Novan, Inc. (NASDAQ:NOVN) Q4 2022 Earnings Call Transcript

Novan, Inc. (NASDAQ:NOVN) Q4 2022 Earnings Call Transcript March 30, 2023

Operator: Hello and welcome to the Novan Inc. full year 2022 update conference call and webcast. As a brief reminder, all participants are currently in a listen-only mode. If anyone requires Operator assistance during the event, please press star then zero on your telephone keypad. Following the presentation, there will be a question and answer session. Note that this webcast is being recorded at the company’s request and that 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’s 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, Chairman, President and Chief Executive Officer. Please proceed.

Paula Brown Stafford: Thank you Operator. Before I begin my formal presentation, I would like to take a moment to recognize two important individuals to me and to the full Novan team. Both individuals recently passed away: first, Dr. John Palmer, one of our original board members and shareholders passed away in November, and second, Mr. Bob Ingram, previous Chair before myself of the Novan board, a decade-long member and shareholder and an icon in the pharmaceutical industry passed away this past weekend. I ask for just a moment of silence in their memory. Thank you. Now I would like to thank our stakeholders and analysts for joining our annual earnings webcast and general business update. Novan is building a premier medical dermatology company that is focused on developing and commercializing innovative therapies for diseases of the skin.

In January, we submitted our NDA for berdazimer gel 10.3% for the treatment of molluscum contagiosum. Our filing has been accepted for review and we were provided our PDUFA goal date of January 5, 2024. We are in the review cycle with nine months remaining, hence we anticipate a potential FDA approval in the first quarter of 2024 if not before. Importantly, we could be the first FDA approved prescription treatment solution for molluscum. Over the course of 2022 and in the first quarter of 2023, we have achieved a number of noteworthy accomplishments. We remain excited about our progress, our momentum and what lies ahead. Our NDA was filed and accepted for review with no known potential issues. This followed our submission in January which followed the completion of our CMC and analytical testing, which we had shared with you, which was required for submission.

Prior to that in July, the results from our pivotal Phase III trial were published in JAMA Dermatology, and to start 2022 we acquired EPI Health, which had marketed products and a commercial capability to launch berdazimer gel 10.3% if approved. We firmly believe that Novan remains a compelling investment opportunity. Speaking of berdazimer, berdazimer sodium, our active pharmaceutical ingredient, is a new chemical entity, and berdazimer gel 10.3% is a novel topical nitric oxide-releasing medication for viral skin infections. Our NDA is based on a Phase III program that demonstrated clinical evidence of efficacy and a favorable safety profile. As I mentioned, clinical trial data from the B-SIMPLE4 trial were published in 2022 in JAMA Dermatology and, 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 contagiosum has no standard treatment of care today. More than 70% of molluscum patients go untreated. The market is prime for a topical self-administered or caregiver administered therapy. The market potential is large with 6 million patients in the U.S. today and approximately one million new patients annually. Approximately 90% of pediatricians have a wait-and-see approach. We believe the lack of at-home options results in many undiagnosed cases. Berdazimer gel 10.3% has the potential to become a first line therapy for molluscum. Dermatologists and communities will lead the way and we expect pediatricians to follow. As I mentioned, there are no FDA approved treatments today. Our NDA is in the review cycle and we are expecting the review to be complete by the goal date of January 5, 2024, again just nine months away.

As we respond to FDA information requests, we are also investing in a successful launch in 2024. Specifically, we are planning to build awareness and excitement for our potential product among our customers and our employees to educate healthcare providers about the disease and the treatment options to deliver the best possible access program. Based on our market research, we expect favorable access with payors, to prepare our existing commercial organization and to protect our proprietary platform technology with patents, both nationally and globally. We are committed to the medical dermatology community with our diverse portfolio of promoted products and with strong development pipeline. Our commercial unit is built to expand disease states within the medical dermatology area, such as molluscum, and to other specialty areas such as pediatrics.

I’ll now hand the call over to our Chief Operating Officer, John Donofrio to provide an update on the successes of our commercial unit in 2022. John?

