No SPA for you!

[George] "Um, excuse me, I - I think you forgot my bread."
[The Soup Nazi] "Bread, two dollars extra."
[George] "Two dollars? But everyone in front of me got free bread."
[The Soup Nazi] "You want bread?"
[George] "Yes, please."
[The Soup Nazi] "Three dollars!"
[George] "What?"
[The Soup Nazi] "No soup for you!"

Provectus issued a PR this week, reporting on the company's 3rd meeting with the FDA to achieve a consensus design suitable for an SPA for its pivotal MM RCT Phase 3 trial. No SPA for them!

The share price dropped 5% (with an intraday 10% drop) on higher than average trading volume. This continued a 6-month decline of more than 31%, lending credence, in my view, to the position that the market feels the company either will not get the SPA or requires much more time and interaction with the FDA before they get it.

Was I disappointed? Yes, of course. I view the SPA as a key valuation driver and an important waypoint on the journey to the end-game. With an SPA in hand, the regulatory path for PV-10 for melanoma is defined (or vastly narrowed), and provides the big pharma acquirer with a clear regulatory path. Given the requirement of at least a 4th meeting, achieving agreement with the FDA on the SPA before year-end seems unlikely. I will adjust my expectation for this to the end of the 1st quarter or 2012 (March 31st), which is a revision to my TiK ToK post revision of Q4 2011, which was a revision to my initial expectation of Q3 2011. This may seem like I am moving the goal posts, rather than relent to the markets' perspective: either Provectus will not get the SPA, which is a fail, or management requires much more time and interaction with the FDA before they get it, by which time the SPA is obsolete (i.e., PV-10 has been diminished by recently approved treatments and/or surpassed by up-and-coming ones).

Should I be disappointed? Let's explore this emotion and the answer. Management believes the key takeaways from the PR are:

• The recognition of the substantial FDA reorganization; and,
• The hand-off from one group overseeing the SPA process to another, which resulted from the reorganization.

Reorganization: Much has been written and opined on this topic, so there is no need for me to rehash it here, save for: The reorganization was fundamental (not incremental) and thus substantial. Many NDAs, BLAs and INDs for cancer drugs were reassigned to new divisions for "re-review" as part of the reorganization. The outcome for Provectus was delay: delay in the process from moving what had been expected to be the timing of the 3rd meeting from June to October, and delay in the process from having to reestablish a relationship with a new review team.

Hand-off: Management saw PV-10 handed-off from CDER to DOP2; a hand-off, they believe, was successful.

I view it this way:

• The 3rd meeting, given the reorganization, effectively comprised "re-educating" or "re-doing" some part of the process with the new DOP2 team;
• If the reorganization had not occurred, the 3rd meeting would have been used to finish the discussion to finalize the MM Phase 3 + SPA protocol;
• The reorganization required n+1 meetings, as opposed to n meetings, where n typically is 3. Thus, again, the 3rd meeting was used simply and solely to get a new group up to speed in order for them to make and then own their decision.

Obtaining the SPA has been management's primary goal from the very beginning (together with their parallel efforts to obtain accelerated approval). As a result, while Provectus fully expects to arrive at the consensus design at the 4th meeting, if for whatever reason that it is not accomplished, a 5th meeting would occur. Getting the SPA is the ultimate outcome. The company expects the consensus design for SPA to be done every time they meet with the FDA. That is what they ask for, and the FDA knows this. Management contends the FDA is working with them, and not working against them. Shareholders should understand the FDA is on Provectus' side.

Industry insiders would tell you the typical number of meetings with the FDA that are required in order to secure an SPA is 3 to 4. And while the time it takes varies by situation, 12 to 36 months is a reasonable (yet wide) range. Provectus is at about 20 months, including the reorganization delay of several months. Vical, for Allovectin-7, took from 2004 to 2007 to get its SPA.

In this week's PR, "...melanoma, which is a rapidly evolving therapeutic area" means the FDA recognizes that the approvals of ipilimumab and vemurafenib address only part of the melanoma patient population and that other areas (i.e., the bulk of recurrent melanoma) still are unmet needs.

If you recall the PR from the meetings management had with the TGA last year, the mention this week of a potential second MM phase 3 trial in Australia should be viewed, I believe, of the company simply saying that the Australians want to proceed now. I do not believe this trial will go forth, as there are lots of good reasons for conducting one global study.

Finally, I leave you with a reminder of the point of the immunology/MOA efforts at Moffitt, which is to support Provectus' parallel effort to obtain accelerated approval for PV-10 for MM.

So, should I be disappointed? No.

Again?

Eric Wachter exercised yet another slug of stock options last week. See here for the filing. Over the last couple of years, Dr. Wachter has exercised about 1.7 million shares. His average exercise price has been approximately 94 cents.

A quick 'n dirty analysis of management's holdings to date is below (rounded to the nearest thousand). These figures may be inaccurate (read: wrong), but I tried my best.

Takeaways:

• Dr. Wachter continues to exercise options at favorable share prices; and,
• There is a disparity between stock holdings (versis stock option holdings) of the management team members. As I wrote in my post entitled O Captain, My Captain, there are differences between the team, such as net worth, contribution of in kind assets as the start of the venture, and personal situations related to living style, number of children and the views of their spouses on risk.

Dr. Wachter's continued stock option exercises are telling sign.

Fast & Furious

That would be Vin Diesel's version, not Eric Holder's. By the way, is it just me, or does everyone think The Chronicles of Riddick is a movie classic?

It is quite possible that when the deal to license (sell) the dermatology business has been completed, licensing (selling) the oncology business (i.e., a complete monetization of the company) could move very fast, deal-wise that is.

How it happens is fluid; however, I do appreciate management's positioning of the company to have several options along the path:

• The dermatology deal;
• Several potential mini-oncology deals, based on indication and geography. For example, MM in Australasia and/or liver in a part of Asia;  
• The big oncology deal; and,
• An equity investment (or two) by big pharma.

The path management must traverse appears to me to be very well lit, with several parties at the end of it waiting to embrace them. Wouldn't it make good sense to simply and solely focus their energy on traversing the path?

A Dissenting Opinion

In January 2011, Provectus raised about $5 million from an investor syndicate that included AQR and AST. When the company put various matters to a shareholder vote at the annual meeting in June, from what I could find through SEC filings, AQR and AST voted against proposal 4 to essentially approve executive compensation.

AQR:

AST:

While I voted for this proposal, which ultimately passed, it was interesting and in my view notable that AQR and AST did not.

I also found it notable that they withheld their votes for the slate of directors and, understandably, voted in favor of increased the authorized number of common shares. Monetization is monetization, eh? Increasing the number of these shares provides management with the flexibility to facilitate an equity investment in the company by big pharma (utilizing one of the two shelf filings Provectus previously has made).

I recently asked management for their perspective on the topic. When I receive a response, I will update this post.

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.

Infected

At the 2nd annual “Cancer Immunotherapy: A Long Awaited Reality” conference event in New York in October 2011, Craig's presentation opened with his describing Provectus treating cancer like an infectious disease.

