NOVN: A Banner Year for Novan - 2021 Results

By John Vandermosten, CFA

NASDAQ:NOVN

READ THE FULL NOVN RESEARCH REPORT

Fourth Quarter and Full Year 2021 Results

On February 22, 2022, Novan Inc. NOVN reported fourth quarter and 2021 financial and operational results in a press release following the filing of Form 10-K on February 18^th. A conference call and webcast was held to update investors. The call reviewed progress made on leading candidates in the pipeline and next steps for SB206's NDA application. Novan has experienced a delay relative to previous expectations and now anticipates a 4Q:22 NDA filing. Novan has prepared its manufacturing assets and aims to complete NDA-enabling stability testing by 3Q:22. New executives were added to the company's commercialization team in the last few months including Melvin Whitehead, Sheetal Sahel, and Martina Cartwright, PhD. 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. The FDA also conditionally accepted the proposed brand name KINSOLUS™ for SB206.

Highlights for the fourth quarter ending December 31, 2021 and to-date include:

➢ Brian M. Johnson appointed Chief Commercial Officer - November 2021

➢ Fireside Chat hosted by Jonathan Ashchoff, PhD - November 2021

➢ FDA conditional acceptance of proposed brand name KINSOLUS for SB206 - November 2021

➢ Favorable preclinical safety data for SB019 in COVID-19 - November 2021

➢ Investor Roundtable webcast - November 2021

➢ Poster presentations at 2022 Winter Clinical Dermatology Conference - January 2022

Upcoming milestones include:

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

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

➢ SB206 NDA submission - 4Q:22

➢ Launching pivotal trial for SB204 in acne - 2023

➢ NDA submission for SB204 - 2024

➢ SB206 approval in Japan (Sato) - 2027

With respect to financial performance, Novan generated $3.0 million in revenue in FY21, comprising license and collaboration and government research contracts and grants revenues, versus $4.9 million last year, and posted a net loss of ($29.7) million or ($1.74) per share compared to a loss of ($29.3) million or ($2.96) per share for the prior year.

For the fiscal year ending December 31, 2021 and versus the prior year:

➢ Revenues were $3.0 million, down 40% from $4.9 million. Amounts are related to recognition of the upfront and expected milestone payments under the Sato Agreement and grants revenue from government research contracts related to Department of Defense projects;

➢ Research & development expenses totaled $20.4 million, up 3% from $19.8 million related to a $1.4 million net increase in SB206 spending, and $0.5 million increase in other research and development expenses, partially offset by a $0.3 million decrease in SB414 program spend;

➢ General & administrative expenses were $12.3 million, up 10% from $11.3 million with the increase attributed to a $0.9 million increase in insurance premium expenses, a $0.3 million net increase in personnel and related costs, and $1.9 million increase in SB206 prelaunch preparation costs, partially offset by a total of $1.7 million in non-cash expense and $0.3 million decrease in rent and depreciation associated with Novan's Morrisville facility lease termination;

➢ Net loss was ($29.7) million, or ($1.74) per basic and diluted share, compared to ($29.3) million, or ($2.96) per basic and diluted share.

As of December 31, 2021, cash and equivalents on the balance sheet totaled $47.1 million, supported by net financing cash flows of $44.1 million. This compares to cash holdings of $35.9 million at the end of 2020. In June 2021, Novan raised net proceeds of $37.2 million as part of an underwriting agreement with Cantor Fitzgerald. 3.6 million shares of common stock were issued at $11.00 per share. Cash burn for 2021 totaled approximately ($33.8) million including capital expenditures of $9.0 million. Novan anticipates that its cash reserves will provide a runway through 1Q:23.

Brian M. Johnson Appointed Chief Commercial Officer

On November 2^nd, Novan announced that Brian M. Johnson had returned as its Chief Commercial Officer. Johnson has intimate knowledge of Novan and expertise in dermatology and will support SB206's pre-launch and commercialization efforts. Johnson brings more than three decades of commercialization experience for products in multiple therapeutic areas. His successful track record includes roles at Ortho Pharmaceutical Corporation, Medicis and Galderma. Most recently, he served as Principal at Two Hearts Group, a pharma and life science consulting firm where he acted as UCB's Head, Digital Marketing, Psoriasis in the Global Mission for bimekizumab. During his time at Galderma, he served as Vice President of Prescription Marketing and Chief Digital Officer, where he and his team successfully launched seven products. In the past he also served as President at Revian and Director, Peer to Peer Marketing at Novartis. Johnson had previously served as Novan's Chief Commercial Officer from 2015 to 2018 where he led pre-commercialization activities including assessment of molluscum and acne markets. Johnson holds an MBA from Southern Methodist University and a BS in business administration from the University of Kansas. He is a member of American Acne and Rosacea Society, Masters of Dermatologic Society, Women's Dermatology Society and the American Academy of Dermatology.

