Provectus Pharmaceuticals Started At Buy By Roth Capital

Roth Capital Partners initiated equity research coverage of Provectus this week with a Buy rating and a $3.00 12-month price target. See here for:

• The research note,
• The full report, and
• The financial model.

Roth initiated coverage because of their biotech analyst Dr. Yale Jen, who previously covered Provectus for Maxim and was very knowledgeable of Provectus and PV-10/PH-10. See here (read Provectus has a new lead research analyst covering them at Maxim Group). Jen had a $3.50 12-month price target while he was at Maxim (his last note was January 18).

There are several items of varying interest in Jen's initiation note. One that stands out is this:

"Substantial unmet needs exist for advanced melanoma treatment despite the entrants of two recently-approved drugs. One of the major investor concerns is whether PV-10 would have an appropriate disease setting in the melanoma space to exhibit its value given two new drugs [Yervoy from Bristol-Myers Squibb (BMY – NC) and Zelboraf from Roche (RHHBY – NC)] recently (both in 2011) have been approved in the U.S. and Europe as treatment for late stage (Stage IIIb, IIIc and Stage IV) melanoma. We view this as an overblown concern. First, despite Yervoy demonstrating improved median OS (mOS) benefits from its pivotal clinical study, the shortcoming of the drug is amore serious side effect profile (with a Black Box warning) and high costs (~$120,000 annually). In addition, although Yervoy’s approved indication broadly covers late stage melanoma (Stage III and IV), approximately 90% of patients in the Yervoy pivotal trial were of Stage IV M1b and IV M1c; while Stage III patients accounted for only 1.5%. Together, we believe Yervoy could be used more appropriately for Stage IV melanoma patients if a more fitting therapy is available for Stage III patients and should be reserved for patients as potentially a last-resort option. Further, in current real world practice, Yervoy has been prescribed more for late stage, instead of Stage III, melanoma patients. Zelboraf (vemurafenib) is indicated for the treatment of patients with unresectable or metastatic melanoma with BRAF v600E mutation (account for ~46% of total cases) as detected by an FDA-approved test. Together, given the significant differences of the five-year survival rate exit between Stage IIIC and Stage VI melanoma (40% vs. 15%), in our opinion, it would be valuable to treat and prevent Stage III melanoma patients from advancing into Stage IV. As such, we believe PV-10, if clinically successful, could fulfill this unmet medical need, particularly with its lower cost and relatively easy administration. We estimate annual peak market potential for PV-10 in melanoma could reach $380MM based on a price assumption for PV-10 in the U.S. of $5,100 per vial with average annual treatment of approximately 6 vials, or annual costs of $35,000."

Rodman & Renshaw, Maxim Group and Stonegate Securities currently cover the company. R&R and Maxim have provided investment banking services to the company; primarily or exclusively fund raising or placement services (i.e., PIPEs). All of these investment banks, including Roth, are small boutique banks that cover small cap or smaller companies.

As a reminder, "small cap" is a company with a market capitalization of between $300 million and $2 billion. "Micro cap," a term which more aptly describes Provectus,  is a company with a market capitalization of between $50 million and $300 million. These definitions comes from Investopedia, although people may quibble with the boundaries.

Equity research on Wall Street has been broken for many, many years, pre- and post-2003's Global Research Settlement. And there is no meaningful solution in sight. This is not meant as a criticism of the analysts, but rather the investment banking firms for which they work. There are many good and great analysts who provide insightful and comprehensive coverage of publicly traded companies; however, their salaries and other related expenses still are supplemented or paid for by investment banking revenues. The not-so-dirty-little-secret on Wall Street is "pay-to-play" for non-large companies: Equity coverage in exchange for a deal (e.g., a fund raising or PIPE, an M&A transaction, etc.), or coverage in hopes of a deal.

Getting additional coverage like Roth and, previously, Stonegate, where there is no implicit or explicit promise by Provectus management of investment banking work is no small feat. By investment banking work I am referring to fees generated from fund raising and placements, M&A transactions and deal representation. Investment banking revenues derive from assisting companies involved in raising money and M&A, but also providing ancillary services (e.g., market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities). Roth makes a market in Provectus stock (as does R&R and Maxim).

Another broken aspect of equity coverage is that large cap companies enjoy dramatically more coverage than their smaller counterparts. Goldman Sachs Asset Management (GSAM) produced a white paper in 2011 entitled The Case for a Systematic Approach to Small Cap Investing. In it, they note that small cap firms have less research coverage than large cap firms:

"Large cap firms have over twice the amount of research coverage of small cap firms. As shown in the following chart, small cap firms fall under less analyst scrutiny than their large cap counterparts, as would be expected given their market cap representation as well as the larger number of small cap companies overall. Less coverage in the small cap universe can provide substantial opportunity for active managers to add value in small cap equity investing. We believe a quantitative approach has the ability to effectively track analyst ratings across the entire investment universe and can monitor any changes in analyst sentiment, even for those firms that are less researched, on a daily basis.  

We believe it is more likely that large cap securities, which are more closely followed relative to their small cap counterparts, may have prices that more accurately reflect their intrinsic value. This may provide more return opportunities for small cap equities and lends itself to a quantitative investment approach, where managers can assess the entire universe of securities based on a number of fundamental and behavioral factors."

Coverage by 4 small boutique banks is good. What will be more telling is when coverage comes from larger and top tier investment banks.

It is comforting and impressive to note, however, that the company's unnamed financial adviser is on the list of the link I just provided. Way up the list...