Working from the premises that (a) a treatment must have immune system help and (b) the immune system will respond proportionally to the degree of insult or injury:

• PV-10 has near absolute specificity when targeting diseased tissue and spares normal tissue. As a result, side effects are minimal and adverses events are nearly non-existent;
• PV-10 removes tumors by multiple novel mechanism(s): Apoptosis-like on treated targets potentially combined with contributions by immune processes;
• The intralesional delivery route produces a “vaccine/immunotherapy-like” systemic effect and enhances normal defenses;
• PV-10 has a very wide range of activity (broad spectrum antibiotic-like); and,
• It is reliable and the results are reproducible.

He then discussed new animal mechanism of action studies (below):

T cells do have something to do with PV-10's removal of remote tumors. Nude mice are athymic nudes, having intact immune systems except for T cells (i.e., B cells, NK cells, macrophages, dendritic cells, etc., but just not T cells). So, when PV-10 works in immunocompetent mice and not in nude mice, the outcome is due to the immune system, because it requires T cells. Provectus has repeated this over and over with different tumor types for melanoma, pancreatic, HCC, colorectal, etc.

The hallmarks of western science are predictability, verifiability and empiric repeatability. Craig's historical work has now been repeated by Moffitt. How well has it been repeated? To what level of success? You'll have to wait for the abstracts of immuno-studies #1 and #2 to be published.

I anticipate Moffitt's current animal studies this year and contemplated future animal and human studies next year should repeat more of Craig's work.

in·dic·a·tive

Adjective: Serving as a sign or indication of something.

Cancer Immunotherapy Conference

In 2010, Craig Dees presented at MD Becker Partners' Cancer Immunotherapy: A Long Awaited Reality conference at the New York Academy of Medicine in New York. Stealing from a press release from the conference, highlights of the conference included:

• Presentations by leading companies and institutions with active immunotherapies in development, including Bavarian Nordic A/S and the National Cancer Institute, BioSante Pharmaceuticals, Biovest International, Celldex Therapeutics, Dendreon Corporation, ImmunoCellular Therapeutics, Inovio Pharmaceuticals, Northwest Biotherapeutics, Prima BioMed Ltd, Provectus Pharmaceuticals, Quantum Immunologics, and others;
• An overview of appropriate choices of clinically relevant endpoints for U.S. licensing approval;
• Discussions from leading researchers on the clinical application of cancer vaccines and issues related to the development of surrogate markers that can reduce the time and expense associated with clinical trials;
• Presentations on manufacturing issues associated with the production of autologous vaccines; and,
• Wall Street and investor perspectives on the cancer immunotherapy landscape.

It was a fascinating conference, and Craig's reception certainly was interesting in so far as the eyebrows it raised, the curiousness of competitors and analysts alike, and the contrarian tact management has taken to get this far. For example, the discussions on manufacturing issues associated with the production of autologous vaccines provided a telling juxtaposition when compared to my and others' perspectives on Provectus' manufacturing process and manufacturing cost.

Below is a table from Craig's presentation summarizing, at the time, the cancer indications successfully treated by PV-10 and rose bengal:

Fast forward a year or thereabouts, in 2011, and Craig presented again at MD Becker Partners' 2nd Annual Cancer Immunotherapy: A Long Awaited Reality conference at the New York Academy of Medicine in New York.

It was another fascinating conference. Craig's reception was greater this year, as more eyebrows were raised. I did find his demeanor dramatically different.

Below is a table from his presentation summarizing the cancer indications successfully treated by PV-10 and rose bengal:

The progress is clear.

Yucky, Gross [Margin] & Cool

When you analyze the financial statement projections and discounted cash flow analyses the equity research analysts use in coming up with their price targets for Provectus, two interesting toggles are treatment price and gross margin.

Treatment price can be influenced by several factors, including reimbursement and competitive. Gross margin, on the other hand, is strongly influenced by the company's approach to manufacturing product. Contemplating price is of course premature in the context of the company's development stage. Taking a logical but long-term view, however, it is easy to see analyst valuation, as a proxy for valuation in general, several multiples higher (e.g., 3-5x) when considering that (a) their price assumptions are a fraction of other cancer immunotherapy products and (b) gross margins are at least 90%.

This merely is one way of toggling valuation.

Recall management's efficiency of trial design and execution. The result is a dramatically lower accumulated deficit. Imagine the flexibility the company has, or its eventual acquirer will have, competitively and predatorily all things being equal (robust efficacy, tremendous safety profile, ease of administering). Management has been very thoughtful in how this can play out at the appropriate time. I do find the ability to lower price to increase market share or to be more conducive to government reimbursement/payment a category killer so to speak. This bears watching during end-game discussions.

TiK ToK

Coming out of the company's second meeting with the FDA earlier this year, the expectation was for a third meeting to resolve remaining design issues related to the pivotal MM Phase 3 trial. Diligence suggested an expectation of a late-June or early-July meeting date. June turned into July turned into...September, when Tim Scott mentioned the upcoming meeting with the FDA at the Rodman & Renshaw conference. Ultimately, the meeting appears to have occurred in October, some 3-4 months later than expected.

What caused such a delay? With the benefit of hindsight and after checking around, it seems the massive FDA reorganization that began, perhaps, in July setback management's attempts to secure their 3rd meeting. As as result, my expectation of the company agreeing to a consensus design by or before the end of the 3rd calendar quarter (September 30th) was incorrect.

I've adjusted my expectation to the end of the 4th quarter (December 31st), as the delay was no fault of their own. They, like several other companies, were caught up in the reorganization.

Let's then keep an eye on two steps of the path before we strike a rendition of Auld Lang Syne: agreement with the FDA on the trial design suitable for an SPA and release of the psoriasis trial results. With luck, our champagne toast may taste that much sweeter.

Mo' Money

A quick 'n dirty comparison of the companies Stonegate Securities recently used in their equity

research note of mid-November, using salary, bonus, stock and option compensation, and other compensation from recent filings for principal officers:

Compensation in 2009 was below average. 2010 compensation is higher than average. Some folks believe management's compensation is high. I do not have much if any issue or concern with their compensation. I come at this from several directions:

• In the grand scheme of things, and with the benefit of hindsight (in the future, not now), I expect to monetize my ownership in the company at several multiples (>10x) from where the stock is now (on a fully diluted basis, accounting for the potential likelihood of future dilutive acts). If that indeed happens, the price paid to management through cash and stock compensation would have been more than worth it;
• Provectus, for all intensive purposes, is a private company that just happens to be public. Management's ownership is much smaller than what I would have expected. So, increases in stock ownership (part of compensation) through option issuances does not bother me. Happy management should result, eventually, in happy shareholders, assuming management is ethical. I believe, without a doubt, that they are ethical; and,
• Management has been very efficient with the use of capital raised to get this far.

As a result, in my view, the dilution shareholders have incurred through fund raising, some of which obviously goes to pay management, is no where near what it has been at other companies. The leverage profile upon acquisition of Provectus makes an investment of a dollar in the company a better ROI or IRR than an equivalent dollar in, say, Dendreon, at the same point in time.

Obviously, all of this is relevant and appropriate if we end up in a successful outcome, which I believe it will.

The Efficiency Expert

I was first introduced to Provectus in 2006 by a hem-onc who has a good track record of assessing the likelihood of drug compounds moving through clinical trials based on his bedside view of patient reaction. He had heard of the early MM Phase 1 trial results coming out of Australia, which were a couple or more standard deviations above what one typically sees in an early stage clinical trial (understanding and adjusting for the limitations of Phase 1 trials).

