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Novan Files for IPO to Finance ‘Nitric Oxide on Demand’ Skin Drugs

Xconomy Raleigh-Durham — 

Novan, a company researching ways to harness nitric oxide for drugmaking, has filed for an initial public offering to fund clinical work on treatments for an array of skin conditions.

Durham, NC-based Novan set a preliminary target of $60 million for the IPO, a figure that may change as the company works through how many shares it will sell and at what price. In its prospectus filed with securities regulators on Wednesday, Novan says proceeds from the stock offering would fund its lead drug, a topical gel for acne known as SB204, all the way through an application for FDA approval, and help push four other compounds in its pipeline forward, as well. The company has applied for a Nasdaq listing under the stock symbol “NOVN.”

The IPO filing comes eight months after Novan raised more than $30 million for late-stage clinical trials. SB204 is in two Phase 3 clinical trials for acne that should produce data in early 2017. If all goes well in those trials and Novan completes a planned long-term safety study, the company could apply for FDA approval by the end of next year. Data from mid stage trials of another drug, SB206, a gel being studied as a treatment for the warts caused by human papillomavirus (HPV), are expected later this year.

The dermatology market was $28 billion in 2014, Novan says, citing IMS Health data. But Novan says innovation in dermatology has been stagnant and some treatments for skin conditions, such as antibiotics, raise concerns about contributing to drug resistance. Novan believes its drugs can provide an alternative to such acne treatments.

Novan says it has figured out a way to administer nitric oxide, a volatile compound that is normally a gas, in a solid form. The compound has been researched in applications such as treating microbial diseases and managing inflammation. Right now, the only FDA-approved use of nitric oxide is the treatment of newborns who have pulmonary hypertension, or high blood pressure in the arteries to their lungs. Nitric oxide is administered from a gas tank in this setting, which makes it difficult to use as a treatment for other types of diseases.

By storing nitric oxide in a solid form, Novan says its “nitric oxide on demand” technology, called Nitricil, can be used to form new drugs that make delivery of the compound stable, targeted, and safe. Novan says it has a library of more than 200 Nitricil compositions, each with a unique way of releasing nitric oxide. The company says it focused on dermatology because its technology can work with the body’s own nitric oxide producing capabilities; each of the skin’s three layers release can produce and release nitric oxide at different rates.

“Our platform allows us the ability to tune the release profile of nitric oxide and trigger its wide range of beneficial effects when host systems fail or are overwhelmed by invading microorganisms,” the company says in its filing.

Nitricil was originally developed in the laboratory of Mark Schoenfisch, a chemistry professor at the University of North Carolina at Chapel Hill. Schoenfisch co-founded Novan in 2008 with Nathan Stasko, who was one of his graduate students. Stasko is now the president and CEO of the company, which has an exclusive license from UNC to develop and commercialize the nitric oxide technology.

Novan has spent more than $64 million on R&D since its inception, according to the filing, and has taken an unusual financing path for a biotech. Rather than rely on venture capitalists for funding, the company’s first outside investment came from Neal Hunter, the co-founder and former CEO of Durham LED technologies company Cree (NASDAQ: CREE). Novan’s work has since been funded primarily by wealthy individuals, many of them introduced to the company by Hunter, who became chairman of Novan’s board of directors. Speaking at UNC’s Kenan Flagler Business School in April 2015, Hunter said that the company’s first $40 million was raised from angel investors in North Carolina’s Research Triangle. “What does that say about the Triangle? [There is] a lot more money around here than we think,” he said.

Novan brought on its first institutional investment in March 2015, when it raised $50 million led by Malin (ISEQ: MLC), an Ireland-based life sciences investment company. Hunter stepped down from the board in February after the closing of Novan’s most recent financing, which topped $32 million. A securities filing shows that 172 investors participated in that December 2015 round, suggesting that the company stuck with its strategy of raising money from individuals rather than institutions. Malin is Novan’s largest shareholder, with a 16.25 percent stake, according to the prospectus. Hunter owns 13.83 percent of the company.

Novan didn’t start out as a dermatology company. It initially aimed to use its technology as an antimicrobial coating for medical devices, which Stasko told me in 2009 would be the fastest way to market. Medical devices featuring Novan’s nitric oxide technology may yet reach the market, but under a different company. In its filing, Novan disclosed that late last year it formed a separate, privately held company called KNOW Bio and gave it Novan’s non-dermatological assets, intellectual property valued at $1.8 million. Novan also provided the new company with $5.2 million in working capital.

Any new investors in Novan won’t have a stake in any non-skin products that emerge from the new company. But Novan does have the right of first negotiation to license from Know Bio any dermatology-related technology the new company develops within three years of the separation agreement.

Novan’s filing comes as biotech IPOs haven’t been quite as easy to pull off as they were during the boom from 2013 through 2015, according to Glen Giovannetti, global biotechnology leader at Ernst & Young. Speaking in Durham Wednesday at an event to launch the firm’s annual Beyond Borders report on the life sciences industry, Giovannetti said the IPO window is not shut, but companies that successfully go public are doing so with significant insider participation in the stock offering. “Deals can still get done but it’s a much more challenging environment,” Giovannetti said.

Examples of recent biotech stock offerings that required inside help include the $70 million IPO of Watertown, MA-based Selecta Biosciences (NASDAQ: SELB) and Syros Pharmaceuticals (NASDAQ: SYRS), a Cambridge, MA-based biotech that raised $50 million in its IPO.

Novan does not yet have any FDA-approved products. The company has previously received revenue from government contracts, including a National Institutes of Health grant to study Nitricil for antimicrobial catheter coatings, as well as a Department of Defense contract to research the technology as a potential topical wound treatment for the military.

As of June 30, Novan had $19.6 million in cash. Even if Novan raises $60 million in its IPO, it will need more money to bring its products to market. Novan spent $22.3 million on R&D in the first half of 2016, more than double its R&D costs for the same period last year. Besides the acne and HPV drugs, Novan is also studying drug candidates for fungal infections of the skin and nails, psoriasis, and eczema.

Photo of downtown Durham sunset courtesy of Flickr user David Mooring under a Creative Commons license.