September 14, 2012

Blog Reader Statement About $PVCT.OB

As a followup to the blog question just posted, I can't help but wonder, if an SPA and a derm deal, and an onc mini deal are around the corner, why would the this potentially preferred share offering be offered in the first place, if the putative purpose is to get the stock onto the NASDAQ, which only takes a stock price of 2 for 5 days. Also, I had thought there was going to be basically no more dilution, and yet, we're hit with this out of the blue. I'm not sure there's anything either you or management can say at this point to make me feel happier about holding this stock for 6ish years.
It has been a brutal September thus far. The share price has dropped 17% on extremely heavy volume. 8 trading days into an 18-day month, total monthly volume (1.9MM) nearly equal August's (2.2MM) and is on track to double it by month's end (4.3MM).

What to make of this selling? One view, from an investor and shareholder I highly respect, is the selling is technical in nature, meaning it is coming from nervous shareholders concerned the preferred stock filing will dilute their interests, Dr. Adams (speculation, of course, but based on past experience), larger shareholders who are done waiting, and nervous nellies.

Shareholders like yourself need an explanation of the preferred stock filing, the concept, strategy and rationale behind it, and the minimum requirements for listing the PVCTP security on the NASDAQ.  Such factual information about this security and the minimum listing requirements should allay some fears, potential misunderstanding and lack of understanding that may exist.

But selling is selling. And as traders and investors, it is stating the obvious it is well within out right to offer shares for sale or hit the bid, begrudgingly or angrily acknowledge losses, and move on. Still, the share price is the result of the decisions, inefficient as they are, of market participants engaged in the buying and [mostly] selling of the stock; essentially, the behaviorally-motivated meeting of supply and demand.

The goal of the blog is not to make you feel happy about holding Provectus stock. I think the SPA is around the corner, and I think there is promising opportunity in potential dermatology and mini-oncology deals, but I do not know when these will occur exactly, or if they will occur (although I highly suspect they will).

The goal is equal parts writing a story, sharing information, creating or fostering a community of those invested financially and emotionally in the stock, blogging history, testing and re-testing and re-re-testing my investment thesis, etc. I could (but I won't) point to more than 10 separate, specific and substantive data points that make me think Pfizer, without any doubt, wants to do a transaction with the company. But, I do not know for sure if they will (although, again, I highly suspect it).

If you think the company and drug's value proposition no longer holds, there is no logical reason to continue to hold shares of the company. The best decision you can make is to acknowledge this failure [in your view, although I am not saying this is your view] and re-invest those monies elsewhere.

From a clinical value proposition, nothing has changed. Referring to Peter Culpepper's slide number 17 from his Rodman & Renshaw presentation this week (which I created and developed for the company at of course no cost to them) remains:
  • Very efficacious,
  • Very safe,
  • Local regional and systemic benefits,
  • Multi-indication viability,
  • Repeatable, reproducible and veracious results, and
  • Further efficacy from combination therapies.
The risk-reward profile remains, in my view, the same (if not even more tilted in the direction of return rather than risk) :
  • The potential or probable upside from current share price levels ($0.63 closing price as at September 14) is much more than commensurate downside risk (adjusted for possible future dilutions).
At its most basic, if I am wrong, and the drug only has utility as a local-regional treatment, the stock is worth $3 to $7 per share (i.e., the present value of acquisition payment milestones). If I am right, and the drug is accepted for its systemic benefit, the share price should exceed a present value of at least $15 to $20.

Could the share price go lower? Sure. Could it take longer to monetize the above figures? Sure.

But the downside risk of, perhaps, 10% to 20%, primarily driven by nervous nellie selling, is acceptable in my view given the at least 500% upside return from here (if I am wrong, and the stock maxes out at $3 per share). Our cost basis, while higher than Friday's closing price, has a comparable risk-reward profile (i.e., at least 300% upside return potential).

