, ulcers, and death (Hernández-Díaz et al., 2000). Both nonselective and COX-2 selective NSAIDs (e.g., celecoxib and rofecoxib) are known to increase the risk of myocardial infarction, stroke and death (Antman et al. 2007). Thus, the rational for a topical formulation of a NSAID is that the drug can be administered locally while minimizing systemic side effects.

Nuvo has developed Pennsaid® for the treatment of the signs and symptoms associated with knee OA. Pennsaid® is a topical formulation that combines the transdermal carrier dimethyl sulfoxide (DMSO) with diclofenac sodium, a NSAID, which delivers the drug through the skin directly to the sight of inflammation and pain. Pennsaid® first gained FDA approval in November 2009 and was commercially launched by the company's partner Mallinckrodt, Inc. (then a subsidiary of Covidien) in April 2010. Pennsaid® is also available for sale in Canada, Greece, Italy and the United Kingdom.

…Enter Pennsaid® 2%…

Pennsaid® 2% is a follow-on product to original Pennsaid® and contains 2% diclofenac sodium compared to 1.5% for original Pennsaid®. Pennsaid® 2% is more viscous than original Pennsaid®, supplied in a metered dose pump bottle, and has been approved in the U.S. for twice daily dosing compared to four times a day for Pennsaid® and its chief competitor, Voltaren® Gel. Nuvo has new patents covering Pennsaid® 2% in the U.S. that extend the intellectual property protection to 2030. A patent was also issued in the E.U. that provides protection for Pennsaid® 2% formulation and its use.

In June 2009, Nuvo entered into a U.S. Licensing Agreement with Mallinckrodt, granting Mallinckrodt exclusive rights to market and sell Pennsaid® in the U.S. through the transfer of the NDA to Mallinckrodt upon FDA approval in the U.S. Under the terms of the U.S. Licensing Agreement, Mallinckrodt assumed responsibility for all development activities and costs related to Pennsaid® subsequent to the Effective Date and subsequent to the transfer of the NDA all regulatory responsibility. Nuvo is entitled to receive 20% royalties on net U.S. sales of Pennsaid®.

…Disagreements with Mallinckrodt over Pennsaid® 2% Development Pathway…

When Nuvo signed the U.S. Licensing Agreement with Mallinckrodt (NYSE:MNK) in June 2009 for Pennsaid®, they also negotiated and agreed to a development plan for Pennsaid® 2%. This plan called for specific development activities to be conducted by Mallinckrodt and timelines for carrying out these activities. The development plan included a Phase 2 clinical trial, which was to be followed immediately by two Phase 3 clinical trials. Mallinckrodt provided the final results of the Phase 2 trial for Pennsaid® 2% to Nuvo in June 2011, with results showing that Pennsaid® 2% met its primary endpoint of reducing knee OA pain.

The Pennsaid® 2% development plan had provided that two Phase 3 pivotal clinical trials were to have commenced no later than February 2011, and that if this timeline was not met then Nuvo had the right to terminate the licensing agreement as it relates to Pennsaid® 2% and to take back U.S. rights to the product. In June 2011, Mallinckrodt advised Nuvo that it was pursuing a Supplementary New Drug Application (SNDA) regulatory approval pathway for Pennsaid® 2% using the data from the Phase 2 clinical trial rather than a New Drug Application (NDA) supported by two Phase 3 clinical trials, as was specified by the development plan. Under the terms of the License Agreement any changes to the development plan required the unanimous consent of the Joint Steering Committee (JSC) that had half Nuvo and half Mallinckrodt representatives. Mallinckrodt presented their proposal to eliminate the two Phase 3 studies to the JSC and Nuvo formally refused to provide its consent.

