May 26, 2014


I noted two risks in my Why I'm Long Provectus Biopharmaceuticals investment letter under the But what if I’m wrong? section:
  • "Could more time be required to confirm the regulatory path for MM?," and
  • "The key downside risk could be Management being unable to monetize the Company at a valuation commensurate with their innovation."
The FDA's response letter noted the need for more data. I think the Agency agrees there is a link between complete response (tumor ablation) and symptom control (e.g., pain, infection, significant bleeding) for which the company provided some data; however, in turning down the company's breakthrough therapy designation ("BTD"), the FDA appears to have told Provectus it simply did not provide enough of this data to conclusively establish the link.

At the heart of the debate (it seems to me) in the regulatory, medical and investment communities is whether local intralesional oncology agent PV-10 can treat the systemic disease that is cancer. This debate, generally decided by the successful or unsuccessful clinical trials, historically has focused on overall survival endpoints. The premise of PV-10 in treating melanoma (solid tumor cancer) is to destroy tumors in order to deny, prevent or forestall the metastatic spread of cancer. Small molecule Rose bengal, PV-10's active pharmaceutical ingredient ("API"), has immunologic capability that Moffitt Cancer Center will further elucidate at ASCO 2014. But, for the regulatory path at hand, Provectus is trying to establish agreement on appropriate endpoints to measure success of its agent for locally advanced cutaneous melanoma, endpoints that are not related to overall survivability but rather to denying, preventing or forestalling melanoma's spread. Different endpoints are appropriate and necessary for local-regional versus metastatic disease to better measure and determine success in both.

Provectus is product, business and stock. The products are oncology and dermatology agents based on API Rose bengal, namely PV-10 and PH-10. The business presumably is the value created by bringing these products to market. The stock hopefully reflects this value over time but especially at final monetization, namely the end-game. I think there is sufficient Provectus, third-party and regulatory agency data available to suggest the drug works (for this diatribe, I am focusing on oncology). I also think the business has value today and the potential to grow dramatically in value in the near- to medium-term as management navigates the regulatory path. Regional transactions are interim monetization steps along the way to the eventual sale and monetization of the company. The share price at any given point rightfully measures value, and I am more focused on share price when the company is sold than at a point in time before such an outcome.

A technology, service or product does not come to market itself. Management teams, people and businesses bring them to market, or are less successful than investors and they hope or fail in trying to do so. If these companies are public, their respective share prices measure these full or partial successes or failures.

I think PV-10 (again, focused on oncology for this post) is a great technology and product. I think Provectus' management team have attributes (e.g., research, development, general management, finance, communications, marketing, strategy, corporate development, business development, etc.) required to monetize their innovation that vary from below average to above average.

Baseline investment success in this holding, as I measure it, would be whether we can meet or exceed the annualized weighted average cost of capital for small cap or small company biotech (i.e., risk-adjusted return), arguably a compounded annual growth rate [return] ("CAGR") of 16-20%. Great success would be the company monetizing much more than less of PV-10's worth for Provectus shareholders, as opposed to more of this worth accruing to the company's eventual acquirer and its shareholders.

Provectus management have numerous tactical issues (e.g., regulatory path plan, clinical development plan, lawsuits, potential de-listing, etc.) they must address coming out of Friday's trading halt, press release and conference call as well as key strategic decisions (e.g., work on other indications, regional transactions, PH-10, etc.) they must make and that undoubtedly will determine the level of success of their endeavor to monetize their innovation commensurate with its value. And there is and will be uncertainty over these issues and decisions until they are resolved or successfully achieved.

I believe my investment thesis remains intact; however, its key risks also remain.

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