As I delved into the breast Phase 1 trial design (and results), the two MM trials, the liver trial, the expected liver Phase 2/Phase 3 (or Phase 2) trial and and the contemplated pancreas Phase 1 trial, I have continued to be struck, pleased and always surprised by their efficient design approach that provides much more information than the typical comparable trial by other companies.

A quick 'n dirty comparison of the companies Stonegate Securities recently used in their equity research note of mid-November, focusing primarily on each company's balance sheet's accumulated deficit:

I could spend hours discussing with you my thoughts of the above table. For now, my main takeaway is how little money the company has spent in order to get this far. There are more nuances to the analysis, such as partnering or the lack thereof. A dollar invested in one company versus another at a given point in time using the same exit assumption produces two very different return profiles and expectations. I expect Provectus' efficient use of capital ultimately will translate into a much higher per share acquisition price than many of these other companies can expect to enjoy.

Trailing 12 Months, Forward 12 Months

A lot of good things have happened in the last twelve months or so, since November 2010's Australian melanoma conference: clinical data, regulatory interaction, corporate partnering. Starting from this month's Tampa melanoma conference, the next twelve months should be even more fruitful: clinical data, regulatory interaction, corporate partnering, monetization.

I know that comparing data from clinical trials, to some, is like comparing apples and dolphins. To others, it is an exercise in navel gazing. Nevertheless, such comparisons are germane in so far as they are directionally correct.

Despite the approval/progress of ipilimumab and vemurafenib, the landscape for melanoma treatments remains more wide open than ever. It is clear that PV-10 has:

• Demonstrated unprecedented response in the MM P2;
• Demonstrated response correlations that exceed the state of the art, with an unparalleled complete response rate;
• Demonstrated an unparalleled durable response rate that also exceeds the state of the art;
• Exceeded the response rate, by stage comparison (from Stage III through M1a-c), of both OncoVEX and ipilimumab;
• Is suitable for development in first or second line therapy;
• Has impressive survival compared to previous studies. When compared to Korn et al's 2008 meta-analysis of 42 MM P2 studies (70 arms, and >2,100 patients), PV-10 one year survival rate is statistically greater than the mean (i.e. fall outside the 95% confidence interval), which no study in Korn's analysis did, save for OncoVEX;
• Demonstrated impressive clinical data in multiple tumor types;
• Destroys injected and non-injected tumors (treats local and metastatic disease);
• Has the potential to develop a new standard of care in the treatment of solid tumors;
• Possesses an excellent tolerability profile, and,
• Can be simply administered in an out-patient setting.

BioVex's OPTiM Trial in Stage IIIb/c and IV Advanced Melanoma presentation is a must read, particularly when you carefully compare the material within to Provectus' metastatic melanoma Phase 2 trial data. Recall that Amgen acquired BioVex for up to a $1 billion earlier this year. Ask OncoVex PIs about their view on PV-10.

When the full MM Phase 2 trial dataset is revealed -- remember that the company continued to collect certain data to expand the previously released dataset -- you'll understand why the valuation floor for this indication is well above that paid by Amgen for BioVex.

o·paque

One of the primary challenges (one that I believe borders on frustration) that many serious and nearly all casual investors have had and still have with Provectus is the paucity of information the company historically has made available:

• Clinical data typically introduced by PIs at medical and/or scientific conferences;
• The company irregularly uses press releases to distribute such data in a deeply quantitative manner;
• Rather, press releases are used to qualitatively note achievements;
• Management uses investor conferences and conferences at which the principals speak to introduce important achievements or insights; however, management typically is very circumspect in what they say. Press releases related to these events typically do not elaborate on these insights; and,
• The company has not promoted its efforts to the news media. Rather, Provectus has eschewed such awareness, enabling the success of rose bengal with patients and the excitement of PIs to be highlighted by the media; and
• Press or information releases tend to be fairly well lawyered. Only occasionally do they contain key revelations.

Management's style is typical of a team focused on the end-game, rather than the waypoints. And with their current sole focus on the FDA and big pharma, where management is directly discussing a variety of matters with officials and executives, respectively, Provectus does not see the need to inform the market (and thus, shareholders) of every step along the way. The way to understand what is going on is to directly engage management.

I don't see Craig Dees, Tim Scott, Eric Wachter and Peter Culpepper changing their approach anytime soon. They could've if they would've, but they haven't so they won't. Frustrations will continue to mount until the inevitable end-game plays itself out. The subsequent share price rise will blunt criticism. Unfortunately for too many investors -- those who have not done their due diligence and homework, those who have not built up a robust rapport with management, those who are not intellectually curious, those who have misread the risk-reward profile of this opportunity -- their ultimate return on investment will be far lower than it easily could have been.

The Usual Suspect[s]

Verbal: Who is Keyser Soze? He is supposed to be Turkish. Some say his father was German. Nobody believed he was real. Nobody ever saw him or knew anybody that ever worked directly for him, but to hear Kobayashi tell it, anybody could have worked for Soze. You never knew. That was his power. The greatest trick the Devil ever pulled was convincing the world he didn't exist. And like that, poof. He's gone.

When I learned of Dr. Eagle's addition to the corporate advisory board, it was eminently clear [when combining this announcement with my historical due diligence] that Pfizer was the leader in the clubhouse to acquire the company once the necessary and several boxes were suitably checked. Not that J&J, Novartis and Roche (and, to a lesser extent, GSK) won't have a say, but there are too many indications that PV-10 will soon become a strategic priority at Pfizer.

With BMS having the most high profile anti-CTLA-4 compound, and Pfizer's anti-CTLA-4 fail, it seemed strange there had been no progress by Pfizer in this regard. People previously have noted that the difference between the two compounds is small: Both are fully human monoclonal CTLA-4-directed antibodies; however, while ipilimumab is an immunoglobulin (Ig)G1 isotype, tremelimumab is an IgG2 isotype. Some commentators point to tremelimumab's failure in melanoma Phase 3 trials simply as the result of the dosing, scheduling and trial design. Different and better dosing, scheduling and trial designs could lead to successful outcomes.

Then, in October 2011, MedImmune licensed tremelimumab from Pfizer. Was this the end of Pfizer's efforts for this family of compound? Yet, under the terms of the agreement, while MedImmune would assume global development rights, Pfizer retained the rights to use tremelimumab with specified types of combination therapies. Since ipilimumab's coming out party, combination therapies, such as with vemurafenib (and others), are being suggested to optimize its utilization.

Combination therapies, in my view, relate to novel approaches combined together, such as radiotherapy and PV-10, rather than comparators, such as sorafenib and PV-10. The former represents the frontier of further beating cancer senseless, while the latter relates to the regulatory approval process (if management had not made a calculated risk-based decision to pursue accelerated approval for MM that with the benefit of hindsight turned out to be wrong, we would have seen an RCT completed by now).

I asked management about the MedImmune transaction, as it was well known that Pfizer had, for some time, discussed out-licensing tremelimumab with several parties:

• Did Pfizer approach you to license tremelimumab? No comment.
• Have you discussed combination therapies with Pfizer, such as tremelimumab and PV-10? No comment.

