The following document has been provided by OCuSOFT for your consideration. It serves as their reasoned response to my recent investment thesis on NovaBay dated, April 20th 2015. It includes what I believe to be important rebuttals to some of the assertions made by NovaBay management and key opinion leaders. As you well know, our due diligence with respect to the equities we invest in is ongoing and ever incomplete. A fuller picture is provided here.
The Facts about Eyelid Cleansers—Contrasting OCuSOFT and NovaBay
A lot has been written of late regarding eyelid hygiene and eyelid treatment options. The majority of this attention has been directed to OCuSOFT Inc., the market leader and a new entry, NovaBay Pharmaceuticals. NovaBay has introduced a 0.01% Hypochlorous acid Rx formulation in contrast to OCuSOFT’s family of OTC cleansers including OCuSOFT’s own Hypochlorous acid in a 0.02% concentration. With so much hype going on, it’s important to get the facts straight.
OCuSOFT Inc. is a privately-held eye and skin care company with an established reputation for innovation in eyelid hygiene. Recognized as the market leader and #1 recommended by eye doctors, OCuSOFT® Lid Scrub® Eyelid Cleansers are intended for daily use and are available in pre-moistened pads or foam pump dispensers for easy application. Their mild, non-irritating formulations are 16X milder than baby shampoo (which was the standard of care until OCuSOFT). OCuSOFT® Lid Scrub® Original Formula is a surfactant based cleanser intended to be used on the outer eyelid and lid margins and works by removing excessive oil, debris, and desquamated skin from the eyelids. OCuSOFT® Lid Scrub® PLUS offers proven antibacterial properties—killing in as little as 60 seconds! It is important to note, however, that the time kill rate for bacteria is actually less important to patient treatment than convenience and compliance. Oral antibiotics for example are taken for 5-10 days so whether its seconds or hours, is of little importance to the clinician. What is important is whether they are 1) Effective; 2) Economical; 3) Convenient.
Effectiveness, cost and convenience are the barometers by which patient satisfaction is measured. The reality is healthcare costs have risen to a level where patients often have to prioritize pharma treatments. This article seeks to clarify misstatements made in the recent press along with critical omissions. Consider then the relationship between surfactant cleansers and Hypochlorous Acid (HOCL) products.
As mentioned, NovaBay Pharmaceuticals is now offering an eyelid cleanser, Avenova™, which utilizes HOCL in a 0.01% concentration. OCuSOFT is now offering HypoChlor™ in a 0.02% concentration of HOCL. Avenova™ is marketed as “pure” and proceeds to differentiate its HOCL from other HOCL (there are many) products—including OCuSOFT. The problem is the Food and Drug Administration (FDA) makes no such distinction.
Hypochlorous Acid OTC vs. Rx Claims—Understanding the Difference
The FDA requires that Hypochlorous acid is registered as a medical device which may be marketed by the filing company as either a prescription (Rx) or OTC product. The basis of Rx vs. OTC relies on the claims that can be made of the product as contrasted with ingredient concentration. More specific claims can be made if the product is marketed as an Rx (“… for use under the supervision of healthcare professionals…; for moistening absorbent wound dressings and cleaning minor cuts, minor burns…” etc.) however, more general claims are made if the product is OTC (“…immediate care of minor cuts, minor scrapes and minor burns.”) Generally speaking, the Rx vs. OTC has nothing to do with percentage of principle ingredient. For example, OCuSOFT® HypoChlor™ Solution and OCuSOFT® HypoChlor™ Gel both contain 0.02% Hypochlorous acid and are OTC. Other company’s brands are available at lower strengths than OCuSOFT® HypoChlor™ yet one may be Rx and yet another OTC.
