I previously wrote a blog post entitled Can Management Get A Deal Done In China? I used "can" because I thought management could be able to secure a deal; that is, there is the ability to get or the possibility of getting a deal in China done.
Time passes. More dots connect.
I think the question, for over the next few weeks to the next couple of months, now is: Will management get a deal done in China? I use "will" to query management's intention to do this deal, or another.
Existing shareholders and prospective investors, in my view (through discussions with a variety of them), thought or think of "can" as management's ability -- their skill set -- or PV-10's (or PH-10's) ability -- the facets and features of the drug(s). I have never thought that way. Rather, I have examined and focused on the whether management has the process and pieces of sufficient quality and quantity to get a deal or deals done.
Management has been approached and continues to be approached to do deals. Frankly, anyone can do a deal. The real question -- the real perspective -- is whether the deal is a good or great one. Lots of people can and do do bad deals all of the time. Provectus understands better than most, and now better than ever, the value of the company's portfolio of drug compounds.
It seems we are drawing closer and closer to a seminal event, or more.
There have been previous discussions across and around the table about licensing PH-10 and PV-10. I do not doubt those discussions involved numbers, terms and conditions; however, in my experience, such discussions become "more real" or advance when a term sheet materializes.
From what I can gather (and it may well be a rumor), a term sheet has materialized in China. The parameters probably are not too dissimilar from what I wrote here. There is of course lots we do not know.
Who is the prospective Chinese big pharma partner? For example, is the partner on the list below?
Click figure to enlarge it. Source: China's Pharmaceutical Industry - Poised For The Giant Leap. KPMG, 2011.
Is Pfizer involved in some way? Pfizer's presence in China, from sales to R&D to manufacturing, is notable.
Click figure to enlarge it. Source: China's Pharmaceutical Industry - Poised For The Giant Leap. KPMG, 2011.
I previously wrote that regulatory and governmental agency backing in China was crucial. What kind of backing does Provectus and its prospective Chinese pharma partner have? I had the good fortune of participating in a trade delegation to China several years ago (what a treat!), and met a senior member of the Premier's staff. For pharmaceuticals, I would assume the State Food and Drug Administration and the Ministry of Health are germane regulatory and governmental bodies, among others.
If management elects not to do a deal in China yet, what else is there to take its place?
Provectus released its 10-Q filing for Q3 2012 today. See here.
Quarter-over-quarter ("QoQ") -- Q3-over-Q2 -- monthly cash expenditure decreased by 23.3% (v. +3.6% Q2-over-Q1) to ~$745K per month (v. ~$969K). Ending Q3 cash was $1.8MM. The company raised ~$2MM in October (Q4). I think, based on some assumptions, that Provectus might have $3-$3.3MM of cash as of the filing date. QoQ R&D expenses decreased by 47% (v. +5.6%). QoQ G&A expenses decreased by 7.1% (v. +0.5%). Operating expenses include both cash and non-cash charges.
Click on the figure to enlarge it.
Management noted in the filing's MD&A section:"By managing variable cash expenses due to minimal fixed costs, we believe our cash and cash equivalents on hand at September 30, 2012, together with cash proceeds received during October 2012, will be sufficient to meet our current and planned operating needs until well into 2013 without consideration being given to additional cash inflows that might occur from the exercise of existing warrants or future sales of equity securities, although we may, in our sole discretion, direct Lincoln Park Capital Fund, LLC (the “Fund”) to purchase up to an additional $29,950,000 of our common stock per an existing agreement with the Fund." I would expect the company to continue to do private placements, raising money as necessary to maintain enough cash on hand to satisfy the external auditors, until such time as a dermatology deal or a mini-oncology deal or two are consummated to provide Provectus with the necessary cash to effect the pivotal MM Phase 3 trial. I think the minimum cash figure acceptable to the auditors is around $3-4MM, but this is not a hard floor or range; rather, having the ability to continue to support 12+ months of cash burn should be helpful in Provectus' representations.
The company expanded on their Q2 filing statement related to the strategic investment program: "We are seeking to improve our cash flow through both the licensure of PH-10 on the basis of our Phase 2 atopic dermatitis and psoriasis results, and the geographic licensure of PV-10 on the basis of our Phase 2 metastatic melanoma and Phase 1 liver results in certain areas of the world, as well as pursuing a strategic investment strategy, including equity sales to potential pharmaceutical and or biotech partners, and continuing with the majority stake asset sale and licensure of our OTC products as well as other non-core assets." This refers to the mini-oncology deal transactions the company is exploring in Australia, China, Japan and MENA.
Fratres! Three weeks from now, I will be harvesting my crops. Imagine where you will be, and it will be so. Hold the line! Stay with me! If you find yourself alone, riding in the green fields with the sun on your face, do not be troubled. For you are in Elysium, and you're already dead! Brothers, what we do in life... echoes in eternity. -- Maximus Decimus Meridus in Gladiator
I want to:
Share my speculation about what I think happened towards the end of the third quarter and how it relates to the temporal nature of the PVCTP "IPO,"
Explain why I will invest a token amount of money in the "IPO" if it happens, and
Write about management's poker hand, the hand they have dealt shareholders, and how both of them might be played.
I think management was convinced the SPA would arrive by the end of Q3 and the PVCTP "IPO," which was supposed to have been in the right place at the right time, was being teed up to follow it.
As we know, Provectus and Peter have been working several financing options:
The "IPO,"
A dermatology license deal,
One or more geography-specific oncology license deals, and
A strategic investment from a Big Pharma entity like Pfizer as the sale of common stock at a premium to the share price (or, as mentioned above, an "IPO" led or co-led by a Big Pharma company).
Each of these has its own value proposition (i.e., pros and cons), but the propositions are temporal, having greater or lesser value as a function of time.
For example, the best option today for shareholders would be an optimally valued (i.e., net present value) and structured (i.e., upfront, milestone and royalty payments) dermatology or geographic-specific oncology license deal yielding an upfront payment sufficient to at least pay for the pivotal MM Phase 3 trial. Optimality, however, might be more likely to be achieved later rather than sooner, in November or December.
