Volume precedes price, or maybe it was "'i' before 'e' except after 'c'"

The stock has been averaging nearly 200,000 shares traded per day since the company's most recent announcement about FDA guidance on the SPA. Take out the euphoric trading on the day of the announcement, and the stock is averaging 150,000 shares traded per day, which, while low, still is nearly 50% higher than daily trading in November and early- to mid-December. Anyway you cut it, though, we need to be trading several multiples of these numbers. Soon but not imminent (like later next month or this quarter), perhaps...

I highly doubt there will be new news for us to digest and analyze over the next few weeks. Next on tap, sometime towards mid- to late-February should (could) be the release of the MM Phase 2 and psoriasis Phase 2c trial data.

In the meantime, some further staring at belly buttons. November and early- to mid-December was typical (although Network One returned as a market maker in December). We see decreasing share price and relatively meager volume (remember: trading volume in the first half of 2011 was quite robust). Daily trading seems predictable, following the trend line (dotted, light blue line) with a high R-squared value:

Then, we see an increasing share price and materially higher volume (108K shares traded per day above v. 194K per day below):

On January 18, Provectus announces FDA guidance on its pursuit of an SPA for the company's pivotal Phase 3 trial for MM. Share price bounces around, but daily trading volume continues at previous elevated levels.

Scully: What if there was only one choice and all the other ones were wrong? And there were signs along the way to pay attention to.

Mulder: Mmm. And all the choices would then lead to this very moment. One wrong turn, and we wouldn't be sitting here together. Well, that says a lot. That says a lot, a lot, a lot.

Time line?

A friend of the blog recently circulated his expectation (speculation) of a time line in regards to the company's progress on several fronts. I found it interesting, as we were comfortingly (great minds think alike!) or eerily (more Kool-Aid please!) similar in all areas.

I summarized the clinical, regulatory and publication aspects of our time lines below:

Time lines and expectations are two-edged swords. On the one edge is the understanding of what needs to be or may be done together with a time frame under which such work might be completed. On the other edge is the positive or negative feeling related to an expectation exceeded, met or fallen short.

Endeavor to set aside emotion, either of elation or disappointment. In an objectively dispassionate manner, substantively determine why an expectation has been exceeded or has not been met. Ask questions. Get answers.

Revenue Channels

Following up on the Practical Dermatology article, the implication is that PV-10 has multiple channels for patient access to include surgical oncologists and dermatologists, and not just medical oncologists.

Dermatologists (which is more obvious, at least to me) and surgical oncologists (less obvious) see PV-10 as a viable source of revenue for their practices. In the case of surgical oncologists, their interest in a non-surgery revenue stream is particularly telling.

PV-10: A Melanoma Therapeutic in the Pipeline

Some press via Provectus News today: An article on PV-10 in the January 2012 issue of Practical Dermatology, which has the cover statement of: Can we win the war on melanoma?

Most interesting to me was the commentary on administration of and, in particular, access to PV-10:

• "Administering PV-10 does not require any specific oncology training. The dose is calculated based on tumor volume, and local injection can be performed by a physician or even a nurse."
• "Unlike the therapies for advanced melanoma, PV-10 could be provided by the dermatologist or surgeon."

Double-sided Coin

The clinical value proposition of Provectus is unambiguous: Safe. Targeted. Pre-approved as a diagnostic. Triggers the immune system. This fourth component of the proposition -- immune system triggering -- is too good to be true to some, and snake oil or witches' brew to others. As more information on Moffitt's immunology work is known, as more peer-reviewed abstracts, posters and papers are presented, snake oil or witches' brew become robust, compelling, necessary.

The other side of the coin (of doubt over the triggering of the immune system), as I blogged earlier today, are casual, lazy, weak, empty reasons for why one should not be long Provectus (such as "these folks haven't done anything like 'this' before").

Paradigm shifts more often emanate from individuals closer to the periphery than those at the center. I suspect we'll see a dramatic and timely convergence of acceptance of both Provectus' clinical and investment propositions.

Just because you aren't (in a biotech hotbed) or haven't (brought a drug to market, got an illustrious investor/shareholder or drug partnership) doesn't mean you can't or ultimately won't.

Why I Shouldn't Be Long Provectus

Previously, I wrote an open letter in which I shared my investment thesis in depth and described why Provectus is an exceptional long idea. See here.

In any investment I have made or will make, I feel compelled to try and, arguably, find myself often obsessed with trying, over time, to figure out if I am wrong in the event I am indeed wrong. After a successful monetization, I enjoy the moment for a moment. Then, I grind away again over the next investment or investment candidate. Lather, rinse, repeat.

I continually wonder if I shouldn't be long Provectus. What is the anti-thesis of, or antithesis to, my investment thesis? Understandably the crux of a robust investment thesis typically is or should be about management, and the probability or likelihood of their successful execution. Below, I am primarily focused on the investment value proposition, including but not limited to:

• Knoxville is not the/a hot bed of biotechnology in the country;
• The management team has not brought a drug compound to market;
• There is no "name" investor in the stock;
• The company has no partnership with big pharma;
• The company's virtual business approach, whereby they are outsourcing or leveraging outsourced capabilities to efficiently run several processes, is not typical; and,
• There is no plethora of peer-reviewed literature.