In May 2012, Mallinckrodt submitted a sNDA for Pennsaid® 2% to the FDA. In July 2012, the FDA requested that Mallinckrodt withdraw the sNDA and refile it as a full NDA. Mallinckrodt then resubmitted the application as a NDA in July 2012, which the FDA accepted for review with a Prescription Drug User Fee Act (PDUFA) date of March 4, 2013. Mallinckrodt received a Complete Response Letter (CRL) to the NDA for Pennsaid® 2% in which the FDA confirmed that the only requirement was the completion of a pharmacokinetic (PK) study comparing Pennsaid® 2% to original Pennsaid®. Mallinckrodt completed the additional PK study and in August 2013 submitted the study to the FDA to address the CRL. On January 16, 2014, the FDA approved the sale and marketing of Pennsaid® 2% in the U.S. along with a 3-year marketing exclusivity for Pennsaid® 2% pursuant to the "Hatch-Waxman Act".

The approval of Pennsaid® 2% was for the pain of knee OA, as opposed to the treatment of the signs and symptoms of knee OA, which was the approved indication for Pennsaid®. The lesser indication was granted because the Phase 2 study submitted to the FDA wasn't adequately powered as a pivotal study and therefore statistical significance was achieved for the pain endpoint only. Statistical significance was not achieved for physical function and overall health assessment. These latter endpoints had been achieved in all Pennsaid® Phase 3 studies resulting in the signs and symptoms indication, a much broader indication.

…Nuvo heads to court…

In April 2013, Nuvo delivered a formal notice of material breaches (NOMB) to Mallinckrodt that was intended to give Mallinckrodt an opportunity to cure the breaches alleged by Nuvo and served as a pre-condition to Nuvo commencing formal legal proceedings for breaches of the U.S. Licensing Agreement. On August 20, 2013, Nuvo commenced legal action against Mallinckrodt by filing a complaint in the U.S. District Court for the Southern District of New York. Nuvo is accusing Mallinckrodt of breaching the U.S. Licensing Agreement in which Nuvo licensed the right to sell and market Pennsaid® and Pennsaid® 2% in exchange for Mallinckrodt taking on certain obligations in relation to clinical development of Pennsaid® 2%.

Nuvo is seeking damages of at least $100 million along with the right to terminate the Pennsaid® U.S. Licensing Agreement that would result in Nuvo retaining all rights to market and sell Pennsaid® and Pennsaid® 2% in the U.S. While the case is being litigated, both companies are operating on the basis of the agreement set forth in the Licensing Agreement. Nuvo and Mallinckrodt have agreed to a joint discovery schedule in which document discovery is to be substantially completed by June 2014; all fact discovery is to be completed by December 2014. According to the current schedule, a trial would likely not occur until at least mid to late 2015.

…Topical NSAID Market Analysis…

The knee OA market represents a sizable population as it is estimated that 16% of Americans over the age of 45 have symptomatic knee OA (Jordan et al. 2007). According to the 2010 Census, there were approximately 121 million Americans over the age of 45. This puts the total knee OA target population at approximately 19 million individuals. Above we previously reported data from the U.S. CDC estimating approximately 27 million people in the United States who suffer from OA. Thus, we believe the patient target population is between 20 and 25 million.

In the U.S. there are a number of products available for the treatment of OA including: over-the-counter (OTC) oral medications that are available without a prescription. These include acetaminophen and low-dose oral NSAIDs such as ibuprofen or naproxen. Prescription-only medications, such as full-strength NSAIDs (both with and without proton pump inhibitors), COX-2 selective NSAIDs, oral opiate analgesics, and topical NSAIDs are also available. We estimate that in 2012, topical NSAIDs captured 4 million prescriptions and the total size of the market exceeded $500 million in the U.S.

Pennsaid® and Pennsaid® 2% are in a group with two other FDA approved topical NSAIDs, with the others being Voltaren® Gel (diclofenac sodium topical gel) 1% sold by Endo Pharmaceuticals, and Flector® Patch (diclofenac epolamine patch) 1.3% sold by Pfizer. Net sales of Voltaren® Gel and Flector® Patch were $170.8 million and $160 million for 2013, respectively.

