Showing posts with label gross margin. Show all posts
Showing posts with label gross margin. Show all posts

December 14, 2012

$PVCT: Comparing illustrative $CLSN bull and bear cases, and how they help inform us about $PVCT

Two informative articles recently appeared about Celsion Corp. (NASDAQ: CLSN). The stock has had quite a run-up in 2013.

Click figure to enlarge it.
The first article, by Alex Daley, presents the bull case. The second article, by Adam Feuerstein, includes a short-side fund manager's bear case.

I want to set aside CLSN's headlines, stock performance and trading angles (whether long or short) in approaching, structuring and writing this post. Both authors and article undoubtedly are focused on the near-term, and there thought processes are useful and informative. More broadly, their comments also are applicable to longer-term views.

In Daley's article, "...there is a simple set of tests we apply to ensure that we've found a stock that can deliver significant, near-term upside." Summarized, this is:
  • Improving outcomes or lowering costs: "...it must improve outcomes, by improving patients' length or quality of life, or lower costs while maintaining quality of care, or both;"
  • Market size: "...the market must be measurable and addressable;"
  • Payer acceptability: "...payers should be easily convinced to cover the new therapy at profitable rates;" and
  • Time to market: "...there must a clear path to market in the short term."

Daley and Mr. Short CLSN are arguing asynchronously about the first half of Daley's first criterion: More improvement. Daley thinks CLSN is:
  • A better lysolipid thermally sensitive liposome (LTSL) technology,
  • A better approach with chemotherapy than just chemotherapy alone, and
  • A better solution with radiofrequency ablation (RFA) than RFA alone.
CLSN -- more improvement (greater, equal or lesser cost) or lower cost (no lesser improvement)? Ultimately, the synthesis of the above is CLSN improves outcomes (before progressing to discuss the other items). Mr. Short CLSN, on the other hand, thinks CLSN will be shown not to improve outcome and "be unable to demonstrate a significant benefit on delayed tumor progression in the phase III study" (because "more often than not, tumors grow back in distant parts of the liver away from the lesion(s) that's been ablated using RFA" and CLSN/Thermodox).

If CLSN does not improve outcome, cost or price is not relevant. If it does, cost then is relevant; however, Daley does not provide sufficient information to understand pricing magnitude and flexibility (i.e., treatment price, cost and, thus, gross margin) and address either (i) incremental improvement per unit price (and cost and gross margin) or (ii) lower cost with no lesser improvement.

Provectus has not released sufficient information to prove the claim PV-10 improves outcomes. At least that what traditionalists, purists, skeptics and others have said. I suppose, then, a Daley-like proponent of the company or Mr. Short PVCT really having nothing to argue about, let alone debate the merits other criteria. Perhaps...

Check One. I posit PV-10 dramatically improves outcome. That outcome comes at a dramatically lower cost compared to either competitors or standards of care. Length of life improves. Quality of life improves. A lot.

Check Two. I posit the addressable market is very large. The addressable markets of individual indications like melanoma or metastatic melanoma, or HCC are substantial in their own right. Considering PV-10 as a true multi-indication treatment, whether individually or in combination with other therapies and approaches at the appropriate rung of the treatment ladder, proposes a monstrously large addressable market.

Check Three. I posit payer acceptability will be inevitable. This, of course, goes back to the cost of manufacturing PV-10 and, subsequently, the pricing of the drug. The rather large gross margin the drug permits provides tremendous flexibility is smartly pricing it. Pricing impacts profitability and thus valuation. Pricing also impacts the competitive landscape is a very large way as well.

Check Four? Not quite yet. While the company is much closer to the end of of the path to market than it has ever been, the finish line has not yet been reached. I can yet posit anything here...yet.

November 13, 2012

Article: "Will cancer breakthroughs pass economic test?"


Will cancer breakthroughs pass economic test?

By Virginia Postrel
Apostolia Tsimberidou, of the
University of Texas 
MD Anderson Cancer Center
in Houston, is on the front lines
of drug research to treat
narrowly targeted groups of
cancer patients.

When Apostolia Tsimberidou was a young hematologist, a diagnosis of chronic myelogenous leukemia meant a patient had only a few years to live.

The median survival time when she started medical school in 1985, she recalls, was just 3.5 years. Then came Novartis’s Gleevec, or imatinib, which the Food and Drug Administration approved in 2001. Unlike traditional chemotherapy drugs, which work by poisoning the body’s fast-growing cells, Gleevec is a so-called biologic that works by altering the behavior of abnormal protein molecules — in this case, inhibiting an enzyme that makes the cancer cells proliferate.

With Gleevec, the death rate for patients with the disease plummeted to only 1 percent or 2 percent a year. The estimated eight-year survival rate has increased from 6 percent before 1975 to 87 percent since 2001. The drug, says Tsimberidou, “changed dramatically the survival of patients with this disease.”

