Circadian : Where’s the bump?

In my prior post (last month) on Circadian Technologies (ASX : CIR), I think I gave a fairly pragmatic analysis of the company. Overall, I like the opportunity that CIR has going forward. I think there is some talent in the company and a product pipeline story (including the Lilly relationship) that could be turned into something of value for shareholders. Notwithstanding the all-encompassing momentum that immuno-oncology has at present, useful angiogenesis/vascular molecules are still an important drug class in cancer and other diseases. I also like CIR because it does a lot of things to a higher standard than most of its ASX peers, particularly in the way that it communicates commercial information and clinical milestones. I believe that this is a reflection of Megan Baldwin’s integrity as a person, and the experience of her board.

I have come to the conclusion after a lot of scotch-mediated navel gazing, that ASX-listed companies go through three major phases of shareholder engagement. The first is the euphoria of everyone “climbing aboard” an exciting new story (and most of the time, it is just a bedtime story and nothing else) in the hope that they are going to make a 10x return on a financial roll of the dice. This is the highly acclaimed “Cynata” or “Regeneus” phase, where a company can do no wrong and will often produce voluminous quantities of public domain twaddle. The second stage occurs when a company experiences a major falter and the shareholder base undergoes a kind of Darwinian elimination process. Anyone with intelligence and a developmentally complete set of gonads leaves the flock to sew their financial seeds elsewhere, and all you are left with is a bunch of lunatics with the investing equivalent of Stockholm Syndrome. This is the so-called “OBJ Phase”.

The third and final phase is the “Circadian” phase. Somewhat ironic, really, when you consider the name of this company. The Circadian phase is like the very end of the Christmas office party. It’s about midnight, the dirty dancing to Abba songs has ceased and Khe Sanh has been played at least twice. Backsides have been duly processed on the office photocopier and anyone who was going to have an inappropriate hook up that night has long gone in search of a quiet office corner for fumbled and rushed copulation, often leaving odorous stains on desktops for discovery the next morning. The punch has been watered down enough times that your bladder is probably working harder than your liver. The conga line has dwindled down to 6 weird bearded guys that work downstairs in IT.

You know what I am talking about. We’ve all been there.

Very few people manage to re-stoke the party at this stage – except maybe Viralytics. Though I also note if you are a very charismatic CEO, you might manage a temporary surge of activity by burning the contents of the paper recycling bin and setting off the fire alarms. That’s the world-famous “Anteo Manoeuvre”. I hate the Anteo Manoeuvre and it always ends in misery. But notwithstanding the unique and fascinating natural history of an ASX-listed biotech company (hereafter referred to with affection as the “Circadian Cycle”), I was incredibly surprised this week to see that CIR’s announcement of an FDA IND approval for OPT-302 for wet AMD elicited precisely no market response whatsoever. The share price was like watching a ER patient flatline on a cardiac monitor. As some readers know, I have endured a full week of waiting to see some kind of follow-up, publicity, market response.

Nothing. Nada. Zip.

I mean, Novogen can kill a few cells in a dish and get a nice price bump. Cellmid dosed a couple of cynos and got a 17.5% rise. Team Cynata seems to be talented enough to issue a press release over a management circle-jerk about manufacturing and get robust double-digits. Prima enjoyed a stratospheric price rise on the announcement that they had finished a study for a program they had actually killed a couple of months previously. Yet when a company that has quietly gone about its business to get a US IND allowance for a biologic with a novel mechanism of action, in eye disease no less (so we are not talking about a basic 14-day NOAEL toxicology study like in a cancer drug, but more sophisticated pre-clinical models and much tougher formulation), the market does absolutely nothing.

That’s the ASX for you, God bless ‘im.

And the reason is simple – nobody gives a shit. No analysts care about CIR because the brokerage firms they represent aren’t going to make any money out of them any time soon. Shareholders hate CIR with a passion because not only is the office party over, but people are starting to puke in the planters. When I wrote my last post on Circadian I received dozens of emails from former shareholders lambasting me for the audacity to even imply that there was something “there” worth talking about. Even current shareholders wrote to me and told me that I was a moron and the only reason why they were still holding onto their shares was because they were waiting for the right moment to take a tax loss (a reason, incidentally, that I honestly think contributes to this week’s flatline – maybe CIR should have waited two weeks and made their announcement after the end of the Australian financial year!).

