Clinuvel, Compensation and McCarthyism

Are you now, or have you ever been, a member of the Communist party?

– Joseph R. McCarthy


No, I have not.

But judging by the fairly vehement reaction of readers since my last post on Clinuvel (ASX : CUV), there might be a rumour going around that I have. I feel like my comments were misconstrued, and so in the interest of clarification I have decided to write this post, just to clear the air a little. I think by now most of you know my position on executive compensation, and given that the purpose of this site is to inform retail investors of some of the risks of investing in ASX bioscience companies, I think it is perfectly reasonable to address compensation as a matter for consideration.

For absolute clarity – in case some of you missed it in my last “puff piece” (not my words, obviously) – here is my position on Clinuvel:

  1. Good science, overall can’t fault the clinical rationale too much. Story has improved a lot.
  2. Core assets are ancient, no matter how dressed up. Orphan designation provides some protection but not indefinitely.
  3. Has raised a lot of cash – relative to current market cap (in their enthusiasm, newer shareholders often forget this).
  4. Love the ultra-orphan story for EPP and very impressed with the EMA approval. Well done. Not many ASX companies can claim this milestone.
  5. Don’t believe that Scenesse will move sideways into vitilgo all that easily. Three reasons – if a 1% prevelence is indicative of the US or EU market opportunity, then it isn’t an orphan drug. Secondly, vitiligo is actually sort of a complex disease and adult-onset and pediatric vitiligo have very different drug development risks. Thirdly, the lack of IP protection means that it will ultimately be a competitive space for generics (company knows this, presumably that’s the reason why it is developing second-generation MSH molecules).
  6. A successful ultra-orphan company with an EMA approval doesn’t usually have a market cap of ~USD $100m. It’s pretty underwhelming.
  7. Having said this, the company is fairly young in terms of post-approval revenue, and so we will see how quickly things pick up. It could be that 2 years from now this company is a “ten bagger”. I’ll be delighted if this is the case because we will have another $Bn ASX company.
  8. The CEO has done a damned fine job since taking over the company in 2005, where it was basically languishing a slow death. Kudos (being sincere here).
  9. The CEO has been extremely well paid relative to any reasonable market benchmark for a company of this market cap and revenue. I don’t care what its regulatory status is.
  10. CEOs should never get get rich in advance of shareholders. Competitively paid? Yes. Talent retained? Yes. Rich? No.

I trust this is clear and reasonably balanced? For the intellectually-challenged individuals reading this post, the take home message you should glean is “Long Tail likes the story, doesn’t think the CEO should get rich before shareholders do.

And … at today’s market cap / revenue, you are not rich yet.

Lest people think I am overstating the point, I went back through the last 10 years of annual reports and compiled a summary of Dr. Wolgen’s compensation profile (illustrated graphically below but you can download the numbers here). To keep it simple (and yes, I am aware that this point will incite wrath) I have sort of lumped together performance rights, shares and share options, mainly because there isn’t a lot of disclosure colour around any of those compensation aspects. Besides, if you are an antagonist, you will argue that they don’t count for much anyhow.

Whatever.

... the dotted line (secondary axis) is cumulative compensation over the last 10 years ...

… the dotted line (secondary axis) is cumulative compensation over the last 10 years …

“Lumped” together, since Dr. Wolgen joined the company, he has received in excess of $17m in disclosed compensation. Of this $17m, almost $6m is in basic salary, an average of $600,000 / year, which is roughly 2x the industry average within CUV’s market cap range. He received a further $3.5m in cash payments and bonuses, averaging $350,000 per year. He also picked up another $600,000 in unclassified “other” expenses, roughly equal to two years of CEO salary for similar benchmark companies in the $100m market cap range. Finally, Dr. Wolgen has picked up about $7.2m in performance and share-based incentives. Very few of those incentives are in the form of options (<10%) and – as far as I can deduce – have no vesting conditions attached to the vast majority of them – in other words they are grants.

