MANAGING DIRECTOR’S LETTER
MANAGING DIRECTOR'S LETTER
Dear Shareholders,
INTRODUCTION
I contemplate CLINUVEL’s successful progress and financial results in 2020 in contrast with the unforeseen pandemic and various containment measures unfolding around the world. It has been a surrealistic series of events in the past year, the emergence of a new epoch and existence for all of us. In the vortex of a virus working its way methodically across all borders and has already stolen 1,000,000 lives around the world, global commerce has slowed down at a rate far beyond that seen during the Great Recession and has caused millions of workers to be laid off.
Like most businesses, CLINUVEL was forced to adapt quickly and plan its operations in a materially different way. First, Brexit caused us to relocate some of our operations to the European Economic Area while keeping other services in the UK. We made this transition successfully and kept adding new services and structures to EU distribution.
…we were proud to learn in February that CUV’s Board was one of only 11 on the S&P/ASX-200 where at least half of the directors were female, reflecting the progressive and intentional approach to gender and cultural spread within the Company.
The past year taught us that limited travel required an indirect approach to CLINUVEL’s operations, and the curfew and inhibited ability to enter offices forced the Board and management to rethink strategy and the future of the Company. Senior management found itself defending the healthcare needs of the targeted porphyria patients both in Europe and the US. While some erythropoietic protoporphyria (EPP) patients could not gain access to treatment due to closure of specialist hospitals, other centres needed to be immediately activated to prescribe SCENESSE®. Under extraordinary circumstances, special permissions were requested from, and granted by, national competent authorities in the European Union and the US.
Following the FDA’s approval in October 2019, there has not been a second to reflect upon – let alone celebrate – the momentous occasion. Rather, it has been an accelerated path to formulate the second product PRÉNUMBRA®, contest Ethics Committees and regulatory authorities, and introduce SCENESSE® to US insurers, all while expanding the Company on all other fronts. We invested in new facilities in Singapore, and despite a delay of several months, were able to open our laboratories on 31 August. With newly elected Chairman, Mr Willem Blijdorp and the addition of Mrs Sue Smith and Professor Jeffrey Rosenfeld as Non-Executive Directors to the Board, new insights, new strategic discussions, and different practices were introduced. The current Board with Mrs Brenda Shanahan and Dr Karen Agersborg is well diversified in skills, and we were proud to learn in February that CUV’s Board was one of only 11 on the S&P/ASX-200 where at least half of the directors were female, reflecting the progressive and intentional approach to gender and cultural spread within the Company.
In terms of cost-efficiency, we have continued to improve with operating expenditure as a percentage of total revenues reaching 26.9%. We also saw an improvement in our overall return on invested capital to 14.2% this year (up from 13.7% in 2019). This performance demonstrates considerable momentum as we enter 2021. We built and kept our balance sheet clean to create options for the ensuing years, increased our cash reserves by 23% and expanded the Group with an eye to overall sustainability. Along a chartered course, our R&D activities gathered momentum to provide for the next generation of products. I see CLINUVEL’s output the past year as one of the most memorable achievements by our dedicated team in the midst of the most severe economic recession in recent history.
As much as we could, we changed our pharmaceutical product supply and worked for weeks 24/7 to secure continued distribution. We witnessed how authorities, distribution centres and customs at various borders were tapering or shuttering operations all together. As supply chains slowed down, we were asked to find most original ways to distribute SCENESSE® under specialised transport, against the time ticking to get the hormonal therapy to hospitals on the hour. In March, northern Italy was under siege from COVID, and many porphyria patients became understandably too anxious to travel or seek treatment in designated hospitals.
It is an understatement to say 2020 has been quite a test, but not at any time have I detected a sense of panic or loss of control across our group of companies. Rather, a silent confidence underpinned our staff that they would collectively manage the uncertainty even if it meant accepting some delays. Surprisingly, during the global lockdown there was a high percentage of requests from known EPP patients for continued SCENESSE® treatment at the peak of the daily COVID hazards. As seen from our operational results, we have steadily grown the Company, despite the spread of the pandemic. In analysing the rate of continuation of SCENESSE® treatment on 30 June, we found 96.6% of patients who had started treatment in 2016 were still requesting and receiving the drug. Overall, through qualitative surveys patients have reported a positive change and or improvement in their behaviours and activities undertaken, as recorded by an inventory of daily activities. Even in 2020, the number of treatments increased year on year as well as the number of new patients.
GOVERNMENTS’ ROLE
In the wake of the global pandemic we have witnessed the rise of the state’s role in choosing which workers to defend, which companies to assist and where to allocate resources among the general population. Households in G8 countries were handed free money, while relief was given to businesses for rents and additional incentives to retain workers. In a Keynesian doctrine where the state plays a central role, central banks have kept interest rates low while state debt is now predicted to rise to 15-17% of GDP as borrowed funds among western countries. The stimulus seen in Europe, the USA and Australia seems to have no boundaries with an aim to keep economies fluid.
There are many ifs and nobody, including our central banks, really knows how to forecast our economies for the next 12 months. We are in unchartered territory.
