Novan, Inc. (NASDAQ:NOVN) Q1 2023 Earnings Call Transcript May 15, 2023

Novan, Inc. misses on earnings expectations. Reported EPS is $-0.54 EPS, expectations were $-0.32.

Operator: Hello and welcome to the Novan Inc. Quarterly Update Conference Call and Webcast. As a reminder, our participants are currently in a listen-only mode. [Operator Instructions] Following the presentation, there will be a question-and-answer session. Note that this webcast is being recorded at the company’s request and a replay will be available on the company’s website following the end of the event. At this time, I’d like to remind our listeners that remarks made during this webcast may state management’s intentions, beliefs, expectations, or future projections. These are forward-looking statements and involve risks and uncertainties. Forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the federal securities laws and are based on Novan’s current expectations and actual results could differ materially.

As a result, you should not place undue reliance on any forward-looking statements. Some of the factors that could cause actual results to differ materially from those contemplated by such forward-looking statements are discussed in the periodic reports Novan files with the Securities and Exchange Commission. These documents are available in the Investors section of the company’s website and on the Securities and Exchange Commission’s website. We encourage you to review these documents carefully. Additionally, certain information contained in this webcast relates to or is based on studies, publications, surveys, and other data obtained from third-party sources and the company’s own estimates and research. While the company believes these third party sources to be reliable as of the date of this presentation, it has not independently verified and makes no representation as to the adequacy, fairness, accuracy, or completeness of that or of any independent source that has verified any information obtained from any third-party sources.

Joining us on today’s call from Novan leadership team are Paula Brown Stafford, Chairman, President, and Chief Executive Officer; John A. Donofrio, Executive Vice President and Chief Operating Officer; and John M. Gay, Chief Financial Officer. I would now like to turn the conference over to Paula Brown Stafford. Please proceed.

Paula Brown Stafford: Thank you, Andrew and thanks to everyone for joining us this morning. Novan is building a premier medical dermatology company that is focused on developing and commercializing innovative therapies for diseases of the skin. Our priority is our NDA for Berdazimer gel 10.3% for the treatment of molluscum, molluscum contagiosum. It is under review at the FDA with a PDUFA goal date of the 5th of January 2024. We are in the review cycle and we have less than eight months remaining. Since January, we have had a number of noteworthy accomplishments. Our entire team remains excited about our progress, our momentum, and what lies ahead. Our NDA was submitted in early January. This represents the most significant milestone Novan has achieved to-date and something of which we are extremely proud.

In March, our filing was accepted for review with no known potential issues. And we have provided our PDUFA goal date, as I mentioned, as well as other expected milestone dates for a standard review cycle. We continue our dialogue with the agency while we move forward with preparing toward our commercial supply of drug substance in anticipation of a potential approval. Berdazimer gel 10.3% is a novel topical nitric oxide releasing medication for viral skin infections. Berdazimer sodium, our active pharmaceutical ingredient is a new chemical entity. Our NDA is based on a Phase 3 program that demonstrated clinical evidence of efficacy with robust clinical data from our B-SIMPLE4 trial and a favorable safety profile for patients with molluscum.

Our clinical trial data from B-SIMPLE4 were published in JAMA Dermatology in July of last year. So if approved, this product would satisfy an important patient care need, largely displacing in-office procedures that are often cumbersome, painful and time-consuming. Molluscum is highly contagious. It is one of the five most prevalent skin diseases worldwide and the third most common viral skin infection in children, most of them less than 10 years old and if left untreated it could last up to 48 months. Through recent market research, we received caregiver feedback that speaks to the impact of the disease really on the psyche of the patient. And to give you a sense of the real-world experiences, as you can see in these quotes here at least children feeling depress, hopeless, bullied, a need to build their self-confidence.

And last week, we actually received an e-mail from a parent. We get these quite frequently. And this one it was just a striking e-mail and at the end it said, I am looking for a sign of hope. We think we’re that sign. The market is prime for a topical self-administered or caregiver administered therapy. The market potential is large with six million patients in the US today and approximately one million new patients annually. We believe the lack of at-home options results in many undiagnosed cases. The current standard of care is in-office procedures, freezing, cutting, blistering and off-label and OTC offerings that have no proven efficacy. Per US claims data, over 70% of patients with molluscum go untreated. 19% of molluscum patients seek treatment from a dermatologist.

