By Jason Napodano, CFA & David Bautz, PhD
On July 30, 2014, Nuvo Research, Inc. (NRI.TO) (NRIFF) announced financial results for the second quarter of 2014. Revenues from product sales for the quarter were $2.2 million, compared to $1.7 million for the three months ended June 30, 2013. The increase in product sales was mostly due to an increase in sales of Pennsaid® to both Greek and Canadian distributors, partially offset by a decrease in U.S. sales. Product sales were comprised of Pennsaid® ($1.7 million), Pennsaid® 2% ($0.4 million), and WF10 ($0.12 million).
Royalty revenue for the quarter was $1.5 million, which was unchanged from the same time period a year ago. Royalties were derived from Pennsaid® ($0.6 million), Pennsaid® 2% ($0.8 million), Pliaglis® ($0.03 million), and HLT Patch (Synera®/Rapydan®; $0.06 million).
Operating expenses for the quarter were $4.7 million, which was comprised of $1.5 million in R&D, $2.9 million in SG&A and $0.3 million in interest expense. The company reported a net loss of $2.3 million, with a net foreign currency loss of $0.1 million, yielding a comprehensive loss of $2.4 million, or $0.23 per share. Nuvo Research exited the second quarter with $10.7 million in cash and cash equivalents, which we estimate will be enough to fund the company into 2015.
Pennsaid®/Pennsaid® 2% Update
An important milestone was achieved during the second quarter of 2014 where total prescriptions for Pennsaid® 2% (18,000) surpassed the total number for original Pennsaid® (14,000). The strategy by Nuvo’s U.S. marketing partner Mallinckrodt had been to transition current Pennsaid® patients and prescribing physicians to Pennsaid® 2%, and it appears that the strategy is in full effect. On May 29, 2014, Nuvo announced that a third party received FDA approval to market and sell a generic version of Pennsaid®. However, we do not believe the introduction of generic Pennsaid® will materially impact Pennsaid® 2% sales due to the difference in formulation between Pennsaid® and Pennsaid® 2%, easier application of Pennsaid® 2% compared to Pennsaid®, and perhaps most important of all the fact that Pennsaid® 2% is administered twice a day compared to four times per day for Pennsaid®. In our view, Pennsaid® 2% is a superior and differentiated product.
The litigation against Mallinckrodt in regards to the development and marketing of Pennsaid®/Pennsaid® 2% continues, with Nuvo delivering an additional notice of material breaches (NOMB) to Mallinckrodt in July 2014. The purpose of the NOMB was two-fold: 1) to give Mallinckrodt an opportunity to resolve the continuing breaches of the Pennsaid® U.S. Licensing Agreement along with the additional breaches subsequent to the initial NOMB issued in April 2013, and 2) to include additional accusations related to Mallinckrodt’s failure to use diligent efforts to launch and market Pennsaid 2%.
We continue to believe that Nuvo has a very strong case against Mallinckrodt, with the most likely outcome being a settlement between the two companies before the case goes to trial. The Pennsaid® products were probably never a great fit at Mallinckrodt, and if MNK-155 (an extended-release oral formulation of hydrocodone and acetaminophen) is approved Mallinckrodt will have two extended release opioid products to market along with Pennsaid 2%. Doctors who prescribe Xartemis™ and MNK-155 would not necessarily be the same who would prescribe Pennsaid 2%, thus we don’t see much incentive for Mallinckrodt to fight hard to retain the rights to Pennsaid® 2%. Their motivation to go to trial should be low. As such, we don’t foresee the case against Mallinckrodt going to trial and that a fair settlement would be for the rights to Pennsaid® 1.5%/Pennsaid® 2% reverting to Nuvo, cash compensation to perform the requisite Phase 3 clinical trials of Pennsaid® 2%, and damages in the $10 million range.
With the full rights to Pennsaid® 1.5%/Pennsaid® 2%, Nuvo should be able to sign a licensing agreement with a suitable partner, specifically a company that would give Pennsaid 2% higher priority and help to drive sales. In addition, performing the necessary Phase 3 trials would allow Nuvo to seek approval for Pennsaid 2% outside the U.S. and could lead to additional licensing deals.
Nuvo began enrolling patients for a Phase 2 clinical trial of WF10 for the treatment of allergic rhinitis in March 2014. Thus far the trial has enrolled 121 patients, with the total number of patients expected to be 160. This is a randomized, double-blinded, placebo-controlled, 4-arm multi-center trial to test the efficacy and safety of a regimen of five infusions of WF10. While there has been a slight delay in recruiting patients for the study, the company continues to believe that the trial will be completed by the end of 2014, with top-line results available in the first quarter of 2015.
We are optimistic on WF10 because the drug covers a broad range of allergens vs. traditional immunotherapy that targets only a single allergen. For example, in the previous Phase 2 study, patient were sensitized to multiple antigens and the data on WF10 shows the drug to be more effective than placebo after just five days of treatment, with a therapeutic effect potentially lasting for 2 years. Traditional immunotherapy requires weekly or monthly injections to maintain persistent efficacy. The results of the Phase 2 trial showed that there was a response rate of 70-90%. For immunotherapy, there is typically a modest clinical benefit that takes a long time to manifest itself. WF10 also has a favorable safety profile, with no SAEs seen in the previous Phase 2 trial. Immunotherapy is generally well-tolerated, but there are possible rare serious side effects such as anaphylactic shock that could lead to death.
Additional Preclinical Collaboration Announced
On April 23, 2014 Nuvo announced a collaboration involving Ferndale Laboratories, Inc. and a leading contract research organization (CRO) to develop two topical dermatology products based on Nuvo’s patented Multiplexed Molecular Penetration Enhancer (MMPE™) technology.
The agreement calls for Nuvo to formulate two patented dermatology product candidates utilizing the MMPE™ technology. Once the formulations are complete, the compounds will be passed on to Ferndale and the CRO, which will oversee the continued development through Phase 2 clinical studies. The products will then be made available for outlicensing. The parties will share any licensing revenues, milestone payments, and royalties that are derived from the compounds.
Valuation and Recommendation
Nothing has materially changed since we initiated coverage of Nuvo approximately 3 months ago, thus we are continuing to rate the stock a Buy with a $7.50 price target. We see an investment in Nuvo as relatively low risk with the potential for a large upside should the clinical trial for WF10 succeed. Potential catalysts coming up in the second half of the year that could drive the stock price higher are a run up leading up to the release of the WF10 Phase 2 data in early 2015 and any positive news surrounding the litigation with Mallinckrodt around Pennsaid® 2%. Our valuation is derived from a sum-of-parts where we see the cash balance and Pennsaid® royalties supporting the current valuation, along with meaningful potential upside from regaining Pennsaid® 2% rights and WF10.
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