A sale of common stock to a Big Pharma company would be "more optimal" if the price at which these shares would be sold was much, much higher than Friday's close of $0.59, like at least $4. But why approach or ask a Big Pharma company like Pfizer for this kind of strategic investment unless you have or need to ask? In my view you ask after the SPA is in hand and if you determine (a) the PVCTP "IPO" is not feasible and (b) dermatology or mini-oncology optimality is later rather than sooner.
Up next is the PVCTP "IPO," which, for a certain period of time, provides attractive and pragmatic ways to begin driving company valuation dramatically upwards:
Attractively: A NASDAQ listing would facilitate new buyers, who could not buy the common while it remained an over-the-counter stock, and more national media attention from major journalists and reporters, who would not cover Provectus until it traded on a major stock exchange and was in Phase 3 trials.
Attractively: A smart IPO, led by Pfizer (and J&J or a life sciences investor like OrbiMed) and with a conversion ratio and warrant coverage good for existing common shareholders, would draw many more new buyers to the preferred stock listing itself over time.
Pragmatically: A $15-20MM raise at an acceptably high valuation, while creating dilution that a dermatology or a so-called mini-oncology license deal would not, fully funds the pivotal MM Phase 3 trial. There would be no need to force or rush dermatology or oncology deals, nor completely rely on them to commence the MM trial. The trial could start within 30 days of the SPA PR and move Provectus and its shareholders closer to the interim analysis of at least the first half of the trial's patient population.
A smart PVCTP "IPO" is a better temporal option in October than a dermatology or mini-oncology license. In November, it might not be.
Back to the SPA PR. It was the first domino to have fallen in a hoped for series of them, whether the next temporally best one was a license deal or the "IPO."
But the SPA did not arrive by the end of September, despite very ernest and serious expectations set to the contrary by folks directly interacting with the FDA. It is coming, but it was not nor is not here yet.
To compound these missed expectations were:
Shorting of the stock (end-of-September short interest was nearly 100% greater than the end-of-August figure) for whatever reason(s),
Selling of shares (September's monthly amount of traded shares was nearly double that of August's) for whatever reason(s), and
The PVCTP "IPO" process, and particularly the aspect undertaken by Maxim Group's retail banking side.
Th "alleged" sloppy "IPO" process was made much more so by "alleged" disgusting behavior by some Maxim retails reps spreading baseless "facts" about the "IPO's" details. I used "alleged" because, while Paul LaRosa from Maxim's capital markets part of business agreed Maxim reps should not have been saying what they were saying, the reps themselves probably would say they were doing nothing wrong. "Alleged?" I crack myself up.
The rep revenue model is predicated on the number of transactions they encourage and facilitate. The revenue model is not based on asset appreciation.
I now have what I think is a better handle on the increase in short interest, and will wait until October reporting dates to confirm this. In the interim, am I concerned? No. Am I annoyed and irritated? Yes.
There is the thought one very determined seller has been and is getting out of the stock. Could he/she/it have thrown in the towel for whatever reason(s)? Most likely yes. Does he/she/it know something we do not? I am betting my share ownership (note: no sales of any shares bought) the answer is "no."
Funds holding Provectus preferred and/or common shares have much different pressures than entities and individuals. The quarter-to-quarter reporting to investors and limited partners funds in this group (as opposed to a venture capital or private equity fund) are required to provide make it difficult to hold to an investment thesis because of complaints of poor performance by these very investors and LPs. Such theses turn into trading ones, if they did not start out as such. Did someone's patience runout? Probably.
So, here we are today, observing an IPO that keeps getting pushed out, from the week of:
October 1st to
October 8th to
October 15th to, likely,
October 22nd.
While the preferential path to financing might be a dermatology deal, the "IPO," for the reasons I presented above and others, is temporally better. I think, however, it needs an SPA PR to launch it, and I do not see the "IPO" occurring until after an SPA PR is issued. As such, if the "IPO" does not occur in October, management will probably pull the plug on it because other financing options would have become temporally better.
2.I got your initial public offering RIGHT HERE! (w/gesture)
If the PVCTP "IPO" goes off, I will participate in a very small way. I prefer buying common stock.
I work hard to maintain an objectively dispassionate investment case to buy and hold Provectus stock, but I am not always successful as emotion does creep in from time to time. I have an emotional attachment to this situation. Seriously folks, who blogs this much about one company or stock if they are not part of it? Participating in a token way in the "IPO" is something to add to "the box" that holds the collection of my life memories.
Emotion aside, however, the ROI from buying common stock should exceed the ROI of buying preferred stock (when compared together and presented as a choice of whether to buy the "IPO" or spend the equivalent amount of money buying the common stock), irrespective of what a Maxim retail rep tells you. Of course, you could always trust Chris Varick.
Let us make some assumptions to frame this analysis -- and please let me know if you disagree with my work below (as I am open to feedback and being corrected). I will toggle these later under certain circumstances to make some illustrative points. Nevertheless, the key assumption underlying my belief of a better common share ROI is that Provectus will not do a dumb IPO.
Let us assume you have $100,000 to either spend on the "IPO" or just buy common stock. In this analysis, you cannot buy both. Furthermore, since you do not know if and when the "IPO" goes off, you have to make a reasonably timely decision: wait for the "IPO" to happen or buy common stock before the SPA PR is issued. The SPA, which management surely knows they now have, should not affect the terms of the "IPO" but should increase the price of the common stock post-announcement.
Do you buy the "IPO" whenever it goes off, or do you buy common stock, say, starting Monday?
I assume about 150MM fully diluted number of shares of non-listed preferred and common stock, stock options and warrants. PVCTP deal terms then suggest some more shares. "As converted" means I used the conversion ratio above (i.e., 1) to convert the PVCTP shares and warrants on PVCTP shares into the appropriate but requisite number of common shares.
On an as converted basis, your $100,000 gets you (a) 35,000 PVCTP-derived common shares or (b) 166,500 common shares.
Let us assume the company is acquired for, among other things, a $1B upfront payment (i.e., the preferred shares you bought when converted into common stock or your common shares you bought are exchanged for your pro rata share of $1B) on December 17, 2013. Let us also assume the IPO still happens: you either participated in it, or you bought common shares and did not. I make this assumption only to simplify the analysis in some ways. If you buy common stock and the IPO does not go off (i.e., it is November and Provectus completes a license deal), the fully diluted shares outstanding figures remains at $150MM and your common stock ROI is higher.