John Donofrio: Thank you Paula, and good morning everyone. Our commercial organization provides an established foundation for the potential berdazimer launch with an ideal complement to our R&D and manufacturing expertise. Our commercial capabilities include an integrated platform with supply chain, patient access and distribution, with a sales and marketing team ready to scale for the future. We start with supply chain management of our third party suppliers along with an optimized demand management process and distribution capability to both wholesalers and direct network pharmacies. Our market access strategy focuses on favorable insurance coverage volume complemented with patient affordability programs to ensure patients have affordable access to our medications.

Our dedicated marketing team has significant experience in dermatology with demonstrated success with brand and disease state messaging and education. Our team has extensive launch experience across numerous therapeutic areas both in competitive selling and medical education, providing a solid foundation for our potential future launches. We have also built strong professional relations engagement with our healthcare practitioners and key opinion leaders across the country. Our sales organization consists of four regions in 42 territories with the ability to reach more than 4,000 healthcare practitioners across the country. We’re extremely excited to prepare for the potential launch of berdazimer gel 10.3%. While we’re excited about the future, let’s review our promoted product growth in 2022.

I’m pleased to report that our promoted products delivered strong double digit prescription growth for the full calendar year. All three brands exceeded targets established at acquisition and each outperformed the growth in their respective markets. We are also pleased to see similar strong double-digit prescription growth for the fourth quarter, demonstrating our continued focus on execution of our commercial plans, strong prescriber base, and solid promoted product portfolio. I will now provide additional highlights in each of our promoted products. Rhofade is the number one prescribed treatment for persistent facial erythema – PFE, or facial redness, owning approximately 90% of the market. Our growth strategy is to continue the expansion of the PFE market and increase the number of rosacea patients treated for redness.

Q4 prescription volume of 40,791 prescriptions was just shy of an all-time high set in Q2 and total prescriptions for December exceeded 15,000, the highest ever monthly total for the brand. We are also extremely excited about the opportunities outside the U.S. for Rhofade, starting in Japan with strong potential to expand in other markets. As we complete our first full year on the market with Wynzora, we have established a strong first base of prescribers. We have a partnership in collaboration with MC2 Therapeutics for the sales and marketing of Wynzora in the U.S. for plaque psoriasis. As we’ve covered in our previous calls, a new competitor launch in Q3 has challenged the use of topical steroids for psoriasis. You can see the impact in the reduction of total prescriptions from Q2 and we have primarily remained flat for the second half of the year.

However, despite the strong competition, Wynzora managed to finish Q4 with no loss in market share within the topical psoriasis market, and today Wynzora outperforms all competitors on average number of total prescriptions per writer, or productivity. We are confident in the continued use of topical steroids for the treatment of plaque psoriasis going forward and the benefits that Wynzora brings to patients who need and desire quick relief. Our growth strategy continues to focus on increasing brand awareness and the continued expansion of our writer base. MinoLira is an oral minocycline for the treatment of acne, offering weight-based flexible dosing for patients with the first-ever biphasic delivery system. We’ve seen significant growth in prescriptions since increasing our promotional efforts on the brand this year.

We delivered our largest growth in MinoLira prescriptions during the third quarter and are extremely pleased with the 68% growth in Q4 versus last year. The reduction in Q3 all time high was in part due to seasonality and competitive supply challenges in Q3. MinoLira’s strong growth in 2022 was a highlight in the overall market that declined 10% throughout the year. Overall, we’re extremely pleased with the performance and continued prescription growth of our promoted brands. Thank you, and I will now hand it over to John Gay, our Chief Financial Officer.

John Gay: Thank you John. Our December 31, 2022 year end represents our first fiscal year in which we have fully consolidated results from our commercial business. I’ll remind you that when I refer to year-to-date figures, this represents 295 days of activity based upon our March 11 acquisition. I would like to let our listeners know that we are not yet in a position to provide guidance as it relates to Q1 and full year 2023 revenues EBITDA. As of December 31, our year-to-date commercial business reported total revenues of $21 million. Net product sales included in our commercial business’ total revenue was $11.5 million for Rhofade, $1.6 million for Wynzora and $1.6 million for MinoLira, with other products in our portfolio contributing $1.1 million year-to-date.

