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Novan Inc (NASDAQ:NOVN) Still Has Plenty Farther To Run

Novan Inc (NASDAQ:NOVN) Still Has Plenty Farther To Run
Written by
Chris Sandburg
Published on
February 17, 2017
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At the end of January, Novan Inc (NASDAQ:NOVN) published data from its lead acne trials, and the company took a severe hit on the back of the numbers. From a PPS of around $20, markets traded Novan down to less than $5 a share, pushing the company to a sub $100 million market cap. As the decline happened, we published this piece, suggesting that the reaction we were seeing was unjust, and that as a result, the decline represented a nice opportunity to pick up a discount exposure ahead of a recovery.We'll get into why shortly, but we noted that the gap-down decline should, over time, close out, and in turn, that the company would likely recover pretty much all its lost value. This week, we've seen the start of this recovery – the company is currently trading at a close to 40% premium to its week-open price.For us, however, this is just the start of the run. There's still time to pick up an exposure to the recovery, and there's still plenty of reward on offer ahead of a market realignment.Here's what we're thinking.For those that missed the action at the end of last month, Novan was (and still is) developing an acne drug called SB204, and conducted two phase III studies in an attempt to collect the data required to underpin a registration application. As noted last time, acne drugs (and this is true of pretty much any pharmaceutical dermatology asset) need two phase III studies to pick up approval. Novan had already put out data from an initial phase III pre-end January, and the data was a hit across three co-primary endpoints. As such, expectations of a near term registration submission ran high, and investors bought in speculatively ahead of the second phase III release.Then the news hit, and it wasn’t good.Basically, the drug failed against two of the three endpoints it was targeting (note, these were the same endpoints it had previously hit against in the first phase III) and the company collapsed.Our argument was as follows:First, just because the drug failed against two endpoints in a secondary phase III doesn’t mean it doesn’t work. We know it does work, because it hit against three endpoints in a previous pivotal. Take the two studies as an aggregate, and we've got four out of six primaries hit.Second, a failed phase III generally means discontinuation in another indication. However, when two pivotals are conducted and only one fails, and especially when one passes with flying colors as is the case here, we almost always see the company conduct a follow up study. Sure, the follow up costs money, and there's a degree of added burn (which could necessitate dilution, and that's a near term risk), but the program is far from done.Third, Novan isn’t a single digit million-dollar microcap with all its eggs in one basket. The company has a follow up pipeline and a proprietary platform (which it used to create SB204), and these have both intrinsic value and the potential for value-add as they mature towards commercialization.Bottom line here is that even if the phase III acne asset was to fail completely, and the company discontinue development outright, the market response seen at the end of January would have been harsh. That there is still a decent chance of us seeing a registration application submission this year or next only adds to the imbalance.In other words, it is sentiment that has taken a hit, and not intrinsic value. We think there's a real opportunity to take advantage of this divergence, and the recent run has provided some early validated for this suggestion.Of additional note, there have been three filings submitted this week announcing what amount to insider buys. The first two are by company founders Mark Schoenfisch and Neal Hunter (through his investment vehicle T.D.H One) and the third is by CEO Stasko and his wife Jeanie.We will be updating our subscribers as soon as we know more. For the latest updates on NOVN, sign up below!Disclosure: We have no position in NOVN and have not been compensated for this article.

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