In this letter, I want to share my investment thesis in depth and describe why, at a share price of $0.94 and market capitalization of $103 million (based on Friday’s close), Provectus Pharmaceuticals is an exceptional long idea. This security is the largest holding in our multi-asset portfolio.
For framework, approach and, in some cases, language of this letter, I liberally borrowed from Whitney Tilson’s Why We’re Short Netflix. See here. For quick access to data summations and historical information (rather than have to dig through my notes), I quoted from OneMedPlace’s recent profile on Provectus. See here.
I am not a biotechnology investor, although I have made investments in life sciences companies. My experience in and exposure to different industries includes biotechnology (and life sciences), computer hardware and software, defense and intelligence, environmental services, financial services, gaming, information technology, investment management, mining and nanotechnology.
There are common traits to successful companies and their management teams, businesses, business strategies and tactics, and products and services, irrespective of industry. There also are common traits to successful investments, irrespective of asset class or security sector.
Biopharmaceutical industry participants (e.g., executives, scientists, investors), in other words experts, may poke or blast holes in this letter because of my focus on accuracy rather than precision in drawing conclusions. One might do well to channel mental energy into more productively observing situations and listening to people.
Background
My due diligence is a compilation of nearly four thousand interactions with Provectus management (e.g., calls, queries, questions, e-mails, meetings, attending conferences, etc.) amassed over several years. My own thinking about the company’s prospects evolved over time.
If our portfolio was one hundred percent cash and I was investing from scratch, would I establish this position in Provectus and, if so, how big would it be? The answer is I would have the same position I have today.
Overview
Investors often underestimate or overestimate risk in the context of the return they should expect. Just because a so-called safe asset or security could provide a safe return does not mean the expected return is commensurate (high enough) for that level of risk. Conversely, just because a so-called risky security could generate a robust return does not mean the expected risk is commensurate (too high) for that amount of return.
Provectus falls into the category of an investment opportunity where the risk-reward profile is clearly and visibly out of whack.
Until very recently, the share price trended downward for at least five years, despite: copious, unambiguous pre-clinical, clinical, safety and multi-indication viability data for oncology and dermatology therapies; ease of drug administration and low drug production costs; a broad and deep accompanying intellectual property portfolio; the historical and likely future prudent raising and efficient use of capital; and an intelligent, hard working, ethical and unchanged management team.
Why on earth would I be betting on this stock, when most institutional investors, including most life sciences and biotechnology-focused investors, have completely ignored Provectus? The current valuation is extremely low. There is substantial additional upside above the near-term fair market value. Once the only remaining unknown, the regulatory path for the company’s oncology drug PV-10 – primarily metastatic melanoma, and secondarily hepatocellular carcinoma, and the company’s dermatology drug PH-10 for psoriasis – begins to be resolved, investors will become more aware of the company and the stock’s attractive risk-reward proposition, Acquisitive pharmaceutical companies also will begin accepting the company and its active ingredient’s value propositions.
Valuation
Provectus’ current valuation is very low. The company’s current market capitalization at best is equal to or less than less accomplished, pre-revenue biotechnology companies, and at worst only a fraction (one third to one tenth) of comparable but less substantive companies.
The company’s acquisition value when prospective pharmaceutical acquirers realize Provectus’ promise for oncology (and dermatology) patients is substantially higher than the current valuation.
Clinical Results
Provectus’ clinical results, through trials and the compassionate care program, have been impressive and, because PV-10 is delivered intra-tumorally and not systemically, unprecedented. These results show:
- Superior results for objective response, complete response, durable response and progression free survival; the data suggests superior potential for much better overall survival;
- Multi-indication viability: metastatic melanoma, hepatocellular carcinoma and recurrent breast cancer;
- A high degree of tumor destruction;
- Both local and remote (systemic) effects on diseased tissue; and
- Repeated reproducibility in and across pre-clinical and clinical trials.
“…Rose Bengal…has been…known for [8]0 years as an a liver diagnostic agent…[T]he founders…realized that being a diagnostic agent [Rose Bengal] was already FDA approved for IV therapy and at much higher doses than what would be needed for cancer. Furthermore, thru decades of use, its safety is well established and all preclinical and animal toxicity studies have already been performed historically and are on-file at the FDA. …[T]heir FDA dossier will be significantly easier than if [Rose Bengal]was a brand new agent.”
For example, prior to 1982, the FDA approved Bracco Diagnostics’ Robengatope, which used Rose Bengal Sodium.
There have been no meaningful adverse events. Patients feel transient local pain. Such historical safety means no surprises in future clinical trials.
Regulatory Path
The primary unknown centers on the regulatory path for metastatic melanoma, Provectus’ lead indication. A fourth end-of-Phase-2 meeting with the FDA to complete Phase 3 trial design discussions should occur in February, with the likely outcome being the receipt of the SPA, which should occur by March. There is a parallel track to the SPA effort, which is to seek accelerated approval based on the immunology results from Moffitt Cancer Center.
Australia’s Therapeutic Goods Administration already has to a data analysis and review process to allow early evaluation for marketing approval for metastatic melanoma.
The company could finalize designs for a pivotal hepatocellular carcinoma/liver cancer Phase 2/Phase 3 trial and a pivotal psoriasis Phase 3 trial in 2012.