72% visit their pediatrician, but approximately 90% of these pediatricians have a wait-and-see approach. Whereas 65% of dermatologists will treat molluscum but it’s typically with a treatment that’s an in-office procedure. So, this is how we view the future. We believe that berdazimer gel 10.3% has the potential to become a first-line therapy. Dermatologists and communities would likely lead the way and what we expect is that pediatricians would follow. There’s no FDA-approved treatment today for molluscum. But a wait-and-see approach is not a standard of care that patients or caregivers seem to benefit from today. So in the next 7.5 months, the FDA could approve two potential treatment solutions that we believe would complement one another.

We believe if approved, Berdazimer gel could be prescribed by pediatrician as a prescription product that would most likely be covered by insurance at the pharmacy, whereby, if approved, a new drug device combo could be used as an in-office procedure by dermatologists across multiple visits, if covered by medical insurance. So there’s room for both in the market, if approved; one, a prescription, one, a drug device used in the office. Our research shows that healthcare providers are ready for a safe and effective treatment and specifically Berdazimer gel, if approved. As you see here, very — there’s a very high potential, very high adoption rates are expected within 12 months of approval across the three primary HCP types who are seeing molluscum patients today.

So we’re planning for success. Our NDA is in the review cycle with the FDA, and we’re currently expecting the review to be complete by the goal date of January 5th, which is, again, less than eight months away. So as we respond to FDA information requests, we’re also planning toward a potential launch. So specifically, we look to build awareness and excitement for our potential product among our customers, as well as employees and potential future employees. We work to educate healthcare providers about the disease and the treatment options. We look to deliver the best possible access program, we want to prepare our existing commercial organization. We continue to protect our proprietary platform technology with patents nationally and globally.

Now the extent of these efforts remains dependent on funding available to the business. So our go-to-market strategy starts with the opportunity in the dermatologist offices. They recognize the value. Their patients recognize the value. They are eager. So we expect pediatricians will look to them and follow. We will mostly market to non-derm HCPs digitally. Once we prove out our marketing playbook with the dermatologists, we would look and expect to have the foundation to expand beyond dermatologists. The opportunity for Berdazimer gel is compelling. So I’ll now hand the call over to our Chief Operating Officer, John Donofrio, to provide an update on our commercial business for the first quarter of 2023.

John Donofrio: Thank you, Paula. Good morning everyone. I’m pleased to report our promoted products delivered strong prescription growth compared to Q1 2022. This is the fifth consecutive quarter of strong commercial team execution delivering growth across our promoted product portfolio as compared to prior periods. Our team successfully launched new promotional campaigns for RHOFADE and WYNZORA moved to digital platforms and selling tools across our portfolio. Complementing our strong total prescription growth, compared to Q1 2022, we have also experienced a significant increase in underlying demand in new prescriptions for both RHOFADE and MINOLIRA and increased ACP rider activity for WYNZORA. WYNZORA which was launched in mid-2021 compete in the market that has many treatment options for psoriasis.

As such, this is a positive trend in a very competitive market. For the quarter, we continued to grow our prescribing base and market share for our core promoted products. Q1 RHOFADE total prescription volume of 40,149 was less than 100 prescriptions short of an all-time high set in Q4 2022. This represents an 11% growth over Q1 2022 18% growth in new prescriptions and all-time highs in both new prescribers and total prescribers of 8,000 and 9,000, respectively. As noted in previous calls, WYNZORA was impacted in the second half of 2022, by new competitive launches that have challenged the use of topical steroids in the U.S. for plaque psoriasis. However our new promotional efforts and execution have returned WYNZORA to growth of 9% in Q1 2023 versus Q1 2022.

MINOLIRA continues to outperform the declining minocycline market for acne, strong growth of 19% in total prescriptions and 18% growth in new prescriptions versus Q1 of 2022. Our strong prescription growth during the quarter was partially offset by two factors impacting our net profitability. We experienced a supply disruption in March for RHOFADE. This issue was quickly resolved and distribution channels restocked and solid demand and pull-through in mid-April. In addition, as it relates to our gross to net deductions, we experienced an increase in payer rebates as we moved from non-preferred to preferred coverage, higher patient assistant co-pay costs due primarily to a coverage mix shift of higher deductible plans and the result of patients’ annual coverage deductible resets.