If I am wrong, feel free to correct me (I am sure you will).

I also note that Dr. Wolgen moved to Singapore on the company’s dime and appears to have established tax domicility in Singapore (effectively disclosed in the 2015 annual report by way of reference to his service agreement, which is via the Singapore subsidiary). There is a bit of a discrepancy between 2013 annual reports that initially mentioned a wholly-owned subsidiary in Singapore and the 2015 report that talks about a technical joint venture (with a company, incidentally, that was only established a few months earlier – i.e. it was not an “established” company with a track record in product development). I am doing some more investigation into this, but my instinct is that Clinuvel’s activity in Singapore is probably less about an “Asian Presence” than it is about personal wealth management for Dr. Wolgen.

That may be interpreted as an unkind comment, but it’s entirely reasonable. If I knew that I had a big performance bump coming up and that my shares were going to be really worth something, I’d probably re-domicile too. But to be clear, in order for the company to do a bit of formulation work and run a little clinical trial in Singapore, the CEO doesn’t have to move there.

Just saying.

So the bottom line for me is that Dr. Wolgen has done very, very well. And that’s fine, because talent should be well compensated. His work ethic is reputedly impressive and he has clearly be a tireless advocate for his company. I mean this sincerely – frankly, without him “Epitan” would have died a long time ago. But relative to the investment in the company, the current market cap and any sort of recent financial performance, the thick-end of $20m of compensation kind of makes me scratch my head in wonder.

Going back to the title of this post, I am not a communist but I do believe that CEOs that make shareholders rich, should also get rich. Even fabulously so. This is also not a witch-hunt and I am sure Dr. Wolgen is a bang-up guy. But when I consider risk factors in public companies, executive and board compensation is one of the most potent and useful lenses into company culture, performance and expectations. In the case of CUV, the CEO has generated personal wealth considerably in advance of wealth for shareholders.

That’s just putting the cart before horse.

The feature image is taken from this propaganda poster from a McCarthy-era propaganda poster. I thought it was cute.

The feature image is taken from a McCarthy-era propaganda poster. I thought it was cute.

2 thoughts on “Clinuvel, Compensation and McCarthyism

  1. Thankyou for your posts regarding Clinuvel.

    I am certainly in agreement with your assessment regarding Dr Wolgen’s remuneration. At the AGM 2014, just after EMA approval he was granted 2,500,000 performance rights. At the time of the AGM the share price was around $4.50, giving these rights a value of over 11 million if exercised at that time. In 2011 he was given 600,000 conditional performance rights to be vested for essentially the same performance conditions. “Performance rights were priced using a binomial pricing model” and as such the reported value is less than the value even at today’s share price of $3, now worth a mere 7.5 million. So he was given 3.1 million rights with nil exercise price and no share price hurdle for such tasks as; submitting a dossier, securing funding and receiving revenue from approved drug sales. Essentially doing his job as CEO.

    Clearly aligning the interests of the CEO to those of the shareholders is in everyone’s best interests, however I was critical of the overly generous nature and lack of a price hurdle at the time and attempted to obtain a shareholder register to contact major shareholders prior to the AGM. Due to inexperience in such matters and insufficient time I was unsuccessful. The 2015 Remuneration report states that no feedback was received at the AGM on its remuneration practices. None was sought and indeed at the 2011 AGM the chairman, Mr McLiesh did his best to prevent a shareholder raising a “snouts in the trough” comment based on the 600,000 rights!

    The mood was high 12 months ago following approval. However, after a 50% drop in share price, no sales in the EU (Italy excepted), delayed vitiligo results and a preliminary knockback with the FDA, the mood at this years AGM may not be as rosy.

    Like

    • I really value this kind of commentary from readers that have been “in the trenches” during key events like this. Many thanks for sharing. I haven’t commented much on the FDA “knockback” so far but I am keeping an eye on it.

      Thanks for reading.

      Like

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