In addition, our commercial business also reported licensing and collaboration revenue of $5.2 million comprised primarily of the $5 million out-license agreement for Rhofade signed in December of 2022 for the Japanese territory with Sato Pharmaceuticals. For our promoted product portfolio, Rhofade prescriptions have continued to grow with a year-over-year increase of 33%. We continue to see market opportunity for improvement and Wynzora, which John mentioned launched in Q3 of 2021. In addition, MinoLira prescriptions have continued to grow with a year-over-year increase of 61%. As of December 31, 2022, our year-to-date R&D business reported total revenues of $2.7 million. This amount related to the Sato agreement related to the Japanese territory out-license of two of our product candidates, including berdazimer gel 10.3%.

I will now provide a bit more detail on our fiscal year 2022 financial results, which expands on the information filed this morning with our earnings release and in our annual report on Form 10-K. Total cost of goods sold was $7.4 million for the year ended 2022. 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 year ended December 31, 2022, we recognized net product revenue related royalty expense of $4 million within cost of goods sold. This amount included our current obligations to third parties in addition to amounts related to the accounting presentation for the MC2 license agreement of $1.4 million.

In addition, $1.25 million was included in cost of goods sold as part of the Sato Rhofade license and collaboration upfront payment for the Japanese out license agreement due to a third party. Our R&D business incurred research and development expenses of $16 million for the year ended December 31, 2022 compared to $20.4 million in the prior year. The decrease of $4.6 million was primarily driven by decreased clinical costs associated with the timing of the B-SIMPLE4 trial totaling $7.7 million, offset by an increase of $3.1 million of costs related to regulatory activities, stability testing, CMC and material costs to support our berdazimer gel 10.3% NDA filing. On a consolidated basis, SG&A expenses were $34.1 million for the year ended December 31, 2022 compared to $12.3 million for the prior year.

The increase of $21.8 million was primarily due to $13.7 million of selling, general and administrative expenses incurred to support the conduct of our commercial operations acquired during the year, $4.7 million of transaction-related expenditures related to the EPI Health acquisition, $1.1 million of investment costs related to the SB206 pre-launch strategy and commercial preparation, and $2.3 million of facility and depreciation, personnel and other general and administrative costs. For the year ended December 31, 2022, we also had $2.9 million of other income, which was composed of a $4.3 million gain on debt extinguishment related to the promissory note issued in March of 2022 in connection with the EPI Health acquisition, partially offset by $1.4 million of interest expense incurred prior to the settlement of that promissory note in July of 2022.

On a consolidated basis, total revenue was $23.7 million for the year ended 2022 compared to $3 million for the prior year. Consolidated net loss was $31.3 million for the year ended 2022 compared to $29.7 million for the prior year. Our commercial business net loss for the year ended 2022 was $1.8 million, and our R&D business net loss for the year was $29.5 million. As it relates to our balance sheet as of the end of the year, we had a total cash balance of $12.3 million and accounts receivable totaling $22 million. Since December 31, 2022, we closed a registered direct offering for gross proceeds of $6 million. We receive the Sato upfront payment of $5 million related to the Rhofade out-license agreement, and we have continued to use our $15 million accounts receivable factory facility executed in December of 2022, which provides working capital in an amount that is up to 70% of our commercial business’ gross eligible receivables.

We will need additional funding to support our plan and future operating activities in our berdamizer gel 10.3% product candidate and our business in general. We believe that our cash balance as of December 31, 2022 plus expected receipts associated with product sales from our commercial product portfolio and the proceeds of the March 2023 registered direct offering will provide us with adequate liquidity to fund our planned operating needs into the latter part of the second quarter of this year. Variability in our operating forecast driven primarily by commercial product sales, timing of operating expenditures, and unanticipated changed in net working capital may impact our cash runway. We are tirelessly working to obtain the additional funds necessary to get to a potential approval and launch of berdazimer gel 10.3%, if approved, including evaluating potential 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 through a broad range of financing strategies and other strategic alternatives. Other potential funding activities may include equity financing, convertible debt, or capital from other sources, or traditional debt financing. With that, I will turn it back to Paula.