Fireside Chat Hosted by Jonathan Ashcroft, PhD

Jonathan Ashcroft, PhD of ROTH Capital Partners hosted a Fireside Chat featuring Novan's CEO, Paula Brown Stafford. The two began by covering Novan's recent selection of Syneos Health as a commercial solutions provider. Stafford explained the history and reasoning behind Syneos' selection. Novan and Syneos had built a relationship since partnering in 2019 for Novan's earlier Phase III trials, and Stafford's professional experience informed her of the capital and logistical burden of reconstructing Syneos' services internally, and she elected to focus on development of the product rather than infrastructure. The conversation then proceeded to explore how sales engagements would function, especially from the provider perspective and desire for gentle at-home options versus in-office surgical procedures. Next, Stafford explained the economies of adding another candidate, SB204 in acne, to the sales process, and voiced the potential for SB204 as a first line treatment. Stafford then detailed progress for SB019 in COVID-19, including the encouraging preclinical results that now support an IND, after which, if approved, would enable a Phase I trial for the first-in-human intranasal formulation of berdazimer sodium. Progress for SB019 will depend on developments in the pandemic and will be evaluated in real time. Finally, the discussion turned to NVN4100, Novan's animal health product, which is currently on hold while Novan pursues opportunities for SB206. Stafford enumerated next steps and milestones, including finalizing B-SIMPLE4 clinical study report, commissioning a small-scale manufacturing facility, working with Syneos on branding for SB206, now conditionally named Kinsolus, and preparing SB019 for IND submission.

Favorable Preclinical Safety Data for SB019 in COVID-19

On November 9, 2021, Novan announced promising preclinical safety results with its COVID-19 candidate, SB019, in a 14-day, in vivo, Good Laboratory Practice (GLP) repeat dose intranasal toxicity study. Dosing was five times per day and after the 14-day dosing period, a 7-day recovery period, without drug exposure, followed. There were no treatment-related adverse events up to the highest dose tested, 14 mg/day. The results support Novan's further pursuit of the candidate in human trials. The data showed that intranasal administration of SB019 was well tolerated and safe. Novan is currently preparing for an IND and is targeting a Phase I study that would be a proof of concept for other respiratory diseases beyond COVID. Novan has made the FDA aware of its SB019 program through engagement with the FDA's Coronavirus Treatment Acceleration Program (CTAP).

In the same release, Novan informed that it had completed additional dose-range finding studies in SARS-CoV-2 infected golden Syrian hamsters through work conducted at the Institute for Antiviral Research at Utah State University. Significant reduction in the amount of virus in lung or nasal tissue of SARS-CoV-2 infected animals was observed and was found to be dependent on both concentration and dosing regimen (e.g., once daily vs. twice daily).

