Is Clinuvel Relevant?

I will state from the outset, I don’t like this company, but not for reasons that will dissuade most people from taking a look at the stock.

It’s funny because I get a lot of flack for writing posts about baby ASX biopharma companies that I actually do sort of like. I do sort of like Circadian (most people hate it). I do sort of like Imugene and Viralytics (most people haven’t ascertained this from my writing, believe it or not, and my hate-mail pile is surprisingly high). I even think the science of Neuren is ok, even if I still scratch my head at the strategy.

For the avoidance of doubt, I still think Novogen is one of the stupidest, most incompetent pharmaceutical companies on the planet.

But I don’t dislike Clinuvel (ASX : CUV) for the science. The science is pretty clear, and totally reasonable. Over 20 years of research into α-MSH (a.k.a. Scenesse) and synthetic melanotropins means that this is clearly technology that works and the basic idea and clinical value of repigmenting skin is well demonstrated. None of Clinuvel’s clinical trials have been particularly mind-blowing but when you tackle an ultra-orphan disease (in the case of Erythropoietic Protoporphyria, or EPP, about a 1/150,000 prevalence) you sometimes get cut some slack because patient populations are small and there aren’t a lot of options. With such a clearly defined orphan indication, it also means that any company willing to tackle the space and offer a therapeutic solution that moves the needle on patient outcomes, can do very well.

EPP is a medically serious disease, but vitiligo is not. I don’t want to be insensitive to the psychological impact of skin de-pigmentation, but the physical “harm” factor is low – in fact, patches of vitiligo actually have a far lower risk of skin cancers like melanoma, because melanocytes are not present. Although I can fully appreciate that this would not be a pleasant condition to experience first-hand, it’s a very far cry from EPP in terms of drug development and regulatory strategy, and because Clinuvel’s core IP is very long in the tooth, success in a non-orphan disease area like vitiligo isn’t going to do much for the company’s fortunes.

Why?

Because notwithstanding (possibly valid) claims of “garbage” and “unsafe” melanotan I and melanotan II peptides available online, the plain fact is that if someone wants to make and sell a “Scenesse” look-alike, it’s an incredibly easy small peptide to make. Also, the original University of Arizona patents (US 4866038, 4918055, 5049547) have long since expired.  Although I suppose it is reasonable to take the position that self-administration of functionally-active peptides like this without any sort of medical basis carries some risk, if another company really wants to make an equivalent product and provide proper prescribing guidelines, it’s certainly far from impossible. In fact, to some extent, it’s already happening, and there isn’t much the company can do about it.

So that’s the reality of Clinuvel – great orphan story and therefore a defensible commercial strategy (at least for a while). Kind of a mediocre story in terms of market expansion opportunity. But to be fair, in the last year, the company has done a great deal to improve its scientific articulation and general marketing presence. It used to have one of the most confusing and frankly weird web sites I have ever seen for a small pharmaceutical company. It’s done a great deal to improve communication and I even found a lot of the company’s marketing content informative and well-referenced, which is great to see. Though I should note that I am still of the opinion that the use of a frilled-neck lizard as a company logo is kind of bizarre, despite an apparently rational explanation.

At this juncture, you must be thinking to yourself, “well, Long Tail, so why don’t you like this company?” I mean, pretty much everything I have said so far tends to point toward the positive end of the skepticism spectrum, right?

Indeed.

Well, science is only part of the story and, as you know, one of my pet peeves is executive compensation. Clinuvel’s CEO, Dr. Philippe Wolgen, is completely inappropriately compensated for a company of this market cap and (very) limited financial success. I’m not implying that value hasn’t been created for shareholders – it clearly has – but his compensation doesn’t reflect executive leadership that is compelled by the long-term performance of the company. It’s basically all about taking cash off the table now, and this is a massive warning sign for me. If you consider this alongside the fact that the company doesn’t really have a compelling growth strategy, it’s sort of worrisome. Dr. Wolgen’s 2014 compensation was, quite frankly, outrageous. The 2015 package was similarly devoid of any kind of effective long-term incentive – to be clear, zero options. This a leadership team – particularly the CEO – that is essentially directly pocketing shareholder cash, and I have no difficulty stating it like this given that 2015 revenue was a paltry $3.2m bucks.

This leaves a bad taste in my mouth and therefore detracts from any good stories around clinical science that the company might have on offer. Also, let’s be honest, if this was a really hot ultra-orphan story (particularly a derm story – the stuff of dreams), with an EMA approval no less, the company would have been snaffled up in a heartbeat.

That hasn’t happened and it should perhaps make you wonder…

25 thoughts on “Is Clinuvel Relevant?

  1. Hi Chris,

    Yes I see your point about executive compensation…..Dr. Wolgen’s $6.3m (based primarily on “low bar” short term performance milestones) is outrageous and unbelievable for a company with a market cap of $130m. As you mentioned a much fairer method is to issue long term incentive options (with a reasonable hurdle exercise price) thus aligning the interests of executives with those of the common shareholder.

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    • Low bar milestones? He brought a new molecule to market and received approval for their lead drug after 10 years of work. Is this a low bar?

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      • Actually he did his job – a job that he was paid a million bucks a year for (cash) on average.