Paula Brown Stafford: Thank you John Gay, and thank you John Donofrio. Listeners, you’ve heard an update regarding our lead asset, berdazimer gel 10.3%, our commercial operations and our financial update and status. Novan is in a solid position to succeed with a potential approval and the infrastructure to support a launch. We are therefore focused on driving towards the potential approval of berdazimer gel, on aligning our commercial infrastructure to support a potential launch, on continued growth of our marketed products, Rhofade, Wynzora and MinoLira, and on pursuing additional ex-U.S. out-licensing opportunities. In closing, we at Novan remain focused and excited for our future. Thank you, and Operator, you may now open the line for questions.

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Q&A Session

Operator: Yes, thank you. At this time, we will begin the question and answer session. The first question comes from Jonathan Aschoff with Roth.

Jonathan Aschoff: Thank you. Good morning guys, and congrats on the increasing sales. You guys have definitely talked about some of the special items that have led to, I guess, like a 74% COGS for the fourth quarter, but what can you say about gross to net for 2023, and also should R&D drop substantially in that year–I mean, in this year versus last year?

John Gay: Yes, thanks Jonathan, good morning. This is John Gay. Thanks for the question. To your point, making sure I touch on all of them, COGS, you’re correct – there is some atypical activity for the current quarter as it relates to the Sato agreement. As it relates to your question on gross to net, I’ll give a little bit of background, as you know, but I think it might be helpful. The components of gross to net, or GTN deductions could really be categorized in two parts: first, the actual activity based upon the number of prescriptions filled by our patients in a given period, and second estimates used to project future activity for prescriptions not yet filled for patients as the channel inventory held at wholesalers were for our pharmacy-direct customers.

But both components, both of those GTN components, consider them as–you know, if you think about the most significant line items for those deductions, it’s comprised of payor rebates, co-pay coupons, and reserves for products. Each period, we update our gross to net deductions for both parts, both the actual and the estimated. The actual activity can vary based upon the numbers and method of how prescriptions are effectively filled by our customers – for example, what insurance program they’re covered by, what healthcare plan they’re on, and which PBM is utilized. In addition, the mix of coverage of PBM versus coupon will vary by the underlying patient, so this product mix and changes period over period will impact the actual GTN deduction and may up or down over time.

The estimated activity for that part of the gross to net is going to also vary based on how we utilize historical trends paired with assumptions to project future deductions based on channel inventory, open lots and other factors. During the fourth quarter, you’re right – we saw TRx increase for certain products, for Rhofade for example, but we also saw a decline in the period-over-period gross margin for that. This was based upon the gross to net deductions, based on actual activity as it relates to payors and coupon mix, and our estimates which are based upon historical trends and year-end accounting adjustments. Both the commercial and finance teams are working closely with our partners to work towards optimizing both the payor and coupon mix, if you will, and we’ll continue to focus on improvements in the near term.

John Donofrio, would you have any thoughts on that?

John Donofrio: Yes, thanks John. Jonathan, thanks for the question, too. I think as you know, probably the industry issue across the board with some challenges, and we have seen some increased rebates and some challenges at the pharmacy, but we’ve already started to implement in 2023 a better partnership with the PBMs to ensure that the coverage that we have acquired is actually pulled through at the pharmacy level. We’ve also looked at a copay card redesign to ensure the business rules that we set in place, to make sure there’s access but also profitability on our scripts implemented, and we’re also looking to implement an e-hub service to help facilitate the scripts and ensure that our scripts go through, to follow the coverage that we’ve won and earned as we focus on 2023. I think there’s some critical operational programs that have already been started or that will be implemented in Q2 to ensure you see that kind of be just a bump for Q4 versus an ongoing trend.