As you know from Provectus' IP strategy, the company aggressively has patented or applied for patents on:

• Rose bengal structurally and as an active pharmaceutical ingredient;
• The manner in which rose bengal is biopharmaceutical delivered; and
• Combined use. The first evidence of this relates to the combination of radiotherapy and PV-10 dating well before the Australian team's successful outcome was first revealed.

Investigators and scientists obviously believe it is too early to make declarative judgements on the ipilimumab's ultimate efficacy as well as how to effectively combine it with other treatments for the ultimate benefit of patients. That simply is the nature of science and research.

But, if management had the forethought to address the future in its IP and patenting strategy, is there something to Pfizer retaining the rights to use tremelimumab with specified types of combination therapies? This certainly bears watching.

You're my ambassador of quan, man.

How much is Provectus worth? I think a better question to ask is how much do the principals think it is worth? There is a big difference in valuation expectations between entrepreneur managers and professional managers, and that difference often is starkly seen in the monetization process.

Over time, valuation expectations have risen. It was not so long ago, perhaps 2009, when the threshold was $1 billion. In 2010, the threshold was raised to $2 billion. More recently, my diligence would suggest a $2.5 to $3 billion threshold.

How do we get to this figure? $2 billion comes:

• $500 million for dermatology (primarily atopic dermatitis and psoriasis). I am curious, however, about the impact of acne on this valuation;
• At least $1 billion from melanoma (recall previous recent precedent transactions); and, 
• $500 million for liver.

$500 million to $1 billion relates to other indications (e.g., pancreas, breast, prostate, etc.); thus, $2.5 to $3 billion.

Management understands valuation matters -- frankly, is only relevant -- when both parties agree to a number. And that's why it's important to understand them and their expectations:

• Are they reasonable people? Reasonable people can bridge valuation gaps between sellers and buyers. Idealists cannot.
• Do they have reasonable expectations? Not every entrepreneur (or mercenary executive) can combine an understanding of (a) value in the abstract and (b) value when it comes to the deal. Sometimes people sell too low. Sometimes they can't sell because they're expectations are too high.

Right now, it looks like a $2 billion upfront payment is the minimum number that will get management's attention. Using the weighted average number of common shares outstanding (basic and diluted) of approximately 109 million, the company's minimum quan is about $18 per share.

Deal structure, of course, is a lengthy and useful discussion to have, but not now.

300

Persian: A thousand nations of the Persian empire descend upon you. Our arrows will blot out the sun! 
Stelios: Then we will fight in the shade.

Some weeks back, the context of HGSI, several folks including Adam Feuerstein, Jason Napodano and others engaged in a Twitter discussion about big pharma and risk-reward. Paraphrasing, valuation is paramount to big pharma; they would rather spend more later when the risk is lower.

I engaged Peter Culpepper in this "thought thread," as this approach to risk-reward is common across and very applicable to many industries and acquisition situations. While this continues to be a robust, developing thread, it was gratifying to hear Peter confirm this sentiment was seconded by pharma executives with whom he interacts.

I'd wager that Pfizer would prefer to pay $3 billion for a Provectus that has, among other things, received an SPA for a pivotal MM Phase 3 trial and an SPA for a liver Phase 2/Phase 3 trial, than $300 million for a Provectus that only has a completed MM P2 trial with no certainty of its regulatory path.

Given that large difference in valuation for what will amount to 12-18 months of time, wouldn't you say it will have been worth the wait?

I ate his liver with some fava beans and a nice chianti.

My diligence indicates Provectus is pursuing accelerated approval in its liver Phase 2/Phase 3 trial under a special protocol assessment.  It is possible, however, as Tim Scott mentioned in his September presentation at the Rodman & Renshaw conference, that the study could be just a Phase 2 trial. As a result, this trial might not qualify for SPA or AA. The ultimate approach and trial design will depend on management's interactions with the FDA.

In either case, I expect the eventual liver trial will have received significant input from key opinion leaders and the FDA. Given the results Dr. Scott tantalized the audience with at the conference, I am sure big pharma is most focused on the trial providing randomized data (i.e., sorafenib vs. sorafenib + PV-10). It would seem everything else (clinical data) is gravy.

The Skinny

In Dermapalooza I began a discussion about the pending psoriasis Phase 2c trial results. Many rightfully are very focused on the top-line numbers (and the substance of the related clinical data report). I am as well. I am, however, even more focused simply on the timing of the information release. Think of the press release that accompanies this event as a starting gun going off.

When I hear the shot, I know the data is being shared with two groups: the prospective licensees (buyers) of the dermatology business and the equity research analysts. Within, I hope, a short period of time, we should expect the company -- given the interest expressed by a number of interested parties -- to receive a term sheet. Thereafter, in order to facilitate the process, the financial adviser will be formally engaged, of which we will learn through another press release. The investment banker will shepherd the process through the closing of this transaction.

In my view, closing the deal (from the time the first term sheet is extended) could be as short as a couple of months to as long as 6 or more months. I expect timing on the order of 3 or so months, mainly because the digital data room in which all dermatology-related and some corporate information resides has been well visited by these prospective licensees.

What I do not know, however, is how management will manage the information flow beyond the press release announcing the engagement (hiring) of the investment banker. Will we hear about final deal parameters when the transaction closes? Will we hear about these parameters when the term sheet is finalized, but before the deal is closed?

So, when the press release announcing the top-line results is issued, very likely before year-end, I would expect the transaction to close in or before the end of Q1 next year. As one of the key near-term drivers of valuation (together with immunology), the share price also may begin its ascent when the starting gun goes off.

Immunology Redux

It is abundantly clear that characterizing the immunologic response to PV-10 is extremely important to medical oncologists. Surgical oncologists could care less, and think PV-10 already should be approved.

My diligence suggests immunology now has become a very key valuation driver. As I wrote previously, two immunology studies have been completed (immuno-studies #1 and #2) and additional studies are in process, which are expected to be completed in December. Additional immunology studies will be undertaken next year.

I will be paying close attention to where and how immuno-studies #1 and #2, being the first in the pipeline, are presented: What are the venues? What is the tenor of the author(s) in conveying the respective results?

Don't Take Candy From Strangers

And, don't believe everything (anything?) you read on the Internet.

I like Peter Culpepper. I find him to be intelligent and intellectually curious, methodical and process-driven, and efficient. Oh, and, in my view, he is a good CFO.

I've been a CFO in a past life. During several other past lives as a venture capital and private equity investor, I've been on audit committees as well as overseen CFOs and the finance function of companies. There are two kinds of CFOs: operations-focused ones and, for lack of a more precise term, Wall Street-oriented or focused ones. The former understand and care for the business. The latter understand and care for the transaction. Rarely does one encounter CFOs who effectively straddle both camps. These individuals are the exceptions that prove my rule.

Peter is one of those rare individuals. While he is operations-focused, he can deal effectively with Wall Street and big pharma (corporate development and M&A). How so?

Some time back, Peter and I were discussed the deal terms of the sale of a biotech to big pharma. He always had struck me as an operations-focused CFO -- by now, you should have guessed my bias; if your company or a company in which you have invested hires a former research analyst or investment banker as a CFO, sell your shares sooner rather than later. The transaction-oriented CFO, because of his or her experience, counterintuitively to most, has less of a handle or sense of value than the operations-focused CFO.

