July 13, 2013

The Beginning of the End[-game] for $PVCT

The title of this post started out as “Is $PVCT a private or public company?” As I wrote more of it, framing the content through the filter of investment analysis rather than merely reporting or describing, I decided to change the title to “The Beginning of the End[-game] for $PVCT.” For some blog readers, this smacks of timing. The company has yet to receive regulatory clarity on its lead indication and here I am writing about the beginning of the end of management's journey to attain drug approval for PV-10.

I’ve tried to convey in recent posts that querying “timing” isn’t necessarily querying "when," but more about milestone achievement and thus "what." In order to assess the remainder of the path to monetization, I (we) need to understand what's left to demonstrate or prove to the FDA the value proposition of a local-regional therapy in PV-10 with systemic benefits as well as the ability to stimulate the immune system.

You’ll recall I wrote in my $PVCT: Moving On, Moving Up post there has been an evident shift in management sentiment. On the cusp of regulatory clarity, with whatever commercial validation should follow based on the specific clarity received, there has been a palpable shift in the sentiment emoted by management, individually and collectively. Although I’ve noticed it grow over the last few months, I observed aspects of it even before that. Others have noticed it too. It would seem we've been there before on one or two previous occasions, but is this time different? It very much seems so.

Management has long been confident about their innovation. They’ve generally been single-minded in their go-to-market strategy and its implementation, with the occasional zig here and zag there. February 2013's Cancer Watch's "Back to Phase 1: Understanding Systemic Effects of PV-10" article quoted Eric about Craig that captures this approach: “Back in the preclinical days at Provectus, Craig Dees, PhD, theorized that ablation of tumors with PV-10 might lead to unmasking of tumor antigenic material. I don’t think he anticipated that it would work as well as it does.”

Take this sentiment and approach further. If you (Craig, Tim, Eric and Pete) had and/or you (Craig, Tim and Eric) had innovated a cure for cancer, or something akin to it, how would you feel? How would you act? How would you play for the end-game?

Confidence and arrogance are different sides of the same coin. “How can we define confidence? What separates it from arrogance? Where are the lines blurred between positive and negative personality traits? Arrogance, or cockiness, in an athlete and in the sporting world more generally, is most often viewed as a negative trait. However, the very qualities that can result in arrogance clearly help to make the great ones great at their craft” (Quote source here). Imagine the confidence or arrogance of Craig, Tim, Eric and, some years later, Peter, to think they could cure cancer, and embark on a journey to attempt to do so. Alternatively, imagine the confidence or arrogance of those who think they cannot.

Why does one climb a Mount Everest? "You've climbed the highest mountain in the world. What's left? It's all downhill from there. You've got to set your sights on something higher than Everest" (Willi Unsoeld). After you’ve reached the summit, achieving internal conclusion, and travel along what remains of the path to reach external conclusion, how do you feel? This presumes you have validated and have had validated your summit reaching efforts and outcome, and that you then know you have a cure, or something close to it. How do others observing or hearing of the climb and summit clinching effort feel? How do you act when you return to base camp?

A McKinsey & Co. practice interview question goes something like this: Your client has an orb or sphere that turns water into crude oil. How do you value the sphere? As a Provectus shareholder, what is a cure or something akin to a cure for (solid tumor) cancer worth (i.e., total value or valuation) and worth to you (i.e., the share price at which you may or will sell your holdings)?

At this point, put into context your views on and feelings about management’s compensation, which for those who have them are very likely exclusively and highly negative, because the emotion and near singular focus (unless rooted in objective analysis) can cloud perspective. Compensation is but one of many items you should take into consideration when analyzing this investment opportunity. Management has a drug that works so well it’s mentioned by others in the same breath and sentence as the Nobel Prize. These lofty comments are hearsay, but have bubbled up and been circulated as rumor or near fact over the last several months. If you think Provectus has “got the goods,” what is it worth? What is it worth to you?

A very large shareholder called me this week on a matter related to Provectus (I had conveyed a query of mine to him, and he replied). In the course of the conversation he said (paraphrasing) it's a good thing the drug is a "10" because management is a "2." It's an unsurprisingly disingenuous statement given he's very likely been nothing but supportive of (obsequious with) management in his interactions with them. Management has its flaws, individually and collectively. We all have flaws. For some of us, they're deep. But, these flaws merely are a piece of the puzzle the investment manager tries to place and solve on the way to affirming or refuting his or her investment thesis, particularly if the manager makes the assessment the flaws are non-fatal.