I have answered these questions to my satisfaction some time ago; however, I think it is informative to share them with you.

Disclaimer

This blog is neither intended to be nor is investment advice. The author of this blog (the "Author") is not a registered investment advisor. Under no circumstances should any content from this blog be used or interpreted as a recommendation of a trade or investment in Provectus Pharmaceuticals, Inc. Trading and investing can be hazardous to your wealth, health or both. Any investment decision must, in all cases and without exception, be made by the reader or by his or her registered investment advisor. This blog is only and strictly for educational and informational purposes. The Author may have a position in Provectus Pharmaceuticals, Inc. at any given time that is not disclosed at the time of publication. All opinions expressed by the Author are subject to change without notice. You, the reader, should always obtain current information and perform the appropriate due diligence before making any investment or trading decision.

All efforts are made to ensure the information contained in the blog and/or a blog post is factual and accurate; however, the Author does not guarantee its accuracy under any circumstances.

MAXIMum

An interesting piece in Dr. Jen's research update: an immunology abstract potentially presented at ASCO ("potentially" because authors of accepted abstracts are notified in March, I think, with abstracts posted online on May 16th).

This conference presentation/poster session compliments the March poster session of the first immunology abstract.

MAXIMized

Maxim Group's Dr. Yale Jen issued an equity research update on the company today. He anticipates Provectus would gain the SPA from the FDA in mid- to 3Q 2012, with the pivotal trial start afterwards (3Q12). Without the need for a 4th EOP2 meeting, this outcome was a positive surprise.

I think Dr. Jen is being very conservative in his time line for Provectus gaining the SPA.

Let assume the company submits the final protocol, for the sake of argument but illustrative of "as soon as possible," on Monday, January 23rd. 45 days from then (thus, assuming no further iteration with the FDA) is March 8th (I think). More generally speaking, early- to mid-March, or late-Q1. This is not mid-2012 or Q3. My early expectation is one to one-and-a-half calendar quarters (3-4 months, at least) sooner than Jen. It doesn't matter if my time line slips (it is bounded by Jen's); however, it helps for preparation not to be surprised if management secures the designation sooner than the crowd expects it (like Provectus not requiring a 4th EOP2 meeting).

A late-Q1 official receipt of the SPA also potentially pushes up the start of the pivotal MM P3 trial. Jen estimates a Q3 start. I project Q2, at the earliest.

Autophagy

A very key highlight of Craig's presentation at the Noble Financial Capital Markets' Eighth Annual Equity Conference were his reference to and comments on:

• Work by Michaud et al, presented in Science Magazine (and reported by Genetic Engineering & Biotechnology News). See here, here and here.

This independent, peer reviewed work shows (confirms) what Craig and his team have been saying for 10-12 years -- that autophagy generates anti-tumor immunity, which is t-cell independent.

The GEN article provides a nice synopsis of Michaud et al. work: "Autophagy of chemotherapy-treated dying cancer cells is necessary for triggering additional anticancer immune responses against remaining tumor cells..."

The abstract of the Science Magazine article is here: "Autophagy can promote the survival of tumor cells through nutrients recovered from degrading and recycling damaged organelles. How this mechanism can stimulate or limit the immune system's attack on tumor cells has not been well understood. Michaud et al. show that in mice, chemotherapy-induced autophagy causes the release of adenosine 5′-triphosphate (ATP) from tumor cells, thereby stimulating antitumor immune responses."

The abstract of Michaud et al's work is here: "Antineoplastic chemotherapies are particularly efficient when they elicit immunogenic cell death, thus provoking an anticancer immune response. Here we demonstrate that autophagy, which is often disabled in cancer, is dispensable for chemotherapy-induced cell death but required for its immunogenicity. In response to chemotherapy, autophagy-competent, but not autophagy-deficient, cancers attracted dendritic cells and T lymphocytes into the tumor bed. Suppression of autophagy inhibited the release of adenosine triphosphate (ATP) from dying tumor cells. Conversely, inhibition of extracellular ATP-degrading enzymes increased pericellular ATP in autophagy-deficient tumors, reestablished the recruitment of immune cells, and restored chemotherapeutic responses but only in immunocompetent hosts. Thus, autophagy is essential for the immunogenic release of ATP from dying cells, and increased extracellular ATP concentrations improve the efficacy of antineoplastic chemotherapies when autophagy is disabled."

By The Numbers (another update)

An update to my last post on this subject.

Revising my scorecard for 2011 one last time, as word of no 4th EOP2 meeting was heard prior to year-end, we have:

• Melanoma: SPA subject to final protocol submission and acceptance (3 of 6 pts);
• Liver: Orphan drug status (3); enrollment (0.5), treatment (0.5) and study (1) completed;
• Psoriasis: Enrollment (0.5) and treatment (0.5) completed;
• Immunology: Study initiated (0.5) and completed (0.5); and,
• Corporate governance: Director (Smith) and adviser (Eagle) added (0.5).

2011: My simple (simplistic) milestone score now equals 10.5; a breakthrough year all-around. As a graph, below:

Taking a longer-term historical view of share price (including today), an ever so slight upward trend in price unsurprisingly unreflective of intrinsic value:

That surely will change...

