If it takes 15 minutes for you to read this article, during this period, 8 women will be diagnosed with ovarian cancer, 7 people with brain cancer and 285 cancer-related deaths, 486 people will be diagnosed with life-threatening cancer. Of the 1 in every 2 men and 1 in every 3 women who will develop a life threatening cancer within their lifespan, 40% of those will die within 5 years from diagnosis.
Novogen (NVGN) is an Australian pharmaceutical company, headquartered in Sydney. It is currently traded on NASDAQ under the ticker symbol NVGN.
Novogen Limited is primarily engaged in pharmaceutical research and development, and the marketing of consumer healthcare products.
The Company has three segments: Drug Development, Oncology Drug Program, Consumer Business and Wound Healing.
Drug Development includes the discovery of new compounds and the early stage screening for bioactivity of such compounds through both in vivo and in vitro testing. Oncology Drug Program involves the development of selected oncology drug candidates, which have indicated bioactivity against cancer cells through clinical trial programs to assess safety and efficacy. Wound Healing is a separate technology based on Beta-1 Glucan to aid in the management of wounds. The Company's clinical development program run through Novogen's subsidiaries Marshall Edwards, Inc. (NYSE:MEI) and Glycotex, Inc. (Glycotex).
The following is an overview provided in the Novogen website.
(Novogen Overview, n.d.)
We believe that this company is not just a great financial investment, but also a wonderful social investment. Our investment team believes in investing in companies that further a social cause because it fulfills all the 3Ps of businesses, which serves as a stock catalyst. These 3P's are: Product, People and Purpose. Our team asserts that Novogen is offering a highly competitive, socially beneficial and highly demanded product. It is also effectively communicating its Customer Value Proposition (CVP) to its consumers and catering specifically to its customers' needs. Lastly, it is a company run by a highly driven management team (the CEO himself has cancer) with a sense of purpose.
II. Basic product offering
The company attempts to be a pioneer in cancer drug treatment technology and is basing this on a combination of its 2 different drug technology platforms.
The Novogen concept is to bring both drug technologies to bear to maximize the prospects of eradicating 100% of all cells within a tumor, across a wide range of tumor types. That is, the Novogen strategy is to achieve with drugs what is currently achievable only with surgery- the complete removal of all cancer cells.
Ovarian cancer is one of the leading causes of cancer related death among women. Each year, approximately 14,000 women will die from ovarian cancer in the United States and more than 270,000 women are diagnosed with ovarian cancer globally. The mortality of ovarian cancer remains to be the highest among all gynecologic cancers. This is mainly due to lack of early symptoms, which result in late diagnosis at advanced stages. Once the cancers cells spread from ovaries into abdominal cavity at advanced stages, they are impossible to be cleared by surgical removal and can migrate to other organs such as liver and lung via blood stream.
The most preferable treatment for ovarian cancer is the maximum or near complete surgical removal of cancer tissues. This is true of any other cancer treatment. However, the late diagnosis of ovarian cancer makes it hard to be removed completely. Therefore, patients are usually treated with chemotherapy following surgical treatment. Unfortunately, there has been more than 30 years that no particular chemotherapy drug was successfully developed to change the mortality rate of ovarian cancer. This directly leads to the appearance of ovarian cancer on the list of Recalcitrant Cancer Research Act passed by congress in 2012.
Another disease, Glioblastoma Multiforme (GBM), is also on the list of Recalcitrant Cancer Research Act. These tumors are usually highly malignant simply because the cells reproduce quickly and they are nourished by an ample blood supply. This makes GBM the most common and most aggressive form of primary malignant brain tumor. Approximately 240,000 people are diagnosed with GBM globally every year. Because of the special location of the disease, GBM is very hard to be removed completely by surgery, even when diagnosed at early stages. The symptoms associated with this disease are devastating. They include seizures, nauseas, headache, and change in personality and neurological deficits. The current estimated 5-year survival rate is 4.8%, making GBM one of the deadliest cancer types.
GBM has been very difficult to treat primarily because it contains many types of cells. Some cells respond to a specific therapy quickly, while others are not affected at all. Therefore a combinatorial treatment plan is usually designed for GBM patients. Despite the extremely low 5-year survival rate, GBM is actually classified as an orphan disease by FDA, which is defined as affecting less than 200,000 people in total in the US. This partially explains why drug development for GBM has been slow due to the small market.