I was struck by Peter's detailed handle and insightful comments on the deal. It was clear to both of us that the biotech CFO had whiffed, and that whiff was going to cost shareholders. My view of Peter:

• He's operations-focused (how many times have I said that?);
• Peter plays the Wall Street game in so far as it needs to be played: he understands the necessity but not excessiveness of pay-to-play as it relates to equity research coverage;
• He has handled the company's two shelf filings, given my comment above, well;
• Peter is very polite with and accommodating of prospective institutional investors, but if they take him to be naive, too bad for them;
• He, like the other principals, has a long-term view. Is a deal worth doing now? How does risk adjusted or probability adjusted deal value change over time?;
• Pete has surrounded himself with smart financial advisers, particular the prospective lead investment banker, so what he doesn't know he figures out pretty quickly; and,
• He's got a superb handle on valuation (construction, comps, parameter analysis) as well as dermatology and end-game deal structure.

I believe the company has turned down a big pharma licensing deal for metastatic melanoma. I also believe such a deal likely was valued in the low- to mid-hundreds of millions of dollars. Why? At the time they turned it down, despite what I am sure was a likely desire to check a traditional biotech box, management (likely led by Peter, but with strong input from the other principals and the financial adviser) instinctively felt the price was low, in a vacuum and in concert with the efficacy found in other indications. The floor for melanoma for them is $1 billion, given the Amgen-BioVex and Daiichi Sankyo-Plexxikon transactions.

Share Price: R-E-S-P-E-C-T, But Not Right Now

On Friday, the share price closed at $0.85. The price is:

• Down 10% year-to-date;

• Down 12% for one year;

• Up 4% for three years;

• Down 30% for five years; and,

• Up 64% for seven years.

For shits and giggles, the share price is down 35% for eight years. The stock has been a good vehicle for traders, although liquidity, bid shallowness, the size of the bid-offer spread one often encounters and the average number of shares traded daily are not conducive to trading more than a few tens of thousands of shares for a good risk-adjusted return.

Nevertheless, the historical performance of the share price has been poor to say the least. Such performance likely will remain in character through the end of the year barring:

• Completion and, potentially, release of the now full metastatic melanoma Phase 2 trial data; and,
• Completion and release of the psoriasis Phase 2c trial report (both of which should come out before year-end).

Management does not care about shareholders. Really? Ha! In a way, a very sarcastic way, yes.

With a primary focus on the FDA and big pharma (in particular, one and more), management is simply not focused on the near-term share price. Although, it would appear the near-term has been for several years now. Despite a clear understanding of and recognition that data, information and news (press releases, or being in the news) has moved and will move the share price, management's ultimately time frame for optimizing the share price is at acquisition of the entire company, with waypoints being the license (essentially the sale) of the dermatology business and one or more (likely one to two) mini-oncology (geography specific, indication specific) licenses for melanoma and/or liver.

In the end, the share price, in my view, will resemble more of a step function in its optimal or near-optimal outcome.

Even though more than a handful of institutional investors have dipped their toes in the water thus far (there are, perhaps, some 15 such investors, give or take), the institutional investor community at large (pension, mutual and hedge funds) will likely arrive somewhat late to the game. Big pharma will strike a deal with Provectus well before the market prices in the company's true value.

Who's Who?

Provectus has assembled a very strong cadre of directors and advisers with deep knowledge in their respective areas of expertise (in no particular order):

• Board member and adviser Dr. Kelly McMasters (oncology);
• Adviser Dr. Seth Orlow (dermatology);
• Adviser Dr. Craig Eagle (oncology); and,
• Board member Alfred Smith IV.

Management will engage a financial adviser in concert with the firm term sheet being extended to the company for the dermatology business. Not all investment bankers are equal. Years ago, one of our portfolio companies was approached by Cisco Systems to be acquired for a nice nine figure amount that would have generated a solid return on our investment. The bulge bracket firm management and the board of directors hired to represent the company ended up having a vice president lead the engagement, rather than a managing director. Why? Who knows, but shame on management and the board, who were comprised of purportedly experienced investors, for letting what eventually transpired: the vice president not only screwed up the auction process but also managed to lose the firm bid in front of us. Talk about the B-team.

A good investment banker is worth his or her weight in gold, which is like $5 million if they're on the heavy side (who knew gold was more expensive than rhodium these days). A great investment banker is worth at least several billion dollars.

Boy, do they have a doozy of a banker, who's of course not yet engaged: a board certified physician with the same specialty as my brother-in-law, an M&A adviser to big pharma on a monstrous-sized deal, experience with selling biotechnology companies for billion dollar price tags, and relationships with Provectus advisers.

If management indeed formally engages this gentleman, it should be safe to say that shareholders are in great hands.

Immuno-impact

It is both instructive and helpful to categorize the company's work:

• Value drivers (in no particular order):
• Dermatology
• Metastatic Melanoma
• Liver
• Value enhancers
• Immunology

Obviously the company's breast Phase 1 trial and the contemplated pancreas Phase 1 trial, together with the growing list of cancers Provectus' compassionate care program has treated, are themselves value drivers in a sum-of-the-parts notion. But, these 4 strategis thrusts -- melanoma, liver, dermatology and immunology -- is where the a good amount of the company's time and resources currently are being spent.

It seems to me that immunology has grown into a substantial wild card for the company. When I say wild card, I mean the card you add to your hand of playing cards to complete it. Is immunology the card that complete's management's straight flush? A royal flush, perhaps?

Two immunology studies have been completed and additional studies are in process, which are expected to be completed in December. Additional immunology studies will be undertaken next year.

SPAnchline

So what's the punchline? To SPA, or not to SPA?

I believe Provectus will agree with the FDA on a consensus design for a pivotal Phase 3 for MM suitable for an SPA (did I say that right?). But, I also believe Mr. (or Ms., your choice) Market thinks that, at worst, the company will not get this SPA. At best, Mr. Market thinks that, I believe, agreement will not happen anytime soon.

Management views the situation in a somewhat or slightly more nuanced way:

• First, it isn't a question of if, but rather when. Life science investors expect Provectus will get the SPA, but they won’t believe it (read: buy shares) until they see it (read: get it);
• Second, what. It’s not just about getting an (the) SPA. More critically, it’s about the details of the design (endpoint(s), and number of patients, etc.); and,
• Third, it's about the very critical understanding of the immunology that has resulted from Moffitt’s work.

Fair enough on the first point. Points two and three require most discussion in subsequent posts.

I don't think management has a precise time frame about when they will agree on the SPA with the FDA. While the expectation is, literally, any day now, they express the sentiment that they've done all they can.

They wait. We wait.

Another SPAsm

When the fracking hell will receipt of the SPA be announced? This question is one of at least two questions on my mind in the very near-term. The other: When will the top-line psoriasis Phase 2c trial results be released?

According to Mark Monane, MD, Vice President and senior analyst in biotechnology and biopharmaceuticals, Needham & Co, New York, “Having an SPA in place  is especially important if it’s the company’s first drug in late-stage development.” Other situations where an SPA is a desirable possession are when the drug entity in question is first-in-class, or has (or could have) orphan status designation. This is particularly true in oncology where drug development frequently explores uncharted terrain. “The SPA is very helpful because it lays the groundwork. It gives you a trail to follow,” he said. Not that you still can’t get lost, he commented, saying, “Yes, the agreed upon protocol exists as a sort of contract with its itemized expectations, and you have to live and breath by this thing. But, as the trial develops and you want to make changes, those are harder to make because of the SPA.” According to Monane, there are fewer degrees of freedom with SPAs than if a company had proceeded on its own. To be clear, an analyst is not privy to the SPA’s provisions, but it creates a comfort zone. “It’s like a recipe for a cake. It takes time, attention, and love to get the cake right.” However, the recipe isn’t enough, there still needs to be an effective team in place to do the work. “I definitely use the SPA as one of my check boxes,” he says, “You still have to execute, but it’s a nice place to start.” Source here.

