Since we originally published a full report on Novan (NASDAQ: NOVN) the company has been delivering good results – recent Phase 2 results for genital warts from HPV were positive and ready for the next step into Phase 3. The news sent the stock up from the $20 level to the $25 level.

More importantly, we will be getting Phase 3 results for their treatment of acne (SB204) in the next few weeks. Acne is a much larger market opportunity so positive phase 3 results are likely to drive an outsized stock movement. The Novan treatment is a topical treatment that is formulated to meet commercial requirements for stability and shelf-life.

Nitric Oxide has been hailed as a “breakthrough” since it was introduced, and accounted for the Nobel Prize in Medicine back in 1998. But so far, the role of the molecule in useful therapies has not materialized. Hence some skepticism from industry insiders that Novan can pull this off. However, positive Phase 3 results are likely to end the argument and make it clear that Nitric Oxide will play a major role as an anti-bacterial, anti-viral and anti-fungal. This will lead to multiple effective therapies and large market opportunities for Novan and their partners.

One thing we’ve heard back from experts in the field is that there are already some standard treatments for severe acne – Clindamycin which is topical and Minocycline which is oral. While effective against inflammatory lesions, they do nothing for non-inflammatory lesions which leaves much acne still on the face. SB204 is equally active against both types and equal or better to both against inflammatory lesions.

Novan has developed both their “Nitricl” technology which allows them to deliver Nitric Oxide in different ways as well as their formulation approach which is critical to being able to package the treatments for commercial success.

With a market capitalization of $400M, we think the upside from positive Phase 3 results is as much as 2x the current stock price with additional upside possible from partnerships that may materialize in the wake of them.

To be fair, we know that the company will seek additional financing to move some of the other successful Phase 1 and Phase 2 trials into Phase 3, but we see those as non-dilutive in the longer term.

We’d encourage investors to review the NOVN IPO roadshow slides and also the report we published here: NOVN IPO Note. [There is a wealth of information in the note so if you are serious about Novan you will want to read it.]


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