I observe my own journey (I refer to it as such because the outcome has the potential to be transformative in several different ways) as an investment manager with a sizable equity position in the company might be described, in part, this way: “You will be wrong about many things in life. And it’s easy to fall into the trap of trying to confirm all of your biases. But what if we all started to recognize that improvement often starts with understanding how to be wrong? Imagine how much more we’d all get accomplished. I say embrace being wrong. And more importantly, be open-minded enough to learn and adapt around being wrong so you can be right more often” (Cullen Roche, Pragmatic Capitalism).

Throughout my career I have tried to balance the investment manager’s need to be right with the manager's requirement to relentlessly question whether he or she is wrong. I reached the conclusion that Provectus has innovated an oncology drug that works like nothing the industry has recently or, perhaps, ever seen. I have an extremely good sense or estimate of what that is worth (which of course is different from and not yet proven to be what management ultimately can monetize). More importantly, I know what it’s worth to me.

A topic for a future post, there is more than sufficient public and publicly-stated information, observations and comments for me to arrive at the above mentioned conclusion. This is especially so if one complements the aforementioned data with answers to a broad and deep array of questions of management and third parties, all of which they would provide to anyone who thoughtfully and diligently asked them. One then bounces the conclusion off of other thoughtful, intelligent, intellectually honest folks in hopes of seeking agreement on or destroying it. Inevitably, true material difference of opinion is what proverbially makes a market. On one side, buyers. On the other, sellers. Everyone else, on the sidelines. Players play, coaches coach and owners own. Everyone else (who cannot or will not) are fans, critics or bystanders.

On the surface, it might seem odd to think of Provectus as anything but a publicly traded company. Technically speaking, it is, trading as an over-the-counter (“OTC”) equity security under the ticker symbol PVCT and falling under reporting requirements set out by the Securities and Exchange Commission (“SEC”). Stock exchanges have respective specific financial and reporting guidelines that govern companies whose shares are listed for trading on these exchanges. One positive that emerged from October 2012’s failed PVCTP “IPO” was meeting the NASDAQ’s corporate governance listing requirements. At the time, Provectus also had met the exchange’s financial and liquidity requirements. All of these financial, liquidity and corporate governance requirements are necessary for a company to have its stock listed on one of the NASDAQ’s three tiers of markets: Global Select, Global Market, and Capital. According to Peter, as of Friday’s close, save for the stock’s closing bid price, Provectus meets all of the listing requirements for the NASDAQ Capital Market. To actually list, the bid price must exceed $2 for 5 consecutive trading days.

The public-ness versus private-ness of the company, I think, centers around or is a function of Provectus’ liquidity, which has meaning beyond “…an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value.”.

Some private companies act like public companies, insofar as they provide liquidity of varying degrees to employee shareholders and, more than likely, have some level of SEC reporting. Facebook and other high profile, typically Silicon Valley tech companies have had their shares traded on secondary markets. Some investment firms and funds provide liquidity for employee stock options.

Some public companies act like private companies where value is illiquid to varying degrees, partly or not fully reflecting intrinsic value. That is, there is some degree of divergence between intrinsic value and market capitalization (extrinsic value).

Liquidity, or its opposite, illiquidity, doesn’t just happen. There are reasons and causes for it, such as but not limited to tier of stock exchange, market capitalization, equity research coverage, ownership, etc., all mostly obvious. There are some un-obvious reasons, too, that also should make you contemplate liquidity further. Wall Street and other investors apply a liquidity discount of varying degrees to their valuation of any asset, and factor a level of liquidity into their investment thesis for it. Liquidity, or some lack thereof, should influence your perspectives of an investment opportunity's risk and return.

Provectus has been, continues to be and should remain for a time an illiquid, private-like public company, requiring you to think (and have thought) differently about the shares you hold until such time as it becomes a more public company, requiring you then to think differently about those shares.

Publicly traded Provectus stock provides illusory liquidity for shareholders. Shares can be bought at any time in order to buy into the company’s story, or sold at any time should investors need to raise cash or no longer deem the story true or worthwhile. For several liquidity-related reasons, however, I think the company’s market capitalization does not reflect Provectus’ true value or valuation.

The liquidity offered by its stock, such as it is, has provided management a pathway and thus the means to raise the necessary capital it needs to achieve a full monetization or sale of the company (i.e., the endgame) without having to lose effective control of Provectus.

