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BlacknGold Pharma Blogs - NBY

March 07, 2011 – Comments (6) | RELATED TICKERS: NBY , KERX , OGXI

FOOLS! I would like to apologize for my hiatus from the CAPS community - and my rating ain't too great because of it. I'm just beginning to realize the importance of the "thumbs down" option. I have been quite busy with school and work (aren't we all?), but please forgive me starting these late since I know I promised them in like what, November? Give me a swift kick in the a$$ the next time I keep you guys hanging. So, without further delay I present to you NovaBay Pharmaceuticals (NBY).

Background    While NBY is no star of CAPS (4 ratings, not stars, from the communtity), it would definately be in your best interest to research them. NBY is actively engaged in countering the problem of drug-resistant bacteria, also referred to as super bugs. You may not be familiar with the danger these bacteria pose, but the CDC and FDA are a little worried to say the least. As investors reward companies for developing potential home-run stocks the industry has shifted away from low-profit drugs such as antibiotics. Anyone can see how less R&D into antibiotics at a time when our overuse and overperscription of them is leading to resistant bacteria should be a major red flag. IT IS IMPORTANT TO NOTE THAT NBY IS NOT DEVELOPING ANTIBIOTICS, BUT I'LL FEED YOU BABY BIRDS...KEEP READING.

There are 21 classes of antibiotics with over 100+ drugs total, so it is tough to develop a home-run antibiotic. They work with varying mechanisms, such as targeting the outer cell wall and rupturing the cell (penicillin). The bad thing with targeting a biological process of organisms that can double in just a few hours is that while your mechanism may work, over time it it statistically favorable for at least one out of 10^6^6^6 cells to adapt to the changes. This is just one example of how bacteria can be resistant to antibiotics. For instance, strains of bacteria that are resistant to penicillin can produce the enzyme penicillinase, which cuts the penicillin molecule in two - making it a useless pile of organic atoms. Or, just by simple survival of the fittest. When the doctor tells you to take your prescription for 10 days and you take it for 7, some cells may be able to withstand the lower than prescribed dose. So, those cells will now replace their weaker relatives that you successfully killed. It may not seem like much, but over the years it adds up. Don't forget how quickly they live and die. A bacteria colony can go through several generations in a week. That must make birthdays confusing...

NovaBay Dude    NBY is developing anti-infective compounds (in the aganocide class, not anti-biotics), which mimic the body's immune system. They target the most important part of a bacteria colony: the biofilm. The biofilm is the slimy layer formed by the buildup of indivdual cells. It keeps colonies close to food sources - attached to the back of your throat, on rocks in a flowing river - you get the picture. It can't hurt that Dr. William Costerton, who discovered biofilms in 1978, is a member of NBY's Scientific Advisory Board.

Their lead drug candidates are kicking a$$ in their trials, proving 95%-100% effective against MRSA and other bacterial infections for which there is no approved treatment. I repeat, FOR WHICH THERE IS NO APPROVED TREATMENT. The MRSA market currently has an estimated $500 million unmet need (antibiotic market was an estimated $1 billion in 2010). To highlight just how important the FDA, CDC, US government, as well as European health agencies and governments are taking the issue, they called an emergency meeting towards the end of 2010 (sorry I don't have the date but Pollack wrote an article for the NYT if you want to do a search). They discussed their concerns for limited R&D into antibiotics and pledged increased funding for such research. Funding or not, NBY will be just fine. Why? Partnerships!

NBY is currently partnered with dermatology giant Galderma and eye care behemoth (monopolist might be better) Alcon. If you have any eye-care product, such as eye drops or contact solution, take a look at the bottle. $20 its from Alcon. These giants were quick to hop onto the NBY train because they have seen the antibiotic-resistant bacteria problem coming at them head on for years.

Another key stat working for NBY is the time it takes to conduct a trial. In April 2008 SeekingAlpha interviewed NovaBay Pharmaceuticals CEO Dr. Ron Najarfi. When asked why long term investors should be attracted to his company Dr. Najarfi answered:

What's really important for a potential investor to recognize is that the time and the cost of developing anti-infective drugs is much less than other therapeutic areas such as cardio-vascular or cancer. The chance of anti-infectives becoming a product once they make it through Phase I is very high historically. The exact time that it takes to do a clinical trial is much faster. It is weeks, not years, or sometimes maybe a month, not years, and the end points are much more delineated by the regulatory bodies, FDA or EMEA (Seeking Alpha, 2008).

 

It's on you Fool    So check out their website, research the company, and at the very least keep NBY on your watchlist. It is the largest holding in my portfolio, in @$1.70. The recent pop to $2.30 may just be temporary as their trials are still in Phase II. I wouldn't be surprised if it comes back down below $2.00. Either way, it is still a good buy at this current price (I actually put another $500 in at $2.20). Also, as I disect some small cap pharma companies in these blogs - yes, I promise more soon - keep in mind that the industry is changing this year. Major players such as PFE, GSK, etc will lose an estimated $50 billion in home-run drugs this year as patents expire. They do not have $50 billion in drugs waiting in the pipeline either. Oh, and they are cash rich. PFE has ~$20 billion in cash. MEANING: they will need to acquire smaller companies with large-margin drugs to make up for it!!! (also an article from NYT, published yesterday or today 3/7/2011, search it). Yes, they are cutting workers and merging, but that can only happen for so long. KERX, NBY, OGXI, CRMD, etc are possibly on the radar.  

 

As with any small cap pharma company share dilution is a real scenario for investors (KERX recently shelved $100 million in warrants.) It is good in that it brings more people to the party, but you might lose your favorite hat. I think the acquistion frenzy that could take place this year will offest any dilution drawbacks. That doesn't mean you shouldn't set price points and try to get in as low as possible. Once one giant moves, ever so slowly, the others will be close behind (remember the PAR bidding war for its cloud-computing business? mmmm). NBY doesn't have many shares out, but their potential market cap is ginormous. I won't post the number because I cannot verify it from a reliable source (I can't find the source), but its a big one.

Thoughts, comments, corrections, kudos are welcome. My next post will be KERX, OGXI, or CRMD. KERX is having a lousy limbo year while Phase IIIs are underway, so I'm not so thrilled to write about them. CRMD isn't on CAPS, so they might be an interesting write-up. OGXI is at a VERY salivating price right now. So heads up for CRMD or OGXI.

(I recently wrote a paper on the future of antibiotics and I can email it to interested people if you email me at steelcurtain_08@yahoo.com. Just throw "Blackngold NBY" in the subject line.)

BlacknGold (is back)