Provectus Receives Guidance From FDA On Pathway to Approval for Phase 3 Trial of PV-10 For Metastatic Melanoma

Let's cut to the chase: Management got their SPA (for the pivotal MM Phase 3 trial). Congratulations!

Of course, the PR did not explicitly say Provectus reached an agreement with the FDA on the trial design. Such agreement will come (and subsequently be announced via another PR) when the company submits the final protocol (trial design) to the FDA for its endorsement and the agency endorse such.

Remember, words have meaning. The PR, to include the appendix (About the Special Protocol Assessment), was carefully constructed. Compare Provectus' PR today with the PRs of other companies that have agreed with the FDA on their respective SPAs. The company's PR, by inclusion of this appendix, is the same as those others.

Today's PR should suggest that management got their SPA (of course, as delineated, potentially subject to some iterations with the agency).

Great news! And another big step for the company.

From a time frame perspective, if management were to submit the final protocol this week or next (i.e., as soon as possible), and without further iterations with the FDA, I would expect Provectus to announce agreement in early- to mid-March (Q1).

A friend of the blog suggested to me today that institutional investors and hedge funds, while perhaps nibbling at the stock along the way, will jump in or get off the sidelines only when the "official" agreement PR (together with details of the trial design) is out. For those [investors] not yet looking at the company, a PR clearly stating "agreement" with the FDA on the SPA will get their attention.

Lights, Camera, Action!

Provectus' immunologic MOA announcement today is very important. I think immunology is growing from a valuation enhancer to a valuation driver.

The abstract, entitled Intralesional Injection of Melanoma with Rose Bengal Induces Regression of Untreated Synchronous Melanoma in a Murine Model, will be presented at the Society of Surgical Oncology Annual Meeting (March 21-24) in Orlando. The full abstract (i.e., the one paragraph that describes the work and outcome) is not yet publicly available, as far as I can tell.

Here's what comes to mind: the degree and proportion of such reversion of tumor-state that the authors' use of the word regression implies:

• Complete regression? Partial regression? If so, a high degree or low degree? A combination of several states of regression?
• What percentage of treated model tumors completed regressed? Regressed a lot? Partially regressed?

Recall from my Dinner at Eight post, we learned about "Moffitt’s excitement over their immunology work. They confirmed the bystander effect using a mouse lung metastasis model much harsher than the real disease. Moffitt's results were very robust and beyond what they have ever observed from other treatments using this model. PV-10 nearly cleared the lungs of all tumors..."

Noble Financial Capital Markets Conference

Craig is presenting tomorrow at 1300 EST at this conference. More details and a link to a webcast of his presentation may be found here.

Sign up for Provectus News here.

Patience Young Jedi

Easier said or written than actually done or lived. Although my investment thesis (the monetization portion) is underscored by Provectus' pre-commercialization acquisition, seeing the share price reflect or come close to reflecting what I think is its intrinsic value certainly would be comforting. The share price does not reflect such value. Thus, I feel [a lot of] discomfort.

We all feel disappointed 4Q11 was not Provectus' break-out time (as measured by the share price); some might argue (as I would) that the stock should have broken out much earlier. Should have, would have, could have...

I think, objectively, the company's progress in 2011 was fundamental, with (as I've previously blogged) breakthroughs in all of Provectus' major programs. I think 2011 clearly was management's best year yet, even though the share price disagrees with me, for now. Reflecting on my own historical expectations, I take some small comfort in knowing I was off by only a quarter.

Q1 should be a pivotal time in Provectus' history, and a key waypoint in management's long journey.

Somebody's Watching Me

I always feel like
Somebody's watching me (Rockwell)

Another shareholder, with Wall Street experience, and I recently contemplated the potential share price behavior when Provectus agrees to/receives an SPA with/from the FDA for the company's pivotal MM Phase 3 trial. Set aside the temporal differences between reaching a consensus agreement with the FDA on a trial design suitable for an SPA, and receiving official notification of the SPA itself.

As a reminder, my current expectation is for management to complete their remaining trial parameter discussions with the FDA at the 4th EOP2 meeting and, thus, agree on a consensus design; a meeting that likely would be held around or before mid-February.

Management has worked hard to bring institutional investors into the stock, while cultivating ownership from stable, committed, supportive individual investors.

With the agreement announcement, at a minimum, or the receipt announcement, at the latest, I assume the share price would go vertical and endeavor to approach (but perhaps not initially reach) Maxim and Rodman & Renshaw's overripe price targets ($3, I think but cannot recall). To be sure, many of us in the stock at large ownership levels could well be drinking the Kool-Aid after all this time.

This other shareholder said he was not sure. While his perspective surprised me, it certainly resonated with a part of me that thinks it may take a little while for the sound of obtaining the SPA to reach the ears of more institutional investors. The shareholder made the point that he is not sure who exactly is looking at the stock and the company. He's not referring to those investor folks who are waiting on the sidelines for the company to officially receive the SPA. He's referring to the greater universe of investors who simply know nothing of the company. Being an OTC stock, being under $5, being under the radar screen of most industry participants, etc. contribute to a low profile.

When the announcement(s) is (are) made, don't be surprised if the share price behavior initially is underwhelming (i.e., it doesn't jump as much as I/you think it might/should). It might take some time for those eyes to turn their gaze towards the stock.