-Novogen's revolutionary drug offering
After 18 years of development, Novogen has pushed its benzopyran drug technology to a new level. The newest generation of the drug is called Super-benzopyrans (SBPs), which are a family of chemical compounds that target abnormal proton (hydrogen ion) movement across membrane of cells. The SBPs are generally 20 to 50 times more potent than second generation benzopyran drugs, and noticeably, these drugs display equipotentence against both cancer stem cells and somatic cancer cells.
One of the biggest challenges in cancer treatment is recurrence. Most of the cancers respond to initial treatment quickly, however, a large proportion of cancers will relapse inevitably. This has been widely attributed to insensitivity of cancer stem cells to chemotherapy and radiotherapy. In this case, treatment serves not to kill cancer cells but to select cancer cells that are resistant to treatment. That is why relapsed cancers are usually more aggressive and irresponsive to further treatment. Therefore, killing cancer stem cells during cancer treatment is a crucial key to eradicate cancer.
Another challenge is that each individual cancer patient can carry multiple and distinctive mutations within their cancer cells, meaning that patients who have the same type of cancer, ovarian cancer for example, may respond to same drug treatment differently. Unfortunately, current anti-cancer drugs are not able to recognize individual genotype, resulting in futile treatment and even serious side effects sometimes. Thus, developing drugs that can match individual genotype will make cancer treatment more effective and accurate. This is also the essence of personalized cancer treatment.
Lastly, there is a challenge within the current cancer research community as to how to effectively eradicate both the stem and somatic cancer cells simultaneously to cure cancer completely.
Two arising stars of the Novogen SBPs drug family, Trilexium and Trx-1, have been shown to be able to kill full hierarchy of cancer cells including cancer stem cells during preliminary laboratory tests. These are so far the first known drugs capable of such equipotent anti-cancer activity. In laboratory tests, ovarian cancer stem cells and glioblastoma stem cells that are inherently resistant to current standard drugs Paclitaxel and Carboplatin are highly sensitive to Trilexium and Trx-1 treatment. A recent update from the CEO of Novogen indicated that Trx-1 is showing positive results in a very stringent test designed by Professor Mor at Yale Medical School. In this test, Trx-1 stopped growth of tumors which were derived from fresh patient explants cells injected into animal abdomen, while a number of drugs from the market had no effect at all. This is very exciting because very few new drugs show such dramatic in vivo effectiveness during preliminary tests compare to drugs in current market.
In addition, Trilexium and Trx-1 have been shown to be able to recognize a mutant form of NADH oxidase, tNOX, which is only found in cancer cells. Targeting this mutant form of NADH oxidase in cancer cells will induce programmed cell death, leaving normal cells unaffected. This makes it possible to identify derivatives from SBP family drugs that specifically bind to individual genotype, a step forward to make personalized drugs for cancer treatment.
Novogen has set up its goal for 2014 to submit IND applications for Trilexium and Trx-1 to treat GBM and ovarian cancer, respectively. A recent update from the company added Trx-7 to the list which is meant to target melanoma and prostate cancer. We are very optimistic that these candidates will be approved by FDA for IND because 1), these candidate drugs belong to a new family of chemical compounds that work under a different mechanism to kill cancer cells, 2) these candidate drugs are to date the only drugs showing effectiveness on cancer stem cells. This can potentially revolutionize cancer treatment in 21st century.
III. Investment thesis
Our investment team believes that the following above factors will catalyze the stock price of Novogen.
The strong marketability of its new drug will be our key investment thesis. The new drug offering will likely be a huge stock catalyst, whether in the short or long run.
The IND approval and acquisition prospects serve as our near to mid term stock catalysts. We admit that we are rolling the dice on this analysis; however, we are rolling the dice with 5 sixes on the face and only a 1/6 chance of failure. Recent news, analysis and macroeconomic trends highly suggest that the new drug is going to attain IND approval. Should this pull through, we are going to see a significant upside to this stock.
Lastly, management efficiency serves as our long term catalyst. With a highly capable management team, we are very confident of the company's future growth prospects. Not only does the executive team have the leadership acumen and technical expertise, but some even have a stake in the success of the drug (because the CEO himself has cancer).
We feel that given all of these factors, the stock will experience short, mid and long term catalysts with significant upside.
1. Strong Customer Value Proposition (CVP) through its product offering
First of all, it is imperative to explain the lack of progress cancer research has made after so many years to fully appreciate the breakthrough product Novogen might deliver.
One difficulty that has stymied cancer research progress is the inability to find a way to kill both the stem cell and the somatic cell simultaneously that are both present in cancer cells. Although there has been relative success eradicating one or the other, there is currently no drug that can eliminate both simultaneously, ensuring a complete eradication of the cancer cells.