That striking success made her want to find more molecularly tailored treatments when she moved in 2007 from hematology to designing “Phase I” human trials in a new department at the University of Texas’s MD Anderson Cancer Center in Houston. But chronic myelogenous leukemia is an unusual case, because almost all patients have the same molecular abnormality and therefore are candidates for Gleevec.

When analyzed at the molecular level, a cancer that has traditionally been viewed as a single disease commonly fragments into many different subtypes, each possibly requiring a different treatment. There are now tests for about 200 different such abnormalities, which may occur by themselves or in combination.

“We should realize first that every patient is different,” says Tsimberidou. “We cannot treat all patients with, say, colorectal cancer the same or think, for instance, that all metastatic liver disease is the same. In addition to the standard diagnostic procedures, we should perform a more refined tumor molecular analysis to better characterize every patient’s disease, and we have to tailor the treatment to the specific tumor and patient characteristics.”

The molecular understanding of cancer means both good news and bad news for improving treatment.
The good news is that more cures should be possible, with less waste from giving the wrong patients drugs that won’t work in their particular cases. That has the potential to save money and significantly to reduce suffering.

By matching patients and drugs, Tsimberidou and her team have already gotten impressive, if preliminary, results.

The patients in Phase I trials, which test brand-new drugs for safety and dosage rather than efficacy, are usually in a bad place. Their cancers are advanced, and they’ve already had lots of treatments. In short, they’re dying. They’re willing to be guinea pigs on the off-chance that something new might buy them some time.

Traditionally, “there was no particular expectation that you would even see any responses in a Phase I setting,” says George Sledge, a professor at the Indiana University School of Medicine and the former president of the American Society of Clinical Oncology.

But Tsimberidou believed she could do better, using molecular information, even at the earliest stage of drug trials. In research reported in September in Clinical Cancer Research, she and her co-authors first performed molecular analyses of patients’ tumors to identify genetic abnormalities in patients with advanced cancer who had volunteered for Phase I trials. They then assigned patients to trials based on the tests.

The results were striking. Only about 5 percent of patients who weren’t assigned to drugs based on molecular profiles responded to treatment, which is typical for Phase I trials. By contrast, 27 percent of patients in the matched therapy — those who got therapy targeting the specific molecular abnormalities in their tumors — responded.

Other measures tell the same story. The median time to treatment failure was 5.2 months for the matched-therapy group, compared with 2.2 months for unmatched patients, and the median survival time was 13.4 months, compared with nine months.

The two groups were not randomly assigned, so it’s of course possible that some hidden factor accounts for the disparate results. But given that these were very sick patients who had already had lots of treatments, and that they had many different kinds of tumors, even with a nonrandomized group the differences are great enough that it looks like Tsimberidou’s team is on to something real.

“When you’re talking about a five-fold improvement in a Phase I response rate over what you see historically, that implies that very early in the development process now we should be able to get some sense of whether or not a drug is active,” Sledge says.

Tsimberidou is now developing a randomized trial to test the concept.

Since June 2011, she and her team have also doubled the number of patients they’ve tested, finding even more molecular aberrations they might potentially match with new drugs. About 52 percent of patients have shown at least one abnormality, 11 percent have two, and 2.5 percent have three or more. A recent patient turned up with 10 molecular aberrations.

Therein lies the bad news.

The first problem is that not every abnormality has anything to do with the cancer. Some are just, in Tsimberidou’s phrase, “cosmetic” — correlated with a cancer but not causal. That poses a scientific challenge. To develop effective treatments, researchers have to figure out which biomarkers are relevant and should therefore be attacked with drugs.

Then there’s the economic problem.

It costs something like $1 billion to develop a new drug and bring it through testing to market. That cost, plus profit, needs to be spread over a lot of patients.

For blockbuster biologics like Gleevec or Genentech Inc.’s Herceptin, which treats HER2-positive breast cancer, the right patients are numerous and easily identifiable. But most mutations — or combinations of mutations — are much rarer, making the markets for drugs to address them much smaller. Sledge points, for example, to Pfizer’s Xalkori, or crizotinib, which treats lung cancer in just 5 percent of patients with a particular mutation.

As cancers and treatments are defined more and more precisely at the molecular level, nearly every form of cancer could become an “orphan disease” with a narrow, potentially unprofitable market for drugs.

“Your markets become a lot smaller,” said Meredith Buxton, the program director of I-SPY, a University of California at San Francisco program doing human trials of potential breast cancer drugs. “That’s the dilemma. The more people learn that breast cancer is not a homogeneous disease — that it’s many different little diseases — the less the value for a company to put in the $1 billion for a drug that’s going to be for a fairly specific and small-market.”

I-SPY is trying to turn the problem around by matching drugs to biomarkers and speeding up human trials. Testing drugs on patients who have the wrong kind of tumors is, after all, expensive and inefficient.

