NOVN: EPI Revenue Trends Are Strong

By John Vandermosten, CFA

NASDAQ:NOVN

READ THE FULL NOVN RESEARCH REPORT

Second Quarter 2022 Results

On August 11, 2022, Novan Inc. NOVN reported second quarter financial and operational results in a press release and the filing of Form 10-Q. A conference call and webcast were subsequently held to update investors on recent developments. The call highlighted the performance of the EPI Health assets and efforts related to SB206's New Drug Application (NDA) which is expected to be submitted to the FDA prior to year-end. Novan has readied its manufacturing assets and aims to complete NDA-enabling stability testing by 3Q:22.

Highlights for the second quarter ending June 30, 2022 and to-date include:

➢ Pre-NDA meeting with the FDA – April 2022

➢ Presentation of BOTE clinical data at SID – May 2022

➢ Select B-SIMPLE4 data presented at Society for Investigative Dermatology – May 2022

➢ Closing of $15 million direct offering – June 2022

➢ Publication of B-SIMPLE4 results in JAMA Dermatology – July 2022

➢ Payment and termination of seller note outstanding – July 2022

With respect to financial performance, Novan generated $6.2 million in revenue in 2Q:22 versus $0.7 million in 2Q:21, and posted a net loss of ($8.9) million or ($0.44) per share compared to a loss of ($6.0) million or ($0.39) per share.

For the second quarter ending June 30, 2022 and versus the same prior year quarter:

➢ Revenues were $6.2 million, up 724% from $747,000. The increase is predominantly due to revenues from sales of dermatology products Wynzora, Rhofade, Minolira and Cloderm which did not contribute in the prior year period. License and collaboration revenues of $344,000 were primarily associated with the Sato R&D upfront and the Prasco agreement for Cloderm. There was also a small contribution from research and grant revenue;

➢ Cost of goods sold was $2.6 million vs. nil representing a 55% gross margin on product revenues;

➢ Research & development expenses totaled $3.1 million, down 40% from $5.3 million on a decrease in expenditures related to the SB206 program partially offset by an increase in other research and development expenses;

➢ Selling, general & administrative expenses were $8.6 million, up 254% from $2.4 million with the increase primarily due to $3.2 million of EPI Health commercial sales operations, $1.2 million of SB206 prelaunch and commercial preparation, $700,000 of personnel and related benefits and $600,000 of EPI Health acquisition transaction-related costs;

➢ Net loss was ($8.9) million, or ($0.44) per basic and diluted share, compared to ($6.0) million, or ($0.39) per share.

As of June 30, 2022, cash and equivalents on the balance sheet totaled $37.3 million. This compares to cash holdings of $47.1 million at the end of 2021. Over the first six months of the year, cash burn was ($13.1) million and Novan expended ($12.0) million for its acquisition of EPI Health. This was partially offset by contributions from financing related to the $15 million direct offering in June 2022 and a small contribution from the at-the-market (ATM) facility. Novan anticipates that its cash reserves are sufficient to support operations until the end of this year.

Upcoming milestones include:

➢ 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

Presentations

Novan has recently participated in two scientific events: the annual meeting for the Society of Investigative Dermatology (SID) in May 2022 and publication in the Journal of the American Medical Association (JAMA) Dermatology.

At SID, Novan exhibited its poster entitled "Berdazimer 10.3% Gel, a Nitric Oxide-Releasing Topical Medication for Molluscum Contagiosum, Triggers BOTE (Beginning Of The End) Inflammation and Accelerates Resolution" at the Portland, Oregon event. The poster concluded that for berdazimer gel 10.3%:

➢ Topical application is associated with minimal systemic absorption;

➢ Once daily application was the best regimen for balancing lesion clearance and tolerability;

➢ Clinically relevant and statistically significant clearance of lesions at week 12 were demonstrated;

➢ Was well tolerated.

JAMA Dermatology published "Efficacy and Safety of Topical Nitric Oxide−Releasing Berdazimer Gel in Patients With Molluscum Contagiosum: A Phase 3 Randomized Clinical Trial" in its July 2022 online issue. The paper summarized the design, measures and results for the B-SIMPLE4 trial that was conducted in 2020 and 2021. It concluded that use of berdazimer gel, 10.3%, for molluscum contagiosum appears to demonstrate favorable efficacy and safety with low adverse event rates.

$15 Million Capital Raise

In early June, Novan announced its intent to raise $15 million in a registered direct offering priced at the market. Several days later, the offering successfully closed with 2.08 million shares of common stock and 3.18 million in pre-funded warrants that were issued at a price of $2.851 and $2.841 respectively. Each share and prefunded warrant included a warrant to purchase an additional share of common stock at an exercise price of $2.851. A total of 5.26 million regular warrants were issued in conjunction with the offering.

Oppenheimer and Co. served as the placement agent for the offering and Brookline Capital Markets was the financial advisor. Proceeds will be used to fund research and development activities, preparation for submission of SB206 (Kinsolus) to the FDA, commercialization preparation for SB206 and to provide support for marketing activities for its active portfolio among other business activities.

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:

Novan paid 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.

Four months after the announcement of the acquisition, Novan settled the $16.5 million seller's note with the payment of $10 million in cash. The amount is a discount to the face value of the note and conserves $4.6 million in interest payments.

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 important leaders to Novan along with the acquisition 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 likely more regions shortly after FDA approval is granted. Prior to the acquisition Novan was planning to develop 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 came to the conclusion that acquiring the company and taking advantage of their active dermatology sales force which was already in contact with many of the entities that Novan was targeting for Kinsolus, 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 offers approximately 100 executives and employees, 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.

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1. Source: Novan's May 2022 Corporate Presentation

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