Let us also assume you convert & exercise/sell your preferred shares and warrants, or your common stock, when the acquisition transaction occurs.
The outcome makes sense. A smart IPO implies a healthy valuation at which PVCTP "IPO" shares were sold and, thus, a substantial uptick (about an order of magnitude) from today's market capitalization. Under this scenario, one should of course buy the common stock, say, starting Monday, then wait and buy the IPO.
Hold on a second! Didn't your stock broker, er, Maxim retail rep "allegedly" tell you to flip the preferred shares and hold onto the warrants as "a lottery ticket?"
The flipping-your-preferred-shares ROI is less than the hold-your-preferred-shares ROI, which should be much less than the buy-common-stock ROI.
Maxim's "alleged" story only works -- that is, you make out like a bandit by indeed cashing in a lottery ticket -- if the conversion ratio and, to a lesser extent, warrant coverage is very punitive to existing common stock shareholders, such as 6- or 7- or 8-to-1 and 60%, respectively. That is, the "IPO" is a dumb "IPO."
A 2-to-1 conversion ratio (and, say, 50% warrant coverage), worse than my initial example above but far from punitive more than doubles your return from buying the "IPO;" however, one makes more money, again, by just buying common stock soon.
To be fair, a dumb IPO produces a result where buying PVCTP and eschewing the common stock is the better course of action.
3."Poker is not a game of cards played with other people, it is a game of people played with cards."
Right now, Provectus only needs money to literally keep the lights on and the water running (note: hyperbole). Fixed costs are low. The burn rate can be turned down and compensation deferred, with a focus on those activities, and whatever variable costs are associated with them, that drive value (e.g., the end-of-phase 2 meeting with the FDA for psoriasis, remaining toxicity study parameter elucidation, etc.) until money targeted for key, pivotal and other trial work is raised or obtained.
In this game of poker, management will play the hand they think they have the way they see fit. I think:
The company's hand is very strong,
Management thinks the hand is a royal flush (I think the hand is a royal flush, too),
Provectus has enough chips (cash on hand, and temporal cash needs) to play it well, and
Management will play it well (i.e., not raise money in a dumb way).
I am betting my share ownership on this. Of course, I could be quite wrong (note: the usual economist's conviction of "on the one hand, ..." but "on the other hand, ...," which is why we need more one-armed economists).
Now, what kind of poker hand do you think it is: a straight flush, four of a kind, a full house, worse or one that can be beaten? Which hand you have is up to you to determine. How you play it also is up to you.
There is no doubt of the battering the share price has taken since the beginning of September, let alone this year or over the last several years. I see it. I feel it. I understand it.
You got to know when to hold 'em, know when to fold 'em, Know when to walk away and know when to run. You never count your money when you're sittin' at the table. There'll be time enough for countin' when the dealin's done.
The company needs money, but not in the way the markets and most observers think Provectus does. Management has indicated they will do a smart IPO if they do one at all, and that raising money below $1.12 is not in the cards (pardon the pun). Anonymous wrote "[p]oker is not a game of cards played with other people, it is a game of people played with cards."
Playing your poker hand requires you to ask yourself how management will play their hand.
Disclaimer:This blog is neither intended to be nor is investment advice. The author of this blog (the "Author") is not a registered investment advisor. Under no circumstances should any content from this blog be used or interpreted as a recommendation of a trade or investment in Provectus Pharmaceuticals, Inc. Trading and investing can be hazardous to your wealth, health or both. Any investment decision must, in all cases and without exception, be made by the reader or by his or her registered investment advisor. This blog is only and strictly for educational and informational purposes. The Author may have a position in Provectus Pharmaceuticals, Inc. at any given time that is not disclosed at the time of publication. All opinions expressed by the Author are subject to change without notice. You, the reader, should always obtain current information and perform the appropriate due diligence before making any investment or trading decision. All efforts are made to ensure the information contained in the blog and/or a blog post is factual and accurate; however, the Author does not guarantee its accuracy under any circumstances.
I agree with your recent blog post that the fireworks will all go off in one day (or week) to catapult the share price. Yet, in your opinion, why hasn't the share price reflected anticipation? Perhaps the fear of dilution?
The above is from a reader with whom I regularly and very enjoyably e-mail back-and-forth about all things Provectus.
There is market confusion regarding the PVCTP "IPO." The company is in control of the process by which terms are set; that is, management is negotiating with the prospective lead investor(s). Of three potential investing entities (two strategics, one financial), one or two of them would lead or co-lead the round and account for about of half of its proceeds.
Maxim, in order to gauge whether there are 300 or so fellow round lot holders to follow the lead investor(s), is circulating "not established" deal terms of a potential "IPO" that are (a) very attractive for prospective investors subscribing for it and (b) very unattractive for existing shareholders and prospective pre-"IPO" buyers of the common stock.
Specifically, the "at market" conversion ratio -- the purported $4 per share PVCTP offering price divided by the PVCT.OB share price when the "IPO" closes, which at today's closing price of $0.67 would yield a conversion ratio of 6 -- and warrant coverage -- at least 40-50% to perhaps as high as 100% -- indicate drastic dilution of about 25-30%. I do not think nor do I believe management would allow existing shareholders, particularly long-time and very long-time supporters, to incur such pain. Market uncertainty, however, is being created.
As a result, some existing shareholders may be selling some or all of their share ownership and/or refraining from buying more shares. This group believes it sees likely dilution ahead. There may be other contributors to selling in September, too. Prospective new investors may be refraining from buying more shares because of the dilution they too believe will result from the PVCT "IPO."
There also is, more broadly, a continued "show me" attitude with prospective investors who are not confused by nor care about the PVCTP "IPO" and a dilution bogeyman: Show me the SPA. Show me the final MM Phase 2 trial data. Show me more Moffitt data. Show me more about the Pfizer interest. Show me. Show me. Show me.
Yes, kalkoen-man, the SPA did not show up this week. I admit, pabo-tao, that Q3 effectively ended today. You may commence the grief giving indioilar-man.