The greater point you raise is that this story (with thanks to a regular blog reader and someone who regularly e-mails me with questions and comments about Provectus) is not new. If it were, you, he and I would be rich, beautiful or handsome, and always right.

For traders and investors alike, buying is easy. Too easy. Selling (i.e., closing one's position) -- the why and when -- is much, much harder, and what distinguishes us from everyone else.

Investment management is the profession to which I find myself having devoted the last 15 to 20 years. It is the craft I have endeavored to hone.

When do we sell, and why? Selling occurs because we have captured the upside we expected to materialize, or because our thesis failed. I started my capital markets career in the trader and salesperson intake program for a global Canadian commercial bank. I wanted to be a trader. It was cool, and what I thought I wanted to do. With the benefit of growing older, I now know that investment management is all I ever wanted to do -- all day, every day -- as I recalled sifting through the stock market pages of the local newspaper every morning as a child to see whether "my stocks" had gone up or gone down.

I knew it all: Two degrees from MIT (engineering, public policy), one from The London School of Economics (economics), a Rhodes Scholar nomination, etc. I made money (or succeeded) easily, sometimes with more effort, at every stop in the program: currencies, interest rates, commodities, derivatives, quantitative analysis, retail, corporate, institutional, etc.

When I finished the program and landed in Chicago on the currency derivatives desk (the head of which I had lobbied very hard over many months to accept me as a team member), a proprietary trading desk (both in actuality and for all intensive purposes given the lack of significant customer flow), my knowledge met for the first time (but not the last) its limits. I found myself not being able to short the Canadian dollar. I made money as a junior trader apprenticing the seniors traders of the mark, pound and yen books, or managing the secondary currency books. But I could not consistently make money trading CAD. No way, no how.

When the head of our desk discussed this lack of success was tantamount to, er, inevitable future lack of employment, but more specifically separating love of country from love of currency, betting against the currency as proprietary traders in the currency asset class are wont to do, I found consistent sustainable success. I then knew, at the time, when and why to sell (i.e., much more often than not when and why to close an initiated position).

Following this experience, I left for Wharton to pursue my MBA. It was a very "interesting" time: the Internet, online trading, cell phones, Mary Meeker, Henry Blodget, IPOs, sock puppet spokespeople, bricks and mortar businesses, b-to-b (business-to-business), b-to-c (business-to-consumer), Goldman Sachs, Morgan Stanley, McKinsey, Wilson Sonsini, Kleiner Perkins, Sequoia, eyeballs, valuation in per engineer units, virtualizing any kind of business (like funerals), exchanges, etc. Oh, and I got married to my wife @Wharton.

During the run-up in the NASDAQ and the subsequent run down, I turned a mid six-figure principal amount into a near mid-seven figure number (who didn't, really?) into a low six-figure number (who didn't, really?). On the way up (i.e., buy-sell, buy-sell...), I made money, but a rising tide raises all boats. On the way down, I could not sell. I did not know why, and I certainly did not know when.

I graduated, and began work with a privately held operating company that was responsible for one of the largest Internet-based company IPOs in history at the time. As an aside, through an IPO, two follow-ons and the merger with another company, our portfolio ballooned in size because of this security (together with the appreciation of other public and private securities) to nearly $20B. During my time with this company, I ultimately co-managed investment activities, carrying out deal sourcing, due diligence, structuring, negotiations, transaction execution, portfolio company management, and securities monetization. I led or helped lead investments in more than $100 million in more than 20 companies in communications and enterprise software, healthcare and life sciences, nanotechnology, network infrastructure and security, and wireless software and systems. Overall, our team invested several hundreds of millions of dollars. When the dust settled, we enjoyed a materially positive cumulative return on investment.