Once the regulatory path for PV-10 for metastatic melanoma begins to be resolved, Provectus’ valuation should begin to approach fair market value. The clarity of the respective paths for HCC and psoriasis, as will preclinical and compassionate care program data on other solid tumors, will contribute to an already robust valuation.
Ease of Drug Administration
PV-10 currently is injected into target lesions. Doctors do injections in outpatient settings, although a suitably trained nurse practitioner should be able to provide the same service. Injections into tumors on organs inside the body require an imaging assist. In either case, effective administration of the drug does not require a meaningful change to physicians’ current practices. In future, PV-10 could be ingested or deployed intravenously.
For dermatology, patients apply PH-10 as a topical gel to the targeted area of skin.
Treatment Price and Cost to Manufacture
For the purposes of their valuation models, equity research analysts following the stock assumed a treatment price of $20,000 to $30,000. These are arbitrary numbers unrelated to the cost of manufacturing the oncology drug (and for that matter the dermatology drug). At these prices, PV-10’s (and PH-10’s) gross margin exceeds 99%. Following drug approval, the company’s acquirer should have no reimbursement challenges, and will possess tremendous flexibility in setting treatment prices.
Given PV-10’s equivalent to dramatically better efficacy and dramatically better safety profile, predatory pricing – as it relates strictly to competitors’ pricing of their products – could be very lucrative to Provectus/its pharmaceutical company acquirer and devastating to competitors. To be clear, I think pricing flexibility, resulting directly from the cost of producing the drug, could be a strategic competitive wildcard that goes unnoticed.
Also unnoticed is the GMP-level and quick scale-up ability of drug manufacture.
Intellectual Property
“[Rose Bengal is] an ‘old’ agent; the composition of matter patent has expired but [Provectus] has recently filed a synthesis patent that spells a method to manufacture this agent that is devoid of any impurities and is the only formulation that meets the FDA's ICH guidelines. This patent maybe as robust as a composition of matter patent because without using this synthesis protocol, medicinal grade [Rose Bengal] can never be synthesized. Additional ‘picket-fence’ is provided by use, indication, formulation and mechanism of action patents.”
Provectus scooped several companies, including Bristol Myers Squibb, Vical and BioVex/Amgen, by filing a combination therapy patent claiming the combined use of PV-10 and ipilimumab, Allovectin and OncoVEX, respectively, while disproving obviousness on the basis of a new class of agent (i.e., chemoablative immunotherapeutic) for PV-10 and the drug’s highly unanticipated advantage (i.e., priming the pump of the immune system).
Another patent application talks to improved PV-10 potency by combining it with an approved non-oncology drug.
Together with its patent portfolio, the company’s platform of agents (e.g., PV-12) provides an acquirer a long runway of freedom to sell drugs before turning to face generics competition.
Management
Provectus is the story of an old molecule, a business scientist (Craig Dees), two scientists (Tim Scott and Eric Wachter), a businessman (Peter Culpepper), a decade of clinical development, and a journey that began in the 1990s. This four-man team has been together for eight years, and should remain together through the acquisition of the company.
Management is intelligent (e.g., repurposing an old diagnostic compound as an ant-cancer agent, understanding the value of the molecule’s safety history in working through the regulatory process).
Management is very competent (e.g., getting this far in clinical development while accumulating a $102 million deficit during the development stage).
Management is hardworking (e.g., while creating near composition of matter patents and scooping other companies requires intelligence and creativity, only hard work ensures robust execution and implementation).
I believe management to be ethical and have a good business moral compass.
In addition, while not having sold a single share of stock thus far, the principals have made in-kind contributions at inception of the company and exercised options to date at an expense of $20 million.
What If I’m Wrong?
What if I am wrong? What would that scenario look like?
Poor clinical results? Given the reproducibility of pre-clinical and clinical results, likely no.
Adverse events? Given Rose Bengal’s multi-decade, historical safety, likely no.
More time to confirm the regulatory path? This is the likely scenario if I am wrong. I am prepared for the time to achieve regulatory clarity to be longer than expected. Management may have to raise additional capital to fund operations until such time as this ambiguity is resolved to their satisfaction. This, however, is finite and can be bounded by several millions of dollars or several percentage points of potential dilution.
This downside risk, however, is more than commensurate with the vast upside return opportunity when the regulatory ambiguity is indeed resolved.
Conclusion
Provectus is an extremely undervalued stock. The current market capitalization of $103 million simply ignores unambiguous pre-clinical, clinical, safety and multi-indication viability data for oncology therapies; ease of drug administration and low drug production costs; a large intellectual property portfolio; and, an intelligent, hard working, ethical management team.
Once the unknown of the regulatory path begins to be known, Provectus’ valuation should increase. Eventually, the share price will display its substantial upside when acquisitive pharmaceutical companies fully accept Rose Bengal’s value proposition.
Disclaimer
This letter is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein should constitute a solicitation, recommendation or endorsement to buy or sell any security by the author. The author owns shares of stock of Provectus Pharmaceuticals. He has no obligation to update the information contained herein and may make investment decisions in the future that are inconsistent with the views expressed in this letter. The author makes no representation or warranties as to the accuracy, completeness or timeliness of the information, text or other items contained in this presentation. The author expressly disclaims all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained in this letter.
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