- If you assign a 100% chance of success and the current sharecount, PV-10 for Melanoma is worth between $0.32-$0.84 depending on when they get generic competition.
- PV-10 has nowhere near a 100% chance of success and the company will have to dilute investors markedly to fund a Phase III and company operations.
- An equity dilution death spiral is possible if shares fall further.
People who have been following PVCT or God forbid, owning its shares, might think the stock is a bargain now that it has fallen by 75% in a week. Doing the numbers however, it's clear that it is far from a bargain and is still greatly overvalued given its market size, the chance of success and expected dilution.
In my previous article on PVCT, I pointed out that even if you buy the bullish arguments on the company and PV-10 the drug, the stock was way overvalued (the stock was halted at $2.02 when my article came out). My NPV, which assumed 100% chance of success for the company, valued PVCT at $0.84 a share if you assumed that their 2031 patent would hold and $0.32 a share if they had to depend on 3-year Hatch Waxman exclusivity. The biggest problem for the company is that Stage III patients (the addressable population for PV-10) is only 9% of the melanoma market and over 60% of them are well served by current therapy. So even with aggressive pricing assumptions ($50k per patient) for a drug that can be obtained for $25 a gram online, they'd be lucky to get $100 million in peak sales.
Given that we are now trading with the range I had set for the value of PVCT, would I be a buyer? Heck no. The point of my analysis had been to accept the bullish arguments and see where they led, but they don't represent reality. PV-10 has nowhere near a 100% chance of success, it is probably closer to 30% given the paucity of data and the fact the company has not been in any rush to actually start a Phase III (companies don't usually wait 4 years from the end of Phase II to begin Phase III if they believe in the drug). Factoring in that chance of success gets you to $0.10-$0.25 per share in value.
Now let's not forget about the dilution that will be necessary to fund a Phase III and the company's operations while they run the trial. I know the company mentioned on their Friday afternoon call that they expect to do a small bridging study in order to get approval and they won't need to raise additional capital but I'm not buying that (especially after their most recent fiasco).
Let's assume they need to run a trial as big as the one for Yervoy, which received FDA approval for melanoma a few years ago. Yervoy was approved based on an international 676 patient trial. And according to this, the average per-patient cost for an oncology Phase III is $74,800. That means that a Phase III here could cost PVCT $50,564,800! Now let's give them a little benefit and assume it only takes them 4 years to complete (it could easily take much longer as physicians might not rush to put people on this drug given all the recent bad press). They are currently burning $16 million a year, so multiply that by 4 and you get $64 million. So just to get to the end of the trial they will need to raise about $115 million in cash. That corresponds to the company issuing an additional 150 million shares at the current share price, amounting to 40% dilution.
The problem for the company though will be that once people hear they are raising money, their stock will tank and so the dilution will increase. Here is a handy-dandy table on how the dilution will increase and the value of the company will change at different stock prices.
|Stock Price||Number of Additional Shares to be Issued||Dilution to Current Holders||Fair Value Per Share Post-Raise|
That last option is pretty much an equity dilution death spiral. Assuming of course that they don't go bankrupt first as the company will find it hard to actually physically raise that much money in the first place.
What about all their other programs you ask? There really isn't much to go on with any of them, and as you can tell from this chart taken from their 10-K, the company isn't exactly excited to invest in any of their programs (in fact it looks like the management has been doing nothing but collecting paychecks for years):
The company also has almost no assets to speak of, other than their cash which amounts to $0.07 per share at current share counts and as low as $0.01 at potential future share counts.
So the risk-adjusted value of this company which takes into account dilution is between $0.03 and $0.23 or down between 69% and 96% from current levels.
Doesn't seem like a very sound investment to me.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.