From this experience, I began to learn how companies were built, both superbly, well and badly:
  • Bottom up, when I focused on functional areas, like research, product development, sales, marketing, finance, etc., and worked with management, like the CEO, CFO, CIO, SVP of fill in the blank, VP, salesperson, engineer, etc.; and
  • Top down, as a board member or observer.
Although it can take more time to sell a private company -- private securities are illiquid -- I continued learning when to sell and why: If someone offers you a check, think about (i.e., consider) selling, because (i) you might not get a bigger or any size of check later, (ii) your competition might eventually eat all or most of your lunch and, later, no one might find you interesting enough to buy, (iii) it is a lot of money, and you want it (there is nothing wrong with that), etc. If someone offers you a check, you could turn it down because (i) you are objectively, thoughtfully confident you can get a much bigger check later, (ii) you think you can build a sustainably successful company with more time and you do not want to sell right now (that is okay, too), etc.

I saw "bull" and "bear" markets through the cyclical ups and downs of currencies. Most of the equity portfolio managers of my vintage had never seen a vicious bear market in stocks (unless they were actively aware during the popping of the NASDAQ bubble, and appropriately scarred but still viably functional). The financial crisis of 2008 and 2009 was a seminal moment in my capital markets career. I knew when to sell, and I knew exactly why. We moved almost entirely into cash in late-2007 and early-2008 and waited very, very impatiently until March 2009 before going nearly all-in with the aforementioned cash. I knew when to buy and why.

Here is a great example: I knew Teck Resources, weighed down by an excruciatingly large amount of debt from its acquisition of Fording Canadian Coal Trust. Such debt was held nearly exclusively by Canadian commercial banks. Teck was not going to go bankrupt, and its equity was not going to zero. First, and remember the time and what talking heads were shouting and parroting on CNBC, the world suddenly was not going to stop ALL use of ALL commodities (i.e., the world as we knew it was not going to end). Second, the Canadian commercial banks were not going to be overly punitive to a major Canadian company in their collective backyard.

So, I bought. A lot. I knew when to buy and why. And I made a lot of money. I sold the entire position in late-2009. Did I know when to sell and why?

Well, maybe not so much.

The point here is not to top-tick a particular capital market or a stock's share price. The point is I did well, and I could have done better. Investment management is a craft at which we spend our entire adult lives trying very hard to become better and better. But there also is the point we spend a lot of this time trying to become better and better sellers. At least that is what I am doing with my time.

After leaving my corporate venture capital job, but before going out on my own, I worked for an incredible entrepreneur making opportunistic venture capital and private equity investments from his large capital pool, and managing these investments (sometimes from the ivory tower, sometimes from rolling up my sleeves and reprising my role of facilitating business building). The lessons he taught me I use today and will continue use them until I no longer can. For example, the creation of true wealth is not making a 30% return on investment; rather, it is trying to make 300% or 3,000%.

Show me someone who says he consistently makes 30% or thereabouts day, week or monthly trading a stock or currency or another asset class, and you have just shown me a liar. Show me that someone who has become really wealthy doing that, and I will ask you why are you showing me this person.

Consistently making a lot of money as a trader, investor or fund manager is very, very hard. It is the exception that proves the rule. I am not talking about the management fees one can charge on a pile of OPM (other people's money). I'm talking about making 300% or 3,000% on an investment. If you are a hedge fund manager, you have made your investors and limited partners a lot of money, and 20% of a lot still could be a lot.

Making true wealth requires concentration (of one's time, resources and money), time, perseverance, a little hope and faith, and objectively and critically assessing and re-assessing your investment or business thesis.

Which brings me back to Provectus. This company, if/when I am successful, will be the seminal moment and investment in my investment management career to date. I have concentrated my money (don't tell my wife...). I am looking for a 2,000% return or more (actually, much higher). I certainly have some hope and faith. But mainly I have objectively and critically assessed and re-assessed and re-re-assessed my investment thesis. And I continue to do so.

Is it frustrating to watch what is happening with the stock of late? Absolutely.

When: Is it time to sell? I do not think so.

Why: Has anything changed for the negative in my thesis? No. Several items have changed for positive, and by a lot.

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