NovaBay Pharmaceuticals Provides Business Update

Reports on Progress in Its Four Business Units and Use of Cash, Including Proceeds From Recent Cash Infusion

EMERYVILLE, Calif., July 11, 2011 (GLOBE NEWSWIRE) -- NovaBay Pharmaceuticals, Inc. (NYSE Amex:NBY) provided a synopsis of its accomplishments and progress during the first part of 2011, the company's outlook for the remainder of 2011, as well as report on the expected use of current cash, including approximately $7.7 million it will receive from multiple sources.

NovaBay is developing commercial opportunities for its Aganocide^® portfolio of anti-infectives in four distinct healthcare markets: urology, dermatology, ophthalmology, and hospital infections. NovaBay believes each of these market segments contains indications that are poorly served or have no approved Food and Drug Administration (FDA) treatments available and represent potential significant revenue opportunities. NovaBay's strategy is to address these market opportunities either through partnerships and collaborations or by building an internal organization to strategically market its own products when suitable from a commercial standpoint.

HIGHLIGHTS

Expected Use of Current Cash, Including Recent Cash Infusion of $7.7 Million:

• On June 16, 2011, NovaBay announced the ending of its collaboration and license agreement with Alcon related to NovaBay's proprietary Aganocide compounds. This event triggered a $3 million payment to NovaBay that included a termination fee as well as final reimbursement for R&D and personnel costs related to the collaboration.
• On July 5, 2011, NovaBay announced the closing of a registered direct equity financing of common stock and warrants that produced $4.7 million in net proceeds and included a select group on institutional investors.
• NovaBay expects to combine its current cash assets ($12.6 million at 3/31/11) with the net proceeds of these events for the following purposes:

• Support a Phase 2b clinical trial of NovaBay's lead Aganocide, NVC-422, for the treatment of adenoviral conjunctivitis. The endpoints of this study will be redesigned and optimized using the encouraging data developed from the recently completed Alcon-NovaBay viral conjunctivitis Phase 2 trial;
• Fund a Phase 2 clinical trial of an irrigating solution of NVC-422 for the treatment of urinary catheter blockage and encrustation (UCBE);
• Manufacturing scale-up of NVC-422 to support Phase 3/commercial needs for impetigo and UCBE programs;
• Based upon preclinical studies in which NVC-422 successfully demonstrated nail penetration and eradication of nail fungus; NovaBay will fund a pilot study for the treatment of onychomycosis expected to start in Q4, 2011; and
• NovaBay intends to use its remaining cash assets to support the 2011 manufacturing scale-up and 2012 commercial launch of its NeutroPhase^® product through partners, for working capital, capital expenditures and general corporate purposes.

Recent Advancements and Outlook for NovaBay's Four Business Units:

• Urology: Phase 2 UCBE trial has commenced in permanently catheterized spinal cord injury (SCI) patients at multiple clinical centers in the US; results are expected in the second half of 2011. To date, 16 of the planned 20 patients in a Part A study have completed treatment. Another 20 patients in a Part B study will be treated with a different formulation of NVC-422 later this year, with results available in 1H-2012. The clinical protocol is a double-blind, randomized crossover study in which patients serve as their own control. The primary endpoint is the prevention of UCBE.
• Dermatology: Impetigo indication has been successfully partnered with Galderma, the world's leading dermatology company. An Investigational New Drug application (IND) has been filed with the FDA and NovaBay received clearance to conduct formal Phase 1 studies. NovaBay will transfer the IND to Galderma and Galderma is expected to commence a multi-country 400-patient Phase 2b clinical trial in Q4-2011 with data expected in H2-2012.
• Ophthalmology: Now that NovaBay has regained worldwide development and commercial rights from Alcon for NVC-422, the company anticipates continuing its development for the treatment of adenoviral conjunctivitis to confirm the encouraging results shown for epidemic keratoconjunctivitis (EKC) seen in the adenoviral conjunctivitis trial. The company is planning a multi-country Phase 2b trial to be conducted in 2012. Pending successful completion of this trial, NovaBay expects to seek a partner for Phase 3 registration studies through commercialization.
• Hospital Infection: Development of NovaBay's FDA – 510(k) cleared NeutroPhase^® product is in manufacturing stages and is expected to be available for commercial launch in early 2012 to the six million patients suffering from chronic non-healing wounds such as diabetic, pressure, and venous stasis ulcers.

