November 27, 2011

When, Not If

When you're an investor, it becomes terribly difficult to understand whether your investment should be characterized as "when" or "if." If we drift into the when, it is either tepid or caveated. There are no certainties in investing. We all know that. Even the venerable risk-free interest rate, the theoretical rate of return of an investment with no risk of financial loss, is itself being questioned in light of growing debate over sovereign debt risk around the world.

But as you engage management more and more, and understand their perspectives, their viewpoints, their strategies and rationales, your appreciation of their view on when grows and deepens. I would not try to convince a fellow investor in Provectus, existing or prospective, that the end-game is a question of when and not a question of if. Each of us starts with a different set of data points and a different basket of knowledge. I have strived and continue to strive, with my investment, to understand or discern when and if. Saying that investing in biotechnology is risky is clearly an understatement (source of below):
  • Product failure: the possibility that a company’s product may not work in a safe and effective manner. This risk usually arises when products are being tested in clinical trials;
  • Lack of a commercial market: the risk that there will not be a demand for the product. This could occur for a number of reasons. There could be a negative reaction to the product from industry professionals such as doctors, or there simply may not be enough market interest;
  • Obsolescence: the risk that a company’s leading drug candidate might be rendered obsolete by another company’s product that may turn out to be more effective, easier to administer, or have fewer side effects;
  • Financial risk: It is very important that the company has the capacity to raise funds, as biotech companies have the potential to consume large amounts of capital over a number of years. They need to have timely access to adequate cash to fund the commercialisation of their technology and for ongoing product development;
  • Regulatory risk: The products of biotech companies are regulated by government bodies, and they must seek approval for any new medical products or services. Regulatory risk is the risk that a new product may not satisfy the stringent requirements for approval, or that the approval process takes longer than expected. There is also a risk that the company will not meet prescribed standards for manufacture and operations. In the case of new technologies, there is also the time required for the regulatory body to study the technology and determine how it should be regulated;
  • Protection of intellectual property: A lot of the value of a biotech company comes from the knowledge embedded in its patents. There is a risk that another company could legally challenge the patent. If a large pharmaceutical company challenges a small biotech company then there is a risk that the small company may not have the resources to defend and retain its intellectual property rights;
  • Licensing and collaborations: Many biotech companies seek to create licensing deals for their technologies with larger biotechnology or pharmaceutical companies. In doing this they receive license revenue and have the potential to receive royalties once the product reaches the market. There is a risk, however, that the larger partnering company may not have the same motivation to push the product to the market. This risk may be minimised if the partnering company has an equity interest in the smaller biotech company.
Whew! That's a lot of risk!

So how can I believe Provectus is a question of when, not if?

Let's examine the steps of the path management must and will traverse along the way to the end-game:
  • Receipt of an SPA for the pivotal MM Phase 3 trial;
  • Finalization of the liver Phase 2/Phase 3 trial design suitable for SPA (receipt of the SPA) or Phase 2 trial;
  • Completion of the immunology studies;
  • Publication of the MM Phase 2 results;
  • Publication of the immunology studies; and,
  • Possibly, forks in the road that ultimately lead back to the path, showing randomized data for either or both of the MM Phase 3 trial and the liver Phase 2/Phase 3 trial.
In my view, these are boxes to check. My diligence gives me sufficient comfort management will check them. But, of course, when?

Craig, Tim, Eric and Peter cannot predict the timing of the end-game, or the time it will take to traverse the path above. While much of their destiny is in their control, much of it is clearly and obviously not.

Given rose bengal's reliability and safety, whether administered as PH-10 or PV-10, management indeed does control the process of doing what they need to do (see the steps of the path above).

When I dramatically reduce uncertainty, and thus am able to simply consider the risk of the next step in the path, the certainty of the outcome is much, much higher. This approach fundamentally underscores my belief in when for Provectus and Craig et al, even though I may not know when when is.

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