In all seriousness, however, I am focused on the outcomes of next week following ESMO 2012. As arguably the biggest event in the company's history, I expect management to use the venue as a platform for Provectus and PV-10. What is more critical to the common stock is not the nervous nellies, nor is it sharp investors looking for a good deal. Rather, it is the Missourians in the crowd who, upon reading the SPA PR, the ESMO PR(s), the Moffitt PRs, etc., come off the sidelines and buy, buy, buy.
Let us circle up towards the end of next week and take stock.
Provectus issued a PR today for its joint patent application with Pfizer. The patent application was first revealed a week ago.
In a break from historical practice, management issued a PR for a patent application rather than only for an issued patent. While not wanting to hype this achievement (since a patent application has a way to go before it is finalized [if at all]), Provectus nevertheless clearly wanted to highlight another aspect of its growing relationship with Pfizer.
Having made venture capital investments in hi tech start-up companies (mostly information technology ones, but some life sciences companies) on behalf of a corporation, I understand the situation Provectus faced. I have no doubt management dutifully asked the folks at Pfizer's Specialty Care and Oncology business unit for permission to include the Big Pharma company's name in today's PR. The Pfizer BU asked Pfizer's corporate legal department, which subsequently said no (an answer that was not going to change).
As a corporate VC, I knew the tangible and intangible value to the investee from having our parent company's name in the investee's PR announcing the investment round (and our investment). On the other hand, our corporate legal department was fearful of misrepresenting the nature of the relationship between the corporation and the investee company, no matter how minuscule the potential or actual risk. It was one thing to say the corporation's wholly owned but separately governed and functioning subsidiary invested in a start-up company. It was another thing to imply any kind or sniff of "partnership" that did not yet exist between the corporation, howerver, and the investee.
While it may be disappointing to shareholders the relationship with Pfizer was not more broadly broadcast, more of it should become evident over time. For example, we may learn more about it coming out of ESMO next week. Alternatively, if PVCTP ultimately is used, we may learn Pfizer is the lead investor, or one of two lead investors (PFE + another Big Pharma company, PFE + a life sciences investor/fund).
The current Maxim presentation of some of the deal terms:
There appear to be 2 lead investors who would subscribe for one-half of the deal.
A closing next Wednesday or Thursday,
A $4 offering price,
An "at market" conversion ratio, where the ratio is based on the common share price at closing/final pricing of the PVCTP "IPO," and
i.e., conversion ratio = $4 ÷ closing PVCT.OB share price at PVCTP deal closing
The conversion ratio may be lower. That is, a higher-than-actual common share price could be used.
At least 40% warrant coverage at an exercise price of a 10% premium to the offering price
i.e., $4.40
The coverage percent may increase.
Management needs to know if it can secure a sufficient number of round lot shareholders to meet the minimum NASDAQ listing requirement. Maxim investment bankers and stock brokers are not directly privy to the company's discussions with prospective PVCTP lead investors, but the underwriter is a management tool for this piece of information discovery. The process to determine if there are 300 round lot shareholders to participate in the PVCTP "IPO," should management ultimately decide to utilize it is what it is. The uncertainty it may cause to the common stock share price in the process is an irritant.
On the topic of the SPA PR, I continue to hold to management's Q3 guidance as my baseline expectation (until I am required my expectation). I am certain to get grief from Hr. Tyrkiet, a chief Investor Village poster, reader of this blog and periodic e-mailer (bring it on Señor Pavo!), about this should no SPA is announced in Q3. Today (last evening to this evening) is Yom Kippur, and I would imagine not an appropriate day on which to issue an important PR.
Maxim reps have been calling around to solicit interest to invest in PVCTP's "IPO." Offering details (e.g., lead investor(s), offering amount, offering price, conversion ratio/price, warrant coverage & exercise price, etc.) do not appear to be established yet. We should learn more later this week. The goal seems to be an "IPO" pricing/closing next Wednesday or Thursday.
Yesterday, a joint patent application between Provectus and Pfizer became public. The application was a broad combination therapy patent pharmaceutical and biotechnology companies typically file to cover actual and potentially effective therapy combinations. You may recall I blogged on this topic in January.
The application is strategically important because Bristol Myers already has a broad combination therapy patent for its CTLA4 inhibitor ipilimumab, which competes with tremelimumab, the Pfizer drug of the same mechanism of action.
In October 2011 AstraZeneca subsidiary MedImmune in-licensed treme from Pfizer. MedImmune assumed global development rights, while Pfizer retained rights for certain combination therapies. To put the backdrop of this in-license deal and the growing Provectus-Pfizer relationship in context, there are several events to consider chronologically:
The Australia melanoma conference occurred in November 2010,
Pfizer sought partners for treme in 2010 and 2011,
Dr. Eagle joined Provectus' corporate advisory board in August 2011, and
While the Provectus-Pfizer patent was filed in March 2012, its priority data date was October 3, 2011 (the same date, coincidentally, as the MedImmune PR).
PV-10 was the only combination therapy of import Bristol Myers did not patent as a combination because, at the time of Bristol Myers patent filing, PV-10 was not on its and others radar screens. The Big Pharma company locked up all productive combinations as far as it was concerned.
Provectus management -- knowing PV-10 and treme's respective mechanisms of action (as well as ipi's) -- saw the opportunity to link PV-10 to the Pfizer drug. As a result, Provectus locked up Pfizer should it decide to launch a treme combination therapy.
There also has been much discussion about combining PV-10 and ipilimumab. We could learn more about this combination when Moffitt releases more data and results, which is inbound and, perhaps, imminent, and Craig speaks at the Society for Immunotherapy of Cancer Annual Meeting in late-October.
Amgen's T-vec or OncoVex and Vical's Allovectin were among those caught in Provectus' combination therapy net. Imagine being scooped by "4 guys from Knoxville." Significant kudos are due Jaimie Singer on this and the synthesis patent applications, among other things she contributes to Provectus.
So, as far as the relationship ("corporate legal," the name business unit line folks may give to the men and women at a corporation's HQ's legal department, hates the word "partnership") goes, we have:
A patent application filed in March 2012 and made public in September 2012, but likely worked on as late as Spring or Summer 2011, and possibly earlier (i.e., 1H11)
An industry-wide respected senior oncology executive (respected for both his technical and commercial acumen) in Pfizer's Dr. Eagle added to Provectus' corporate advisory board in August 2011 (i.e., 3Q11), and
A rumored $7 per share all cash bid for the company by Pfizer in Fall 2011 (i.e., 2H11).