Southeast Asia

Management recently found themselves:

• In Southeast Asia for meetings with key opinion leaders.

im·mi·nent (update)

In my im·mi·nent post, I played with OMP's use of the words "imminent" and "imminently." Based on my read of their work, I had felt OMP made a very agressive call on the MM Phase 3 trial design decision's time frame.

In the last few days, two shareholders (who do not know each other, as far as I know) shared with me the rumor (they heard) that there is no need of a further meeting for the company with the FDA. They wanted my take on it. One shareholder thought the rumor was bad news. The other thought it was good news. How's that for making a market? Someone's a "buyer." Someone's a seller.

I won't speculate on this rumor, or answer their questions of me: Sorry guys! Given how diligently and collaboratively management has worked with the FDA, I highly doubt this purported outcome is bad news.

As I previously blogged, here and here, my current expectation is for management to complete their remaining trial parameter discussions with the FDA at the 4th EOP2 meeting and, thus, agree on a consensus design; a meeting that likely would be held around or before mid-February.

Afterwards, the company would submit the final protocol to the FDA. Provectus then, some time thereafter, would receive the SPA.

Summarizing: Meet. Discuss. Agree. Submit. Receive.

I would expect to see a PR announcing agreement on a consensus design, followed some time later by a PR announcing receipt of the SPA.

Aside from the small group of us that thinks agreement on the SPA is inevitable and simply a matter of when (not if), the rest of the market falls into the following camps:

• Provectus who?
• They won't get the SPA. I don't care.
• When they get the SPA, I'll buy.
• Provectus got an SPA? I need to do more homework on these folks. I think I need to buy some shares
• Why is the share price of this biotech going up so much? I better buy some shares.

While I am being tongue-and-cheek with the above list, there is a lot of truth there. I think the ambiguity or uncertainty of the regulatory path for metastatic melanoma is weighing heavily on the share price. When the uncertainty is removed -- once the FDA and management agree on the SPA -- that weight is lifted, and it is replaced by a gusty wind beneath their wings.

Equity markets react poorly (they fall a lot) to negative surprises or when companies fail to live up to expectations. They react irrationally (they rise violently) when a positive surprise occurs or when companies beat the expectations of the market.

If there really is no need to meet, then I would expect we will hear from management in due course about this reality, its meaning and next steps.

Such an outcome would have "beat expectations" by a good amount, or be termed a big "upside surprise" (in Wall Street lingo), in my view.

Not only would management not require another meeting (the expected 4th one) to seek agreement with the FDA, but they the agency itself would have agreed with management's design parameters much sooner than the market actually expected the FDA to do so (if the market even expected such agreement to occur in the first place).

Cover Me!

Once the company receives the SPA for their pivotal MM Phase 3 trial -- whenever that happens -- I would not be surprised to see high profile biotechnology equity research analysts (like a Dr. Mark Monane-type) initiate coverage (without management having to put an implicit or explicit investment banking relationship in place with the analyst's firm).

Such coverage would be most welcome!

per·spec·tive

2. the proper or accurate point of view or the ability to see it; objectivity

As investors in a publicly traded biotechnology company, we usually are obsessed with near-term milestones. Big pharma are not obsessed with such milestones. If, for example, regulatory or clinical trial ambiguity requires more time to be made unambiguous, big pharma does not care. They have a different mindset.

[Credit the paraphrased thought above to yesterday's live chat by Adam Feuerstein at the 2012 JP Morgan Healthcare Conference in SF.]

My investment thesis, and the underlying potential return on investment (and annualized ROI or CAGR), is strongly influenced by the pre-commercialization acquisition of the company by big pharma.

But, like you, I do navel-gaze and obsess, from time to time.

Surge and Fade?

Germane, topical post by Monsieur Dinde:

The share price recently has gone near-vertical, but history would suggest (as Señor Guajolote write) peaks and valleys around anticipation of clinical trial results and capital raises. Akin to: buy the rumor, sell the fact. A sampling below:

Average daily trading volume typically measures hundreds of thousands of shares or less. Small. It should be much, much higher.

How much higher does the share price go, and for how long? Will news follow-up sustain and potentially further increase the share price? Or, per Herr Türkei, will there be another fade?

Why I’m Long Provectus

Preface

In this letter, I want to share my investment thesis in depth and describe why, at a share price of $0.94 and market capitalization of $103 million (based on Friday’s close), Provectus Pharmaceuticals is an exceptional long idea. This security is the largest holding in our multi-asset portfolio.

For framework, approach and, in some cases, language of this letter, I liberally borrowed from Whitney Tilson’s Why We’re Short Netflix. See here. For quick access to data summations and historical information (rather than have to dig through my notes), I quoted from OneMedPlace’s recent profile on Provectus. See here.

I am not a biotechnology investor, although I have made investments in life sciences companies. My experience in and exposure to different industries includes biotechnology (and life sciences), computer hardware and software, defense and intelligence, environmental services, financial services, gaming, information technology, investment management, mining and nanotechnology.

There are common traits to successful companies and their management teams, businesses, business strategies and tactics, and products and services, irrespective of industry. There also are common traits to successful investments, irrespective of asset class or security sector.

