NOVN: First EPI Sales

By John Vandermosten, CFA

NASDAQ:NOVN

READ THE FULL NOVN RESEARCH REPORT

First Quarter 2022 Results

On May 16, 2022, Novan Inc. NOVN reported first quarter financial and operational results in a press release and the filing of Form 10-Q. A conference call and webcast were held that morning to update investors on recent developments. The call highlighted the transformational acquisition of EPI Health, a specialty pharmaceutical commercialization company with four marketed assets. Other important activities include preparation of the New Drug Application (NDA) for SB206, including the completion of stability testing and submission of the application prior to year-end. Novan anticipates three NDAs to be filed in the next three years including applications for SB206 in molluscum, SB019 in COVID-19 and SB204 for acne vulgaris.

Highlights for the first quarter ending March 31, 2022 and to-date include:

➢ Presentation of two posters at Winter Clinical Dermatology Conference – January 2022

➢ Acquisition of EPI Health – March 2022

➢ Late Breaking Abstract Accepted at AAD – March 2022

With respect to financial performance, Novan generated $1.9 million in revenue in 1Q:22 versus $0.8 million in 1Q:21, and posted a net loss of ($13.4) million or ($0.71) per share compared to a loss of ($9.0) million or ($0.60) per share.

For the first quarter ending March 31, 2022 and versus the prior year quarter:

➢ Revenues were $1.9 million, up 135% from $819,000. Amounts are related to recognition of sales of dermatology products Rhofade, Minolira and Cloderm which did not appear in the prior year period. License and collaboration revenues of $1.2 million were primarily associated with Sato R&D upfront and milestone payments. Promotional and distribution services contributed another $0.4 million to 1Q:22 topline related to performance of Wynzora under the MC2 agreement;

➢ Research & development expenses totaled $4.8 million, down 25% from $6.4 on a decrease in expenditures on the SB206 program partially offset by an increase in other research and development expenses;

➢ Selling, general & administrative expenses were $10.0 million, up 272% from $2.7 million with the increase primarily due to $4.0 million of non-recurring transaction-related expenditures incurred in connection with the EPI Health acquisition, $1.6 million of selling, general and administrative expenses incurred to support the conduct of EPI Health's commercial sales operations during 1Q:22, a $0.8 million increase in support costs related to the SB206 prelaunch strategy and commercial preparation, and a $0.9 million increase in other general and administrative costs including human resources and recruiting costs, corporate tax and insurance costs, and personnel related and consulting costs;

➢ Net loss was ($13.4) million, or ($0.71) per basic and diluted share, compared to ($9.0) million, or ($0.60) per basic and diluted share.

As of March 31, 2022, cash and equivalents on the balance sheet totaled $35.5 million. This compares to cash holdings of $47.1 million at the end of 2021. Cash movement in the quarter saw a small contribution from operating activities due to builds in accounts receivable and receipt of deferred revenue and a small contribution from shares issued under the ATM facility. This was offset by the ($12.0) million payment for EPI Health. Novan anticipates that its cash reserves are sufficient to support operations until early 4Q:22.

Upcoming milestones include:

➢ SB206 Pre-NDA meeting with the FDA - 2Q:22

➢ SB206 NDA-enabling stability testing - 3Q:22

➢ SB206 NDA submission - 4Q:22

➢ Pivotal trial launch for SB204 in acne - 2023

➢ NDA submission for SB204 - 2024

➢ SB206 approval in Japan (Sato) - 2027

EPI Acquisition

Novan announced the acquisition of EPI Health on March 11, 2022 with details provided in a press release. EPI Health is a specialty pharmaceutical company with a base of operations in Charleston, South Carolina focusing on the delivery dermatology products. Its portfolio consists of six assets listed below along with the primary indication for each:

Rhofade is the highest revenue generator in the portfolio and Wynzora the most recent launch, which was started in July 2021. In the first quarter, three of the four assets grew on a year over year basis, with only Cloderm seeing a decline in prescription volume. Wynzora posted continued growth in the period, up consistently month over month and quarter over quarter. Based on commentary, it appeared that Rhofade generated the strongest performance with over 37,000 prescriptions, a 50% rise over prior year levels. Minolira also experienced impressive growth with a near 50% increase on a year over year basis and a 14% sequential increase in the quarter.

Novan will pay an upfront purchase price of $27.5 million, which includes $11.0 million in cash and $16.5 million in a seller's note with a 24 month term. Success-based milestones are also part of the transaction and an additional $23.5 million in future payments may be disbursed in cash or shares of Novan common stock.