A second hurdle that has proven tough to cross is the ability of current cancer treatment to eradicate not just primary cancer, but also recurrent cancer. Although radiotherapy and chemotherapy can kill almost all cancer somatic cells, the surviving cancer stem cells can go on to produce a new generation of cancer somatic cells. This new generation of cancer somatic cells is the reason for recurrent cancer and is fundamentally different from the original generation. This new generation is much more aggressive and resistant to chemotherapy and radiotherapy. Hence, current modes of cancer treatment are only effective against primary disease, but not against recurrent disease.
What makes Novogen so promising as a company is its very strong CVP in the sense that its new product offering attempts to eliminate the two problems mentioned above. Novogen aims to destroy the cancer cell's signal transduction capacity and the full hierarchy of cells within a tumor, effectively eliminating both primary and recurrent cancer. The Novogen strategy is to achieve with drugs what is currently achievable only with surgery-the complete removal of all cancer cells.
2. IND approval would prove to be a catalytic tailwind
Judging from Novogen's current progress on its new drugs, the Trilexium and Trx-1, FDA is highly likely to approve its appeal on IND fillings and for phase one clinical study. This could be a huge price catalyst for Novogen. Historical evidence suggests that stock prices of pharmaceutical companies tend to react highly positively to IND filings approvals. Below are few past examples:
• On August 7, 2012. FDA approved TherapeuticsMD (NYSE:TXMD)'s IND filings. The stock price rose 300% from $2.21 to highest $9.01 after the approval.
• On October 7, 2013. FDA approved Ligand Pharma (NASDAQ: LGND)'s IND /filings drug treating type-2 diabetes. The stock price rose 64.2% from $49.98 to highest $80.42 after the approval.
• On February 13, 2014. FDA approved Regado Biosciences (NASDAQ: RGDO)'s IND filings on GEF2 drug. The stock price rose 140% from $5.88 to highest $14.10.
Regarding the prospects of the Trilexium drug, there seem to be overpowering consensus that it will be a success. Novgen's market release on 18 March 2014 announced that the Trx-1 drug 'proves effective in Vivo'. Prof Mor from the Yale School of Medicine declared that "until now, we have not been able to identify a drug from any company that is effective in this model. So it is very exciting to observe an anti-tumoral effect with Trx-1".
Furthermore, other researchers also showed their support for this drug when they announced "Trilexium is the first drug in our hands that has been shown to penetrate and destroy the spheroid architecture… and gives us confidence that it should be able to kill ovarian cancer tumors in vivo"
Thus, our investment team is highly confident of an approval by the FDA, which will be a massive short-term catalyst for Novogen's stock price.
3. NVGN is a highly favorable acquisition or partnership candidate
First of all, let's look at some its fundamentals. Given a company with only $24 million market capitalization, it has a surprisingly large free cash capacity of about $5 million with zero liabilities. Given such a R&D intensive company, this gives the company a lot of resources to devote to further high-quality cancer research. Furthermore, given the research prowess of the company, its low market capitalization and health balance sheet data, it makes a perfect candidate for acquisition or partnership candidacy.
In the past, many companies with similarly high growth prospects and low valuations have been acquired with considerably high premiums.
A very recent example would be pharmaceutical giant, Pfizer, that was actively looking to target Ovarian cancer drug makers. Pfizer is currently bidding for AstraZeneca, a UK company which focuses on Ovarian cancer treatments. Although Pfizer offered a 10% premium of $106 billion to AstraZeneca's current market cap, the company still refused to budge. This recent movement implies Pfizer's attention given to the Ovarian cancer treatment, so we might expect a takeover of Novogen to occur.
Another prime example of the high premium that mid-sized pharmaceutical companies attract is Astex Pharmaceuticals (NASDAQ: ASTX), a company developing ovarian cancer drugs and prostate cancer drugs, which was acquired by the Japanese pharmaceutical company Otsuka Holdings Co for $900 million with 48% premium.
Hence, Novogen's current operational progress and market cap will strongly attract big companies attention. The current M&A climate, especially in the wake of Pfizer's aggressive bid for AstraZeneca, is also highly conducive for Novogen's possible acquisition at high valuations. This will prove to be a massive catalyst for Novogen's stock price.
4. Management efficiency
Dr. Graham Edmund Kelly is the founder and current CEO of Novogen, who has more than 25 years' experience in cancer research in the department of Surgery, the University of Sydney, and the German Central Cancer Research Institute. Also, Graham personally oversaw the design and implementation of 33 Phase I and II clinical trials, and a multi-national Phase III trial in conjunction with the US FDA. Under Graham's leadership, the market cap of Novogen once reached more than $500 million.