We continue to work towards the implementation of tactical and strategic actions to reduce the impact of gross to net adjustments on profitability. Overall, we’re excited, with the total prescription growth performance including new and total prescribers for our promoted brands. Thank you and I will now hand it over to John Gay, our Chief Financial Officer.

John Gay: Thanks John, and thank you to everyone for joining our call today. Before we review the activity for the quarter ended March 31st 2023, I will remind you, that when I refer to prior year figures for the quarter ended March 31st 2022, it includes 20 days of activity based upon our March 11 acquisition last year and the related timing of the consolidation of our commercial business within our financial statements. As such, the comparability of the current year versus prior year first quarter should be noted as it relates to this 20-day stub period in the prior year. I’d also like to let our listeners know, that we are not yet providing guidance as it relates to Q2 and full year 2023 revenues or EBITDA. For the three months ended March 31st, our net product sales of $2.4 million included in our commercial businesses total revenue was comprised of $1.1 million for RHOFADE, $0.5 million for WYNZORA and $0.3 million for MINOLIRA with other products in our portfolio contributing $0.4 million.

The increase in our net product revenue for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was due to the timing of the EPI Health acquisition, offset by the impact of a manufacturing delay with the supplier for our RHOFADE commercial product. RHOFADE was on backwater beginning in March 2023 until mid-April of this year. This temporary stock-out of RHOFADE impacted the overall net product revenue during the first quarter of 2023, as there was a 28% decrease in the number of units sold in Q1 2023 from Q1 2022. I will note that this decrease of unit sold is calculated based upon the total units sold in the first year — prior year first quarter, including units sold by EPI Health prior to the acquisition by Novan.

However, I’m pleased to report that the volume of units sold to our customers in mid-April 2023 rebounded when RHOFADE was restocked. License and collaboration revenue on a consolidated basis was $0.6 million for the three months ended March 31, 2023. This amount relates primarily to the Sato agreement for the out-license of SB206 recorded in the research and development operations business. Total cost of goods sold recorded in the commercial business was $1.3 million for the three months ended March 31, 2023. Cost of goods sold includes the cost of procuring finished goods from our third-party manufacturers, sales-based royalty and milestone expenses and other third-party IP licensing costs. For the three months ended March 31, 2023, we recognized net product revenue related royalty expense of $0.7 million within cost of goods sold.

This amount included our current obligation to third parties in addition to amounts related to the accounting presentation for the MC2 licensing agreement. Our R&D business incurred research and development expenses of $4.8 million for the three months ended March 31, 2023 and 2022. Included in the fluctuation from the prior year quarter was a $1 million net decrease in the SB206 program related to the SB206 NDA submission in January of 2023, offset by a $1 million increase in expense related to a regulatory milestone payment, which became due to Ligand Pharmaceuticals during the first quarter of 2023. On a consolidated basis, SG&A expenses were $10 million for the three months ended March 31, 2023 and 2022. Included in the fluctuation from the prior year was a $4 million net decrease and transaction-related expenditures in connection with the EPI Health acquisition, offset by an increase of $3.7 million of selling, general and administrative expenses incurred to support the conduct of our commercial business operations.

Consolidated net loss was $14.1 million for the three months ended March 31, 2023, compared to $13.4 million for the prior year comparable period. As it relates to our balance sheet, as of the end of the quarter, we had a total cash balance of $12.5 million and accounts receivable totaling $13.8 million. In the first quarter of 2023, we closed a registered direct offering for gross proceeds of $6 million. We received the Sato upfront payment of $5 million related to the RHOFADE out-license agreement in Japan, and we have continued to use our $15 million accounts receivable back factoring facility, which provides working capital in an amount that is up to 70% of our commercial businesses gross eligible receivables. We will need additional funding to support our planned and future operating activities related to our berdazimer gel 10.3% product candidate and our business in general.

We believe that our existing cash and cash equivalents as of March 31, 2023, plus expected receipts associated with product sales from our commercial product portfolio will provide us with liquidity to fund our planned operating needs into the late second quarter of 2023. The variability in our operating forecast, driven primarily by commercial product sales, timing of operating expenditures and unanticipated changes in net working capital may impact our cash runway. We continue to be laser focused on obtaining the additional funds necessary to get to a potential approval and launch of berdazimer gel 10.3%, if approved, including evaluating strategic opportunities, while at the same time, conserving cash by delaying or deferring certain expenditures.