Investor Roundtable Webcast

On November 17, 2021, Novan hosted an Investor Roundtable Webcast featuring Novan CEO Paula Stafford and KOL¹ Adelaide Hebert, MD. The program opened with discussion of Novan's clinical pipeline, namely results from B-SIMPLE4, which Stafford expressed is believed to be sufficient for submission of its NDA. Stafford recounted the impressive topline results from the study. To prepare for next steps, Novan will finalize its manufacturing capability, generate the necessary stability data for its drug and product and hold a pre-NDA meeting with the FDA in the first half. Dr. Hebert, the Chief of Pediatric Dermatology at McGovern School of Medicine and Children's Memorial Hermann Hospital, told of her experiences seeing molluscum in her practice and how molluscum typically presents and is diagnosed. Typically, patients will refer themselves to pediatric dermatology and many patients elect to wait out the disease but some with lasting disease will return. But standard of care can still require wound care after procedures are done in the office. Dr. Hebert listed the currently available options for treating molluscum and their drawbacks, and voiced her support for the use of Kinsolus in her own practice, with her own patients, and believed it would be very well received in the clinic. Stafford followed Dr. Hebert's remarks stating the potential for Kinsolus as a first line treatment for molluscum, across all healthcare providers. With Syneos, Novan has begun with education and advisory board meetings, more of which are expected over the coming months. Stafford then spoke on the differences in formulation between SB206 and SB204, which is targeting an indication in acne vulgaris. Novan must complete one more successful Phase III study before applying for regulatory approval for SB204. Leveraging lessons learned in B-SIMPLE4, Phase III trial design for SB204 would strengthen inclusion/exclusion criteria, sample size and proper trial powering, training investigators and patients and caregivers, especially in terms of reaction expectations and patient follow-up. Acne is the number one diagnosis for dermatologists, as evidenced by coding data. Algorithms exist for the treatment of acne, but SB204 would represent a non-antibacterial agent in the dermatologists' armamentarium, which are concerning from not only a pathogenic standpoint, but are also not tolerated in some patients. Finally, Stafford reminded of the recently reported SB019 (COVID-19) preclinical safety data published on November 9, 2021 and updated investors regarding next steps.

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 SID² 2019 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," covered-off 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 (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+ 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-, 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.

FDA Site Inspection Risk

As we have previously discussed in our research, the FDA has been significantly delayed in its site inspections at locations both domestic and foreign. The FDA has implemented remote interactive evaluations that may circumvent site inspection restrictions, but on December 29, 2021, the FDA informed that it had temporarily postponed certain inspectional activities in response to the omicron variant with the hopes of restarting activities as soon as possible. On January 18^th, the agency extended its pause. The planning of prioritized surveillance foreign inspection assignments that were scheduled to begin in February 2022 were also postponed. On February 2, 2021, the FDA responded to the decline in omicron cases stating that on February 7^th the agency would resume conducting domestic surveillance inspections, and continues only mission-critical⁵ foreign inspections. Planning for additional foreign surveillance inspections is ongoing, with an anticipated goal of conducting foreign prioritized inspections starting in April. Novan is targeting an NDA submission by the end of 2022. FDA site inspections of both Novan's domestic facility and its Finland partner facility will likely be necessary in 2023 as a condition of approval.

Indication in Acne Vulgaris

Timeline

With Kinsolus (SB206) preparing for NDA submission this year, focus now turns to SB204 in acne vulgaris. SB204 completed two Phase III studies in 2017. SB204's second Phase III study (NI-AC302, NCT02667444) achieved positive results across all three co-primary endpoints. Furthermore, results from the two Phase III studies agreed with each other on two of the three co-primary endpoints, strongly supporting its advancement in the development pipeline. Experience and knowledge gained from SB204's previous trials and successful execution of SB206's B-SIMPLE4 will now be applied to the design of the next Phase III for SB204. The FDA has indicated that one additional Phase III trial will be needed to support the submission of an NDA. Novan management has guided toward a trial size of over 1,000 patients and will maintain its three co-primary endpoints of non-inflammatory lesions, inflammatory lesions, and IGA success.

Epidemiology

Acne is the eighth most common skin disease with estimated global prevalence of all ages of 9.4%,⁸ and is practically ubiquitous in individuals ages 15-17.⁹ Moderate-to-severe acne affects about 20% of young people, correlating with puberty.¹⁰  The American Academy of Dermatology report 2004 estimates of acne prevalence of up to 50 million in the US.¹¹ Acne also persists into the 20s and 30s in 64% and 43% of individuals, respectively. Furthermore, acne heritability in first degree relatives is almost 80%. Thus, acne is very common and varies in severity between individuals correlating with age and sex.

Other Drugs

Acne treatments vary with severity of the condition.¹² If acne is mild, it may be left untreated or treated with lifestyle changes such as diet and hygiene. If moderately severe, noninflammatory acne may be treated with over-the-counter (OTC) rinses, moisturizers, gels, toners and creams. Common active ingredients in acne products include benzoyl peroxide, salicylic acid, azelaic acid, and adapalene. Noninflammatory acne types include whiteheads and blackheads. Mild inflammatory acne types include papules and pustules, typically treated with OTC options and sometimes prescriptions such as topical dapsone and antibiotics. Severe acne forms include nodules and cysts that are typically treated with antibiotics, oral contraceptives, systemic retinoids, steroids, photodynamic therapy, and surgical drainage and extraction of large cysts.

