NOVN: B-SIMPLE4 Topline in June

By John Vandermosten, CFA

NASDAQ:NOVN

READ THE FULL NOVN RESEARCH REPORT

First Quarter 2021 Financial and Operational Results

On May 11, 2021, Novan Inc. NOVN announced first quarter 2021 financial and operational results and filed its form 10-Q with the SEC.

Company highlights year-to-date 2021 include:

➢ Announcement of new corporate headquarters - January 2021

➢ Regained compliance with NASDAQ minimum bid requirement - January 2021

➢ Completed enrollment in B-SIMPLE4 - February 2021

➢ Election of Steven D. Skolsky to Board - March 2021

➢ Final week-12 visit for last patient in B-SIMPLE4 - May 2021

Novan recognized $819,000 in revenue in the three months ended March 31, 2021, a mix of license and collaboration revenue, government research contracts and grant revenue. Net loss for the quarter totaled ($8.95) million, or ($0.06) per share.

For the quarter ending March 31, 2021 and versus the quarter ending March 31, 2020:

➢ Revenue totaled $819,000, down 32% from $1.21 million as grant revenue from the DoD's CDMRP was exhausted and partially replaced with grant revenue from the NIH;

➢ Research & development expenses totaled $6.42 million, rising 31% from $4.92 million as Novan continued progress on its B-SIMPLE4 clinical trial and recognized an increase in other R&D expenses, slightly offset by a decrease in expenditure for the SB414 program;

➢ General & administrative expenses were largely stable, rising 7% to $2.69 million from $2.51 million on a mix of increase in insurance premium expense and other administrative expense, offset partially by decrease in personnel related costs;

➢ Net loss was ($8.95) million, or ($0.06) per share, compared to ($6.17), or ($0.17) per share;

As of March 31, 2021, cash and equivalents totaled $32.7 million. Cash burn in the first quarter was ($9.5) million, up 23% from the $7.4 million consumed in the matching prior year period.

B-SIMPLE Series Studies

Berdazimer Sodium In Molluscum Patients with Lesions (B-SIMPLE) designates a set of studies that examine the safety and efficacy of berdazimer sodium (SB206) on molluscum contagiosum. There have been four studies with the B-SIMPLE designation. With the exception of B-SIMPLE3, all were all multi-center, randomized, double-blind, vehicle-controlled studies. B-SIMPLE1, 2 and 3 have been completed, while B-SIMPLE4 remains active. Each is summarized below:

➢ B-SIMPLE1 – Phase III; launched 2Q:19; full efficacy data available March 2020, 352 patients enrolled.

➢ B-SIMPLE2 – Phase III; launched 2Q:19; full efficacy data available March 2020, 355 patients enrolled.

➢ B-SIMPLE3 – Phase I open label study assessing safety, tolerability & pharmacokinetics; launched 2Q:20; final study report completed in 3Q:20. 34 patients enrolled.

➢ B-SIMPLE4 – Pivotal Phase III launched August 2020; topline expected June 2021; 891 patients enrolled.

B-SIMPLE4

Novan announced on January 19, 2021 that it had achieved 90% enrollment in its B-SIMPLE4 study. Two weeks later, enrollment in the trial was announced as complete. The last enrolled patient finished the planned 12-week visit on May 3^rd with the final 24-week follow-up to be completed by August. 891 patients were ultimately enrolled across 55 clinical sites. Next steps include closing out the study and completing the clinical study report prior to submitting the NDA, which is expected to occur in 3Q:22.

Novan announced the launch of the B-SIMPLE4 trial on August 31^st, 2020 and enrolled and dosed its first patient a few days later. The B-SIMPLE4 trial is a pivotal, Phase III, multi-center, randomized, double-blind, vehicle controlled, parallel group study conducted across 55 sites. Enrollment was reported to be well distributed among the sites, with no risk concentration in any one location. Subjects are age six months and older presenting molluscum contagiosum (MC) and randomized in a 1:1 ratio of active and placebo arms. SB206 is administered once daily to all MC lesions for a minimum of four weeks and up to 12 weeks until all lesions are cleared. Following 12 weeks of treatment, patients will receive a follow-up visit at week 24. Enrollment was completed by the beginning of February, ahead of initial expectations due to a smooth start and steady acceleration in enrollment. Topline efficacy results are expected to be made public in 2Q:21.

