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.
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?
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…