February 4, 2013

$PVCT: $CLSN, the @adamfeuerstein-Ratain Rule, and Provectus in China

Celsion's share price was obliterated last Thursday, down more than 81% and lower than price levels in 2012 before the stock made a dramatic run-up later in the year. On Friday, the stock dropped nearly 13% more. This morning it is down another 10%. Celsion “...announced what appeared to be an absolutely catastrophic failure from their Phase III heat trial for ThermoDox,” and succumbed to the Feurstein-Rattain rule.

Adam Feuerstein's column here.
I am less interested in the stock, and more interested in comparing Celsion’s deal with Chinese pharmaceutical company Zhejiang Hisun Pharmaceutical ("Hisun") with Provectus’ contemplated China deal and the process by which both companies arrived at where they are. 

The Celsion deal essentially was a license transaction call option owned by Hisun. Positive ThermoDox results were necessary for Hisun to exercise its option to further negotiate an eventual license transaction for China, Hong Kong and Macau. While Hisun is not one of the top pharmaceutical companies in mainland China (according to 2011 market caps), based on the table (below) I previously publishedI must acknowledge I previously was incorrect about suggesting or implying the no name-ness of Hisun, which launched a joint venture with Pfizer in September 2012, Hisun-Pfizer Pharmaceuticals Co.

I am a big fan, proponent and practitioner of process. Good process doesn’t make a bad deal good, but can make a good deal great. In the case of Provectus, management’s good process could make a good China deal a great one.

Success in China for Western companies appears based on working with that country's federal government as a partner, rather than acting antagonistic, ignoring it or not involving it in one's process.

Engaging in business in China as a foreign entity can be a very challenging endeavor for the largest of multinational corporations, let alone a small biotechnology company like Provectus. Two issues usually arise, the positive resolution of which typically bode well for success: the presence or lack of government support and, depending on the industry sector and business application, sufficient or insufficient intellectual property protection.

Many companies have enjoyed success because of a fruitful and “eyes wide-open” relationship with the Chinese state. When I traveled there a few years ago, that was the message of the CFO of Intel’s Dalian-based organization: see and seek the government as your partner, not your opponent. Just ask how successful Google and Paypal, among others, have been in trying to thwart or circumvent the Chinese government.

A nanotechnology company in which I am a very active shareholder spent a good amount of time, money and resources as it struggled to gain sufficient protection for its products, technologies and intellectual property as it hammered out a relationship with Foxconn to provide certain hand held electronics parts, componentry and coatings to several smartphone OEMs. The end consumer market was not China, but rather the company had to utilize China for manufacturing of products that ultimately would be sold in the U.S. and Europe. In the end, with the necessary support and promises of enforcement of its larger partners, the small nanotechnology company felt sufficiently comfortable and compelled to move forward in China. As a small company, time, money and resources are scarce and have to be adjudicated wisely, sometimes leading to nothing in the end.

A regional oncology deal in China between Provectus and a Chinese Big Pharma company has been in the works for several calendar quarters. The making of a deal emerged earlier this year in the spring. The company has worked through a process of due diligence, evaluation and negotiation to arrive where it is today.

In late-November, after a good amount of groundwork was laid, Peter traveled to China to meet with potential strategic partners and a bevy of government officials. There are multiple prospective partners for now (all of whom apparently are on the list of the top local pharmaceutical companies according to market cap above), and Provectus still is assessing the optimal one. On the government side, Pete and his intermediaries met, differently, with senior leadership of the office of the Premier of the People’s Republic of China, the Ministry of Health, the Ministry of National Defense, and the State Food & Drug Administration.

It appears he left China having established a good working relationship with the government and government officials, a relationship that since has permitted Provectus and its advisors to now work with prospective strategic partners to finalize a license transaction with a down-selected one on top-line terms and conditions blessed by the government. Government support of Provectus, PV-10 and the business relationship between the company and the eventual strategic partner has been established, as I think has been the intellectual property protections afforded Provectus (with which I think management is mostly comfortable, or understanding or realistic of how the relationship might work in the context of their IP and its protection or lack thereof).

When Pete returns from his late-February trip to China (this assumes, of course, he does travel), he could bring home a signed deal and the contemplated upfront cash payment. These monies could fund the pivotal MM Phase 3 trial, to-be-finalized HCC (liver cancer) Phase 2/Phase 3 trial and, possibly, and one or two more Phase 1 trials, and contribute to other corporate use of funds.

An interesting situation arises, since the prospective partners all appear to be from the table above, with the China subsidiaries (WFOEs/WOFEs, which I think is unlikely, or acquired domestic subs) of key Western Big Pharma companies. I need to do more homework on this aspect or facet of a potential China deal.

Of course, Pete may not be successful. Deals break down or do not come to fruition for both substantive and silly reasons. As cliched as the phrase is, only time will tell.

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