SPAsm

When the fracking hell will receipt of the SPA be announced? This question is one of at least two questions on my mind in the very near-term. The other: When will the top-line psoriasis Phase 2c trial results be released?

An oldie but a goodie: Mike Miller, Minyanville, 2004: While the alphabet soup is not nearly as densely packed with letterish noodles at the FDA as it is at the Pentagon, biotech investors have to wade through their fair share of acronyms. In this article, I dealt with a number of pre-approval designations. In this one, I covered the different ways the FDA can approve a drug – including the euphemistic “approvable letter.”

Now we turn to a program I believe is going to be crucial for successful drug approval going forward: The Special Protocol Assessment (SPA).

At the May 3rd ODAC meeting, we saw a promising cancer drug (Genta’s (GNTA:NASD) Genasense) with undeniable clinical activity in metastatic melanoma shot down in an ODAC panel meeting due to statistical technicalities. Differences in interpretation of trial results between the sponsor and FDA statisticians severely dampened this drug’s chances for approval in melanoma. This is a consistent problem in the FDA drug approval process where statisticians’ views on a clinical trial are held in higher esteem than clinician and patient needs.

Negotiations between the pharmaceutical industry and Congress created the SPA program. The program is an effort by the industry to bind the FDA to a series of agreements about a particular clinical trial. In short, it offers some predictability to dealing with the FDA during the approval phase of a drug’s development and limits their ability to change their minds about trial requirements halfway through the process.

An SPA should eliminate most of the ability of FDA statisticians to nitpick about the design of the trial. In many FDA briefing documents, we see long rationalizations by FDA staffers as to why a particular clinical trial did not measure what it was supposed to measure. Under an SPA, the FDA enters into a written, binding agreement that the design of the trial is sufficient to demonstrate an agreed-upon set of clinical endpoints.

In general, the idea is if you sign an SPA with the FDA and conduct the trial as agreed, good results from the trial will be sufficient for marketing approval. This makes securing an SPA especially valuable to both the company and its investors – especially after the FDA’s behavior on May 3rd.

It must be noted the FDA still has a few outs when it comes to the SPA:

(1) They can argue that the company did not, in fact, run the trial as they agreed. If they can make this argument stick, the whole SPA goes out the window.

(2) If the director of the FDA division reviewing the application determines "a substantial scientific issue essential to determining the safety or effectiveness of the drug" was identified after the testing began, then the FDA can invalidate the SPA unilaterally. We would note, because the issue has come up in one of the companies we cover, that impressive results from another drug would not qualify under this exception, unless the SPA contemplated orphan or accelerated approval. You might remember that both those approval designations have a requirement for superiority over existing approved treatments.

(3) The information presented by the company to the FDA and used as the basis to formulate the SPA was misleading or inaccurate.

In sum, an SPA is about as binding of a deal as you can get with a government agency.

I’ll go out on a limb here: If a biotech company starts a new Phase III pivotal trial and does not have an SPA for that trial, investors in that company should be concerned. The FDA is not being shy about handing out SPAs and the extra 2-5 months it takes to get one of these things negotiated and signed is well worth the time spent.

Note I say “starts” a new pivotal trial. The SPA is not available once a trial has started, so this is a feature you should look for going forward in new Phase III trials. It is also not available in Phase I or Phase II trials unless the FDA judges those trials to be pivotal in nature. While the SPA program has been available since 2002, only in the last 9-12 months have companies begun to take advantage of it.

The reverse of this is also true: Any biotech company who has secured an SPA for their Phase III pivotal trial should receive a higher valuation – all things equal – than a company that has no SPA. 

The granting of an SPA does not mean the trial is more likely to succeed. Things still go wrong in pivotal trials. What it does mean is things are less likely to go wrong once decent data are generated by the clinical trial.

While an SPA does not eliminate the risk FDA statisticians will find some mumbo jumbo statistical disagreement with the trial data, it does provide some limitation to those games. That limitation reduces risk in the regulatory process. Even a slight decrease in risk in the biotech environment is important – doubly so on the regulatory side after the display the FDA put on in the May 3rd ODAC panel meeting.

Corporate Alliances

Has Provectus checked the box of a corporate alliance with big pharma? No.

Frack! What the hell is taking them so long. These guys don't have a clue. Isn't is obvious? If they did [have a clue], they'd have licensed one of their indications long ago.

LMFAO!

Has management been approached by a pharmaceutical company to license an indication in development?

If so, did they turn down such an overture(s)? Why?


Has management been approached or asked by Pfizer to license an indication in development?

If so, did they turn down this (these) overture(s)? Why?

By the way, why would they turn a license transaction down? Hint: It's not high enough.

N.B.1 rhe·tor·i·cal questions

N.B.2 Truth or lie?

Founders versus Non-founders

I contend the cost basis of a founder's ownership in shares of a company, public or private, are higher than the cost basis of non-founders.

From strictly a common stock price, or an option exercise price, founders' cost bases likely are lower. Why? They've simply been around longer, like at inception.

But, when you add to the mix what they may have contributed by way of tangible or intangible assets (including sweat equity, opportunity cost, and bringing to fruition the dream/vision), the cost bases rise.

As a result, non-founders do not have as much incentive to quantitatively and qualitatively optimize the outcome.

N.B. In the context of the above post, I consider Peter Culpepper a founder-type.

ques·tion

When I was an young venture capitalist, I worked for a former investment banker (his managing director to my associate and, later, principal). I both hated and loved him (Note: hyperbole, but truthfully, the former > the latter). Of the several pieces of great advice he gave me, the greatest lay in the formation of a question to a prospective investee.

Simplifying:

1. Ask questions that require the investee to expound on response requiring many, many words:
• You learn more from these kinds of questions that yes-no ones.
• The responses will lead you to ask more questions.
2. When you do ask a question for which the answer will a "yes" or a "no," be very precise in your question.

Simple stuff.

Liar, liar, pants on fire!

Deceiver, dissembler
Your trousers are alight
From what pole or gallows
Shall they dangle in the night?


When I asked of your career
Why did you have to kick my rear
With that stinking lie of thine
Proclaiming that you owned a mine?


When you asked to borrow my stallion
To visit a nearby-moored galleon
How could I ever know that you
Intended only to turn him into glue?


What red devil of mendacity
Grips your soul with such tenacity?
Will one you cruelly shower with lies
Put a pistol ball between your eyes?


What infernal serpent
Has lent you his forked tongue?
From what pit of foul deceit
Are all these whoppers sprung?


Deceiver, dissembler
Your trousers are alight
From what pole or gallows
Do they dangle in the night? (The Liar, William Blake)

It all boils down to integrity. Everything else is just the canvas of the picture we call our professional career.