Life is pretty frickin’ miserable for a biotech company when shareholders see more prospective value in a tax loss, then an equity gain. Yet, taking a look at the historical stock chart, it’s not hard to understand why people are beyond caring, and why – put simply – CIR has no mates.

June 2015 - Circadian Stock Price Chart

Actually, that’s not true.

They have one mate.

Me.

I think the company has a shot at going somewhere and deserves a second chance. The company has some decent technology (including an historically solid pharma partnership in Lilly), a biologic going into the clinical for a potentially high-value (albeit congested) application with a novel mechanism of action, and probably just cash to get through Phase IIa for OPT-302 – not bad for a company with a $20m market cap. I’m not saying it’s a slam dunk – it has quite a journey ahead. However 75% of ASX-listed biotech companies are not even this accomplished, and many of the bottom feeders have 3-4x the market cap of CIR precisely because they do have mates, albeit a bunch of space-cadets. I don’t even mind if Lilly chooses not to move forward into Phase II – it happens all the time, pharma companies change priority and they juggle a lot of pipeline noise. CIR’s VEGF technology has good potential in cancer and if Lilly doesn’t develop it, it’s far from the end of the world for that asset.

So, if CIR wants to initiate a VLA-style phoenix stunt, now is the time. Management has almost infinite flexibility to make the company better because frankly, nothing is going to lower the stock price any further and if an IND notice of allowance doesn’t cause even a flutter of a heartbeat, nobody is watching anyhow. I can think of a good dozen things that CIR should consider doing to transform its prospects but in this post, today, I would like to focus on just three. Frankly, the management team has probably had a tough enough week without me adding to it. I will note that these suggestions are essentially repeats from my prior post on CIR, but I will reiterate them with a bit more clarity on the basis of recent events.

Here goes : here are my top three suggestions to CIR for re-engaging with your shareholders:

1) Get rid of the chair. I don’t know Dominique Fisher, we have never met, and I have absolutely nothing negative to say. By all accounts she’s a brilliant and accomplished executive and, quite frankly, I wish we had a few more talented women on ASX biotech boards instead of the usual liver-lipped collection of middle-aged male golfing buddies. Unfortunately, no matter what her positive attributes are, she has overseen a company that has had 90% of its market cap steadily and consistently wiped off under her 10 years of tenure. CIR’s shareholders loath her and emails I received from current and former shareholders fairly spittle out of my computer monitor with vitriol. Therefore from a shareholder engagement and corporate governance vantage, it’s time for Dominique to step down. The board, in general, is the wrong composition for a company at this stage of development anyhow. This is not CSL. It needs a lot more proper pharma BD and drug development experience, and it needs a little less Aussie “socialite” veneer if it is going to propel the company into the sights of a pharma acquirer. In my humble and well-meaning opinion.

2) Collapse the company structure. There are just too many damned entities and subsidiaries and detritus floating around the CIR story. If those entities have to be there for tax, or licensing or financial engineering purposes (i.e. in the event of an asset acquisition) then fine, but keep it as a page of notes in your annual report, don’t flog it as a strategic, operational or marketing differentiation. It isn’t. All it does is serve to reinforce the existing shareholder perception that the company’s management team is unfocused and stretched too thin. Execute and then tell shareholders you have done it as the beginning of a larger reform process. It will be appreciated, I am quite certain.

3) Time for a rebrand. Circadian is a meaningless, legacy name and it doesn’t tell anyone what your company does – at least not that I have been able to fathom. The company’s name is tarnished, hated and irrelevant, so why keep it? At the very least HotCopper will explode with mirth as you are relentlessly mocked for choosing some sort of ridiculous name. I note, to save any inconvenience, that Alyptus is already off the table. Oh, and please don’t decide to adopt any of your subsidiary names. Opthea sounds like a late 19th century spinster’s name – like Dorthea or Agnes (apologies to my beloved grandmother whose name is Agnes … hugs Gran). Vegenics sounds like a brand of personal lubricant that you can buy in single-use sachets at your local gas station.

Good luck. I’ll be watching and wishing the team every success.

10 thoughts on “Circadian : Where’s the bump?

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