A rewrite of my first investment letter...
Preface
At
a June 1st closing share price of $0.88 and market capitalization of
$99 million, Provectus Pharmaceuticals is an exceptional long idea.
I
began due diligence on the Company in 2006, and started accumulating shares in
2007. My historical and ongoing diligence comprises thousands of interactions
with Provectus management. As a result, my view of the Company’s prospects has 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.
In
writing this investment letter to and sharing my investment thesis with you, I
borrowed from Whitney Tilson’s Why
We’re Short Netflix letter as well as OneMedPlace Research’s December 2011
report, which is a well-written primer on the Company.
Provectus
Pharmaceuticals (PVCT)
Provectus
is a Knoxville, Tennessee-based biotechnology company with two lead compounds in
early- to mid-stage clinical trials: PV-10 for oncology (metastatic melanoma, hepatocellular
carcinoma, recurrent breast cancer, other solid tumors) and PH-10 for
dermatology (atopic dermatitis, psoriasis, other inflammatory skin disorders).
Rose Bengal, the active pharmaceutical ingredient (“API”), has an established
safety profile with the Food and Drug Administration (the “FDA” or “Agency”) for
prior human use as an intravenous hepatic diagnostic (Robengatope) and topical
ophthalmic diagnostic (Rosettes and Minims), and has been used in liver
function studies for more than 90 years.
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 (i.e., 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’ stock is a
situation where the risk-reward profile is clearly and visibly out of whack. The
return opportunity is much more than commensurate for the potential risk.
The
Company’s share price has trended downward over the last five years however, losing
nearly 50% of its value along the way, despite clinical, regulatory and business
value propositions that have increased over time.
Clinical: PV-10 is very
efficacious and safe, and produces very beneficial local-regional and systemic effects
on cancerous tissue. Pre-clinical and clinical results have been repeated and
reproduced. Further efficacy, particularly when tumor burden is high, is achieved
by combining PV-10 with other therapies, such as radiotherapy and Bristol Myers
Squibb’s Yervoy, because PV-10 facilitates the efficacious action of these
treatments.
Regulatory: The path to drug approval
in the U.S. and Australia for metastatic melanoma (“MM”) is clear, but not yet
completed. The path for hepatocellular carcinoma (“HCC”) is in process. Orphan
drug status has been received for both MM and HCC. The path for recurrent
breast cancer has been started. The FDA has been very constructive. Interactions
with the Agency have been unusual in a good way.
Business: PV-10 is very easily
administered and should be easily reimbursed. Provectus has significant
treatment pricing flexibility (as currently contemplated, gross margins are
very high), incurs very low manufacturing costs to produce the drug and requires
very low costs to scale manufacturing to meet domestic and international demand
for the drug when it is approved. The Company has a large, well-protected
intellectual property portfolio of U.S. and international patents.
Stock: Provectus recently
formed an independent board of directors. The corporate advisory board has been
tactically and strategically populated. The stock, however, does not trade on a
major exchange and has limited equity research coverage. No license deal in
either oncology or dermatology has been struck, as managed has turned down or
resisted license interest because of valuations below their acceptable minimum
at the time. There has been no historical insider selling and plenty of insider
buying. The Company’s balance sheet is solid, with committed and structural
access to capital.
So,
why am I risking my professional reputation, a large portion of net worth and my
sanity on this company, its management team and the stock, when most
institutional investors, including biotechnology-focused investors, have mostly
or completely ignored Provectus? Healthcare fund manager OrbiMed Advisors, a
firm with whom the Company has an association through a corporate advisory
board member for several years owns no shares as of a March 31st 13F
filing (David Darst, the advisor, is a member of OrbiMed’s private equity team
and not their public equity one). Hardcore biotech investors understand the
situation and opportunity. There are two practical and pragmatic reasons for
their lack of participation in the stock: a yet-to-be-received Special Protocol
Assessment (“SPA”) from the FDA for the Company’s pivotal MM Phase 3 trial and
a security that trades over-the-counter.