Consider the statement made from an earlier post when referencing OCuSOFT’s Hypochlor™: “The problem with this is three-fold. First, a product that contains .02% hypochlorous acid is comparable in name only. The impurities found in such formulations (Avenova™ is a special NeutroPhase™ spinoff of 100% pure hypochlorous acid) are often irritating to the eye. So while this makes for a nice headline it doesn't make for a better product. Yes, it too attacks microbial invaders but to what extent and how fast is left to our imagination. Most importantly, OCuSOFT's Hypochlor™ can't be labeled, and is not, prescription grade.” The statement referring to other HOCL products as “often irritating to the eye” is factually incorrect as HypoChlor™ was tested for use directly in the eye and received a “0” perfect non-irritating score. It should be noted that all these HOCL products are intended for use ON the eyelid…not in the eye, however, in the case of inadvertent spillage into the eye(s), it is comforting to know Hypochlorous acids are non-irritating to the eye.
OCuSOFT® Lid Scrub® Original & PLUS Formulas Needed to Remove Oil and Debris
OCuSOFT® Lid Scrub® Original and OCuSOFT® Lid Scrub® PLUS are effective and intended for continuous daily eyelid hygiene use. The root cause of anterior blepharitis is the overproduction of oils. Mild surfactants in OCuSOFT® Lid Scrub® eyelid cleansers act to dissolve and remove oil, debris and desquamated skin. Hypochlorous acid formulas do not contain these surfactants and thus are largely ineffective in debriding the oil, scales and debris often associated with eyelid irritations. Accordingly, in the most severe cases where Hypochlorous acid might be most beneficial, it is suggested to use Combination Therapy including both a surfactant cleanser and Hypochlorous acid to achieve optimum results. In the article, “Alternative Products Available to Combat Ocular Surface Disease” that ran in the November 2014 issue of Primary Care Optometry News, Katherine Mastrota, O.D., a consultant for NovaBay herself, recommends pairing a hypochlorous acid product with a “doctor recommended surfactant product.”
OCuSOFT® Lid Scrub® Original Formula is principally a surfactant formulation and acts to remove oil, debris and desquamated skin in various eyelid conditions. OCuSOFT® Lid Scrub® PLUS contains a patented moisturizer and preservative blend that effectively eradicates seven different strains of bacteria commonly found on the eyelids without the need of prescription cleansers.
Regarding the effectiveness of OCuSOFT® Lid Scrub® PLUS, Marguerite McDonald, M.D. of Ophthalmic Consultants of Long Island and Clinical Professor of Ophthalmology, NYU School of Medicine, New York, US, goes on to say, “In a time-kill study, the anti-bacterial effectiveness of OCuSOFT® Lid Scrub® PLUS was independently tested against a variety of pathogens. In particular, S. epidermidis, a leading cause of post-operative endophthalmitis was tested. These studies demonstrated a 5.5 log reduction confirming its significant effectiveness.”
It is interesting to note that debridement claims made by hypochlorous acid products are due to the spray projectile packaging of all hypochlorous acid products rather than strength of the concentration. Significantly, none of the hypochlorous acid formulations on the market contain any surfactants to remove oil from the eyelids. Most expert ophthalmologists and optometrists agree that the surfactant components of existing eyelid cleansers are necessary to remove excessive oil, debris and desquamated skin from the eyelids. Since OCuSOFT® Lid Scrub® PLUS contains anti-bacterial properties, in cases of bacterial blepharitis treatment, this ONE product will effectively treat most patients.
Hypochlorous Acid for Severe Eyelid Treatment
The role of hypochlorous acid in eye care is not for continuous everyday eyelid cleansing, but instead used as an adjunct to OCuSOFT Lid Scrub cleansers in severe cases only. Only in such severe cases might Hypochlorous acid (OCuSOFT® HypoChlor™) be beneficial. In such cases, OCuSOFT suggests the use Combination Therapy including both a surfactant cleanser and Hypochlorous acid to achieve optimum results. (It should be noted that such combination therapy is not necessary for the vast majority of patients.) OCuSOFT® HypoChlor™ Gel is ideal in these cases since it can be applied and left on overnight in order to expedite healing.
