February 3, 2012

Saving Private Ryan

Provectus is a publicly traded company. From the outset, I viewed Provectus as a public private company -- a private company that happens to be publicly traded. I still do. This blog post may be too much of inside baseball, but I want to tie this post to why I believe the end-game valuation and outcome is both substantial and realistic.

As a public company, Provectus has:
  • Shares that trade over-the-counter. To me, all this means is that you have some level of liquidity to buy and sell shares, that the share price can go up and go down, and that if the share price exceeds a certain level for a certain period of time the stock is eligible (after certain other criteria are met) to be listed on a larger stock exchange.
  • Timely and informative regulatory reporting. The company meets SEC reporting requirements. There are rare instances where it does not, such as when the company had to restate certain financials because management characterized and valued the preferred stock in a manner inconsistent with how the SEC wanted it characterized. Uninterestingly enough, you get as much information from reading Provectus filings as you do from listening to Bil Belichick press conferences.
  • Many shareholders. You know who you are. We can vote on board members, corporate structure changes, amendments and other things.

The above and $3 (give or take) will get you a venti (with whip) Americano at Starbucks.

As a private company, Provectus has a board of directors controlled by company insiders. There is no requirement for the company to have an independent board (i.e., the number of independent directors outnumber insiders) so long as it remains traded over-the-counter. If and when the stock is eligible to move to the AMEX or NASDAQ, board composition will require changes. Further, the audit and compensation committees controlled by insiders. Again, this will change if and when the stock moves to a much larger stock exchange.

I am being quite general in my statements of Provectus as a public private company. Why does it matter? Yes, biotechnology companies historically have tapped public markets through IPOs and secondaries, PIPEs and placements, to raise the necessary money to fund their development. Private companies that eschew this path raise money from venture capital firms and other like investors.

A key difference lies in how certain stakeholders like management and investors behave in each circumstance. As a public company, shares held by management and investors (here I'm referring to institutional investors, but there's no reason not to include you and me) come and go through the mechanism of the public market. Motivations may differ, but they're usually the same. The markets are a mechanism for liquidity for these folks.

As a private company, management and investors (here, venture capital firms and perhaps angel and other early individual investors) exit upon an IPO or acquisition of the company. Secondary markets for shares of private of companies (read: Facebook and other notable Silicon Valley start-up companies, among others) is not really an option for the vast majority of privately held biotechnology companies. In other words, they're locked in for some time. This speaks to the motivations of the management team (and to a certain extent the investors who back them).

Provectus management ultimately is looking to position the company for an acquisition by a global pharma company at an egregiously large valuation. Along the way, they may transact a dermatology deal (A), an investment by a global pharma company like Pfizer or Johnson & Johnson (C) and/or a limited, geography-specific oncology license or two (B). They might sell a few shares when the price reaches $5 to $10, and take some money off the table. But, the prize is the end game, and management is keeping their eye on the prize.

I write all of this to lead you into a discussion of determining the valuation of the company as if it were private. Venture capital investors talk of a company's pre-money valuation -- the valuation of a company before consideration of the amount of money invested in it during an investment round. The company's post-money valuation is equal to its pre-money valuation plus the investment amount. A rudimentary way of backing into pre- or post-money valuations is to determine the number of shares, warrants, options and other equity securities offered to an investor (call this number X), and divide X by the total number of outstanding shares, warrants, options and other equity securities of the company (call this number Y). Divide the result of X divided by Y (call this number Z) into the investment amount (call this number M). M divided by Z will give you the post-money valuation. M/Z minus M will give you the pre-money valuation.

Going back several years, I calculated (very roughly) Provectus' pre-money valuation before several investment rounds it has consummated with institutional and accredited investors:

The main conclusion I draw from this is that management, has most recently set Provectus' pre-money valuation, as a private company, at about $88 million. If management behavior towards monetization is comparable to managers of private biotechnology companies, the monetization expectation of at least several billion dollars generates a sale multiple consistent with public company valuation techniques.

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