At
just under $100 million, Provectus’ valuation is extremely low. Fair value is at
least $200-300 million. Once the Company receives an SPA for its pivotal MM
Phase 3 trial and more information on the drug’s mechanisms of action and
immune response are further elucidated, followed by the out-licensing of
Provectus’ dermatology drug PH-10 for inflammatory skin disorders, institutional
and retail investors should become much more aware of the stock and its risk-reward
proposition. There is substantial cash and contingent upside above fair value
in excess of $2-3 billion.
Rose
Bengal and PV-10: A tremendous clinical value proposition
Through
early- to mid-stage trials and a compassionate use program, Provectus’ clinical
results have been impressive. The Company has completed Phase 1 and 2 trials
for MM, for which Provectus received orphan drug status; a Phase 1 trial for
HCC, for which it received orphan drug status; a Phase 1 trial for recurrent
breast cancer, for which the Company demonstrated efficacy; and Phase 1 and 2
trials for atopic dermatitis and psoriasis, for which Provectus demonstrated
efficacy given limitations of trial designs. These trial results show, suggest and
infer much better overall survival benefit, much higher levels of tumor
destruction and disease reduction, beneficial local-regional and systemic effects
on cancerous tissues, multi-indication viability, and repeated reproducibility of
outcome in and across pre-clinical and clinical trials.
PV-10 is
very efficacious:
Clinical results indicate, for MM and HCC, and more than likely suggest, for
recurrent breast cancer and several other indications treated in the
compassionate use program, materially superior results for objective response,
complete response and progression free survival (taken alone and when compared
with the results achieved by standards of care and competing drugs). Results
infer such for durable response. Understanding the caveats of comparing
clinical trial results, PV-10's response rates for injected lesions,
non-injected lesions and non-injected systemic lesions exceeded other
intralesional therapies like Vical's Allovectin-7 and Amgen's talimogene
laherparepvec (formerly BioVex’s OncoVEX GM-CSF). Substantial unmet needs exist
for melanoma treatment despite the approvals of Yervoy and Zelboraf, whose
efficacy outcomes and safety profiles pale in comparison to PV-10.
Two
fair criticisms of PV-10 are the small number of trials completed (oncology: 4,
dermatology: 4) and the small number of patients treated (oncology: >200,
dermatology: >225). Efficacy, however, has been repeatedly superlative in
pre-clinical work (from bench research, in murine models and on animals),
clinical trials (MM, HCC, recurrent breast) and the compassionate use program.
Further, Provectus, its principal investigators and H. Lee Moffitt Cancer
Center & Research Institute (“Moffitt”) have reproduced superlative
efficacy in pre-clinical work, clinical trials and murine models (and human studies),
respectively.
PV-10 is
very safe:
Rose Bengal is an FDA-approved API, with a century of safe and successful use
in humans as an intravenous hepatic diagnostic and topical ophthalmic diagnostic.
Patients treated with PV-10 predominantly suffer only mild to moderate adverse
events. There have been neither NCI CTCAE Grade 4 or 5 events nor clinical
trial insurance claims. Paraphrasing: “Rose Bengal has a 30-minute “half-life,”
which is the amount of time the compound is in the patient’s bloodstream before
it is excreted in the bile. It is very stable in the human biological system,
and although the portion remaining in the bloodstream is excreted rapidly, the
portion that has been absorbed by the cancer tissue actually remains in its
parent form for weeks until the dying cancer tissue is absorbed by the body and
the remaining Rose Bengal is excreted.” (Amy Baldwin’s Investment
Choices For Melanoma Awareness Month). Such historical and ongoing safety
means no surprises in future clinical trials or, once approved, from patient
use.