Price Tag and Degradation Rate
In order to receive a 510-K Medical Device clearance from the FDA, the product must demonstrate bioequivalence with the predicate devices. All hypochlorous acid products that have received 510-K clearance and have identical bacterial kill rates using the USP51 test and identical principle compositions. Again, from an earlier post: ”…you wouldn't be getting the efficacy of pure hypochlorous acid with its 14 years of product development, absence of sodium hypochlorite found in Chlorox bleach, and 3-year shelf life.” This is incorrect. All hypochlorous acid products are manufactured similarly. Chlorine in water splits into two forms, Hypochlorous Acid (HOCl) and Hypochlorite Ion (OCl-). At the high pH the chlorine provided by bleach contains a maximum of Hypochlorite Ion. The chlorine produced by electrolyses or chemical reaction contains a maximum concentration of Hypochlorous Acid (HOCl).
How much of each is present in a chlorine solution is totally dependent upon the pH of the solution. As pH rises, less Hypochlorous Acid and more Hypochlorite Ion is in the solution. As the pH rises, less germ killing power is available. The ideal pH of a disinfecting chlorine solution is a pH of 6-7 which is where most HOCl products range.
The shelf-life of NovaBay’s Avenova™ is 3 years, however, once the product is opened, its equilibrium shifts, chlorine gas is released and it degrades into saline after 30 days. Therefore, one bottle of Avenova™ only lasts one month. Compare this to OCuSOFT® HypoChlor™ that has an 18 month shelf-life and stability either opened or unopened. Since we believe that OCuSOFT® HypoChlor™ should only be used as an adjunct to eyelid cleansers and for severe cases only, OCuSOFT® HypoChlor™’s 2oz. bottle could last a patient for 3-6 months. Once the eyelid irritation is under control within the first 2 weeks of treatment with OCuSOFT® Lid Scrub® Plus and HypoChlor™, then the patient can switch to a low cost maintenance regimen of OCuSOFT® Lid Scrub® Original.
A minimum order of Avenova™ on-line through NovaBay’s website is 3 bottles at $30 each in 1.33 oz. Annual treatment with Avenova™ would cost at least $360. Compare this with the recommended therapy of OCuSOFT® HypoChlor™ ($21.95), OCuSOFT® Lid Scrub® PLUS® ($20) for the first two weeks of treatment, then OCuSOFT® Lid Scrub® Original monthly thereafter ($20 for a 90 day supply 7.25 oz. bottle) equals $121.00 per year. This is a savings to the patient of 66% using the OCuSOFT preferred therapy.
Doctors have long treated blepharitis and lid disease by recommending mild cleansers with surfactants (baby shampoo initially, then commercial lid cleansers such as OCuSOFT® Lid Scrub®) and prescribing antibiotics when necessary. Although most antibiotic prescriptions will kill the primary bacterial flora found on the eyelid, a surfactant cleanser was, and still is, recommended first to debride the eyelid and remove excessive oil that harbor bacteria.
As many of you are well aware, I've successfully predicted two 50% plus ascents in Synergy's share price over the past 2 years. I'm now predicting that beginning May 18th, Synergy's share price will climb a similar amount and possibly higher over the coming 5 months. Please note that I'm long Synergy Pharmaceuticals (SGYP).
Always be well...
Can anyone explain this to me? The explanation I've received from my editors is that the rankings of contributors on Seeking Alpha are made based upon the total number of page views in the last 90 days. Is that anyway to to arrive at a ranking system that anyone would interpret as based upon some form of quality such as percentage of successful picks; average investment return; number of Pro articles; follower to article ratio, etc; etc; etc? Clearly not!
Question: Noting that I really like the change, how did i-Lid Cleanser become Avenova?
I’d like to answer that question by beginning with some background about this unique product. They say “necessity is the Mother of Invention” and it was the desperate need for an effective treatment regimen for the chronic condition of blepharitis that was the genesis behind Avenova. I-Lid Cleanser, now Avenova, was created by Dr. Kathryn Najafi-Tagol who is an ophthalmologist, cataract surgeon and glaucoma specialist, and NovaBay’s VP of Medical Affairs. Katy also happens to be my sister and has been involved with the development of our entire Neutrox family of products that includes Avenova, NeutroPhase and CelleRx.