“The high cost of oncology drug development is not only an issue of finance but also occurs because many cancers are heterogeneous,” wrote Laura Esserman, the UC San Francisco professor who founded I-SPY, and Janet Woodcock, the director of the U.S. Food and Drug Administration’s Center for Drug Evaluation and Research, in a December 2011 journal article. They called for “new clinical trial designs that account for the heterogeneity and complexity of the specific disease at the outset.”
I-SPY does just that, using two novel approaches to speed up Phase II trials testing the efficacy of about a half-dozen new drugs for breast cancer. Although the I-SPY program focuses on breast cancer, Esserman’s specialty, researchers hope oncologists treating other types of cancer will adopt the tools and processes it has developed.

Patients in the program have been newly diagnosed, but they already have large tumors. Everybody gets the standard treatment, but some patients are randomly assigned to also get one of the new drugs.

The first twist is that instead of treating patients with drugs after they’ve had surgery, and then waiting five years to see whether the cancer recurs, I-SPY uses the drugs first and tracks the size of the tumor over the six or seven months until surgery. If the tumor disappears by the time of the surgery, that qualifies as a “pathologic complete response.” Enough such results allow a new drug to move on to Phase III trials — years earlier than the traditional approach.

The second twist is an adaptive, or Bayesian, design. Patients’ tumors are analyzed for biomarkers when they start the program. If patients with certain abnormalities do particularly well on a certain drug, new patients coming into the trial with that same biomarker will have a higher probability of being given that drug. Over time, drugs that do badly are dropped and those that do well progress. The experimental design cuts the time and number of patients needed for testing. In theory, drugs that graduate to Phase III trials should have an 85 percent chance of succeeding in that final, tougher and much more expensive stage — much better odds than the typical trial.

“If we find a faster, less expensive way to provide these drugs,” said Buxton, “then companies will feel like it’s worth it to continue to test them.”

Understanding the molecular differences among cancers may be interesting science. But without economically feasible treatments, it won’t do much for patients.

November 4, 2012

$PVCT: Desperately Seeking Gross Margin

SeekingAlpha contributing author Theodore Cohen recently wrote an article about Dendreon in which he discussed COGS in relation to valuation.


Provectus' gross margin for PV-10 has not been the subject of much if any public discussion. Circulated material to Big Pharma indicates a placeholder 60% gross margin figure (i.e., a 40% COGS). This gross margin figure, while appropriate, is not the "real" number. It's closer to at least 80% (20% COGS), if not higher.

Dendreon's ultimate goal is to get its COGS to 20-30%, down from 77% in 2Q12 to, hopefully or expectedly, 65% in 4Q12. 20-30%, from here, and exactly when?

Cohen writes: "...[20-30%] will get both the Street's and an acquirer's attention! Why, because Big Pharmas, basically, are in the gross margin business. It's not the multiple of revenue that excites the big guys…it's the multiple of gross margin. The reason for this is when a Big Pharma looks at a biotech, its management makes a series of assumptions. They know they can sell more product than the biotech company simply because of their huge market presence. So, they make their own (higher) sales projections. As well, the potential buyer usually has an overlapping sales force that will sell the product. So, the first cost they eliminate is the sales and marketing line. They also have their own administrative functions, so all of the biotech's general and administrative ((G&A)) costs are eliminated from the analysis. Finally, the remaining operating expense, research and development ((R&D)) is applicable to the overall R&D spending of the Big Pharma, in many cases, so it shifts to a different profit and loss ((P/L)) statement."

June 8, 2012

Contribution Margin

First and foremost, a product should have a good-to-great product value proposition. How good or great is it? In the case of PV-10, there are clinical and business pieces:
  • PV-10's clinical value proposition has been repeated and reproduced by management, principal investigators and Moffitt in murine models, animals and people for multiple cancers: very efficacious, very safe, and both local regional and systemic benefits.
  • The drug's business value proposition: easily administered (PV-10 is injected into target lesions by interventional oncologists in outpatient setting by a physcian or appropriately trained nurse practitioner or nurse; injections into tumors on organs inside the body require an imaging assist).
PV-10's product value proposition is great. So, now, consider a product's potential profitability.

How profitable can a product be when it's sold? In the case of PV-10, extremely. With margins in excess of 99% (assuming no consideration for sales returns) even at prices as low as $5,000 for a course of treatment, PV-10 is a very profitable drug.

If a product is profitable, what's the payback period before each incremental sale of a treatment course of PV-10 drops to the bottom line? That is, when does pure profit kick-in? In the case of PV-10, very soon.


If the Company brings this to market, the payback period is measured in months to a couple of years (depending on the ramp of use, and thus market share penetration). Although the expected outcome is for Provectus to be acquired by Pfizer, J&J or some other Big Pharma, I draw your attention to this scenario simply to emphasize the efficiency of management's use of capital (as compared to industry norms and averages).

If Pfizer brings this to market, and we focus on the payback period on the allocation of the acquisition price to metastatic melanoma (of $1.5B), said payback period, based on the likely price range of a treatment course, is measured in several years (again, depending on the the ramp of use, and thus market share penetration). Depending on Pfizer's global price point, the payback period might be even less than a few years before each incremental sale drops to the corporation's bottom line.

In other words, PV-10's contribution margin is spectacular.