We expect generic competition to Pennsaid® will begin by the middle of 2014, thus we believe that Pennsaid® 2% will be the main driver of revenues for Nuvo in the knee OA market in the U.S. Pennsaid® 2% became available in the U.S. in February 2014 and we are modeling prescription growth similar to what was seen after the launch of original Pennsaid®. Mallinckrodt's CEO, Mark Trudeau, has stated he expects Pennsaid® 2% to generate "tens of millions of dollars" in annual sales. Thus, we have modeled for Pennsaid® 2% to peak at approximately $75 million in annual sales. We discuss our valuation of Nuvo Research based on this forecast below.

HLT Patch (Synera®) and Pliaglis®

In May 2011, Nuvo acquired ZARS Pharma, Inc., a U.S. specialty pharmaceutical company focused on the development and commercialization of topically administered drugs, primarily with respect to pain. The ZARS acquisition significantly broadened Nuvo's pain pipeline by adding two approved products, Synera® (which Nuvo refers to as the HLT Patch) and Pliaglis®, a pipeline of pain products in various stages of development and two important drug delivery platforms, Controlled Heat Assisted Drug Delivery (CHADD™) and topical film-forming dosage forms (Peel and DuraPeel™).

…Synera® licensed to Galen…

In July 2013, Nuvo sold the rights to market and sell Synera® in the U.S. to Galen U.S. Inc. for its current indication. Under the terms of the licensing agreement with Galen, the Synera® trademark was sold to Galen and Nuvo agreed to no long refer to the HLT Patch for other indications or other territories as Synera®.

Synera® (HLT Patch) is a topical patch using Nuvo's proprietary CHADD™ technology that combines lidocaine, tetracaine, and heat. The CHADD™ unit generates gentle heating of the skin and in a well-controlled clinical trial demonstrated that it contributes to the efficacy of Synera®. Synera® resembles a small adhesive bandage in appearance and is applied to the skin 20 to 30 minutes prior to painful medical procedures, such as venous access, blood draws, needle injections, and minor dermatologic surgical procedures.

The formulation of the unit is an emulsion in which the active ingredients are in an oil phase as a eutectic mixture containing 70 mg lidocaine and 70 mg of tetracaine in a 1:1 ratio by weight. The inactive ingredients are polyvinyl alcohol, sorbitan monopalmitate, water, methylparaben and propylparaben. The total surface area of Synera® is approximately 50 cm2, of which the active area is 10 cm2.

…Synera® commercial and licensing history…

Synera® is approved in the U.S. to provide local dermal analgesia for superficial venous access and superficial dermatological procedures, such as excision, electrodessication, and shave biopsy of skin lesions. In July 2013, Nuvo licensed the rights to market and sell Synera® in the U.S. to Galen U.S. Inc. for its current indication. Under the terms of the agreement, Galen made an upfront payment to Nuvo of U.S. $4.5 million on closing and Nuvo will receive royalties of 10% of net sales and is eligible to receive sales milestones.

In September 2012, Nuvo successfully completed a study to provide data to support an application for the removal of the "Not for Home Use by Patient" condition currently on the U.S. label of Synera®. The company filed a prior approval supplement (PAS) with the FDA in May 2013 requesting removal of the "Not for Home Use by Patient" condition from the label. On March 10, 2014 the FDA responded to the PAS by approving the request to have the "Not for Home Use by Patient" label removed.

In most E.U. countries, the HLT Patch is marketed under the trade name Rapydan® and it is approved for surface anesthesia of normal intact skin in connection with needle punctures in adults and children from 3 years of age, and for use in cases of superficial surgical procedures on normal intact skin in adults. Nuvo has licensed the sales and marketing rights to Eurocept International B.V. (Eurocept), a Dutch-based pharmaceutical company, for Western Europe, Russia and most of its former Republics, Turkey, Israel, and the People's Republic of China. Under the terms of the agreement, Nuvo earns 15% royalties on the net sales of Rapydan® and is eligible to receive sales milestones. Rapydan® has not yet been approved in Russia and most of its former Republics, Turkey, Israel, and the People's Republic of China.