PV-10 has
both local-regional and systemic beneficial effects on diseased tissue: PV-10 has an autophagic
mechanism of action and an autophagy-induced, system-wide anti-tumor mechanism
of immune response. Rose Bengal partitions into diseased cells. Entering the
cells’ lysosomes, it causes them to leak or rupture. Autophagy cascade
subsequently occurs. Moffitt independently confirmed PV-10’s local and systemic
response benefits in murine models, and also identified the quintessential
immune-mediated response: Splenocytes from PV-10-treated mice
produced interferon-γ in response to B16-F10 melanoma cells. Shortly,
Moffitt should confirm the same in human studies.
PV-10 has
demonstrated multi-indication viability: PV-10 has been used to treat MM, HCC, recurrent
breast cancer, squamous cell carcinoma, scalp sarcomas and colorectal cancer
(mets to the liver). Moffitt conducted further murine model work on other
cancers besides metastatic melanoma to successfully demonstrate
multi-indication efficacy and immune response.
Two
fair criticisms of PV-10, again, are the small number of trials completed and
small number of patients treated. Yet, multi-indication success has been
repeatedly shown in pre-clinical work, clinical trials and the compassionate
use program. Further, Provectus, its principal investigators and H. Lee Moffitt
have reproduced multi-indication success in pre-clinical work, clinical trials
and murine models, respectively.
PV-10’s
regulatory path is becoming clearer
Management's
interaction with the FDA has been unusual in a good way. This month or next, I
expect the FDA will grant an SPA to Provectus for it’s pivotal MM Phase 3
trial. Australia’s Therapeutic Goods Administration already has agreed to a
data analysis and review process that allows early evaluation for MM marketing
approval. Accelerated approval, at a later date, is a very real possibility,
based on Moffitt’s historical and ongoing murine model and human study work.
Provectus is pursuing a very focused label for PV-10, the supporting proof of
which already has been demonstrated: loco-regional treatment of Stage III and
early-Stage IV MM.
The
company may finalize designs for a pivotal HCC Phase 2/Phase 3 randomized
control trial using Sorafenib later this year. Drug orthogonality between PV-10
and sorafenib has been shown.
A very profitable
business value proposition
PV-10
has the potential to be a very profitable drug. It is easily administered and
should be easily reimbursed. Because of a relatively low amount of capital
spent and required to bring the drug to market, Provectus and its eventual
acquirer will have significant treatment pricing flexibility. PV-10 has a very
low manufacturing cost. The cost to scale manufacturing is very low. The
Company has a large, well-protected intellectual property portfolio.
Ease of
drug administration: A medical or surgical oncologist makes treatment decisions.
PV-10 is injected into target lesions by interventional oncologists in
outpatient settings. An appropriately trained nurse practitioner or nurse can
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 a physician’s current practice and practice
behavior. There is no pre- or post-treatment care, nor is co-treatment needed. In
the 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.
Low
treatment price:
For the purposes of their valuation models, equity research analysts who follow
Provectus assumed a treatment price of $20,000 to $30,000, which is not
necessarily what the Company and its eventual acquirer could or would charge.
At these prices, however, PV-10’s gross margin is more than 80% (in excess of
99% when not including a sales return-type allowance). Given PV-10’s equivalent
to dramatically better efficacy and safety profile, predatory pricing (as it
relates strictly to competitors’ treatment pricings) could be very lucrative. Pricing
flexibility, resulting directly from the very low cost to produce the drug is a
sustainable competitive advantage.
Physicians
should be very easily reimbursed for PV-10 treatments. It is anticipated treatment
would be reimbursed as chemotherapy or a procedure, and a potential crosswalk
to other reimbursed interventional oncology procedures, such as image-guided
therapy. Treatment price and reimbursability should be key drivers of adoption.
Low
manufacturing cost: Provectus’ $110 million deficit accumulated during the
development stage as of March 31st, combined with nearing the end of
the regulatory approval process, means the eventual amortization of development
expenses will not materially influence pricing.
It
costs very little to manufacture PV-10. Synthesis of the API to modern pharmaceutical
standards is well defined. Rose Bengal has a well-behaved, fully characterized
impurity profile. Provectus owns the only formulation that meets the FDA's
International Conference on Harmonization (“ICH”) guidelines. The cost to scale
the production of PV-10 is very low. Critical process parameters and best practices
are complete. PV-10’s formulation utilizes standard equipment.