Competitors

Novan's inclusion criteria for NI-AC302 comprised moderate to severe acne, 25-70 non-inflammatory lesions, and 20-40 inflammatory lesions, in ages 9 and older. Thus, SB204's competitors will be prescription therapies targeted toward these acne types and severities. SB204's multi-factorial mechanism of action allows it to work in both inflammatory and noninflammatory acne. As a topical treatment, SB204 is most comparable to other topical treatments including benzoyl peroxide, salicylic acid, topical antibiotics, topical retinoids and even topical dapsone. While other topical agents may be seen as competitors, combination therapy is recommended in the majority of patients with acne. SB204's novel mechanism of action may be attractive to dermatologists who may incorporate it alongside other treatments into acne regimens.¹⁴

Recent new formulations and new products in the acne space include Epiduo Forte from Galderma (pvt), Amzeeq by VYNE Therapeutics VYNE and Winlevi from Cassiopea CSP. Epiduo Forte is a combination gel product adding adapalene, a retinoid drug, to benzoyl peroxide, both of which have underlying active pharmaceutical ingredients that are generic. Amzeeq (minocycline hydrochloride) is a topical formulation of a previously oral antibiotic which was launched in 2020. Winlevi (clascoterone) employs a new mechanism of action for the space as an androgen receptor regulator. It works by inhibiting the effects of androgen receptors in cells of the sebaceous glands to reduce sebum production and inflammation and can be used in both male and female patients.

Pricing

More than 5.1 million people sought medical treatment for acne in 2013, primarily children and young adults.¹⁵ We analyzed the cost of topical therapies for acne to inform our pricing expectations. Topical agents for acne include benzoyl peroxide, antibiotics, and retinoids.

Pricing data was sourced from goodrx.com. These prices are for 2022 and are intended as an approximate guide for the pricing environment Novan must navigate. Pricing is assumed as a single purchase that covers one course of treatment, sufficient to address the acne of a single patient per year. Clinical guidelines issued by the American Academy of Dermatology¹⁷ call for a combination of topical therapies (and oral therapies), especially in moderate and severe acne. Though benzoyl peroxide, a staple of acne care, is available OTC, its availability and low pricing do not exclude higher-priced, branded entrants.

SB204 will be a branded prescription product and likely command a higher price in the market compared to generics and over the counter options. We reviewed available pricing for Winlevi and think it is an appropriate comparator as it provides a novel mechanism of action, is under patent protection and is a relatively new product. Pricing for Winlevi ranges from $500 to $600 per one month prescription.¹⁸

Other Drugs Revenues

We analyze data from EvaluatePharma on topical acne treatment annual revenues. Revenues appear to peak about 2-3 years after commercialization and are fairly stable after that. All annual revenue data was generated after 2009. Greatest annual revenue observed was in 2021 at about ~$330 million for Galderma's Epiduo, a combination of a retinoid and benzoyl peroxide.

Based on our review of total revenues by product, leaders in the acne treatment group have achieved sales in the high $200 million range, while others such as Duac, Isotretinoin and Asepxia have not broken through the $100 million barrier. Winlevi may be the best proxy for SB204's revenue opportunity, however, it was launched in 2021 and offers only a limited sales history. We look at the historical revenue arcs for several of the leaders in the acne space and show them in the following graphic.

Valuation

We make several changes to our valuation model to reflect extensions in timelines, updated assumptions regarding market penetration and pricing and additional shares needed for financing. In the US, we assume first sales of SB206 in 2024 and penetration of 1.25% into the six million estimated individuals with the condition. Penetration is expected to rise to 9.0% by year five, remain flat until 2035, then taper off. Pricing for a course of treatment is estimated at $1,100 in 2024, growing at a 3% inflationary rate. In Japan, we expect first sales to occur in 2027 with a 1.5% penetration into the approximately two million cases of molluscum contagiosum in that country. Penetration is expected to rise to 9% by year five, then decline afterwards. Pricing is 80% of US levels and is forecast to grow at 3% per annum. Royalties on Sato sales will be paid to Novan. We estimate a 15% rate which implicitly includes amounts for anticipated milestones.

