May 26, 2013

$PVCT Blog Reader Question/Request

Thanks for coming up with "Connecting the Dots." I've had an investment in PVCT since 2010, so I am quite a bit underwater now, at least on my first tranche.  I was about to take my losses and move on when I came upon your blog. You are a great source of information about the company, so I decided to hold a bit longer.  Your blogs around the time of the IPO fiasco actually enabled me to enter a second tranche at a very nice price and recover some losses from the first. To date I have not sold any PVCT stock, but I am leaning toward turning part of my holdings into a trading account. The reason I am contemplating this is because of the trading range of the stock over the last few months. It does not seem to be able to break through the .75 mark no matter how good the news is. I believe the reason for this is succinctly stated in the subject Wharton magazine blog, which was referenced in an Adam Feuerstein tweet a couple of days ago. I would appreciate it if you would read the Sable blog and give your opinion as to whether PVCT is stuck in the same kind of "poor capital structure" that limits its share price and accounts for the high number of PVCT shorts.
The article the blog reader references is The Curse of the Poor Capital Structure by David Sable, W’81, M’86, Portfolio Manager, Special Situations Life Sciences Fund; Adjunct Professor, Columbia University. "Our author explores black-hole capital structures that drag down company share prices to the benefit of hedging portfolio managers."

Provectus suffers from the same or similar kind of capital structure that limits its share price, but I do not think one can explain the share price dilemma, that it cannot break through 75 cents (or that, more generally speaking, it is depressed) exclusively with Sable's capital structure comments.

Among them...

The company is an OTC stock. That does not help. Presence on a major stock exchange will of course be most welcome. And this will change.

Provectus' low profile -- which, in truth, probably allowed management to scoop Bristol Myers and several others by jointly patenting with Pfizer the combination of PV-10 with anti-CTLA-4, anti-PD-1 and anti-PDL-1 agents, among others classes of compounds (notably before such combinations were in vogue) -- has made it difficult for greater awareness to build around the stock. For example, the professor, his investigative dermatology laboratory and university conducting PH-10's mechanism of action and examining the drug's unique lack of toxicity remains labeled by the company as recently as the CEO letter/annual shareholder update as "...a leading research facility..." This professor is very well known by the FDA and the medical community (particularly key opinion leaders of which he is one).  And this will change.

Some market participants expect another dramatic round of dilution to fund the contemplated SPA MM Phase 3 trial. The consensus belief is Provectus needs upwards or $25 million or more to run the trial. Management budgets the expenditure closer to $15 million or less.  And this may not happen from the perspective of which or what scenario plays out vis a vis regulatory clarity and path to approval.

There may be another near-term raise of money via Network 1 to maintain accounting firm's BDO's going concern opinion until regularity clarity is transparent and commercial validation is achieved. Having about $5MM in cash at March, Provectus is burning about $1MM in cash per month. It is possible another N1 placement, together with likely expensive warrant coverage, may be undertaken in June, or shortly after quarter-end (i.e., early- to mid-July). As such, there may be shorting in advance of this further but minor dilution, or a reluctance to buy until transacted. And while there is no certainty this fund raising will occur should events in June raise the share price sufficiently for either Lincoln Park's warrantless equity line of credit to be drawn down or a portion of the shelf to be used at much higher share price levels, it is nevertheless a possibility.

Most importantly, there has been no buying from life sciences investors, firms and funds because there is need for regulatory clarity (e.g., SPA, BTD-AA, BTD-truncated P3) and, additionally for some of them, commercial validation (e.g., regional license deal(s), PH-10 deal, global license deal). Regulatory clarity is necessary because these life sciences investors will not invest until they understand the "exit," PV-10's drug approval path. Commercial validation inevitably presents the market with proof that someone or something is desirous of the compound. For example, with regard to regulatory clarity I think (speculate) Provectus has officially submitted its requests/applications for the SPA and breakthrough therapy designation, perhaps in early-May. For commercial validation I think (speculate) the company is close to consummating an MOU for China, perhaps by early- or mid-June.

News of material progress on the fronts of regulatory clarity and commercial validation will cure the share price malaise. The news expected to come should be vastly more than sufficient to breakthrough the 75 cent level and well beyond.

So, while Sable's capital structure perspective is germane and understood, it should become largely irrelevant or immaterial at the point in time Provectus announces, say, an SPA and a regional license deal in China.

As for Sable, his concluding statement is obvious: "This should be preventable. The five-year duration is an industry standard for no obvious reason. Limiting the duration of warrants to six or 12 months would remove this unintended derivatization of the company’s stock."

It's also not particularly insightful, both from the limited perspective from which he proffers it and basic statistics.

Folks like him suffer from Golden Rule-itis. I know. I did too.

The Golden Rule is "those who have the gold make the rules." I'm not talking about the real Golden Rule that "one should treat others as one would like others to treat oneself." I'm referring to the Wall Street-hedge fund-investment management version.

It doesn't look like Sable has been involved, as a principal, in raising money, either for a fund or a corporation/company.

If you've only invested (i.e., you have the gold), it is difficult (at times, very) to appreciate being on the other side of the table asking for it. Try raising money. Try asking for the gold. It changes your perspective. A lot. I have been asked for gold. I also have asked for it.

Now, try raising money at terms better than everyone else (i.e., greater than extrinsic value, company friendly warrant coverage, etc.). By definition, the far right hand side of the bell curve (i.e., two and three sigma) will be/are successful -- they will raise money at better or much better terms than the population of those raising money -- for both substantive and stylistic reasons and attributes.

As you move left, you approach the region around the mean, where most folks find themselves able to raise money at average or so-called "industry standard terms."

Moving further left, they're less or much less successful. Sometimes, they fail all together.

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