Biopharmaceutical industry participants (e.g., executives, scientists, investors), in other words experts, may poke or blast holes in this letter because of my focus on accuracy rather than precision in drawing conclusions. One might do well to channel mental energy into more productively observing situations and listening to people.

Background

My due diligence is a compilation of nearly four thousand interactions with Provectus management (e.g., calls, queries, questions, e-mails, meetings, attending conferences, etc.) amassed over several years. My own thinking about the company’s prospects 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.

Overview

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 (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 falls into the category of an investment opportunity where the risk-reward profile is clearly and visibly out of whack.

Until very recently, the share price trended downward for at least five years, despite: copious, unambiguous pre-clinical, clinical, safety and multi-indication viability data for oncology and dermatology therapies; ease of drug administration and low drug production costs; a broad and deep accompanying intellectual property portfolio; the historical and likely future prudent raising and efficient use of capital; and an intelligent, hard working, ethical and unchanged management team.

Why on earth would I be betting on this stock, when most institutional investors, including most life sciences and biotechnology-focused investors, have completely ignored Provectus? The current valuation is extremely low. There is substantial additional upside above the near-term fair market value. Once the only remaining unknown, the regulatory path for the company’s oncology drug PV-10 – primarily metastatic melanoma, and secondarily hepatocellular carcinoma, and the company’s dermatology drug PH-10 for psoriasis – begins to be resolved, investors will become more aware of the company and the stock’s attractive risk-reward proposition, Acquisitive pharmaceutical companies also will begin accepting the company and its active ingredient’s value propositions.

Valuation

Provectus’ current valuation is very low. The company’s current market capitalization at best is equal to or less than less accomplished, pre-revenue biotechnology companies, and at worst only a fraction (one third to one tenth) of comparable but less substantive companies.

The company’s acquisition value when prospective pharmaceutical acquirers realize Provectus’ promise for oncology (and dermatology) patients is substantially higher than the current valuation.

Clinical Results

Provectus’ clinical results, through trials and the compassionate care program, have been impressive and, because PV-10 is delivered intra-tumorally and not systemically, unprecedented. These results show:

• Superior results for objective response, complete response, durable response and progression free survival; the data suggests superior potential for much better overall survival;

• Multi-indication viability: metastatic melanoma, hepatocellular carcinoma and recurrent breast cancer;

• A high degree of tumor destruction;

• Both local and remote (systemic) effects on diseased tissue; and

• Repeated reproducibility in and across pre-clinical and clinical trials.

Safety Profile

“…Rose Bengal…has been…known for [8]0 years as an a liver diagnostic agent…[T]he founders…realized that being a diagnostic agent [Rose Bengal] was already FDA approved for IV therapy and at much higher doses than what would be needed for cancer. Furthermore, thru decades of use, its safety is well established and all preclinical and animal toxicity studies have already been performed historically and are on-file at the FDA. …[T]heir FDA dossier will be significantly easier than if [Rose Bengal]was a brand new agent.”

For example, prior to 1982, the FDA approved Bracco Diagnostics’ Robengatope, which used Rose Bengal Sodium.

There have been no meaningful adverse events. Patients feel transient local pain. Such historical safety means no surprises in future clinical trials.

Regulatory Path

The primary unknown centers on the regulatory path for metastatic melanoma, Provectus’ lead indication. A fourth end-of-Phase-2 meeting with the FDA to complete Phase 3 trial design discussions should occur in February, with the likely outcome being the receipt of the SPA, which should occur by March. There is a parallel track to the SPA effort, which is to seek accelerated approval based on the immunology results from Moffitt Cancer Center.

Australia’s Therapeutic Goods Administration already has to a data analysis and review process to allow early evaluation for marketing approval for metastatic melanoma.

The company could finalize designs for a pivotal hepatocellular carcinoma/liver cancer Phase 2/Phase 3 trial and a pivotal psoriasis Phase 3 trial in 2012.

Once the regulatory path for PV-10 for metastatic melanoma begins to be resolved, Provectus’ valuation should begin to approach fair market value. The clarity of the respective paths for HCC and psoriasis, as will preclinical and compassionate care program data on other solid tumors, will contribute to an already robust valuation.

Ease of Drug Administration

PV-10 currently is injected into target lesions. Doctors do injections in outpatient settings, although a suitably trained nurse practitioner should be able to 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 physicians’ current practices. In 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.

Treatment Price and Cost to Manufacture

For the purposes of their valuation models, equity research analysts following the stock assumed a treatment price of $20,000 to $30,000. These are arbitrary numbers unrelated to the cost of manufacturing the oncology drug (and for that matter the dermatology drug). At these prices, PV-10’s (and PH-10’s) gross margin exceeds 99%. Following drug approval, the company’s acquirer should have no reimbursement challenges, and will possess tremendous flexibility in setting treatment prices.

Given PV-10’s equivalent to dramatically better efficacy and dramatically better safety profile, predatory pricing – as it relates strictly to competitors’ pricing of their products – could be very lucrative to Provectus/its pharmaceutical company acquirer and devastating to competitors. To be clear, I think pricing flexibility, resulting directly from the cost of producing the drug, could be a strategic competitive wildcard that goes unnoticed.

Also unnoticed is the GMP-level and quick scale-up ability of drug manufacture.

