Circadian – A Nice Little Rhythm

Ever since I started this blog, I have been asked by many whether there are any ASX life sciences / healthcare companies that I actually like. I think I have always been consistent in the viewpoint that I genuinely believe in the potential of Australian life sciences. If I didn’t, this would be a fairly soul-destroying exercise, would it not?

When I look at a company, I try to tackle it at three different levels. The most basic level is the technology and clinical thesis. You will note that in a lot of these posts I am pretty skeptical about many of the fundamental claims, not necessarily because the science is bad – but because it is insufficiently proven to support the marketing claims of the company. It’s one thing to articulate the human health aspirations of the company, it’s another to make sweeping announcements about the potential of a product candidate on the basis of ZERO data. A case in point was Novogen’s announcement last Friday, a particularly disgusting example of what baby biopharma companies shouldn’t do.

This leads to the second “level” of analysis. I basically consider this to be “corporate viability”. Part of this is the basic valuation, financial and runway considerations, and the ability to raise capital. When a company has a certain balance sheet but articulates claims of sufficient runway to cover a major inflection point for the company, then I want to understand whether it’s too much of a stretch or not. For me this tells me almost everything I need to know about whether the management team is competent and usually it’s my strongest bullshit detector. A very big part of “corporate viability” is also the fundamental governance of the company. Is the board independent? Are execs and NEDs appropriately compensated? Does the company appear to have decent processes and committee structures, or is it just a copy-paste from someone else’s annual report? Important stuff.

The last level – and the level at which I start to get interested – is execution. This are things like clinical trial design, asset development, manufacturing, use of engaged clinical advisory, etc. Finding meaningful information around these issues is often the hardest part, and it is usually the most glossed-over part of a company’s publicly visible persona. It takes a lot of digging around and detective work – and the use of information from comparable companies/programs (often that are further advanced) is almost just as important for this part of the analysis as it is for valuation.

Why am I boring you with this?

Well, it will help you to understand why Circadian Technologies (ASX : CIR) is an interesting company to me. At the most basic level the company has solid technology and the clinical thesis is fairly sound. I don’t think anyone doubts that tackling VEGF “escape” for cancer and ocular disease is a smart idea and CIR has something of value to add here. To be clear, there are a lot of different ways of tackling this problem and what I can glean from the company’s published IP, they have only one particular way, but the world runs on actual drug candidates and not concepts, and so this doesn’t matter too much. Patents are only one dimension of a commercial strategy anyhow, as failures like Benitec illustrate.

On the topic of basic technology proposition, I will admit that I am not wildly enthusiastic about the combination development strategy. While it does make for relatively streamlined clinical trials and by the time CIR gets a product out (i.e. OPT-302) most of the “combo” drugs that would be used will be off-patent and likely have (perhaps) lower cost biosimilar/equivalents, it does intrinsically pressure the economics of a product from the outset. I’m not saying that the technology lends itself to a better strategy (it doesn’t, in my view) but it is probably a contributing factor to the company’s low-ish valuation at this time. I also think the current valuation intrinsically reflects a risk penalty for AMD on the basis that although the market potential is huge, it is a highly congested space and there are a lot of drug candidates out there.

In terms of corporate governance and financial management, CIR is a model company for what our ASX micro-caps should look like. I’ll probably regret saying this one day but if all of our baby biotechs and healthcare companies behaved like CIR, the sector would be twice as valuable because good companies would perform better and the quackery wouldn’t cut it. The board is truly independent – unlike, for example, Neuren (be warned… I am coming), has some real talent and is appropriately compensated. The management team is solid and is also appropriately compensated relative to the market cap of the company and the stage of development. The company behaves like a grown-up biotech, worthy of global partners like Lilly/ImClone. It doesn’t issue superfluous press releases, it uses a peer-review process to disseminate scientific and clinical information and it has one of the cleanest disclosure profiles.

Keep it up!

I start to tread a bit more cautiously around the execution parts. Not that CIR isn’t executing – it is. But the things we need to know about just are not really in the public domain. One of the real concerns I would have is the manufacturability, production profile/scale-up and stability of the product – it’s been presented in scientific forums but only in a cursory way. An intravitreal administration means that product packaging, shelf life, etc. is especially important because the patient is going to get a lot of small doses of the drug over an extended period of time. CIR is manufacturing their product in partnership with DSM at the former Patheon facility in Brisbane, which has quality infrastructure and people. But it would be great to start getting a more detailed idea of how the product development is going as OPT-302 heads into Phase II and what the unit COGS is likely to be.