Anything else? Hmmm...
A quick reminder for folks who might be confused, since all these drugs sound the same: Onyx Pharmaceuticals and Bayer's sorafenib (Nexavar) will be combined with PV-10 for the contemplated HCC Phase 2/3 trial and compared with sorafenib alone. Pfizer's sunitinib (Sutent) failed a late stage liver cancer trial when compared to Nexavar.
The price is making me ill. Was the preferred share option a mistep by management? I emailed the company and they seemed to think it would raise the stock price, but this is clearly not true at this point. It's just extraordinarily discouraging after holding the stock for so many years to see it at this point.
I will have more comments later tonight (my evening in Hong Kong, and your afternoon in Europe or morning in the U.S.) after I return from a reception and dinner at Cafe Deco on The Peak.
The preferred share offering of PVCTP is a vehicle that would be (i) used to bring a name into the shareholder base, either a corporate (like Pfizer or J&J or another Big Pharma company) or financial (like a well-known life sciences fund) investor, (ii) led by said name, either corporate or financial investor and (iii) at acceptable terms to management that would be beneficial or not punitive or overly dilutive to existing shareholders -- all of which would lead to a NASDAQ-listed security.
The preferred stock offering may end up going unused for a variety of reasons, such as the common stock makes its way onto the NASDAQ by itself or potential terms of a PVCTP offering are not acceptable.
The company didn't list "raising money" in the public market in any news release. They said possible dermatology deal or strategic investment. If this preferred is for the latter then why list it? How can we have a listed security if there is only 1 owner. I think you have to have 300 investors for a security to list on the NASDAQ. If that is the case then some of the details of this could be much less important. What are your thoughts?
Yes, the preferred stock offering (the "Offering" or PVCTP) must have at least 300 round lot shareholders to list on the NASDAQ, so there will be multiple initial owners of the Offering if and when it is utilized.
The NASDAQ requires an underwriter for a stock exchange listing, like Maxim. Any investment bank could be brought on as a co-underwriter ("co-manager") alongside or a secondary underwriter below Maxim.
I think the Offering facility is important for several reasons, and refer to it as a facility to mean a tool that can be used, as opposed to a live offering.
The PVCTP filing is a preliminary, placeholder document that does not specify the conversion ratio (i.e., the number of shares of common stock into which one share of preferred stock converts) or prospective warrant coverage, which help ascertain the valuation at which the deal will be done and the dilution that would ensue. Management, with feedback from Maxim and based on the interactions with and feedback from corporate and/or financial investors who subscribe to the deal, will set the conversion ratio. Maxim called prospective financial investors about the Offering at least beginning this past Thursday to gauge indications of interest to buy preferred stock.
As I wrote at the outset of this blog post, there is no certainty Provectus ultimately utilizes the Offering. It is an optional strategy. Being on NASDAQ enables much more visibility and awareness of the stock and company, an obvious observation on my part that refers both to PVCT.OB, when it trades on the major stock exchange, and PVCTP.
PVCTP is one of several plays that could be run. Some of these plays could be run standalone, and others in some kind of chronological order:
A. The SPA and/or more Moffitt data may be sufficient to propel the common stock to the NASDAQ. PVCT.OB requires 5 consecutive days above $2 to move to the major stock exchange.
B. The Offering could be used to "up list" the common stock onto the NASDAQ. PVCT.OB would trade higher (i.e., over $2 per share) if PVCTP were sold for $4 per share or higher with a favorable [to the company and existing shareholders] preferred stock conversion ratio. Perhaps the SPA and/or Moffitt PRs were insufficient to move the common stock as high as though, hoped for or needed. Life sciences investors who then would feel comfortable coming off the sidelines could buy a NASDAQ listed security. PVCTP then "drags" PVCT.OB onto the NASDAQ.
C. The Offering could be used to turbo charge the common stock once PVCT.OB trades on the NASDAQ. Management could offer PVCTP after the common stock lists on the NASDAQ. Buyers of the preferred stock likely would include life sciences investors, where the preferred stock conversion ratio probably is more favorable for the company than in B.
One of several securities could be sold to a Big Pharma company as part of a strategic equity strategy or program:
Common stock, likely when PVCT.OB trades on the NASDAQ. Like with J&J's JJDC deal with Genmab, there will be a premium to the then current common stock share price. J&J paid a 30% premium. The transaction price, however, will be anchored ultimately by where the common stock is trading. Duh!: The higher the common stock, the higher the transaction price;
A non-listed preferred stock security that either exists today or will be constructed; and
PVCTP. Since 300 round lot holders are required, any use of the Offering for a Big Pharma company or its development corporation also would include financial investors.
Do not dismiss the corporate governance and compliance housekeeping stamp of approval the NASDAQ provided Provectus by its PVCTP listing approval. The process management undertook to complete NASDAQ's process was non-trivial, and takes corporate governance (and all related matters) off the due diligence checklist for serious life sciences (and other institutional) investors.
Regarding the new preferred stock issue on the NASDAQ, if and when it starts trading, which would have a price of 4.00, how does that affect the common stock?
[The source for this answer comes directly or paraphrased from material and text found here. There are other places on the Web to learn about convertible preferred shares. Look here.]
The market price and behavior of convertible preferred shares (the "convertible") is determined by the conversion premium, the difference between the parity value (or parity price) and the value of the preferred shares if the shares were converted.
Let's say Provectus issues 4MM convertible preferred shares priced at $4 a share (X), raising "net" proceeds of $16MM. Why $16MM? That's the likely cost of the pivotal metastatic melanoma Phase 3 trial. Management may elect to raise a lower or higher amount for certain reasons. My analysis ignores underwriter fees, the 8% dividend, and the preferred share's warrant coverage (which is not as yet known).