Intellectual Property

“[Rose Bengal is] an ‘old’ agent; the composition of matter patent has expired but [Provectus] has recently 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.”

Provectus scooped several companies, including Bristol Myers Squibb, Vical and BioVex/Amgen, by filing a combination therapy patent claiming the combined use of PV-10 and ipilimumab, Allovectin and OncoVEX, respectively, while disproving obviousness on the basis of a new class of agent (i.e., chemoablative immunotherapeutic) for PV-10 and the drug’s highly unanticipated advantage (i.e., priming the pump of the immune system).

Another patent application talks to improved PV-10 potency by combining it with an approved non-oncology drug.

Together with its patent portfolio, the company’s platform of agents (e.g., PV-12) provides an acquirer a long runway of freedom to sell drugs before turning to face generics competition.

Management

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 (e.g., repurposing an old diagnostic compound as an ant-cancer agent, understanding the value of the molecule’s safety history in working through the regulatory process).

Management is very competent (e.g., getting this far in clinical development while accumulating a $102 million deficit during the development stage).

Management is hardworking (e.g., while creating near composition of matter patents and scooping other companies requires intelligence and creativity, only hard work ensures robust execution and implementation).

I believe management to be ethical and have a good business moral compass.

In addition, while not having sold a single share of stock thus far, the principals have made in-kind contributions at inception of the company and exercised options to date at an expense of $20 million.

What If I’m Wrong?

What if I am wrong? What would that scenario look like?

Poor clinical results? Given the reproducibility of pre-clinical and clinical results, likely no.

Adverse events? Given Rose Bengal’s multi-decade, historical safety, likely no.

More time to confirm the regulatory path? This is the likely scenario if I am wrong. I am prepared for the time to achieve regulatory clarity to be longer than expected. 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.

Conclusion

Provectus is an extremely undervalued stock. The current market capitalization of $103 million simply 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. Eventually, the share price will display its 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.

The Dye Has Been Cast

Alea iacta est (Latin: "The die has been cast." Alternate: "The die is cast.") is a Latin phrase attributed by Suetonius (as iacta alea est) to Julius Caesar on January 10, 49 BC, as Caesar led his army across the River Rubicon in Northern Italy. Read here.

The phrase, "the die has been cast," is used to mean events have passed a point of no return; that something inevitable will happen (from the Wikipedia entry sourced above). Historians point to Caesar's Rubicon crossing as the event that ultimately launched the Roman empire, even though the empire actually replaced the republic twenty years after his murder.

The dye has been cast.

Talking Your Book

Everybody talks their book. See here, here and here.

I am a large holder of Provectus shares. I am writing a blog about the company. I am talking my book. If a tree falls in the forest, aside from the tree hitting me and my bear friend beside me who is doing number two, does anyone other than you and I care about this blog?

I started this blog to get it (my investment thesis) right. Did I invest for the right reasons? What were those reasons? Are there any holes in my investment thesis? What was my due diligence? Why am I buying shares? When the time comes, why am I selling them? Etc. I have not arrived yet at the point where I have put down all my thoughts in as crisp, as cogent, as pointed a manner as I can. As I should. In one place. I will begin that process today.

My goal will be to post an open letter before the end of the weekend about the reasons I am long Provectus.

The Wisdom Of Crowds

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, the central thesis of James Surowiecki's book is that a diverse collection of independently-deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts. See here. The wisdom of crowds is not to be confused with crowd psychology.

There are at least 4 places on the Web where you can find folks chatting about Provectus, productively or otherwise:

• Silicon Investor here;
• Yahoo! Finance here;
• InvestorsHub here; and
• InvestorVillage here.

More than a few times, a poster has raised an issue or written on a topic that has encouraged me to carry out further due diligence, or just think more or harder. Sometimes it's important to repay a fellow long by endeavoring to allay his or her (and perhaps other's) concern or fear or confusion.

Other times, it's very good to read of a misconception, or two.

Innie or Outie?

From an open/intraday low of 67 cents on December 20th ($0.69 close) to an intraday high of 96 cents today, January 6th ($0.94 close): a 43% rise in the share price (+36%) over 12 trading days. That's interesting activity:

Pursuant to a previous post, here is a final follow-up on recent trading volume behavior:

Odorama?

A capital raise in the near future? Improbable (although not impossible), given other factors at play.

im·mi·nent

im·mi·nent
adjective
1. likely to occur at any moment
2. about to happen, occur, or take place very soon

Words have meaning.

A friend of this blog and large investor called me early this morning. We discussed OMP's research note. In particular, we wondered, together, why OMP would use the word "imminent," or a derivative of it frequently and where it did. "Imminent" has a distinctly different meaning for timeframe than Dr. Jen's comments, for example, of 1Q12 or 1H12.

The author(s) of the note likely made use of this verbiage because of their discussions with Provectus. While OMP could have mis-stated managements comments, guidance or expectations, this research piece has a different flavor to it:

• "Now in final stages of their discussions with the FDA, company management could announce a phase III program imminently. Because melanoma is a cancer type where drug development has been historically tricky, pharma interest maybe high with suitors lurking around to assess the complexity and feasibility of an FDA endorsed phase III design before pulling the trigger to in-license PV-10 or acquire PVCT." -- This is a very agressive call on the MM Phase 3 trial design decision by OMP, compared to Maxim's Dr. Jen. That said, it does imply having an impact, time-wise, on an in-license or acquisition (note: I don't believe there will be any qualms regarding the complexity or feasibility of an eventual Phase 3 trial, given the information available on the contemplated design).