Broad and
deep intellectual property: The Company has more than 50 global patents
issued and pending, with numerous applications filed and in process, covering
the drug and subsequent (additional) family of compounds, and synthesis of the
active pharmaceutical ingredient to modern pharmaceutical standards. Provectus’
family of compounds extends oncology applications far beyond traditional patent
cliff.
Paraphrasing:
“Rose Bengal is an old agent; the composition of matter patent has expired but Provectus
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.” (OneMedPlace Research’s December
2011 report)
The
key opinion leader community wants to use an emerging therapy like PV-10 with
other agents like Yervoy, Allovectin-7, talimogene laherparepvec (formerly OncoVEX),
and other anti-CTLA-4 and anti-PD-1 compounds.
The
stock has a weak to modest value proposition at the moment
Provectus
has an independent board of directors that includes Alfred E. Smith IV. The
Company’s corporate advisory board includes Dr. Craig Eagle, Vice President of
Strategic Alliances and Partnerships for the Oncology unit at Pfizer, and Doug
Ulman, President and Chief Executive Officer of LIVESTRONG.
Provectus’s
stock does not trade on a major exchange. Reduced requirements to list on the NASDAQ
(e.g., market value of listed securities standard, net tangible asset minimum,
minimum $2 bid for five consecutive days), however, present a lower bar to
clear.
Although
equity research analysts that cover the stock are highly-ranked or thoughtful,
coverage is by firms with historical investment banking relationships or
niche/boutique businesses and clienteles: Maxim Group, Rodman & Renshaw,
Roth Capital, and Stonegate Securities. Firms with no promised or implied
relationship could initiate coverage post-SPA.
Provectus
has not yet entered into a license deal. Lack of a deal (or deals) does not
mean no deal can be had. Management is seeking valuations commensurate with
their view of value, turning down or resisting several opportunities in the
process.
There
has been no insider selling and plenty of insider buying. Insider exercising of
options and purchasing of underlying common stock totals several million
dollars to date. Most of these exercises have been done by one of the four
principals. The other three principals have made small to moderate purchases.
The
Company has a solid balance sheet, and committed and structural access to
capital. As of March 31st, cash and cash equivalents totaled $5
million. Provectus owes no debt. The Company has a $30 million equity line of
credit committed by a Chicago-based investment firm, and two $50 million shelf
filings.
A management
team in which I believe and support
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, repurposing an old diagnostic compound as an anti-cancer agent
and understanding the value of the molecule’s safety history in working through
the regulatory process. Management is competent, getting this far in clinical
development while accumulating a $110 million deficit during the development
stage. Management is hardworking; while creating near composition of matter
patents and scooping other companies requires intelligence and creativity, hard
work increases the probability of execution and implementation.
I
believe management is ethical and possesses a good moral compass.
While
not having sold a single share of stock, management has made in-kind
contributions (at the Company’s inception) and exercised options at an expense of
$20 million.
But
what if I’m wrong?
What
if I am wrong? What would that scenario look like?
Could
there be poor clinical results in the future? Given the repeatability, reproducibility
and veracity of pre-clinical and clinical results, likely no.
Could
there be unexpected adverse events in the future? Given Rose Bengal’s
multi-decade, historical safety, likely no.
Could
more time be required to confirm the regulatory path for MM? This is the likely
scenario if I am wrong. I am prepared for more time to elapse for regulatory clarity
to be achieved. 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.
Shareholders
would incur further dilution if management elects to conduct the pivotal MM
Phase 3 trial itself. I am prepared for this outcome because the dilution
caused by raising capital to carryout the trial should be made up by a higher
valuation resulting from Phase 3 trial results that are projected to exceed
Phase 2 results.
And in
conclusion…
Provectus
is an extremely undervalued stock whose current share price 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. The share price will display 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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