SB204 for acne vulgaris is expected to start its third Phase III trial in 2023, submit to the agency in 2024 and begin commercialization in 2026 in the US and in 2027 in Japan. We estimate about 50 million acne sufferers in the US with about half seeking treatment. There are many options for patients and we estimate a modest 20 basis points of penetration in the first year of commercialization rising to 110 basis points of penetration by year four. Pricing is expected to be about $500 for a month of treatment rising at 3% per annum and we estimate an average of 1.2 prescriptions per patient. Our model estimates a population of approximately 18 million with acne in Japan, with about half seeking treatment. Penetration is expected to be similar to the US with first year rates at 25 basis points rising to 110 basis points by year four. Prescription pricing is at 40% of US levels and patients are expected to average 1.2 prescriptions. Royalties paid to Novan are forecast to be 15% of Sato sales.

The denominator in our target price consists of the 18.8 million shares outstanding as of February 2022, 1.3 million warrant and option shares and 12.5 million other assumed issued shares required to raise sufficient capital to reach the commercialization stage. Total shares used to determine our valuation are 32.6 million.

Our probability of success is estimated at 90% for SB206 and 66% for SB204. On a weighted basis, we estimate an 82% likelihood of ultimate commercialization for the portfolio.

The largest impact by far to our target price compared to previous estimates is dilution from new shares related to the pre-commercialization need for capital which must be raised at a lower price vs. a year ago.

Summary

Novan reported its 2021 financial and operational results, hosting a conference call and webcast on February 24^th. Focus for the call was on Novan's lead candidate, Kinsolus, as it prepares for NDA filing with the FDA. Among highlights for the fourth quarter, and to date, were the appointment of Brian Johnson as Chief Commercial Officer, a Fireside Chat hosted by Jonathan Ashchoff; PhD, FDA conditional acceptance of Kinsolus brand name, favorable preclinical data in COVID-19, an investor roundtable featuring Dr. Adelaide Hebert, and poster presentations at 2022 Winter Clinical Dermatology Conference.

With respect to financial performance, Novan generated $3.0 million in revenue in FY21, comprising license and collaboration and government research contracts and grants revenues, versus $4.9 million last year, and posted a net loss of ($29.7) million or ($1.74) per share. As of December 31, 2021, cash and equivalents on the balance sheet totaled $47.1 million, augmented by net financing cash flows of $44.1 million. In June 2021, Novan raised net proceeds of $37.2 million as part of an underwriting agreement with Cantor Fitzgerald. 3,636,364 shares of common stock were issued at $11.00 per share. Cash burn for 2021 totaled approximately ($33.8) million including capital expenditures of $9.0 million allocated towards new manufacturing facilities. Novan anticipates that its cash reserves will support operations through 1Q:23.

With Kinsolus preparing for NDA submission this year, focus now turns to SB204 in acne vulgaris. SB204 has already completed two positive Phase III studies in 2017. Experience and knowledge gained from SB204's previous trials and successful execution of SB206' B-SIMPLE4 will now be applied to the design of the next Phase III for SB204. The FDA recommended one additional successful Phase III trial to support approval of an NDA. Novan management has guided toward a trial size of over 1,000 patients and will maintain its three co-primary endpoints.

To prepare for its NDA and commercialization, Novan added to its commercial team, is readying its manufacturing capabilities and is conducting stability testing, expected to be completed by 3Q:22. Novan looks forward to its pre-NDA meeting with the FDA in 2Q:22 and NDA submission in 4Q:22. Meanwhile, Novan's SB204 in acne is expected to begin its pivotal trial in 2023, targeting NDA submission in 2024.

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1. Key opinion leader

2. Society for Investigative Dermatology

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

5. The FDA assesses mission-criticality using multiple factors including Breakthrough Therapy Designation, Orphan Drug Designation or Regenerative Medicine Advanced Therapy Designation, and applies to either domestic or foreign inspections.

6. Novan Presentation February 2022

7. Novan Presentation December 2021

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13. Compiled by Zacks Analyst, EvaluatePharma

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15. American Academy of Dermatology/Milliman. Burden of Skin Disease. 2017. www.aad.org/BSD.

16. Goodrx.com, Compiled by Zacks Analyst

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18. Sources: goodrx.com, singlecare.com, drugs.com

19. EvaluatePharma [February 2022], Data Processing by Zacks Analyst

20. EvaluatePharma [February 2022], Data Processing by Zacks Analyst. Red line denotes average.