Wedbush Top Analyst Downgrades and Chops Price Target on Novan Inc (NOVN); Phase 3 Miss Places Entire SB204 Program in Jeopardy


Novan Inc (NASDAQ:NOVN) stock torpedoed on Friday after the biotech firm’s lead pipeline drug for the treatment of acne vulgaris failed its Phase 3 trial in moderate to severe acne. Though another of NOVN’s Phase 3 trials reached statistical significance, from Wedbush top analyst David Nierengarten‘s eyes, the miss is not a minor drawback, as it places the entire “future of SB204 program in doubt.”

Investors seem to agree, as on Friday, they were running for the hills, sending shares crashing 74%. In reaction to the disappointing top-line read-out, the analyst downgrades NOVN from an Outperform to a Neutral rating on shares of NOVN while slashing the price target from $33 to $6, which represents a 23% increase from where the stock is currently trading.

Nierengarten notes, “With most acne products approved on the basis of two successful Ph 3 trials, we do not believe SB204 would be approvable with latest dataset. The studies were well-powered, with 1,300 patients enrolled in each trial, and vehicle response was not particularly high; we attribute the failure to the inconsistencies in responses to nitric oxide-based therapy and general variability to treatment that makes acne a challenging indication. NOVN did not hold a call, and said it would provide an update after analyzing the data; given the cost of running another Ph 3 program and the limited benefit observed with SB204 (even in the successful trial), we believe it is doubtful the program will be continued.”

Moreover, “cash is a concern,” continues the analyst, who highlights an $11 million upfront payment the firm was granted for recent outlicensing of Japanese rights to SB204. Nierengarten expects Novan to close the end of the first quarter of 2017 with $34 million in cash, or about $2 per share. In wake of the Phase 3 miss, the analyst cuts his expense projections down by 20% to 30% per quarter for the rest of the year.

However, not all hope is lost. Novan has two top-line data readouts waiting in the wings from SB208 in athlete’s foot and more data from the firm’s “successful” Phase 2 trial of Sb206 in warts, with results likely to emerge next quarter.

Looking ahead, “With Ph 3 failure for lead SB204, and limited cash reserves, the future for program is murky; although we view NOVN’s remaining pipeline with promise, we are moving to sidelines given near-term uncertainties,” Nierengarten surmises.

David Nierengarten has a very good TipRanks score with a 51% success rate and a high ranking of #70 out of 4,378 analysts. Nierengarten earns 29.5% in his yearly returns.NOVN Chart

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