The idea for i-Lid Cleanser (now Avenova) came out of Katy’s frustration with trying to help her patients with blepharitis. Antibiotic, steroid, lid compresses and detergent based lid wipes simply did not work. Blepharitis is a chronic condition and is often caused by over colonization of staphylococcus bacteria on the patient’s eyelids and lashes.
Antibiotics help, except you cannot use them continually. Steroids help, but once again prolonged use is prohibited as steroids increase eye pressure, which can be dangerous, especially in glaucoma patients. Detergent-based lid wipes make sense to eliminate the attendant encrustation, collarets, and seemingly dirty looking eyelids and lashes that are caused by this condition. However, they offered no antimicrobial activity and may irritate the skin around the eye. Furthermore, continual use of these wipes results in contact dermatitis and may not be helpful if one is suffering from dry eye.
Katy was looking for a product with rapid antimicrobial, anti-toxin, anti-lipase activity that can be used indefinitely. She found that a modified formulation of NeutroPhase, our skin and wound cleanser product, accommodated the sensitivity of eyelids. This is the formula for success that we now call Avenova.
We had initially branded the product as i-Lid Cleanser. However, this name sounded like just another detergent-base lid wipe, which we are not and wanted to distinguish our product.
Katy began prescribing the Avenova formulation for blepharitis patients with remarkable success. Even patients who have been using this product for more than two years now have not had any need to use antibiotics, steroids or any detergent-base lid wipes.
Let me tell you a bit about dry eye. In the seminal American Academy of Ophthalmology paper, “2007 Report of the International Dry Eye Workshop,” also known as the “DEWS report”, eye doctors from around the world agreed that most dry eye is caused by meibomian gland deficiencies.
In fact, most dry eye patients experience meibomian glands deficiency. Located in the eyelids, these glands produce the fine “olive oil-like” lubricant that cover the cornea and provides for a layer of protection over the water layer on the eye to prevent dryness. That’s why detergent-base lid wipes are not the solution. They rob the eyes of precious, much-needed oil that provides a protective layer on the cornea. Avenova does not contain any of these “problem causing detergents”.
Question: How is it that NovaBay was able to receive a device exemption from the FDA in order to commercialize Avenova when it's not a device?
Avenova falls under the NeutroPhase FDA regulatory clearance. As a skin and wound cleanser, NeutroPhase qualified, and was cleared, by the FDA as a 510(k) medical device. Similarly, Avenova, as a lid cleanser, is also covered under the same FDA clearance. The package insert indicates the potent and fast in-solution antimicrobial activity.
And will that exemption provide sufficient protection should there be reports of any unexpected problems with the product?
NovaBay’s Quality Assurance and Manufacturing departments are tasked with maintaining highest quality product during production and post-marketing. The product has been in use for two years and we have a fantastic safety record. In the rare instances in which we have received any sort of complaint, we use this information to improve quality and safety. Any serious adverse event are required to be included as Medical Device Reporting and shared with the FDA. To date, we do not know of any serious adverse events and no serious adverse events have been filed with Medical Device Reporting with the FDA.
Question: Having seen firsthand changes to the pricing of glasses at my most recent appointment benefiting my eye doctor, I see optometrists as being very enthusiastic about prescribing this product. What percentage of each sale is given to them?
Optometrists who stock and sell Avenova receive a healthy margin of 30-40% on the sale of this product. We view this as a “win-win” for patients who may benefit by using Avenova and optometrists who have a product that can help these patients and also support their business goals.
Question: There's obviously a cosmetic aspect to the benefit of using Avenova which would appeal to both men and women. Are you emphasizing this? And if so, how?