The conversion ratio (Y) is the number of Provectus common shares (PVCT.OB) investors in the preferred stock offering would receive for each convertible preferred share (PVCTP) they own. The conversion ratio is set by management prior to issue with guidance from Maxim (for now, the lead and only underwriter), although the demand or lack thereof from prospective investors in the offering strongly influences the conversion ratio. The greater the demand for the offering, the stronger management's negotiating position is in lowering the ratio (i.e., less common shares per [one] preferred share). Alternatively, if the demand is weak, management may induce investors to purchase preferred shares by raising the ratio (i.e., more common shares per [one] preferred share).
In addition, the warrant coverage, which typically is a sweetener in most any equity deals, is a positive influence on the conversion ratio, since management wave the warrant in front of a prospective investor as an inducement, rather than simply solely focusing on adjusting the conversion ratio to make them happy.
Since the conversion ratio is to be set, and no fund raising has yet occurred, we do not know the ratio (for now). At Friday's closing price of $0.693, the "gross pre-deal break-even" conversion ratio -- the point or ratio where raising money by selling common stock is equivalent to raising money by selling preferred shares (again, ignoring certain items) -- is $4 ÷ $0.693, or 5.77.
If management can strike a deal whereby the conversion ratio is lower (less dilutive) than 5.77, like 3 or 4 or less, great. If not, one would question why they would raise money via the preferred stock offering, unless there are qualitative or tangibly intangible reasons to do so.
The conversion ratio shows what price Provectus common stock needs to be trading at in order for the preferred stock shareholder to want to convert his, her or its shares into common stock, which they will do if they the conversion is profitable. This price, known as the conversion price (Z), is equal to the purchase price of the preferred share divided by the conversion ratio. Thus, Z = X ÷ Y. For this analysis, let's assume the conversion ratio is 4. For Provectus, the market conversion price is $4 ÷ 4, or $1.
PVCT.OB, at the time, then needs to trade higher than $1, or Z, for investors in the preferred stock offering to gain from conversion. If preferred shares convert, and PVCT.OB drops below $1, investors suffer a capital loss. If PVCT.OB rises above $1, investors enjoy a gain.
$4, or X, also represents the parity value of the preferred shares.
The value of the converted preferred share is equal to the market price of common shares multiplied by the conversion ratio. At a closing price of $0.693, the value of the preferred shares is $0.693 × 4, or $2.77. This is well below the parity value of $4. At $0.693, the conversion premium is 31% [($4 − $2.77) ÷ $4].
The lower the premium, the more likely the convertible's market price will follow the common stock value up and down. Higher-premium convertibles act more like bonds since it's less likely that there will be a chance for a profitable conversion. Convertibles trade like stocks when the price of common shares moves above the conversion price. If the stock price slips below the conversion price, the convertible trades just like a bond, effectively putting a price floor under the investment.
Management filed a preliminary prospectus supplement for the issuance of:
Series A 8% convertible preferred stock, and
Series D Warrants to purchase Series A 8% convertible preferred stock.
Note the above preferred stock is different -- it has a different CUSIP number; that is, it is a different security -- than the convertible preferred stock, which had its own CUSIP number and warrants to purchase common stock, Provectus issued in March 2010.
The filing had blanks for numbers of shares and warrants, warrant exercise price, etc. Basically, the filing was a placeholder. This filing, the specifics such as they are, and the process behind it are a big deal [to me]:
As I mentioned earlier today, this new preferred stock security will list on the NASDAQ CM (Capital Market) under the symbol PVCTP.
Note, again, that the other preferred stock security is not related to the new preferred stock security and, thus, will not list.
PVCTP also is ready to list, if and when the company issues it to fund raise; that is, there is no waiting period. Like an IPO, when the security is issued for money, the "paper" goes live.
The new preferred stock will be priced above at least $4 per share, and the associated warrants to buy PVCTP will have an exercise price of at least $4. The $4 level is the minimum requirement of NASDAQ to list any new security (e.g., like an IPO).
Final PVCTP pricing likely would be influenced by the price of the common stock at the time the issuance is finalized or "goes public." If the common stock is below $4 per share, PVCTP would be sold for no less than $4 per share. If the common is higher or much higher than $4 per share, PVCTP could or would be priced above $4.
By approving Provectus to list this new preferred stock security, the NASDAQ undertook a due diligence process that included vetting the security, management, the board of directors and the company.
While the new preferred stock certainly could be issued to life sciences investors, name or otherwise, I think it is clear the security is targeted at and destined for a Big Pharma company as part of the strategic investment strategy Provectus noted in its second quarter 10Q filing. If I had to, er, guess, the Big Pharma company is Pfizer.
With the mechanics already in place for a minority equity investment from a corporate like Pfizer or J&J or other Big Pharma company, now the focus turns to closing such an investment.
Provectus filed a prospectus to raise money through the issuance of Series A preferred shares and warrants on these preferred shares today. No announcement of the actual sale and, thus, fund raising, has been made.
These preferred shares will trade on the NASDAQ as PVCTP (see below).
As a child, did you ever have a not-so-special, frustrating feeling around Christmas time: with presents laid around the Christmas tree with care, you tried your darndest to figure out what exactly was inside those colorfully-wrapped gift boxes, but could not?
You thought you had a pretty good idea. After all, you were nice the entire year. And so you wrote Santa asking for an SPA, a NASDAQ listing, a Pfizer equity investment, a dermatology deal, a mini-oncology deal or two, a double-digit share price, and on and on.
Does it feel like Christmas is coming early? Let's hope so. Eggnog anyone?
My thanks to a blog reader who informed me of Genmab's licensing deal with J&J's Janssen subsidiary, which was announced last week on August 30. The structure of the deal has several features that I think could be similar to what Pfizer, or another Big Pharma company, might employ with Provectus (if indeed such a deal is consummated).
J&J's Janssen unit licensed, on an exclusive global basis, daratumumab, a human CD38 monoclonal antibody, from Genmab. Daratumumab currently is in Phase 1/2 trial development for multiple myeloma. Genmab also granted Janssen a license for a backup human CD38 antibody.