• "In parallel, PVCT is negotiating with multiple companies to out-license their early stage phase I drug PH-10 (Rose Bengal 0.01%) for psoriasis and atopic dermatitis (AD). This is a more imminent but a smaller royalty deal, but since the dermatology marketplace has a backlog of ~10MM under-served patients in the US alone even a small percentage royalty may imply significant revenues for PVCT." -- More imminent [than an in-license of PV-10 or acquisition of Provectus] (n.b. comparative)? A dermatology deal has long been thought of as happening before an oncology deal, either a mini- or complete one. While the announcement of an FDA-endorsed Phase 3 trial starts the beginning of the end-game, prospective licensees need to see the long-awaited psoriasis Phase 2 c data, which likely begins once management releases the efficacy results via a PR.

• "With a cash position of $14.4MM and three large pivotal trials in the design stage (MM, phase 2/3 in HCC versus sorafenib and psoriasis), it seems logical that PVCT will require additional capital imminently, yet management insists that they are well capitalized thru YE2013." -- The company surely will require capital imminently for these three pivotal trials if they start them imminently. At the same time, they can readily and imminently access capital (through the LOE and/or shelf filings) if the strategy and rationale of doing so for one or more of the three trials is justified, vis a vis both imminent and long-term valuation. Did I use "imminent" enough?!

Digging Deeper

Some thoughts about OMP's research note:

• "Because melanoma is a cancer type where drug development has been historically tricky, pharma interest maybe high with suitors lurking around to assess the complexity and feasibility of an FDA endorsed phase III design before pulling the trigger to in-license PV-10 or acquire PVCT." 
• When the FDA blesses the MM Phase 3 design, the beginning of the end-game will be at hand.
• "...they also realized that being a diagnostic agent RB was already FDA approved for IV therapy and at much higher doses than what would be needed for cancer. Furthermore, thru decades of use, its safety is well established and all preclinical and animal toxicity studies have already been performed historically and are on-file at the FDA. Now as PVCT proceeds with clinical work in cancer and dermatology indications, their FDA dossier will be significantly easier than if RB was a brand new agent."
• While competing scientists might well kick themselves, for years to come, for not deducing rose bengal's potential use as an anti-cancer agent, skeptics and critics of management might well kick themselves for not fully realizing the importance of rose bengal's historical safety profile in easing the journey from anti-cancer candidate agent to approved agent.
• "This dual approach of cell- destruction and immune triggering is very potent."
• Chemoablative immunotherapeutic
• "PVCT has approached the FDA with a draft phase III trial design wherein ~300 patients could be treated with PV-10 (or control [standard of care]) for a primary endpoint of modified PFS. Should the trial demonstrate success on PFS the sponsors will apply for accelerated approval of PV-10 but keep the trial running to completion for an overall survival (OS) endpoint. It may be several years until the OS endpoint is achieved but in the meantime PVCT will be able to market the agent under the accelerated approval based on statistically and clinically superior PFS results."
• Management is pursuing AA as a parallel track [to their Phase 3/SPA track] based on Moffitt's immunology work. OMP's connection of the Phase 3 trial and AA is very interesting to read. Is there a connection? Did OMP accurately state this?
• "While they admit to pharma/biotech companies interest in partnering the cancer indications of PV-10, we believe that no deal can be struck without PVCT getting a consent from the FDA regarding their phase III trial design."
• How quickly does Pfizer and/or other big pharma companies initiate discussions with Provectus after the FDA blesses management's Phase 3 trial design?
• "PV-10 has been tested in both...[HCC and breast]...indications in 6 and 12 patients, respectively in phase I trials. In both trials 10% RB was found to be safe and well tolerated and demonstrated tumor ablation in a majority of patients."
• Management has not discussed the breast cancer trial much. So it is, again, interesting to see OMP discuss efficacy, which previously only was alluded to by the company (see here).
• "RB has an "old" agent; the composition of matter patent has expired but PVCT has recently 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 RB can never be synthesized."
• Management's IP protection work is undervalued and under-appreciated.
• "With a cash position of $14.4MM and three large pivotal trials in the design stage (MM, phase 2/3 in HCC versus sorafenib and psoriasis), it seems logical that PVCT will require additional capital imminently, yet management insists that they are well capitalized thru YE2013. This indicates that management has its sight-set on one or more large licensing deals in 2012. The upfront payments from such deals will provide funds for phase III trials to start, and the partners will continue to fund development in a joint venture."
• Provectus has the $30MM equity line of credit from Lincoln Park Capital and two $50 million shelf filings. The LOE and shelf filings are more effectively used of course (i.e., to minimize dilution) when the share price is [much] higher, which should happen when the company receives an SPA and/or a dermatology license is announced. Management should have sufficient financial resources readily available to conduct its pivotal trials if it so desires.