Management Comment:

Commenting on NovaBay's accomplishments, Dr. Ron Najafi, NovaBay's chairman and chief executive officer, stated: "The development of novel chemical entities in dermatology and ophthalmology is a high-risk/high-reward proposition. We are acutely aware of the risks associated with manufacturing, safety, efficacy and approval by regulatory authorities; however, over the last several years, we have succeeded in effectively putting many of these risks behind us. We have benefited from significant financial and developmental support from our partners, without which this would have been an insurmountable task. We continue to work aggressively on our clinical trials and in support of our partnered programs, and believe our shareholders and patients will be the beneficiary of this progress. Moving ahead, we look forward to regularly updating our shareholders on our programs in urology, dermatology, ophthalmology and hospital infections."

DETAILED BUSINESS UNIT UPDATE

UROLOGY

Prevention and/or treatment of urinary catheter blockage and encrustation (UCBE) remains a major challenge for 300,000+ patients^* chronically requiring transurethral or suprapubic catheterization, in the United States. Often the blockage and encrustation becomes the prelude to urinary tract infection and other complications leading to emergency room visits and hospitalization. Current therapies are not addressing encrustation exacerbated by bacterial biofilm, in particular that caused by P. mirabilis bacteria. Attempts to dissolve or mechanically open the blockage are insufficient. In NovaBay's in-house bladder model, NovaBay has shown an irrigating solution of 0.2% of NVC-422 to be effective in killing the bacteria, P. mirabilis, thus preventing biofilm from forming inside the catheters. Following an IND filing with the FDA, NovaBay conducted a 32-healthy-volunteer phase 1 study, a 20-patient open-label study in permanently catheterized patients suffering from high levels of bacteriuria (bacteria in urine, but asymptomatic) and is now conducting a 40-patient study in patients with history of blockage and encrustation. In this double-blind, randomized, crossover, multicenter U.S. study, patients serve as their own control by receiving the drug or placebo during the first two-week treatment period. The catheters are removed and the patients will undergo a washout period. After the washout period, a new catheter is inserted and the patients are treated for two additional weeks with the other treatment (placebo or active) in a crossover design. The severity of blockage after each dosing period is assessed. More detail on the study can be found at:

http://www.clinicaltrials.gov/ct2/show/NCT01243125?term=novabay&rank=2

Market surveys conducted by NovaBay indicate that the majority of spinal cord injury (SCI) patients who are chronically catheterized are managed through a limited number of treatment centers.  In the United States there are 52 major SCI institutions. Based upon these demographics, NovaBay intends to build its own commercial organization and market this product to this 300,000+ patient community.^*

*Quadriplegic, paraplegic due to spinal cord injury, stroke, MS and neurogenic bladder patients in the United States who use transurethral and suprapubic urinary catheters are classified in this 300,000-patient number.

Events - Urology Business Unit

• March 2, 2011 - NovaBay Pharmaceuticals Initiates Phase 2 Clinical Trial for the Treatment of Urinary Catheter Blockage and Encrustation
• April 14, 2011 - NovaBay Pharmaceuticals Awarded 1st Place for Outstanding Scientific Presentation at The Simon Foundation for Continence Conference

DERMATOLOGY

As resistance to antibiotics becomes a critical public health issue, NovaBay intends to aggressively pursue the development of non-antibiotic anti-infectives that are unlikely to cause resistance as a first-line treatment for a range of topical skin infections. In July 2010, NovaBay announced positive results in its 129-patient, Phase 2a impetigo skin infection study. The results showed 92% of the patients in NovaBay's highest dose were cured of this highly contagious disease.