I thought it would be instructive to review the Genmab-J&J deal. Genmab received or will receive:
An upfront license fee of $55MM (DKK* 327MM);
An equity investment of $80MM (DKK 475MM) from J&J venture capital subsidiary Johnson & Johnson Development Corporation (JJDC) for 10.7% of Genmab. JJDC's cost basis for these new shares was DKK 88 per share. Genmab's closing share price on August 29 was DKK 67.85, so the equity investment was made at a 30% premium to the share price. CPH:GEN closing share price today was DKK 83.30. Together, the upfront license fee and equity investment infused Genmab with about $135MM in immediate capital;
Development, regulatory and sales milestones of up to $1 billion; and
Royalties of tiered double digit percentages (i.e., >10%). This assumes I understood the various descriptions of the deal structure in terms of royalty payments being in excess of milestone payments.
* DKK is the symbol for the Danish krone. At the time of reporting, US$1 = 5.9272 DKK.
According to Reuters, "[t]he deal led Genmab to raise its guidance for 2012 revenue to 435-460 million Danish crowns from 375-400 million, and cut its full-year operating loss forecast to 140-190 million from 200-250 million." The deal appears to be responsible for a 15-16% positive increase in top-line and a 32-43% less negative decrease in bottom-line guidance.
Genmab had about a DKK 3B market capitalization before the deal was announced. As of today's closing share price, the market cap was about DKK 3.7B.
J&J:
Will own an equity stake in Genmab via JJDC;
Will be fully responsible, via Janssen, for all costs associated with developing and commercializing daratumumab going forward, including the costs of two ongoing Phase 1/2 studies;
While Genmab will be responsible for phase I/II trials (GEN501 and GEN503) with daratumumab, other development, clinical and regulatory filing activities will be handled by Janssen.
Will explore at least 10 new studies, including phase 3 trials: Besides multiple myeloma, daratumumab may be evaluated for acute myeloid leukemia, diffuse large B-cell lymphoma, plasma cell leukemia, follicular lymphoma, acute lymphoblastic leukemia, and mantle cell lymphoma.
Will the SPA have any influence on the [share price] at all?
The SPA should have a significant influence on the share price.
The premise is simple. Receive an SPA, and certain life sciences-focused investors will buy stock. This has been the observation of my anecdotal due diligence on this topic,and what I believe is management's own perspective. From Friday's closing price of $0.71 and a market capitalization of, per Google Finance, about $80MM, the SPA, which thus paves the regulatory path for PV-10 to be approved primarily as a local-regional treatment, should spur some life sciences-focused and a good number of generalist professional and retail investors to jump into a stock whose market capitalization they could see as multi-hundreds of millions of dollars (i.e., $2-3 per share).
A positive outcome (i.e., closer to or in excess of $2 per share), however, is not so simple.
First, is supply too much? Weighing down the flight of the share price are:
The [purported] remaining selling of Dr. Adams' shares. It has been speculated, I think on the Yahoo! Finance Provectus board, that this figure is about 2 million shares.
Profit taking by some investors. The amount of profit taking will increase as the share price approaches $2. Many retail investors who have been underwater on their holdings for some time very likely will sell if their respective cost bases are exceeded by 20-30%. I guess several million shares will come to market as we near $2; and
Warrant exercising into common stock that are then sold rather than held: As at 12/31/12, ~12MM at $0.95 and $1.00, ~4MM at $1.12, ~5MM at $1.25 and ~3MM at $1.50. Not taking into account the adjustment for cashless exercises, etc., this is about 25MM shares that would be $0.50 to more than $1 in-the-money as the share price approaches $2.
Second, is demand enough?
Some life sciences-focused investors may be constrained by fund criteria that prevents the purchase of the stock while it is an over-the-counter stock. After a minimum $2 closing price after 5 days, followed by the transition of the PVCT ticker to the NASDAQ, they should jump in, too.
Some investors will wait until the share price exceeds $5 before their fund criteria permits then to buy stock; and
Despite the receipt of the SPA, other life sciences-focused investors will wait for the second release of Moffitt murine study work and/or the first release of Moffitt human study work before they too will buy shares. This also, I believe, is management's perspective.
Is there demand for 20-30MM shares, in the near-term, after the SPA PR is issued? Quite possibly. More demand should come on-line when more Moffitt results are released. Even more demand will materialize as a dermatology deal is done, mini-oncology deals are consummated, and Big Pharma relationship revelations are made.
But the first portion of the share price ascent surely will be tested.
There's time and space between now and an equity investment by Pfizer or another Big Pharma company, between now and a license deal with one of them, between now and the acquisition of Provectus.
How much? It's unclear, of course, but perhaps not as much as you might think.
In a prior post, I presented an etheric-like plane in which the company exists, between a world where no one moves unless someone moves and one where someone moves because they have to move.
So, when/why does someone move? It is a result of several things:
PV-10 is in strategy and aligned with commercial capabilities,
The drug has reached sufficient technical maturity to be sufficiently de-risked to the point that it is worth a bet (e.g., SPA, technical data, clinical data, KOL support), and
There is a menu/revenue gap in the strategic plan of the pharma company interested in Provectus.
Big pharma is there, so to speak, with nos. 1 and 3. That leaves no. 2:
The timing of the SPA is base case Q3.
Technical data refers to a large category of data, from immunology-related murine study work by Moffitt to toxicity to manufacturing (CMC: Chemistry, Manufacturing and Control) to direct and indirect data. Moffit's next round of murine results is inbound (perhaps available as early as late-Q3 but more likely some time in Q4). Other technical data is at or nearing sufficiency.
Clinical data refers to all PV-10 clinical study and compassionate use program data. Clinical data should be at or nearing sufficiency (although that's not to say more data cannot be generated from other new and later stage trials such as pancreas and liver), likely culminating at ESMO 2012.
Key opinion leader (KOL) support is in process. It should reach sufficiency with the announcement of the SPA and the full characterization of PV-10's systemic benefit, which could be the next round of Moffitt data.
As you can see, I am trying to understand why and when someone like Dr. Eagle at Pfizer or his counterparts at other Big Pharma companies will move.
Could you please quantify for me the percentage of companies that apply for an SPA that eventually receive it? Are large investors waiting on the sidelines because they want to see the endpoints and efficacy of PV-10 compared to standard care/placebo? What causes the large investors to wait on the sidelines when their entry point into PVCT could be 3/4 times the present stock price in a relatively short period of time?