Attractive features highlighted as the rationale for acquiring EPI Health:

➢ Commercial operating focus in dermatology

➢ Continued investment in people, products and processes

➢ Market access expertise in payors, patients, plan access and co-pay optimization

➢ Successful sales targeting and execution with integrated dermatology portfolio

➢ Dermatology launch experience

The EPI team brings several experienced sales leaders to Novan including the President of EPI Health, John Donofrio, who will also assume the role of Executive Vice President, Chief Operating Officer of Novan. Mr. Donofrio's previous roles were as CFO and Head of Business Development of Merz North America, multiple roles during his 20 years at GSK including Global Vice President of finance for the dermatology business unit.

Based on its forecasts for internal development of Kinsolus, Novan management sees tremendous synergy and cost-saving opportunity with the EPI acquisition. Having this asset with salespersons already in the field provides an active rolodex of contacts in the dermatology space that can be immediately marketed to in 42 and later more regions after FDA approval is granted. Prior to the EPI acquisition Novan was planning to execute its own commercialization strategy with a commercial sales organization (CSO) and had conducted in-depth cost and strategy analysis. When the opportunity to combine with EPI Health arose, Novan management concluded that acquiring the company and taking advantage of their active dermatology sales force which was already in contact with many of the Kinsolus targets, was a compelling business decision. Working with EPI removed a substantial amount of the risk related to building a sales force and will allow a near immediate ability to commercialize following approval with little incremental cost.

The acquisition of EPI helps set the stage for ultimate commercialization of Kinsolus and other assets in Novan's portfolio. EPI health employs approximately 100 individuals, including sales personnel that cover 42 sales territories in the United States. The sales team plans to expand to 50 territories starting in 3Q:22. A reorganization is also planned which will support the move from four to seven regions and should be complete by early 4Q:22.

Late-Breaking Abstract for SB206 Accepted at AAD

The American Academy of Dermatology (AAD) accepted the abstract entitled Berdazimer 10.3% Gel (SB206): A Novel, Topical Nitric Oxide Releasing Medication: Results from a Pivotal Phase 3 Study in Patients (Children and Adults) with Molluscum Contagiosum. The abstract was accepted as a late-breaking oral presentation at the AAD annual meeting and was given on March 26, 2022. Dr. John Browning, a principal investigator on the B-SIMPLE4 study, presented the compelling data from the trial that offers "a safe and effective self-applied medication to treat molluscum."

2022 Winter Clinical Dermatology Conference

On January 14, 2022, Novan announced poster presentations featuring data from completed Phase II and Phase III clinical studies in molluscum contagiosum at the 2022 Winter Clinical Dermatology Conference. The first poster was an encore presentation reviewing results first presented at the Society of Investigative Dermatology (SID) 2019 meeting from Novan's Phase II study of SB206 in molluscum. The second poster, also presented first at SID 2019, entitled "BOTE (Beginning Of The End) is a Clinical Sign of Molluscum Contagiosum Resolution Enhanced by SB206, an Investigational Nitric Oxide–Releasing Topical Medication," reviewed a never-been-prospectively-studied clinical signal of inflammation and lesion resolution. Beginning-of-the-End (BOTE) describes a well-recognized set of clinical signs of localized inflammation, including erythema, edema, and crusting. It is thought that berdazimer 10.3% gel triggers immune surveillance via nuclear factor kappa B (NF-κB) activation, fostering resolution of molluscum lesions and signs of BOTE.

A total of 707 individuals in B-SIMPLE1&2 and 891 in B-SIMPLE4 were evaluated for signs of BOTE. Approximately 80% of patients exhibited BOTE signs regardless of treatment. Lesion counts were significantly decreased from baseline in all baseline BOTE positive (BOTE+) patients. In subjects not exhibiting BOTE signs at baseline, SB206 treatment resulted in enhanced lesion clearance. BOTE+ status appears to be a positive indicator for lesion clearance. Although BOTE+ status predicted naturally higher clearance, SB206 still provided benefit resulting in the highest clearance of any subset. Among patients in vehicle, those who were never BOTE+ at any time had an 18.5% reduction from baseline versus 34.0% in patients who were BOTE+ at any time, suggesting that patients with 18-20 molluscum lesions have a projected duration of 15 months if BOTE negative, and could greatly benefit from SB206. Another consideration is that BOTE signs could be misidentified as an adverse event when in fact it is a clinical sign of disease resolution.

The SID presentation will take place on May 21 in Portland, Oregon, presented by Tomoko Maeda-Chubachi, MD, PhD, MBA, Martina Cartwright, PhD and Amy Paller, MD.

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1. Source: Zacks analyst using information compiled from various corporate and government sources.

2. Source: Novan's May 2022 Corporate Presentation

3. 21-1607-A-BOTE_WCDC_size2_v2.pdf (novan.com)

4. 21-1607-A-BOTE_WCDC_size2_v2.pdf (novan.com)

5. Source: Novan's May 2022 Corporate Presentation. (1) Subject to additional funding (2) Not in active development.