Let’s do a quick 'n dirty bottoms up analysis. For the sake of argument and to make the math easy, let’s assume the company’s market cap it about $100 million (Friday’s market cap was about $78 million, although the figure below is a tad dated showing a $77 million figure). Provectus has neither regulatory clarity nor commercial validation. The market supposedly discounts the company for several reasons including but not limited to distrust of or disbelief in management, lack of equity research coverage, presence on the OTC, and lack of awareness. As such, the market then distrusts or disbelieves Provectus and its third party partners’ array of pre-clinical and clinical data.

These reasons contribute to a wild ass guess (“WAG”) of a 67% liquidity discount. That is, pre-Phase 3, Provectus might or could trade around or at a market capitalization of $300 million.

In excavating the remains of the failed PVCTP “IPO,” I think Pfizer was prepared to lead/co-lead the offering, invest a good amount of money (say, $10 million plus) and effectively value the company at about $1 billion. Although the "IPO's" Series “A” 8% convertible preferred stock with Series “D” warrants offering was filed on September 4, 2012, work to create and develop the offering started in July, at which time management had to be assured Pfizer would lead the investment round and the FDA would agree to the SPA sometime in Q3. When the exact date management realized the SPA was not going to arrive to catalyze the “IPO” and for whatever associated reason(s) is hard to say (and management may never disclose), but sometime in September is not unreasonable. No SPA meant Pfizer would not invest because no regulatory clarity meant illiquidity for it. Said differently, Provectus was not sufficiently de-risked for Pfizer, and Pfizer could not sufficiently assess its time value of money (i.e., the time necessary to elapse before PV-10 would be approved). With the loss of the “IPO’s” strategic investor(s) (there was discussion about Johnson & Johnson's potential involvement), the privates (rumored to be OrbiMed Advisors and Aisling Capital as significant players) withdrew their interest or declined to lead, co-lead or substantially participate in the investment round. Management undoubtedly tried to shake the trees for interest to invest at the terms and conditions to which Pfizer had agreed. They perhaps used, in part, the second half of the ESMO 2012 press release to highlight SPA trial design parameters to which they had agreed with the FDA in hopes of rallying investment support around the preferred share price, approximate billion-dollar valuation and warrant coverage terms.

Management had no intention of going through with the “IPO” if the terms it had agreed to with Pfizer were not generally met by the private investment firms to which they also were speaking. What transpired thereafter in terms of the share price action is a matter for a history book. Let’s be clear about this: Provectus had to fully expect it would receive the SPA from the FDA and Pfizer would lead the “IPO” when it embarked on this offering.

Positing at least a $1 billion for the company, we add to the list of reasons lack of regulatory clarity.

This further reason contributes to a WAG of a 90% liquidity discount. That is, pre-Phase 3, Provectus might/could trade around a market capitalization of a $1 billion, but doesn’t for lack of regulatory clarity. It’s a very simplistic analysis that highlights the key value driver for Provectus at this time which remains regulatory clarity. A rather obvious statement, regulatory clarity has been key and desperately sought by management and shareholders since Provectus said in January 2012 the FDA guided it to submit its Phase 3 protocol for review, either via standard review or a request for an SPA.

As illusory as Provectus’ liquidity has been, it is not an overly negative issue. Pfizer appeared prepared to value the company at or around $1 billion. As a private-like public company, its market capitalization mostly is irrelevant because management will not commit the company to a partial monetization or sale at anything less than the valuation they seek. At the time of the “IPO” it was $1 billion for “a partial sale.” Management repeatedly states it is several billion dollars for a full sale (i.e., the end-game).

But, as a public company, its share price is very relevant. The ability for management to gain liquidity (i.e., offer it to shareholders in return for money) through its Network private placements comes at a cost: valuations that in no way reflect the intrinsic value of the company and merely reflect its market capitalization at the time, unfortunate warrant coverage terms and a poor capital structure. Management’s relatively effective use of capital to advance the clinical value propositions of both PV-10 and PH-10 has been, for many people, overshadowed by their un-fundability.

Historically, there have been many investors who would have invested in Provectus, but who would require management to be replaced and have control wrested from them. No professional investors have stepped up to invest in the company at anywhere close to a valuation commensurate with its intrinsic value without regulatory clarity and without terms and conditions acceptable to management. A pristine safety profile, efficacy never seen before and proof of systemic properties and benefits have not been sufficient without leadership replacement.