If you ask management a question, to which they respond "X," do you believe them? The possibilities:

• X1: The truth;
• X2: A version of the truth; and,
• X3...n: Versions of untruths, including a lie.

If the question is worded properly, the data set of responses simply should be {X1, Xn}: a truth and a lie, where both cannot live in the same universe (matter, anti-matter). The skeptic might say it depends on what the meaning of the word "yes" (or "no") is. I think simple is simpler than this. I think is simple. Does management tell me the truth, or do they lie to me. No shading. No obfuscation. Just, yes or no. Truth or lie?

If you think they lie, while you're entitled to your opinion, such as it is, you should stop reading my blog, now.

Peer Review, Schmeer Review*

* I Googled "schmeer" to ensure I spelled it right (using "peer" in the process), and found out someone else had come up with the same title, first. Oh, well.

As biotech investors, or simply investors in general, we must prevent ourselves from becoming lazy. It's too easy to look for boxes to check: Big pharma licensing deal(s)? Check. Peer-reviewed journal article(s)? Check. Check. Check. Check. How do we find the rare gem?

More importantly, how do we find the investment opportunity before everyone else does?

For a period of time, some time back, I found myself obsessed with trying to square the circle of Provectus and peer review. Management and the company's principal investigators jointly and separately had published a few peer-reviewed papers, including participation at ASCO. But it didn't seem enough to me. Sometimes we check the box(es) before we invest. Sometimes we check the boxes in order to invest.

Why couldn't management publish more peer-reviewed journals? Why couldn't get they get into the New England Journal of Medicine or The Lancet? If they did (publish more, or in illustrious venues), everything would be alright. Right?

There are trade-offs, everywhere: Risk versus reward. Time spent here versus time spent there. Resources used here versus resources used there. If the company already has checked the peer-reviewed journal article box, do they really need to check more? Who feels better about spending and incurring more time, resources and frustation (I had to remind myself of my own experience years ago as a minor co-author of a peer-reviewed paper in an academic periodical)? The company or investors (me)?

If an esteemed peer or group of peers thinks management's work is top shelf, then it must be. LOL! In the peer review process, peers don't know as much as they think they know.

I want management focused on making the FDA and big pharma happy. Peer review, schmeer review.

The peer-review process is broken. It's the only process we have, but it needs to be fixed. For now, a sampling of grumblings:

• Peer review: a flawed process at the heart of science and journals, Richard Smith
• Does peer review need fixing?, David Gorski
• What is wrong with Scientific Publishing and can we put it right before it is too late?, Peter Murray-Rust
• Why publish science in peer-reviewed journals?, Joe Pickrell
• I Hate Your Paper, Jef Akst
• Do we need an alternative to peer-reviewed journals?, Jonathan Gitlin

With all that said, however, we could see more published articles and/or peer-reviewed work by Provectus including but not limited to:

• Metastatic melanoma Phase 2 trial results in a global publication;
• Compassionate care program results;
• Combination therapy of PV-10 and radiotherapy for metastatic melanoma;
• Liver Phase 1 trial results in a global publication; and,
• Psoriasis Phase 2c trial results.

I do hope these literature opportunities ultimately come to fruition.

Am I counting on them to impress either or both of the FDA and big pharma, or substantiate valuation and the end-game? No. Will I feel better? Maybe...

O Captain, My Captain

Connect the dots...

I titled the blog "Connecting the dots..." because so much of the process of investing simply boils down to gathering information about a company. We collect small and large bits and bites of information from different sources, both public and private. We glean as many pieces of data as possible to determine if they tell a story that makes sense.

Why has Eric Wachter exercised so many stock options? Why haven't the others exercised nearly as much? What, if anything, do these option exercises, or lack thereof, tell us?

Let's focus of Dr. Wachter, and connect the dots:

• He oversees all Provectus' clinical trials;
• All sorts of clinical data flows through his laptop. Dr. Wachter analyzes thousands and thousands of pieces of data;
• He's a very smart man. If you won't take my word for it, at least you might agree he's "only" smart given his national labs background; and,
• Dr. Wachter knows math. He knows how to use spreadsheets.

Do you think he might have a decent sense of how good the trial data is? We forgot to ask a question: Have management sold any shares? No. And that piece of data is an important one.

The combination of management, as a whole, (a) not having sold a single share and (b) exercising a significant amount of stock options over time is a great sign. I don't think the timing of their option exercises is significant as it relates to predicting a monetization event. The exercises relates to tax efficiency. The lower the share price, or the closer the share price is to the option's exercise price, the lower amount of taxes paid (at income tax levels).

The skeptic in me or anyone else could wonder why Dr. Wachter has exercised so many options while Dr. Dees, Dr. Scott and Mr. Culpepper have, on a relative basis, exercise so much less. Let's explore the differences between the management team members:

• Is there a disparity in liquid net worth? It costs money to exercise stock options;
• Have one or more of them contributed in kind assets, such as supplies? How recoverable are such assets? A low or high recovery ratio would have a significant impact on the decision to exercise options;
• Do they have children and/or other animals in their care? Such organisms require daily, weekly, monthly and yearly fodder;
• What are the views of their spouses on this entrepreneurial venture that is Provectus? How much risk do these women feel their husbands are taking? The future is by no means certain. Option exercises cost money. That money must come at the expense of another household purchase or need, or out of the rainy day fund. The answers to these questions and queries, together with the respective spouse's risk profile, is undoubtedly a strong influence.

In the end, in my view, Dr. Wachter's stock option exercises are a very telling sign. Option exercises by the other management team members are important as well. And, so too, is the lack of stock sales.

That some members of the team have exercises less options than others is not meaningful.

X, The Independent Variable

Provectus' board of directors currently consists of five members:

• Dees (insider);
• Scott (insider);
• Wachter (insider);
• Dr. Kelly McMasters (outsider/independent director); and,
• Alfred Smith IV (outsider/independent director).

So, insiders outnumber outsiders 3-to-2. Is the company planning to add more independent directors?

I have maintained for a long time that Provectus is a private company that happens to be public; for now, an over-the-counter bulletin board stock. That's for another post.

Does an independent board matter? At the moment, and for the near-term, it doesn't matter. The stock is trading on a minor exchange at below $1 per share. Valuation doesn't matter today.

When the share price does run to a level that makes Provectus eligible to join a major stock exchange, what other boxes must be checked to secure, say, a NASDAQ listing? An independent board, perhaps? Add another independent director and have one of the company founders step down from the board for the greater good (remember Tony D'Amato?). Outsiders would outnumber insiders 3-to-2. Poof! An independent board.

I wonder if Craig thought about that? LOL!

Management Does Not Care About Shareholders

Ahhh...a little bit of shock blogging! How else am I going to get your attention? Who's actually reading this blog anyway?

Management does not care about shareholders. Really?

Like jokes we make to friends or acquaintances, there often is a grain of truth in our words, and context as well. Provectus' constituencies consist of (in order):

• Patients;
• The FDA;
• Big pharma; and,
• Shareholders.

Putting aside patients for this post (management's view on this is indeed interesting, admirable and believable), you will hear Craig Dees repeat over and over that the company's two primary constituencies (aside from current and future patient health prosperity) are the FDA and big pharma.

The FDA: The approver. Big pharma: The buyer. Remind me again where shareholders, in the near-term -- that is, before the end-game -- fit in?