        He brought an (old) new molecule to market and the EPP accomplishment is significant. However big $s should be for commercial success, not regulatory milestones. CUV is not there yet and given the $s that have gone into the company, shareholders should be concerned about executive compensation relative to revenue and valuation.

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  2. Is this for real? For a company that increased revenue by c. 50% to a paltry $3.xm and doubled it’s loss to $10m, dear Dr. Wolgen got $6.3m – holy crap Batman! At least (for once) I’m not a shareholder contributing to this one!

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    • He was paid a cash salary of $1.4 million USD, not $6.3 million. PW was given stock as a performance milestone for EMA approval; something that was agreed on years back by the shareholders. Facts do matter…

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      • Facts do matter. But under the circumstances, being given stock isn’t a whole lot different than being given cash, especially if one moves their domicile to Singapore. Right?

        Not sure we should overly combat this one. It wasn’t stock OPTIONS as far as I am aware?

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      • I think you said in the article that his compensation did not align his risks with the shareholders. Does PW owning 2+ million shares align him with stock holders? He does own the shares and has not sold. I think he not only aligns himself with shareholders, he is a shareholder.

        And justifying his salary based on revenue growth prior to their lead drug being approved isn’t really putting things into perspective. Sales from approval will begin in 2016 so can you justify a $1.4 million salary if Clinuvel has sales in the $20 million range? What about $40 million?

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  3. I am no way trying to justify the CEO’s salary, but if you are going to write an article discussing his salary, we should at least be sure it is accurate. Philipe Wolgen’s salary was $1.3 million USD and $1.4 million USD in 2014 and 2015, respectively. In 2015, PW was given performance rights (stock) when their lead drug was approved by the FDA. He received performance rights of a couple of million shares based on this approval (which took 10 years). The article mentions a cash grab when in reality the management is heavily incentivized in stock and performance milestones. The article mentions management’s incentives are not aligned with investors… doesn’t giving them stock align them pretty well with investors?

    This article needs some corrections before anyone takes it seriously.

    Best

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    • Well, I don’t think the article actually mentions a number. I think it just references the annual reports and a prior piece I wrote on comparative compensation.

      I don’t think your point is very well made. Base cash compensation is about 3x when you would expect for this market cap (and probably more like 4x for the level of revenue). Granting stock as a performance milestone is obviously not the same as options with some sort of vesting structure, is it? As far as I am aware, no vesting terms are disclosed.

      To be clear, I LIKE executives to be well paid and highly incentivised.

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  4. It’s a fluff piece.

    “It’s basically all about taking cash off the table now, and this is a massive warning sign for me. If you consider this alongside the fact that the company doesn’t really have a compelling growth strategy, it’s sort of worrisome. Dr. Wolgen’s 2014 compensation was, quite frankly, outrageous. The 2015 package was similarly devoid of any kind of effective long-term incentive”

    No growth strategy? They received approval for their lead drug 2 months ago!
    Cash grab? PW has not sold a share
    No Long-term incentives? See future milestones for additional shares.

    Anyone you analyzes a stock based on the logo and website should not be analyzing stocks! back to the boiler room with you!

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    • I will respond to your comments – and similar comments from others – later today in the form of a follow-up post. I think you have a very poor understanding of executive compensation in this sector.

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  5. I will follow the quiet & large investments made by Sean Parker, Fidelity Biotech international, Lagoda and Mr. Wolgen himself before considering your loud and misleading viewpoint. Thanks though. This type of analysis reaching the outsiders is very bullish.

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      • Can I ask you sir, if a 200% return over 2 years would be a worthy investment?
        If so, keep in mind these very conservative estimates. 2000 EPP patients should generate roughly 20,000 per year, or $40,000,000. CUV has expenses of roughly $10,000,000 per year. $30,000,000 profit into 45m shares leads to earnings of .67 per share. A lowly P/E of 14 takes CUV to $9. These numbers should be reachable in 2017, if not 2016.
        Is a triple a worthy investment?

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      • You miss my point, Billy. I said that the basis of the company was sound, that the orphan drug strategy was “great” (that is my exact term). I don’t think Scenesse is going to move the needle on vitiligo and the company has more or less acknowledged this.

        So yes – a “triple” is a worthy investment. When it happens. Has it happened yet? No. The CEO should get rich when shareholders get rich, and not before. I will comment on this more fully shortly.

        If the take home message you got from my post that CUV wasn’t worth investing in, then you didn’t read what I wrote. I get a lot of retail investors asking me my opinion about the company and my answer is “it looks good, except that the CEO got rich first.”

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  6. Fair enough. Dr. Wolgen’s “riches” came primarily in the form of shares. I hope they lead to fantastic wealth. Also, his salary is relatively high, but this is an accomplished man in both the hedge fund and medical fields. Pricey yes, but he was the right man to see Scenesse through.

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  7. Pingback: Clinuvel, Compensation and McCarthyism | The Long Tail

    • Thank you JG, I appreciated the push. I don’t really know – I think Dr. Wolgen is probably a bit too tanned and swarthy to be mistaken for a leprechaun?

      Look, almost no small-cap ASX biotech company is “clean”. Maybe the key question to ask as a shareholder is whether or not you are “in the money”?

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