Based on this study, in December 2010, Galderma exercised its option to exclusively license NVC-422 on a worldwide basis and focus on the development of NovaBay's Aganocide compound, NVC-422, for the topical treatment of impetigo. In 2011, NovaBay successfully filed with the FDA their Investigational New Drug (IND) application to conduct formal Phase 1 studies. This IND will be transferred to Galderma who will conduct a 400-patient phase 2b study and will be financially responsible for this study. NovaBay will support this effort and will be reimbursed by Galderma. NovaBay expects the Phase 2b clinical trial to commence in Q4-2011 with data available H2-2012. If this program is successful, NovaBay will receive a multi-million dollar milestone payment from Galderma.

Events - Dermatology Business Unit

• 1/11/2010 – NovaBay Pharmaceuticals Receives $3.75 Million in Milestone Payments from Galderma
• 12/6/2010 - NovaBay Pharmaceuticals and Galderma Expand Their Agreement to Include Impetigo
• 11/29/2010 - NovaBay Pharmaceuticals Holds Successful FDA Meeting on Clinical Development of Aganocide^® Compound NVC-422 for Impetigo

OPHTHALMOLOGY

On June 16, 2011, NovaBay Pharmaceuticals announced the termination of its collaboration with Alcon for the ophthalmic, otic and sinus field. NovaBay will receive approximately $3 million resulting from their termination agreement. NovaBay has regained full worldwide development and commercialization rights for its lead Aganocide compound, NVC-422, as well as other backup compounds developed as a result of the almost five-year collaboration. Importantly, all regulatory filings made by Alcon, and various data and reports related to the clinical and preclinical data on NVC-422 will be transferred to NovaBay, and NovaBay will be free to continue the development of Aganocides for these areas on its own or in collaboration with new partners. NovaBay will be seeking potential partners in the ophthalmic field while planning a new Phase 2b study.

Results from the Proof of Concept Study in Adenoviral Conjunctivitis

In May 2011, NovaBay reported the results of a Phase 2 clinical study for adenoviral conjunctivitis. While it was confirmed that the predetermined endpoints were not met, NovaBay reported efficacy analyses that were strongly suggestive of a treatment effect in both clinical signs and symptoms and microbiological findings in the subset of patients with serotypes commonly associated with epidemic keratoconjunctivitis (EKC). Because EKC viruses have the potential to cause long-lasting corneal damage, they are of primary concern to physicians treating conjunctivitis. Non-EKC viruses self-resolve in the majority of cases without any lasting effect. EKC viruses often are responsible for:

a) Superficial punctuate keratitis, resulting in blurred vision

b) Subepithelial infiltrates (SEIs), which result in glared vision and often may result in long-term vision problems; and in severe cases, corneal transplants are needed to restore vision

The study showed that in patients reporting blurred vision at baseline, for those infected with serotypes associated with EKC, the NVC-422 treated group had a much better blurred vision clearing rate (92%) one week following treatment, than those treated with placebo (50%). Additionally, patients infected with serotypes associated with EKC in the drug arm had fewer SEIs than the placebo arm. These results are consistent with the mechanism of action of NVC-422. NovaBay and its ophthalmology advisors believe these findings and the lessons learned from this study provide a clear path forward for NovaBay to design future conjunctivitis trials. It is also important to note that the drug was well-tolerated.

Events - Ophthalmology Business Unit

• June 16, 2011 – NovaBay Regains Worldwide Rights to Its Aganocide Compounds from Alcon
• May 18, 2011 - NovaBay Reports Results from Phase 2 Clinical Trial of NVC-422 for Adenoviral Conjunctivitis
• May 6, 2011 - NovaBay Spotlights Three New Aganocide Compounds with Confirmed Activity against Ophthalmic Pathogens

HOSPITAL INFECTIONS

NovaBay has its roots in the development of NeutroPhase^® (NVC-101). NeutroPhase is an irrigation solution containing pure hypochlorous acid, the same potent chemical that white blood cells generate to attack invading pathogens. NovaBay has two issued U.S. patents on the use of NeutroPhase for promoting wound healing, tissue repair and tissue regeneration, and for disinfection or decontamination of open wounds and burns, and has other applications pending in the U.S. and foreign countries. NeutroPhase has received two 510(k) clearances from the FDA as a Class I device. The following indication for use: "The device is intended for moistening absorbent wound dressings and cleaning minor cuts, minor burns, superficial abrasions and minor irritations of the skin. It is also intended for moistening and debriding acute and chronic dermal lesions, such as Stage I-IV pressure ulcers, stasis ulcers, leg ulcers, diabetic foot ulcers, post-surgical wounds, first and second degree bums, abrasions and minor irritations of the skin" will allow NovaBay to market NeutroPhase for the treatment of chronic wounds.