Liquidity matters differently to different Provectus economic constituencies. It matters usually based on different time frames. For Big Pharma, liquidity means the ability to market and sell PV-10. As such, liquidity requires regulatory clarity, and the amount of liquidity over time depends on the specifics of clarity. For life sciences investors, liquidity means the ability to monetize their positions in the company's stock. As such, their liquidity also requires regulatory clarity. Holding potentially (in hindsight) losing positions are not palatable to fund investors when describing quarterly returns to limited partners and investors.

For retail investors liquidity depends on personal circumstance. We all are different, and thus our assessment of and need for liquidity is different. Publicly traded Provectus stock provides illusory liquidity for retail folks. Shares can be bought at any time in order to buy into the company’s story, or sold at any time should investors need to raise cash. True liquidity is not yet attainable because because management will not commit the company to a partial monetization or sale at anything but the valuation they seek. The lack of planning for this reality and eventuality hurts retail investors, like it would hurt professional or institutional investors in their respective circumstance. The 2008-2009 credit, financial or whatever-you-want-to-call-it crisis is an example of how not sufficiently preparing for illiquidity can hurt badly. Really badly. At the time, the desperate need for liquidity caused grown men and women to urinate in their pants and skirts and resulted in rash actions by them to gain liquidity.

From the beginning, management has strived to hit a home run, and not merely play for a string of singles or doubles. You have to understand that, first, and be comfortable with that, second, if you're going to understand how long-term illiquidity will turn into vast liquidity upon their success. That PV-10 is a fully owned oncology asset is rare. To listen to them describe their feelings about the current situation, you'd think they had hit a home run out of the park where the baseball had not yet landed.

Many investors and observers wished or opined that management would or should have taken a more traditional route to value creation and monetization. Do this, raise the value. Do that, raise the value further. Another large shareholder opined (paraphrasing) Provectus is the textbook example of how not to build a company. While I understand the perspective, it isn't particularly helpful in part because what the textbook says doesn't matter to management. I've never known textbook ways to build companies because stuff happens along the way. Of course, one should contemplate whether the exception proves the rule or the rule proves the exception. Again, it's merely a perceived flaw that is just a piece of the puzzle the investment manager tries to solve on the way to affirming or refuting his or her investment thesis. Despite his complaint, the shareholder soldiers on as an owner of a lot of stock. I'm not so sure one can hold their nose and make and hold a Provectus investment without a deleterious effect down the road (i.e., selling early). While management is not a "10," I think they're far from a "2." Innovation matters, and protecting the economics of that innovation (which a management team largely is responsibly for doing or failing to do) matters even more.

The company’s liquidity dramatically increases once Provectus gains some measure of regulatory clarity. I think we're nearing or are at the cusp of this clarity.

When Craig presented in town to biotech and life sciences industry folks, and some investment management people, in early-June, he publicly confirmed my supposition (through observing visitors and visit to the blog) in front of folks attending the event that Amgen was interested in some way with Provectus (e.g., learn more, conduct more due diligence, etc.). The two companies have been in contact in some form or fashion for months, I think, but of course there is no guarantee that any deal of any sort will materialize. Still, Amgen is Amgen. More recently, Amgen and Onyx Pharmaceuticals have been in the news because of the former's unsolicited bid to acquire the latter, causing Onyx to engage in a strategic review and consider a sale (i.e., auction) process. Some folks have commented on what they believe to be Amgen's sloppy bid for Onyx. Others suggest Amgen merely acted the way it did to flush out other potential suitors and put Onyxx in play to more publicly force management to make a decision one way or another. Onyx, through Nexavar (sorafenib), leads the treatment of liver cancer. PV-10 going head-to-head with sorafenib should be closely watched. Management thinks Amgen's unaccepted (thus far) bid bodes well for shareholders and them because it highlights Amgen's intentions as well as Provectus' opportunity for eventual monetization.

Peter and Eric travel to Europe next week to attend the 8th World Congress of Melanoma, organized in conjunction with the World Meeting of Melanoma Centers, the Post-Chicago Melanoma Meeting 2013 and the 9th Congress of the European Association of Dermato-Oncology, and engage in more business development meetings. I think there are at least two presentations discussing PV-10 by Provectus principal investigators (Thompson, Agarwala), and would expect a comprehensive press release thereafter (i.e., the week of July 22nd).

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