By the way, this same issue is also going to really impact the cost of clinical trials – getting trial material together is going to be quite expensive compared to a simpler single-dose IV administration of a biologic.

Publicly, the company talks about focus but practically it has a lot of irons in the fire. This might be good for shareholders, especially since the whole pipeline sits around a common technology platform, but CIR could still do a lot more to clean itself up in my opinion. The branding and positioning of the company is a little awkward and while I appreciate that there is strategic and possibly even financial engineering value in parking certain assets into subsidiaries, the articulation is a bit clunky. I get that some of it is legacy, but there is no real need for it. If indeed parking the different operating activities into subsidiaries is designed to convince us that management focus isn’t diverted from OPT-302, we’re not buying it.

Truthfully, I would have to be convinced that CIR’s subsidiary structure really adds value or is even necessary. CIR’s mission should be to simply be “taken out” in totality, not piece-meal carved up or – even worse – end up as a platform company cum one product zombie like Acrux. Unlike other companies that are trying to cure everything, we get that CIR’s technology proposition is relevant and meaningful to several different disease categories because of its mechanism of action. In addition to the challenging clinical development strategy for OPT-302, I believe that the optics of this contributes to the company’s current low-ish valuation because it suggests “carve up” rather than “take-out”.

My final comment is that this company has plenty going for it and it will be interesting to watch the next 12 months. It’s not a slam-dunk for me, but no biotech company really is and let’s be clear, developing eye drugs is not for the weak and afraid. It’s probably not an overpriced equity relative to it’s stage of development (looking at comparable firms) or its balance sheet.

It’s doing a lot of things right that could certainly give it a near-term bump up. I’ll have my eye out for good news… (pardon the pun)

4 thoughts on “Circadian – A Nice Little Rhythm

  1. “In terms of corporate governance and financial management, CIR is a model company for what our ASX micro-caps should look like”. Seriously Chris? Since Dominique joined the company share price went from $1.25 to 16c. $20M+ spent in management fees (I had a trouble going through all of the annual reports) and virtually zero progress in pipeline. The company is completely mismanaged and had no strategy until recently (they had 7 subsidiaries in 2014). The science is not bad, I agree, but the company is a vacuum cleaner sucking investors money. The more you put, the more they suck.

    You are either very naive or …

    Liked by 1 person

    • … or? 🙂 I told you I would “regret” saying it but I think you need to take a step back and look at comparative behavior.

      I think it takes a while to turn things around and while I don’t disagree that a new chair search would be a good idea, I also don’t think harking back to 2005 is a good idea when putting a strategic lens on this company. I’ve read their recent financial disclosures and I don’t see anything about executive compensation that is excessive, and in my view the board compensation is not excessive either, so the $20m in management fees is pretty unsubstantiated. I DO agree that the subsidiary structure makes it more challenging to track the money and I am broadly in favor of collapsing down the structure to make it clearer where the company spends money and how.

      The big question is whether two very talented – albeit slightly socialite with probably too many commitments in the “portfolio” – Directors in Dominique and Tina are the right balance to someone like Russell Howard (who also has a fair amount on his plate but at least he is in the industry). In my opinion a fair amount of the professionalism in the conduct of the company stems from having experienced and sophisticated directors. I do think Megan has talent but she is also a learner CEO and she could use a stronger board.

      As for deciding whether the company is just a vacuum cleaner or not – let’s wait and see whether the rework continues and what the most recent set of funds yield. Hey, if you are that irritated about the company, then be an active shareholder and start asking why a Chair who saw a reduction in market cap of basically 90% under her watch is still employed.

      From my perspective, I can only look forward and not back. I see a company that is, in fact, finally doing some of the right things (in the last 18-24 months) and is certainly not overvalued or based on shit science like so many other ASX biotechs. You may have hit on a point though – and that is when you are sifting through a turd to find corn kernels, it’s very easy to get carried away with how tasty they are given that you are still picking food out of shit.

      Thanks for reading – and even more importantly – thanks for calling me on my bullshit. I appreciate it.

      Like

  2. Pingback: Neuren and Darwinism | The Long Tail

  3. Pingback: Circadian : Where’s the bump? | The Long Tail

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