The Dark Side of Digital Diapers

It’s funny.

I kept getting requests for more “positive” commentary in my writing. I kept getting challenged to help “accentuate the positive aspects” about Australian bioscience/healtchare companies, especially since US readership is fairly significant. My general position has generally been that you make good companies stand out by picking out the chaff, but maybe that was too simplistic of me. However, since my previous  post on Simavita (ASX:SVA), I’ve had a surprising number of shareholders (former and current) email me and tell me I am an idiot.

Now, this is a sentiment I regularly endure, and to some extent it is starting to sink in for me that for most days in Long Tail land, you’re pretty much damned if you do and damned if you don’t. But this reaction sort of surprised me in this instance. Why? Well, nobody really disputes that the “digital diaper” is a good idea – or at least very few. Skeptics may take the position that it is a marginal enhancement to a fairly simple process (did Granny wet her pants or not since her last cup of tea?). I personally think it is a far more sophisticated problem than this and it ranges from addressing important human factors like maximising comfort and dignity – to optimising more healthcare-oriented issues like skin conditions and infection.

I alluded in my last post that I didn’t really see anyone on the team with a convincing track record in building significant value in a tech business targeted at aged care. Considering that some people (i.e. the CEO) have been in the incontinence space for a while – it is surprising that the company has had such a mediocre launch. There certainly isn’t anything about the company’s publicly articulated commercial strategy that exudes competence, but the real “danger sign” that nothing too interesting is going to happen anytime soon, is executive compensation. I know I go on and on about it, but it is absolutely fundamental. Whenever you see a company that has gross misalignment between shareholders and management compensation, you almost always see under-performance.

Despite my earlier, fairly “friendly” review of Simavita from a technology vantage, there is unfortunately a “dark side” to the company that would even have Vader’s knickers bunching up around his nether-regions (though if I recall correctly, after his battle with Obi Wan Kenobi on fiery Mustafar, there wasn’t much left down there…).

In case you missed the subtle mastery of my photoshop. For a while, the Emperor toyed with calling him Darth Huggie Bear but decided it was a bit too sinister...

A close-up in case you missed the subtle mastery of my Photoshop efforts. For a while, the Emperor toyed with calling him Darth Huggies but decided it was a bit TOO sinister…

Let’s start…

Chief Executive Officer, Philippa M. Lewis, took home $601,449 in financial year 2015 – $350,000 in base salary; $197,191 in ‘other’; $33,250 in super; $21,008 in long service and zip, zilch, nada in share-based payments. This is really annoying because this is the one category where you don’t mind seeing a key employee or executive receive a bit extra. To be clear, the $350,000 salary is not way over the odds, but it is certainly a little on the high-side for a company with this market cap and stage of development. Does a total of $601k for heading up a company that lost $9.5m and its US distributor (Medline) sound like a good deal to you? I think it is fair to say that compensation is not aligned with performance.

Hmmm. Better dig deeper…

It seems Ms. Lewis was paid a much more reasonable $262,500 base salary in financial year 2014. That’s actually probably a little on the light side and, clearly, the remuneration committee recognised this. So to make everyone feel better, they threw in a further $584,983 in ‘other’; $24,281 in super; $14,582 in long service and $734,583 in equity-based compensation, for a grand total of $1,620,929. Although it’s not entirely reasonable to lump equity-based compensation together with cash, it does give you a big picture view of compensation that facilitates order-of-magnitude comparison with other executives. That sort of package starts to even give perennial disappointment Jackie Fairley (Starpharma) a run for her money.

‘Other’ in 2015 comprised $70,000 for dislocation and hardship (because being the CEO of a consistently loss-making company is supposed to be easy) and $127,191 in fringe benefits. That is a LOT of fringe benefits for a company at this stage in its commercial development – can anyone say Prada, Tiffany’s and Gucci? 2014 was apparently also a hard year, accounting for $52,500 in dislocation and hardship, and $59,289 in fringe benefits. $473,194 went to Ms. Lewis’ company Dumur Asia Pacific Pty. Ltd. for management and capital raising fees and bonuses.

The capital raising fee ($208,500) especially pisses me off. A pre-commercial (i.e. loss-making) company needs to raise capital to survive, and it is a fundamental responsibility of the management team, particularly the CEO. A CEO taking a clip on capital raisings for doing a job for which they are already very well paid is just greedy, stupid and actually just creates an incentive to continue to dilute shareholders into oblivion. Whenever you see a CEO taking their cash off the table before everyone else, sell your equity and run for the hills because they have no respect for your money. My understanding is that she will continue to get a cash spiff for future fundraising, which is pretty uncool.

Looking through the remuneration of Simavita’s other directors and employees, the ‘other’ column does certainly seem to get a work out. Director Ari Bergman benefited to the tune of $44,054 in 2014 and director Damien Haakman to the tune of $165,000 in 2015 and $300,000 in 2014. Director Warren Bingham only got a pitiful $25,000 in ‘other’ in 2015, so whatever he is doing for the company it is consuming about 12x less “other” than Damien. Moreover, Ms. Lewis is not the only executive being paid handsomely. Thomas G. Howitt took home $373,169 in his role as Chief Financial Officer (no doubt because he did such a stellar job during his long tenure at Genetic Technologies (ASX: GTG)) and Chief Technology Officer, Peter J. Curran, received $430,896 – very meaty for the “science guy”. Ok, Mr. Curran’s life revolves around detecting urine so maybe his $430k is deserved, but how about some sort of upside for making commercially successful products, rather than something that looks as though it belongs on Darth Vader’s instrumentation belt?

I could go on, but I won’t.

While Simavita’s technology for aiding continence care in the elderly looks promising, this is a company that is very VERY far away from delivering on its promises to shareholders, particularly with the kind of weak and underwhelming commercial performance and strategy articulation to date. Frankly, when you take a look at these compensation numbers and their lack of transparency, it’s hard to walk away with the perception of anything other than a company that has set out to fleece shareholders in order to line the pockets of the management team.

It’s a shame because I think that if they got their act together, showed some integrity and product performance, the company could be huge. But not at this rate, and not with this culture of remuneration. This company is evidence that executive compensation still needs more air play, and the mediocre boards of many ASX healthcare/bioscience companies need to better demonstrate to shareholders that a significant part of remuneration is based on upside for commercial performance that delivers value to shareholders.

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