November 4, 2012

$PVCT: Desperately Seeking Gross Margin

SeekingAlpha contributing author Theodore Cohen recently wrote an article about Dendreon in which he discussed COGS in relation to valuation.

Provectus' gross margin for PV-10 has not been the subject of much if any public discussion. Circulated material to Big Pharma indicates a placeholder 60% gross margin figure (i.e., a 40% COGS). This gross margin figure, while appropriate, is not the "real" number. It's closer to at least 80% (20% COGS), if not higher.

Dendreon's ultimate goal is to get its COGS to 20-30%, down from 77% in 2Q12 to, hopefully or expectedly, 65% in 4Q12. 20-30%, from here, and exactly when?

Cohen writes: "...[20-30%] will get both the Street's and an acquirer's attention! Why, because Big Pharmas, basically, are in the gross margin business. It's not the multiple of revenue that excites the big guys…it's the multiple of gross margin. The reason for this is when a Big Pharma looks at a biotech, its management makes a series of assumptions. They know they can sell more product than the biotech company simply because of their huge market presence. So, they make their own (higher) sales projections. As well, the potential buyer usually has an overlapping sales force that will sell the product. So, the first cost they eliminate is the sales and marketing line. They also have their own administrative functions, so all of the biotech's general and administrative ((G&A)) costs are eliminated from the analysis. Finally, the remaining operating expense, research and development ((R&D)) is applicable to the overall R&D spending of the Big Pharma, in many cases, so it shifts to a different profit and loss ((P/L)) statement."

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