We are not emphasizing the cosmetic benefit of Avenova or Neutrox at this time as our focus is on Avenova’s ability to control the chronic condition of blepharitis and dry eye. We also are excited that some ophthalmologists are also using Avenova as a pre and post-surgical cleanser. We are aware of Neutrox’s potential in the cosmetic market, which is addressed by our CelleRx product. But, for right now, NovaBay is focused on the eye care market. We are very pleased by how the market is welcoming Avenova and how patients, even those who have suffered for years, are now benefiting from this unique product in as little as two weeks by simply wiping their eyelids with the product twice a day. What is exciting is that we have the opportunity to focus on cosmetic applications with Neutrox if we choose at some future date.
Question: Over the last 180 years there have been many products containing Hypochlorous Acid, namely Dakin solution and many over the counter products. What is truly unique about your version of hypochlorous acid?
Thank you for asking this question. All non-NovaBay products containing hypochlorous acid are not 100% pure hypochlorous acid. Some contain significant amount of sodium hypochlorite, which is the active ingredient in Clorox bleach. NovaBay products contain pure hypochlorous acid. We have the scientific know-how to make pure hypochlorous acid and more importantly bring it to the market in a formulation that features a three-year shelf life. And our product is patent protected. It took us 14 years to develop our product. Most impure hypochlorous acids of 19th and 20th centuries have only a three-to-18 months shelf life.
Question: I noticed on your marketing maps the absence of my home town of Seattle, Washington. How can you possibly account for this oversight and can I be your sole rep up here until you realize what a gold mine you've overlooked? Please note that this employment request is made purely in jest.
Thanks for your interest. We are very excited to inform you that as of early February we have a dedicated medical sales representative in the Seattle area. Seattle is one of my favorite cities in the U.S. and we agree that there is plenty of opportunity for Avenova in this market.
In the map below, you will see our current sales territories. Following our recent sales organization expansion, we have medical sales representatives in major markets across the country.
I also want to take this opportunity to remind you that our sales organization is led by Glenn Moro, who, based upon his 26 years of experience at Alcon, is highly experienced in launching ophthalmic products.
Question: And finally, I would be remiss in not asking you to give some value to those non-eye care assets that are now being negotiated for sale. At the Q4 Conference Call, you mentioned a window of perhaps 6-months, are you prepared to itemize those and attach some general dollar amounts for us?
An important aspect of our strategy is to monetize certain non-core assets. Our urology asset is in Phase 2 testing with patient enrollment underway. We are actively discussing this asset with potential partners. As for NeutroPhase and CelleRx, we have been licensing these assets and will continue to support our distributors. It is very exciting that our partner Pioneer Pharma, which is a major pharmaceutical distributor in China, is currently introducing NeutroPhase into that market.
Question: Patent protection for Avenova: How extensive is it? And is NBY currently fending off generic competition?
We have several issued and pending patents on Neutrox, which is our pure hypochlorous acid technology. All competing products contain significant sodium hypochlorite impurities, which I mentioned earlier is the active ingredient in Clorox beach. Avenova is the only pure hypochlorous acid. Purity and shelf life make all the difference.
Question: I recall NBY being listed on one of the two major exchanges. Since you've been sub $1.00 for a while now, do you anticipate being relegated to the OTC and if so, when?
We are listed on the NYSE-MKT market under the symbol NBY. Unlike Nasdaq, the NYSE-MKT does not have a "bright line" designated minimum trading price. Simply being sub-$1.00 does not cause de-listing. We very much like being listed on the NYSE and intend take appropriate measures to ensure that we stay compliant with its listing standards.
Here are my thoughts on Amarin, Trevena, Synergy and Seattle Genetics. Enjoy!
I've returned to Seeking Alpha effective in February of this year endorsing four stocks - Synergy (SGYP); Seattle Genetics (SGEN); Celldex (CLDX) and Amarin (AMRN), all four of which have appreciated since publication.
In the near future, I plan on publishing a video with a risk/reward assessment tool to help you and I make better biotech investment decisions. This sector, as I've repeatedly said, is more gambling than investment and any process that can aid us in our decision making is worthy of exploration. Therefore, the Scrying Biotech Reward Matrix, pictured above, is coming soon. Look for it!
And always be well....