Another thing worth noting is that Dr. Kelly has prostate cancer and one of the 5 drugs that Novogen is developing is for prostate cancer. Dr. Kelly said "I had radiology and chemotherapy and then I took it upon myself to treat myself with some of my own drugs. I'm in remission." This proves to our investment team that not only does Dr. Graham have the technical expertise and leadership experience, but he is also personally invested in the success of his own firm.
Dr. Andrew Heaton (Vice President, Novogen North America's CEO) and Dr. David Brown (CSO) have both been working with Dr. Kelly more than twenty years, they founded two companies together and have great understanding and experiences in researching and developing cancer drugs.
Among Novogen's directors, Prof Peter Gunning is another noticeable board member. He is currently the head of the Oncology Research Unit in the School of Medical Sciences and Associate Dean in the Faculty of Medicine at the University of New South Wales. He has developed a strategy for killing cancer cells and is expected to begin clinical trials within the next 18 months. This could be the next catalyst for Novogen's share price after Trx-1 and Trilexium pass IND and start clinical trials. He has already shown this to be very effective against one of the most common and most deadly childhood cancers, neuroblastoma.
Analyzing the executive team from a financial approach, our investment team loves the fiscally conservative approach the management is taking. During the most recent company presentation in New York, Novogen has an impeccable balance sheet with almost no debt. Noticeably, the company has around $5 million in cash which represents up to ¼ of its market cap, suggesting the management team's fiscal conservatism. This large stash of cash makes it much easier to inject capital into R&D without any exposure to raising capital through risky debt. The company has also expanded its employee base from just 3 to 13 in 2014, representing an expansion of the company and a commitment to push for its new line of drug offerings.
Hence, we are highly confident of the management's leadership and expertise in providing continued high-quality drugs that have a strong CVP.
5. Best cancer experts and top labs
Trx-1 is the drug for ovarian cancer patients. Novogen currently owns a joint venture with Yale University to develop this drug. Yale University Medical School's Professor Gil Mor and his lab will be responsible for developing Trx-1. Prof Gil Mor is the one of the best researchers in studying ovarian cancer, he's the first person in the world that successfully isolated ovarian cancer stem cells, which was a mile stone on studying ovarian cancer. He persistently tries to find a way to kill cancer stem cell for curing cancer permanently. In 2009, Mor and his colleague Alessandro Santin, M.D won over $5 million in federal and foundation grants. The fact is, NCI's total funding for researching and developing cancer drugs was 5 billions, and those money was spent on tens of different kinds of cancers. For example, let's look at the picture below, it's the table of 10 most common cancers in the U.S. There was only 16.5 millions for Thyroid cancer research, and ovarian cancer is even not on the list, which means it received less than 16.5 millions for research. However, Mor's lab won more than 5 millions funding for ovarian cancer. We can easily see that NCI has huge faith in Mor and Mor's ovarian research is probably the best in the nation, even in the world. Novogen, an Australian company, gets the support and trust from professor Gil Mor and his lab, we can confidently say that Trx-1 must be the best candidate to treat ovarian cancer and both Yale and Mor have huge confidence in Novogen and Trx-1.
Trilexium is Novogen's drug for brain tumor. In Dec 20th 2013, Novogen announced that it would launch a joint venture with Cornell University's Weill Medical School to study and develop this new drug. In Novogen's presentation we noticed that Trilexium is focusing on cure the most dangerous brain tumor--Glioblastoma. (GBM) Weill Medical School's Brain and Spine center's professor, chair, and founder-Dr. Philip E. Stieg is one of the three experts in department of GBM, Dr. Stieg has been named by Castle Connolly Medical as one of the nation's Top Doctors for 13 years in a row. He has abundant clinical experience. He was a past Chairman of the Congress of Neurological Surgeons (AANS/CNS) and former President of the Society of University Neurosurgeons in addition to serving as an advisor to the Defense Department on brain injury. Dr. Stieg is board-certified in Neurological Surgery. Other two experts Theodore H. Schwartz, M.D. and Dr. Susan Pannullo are also really experienced and well-known in treating brain tumor. Their lab will be really helpful to test and study Novogen's Trilexium, and even clinical trials. Weill Medical School has patients from all over the world, so Novogen's drug will be comprehensively tested there.
IV. Favorable macro-economic climate
1. Ovarian cancer drug macro climate
According to new research from Decision Resources, the targeted cancer drug market will double in value from $26 billion in 2008 to $51 billion in 2015. More specifically, the ovarian drug market is set to more than double to $1.6 billion by 2022, putting Novogen in a very favorable pharmaceutical climate.