Navel-gazing

I'm probably data mining (in a not-intellectually-honest way, by just focusing on November, December and early-January price and volume data), but I found it interesting to take a deeper look into the volume data. The behavior of volume (remember, I'm graphing cumulative volume below) leading up to late-December is somewhat predictable (with an R-squared of nearly 1). Also, I'm not being precise or pure with my statistical analysis. I'm just navel-gazing.

But, isn't it interesting to observe the change in volume behavior over the last 10 days or so? The R-squared of this (red) data series is noticeably lower than the first (blue) data series

As it stands so far today, the volume of approximately 160,000 shares exceeds the slope (128,000) of the red data series' trend line.

Tax Selling?

There's lots of literature and advice about tax selling (tax harvesting), and lots of rules as well (wash sales). For many -- individuals, executives, companies -- taxes (and tax policy and expectations) drive business and investment decisions.

Lots of articles pop up in the financial press in late-November and early-December espousing the benefits of tax selling. Provectus shares, at the moment, are largely held by retail (non-institutional) investors. While institutional investors will dump or buy before quarter- and year-end (to discard losers and buy winners going into the next quarter), individuals typically contemplate their tax load at the end-of-the-year (going into tax filing preparation time in the upcoming year).

Below is a chart of PVCT's daily and cumulative volume and daily closing price for November through yesterday (January 3):

Was there tax selling? Who knows? Perhaps a few folks lightened up their holdings and presumably took the loss on their Provectus shares for their respective tax situations.

Who cares? It doesn't seem to me that the graphic above, as it relates strictly to tax selling, is dispositive.

I am interested, however, in what happened, share price- and volume-wise, around the end of December.

vo·lu·mi·nous

Network 1 Financial (NTFN) returned last month as a market maker in the stock, having left in September to carry out the spin-off process.

NTFN is an important entity in Provectus' ecosystem, helping to facilitate liquidity in the stock. While monthly volume declined markedly before its departure -- 44% decline in monthly volume from the end of January to the end of August -- monthly volume fell another 44% by the end of September (the month starting when the firm no longer made a market in Provectus stock).

News undoubtedly moves share price; however, it's not insignificant to see NTFN back in the box.

OMP Research

Provectus circulated OneMedPlace Research's profile on the company.

As tends to be the case with buy-side (or pseudo buy-side, in the case of OMP) research, the material contain more declarative comments than their brethren and sistren on the sell-side (recall Dr. Jen's update in early December). It is a good read.

If you already have not received it directly from Provectus News (sign up, by the way), download it here.

Property Rights

The importance of intellectual property ("IP") to a company (and its value, and valuation) can be both overstated and understated, often at the same time.

It is well understood that IP is an important component of a company's valuation (a contributor to sustaining competitive value). Often, the IP is the cornerstone. Other times, it merely is a key block or brick of the company's foundation.

The company's IP portfolio is robust. You should peruse it. In particular, management's near composition of matter patent is noteworthy and, I believe, and important contributor to enterprise value.

The recognition of that value might be made by the markets and investors in the near-term, or by the acquirer (or licensee) in the long-term.

Dr. Ross' discussion, towards the end of his presentation, about combination therapies got me to thinking about protecting one's IP related to one's drug (and active ingredient) and the patenting process related to combination therapies.

Company ABC files patents for combinations because it (a) prevents other companies from controlling the  marketing of ABC's drug in such combinations and (b) provides, in some cases, an opportunity for patent extension; for example, if ABC's drug A is combined with company XYZ's drug X as a new product. The primary value is (a) above, which allows a marketing push to expand application to other indications without relying on a third party to detail the market.

Thus, company ABC would (should) file a combination therapy patent for the combination of drug A with drugs (or classes of agents) B, C, D...n (i.e., math speak for all drugs). A good example of such a combination therapy patent is WO 2010/014784 A2, BMS' Combination of Anti-CTLA4 Antibody with Diverse Therapeutic Regimens for the Synergistic Treatment of Proliferative Diseases patent.

Now, what happens if ABC neglects to include drug {n+1}?

Nothing, because generic disclosure and claims should extend coverage to {n+1}, or at least prevent another the company that developed {n+1} from claiming the (A, {n+1}) combination due to obviousness. The {n+1} owner has trouble claiming (A, {n+1}) due to this obviousness, unless they can show a highly unanticipated advantage. So, it is generally possible for company ABC to add drug {n+1} later, as a continuation of the original patent application, while it is hard for the {n+1} owner to do this due to the obviousness issue.

Omitting drug {n+1} potentially is relevant if {n+1} is unrelated to B...n; for example, drug {n+1} belongs to a new class of agent or has a highly unanticipated advantage.

New class of agent? Yes: chemoablative immunotherapeutic. Here.

Highly unanticipated advantage? Yes: Craig's views on why combination therapies (e.g., PV-10 + radiotherapy, PV-10 + ipilimumab, PV-10 + dacarbazine) seem to work dramatically better, particularly on late stage patients with severe affliction, because of the addition of PV-10 and his hypothesis of its impact on the immune system in order to more effectively leverage the other therapy. Here.

Did BMS omit PV-10 from their combination patent for ipi? Yes.

Did other companies make the same omission? Yes. A sampling: Vical's Allovectin-7 and BioVex's (Amgen's) OncoVEX, among others.

Take a read of these patents, and you'll see.

Smart cookies, those Knoxville folks. What combination therapy patents have they filed?