In May 2012, Nuvo entered into a license and supply agreement granting Paladin exclusive Canadian rights to market and sell the HLT Patch, upon regulatory approval. Under the terms of the agreement, Nuvo will receive a double-digit royalty on net sales in Canada and will supply the HLT Patch to Paladin. The HLT Patch has not yet been approved by Canadian regulatory authorities for marketing in Canada. Nuvo holds the sales and marketing rights for the HLT Patch in Mexico, South America, Australia, Africa and most regions in Asia, although it is not yet approved in any of these countries.


Pliaglis® is a topical local anesthetic cream that provides safe and effective local dermal analgesia on intact skin prior to superficial dermatological procedures, such as dermal filler injection, pulsed dye laser therapy, facial laser resurfacing, and laser-assisted tattoo removal. This product consists of a 1:1 eutectic mixture of 7% lidocaine and 7% tetracaine that utilizes the proprietary phase-changing topical cream Peel technology.

The Peel technology consists of a drug-containing cream that, once applied to a patient's skin, dries to form a pliable layer that releases drug into the skin. Pliaglis® is applied to intact skin for 20 to 30 minutes prior to superficial dermatological procedures and for 60 minutes prior to laser-assisted tattoo removal. Following the application period, Pliaglis forms a pliable layer that is easily removed from the skin allowing the dermatological procedure to be performed with minimal to no pain.

…Pliaglis® commercial and licensing history…

Galderma Pharma S.A., a global pharmaceutical company specialized in dermatology, holds the worldwide sales and marketing rights for Pliaglis®. Under the terms of the licensing agreement, Nuvo earns royalties on the net sales of Pliaglis® and is eligible to receive milestone payments when certain specified approvals are obtained and launches occur.

Galderma launched Pliaglis® in the U.S. in March 2013 at the American Academy of Dermatology Conference in Miami. Galderma launched Pliaglis® in the U.S. through a third-party distributor and in January 2014 it hired a small sales force to start marketing Pliaglis®.

In the E.U., the Marketing Authorization Application (MAA) for Pliaglis® that was prepared by Nuvo, as per its obligations under the terms of the licensing agreement, was validated in July 2012. Galderma launched Pliaglis® in the E.U. in April 2013 at the Anti-Aging Medicine World Congress & Medispa in Monaco.

…Topical anesthetic market analysis…

Both Synera® and Pliaglis® face competition in all markets from other topically applied local anesthetic drugs including EMLA Cream, L.M.X. 4 and L.M.X. 5. EMLA Cream is an emulsion in which the oil phase is a eutectic mixture of lidocaine and prilocaine in a 1:1 ratio (w/w). It is indicated as a topical anesthetic for use 1) on intact skin to provide local analgesia, 2) on genital mucous membranes for superficial minor surgery, and 3) as a pretreatment for infiltration anesthesia. The product is owned and sold globally by AstraZeneca, but is also available as a generic product. Sales of EMLA Cream on a global basis are over $100 million.

L.M.X.4 and L.M.X. 5 Anorectal Creams are topical anaesthetic creams containing 4% and 5% lidocaine. L.M.X.4 is indicated for the temporary relief of pain and itching due to: minor cuts, minor scrapes, minor burns, sunburn, minor skin irritations and insect bites. L.M.X.5 Anorectal Cream is approved for the temporary relief of local discomfort, including pain and itching and soreness or burning associated with anorectal disorders. The product is also used for cosmetic procedures such as waxing and laser hair removal. L.M.X. 4 and L.M.X.5 Anorectal Creams are OTC products marketed by Ferndale Laboratories, Inc. in the U.S.