Admittedly, and I will blog in more detail about this later, focusing on the needs of the FDA and big pharma can run opposite to the needs of most shareholders, who want a higher share price to sell their holdings, rather than holding out for the end-game that could well see the share price optimized by management's efforts to best serve the FDA and big pharma.

In my view, if Provectus makes the FDA and big pharma sufficiently happy (together with patients suffering from cancer), management will have demonstrated in a real way -- the only way that matters to investors -- that they truly do care about shareholders.

rhe·tor·i·cal

Which version do you like?

"He that knows not,
    and knows not that he knows not
        is a fool.
            Shun him
He that knows not,
    and knows  that he knows not
        is a pupil.
            Teach him.
He that knows,
    and knows not that he knows
        is asleep
            Wake him.
He that knows,
    and knows that he knows
        is a teacher.
            Follow him." (Neighbour R (1992) The Inner Apprentice London; Kluwer Academic Publishers. p.xvii)

Or...

"We know what we know, we know that there are things we do not know, and we know that there are things we don't know we don't know" (Donald Rumsfeld)*

I believe successful investing over the long-term is about evolving, changing, learning: I know I don't know what I don't know. So? Go find out what you don't know.

My goal is to release as much of my due diligence on the company and the results of my questions to management over the years as I can, hopefully before the share prices runs. Questions you see in my blog posts are, for the most part, rhetorical.

But, question my motives. Am I really going to tell you everything I know?

* Seriously, this from the same guy who wrote: "You go to war with the army you have---not the army you might want or wish to have at a later time."Sheesh.

A Question of Motive

How often have you heard some say "I don't question his (her) motives," and go to questions his (her) motives? If politicians come to mind, you are not alone.

Let's be frank. Frank: Investing is a binary game of life or death. If you are right, you win and live to invest another day. If you are wrong, you lose.

psst! ↑ Hyperbole.

Nevertheless, I think successful due diligence leading up to the initial investment decision, and as part of one's ongoing self-questioning to maintain or refute one's investment thesis, requires that we question motives.

Beyond what I believe are potentially debatable questions of competence, experience and industriousness -- one person's experience is another's inexperience -- I like to find out why company principals fundamentally are where they are.

"Because in either game - life or football - the margin for error is so small. I mean, one half a step too late or too early and you don't quite make it. One half second too slow, too fast and you don't quite catch it. The inches we need are everywhere around us. They're in every break of the game, every minute, every second. On this team we fight for that inch. On this team we tear ourselves and everyone else around us to pieces for that inch. We claw with our fingernails for that inch. Because we know when add up all those inches, that's gonna make the fucking difference between winning and losing! Between living and dying! I'll tell you this, in any fight it's the guy whose willing to die whose gonna win that inch. And I know, if I'm gonna have any life anymore it's because I'm still willing to fight and die for that inch, because that's what living is, the six inches in front of your face. Now I can't make you do it. You've got to look at the guy next to you, look into his eyes. Now I think ya going to see a guy who will go that inch with you. Your gonna see a guy who will sacrifice himself for this team, because he knows when it comes down to it your gonna do the same for him." (Tony D'Amato)

Do you think Peter Culpepper is will to fight and die for that inch? Google peter culpepper new york times. You'll find out what I believe is the answer to this question.

What about the others?

psst! ↑ Rhetorical.

Dermapalooza

There's a lot on tap with Provectus, which I'll get into in another blog post, but top of everyone's mind these days are:

• A consensus agreement on a design suitable for Special Protocol Assessment (SPA) for the company’s planned pivotal Phase 3 randomized controlled trial (RCT) of PV-10 for metastatic melanoma; and,
• Top-line data from Provectus' Phase 2C clinical trial of PH-10 for the treatment of psoriasis.

How often have you seen an illustration of the risk-reward curve, as it relates to investing, where as risk in a given transaction increases so does the reward (or was it, as reward in a given transaction increases so does the risk)? Trading risk for reward, or reward for risk. Hmmm...

The psoriasis equivalent is trading safety (risk) for efficacy (return).

What I'll be looking for in these top-line psoriasis numbers is efficacy. Are they poor, average, good or great? If efficacy is average to good -- middle of the pack, so to speak -- then given PH-10's safety profile: winner, winner, chicken dinner.

It quite conceivable that Provectus' Phase 2C trial design had limitations that in the not so distant future might reasonable be removed or reduced. Might PH-10 be:

• Applied longer than 28 days (like, for example, 2-3 months)?
• Applied at different times during the day?
• And so on...

"...in all undertakings in which there are risks of great losses, there must also be hopes of great gains." (Alfred Marshall)

I think the smart folks on Wall Street, and many, many others, conveniently dropped (or, more likely, forgot) the word "hopes."

The psoriasis equivalent is, while enjoying the same safety (risk), what will the next trial design do for efficacy (return)? If efficacy of the Phase 2C is average to good, then lifting some of the old trial's limitations in the new trial could well increase efficacy to great. Onwards and upwards...

The End Game: Pfizer. Really?

As you know by now, Dr. Craig Eagle, Vice President of Strategic Alliances and Partnerships for the Oncology unit at Pfizer, has been a member of Provectus' corporate advisory board since late-August 2011.

“Well, isn't that special?” (The Church Lady)

Google tells us that Dr. Eagle also is a member of Regenicin's board of directors (from an oncology perspective, why? personal interest?), starting in early-September 2010, and Generex's scientific advisory board (Generex: from an oncology perspective, why?; Antigen Express: from an oncology perspective, it make sense, perhaps), starting in early-August 2010.

Strictly looking at share price as one of many potential metrics to measure "relationship success," OTC:RGIN and OTC:GNBT are down some 90% and 75%, respectively, since Dr. Eagle's involvement with the companies began. In the case of Provectus, the share price is up a modest 5%.

"Please, sir, I want some more [information]." (Oliver Twist)

One could imagine the top 5 potential acquirers of the company, setting aside the eventual licensee of the dermatology business, are (in no particular order): Pfizer, J&J, Novartis, Roche and GSK.

Having worked for several years as a corporate strategic investor, the relationship with Pfizer, ostensibly nascent as it is, is interesting:

• Acquisitions often times begin with baby steps: e.g., a revenue or non-revenue relationship of some sort, a mutual board director, a minority investment, etc.
• But relationships are like living, breathing entities. They grow. They evolve. They live long. They sometimes die early.
• Who initiated the relationship? Pfizer? Provectus? Small companies seek out larger companies, and larger companies seek out smaller companies. Who sought out who?
• Adding a line executive (or any senior executive for that matter) to another company's board of directors or advisory board typically gives the originating company's general counsel or legal department fits. Sarcastically speaking, if it were left up to GCs and legal departments, the business world would be devoid of any kind of "partnership."
• There is an internal champion of the relationship at the larger company. Who championed Provectus at Pfizer [to the leadership of the Oncology and Pfizer corporate], and why?
• Did you know that Pfizer derives nearly de minimis revenues from oncology product sales? See below (3rd quarter 2011 performance); a few percentage points at best.

• Where's smoke there's fire. So far, all we have is Dr. Eagle's presence on the corporate advisory board. Has there been more collaboration?
• For example, Dr. Eagle has also been involved with teams that resulted in eight new products. Has he provided feedback on melanoma and/or liver trial design for PV-10?
•  Is there more collaboration to come?