Could you please quantify for me the percentage of companies that apply for an SPA that eventually receive it? Under a well-defined but at times opaque process companies work with the FDA to seek SPAs for their drug compounds and pivotal trials. A cursory Web-based search reveals one or three companies who sought SPAs but ultimately did not secure them because the companies terminated the process (presumably strongly influenced by their interactions with the FDA). As I have written before, I think Provectus has reached a verbal agreement on the SPA with the FDA. We await the PR to make this agreement known.
Are large investors waiting on the sidelines because they want to see the endpoints and efficacy of PV-10 compared to standard care/placebo? No. The life sciences investors to whom I refer are not waiting for this information, but rather the SPA PR from Provectus. Others wait for the PR and the stock to trade on the NASDAQ. You appear to be referring to the interim analysis of the MM Phase 3 trial or, perhaps, the post-trial analysis.
What causes the large investors to wait on the sidelines when their entry point into PVCT could be 3/4 times the present stock price in a relatively short period of time? Some of these life sciences specialists (i.e., large investors) want to see management have an SPA fully in hand to provide certainty of the regulatory path. Others want the SPA and the stock to trade on a major exchange like the NASDAQ, together with the comfort that comes with greater liquidity and trading volume. Others, but a much smaller subset, want the SPA, the NASDAQ and the final dispelling of any lack of comprehension about PV-10's systemic benefit that comes with the pending release of more Moffitt murine study work. Despite the return proposition you proffer, these investors consider the risk-return proposition. It is less risky for them to buy upon or after the SPA announcement than before, no matter how much they think the SPA is in the bag for the company.
Your question is a good one, and one that perplexes me from time to time. I began my capital markets career as a proprietary currency derivative trader for a Top 20 global commercial bank. Then, I spent several years making strategic equity investments in technology start-up companies on behalf of a Fortune 300 corporation that, while guided by business unit goals and interests, provide my team with a very open-ended mandate. This experience was followed by stints opportunistically investing in both privately held and publicly traded companies for an ultra-high net worth individual and, later, a small hedge fund. As I invest for my own firm, I look for the best investment idea, irrespective of who, what, when, where, why and how. This applies to both long and short approaches to an asset class or equity security.
Inevitably, I have been early to take action in many cases. In most cases, it has worked out because of discipline and conviction in the face of emotional macro and micro reaction, unless the underlying investment theses change. Sometimes, however, I am just plain wrong. For Provectus, I began nibbling in 2007 and 2008, but increased our holdings significantly from 2009 to 2011. I made the decision to convert our profits in mid- to late-2010 (early), from being mostly out of the market starting in late-2007 (early) and returning in March/April 2008 ("lucky"), into more shares of the company.
Over the course of my career, I have never been truly constrained by the institutional investment charters or frameworks that appear to be restraining the life sciences investors to whom I referred. They have a set of investment rules and criteria they think works best for them and sets them up for success. Management has presented to them, and continues to update them. Many of them see and understand Provectus' clinical, regulatory, business and stock value propositions. The lack of an SPA and the stock on a major exchange seem to be the crux of what holds them back.
Pete travels a good deal, meeting with existing and prospective equity research analysts, existing and prospective investors, board members, corporate advisory board members, prospective partners, etc. Typically, this travel does not necessitate an Out of Office [automated] e-mail notice, since he is very diligent in responding to inquiries. Occasionally, he utilizes this notice (about 6 times in the last 2 years), traveling for a few days in such instances. In July he traveled for the entire month, utilizing the Out of Office notice:
Life sciences investors think Provectus will get the SPA, but they want to see it formally and officially in hand. So, they wait, but those who have dipped a toenail or toe into the water, and those who stand at water's edge have been prepped by Pete. These investors, firms and funds will descend on the stock when the SPA is announced. A feed frenzy should ensue when a mini-oncology or dermatology deal is announced. The dam breaks completely when a relationship with Pfizer finally comes to light.
I will know if I have been early or am wrong in short order.
I first blogged on this topic when the 10-Q was filed last week (see here).
Management did not include "[w]e are...pursuing a strategic investment strategy..." in the 10-Q filing as or to be a throwaway statement. They did this to inform Provectus shareholders, among other constituents (like prospective investors), of recent (i.e., since the last 10-Q filing three months ago) and currently ongoing material discussions with Big Pharma.
I have speculated about the implications of Dr. Eagle's presence on Provectus' corporate advisory board ("CAB"). If you use the blog's search function and query "Craig Eagle," my posts to this effect will list. My latest such post is here (each "below the waterline" is a real data point). Connect the dots: I think the material discussions I reference above are with Pfizer (although probably not exclusively).
I have wondered if Big Pharma has approached Provectus to license PV-10, invest in the company or acquire it, particularly after Dr. Eagle joined the CAB in August 2011. Having spent several years myself making equity investments in and helping to forge strategic relationships with life sciences and information technology companies on behalf of a large corporation in support of its business units' respective goals and interests, I know the drill.
There have long been rumors of alliance discussions with Big Pharma. The 10-Q indicates to me these discussions are more than rumors. I speculate we will learn much more in September, and I think it will be revealed that the Big Pharma is Pfizer.
Disclosure: I am a large shareholder of Provectus Pharmaceuticals. I started due diligence on the company in 2006 and purchased my first share of Provectus sometime in 2007. My share holdings number in the seven figures. I have not sold any shares to date. Disclaimer: This blog is neither intended to be nor is investment advice. The author of this blog (the "Author") is not a registered investment advisor. Under no circumstances should any content from this blog be used or interpreted as a recommendation of a trade or investment in Provectus Pharmaceuticals, Inc. Trading and investing can be hazardous to your wealth, health or both. Any investment decision must, in all cases and without exception, be made by the reader or by his or her registered investment advisor. This blog is only and strictly for educational and informational purposes. The Author may have a position in Provectus Pharmaceuticals, Inc. at any given time that is not disclosed at the time of publication. All opinions expressed by the Author are subject to change without notice. You, the reader, should always obtain current information and perform the appropriate due diligence before making any investment or trading decision. All efforts are made to ensure the information contained in the blog and/or a blog post is factual and accurate; however, the Author does not guarantee its accuracy under any circumstances.