Nuvo receives 10% royalties on sales of Synera® in the U.S. and 15% on sales in the E.U., which amounted to $143,000 in 2013. For Pliaglis®, Nuvo receives 16% royalties on sales in the U.S. and 13% in the E.U., which amounted to $118,000 in 2013. Pliaglis® was launched by Galderma in March 2013 without a sales force to actively distribute it. However, in early 2014, Galderma began promoting Pliaglis® with a small sales force, thus sales are likely to increase in the coming years. Nuvo began receiving royalties on U.S. net sales of Synera® in July 2013, when the company sold Synera® to Galen. We believe Synera® and Pliaglis® will each have peak sales in the $10 to $20 million range, putting peak royalties to Nuvo Research in the $1 to $3 million range. We have incorporated these forecasts in our valuation model below.

WF10 - The Underappreciated Gem

WF10's pharmacological profile is best described as that of an immune-modulator with anti-inflammatory properties. WF10 is believed to exert effects on macrophages and the mechanisms by which they modulate the immune response. WF10 is an aqueous solution (1:10 dilution) of the chlorite drug OXOK993 (tetrachlorodecaoxide) that is given intravenously and has potential applications in immune modulation, adjuvant cancer therapy, immune deficiencies, and chronic viral infections. WF10 is currently being tested as a treatment for severe allergic rhinitis, a potential $10 billion market opportunity.

…Allergic rhinitis…

While previously considered a rare condition, recent epidemiological studies show that allergic rhinitis affects 40% of children and 10-30% of adults worldwide (>300 million people) (Steinsvaag, 2011). The hallmark clinical manifestations of allergic rhinitis are nasal itching, sneezing, nasal running, and nasal obstruction. The condition is commonly regarded as merely a seasonal nuisance; however, it is associated with persistent mucosal inflammation (Ciprandi et al., 1995) that can hamper response to viral colds (Cirillo et al., 2007).

Allergic rhinitis is typically associated with other respiratory inflammatory diseases such as asthma, rhinosinusitis and allergic conjunctivitis. Rhinitis and asthma have a propensity to occur together, according to a number of epidemiological studies (Bousquet et al., 2001). There also appears to be a connection between sinus disease and allergic rhinitis with 25% of individuals with acute sinusitis having allergic rhinitis and approximately 50% of those with unilateral chronic sinusitis and up to 80% with chronic bilateral sinusitis (Fokkens et al., 2007).

Rhinitis is classified as allergic, non-allergic, or occupational with 2/3rd of children and 1/3rd of adults presenting with allergic rhinitis (Scadding, 2001). The Allergic Rhinitis and its Impact on Asthma (ARIA) guidelines for classification define allergic rhinitis as either intermittent or persistent and mild or moderate-to-severe. Allergic rhinitis is mostly triggered by inhaled allergens such as grass pollen, tree pollen and dust mites (Bousquet, et al. 2007) In order to confirm a diagnosis of allergic rhinitis, specific IgE reactivity to airborne allergens needs to be performed through either hypersensitivity skin testing or a blood test.

…Current Treatment Options for Allergic Rhinitis…

Several treatment options exist for dealing with the symptoms of allergic rhinitis and they belong to a number of different classifications and can be administered either nasally or orally.

Topical Nasal Medications

  • Corticosteroids: Reduces the swelling and inflammation in the nose. Examples include fluticasone (Flonase®), mometasone (Nasonex®) and triamcinolone (Nasacort®).

  • Antihistamines: Work by blocking the action of histamine, which is responsible for inducing the symptoms of allergic rhinitis including sneezing, itching and runny nose. Examples include azelastine (Astelin®) and olopatadine (Patanase®).
  • Chromones: Inhibit the release of histamine from mast cells. An example of a chromone for the treatment of allergic rhinitis is sodium cromoglicate (Nasalcrom®). Multiple applications needed per day and weaker effect compared to other medications.
  • Anticholinergics: Decrease secretions from the glands lining the nasal passage, thus alleviating runny nose associated with allergic rhinitis. An example is ipratropium bromide (Atrovent®). Need to be applied two to three times a day thus not typically a first line treatment.