The cost of treating chronic wounds is estimated at $5-7 billion in the US, and the occurrence of these wounds is increasing at a rate of 10% per year. In 2011, NovaBay has embarked on manufacturing NeutroPhase and expects to seek appropriate marketing partnerships for North America in 2012 and in the European and Asian markets in 2013.

Events - Hospital Business Unit

• April 19, 2011 - NovaBay Pharmaceuticals Spotlights Positive Results From NeutroPhase Study of 26 Patients With Chronic Non-Healing Wounds

About NovaBay Pharmaceuticals, Inc.

NovaBay Pharmaceuticals is a clinical-stage biotechnology company focused on developing its proprietary and patented Aganocide^® compounds. These are novel, synthetic anti-infectives with activity against bacteria, fungi and viruses, and are being developed to treat and prevent a wide range of local, non-systemic infections with a low likelihood of developing bacterial resistance.

NovaBay is focusing its technology on four distinct therapeutic areas: dermatology, ophthalmology, urology and hospital infections. In dermatology, the focus is on developing NVC-422 gel for impetigo. NovaBay has the advantage of being partnered with Galderma, the leading dermatology company in the world. In ophthalmology, the goal is to develop an eye drop for conjunctivitis. In urology, NovaBay aims to reduce the incidence of urinary catheter blockage and encrustation (UCBE) and the potential for urinary tract infections with an irrigation solution containing NVC-422. In hospital infection, NovaBay is targeting the six-million-patient market of chronic non-healing wounds, such as pressure, venous stasis and diabetic ulcers with its proprietary anti-infective solution, NeutroPhase^®, which has received two 510(k) clearances from the Food and Drug Administration. For additional information, visit www.novabaypharma.com.

Cautionary Information Regarding Forward-Looking Statements

The expected use of financial assets noted in this release represents NovaBay's current intentions based upon our present plans and business condition as of the date of this release. It cannot be predicted with certainty all of the particular uses for these assets or the amounts that will be actually spent on the uses set forth above. The amounts and timing of the actual use of NovaBay's financial assets will vary depending on numerous factors, including unexpected delays in the regulatory process may delay the commencement or completion of clinical trials and product manufacturing and inherent risks and uncertainties relating to difficulties or delays in conducting clinical trials.

This release contains forward-looking statements, which are based upon NovaBay's current expectations, assumptions, estimates, projections and beliefs. Many of these statements are identified by the use of words denoting future events, such as "expect," "anticipate," "plan," "intend," "will," "estimated" and variations of such words. These forward-looking statements include, but not limited to, NovaBay's expected use of financial assets; NovaBay's plans and expectations regarding ongoing and future clinical trials, the timing of commencement and receiving results of clinical trials, the timing of the commercial launch of NeutroPhase and building its own commercial organization with respect to NeutroPhase, expansion of its partnership with Galderma, and potential future partnerships in ophthalmology and hospital infections. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Factors that might cause such differences include, but are not limited to: the risk that negative results from development programs could preclude Galderma from providing additional funding to NovaBay; the risk of unexpected delays in the regulatory process may delay the commencement or completion of clinical trials; inherent risks and uncertainties relating to difficulties or delays in conducting clinical trials; the inherent uncertainty of patent protection for the company's intellectual property or trade secrets; the risks that results obtained in animal models may not be obtained in humans; as well as other risks relating to NovaBay and its Aganocide compounds detailed in NovaBay's Quarterly Report on Form 10-Q, under the caption "Risk Factors" in Item 1A of Part II of that report, which was filed with the Securities and Exchange Commission on May 16, 2011, and in NovaBay's Current Report on Form 8-K, under Item 8.01 of that report, which was filed with the Securities and Exchange Commission on June 17, 2011. The forward-looking statements in this press release speak only as of this date, and NovaBay disclaims any intent or obligation to revise or update publicly any forward-looking statement except as required by law.