Avoid This Drug Stock

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NovaBay Pharmaceuticals Profile

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS

This week's pitch :

Over the last six months, NovaBay has been reanimated from the low of 0.7 that followed the abject failure of aganocide NVC-422 in a phase II trial for viral conjunctivitis. The decline was exacerbated by dilutive financing and the general distaste for speculative stocks in the late summer of 2011, and now the company is benefiting from the counterintuitive rush back into the sector. The stock has also felt the bellows effect of Seeking Alpha pumps, an effect which in recent years has proven to be very short-lived (see Zalicus, Cleveland Biolabs, Radient, and Ampion).

These are the reasons others see to be optimistic about NovaBay:

1. A partnership and commercial launch of NeutroPhase in China.

First of all, NeutroPhase is diluted bleach. We've seen how this is working out for Oculus. Second, attempts by Western companies to sell pharmaceuticals in emerging markets in Asia and South America have never amounted to anything in my experience.

2. The company has a partnership with Galderma for NVC-422, who are planning to initiate a phase IIb trial in impetigo in the near future.

A year ago, NovaBay had two large pharmaceutical partners for phase II programs of NVC-422. After the conjunctivitis trial failed, Alcon dropped them like a sack of potatoes. Now they're halfway to having no partners for NVC-422. Furthermore, I've been hearing about the impending initiation of this phase IIb trial for more than a year. If Galderma hasn't kicked it off yet, I have to wonder about their degree of interest in the program.

3. NVC-422 showed a better effect against the adenoviral conjunctivitis subset in the previously mentioned phase II trial and the company is now planning on performing a new phase IIb trial for that indication.

Post-hoc analysis. No statistical significance. Futile.

Foolish bottom line
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