Oral Medications

  • Antihistamines: Compete with histamine for binding to the type 1 receptor site in blood vessels, the gastrointestinal tract and respiratory tract. Examples include cetirizine (Zyrtec®), fexofenadine (Allegra®), and loratadine (Claritin®). These compounds are all effective in controlling symptoms of allergic rhinitis but do not affect nasal congestion, thus they are typically available as combination products with a decongestant.

  • Antileukotrienes: Selectively prevent the action of leukotrienes released by mast cells and eosinophils. An example is montelukast (Singulair®) that has been shown to produce modest improvements in allergic rhinitis symptoms.
  • Decongestants: Pseudoephedrine (Sudafed®) is effective at reducing nasal obstruction, however it does not treat other symptoms of allergic rhinitis so is typically used in combination with an antihistamine. Side effects include increased heart rate, blood pressure, insomnia and anxiety.

The treatments for allergic rhinitis listed above generated sales in excess of $12 billion in 2009. There are approximately 82 million individuals in the United States that suffer from allergic rhinitis, with approximately 10 million patients who do not get adequate relief from conventional products and who are eligible for an alternative therapy such as immunotherapy.

…Immunotherapy for the treatment of allergic rhinitis…

Patients that do not respond to traditional allergic rhinitis treatments are usually administered allergy shots (immunotherapy) as a way to induce immune system tolerance to whatever allergen is inducing the symptoms. Treatment commences with a skin test to determine which allergen(s) a patient is sensitized. The allergy shots themselves are a saline solution that contains a small amount of the allergen. Shots are administered once or twice per week with the amount of allergen in each shot increased gradually over time for the first 4 to 6 months. At this point, the patient typically enters the maintenance phase where the amount of allergen is kept constant and the frequency of shots is reduced to once every 2-3 weeks.

The patient continues on the maintenance phase for an additional 4 to 6 months, at which point their doctor will determine whether their reaction to the antigen has improved or worsened. If the symptoms have not improved the allergy shots are usually discontinued. An improvement of symptoms will result in a continuation of the shots for an additional 3 to 5 years. Allergy shots have been shown to be effective in treating both allergic rhinitis and allergic asthma. The length of time that they work after discontinuation of treatment varies from patient to patient, with some individuals never suffering from symptoms again while others have symptoms return after a couple of years.

…WF10 for the treatment of allergic rhinitis…

Given its ability to modulate the immune system, alter macrophage function, and its safe track record, Nuvo scientists explored the idea of whether WF10 could alter the immune response in allergic rhinitis. They conducted a Phase 2 randomized, double-blind, placebo-controlled, single-center trial to assess the efficacy and safety of WF10 infusions in 60 patients with at least a two year history of allergic rhinitis and a positive allergen skin test.

The primary end point of the Nuvo Phase 2 study was Total Nasal Symptom Score (TNSS). TNSS is the sum of the individual scores assigned by patients for sneezing, rhinorrhea, congestion, and nasal itching. WF10 was administered for five consecutive days at the start of the trial. The patients received no additional WF10 treatment and were followed for 12 weeks. The figure below shows the improvement in TNSS was much greater for WF10 treated patients than for placebo treated patients (P < 0.001) at all time points beginning at week 3. While there was a decrease noted in TNSS for patients receiving placebo, this was not all that unexpected due to the fact that 1) any trial that uses a subjective endpoint is going to have a placebo response and 2) any trial involving drugs delivered intravenously (IV) will have a placebo response because patients think that a drug delivered IV is a stronger drug.

A review published in 2010 summarized the clinical efficacy seen in treating allergic rhinitis with the different treatment classes: antihistamines, intranasal steroids (INSs), leukotriene receptor antagonists (LTRAs), and cromolyn sodium. The analysis utilized 54 randomized, placebo-controlled studies examining more than 14,000 adults and 1,580 children. While not a direct head-to-head comparison, the following figure summarizes the results of the analysis and suggests that response to WF10 may be greater than response to any of the other class of allergic rhinitis treatments.