Now that the primary part of the trial has completed, the 24-week follow up will be conducted over the next few months with an estimated completion in late summer. Individual clinical study reports (CSRs) will be generated which provide detail about the methods and results of the trial and opine on the efficacy and safety of B-SIMPLE4. After the reports are completed, Novan will meet with the FDA to identify the details the agency wants to review in the package. A chemistry, manufacturing and controls (CMC) meeting will also take place prior to new drug application (NDA) submission. Management has targeted an NDA submission to the FDA by 3Q:22.

Parallel with NDA preparation and assuming a favorable readout, we anticipate partner conversations will take place. Novan has stated that they are open to any option that optimizes the commercialization of SB206. We see this taking the form of anything from full outlicensing to a hybrid arrangement where a Novan sales force focuses on larger targets while a partner with an existing salesforce targets primary care and more diffuse specialties.

NASDAQ Compliance

On February 19^th, 2020, the NASDAQ notified Novan that it was not in compliance with exchange listing rules due to the share price trading below $1.00 for more than 30 consecutive business days. Due to the disruption related to the coronavirus, the NASDAQ provided an extension to regain compliance and Novan was granted additional time to meet the minimum bid price requirement. In January 2021, Novan shares traded above $1.00 per share for ten consecutive days and by the end of the month had regained compliance with the NASDAQ listing rule.

Corporate Headquarters in Durham, North Carolina

In 2020 Novan moved out of its previous 51,350 square foot facility in Morrisville, North Carolina in an effort to become a more asset-light research and development company. The Morrisville facility offered a large scale manufacturing site that enabled substantial research and development work to be conducted and pilot scale current good manufacturing practices (cGMP) to be performed. The company entered into a lease agreement for 15,000 square feet space in Durham, North Carolina in January 2021. The facility will serve as headquarters for Novan's business operations, provide space for R&D and small scale manufacturing as well as serve as a secondary backup as part of a future supply chain.

Our Thesis

Novan's lead candidate, SB206, uses the company's Nitricil platform to suspend nitric oxide (NO) in a gel that allows for controlled release. Nitricil can deliver a variable dose of NO to the epithelium to address a broad variety of skin lesions including molluscum contagiosum. NO presents a unique mechanism of action and a favorable safety and scarring profile. The agent has been tested in approximately 3,400 patients in clinical work, with a 24 week safety assessment conducted in the B-SIMPLE trials demonstrating a favorable safety profile.

There is no standard of care for MC and most healthy individuals clear the virus on their own. In the population where treatment is desired, the lesions can be physically removed or oral and topical therapies can be administered. Some of the more common topical approaches include the use of cantharidin, ZymaDerm and imiquimod; however, none have been approved for treatment for MC and demonstrated consistent efficacy in clinical evaluation. Alternate approaches also have side effects, including pain and severe skin reactions, highlighting the need for a tolerable and effective treatment.

We see a fair estimate of an MC population of around six million in the United States and from two to three million in Japan. We anticipate that the availability of an approved, effective and safe treatment may increase the number of diagnoses and the addressable population could be larger. While a portion of the addressable market will prefer to wait it out, we anticipate there will be a significant number of patients that will seek treatment given the availability of an approved medicine.

Milestones

➢ Final 12-week patient visit for B-SIMPLE4 – May 2021

➢ Topline readout for SB206 – 2Q:21

➢ Preclinical readout for SB019 – 2Q:21

➢ Proof of concept results for NVN4100 in animal health – 2Q:21

➢ Strategic partnership exploration – 2021/2022

➢ SB019 human clinical trials (subject to conditions) – 2H:21

➢ NDA submission for SB206 – 3Q:22

Summary

Since our initiation, Novan has raised sufficient capital to move forward with its pivotal Phase III trial for SB206 and has since completed enrollment. We expect to see topline results in the next few weeks. The data provided in previous work were supportive of efficacy despite not achieving statistical significance. These results give us confidence that B-SIMPLE4 will be successful with a larger population and improved protocols. Based on the pace achieved so far, we are confident in management's target for an NDA filing in 2022 assuming results are supportive.

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1. Source: Novan March 2021 Corporate Overview Slide Deck

2. Source: Novan March 2021 Corporate Overview Slide Deck