Shares of Novabay Pharmaceuticals Inc. (NYSE MKT:NBY) plunged 44 percent, to a one-year low of 69 cents, Wednesday morning after the company reported that its NVC-422 (auriclosene) ophthalmic formulation failed to meet the primary and secondary endpoints in a phase II study in patients with adenoviral conjunctivitis. Shares ended the day at 81 cents, a 35 percent decline, on volume of 3.2 million shares, or more than 13 times the daily average.

Dubbed BAYnovation, the global, multicenter, randomized study was launched in May 2012 and enrolled 450 patients in the U.S., India, Sri Lanka and Brazil, according to Cortellis Clinical Trials Intelligence (CTI). Patients were randomized to placebo or NVC-422 (0.33 percent), one drop per eye, eight times daily, for 10 days, and assessed over six visits.

The primary endpoint was sustained clinical cure in adenovirus intent-to-treat epidemic keratoconjunctivitis serotypes, as determined by the clearing of bulbar conjunctival injection (red eye) at any visit, persisting to the test-of-cure visit at day 18, according to Cortellis CTI. Secondary endpoints included spread of infection to the fellow eye, reduction in sub-epithelial infiltrates, clearing of blurred vision and eradication of adenovirus from the tear film, compared to placebo.

No significant adverse events were reported.

Adenoviral conjunctivitis, which can cause long-term eye damage, has no approved drugs on the market.

"We embarked on this hoping that we would be able to eradicate the shedding viruses that occur during the replication of viruses in the cell," explained Ron Najafi, Novabay's CEO. Instead, he said, the viruses proved more difficult to eradicate than the company expected at the safety threshold that was established for NVC-422 in the indication.

"Obviously, it didn't work," he told BioWorld Today. "There are some slivers of hope in the data, but it really doesn't rise to the level that warrants that we move forward and develop it."

Consequently, Novabay decided "to completely abandon" the viral conjunctivitis program.

'WE THINK WE HAVE A MUCH BETTER CHANCE WITH BACTERIA'

Despite the failure of the company's lead Aganocide candidate in its first and largest potential indication, the company is proceeding with a second phase II study, BACTOvation, in 200 patients with bacterial conjunctivitis that is nearing full enrollment. Novabay expects to receive data in several months and, at that point, "will make a decision to move forward or abandon that, as well," Najafi said.

He's cautiously optimistic, however, since the bacterial indication has a lower cure threshold than viral conjunctivitis. The company's Aganocides are synthetic forms of anti-infective molecules produced by white blood cells when they engulf and destroy invading pathogens. Aganocides are active against both viruses and bacteria, but bacteria primarily replicate outside cells, Najafi pointed out, while viruses hide inside cells during initial replication until the cells can no longer support the process and shedding begins.

NVC-422 was designed to attack and neutralize viruses during the shedding stage, but "bacteria are much more exposed to the action of the drug," he said. "We think we'll have a much better chance with bacteria."

Novabay also is continuing to develop NVC-422 as an irrigation solution to treat blockage and encrustation in indwelling long-term urinary catheters, such as those used by individuals with spinal cord injuries.

The company completed two proof-of-concept studies that, combined, enrolled approximately 90 patients and is planning a three-arm phase II study that would enroll approximately 120 patients with indwelling urinary catheters and a history of catheter blockage and/or encrustation, according to Cortellis CTI.

In the short term, Novabay is turning its attention and resources to the commercial launch of its I-lid cleanser, a nondetergent, non-antibiotic eyelid and lash hygiene product available by prescription. Using an initial team of 10 sales reps, the company is targeting I-lid to U.S. eye care professionals who treat patients suffering from blepharitis and other chronic eye conditions. Novabay plans to expand the sales force to as many as 60 reps over the next 12 months, according to Najafi.

"It's a tough day, but it's also a very interesting day for us," he observed, noting the company held a national sales meeting last week to preview the I-lid marketing campaign at the same time a clinical group was receiving and reviewing the BAYnovation data.

Risk diversification is a key strategic objective for Novabay, Najafi maintained, noting that the adenoviral conjunctivitis indication represented one of seven programs for the company – three, including I-lid, at the commercial stage. Its commercial topical wound care product, Neutrophase (formerly NVC-101), which contains the antibacterial compound hypochlorous acid, is partnered in China with Pioneer Pharma Holdings Ltd. and preparing for commercial launch there, pending CFDA approval, Najafi said. The product is targeting chronic nonhealing wounds, diabetic foot ulcers and necrotizing fasciitis, commonly known as flesh-eating disease.

In December 2013, Pioneer Pharma expanded its initial agreement with Novabay to add commercialization and distribution rights to I-lid and the aesthetic dermatology product, Cellerx, developed by Novabay's Medibay business unit, in China and 11 countries in Southeast Asia.

Novabay also has a potential $50 million deal with Galderma SA, of Lausanne, Switzerland, for a topical gel formulation of NVC-422 in impetigo and related indications. However, that indication took a hit last year when the drug also failed to achieve efficacy in a phase IIb study. (See BioWorld Today, March 26, 2009, and Nov. 8, 2013.)

Novabay also is advancing a differentiated contact lens care system and plans to disclose details about that program later this year, according to Najafi.

"Because of the risk mitigation strategy we've embarked on, we're able to stand and continue with our other programs," he said.

To that end, Najafi insisted Novabay has no immediate plans to raise capital. The company has $11 million in the bank, which he deemed sufficient for the short term until revenues from product sales begin to sustain operations, including future clinical trials.