2. Big institutional investors
Novogen has also secured the trust of several well-known and high profile asset management and Wall Street firms.
a) Hudson Bay Capital Management
NVGN managed to secure up to $5 million of funding from a "sophisticated US based institutional investor"- Hudson Bay. Under the deal, the capital management firm agreed to buy up to 5 interest-free convertible securities and will make the first $1 million investment immediately.
(It's the top 6 investments of Hudson, as we can see, a investment of $5 millions is a large portion for Hudson)
A recent SEC form Schedule 13D revealed that Oppenheimer holds 6.11% of Novogen's outstanding shares.
Other large shareholders include Josiah T. Austin, El Coronado Holdings, Massachusetts Mutual Life Insurance Company and Dr Drew Heaton
The investment by these large institutional investors provides a strong case for the future prospect of this company. Hence, this further justifies our investment case.
Furthermore, our investment team also noticed that the company has historically relied on equity financing for its operation needs. For example, on April 24 2013, the company raised A$2.4million through the issue of ordinary shares and on May 28, it raised another $790,000 through another share offering.
V. Fundamental valuation
It is almost common sense to most investors that if a company successfully develops a drug that cures any cancer, that company will grow by hundreds of times. Where should investors be pricing Novogen today based on its potential for success?
Normally, a new drug needs to take around ten years from IND approval to official release in the market. We can predict the annual revenue from Trx-1 after ten years and use market multiple to price the company.
From National Cancer Institute, an average ovarian cancer patients' spending on the drugs in initial year after diagnosis is around $80,000. As we discussed above, it is highly possible that Trx-1 will be priced at a premium to the market thanks to its revolutionary curative effect. However, we will go with the market average price.
Also, National Cancer Institute provides the average number of new cases of ovary cancer, which is 12.3 per 100,000 women per year. Given that the current world female population is around 3.5 billion and global human population growth rate is about 1.2% per year, the number of patients worldwide in 2024 could be:
3.5 billion X 1.012^10 X 12.3 / 100,000 = 490,000 patients
If Trix-1 were to get ten thousand patients (10% of the market), in a most ideal scenario we could be looking at $5Billion in revenue.
Since we measured the revenue from Trx-1, assuming that patients would only use in the first year after diagnosis, we could see Novogen possibly reaching $2.5Billion in annual revenue (again, in a highly ideal scenario).
There are many inherent risks to success, as discussed in the next section. That said, with a group of matured pharmaceutical companies carrying an average P/S ratio of 3.5, the end valuation of Novagen in the most ideal scenario would be staggering, and more than $5billion.
In addition, low volume and limited sell-side coverage are the perfect ingredients for a mispriced stock. We believe that Novogen is such a stock and is undervalued. Novogen will gain approval very soon due to the recent successes of its clinical trials. In April 8th 2013, Novogen announced it's pre-clinical success of the ovarian cancer drug and it's share price climbed to $6.8. We believe that after the IND approval of both drugs this year, Novogen's share price will soar beyond $6.8, which is 2x the current share price. Also, when Novogen goes into Phase I with positive data, share price will most likely approach $10. This is our price target for now.
In conclusion, based on our valuation and precedent examples of the skyrocketing prices of pharmaceutical companies, we believe that NVGN is a solid investment.
We believe Novogen is destined for IND approval and success. It deserves a much higher share price, but there are risks.
Trial: We think Novogen's new drugs will pass IND and do well during clinical tests, but clinical trials always have risks, and there is not guarantee that Trx-1, Trilexium and Trx-7 will pass through those trials successfully.
Competition: Although Novogen has a really capable management team and respected experts who designed Novogen's drugs, the competition in this industry is intense. We can't guarantee a success.
Dilution: The Hudson Bay Holdings of non-interest note can be converted into 20% of outstanding shares and cause potential dilution.
Cash Burn: The company is not generating any revenue currently and may not be doing so in the immediate future. All of its cash inflows are raised through debt or secondary share offerings. If the company changes its spending habit, especially after the IND approval, it might face the problem of running out of cash. The chairman of the company in the 2013 annual report guaranteed to use the raised fund efficiently and promised only to "raise enough money to get them to the next horizon and in so doing, limit shareholder dilution as much as they can." Yet in unexpected cases, the company is liable to issue more shares and cause potentially unfavorable dilution.
Below is an illustrative summary of our investment thesis. Judging by both company and industry specific factors, our investment team sees short, mid and long-term catalysts for the stock. We believe Novogen is one of the most undervalued company in the market.
Disclosure: I am long NVGN. 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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