We have been pursuing and will continue to pursue additional capital to a broad range of financing strategies and other strategic alternatives. With that, I will hand it back to Paula.

Paula Brown Stafford: Thank you, John and John. I truly believe that Novan is in a position to succeed with a potential approval and an infrastructure to support a potential product launch. We are highly focused on driving towards the potential approval of berdazimer gel 10.3% on aligning our commercial infrastructure to support a potential launch on the continued growth of our marketed products and improving the gross to net profitability. And as John mentioned, we continue to aggressively pursue additional potential capital or strategic relationships to provide the funding necessary to progress the development of berdazimer gel. And these activities include the evaluation of options such as debt, equity, in-license, out-license, acquisition or sale of an asset, a business unit or the company.

In closing, we at Novan are committed to building a premier medical dermatology company. We remain focused on executing and delivering results, and we’re excited for our future. So thank you. And operator, you may now open the line for questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Oren Livnat with H.C. Wainwright. Please go ahead.

Operator: The next question comes from Jeff Jones with Oppenheimer. Please go ahead.

Operator: The next question comes from Jonathan Aschoff with Roth. Please go ahead.

Q – Jonathan Aschoff: Sorry, go on.

A – John Donofrio: No. Yes, I just think to follow-up just on Paul’s point, when you look at the legacy EPI brands, we’re going to target the same physicians. So that footprint of representatives will — will complement as we launch Berdazimer. Also, we have a strong writer base of RHOFADE, WYNZORA and MINOLIRA, and we feel confident that, that writer base will remain strong and then and continue to move forward and grow those products even with the launch. It’s a very complementary selling point with all three current products and then with Berdazimer. Obviously, the top three Berdazimer., RHOFADE and WYNZORA will all do very well. And MINOLIRA in the oral antibiotic market will be the fourth position in that particular point.

Q – Jonathan Aschoff: Okay. You guys mentioned something about $700,000 booked into COGS. Does that mean there’s another $550,000 that needs to be booked this quarter as it relates to the $1.25 million to a third-party, you have to pay from Sato’s $5 million?

A – John Gay: So Jonathan, we’ve recorded that accrual, if you will, in COGS at the end of Q4. So as it relates to my prepared remarks and COGS of roughly 1.3. $700 million of that is royalty, the rest is what I would say is product COGS as it relates to the acquisition of materials we’re selling. But to your point, that prior milestone was reported in Q4.

Q – Jonathan Aschoff: Thank you. And I guess it’s safe to say that any sort of view towards in-licensing any new products is deemphasized for the time being, yes

A – John Gay: I think that’s probably, a fair assumption.

Q – Jonathan Aschoff: All right. Thank you very much.

Operator: The next question comes from Jeff — excuse me Kemp Dolliver from Brookline Capital Markets. Please go ahead.

A – John Gay: Yes. So we — in Q1, we launched brand-new campaigns for both RHOFADE and WYNZORA, which you’ve seen the uptick in performance. We also moved to digital platforms and selling tools for our representatives. That’s been a real nice addition into the marketplace. We definitely executed on our strategy to build WYNZORA awareness and usage hitting all-time highs in total rider for Q1. And we definitely focus on our messaging for fast week one results as a differentiator in a very busy and competitive psoriasis market. And we’ve also continued the momentum and strong growth on RHOFADE with all-time highs in new prescriptions. And our goal is still established the medical need of persistent facial erythema and making sure you’re treating that with a prescription product.

So those initiatives from a marketing perspective, why we tried to ensure we’re being fiduciary responsible to the shareholders has been received very well in Q1, and you can see that in the prescription group.

Operator: The next question comes from John Vandermosten with Zacks. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Paula Brown Stafford for any closing remarks.

Paula Brown Stafford: Thank you all. Thank you analysts for your very good questions. I appreciate those. In conclusion, we believe the opportunity for berdazimer gel is compelling. And Novan remains focused on executing and delivering results, and we’re excited for our future. Thank you for being with us.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.