…WF10 development plans…

Nuvo is planning to initiate a second Phase 2 trial of WF10 for the treatment of allergic rhinitis in the first half of 2014. The study will be a 160-subject, randomized, double-blind, placebo-controlled, 4-arm, multi-center trial to assess the safety and efficacy of five consecutive daily infusions of WF10 and its component ions versus a control. The last patient should be dosed in the third quarter of 2014 with study results available by the end of 2014. In July of 2012 Nuvo secured up to €4.4 million of funding from the Development Bank of Saxony (SAB) for the further development of WF10 as a treatment for allergic rhinitis and other diseases. The funding will take the form of a non-repayable reimbursement of specific development monies expended by the company until July 2014. Nuvo has certain contractual obligations related to SAB, including the obligation to provide matching funding from its own resources of €1.9 million over the two-year period ending in July 2014.

Technology and Pipeline

Nuvo has four proprietary topical and transdermal drug delivery (TTDD) platforms:

  • Multiplexed molecular penetration enhancers (MMPE™): This patented technology uses combinations of molecular penetration enhancers (MPE) to permeate the skin to enhance delivery of drugs.
  • Controlled Heat Assisted Drug Delivery (CHADD™): CHADD™ utilizes a new technology to deliver controlled heat to enhance transdermal drug delivery. Heat is generated from a proprietary mixture of iron powder, activated carbon, sodium chloride, wood flour and water. This mixture is placed in a patch made of filter paper that is then sealed between two polymer films. The CHADD™ technology allows for more effective dosing, faster onset of action, and reduced side effects.
  • Peel and DuraPeel™: These technologies allow drugs to be delivered as a cream that dries to form a pliable self-occluding membrane. Advantages of the Peel and DuraPeel™ technologies are that the membrane cannot be easily rubbed off and it conforms to the skin topography .The difference between Peel and DuraPeel™ is that the Peel technology is utilized for short-term drug delivery while DuraPeel™ offers predictable drug delivery for up to 12 hours.

Nuvo has a large number of development stage products that the Company is actively seeking co-development and licensing partners for to advance in the clinic:

Nuvo Research Pipeline

Valuation and Recommendation

We are initiating coverage of Nuvo Research, Inc. (T.NRI) with a Buy rating with a price target of $7.50.

Our valuation is built upon the four FDA approved compounds as well as the potential for WF10 as a treatment for allergic rhinitis. When considering only the currently approved compounds, Nuvo is selling at a significant discount to even our conservative sales estimates. So, in essence, buying Nuvo today means an investor gets a piece of a specialty pharmaceutical company with a potential blockbuster allergy treatment for free. If WF10 proves to be successful in the treatment of allergic rhinitis, Nuvo has tremendous upside potential.

Pennsaid® 2% will look to gain market share in a $500 million topical analgesic market for OA

Pennsaid® 2% has a number of advantages over Pennsaid®, which we believe will lead to increased sales. These advantages include:

  • Twice daily application instead of four times daily: Nuvo's data showed that patient compliance was likely part of the reason why Pennsaid® never gained a significant market share, as most patients did not apply Pennsaid® four times a day. Thus, they and their treating physicians were likely turned off by seemingly inferior efficacy. Twice daily dosing is likely to lead to far more compliance and thus make Pennsaid® 2% much more competitive with Voltaren® Gel.
  • Improved delivery: Pennsaid® 2% is a more "gel-like" product, similar to Purell hand sanitizer. It goes on smooth, with no mess, and it dries very quickly. This is in comparison to Pennsaid®, which was more water-like with patients having to apply drop-wise onto their knees or onto their hand and then rub on to their knee. In addition, Pennsaid® 2% is supplied in a metered-dose pump bottle to aid patients in determining the proper dosage amount.

