Why Pfizer Will Try to Acquire Provectus in 2014…

…And ultimately may not succeed.

Having, among other things, engaged in share buy backs (four in the past two plus years), sold off dietary supplement capsule business Capsugel in August 2011, sold off its nutrition business in November 2012, and spun off global animal health business Zoetis in June 2013, Pfizer announced in July it would reorganize. All of this would appear to be consistent with CEO Ian Read’s strategy of restructuring and reforming the business. The share price responded favorably since 2011, nearly doubling the advance of the broader market S&P 500 index.

Click to enlarge the figure.

Presumably, Pfizer’s long-term growth strategy (because squeezing more out of less and buybacks don’t necessarily contribute to long-term, sustainable, price-to-earnings (“PE”) multiple expansion) is to effect a break-up of the company along the lines of the previously announced reorganization, where one share of Pfizer held by an investor today might be three different shares “tomorrow” (i.e., by or before 2017) after each of the respective businesses floats on its own (or cash if one or more of the three is acquired).

The three businesses, for the moment called “groups,” would be (sourced from FiercePharma):

• A variety of therapeutic areas including immunology and metabolic diseases, with products that won't go off patent until after 2015,
• Vaccines, cancer and consumer healthcare, again with products that boast at least a few more years of patent life, and
• Products that have already have gone generic, as well as branded drugs set to go off patent through 2015.

Different P-E ratios would apply to each group. Very roughly speaking, Pfizer today trades at a P-E ratio in the 20s. A ratio around there, give or take, likely would be applied to the first and third groups above, while the hope is a higher, Celegene-esque ratio (e.g., 30s, 40s, etc.) would be applied to the second.

Pfizer would begin reporting financial results and statements for each business/group starting in 2014. Such standalone reporting is a staple for evaluating businesses, and determining and projecting their valuations.

There’s a lot written, opined and prognosticated about Pfizer’s reorganization, strategy behind it, likely success, etc.

This blog, however, is about Provectus. The seller (Provectus management, company shareholders), at some in order to achieve full monetization, needs a buyer (Pfizer or another Big Pharma company). More importantly the buyer needs to really need Provectus so as to generate a transaction whose valuation is commensurate with PV-10's (and PH-10’s) innovation.

Pfizer overt history with Provectus includes:

• Dr. Craig Eagle, a Pfizer executive, joining the company’s corporate advisory board (“CAB”) in August 2011,
• In March 2012 (but really starting some time in 2011), the filing of a combination patent (however, it would have taken time to write it and have it go through Pfizer's legal department), and
• Robert (“Bob”) Miglani, another Pfizer executive, joining the CAB in December 2013.

Management thinks Eagle has been a very helpful, insightful, supportive adviser. It’s always a good (great) thing when an advisory board member adds value. Casual shareholders and observers will not appreciate the dynamic that exists. Shareholders paying attention to this “relationship,” however, do understand the nature of the dynamic.

PV-10’s value proposition, and thus its potential to create immense value for its eventual acquirer/owner, is remarkably simple and comprehensive: safety, efficacy, multi-indication viability, use, cost, and pricing.

The drug is:

• Very safe,

• Very effective, both loco-regionally (local-regionally) and systemically,

• Highly applicable to solid tumor cancers (and, with time to more fully demonstrate, very likely applicable to soft tissue and blood cancers too),

• Beyond safety and efficacy, highly useful as a cancer treatment because of its tissue sparing benefit (with time to more fully demonstrate, use before, instead of, and after surgery, as well as in combination with other therapies to further enhance effectiveness),

• Very inexpensive to manufacture, store and ship,

• Highly flexible in its pricing because of its low development cost, and

• Well protected from an intellectual property (“IP”) perspective.

For any acquirer, PV-10 presents a self-contained, ready-made, good-to-go, sustainable, competitive advantage, business strategy and revenue model for decades to come.

Interestingly, while PV-10’s compelling value proposition and vast potential for value creation very lucratively would accrue to its acquirer, its potency bodes darkly for those companies who lose out on an auction process for Provectus. Unlike anti-CTLA-4, -PD-1, -PDL-1, -etc. agents where relatives reside with different Big Pharma companies, PV-10 is sufficiently unique so as not to have molecularly similar peers.

As a result, only one Big Pharma will possess it and, by virtue of strong IP kung fu, its relatives. As PV-10 use proliferates, and begins its march towards pervasive use, think of the resultant pharmaceutical industry fracturing as a very profitable hedge fund pair trade: Long acquirer, short pick-your-non-acquirer.

As an investor I wrote in my September 2013 investment letter: “PV-10, a novel oncology compound being developed by Knoxville, Tennessee-based Provectus Pharmaceuticals, Inc. (“Provectus” or the “Company”) (OTCMKTS: PVCT), exemplifies innovation over incrementalism, meaningful over marginal, productized technology over hypothetical, and changing the world over accepting the status quo, with not an insignificant amount of serendipity over contrivance. In sum, these form the quintessential essence of a paradigm shift in the treatment of cancer.

This is where my investment thesis begins and ends: a novel drug compound with a pristine safety profile, a treatment well tolerated by and easily administered to patients, a ready made product inexpensively produced at scale, and a vast addressable market of unmet need that should be fully and very profitably met over time.

My thesis comprises compelling clinical, regulatory, business and stock value propositions in a pharmaceutical industry ravenous for safe and effective oncology solutions, with the prospect of annual market growth rates exceeding other therapeutic areas, that following approval(s) should deliver a lucrative monetization for shareholders.”

I have very high expectations for the company’s monetization. While a portion of this monetization should come from higher share prices, the vast majority should arrive when Big Pharma acquires the company.

How does one value a paradigm shift? A start might be Trust Intelligence’s Alan Ross’ Provectus Pharmaceuticals: Small Cap, Huge Upside where (based on certain assumptions he makes) he values Provectus at $100 per share or thereabouts.

For me, valuation is a combination of fundamental analysis and “what the market gives you.” In the case of the latter, “the market” is the stock market and Provectus’ eventual acquirer. There’s much to be written on the topic of valuation.

When I think about potential themes for Provectus in 2014, Pfizer undoubtedly is near or at the top of the list, which also includes the FDA, liver, China, India, etc. I really haven’t answered the “question” posed by the attention grabbing title, and the byline, of this post. I’d like to see how January plays out before delving into this topic in much more detail.