I definitely don't want to try to retread the recent epic short piece that appeared here a few days ago, so I decided to look at PVCT from the point of view of what the company is worth assuming PV-10 is approved for melanoma.
Usually when people think of melanoma they think of a very common disease as we are constantly seeing articles about how more and more people are getting it. According to SEER, there are 76,100 new cases each year which is a tremendously large number, but that is deceiving. 84% of new cases are in people who just have local disease (a funny looking mole on the surface of the skin) and the 5 year survival rate for those with local disease is 98%. There is no unmet medical need there at all as usually all that needs to be done is the mole is surgically removed. The rest of the melanoma sufferers either have regional (Stage III) or metastatic (Stage IV) disease and we saw from PV-10's Phase II data that their drug only works marginally in Stage IV patients (where they had a 0% complete response rate). Also, according to their recent 10-K, the FDA wants to limit PV-10 use to those where the melanoma has not yet spread to distant sites, which by definition excludes those Stage IV. Here is what it says: "the FDA agreed with us that treatment with PV-10 of cutaneous and subcutaneous tumors in patients with locally advanced cutaneous melanoma (i.e., recurrent, in-transit or satellite melanoma that has not yet spread from the skin to distant sites) could provide clinical benefit to patients". There's the potential label right there, advanced melanoma but without distant metastases. That is smack dab in Stage III.
The Stage III population amounts to only 9% of new melanoma cases and they have a 62% 5 year survival rate, so the unmet medical need in this group is limited. They are currently treated with a mix of surgery, radiation and pharmaceutical therapy. Doing the math that means that there are less than 3,000 patients in the addressable population. What percentage of those people do you expect to say yes to having red dye/Rose Bengal injected into their cancer? What do you think they would be willing to pay for that? Even if you use aggressive assumptions of 50% penetration and $50,000 a year in cost (you can buy 95% pure Rose Bengal for a little over $25 per gram online) peak sales get to only ~$130 million by 2031 when their process patent expires. I then did an NPV with the following assumptions:
- 100% chance of approval
- Launch in 2019, which assumes they start a trial soon and it takes as long to complete as their Phase II, a big assumption
- 95% Gross Margin
- 100 Salespeople
- No taxes until 2025 due to NOLs
- 12% discount rate
- 246 million fully diluted shares (including options)
The answer I got isn't pretty. Even if PV-10 goes all the way to approval and gets 50% share of its addressable market at an extremely premium price given what it is (red dye) the value of that program per share is $0.84, not anywhere close to where it is as I am writing.
Oh and it gets worse. PVCT is depending on a process patent that extends to 2031 to protect their franchise, those are historically the most difficult patents to protect as generic companies live by going around them. Sure, if you don't follow their exact process you will have a slightly different drug, but the generic approval process doesn't expect you to have the exact same drug. They expect you to be between 80% and 125% on certain measures. A dirty secret of generics is that they aren't actually the same as the branded drug. So you aren't taking Lipitor, you are taking Lipitor-ish when you are buying a generic. So it is very possible that someone could just buy 95% pure Rose Bengal from a variety of reputable medical suppliers, dilute it to 10% and then run bioequivalency studies vs PV-10 and meet the FDA's standards for ANDA approval.
Given this, PVCT will be highly dependent on Hatch Waxman exclusivity to protect their product from generics. Unfortunately for them, PV-10 is not a new chemical entity in any sense of the word. It is a dye and has been approved by the FDA since 1971 as an imaging agent. So instead of getting the usual 5 years worth of exclusivity for a new chemical entity, they are only going to get 3 years worth of exclusivity. When you factor in generic competition after the end of exclusivity (and allow some time for a trial etc.), you get a value for this product of only $0.32 per share.
Of course, this all assumes that management is not incompetent and will successfully navigate this drug to approval, a big if given it has been 4 years since its Phase II trial and the company still hasn't started Phase III. It also has repeatedly ignored FDA guidance on its development plan. And then let's not forget that they overpaid themselves to the tune of millions of dollars in violation of their own compensation plan (please see the Legal Proceedings section of their 10-K), not exactly a good sign for investors.
Based on what I have seen, an investor in PVCT has only two hopes of making money:
- A very desperate large pharma decides to buy them despite the lack of IP and the small market, which I think has a miniscule chance of happening.
- There is an epic short squeeze for some reason and that gives you an opportunity to get out with a gain or less of a loss (remember the short squeeze could happen when this stock is at 10 cents a share, so even if it triples, you have lost your shirt).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.