We model Pennsaid® sales to slowly decline as Pennsaid® 2% sales increase, with Pennsaid® eventually being removed from the market. We forecast peak Pennsaid® 2% sales of $75 million, and as Nuvo is set to receive 20% royalties on sales of Pennsaid® 2% we forecast peak royalties for Nuvo of approximately $15 million.

NPV >> Under this scenario, we believe that Pennsaid®/Pennsaid® 2% are worth: $45 million.

We forecast Synera® and Pliaglis® sales to increase in the future

Pliaglis® was launched by Galderma in March 2013 without a sales force to actively distribute it. However, in early 2014, Galderma began promoting Pliaglis® with a small sales force, thus sales are likely to increase in the coming years. We believe Synera® and Pliaglis® will each have peak sales in the $10 to $20 million range, putting peak royalties to Nuvo Research in the $1 to $3 million range.

NPV >> Under this scenario, we believe that Synera®/Pliaglis® are worth: $8 million.

WF10 is the wild-card in a potential $10 billion market

The Phase 2 data for WF10 in allergic rhinitis showed it to be more effective than placebo after just five days of treatment, with the therapeutic effect potentially lasting for 1-2 years. We forecast the current Phase 2 trial to be completed by the end of 2014, with a Phase 3 trial completed during 2016, an NDA filed in 2017, and approval occurring in 2018. We forecast the treatment to cost $1,000 and for WF10 to get approximately 10% of the market for patients needing immunotherapy treatment.

We believe that Nuvo will partner the drug, and could be in a position to do so with successful results from the current Phase 2 trial. We forecast a deal to be worth approximately $30 million in upfront/regulatory milestones with backend milestone payments of another $30 million with an estimated royalty rate of 12%.

NPV >> Under this scenario, we believe that WF10 for allergic rhinitis is worth: $31 million.

Potential risks to our thesis

The potential risks for investing in Nuvo at this stage involve the following:

  • Pennsaid® 2% sales do not rise to our expectations

Given the lackluster sales of Pennsaid®, it is not inconceivable that Pennsaid® 2% will not be well received by patients and physicians, which could have a detrimental effect on sales numbers. We believe this risk is mitigated by the advantages that Pennsaid® 2% has over Pennsaid®, however whether this will be enough to drive sales numbers to the level that we predict is uncertain.

  • Synera® and Pliaglis® sales do not increase as forecast

Thus far, sales of both Synera® and Pliaglis® have been quite small, although beginning in 2014 Pliaglis is now being marketed by a small sales force, which should help to increase sales. However, there is no guarantee that sales of these drugs will increase to the level that we predict, and while they are not the main drivers of the stock, the failure to achieve higher sales numbers from these products could have a negative effect on the share price.

  • WF10 fails in clinical trials for allergic rhinitis

This is perhaps the largest risk to an investment in Nuvo at this juncture. We have calculated a fair value for the company at approximately $90 million, with close to 1/3rd of that value derived from a probability-adjusted net present value calculation on WF10. The failure of WF10 would have a decidedly negative impact on the shares, and while the above-mentioned products are nice secondary drivers for the stock, removing WF10 from the investment story would cause us to significantly lower our price target.

  • A poor outcome to the Mallinckrodt lawsuit

Nuvo is confident that they have a very strong case against Mallinckrodt, and we believe that a settlement is likely to occur either at the end of 2014 or the first half of 2015. However, there is no guarantee as to what that settlement would include. Thus, two scenarios that would not be favorable to Nuvo include 1) reacquiring the rights to Pennsaid® and Pennsaid® 2% but then being unable to find a new partner to market the compounds and 2) not being monetarily compensated to perform the two Phase 3 trials necessary to get Pennsaid® 2% approved outside the United States. In addition, if this case were to go to trial, there is no way to estimate what the outcome of the trial would be, which in turn could make the stock unattractive to most investors.

Co-Authored by David Bautz, PhD

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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