Novan Inc (NASDAQ: NOVN) is soaring in the market today with mid-day gains as high as 65%. The gains follow the company’s announcement that it has secured $35 million in non-dilutive capital.
While the story seems great at first, and is much needed, this non-dilutive capital didn’t come without a cost, and in the long run, that cost may be quite hefty. Let’s dive into the news:
NOVN Announces Non-Dilutive Funding
As mentioned above, Novan is having a great day after announcing that it has secured $35 million in non-dilutive capital. In a press release issued early this morning, the company said that $25 million of this funding has been made available immediately.
The other $10 million that was secured as part of the agreement is contingent upon achieving positive Phase 3 clinical trial results for molluscum contagiosum. Should the results be positive, the company will be able to access the additional funding.
Why NOVN Stock Gained More Than 65% On The News
There multiple reasons that the news today led to so much excitement among investors. Of the most important include:
- NOVN Was Cash Starved – First and foremost, Novan was working on the last bit of capital that it had in the bank. If the company was lucky, it would have had funding to get through a month or two. However, with the $25 million accessible immediately, the company has the funding it needs to get through several positive catalysts that are likely ahead. That’s exciting news for a company that was grabbing for straws from a financial perspective.
- Pivotal Trial On Its Way – With the funding, the company plans on initiating its Phase 3 trial soon. In fact, it is expecting to start enrolling for the trial in May. Considering this, there are several trial related catalysts ahead. Moreover, if all goes well, the data will likely support a New Drug Application with the FDA, potentially moving the company into commercial stages.
The Funding Was “Dilution Free” Not “FREE”
There is a difference between free capital and dilution free capital. For example, capital provided through grants with no strings attached is free money. However, that’s not the case here. The funding announced is dilution free, but will likely prove to be quite costly in the long run.
The funding was provided by Reedy Creek Investments, which just so happens to be the largest holder of NOVN shares with holdings of about 15% of the company’s outstanding stock. In return for the funding, Reedy Creek Investments will receive 10% of any North American economics, including upfront payments, milestones and royalties, received by Novan with regard to SB205. This is the company’s treatment for molluscum contagiosum which will be headed into Phase 3 clinical trials.
Reedy Creek will also receive 20% of any North American economics, including upfront payments, milestones and royalties, received by Novan for SB414. This is the company’s treatment for atopic dermatitis. Finally, the company will also pay the investor 20% of any North American economics associated with SB204, the company’s treatment for acne vulgaris.
To add insult to injury, Reedy Creek is also entitled to 25% of upfront payments or milestone payments received by NOVN until it has received payments equal to the $35 million funding amount provided.
So, while this transaction will provide the company with the funding it needs to get into Phase 3 trials, the painful reality is that it will cost tens or even hundreds of millions in the long run.
While the funding announced by Novan was non-dilutive, it was also quite costly, should the company get into any partnership agreements or break into commercial stages for any of the pipeline assets listed. While the painful reality is that this is an expensive move, it was also necessary. With little by way of cash on hand and on the verge of a breakthrough, NOVN needed to find a way to access funds and non-dilutive transactions are generally praised by the investing community, as seems to be the case here.
Although the way the company got the cash leaves a bad taste in my mouth, I have to admit that it’s a good thing they got their hands on it. All in all, NOVN may have more room to climb ahead.