March 30, 2014

The Biggest Risk [Updated-2]

When I periodically review and assess the risks I wrote about in my September 2013 investment letter, whether here on the blog or at Seeking Alpha (i.e., the scenarios in which I could be wrong, and if so by how much), I also try to contemplate and consider new potential and possible risks. I've moved beyond clinical questions (e.g., could there be unexpected adverse events and/or poor clinical results in the future) and almost past regulatory questions (e.g., could more time be required to confirm the regulatory path) to commercial ones (e.g., could management be unable to monetize the company at a valuation commensurate with their innovation).

For me, the biggest risk, and very likely the source of disappointment if there is to be one, is whether management can sell Provectus at their desired price, let alone at the worth I see. It's a risk I have focused on almost from the beginning; a question of will they, rather than can they. A simplistic analysis (with no supporting material at this time by intent) might yield an interim assessment of "yes" or thereabouts, potentially pointing to a probable "yes" when the endgame arrives. Note that the analysis below does not contemplate contingent payments.
Click to enlarge the table
We may receive more clinical, regulatory and commercial information during the next 60 to 90 days to better assess risk-reward:
  • Mechanism of action (Moffitt at AACR),
  • Liver program (enrollment & trial progress),
  • Additional indications (maybe breast and/or colorectal),
  • MM Phase 2 results (durability of response I really hope, and finally),
  • A breakthrough therapy designation decision from the FDA,
  • Combination therapy potential (most likely murine model work of a leading research facility at a major oncology conference),
  • PH-10 mechanism of action (maybe), and
  • A NASDAQ up-listing and/or regional license transactions.
Updated 3/30/14: If the stock market ultimately does not reward the company with a market capitalization such that an acquisition premium by Big Pharma (to the then market cap) cannot reach Provectus' management expectation of price and value, the principals face two obvious choices at that time: Sell, or don't sell (and build until the decision is re-visited).

Intrinsic value, as I've written on this blog in the past, is the value of an asset (in this case the company) determined by fundamental analysis (in this case my analysis) without reference to its market value (in this case the share price). Extrinsic value, borrowing terminology from option pricing, is worth or value assigned or determined by external factors. The stock market is an example of an external factor (market capitalization is the result). An M&A transaction is another example.

You'll recall in January 2014 I argued for a worth of $150 per share or a total of $30 billion, my estimate of the company’s intrinsic value on a net present value, an amount that could accrue to Provectus shareholders upon an M&A transaction and over time through an earn out.

One measure of extrinsic value is the company's approximately $400 million market capitalization as of Friday's closing price (although I would prefer to adjust the number to accommodate a fully diluted shares outstanding figure). Another measure would be the price at which Big Pharma might bid to management to buy the company today, formally or informally. Management can turn them down (and re-inform them of their price expectations), but the price point is an extrinsic value point. 

Another way to come at the outcome of the simplistic analysis above is to evaluate stock price appreciation adjusted for dilution over time. Interestingly, on a percentage change basis, adjusted market cap roughly mirrors that of Big Pharma's apparent assessment of value.
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The larger point of the blog post is that having the bigger or biggest risk to my investment thesis as management not being able to sell the company for the price they want (assuming there are no other bigger risks, and management's expectations of price are appropriately and sufficiently high enough) is a "good" problem to have. That the stock market doesn't currently value Provectus anywhere close to these price level discussions is no small thing. The stock market as a snapshot in time, however, is just one measure of extrinsic value.

Updated 3/31/14: Using figures provided by management on Provectus' corporate website presentation for common stock, and stock options & warrants outstanding (approximately 173 and 37 million, respectively), the above tables then would appear as:
Click to enlarge the table

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