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VFC's Stock House: NovaBay (NBY) May Be Highly Undervalued

(EMAILWIRE.COM, March 21, 2012 ) New York, NY -- NovaBay Pharmaceuticals (NBY) released news this week that offers to broaden the scope and reach of the company's Aganocide compounds, which are being positioned as anti-infectives and could potentially replace modern day antibiotics as resistance to such treatment grows.

On Tuesday NovaBay announced a deal with Virbac Animal Health to bring its technology to the veterinary market. According to the agreement, NovaBay will receive an upfront payment - and some additional support for research and development - while Virbac will retain the option to license any of the Aganocide compounds that are successfully applied to treating veterinary indications.

The deal could provide NovaBay with a steady revenue stream in the future if Virbac exercises its licensing option. According to the Tuesday press release, if the option is exercised,

"NovaBay may receive additional payments, which include an exercise fee as well as development and pre-commercial milestones for a line of veterinary products. NovaBay will also receive royalties on sales of any successfully commercialized Aganocide products to arise from this agreement."

Few companies are going to become superpowers in the field of medicine on treating veterinary indications alone, but the deal brings some attention back to NovaBay and gives us another chance to consider this company's technology on the open market - should the pipeline products make it that far.

It also gives us the opportunity to determine whether or not the current market capitalization for NBY justifies that pipeline potential, which, in the opinion of this writer, the determination is "probably not."

First, let's revisit the problem of antibiotic resistance.

When introduced into society seventy years ago, antibiotics changed the shape of medicine, and provided what - at the time - was considered a huge leap forward in treating bacterial infections. Having been so widely-used since then, however, the infectious organisms against which the antibiotics are administered have grown increasingly resistant, and sometimes immune, to today's antibiotic treatments.

The Centers for Disease Control and Prevention considers the developing resistance to antibiotics as a "crisis", noting on its website that, "These drugs have been used so widely and for so long that the infectious organisms the antibiotics are designed to kill have adapted to them, making the drugs less effective. People infected with antimicrobial-resistant organisms are more likely to have longer, more expensive hospital stays, and may be more likely to die as a result of the infection."

Medical professionals themselves understand the growing risks associated with antibiotic resistance, as noted by Dr. Marc Siegel, associate professor of medicine and medical director of Doctor Radio at NYU Langone Medical Center, this week in an article published on Dr. Siegel also notes that Doctors continue to over prescribe these treatments, thereby strengthening the resistance of the surviving bacteria and creating new "super colonies" that will eventually be uncontrollable.

This dilemma has created a huge monetary burden on the global health care system and is possibly setting up a one-time "miracle cure" as irrelevant.

That's where NovaBay comes into the picture.

NovaBay has developed, through its proprietary Aganocide compounds, a pipeline of synthetic anti-infectives that are designed to mimic the body's own defenses against infection. Namely, these synthetic molecules, based on the Aganocide compound NVC-422, essentially act in the same manner and processes of a body's white blood cells and not as antibiotics, therefore significantly reducing the risk of a resistance being developed.

The potential of such a technology has market-moving implications, and under the circumstances, it's understandable why NBY could be tagged with an 'undervalued' label.

There are, however, a couple of reasons why investors may not yet have fully embraced the company and its technology. The first reason may be the most obvious one; that NovaBay still has nothing beyond Phase II, and therefore any investment in the company is highly speculative and risky at this point, which is a fair assessment.

That said, the best deals in biotech are the ones that are found early, when patience is needed as the trial results pan out. It's also worth noting, however, that he trend of staying away from speculative "Phase II" investments may be shifting.

Take Lpath, Inc. (LPTN), for example. Lpath also has a novel and potentially groundbreaking technology in the works, but Pfizer (PFI) has bucked the Phase II label of the company and jumped in with a very significant partnership.

CellDex Therapeutics (CLDX) is another one that has traded very highly during its Phase II stages, even when Pfizer decided to divorce itself from a partnership with the company.

In both cases, investors may have started to become clued in to how much market potential is contained within those respective pipelines and tossed the standard "wait until Phase III" strategy to the side. As investors with similar strategies in mind research NovaBay, the same potential for price appreciation exists; especially give the fact that NBY has a powerhouse partner of its own in Galderma SA, with whom NovaBay is developing a treatment for the highly-contagious skin condition, Impetigo.

Another reason why NovaBay may be missing the mark in terms of market cap right now, and this one may be more relevant than the last, is that an earlier clinical trial conducted with then-partner Alcon in the treatment of adenoviral conjunctivits - better known to the average Joe as "pink eye" - failed.

Shares slumped badly after that news hit the presses and have only barely recovered since.

On the flip side to the endpoint miss, however, which sent sent investors running for the doors, is that a further look at the data from the same trial did show that efficacy was demonstrated against Epidemic Keratoconjunctivitis (EKC), possibly the most contagious form of the infection, and which often threatens a victim's vision.

Based on that data, trials have continued, but the fact that the company has a failed trial under its belt most certainly deters some investors from jumping back in, at least until they see more results.

A Phase IIb trial for this indication is expected to begin within months, while another Phase II trial for the Impetigo condition is also slated for this year.

Results from 'Part A' from a trial testing NVC-422 as a treatment for urinary catheter blockage and encrustation (UCBE) have already rolled in, with results from 'Part B' also due within months.

The pending trial results provide some short term catalysts, but another catalyst due for this year could be the one that puts NovaBay on the map.

A commercial launch is planned for the short to mid term for NeutroPhase, NBY's first FDA-cleared product and a treatment for chronic wound in both hospital and personal care. A successful launch for NeutroPhase could alleviate many of the monetary concerns normally associated with a small company bringing its pipeline through trials, and just a couple of months ago the company announced its first strategic partner for NeutroPhase.

Having a product already on the market and bringing in revenue will go a long way to validating this small company in the eyes of potential investors, especially if the NeutroPhase commercial launch goes off without a hitch.

Based on the pending trial catalysts, the commercial launch of NeutroPhase, and most importantly, the potential of NVC-422 products on the open market as eventual substitutes for antibiotics, NBY may still be trading under the radar and could still be lightly valued, when all is considered.

By 2013 the NovaBay could have three Phase III trials ongoing with an FDA approved product on the market.

If that's the case, it's a fair bet to assume that the market cap will be significantly higher than thirty five million at that point.

For an example of how a shift from Phase II to Phase III can effect a market cap, one could look at Keryx BioPharmaceuticals (KERX). During the early to mid stages of Phase II, the KERX market cap was similar to NBY's now, but when Phase II trials were successful and Phase III came along?

Prices quickly quadrupled.

NovaBay's target market of anti-infective care is a multi-multi-billion dollar market annually, and NBY could quickly penetrate that market, as Doctors are currently looking for a way around antibiotic resistance.

As I've previously discussed, this company may be at the right place at the right time. For investors being in the right place at the right time means being "in" before any price run starts, and it's possible that NBY has a ways to move, should the pending catalysts turn out positive.

Disclosure: Long NBY.

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