However, I continue to believe that a deflationary environment cannot be maintained, nor can prices be kept low long-term, and when inflation eventually creeps in, the concern will be how this will affect businesses and specific sectors. Without having foresight, I see it as management’s task to read the markets as well as we possibly can and conceptualise how to protect the group of companies against these macro-economic waves.
Central banks are now openly intervening in public markets. In parallel, the state’s financial regulators find themselves overburdened in combatting distortion of equity markets where algorithms and short selling dominate daily trades. At CLINUVEL, we have had our fair share of these practices as witnessed since April 2019. Having gone through these episodes in the past (most conspicuously in 2007), I know from experience that continued corporate performance, generating further intrinsic value will eventually wash out these short sellers. In the meantime, the pain is borne by all shareholders, including CLINUVEL’s staff, ergo holding steady is the mandatory approach.
Economies are seeing the delayed effects of the pandemic, whereby the surplus nations such as Germany, Japan and China have seen a sharp decline in exports, while overall consumption has been reduced to the necessary goods and services. While the International Monetary Fund and US Federal Reserve have revised their forecast to a fall of GDP in 2021 to under 5%, the European Central Bank has been more moderate and predicts negative growth of 3% for 2021. As a footnote, the further global recovery is contingent on the fiscal and economic stimulus by the richer nations slowly waning off, central policies to remain effective, foreign demand to pick up and societal uncertainty to ebb away. There are many ifs and nobody, including our central banks, really knows how to forecast our economies for the next 12 months. We are in unchartered territory.
Reviewing 2020, chaos ruled in China first, followed by confusion on the European continent and eventually, lockdowns in the US and Australia and periods of circuit-breakers in Singapore and South-East Asia. Just when the world prepared to resume to normality in May, the second wave of the pandemic struck Europe, Australia, and parts of Asia, whereby the US had remained throughout the year in a state of nationwide restriction. At the time of going to print, there seems to be a renewed emergence of the viral spread, with an R-factor of 1.6 in the European Economic Zone and steady spread in the US. Thus, prolongation of restrictive measures seems unavoidable.
ADAPTIVE MINDSET REQUIRED
Adaptation – as in rapidly accepting a changing environment – comes to mind as the main hymn when reflecting on 2020. I have been most impressed by our teams and their interconnectedness. New professionals joining the Group were without warning asked to work from home, some of them not properly set up to work remotely and unfamiliar with the processes of the new company they had joined. Communication has become the key attribute to cross functional flow, operating procedures, and advancement of R&D, while financial discipline is maintained. Thus far, CLINUVEL’s staff have stood up to the task and the same talented pool of people will continue to rise to the challenges as the economies and markets continue to oscillate.
At the peak of the first wave of COVID, we introduced an individual monitoring system for tracking communications. The weekly reports provide us insight into the Group’s activities hour by hour, since we needed a baseline number of outward and inbound emails, video conferences and connectivity between our global teams.
With a mindset to globalisation, we concluded paradoxically that crisis management needed to take place locally. While Brexit had been postponed twice and the definitive transition period is set to end on 31 December 2020, we were forced to consolidate our UK operations while establishing two new hubs within the European Economic Area. Integration of the Group is key to continued success, meaning that the same procedures, rules, and financial rigour needs to be adopted by all subsidiaries.
Talent joined the Company, and in a remote world very little time is available to young professionals to immerse themselves in our work that is heavily dictated by deadlines and due dates. I am of the belief that young people need to be endowed with responsibilities early on and I repeat this phrase in many interviews with candidates. At CLINUVEL we have laid a basis whereby staff are accountable early on in their career, errors are accepted but a thorough evaluation and avoidance of repeat is required. In these unexpected times and economic reversal of fortunes, individual responsibility is more important than ever. I have seen rays of light and real prodigies shining through our R&D, clinical, commercial, and financial management.
The new Chairman introduced advanced measures to align all staff with the corporate’s objectives, while the Risk Charter and governance were reviewed in depth. The financial management of the Group remains one of our core strengths, the IR and PR efforts of our team reaped benefits and the media and communications team increased its activities by putting out more published news than previously through various social media channels, ASX announcements and translating technical news for broader audiences.
In the new economic era, I view radical changes to CLINUVEL’s business plan as imperative. Less will be more: less face to face interactions, fewer meetings, and faster and more effective decisions to be taken. A relaxation of risk management implies that more errors can creep in, therefore increased controls and contingency plans are needed as part of processes. For instance, in R&D one would expect less time to repeat and reproduce experiments but more time to validate methods, a greater number of formulations, more analytics run simultaneously and increased number of planning to increase the generation of replicable data. In terms of clinical trials, it will translate to more trials sponsored by CLINUVEL, more proofs of concept studies in less centres.
For the third year in a row we have issued a dividend. With the year dominated by global turmoil we wanted to demonstrate our gratitude to the long-term shareholders staying with the CLINUVEL story.
In reviewing each single crisis I have endured with our senior staff the past decades, I can confidently say that specific to CLINUVEL at each of the troubling times, new gains were found when we put our minds to original solutions. This attitude is a repetitive trait by our people, perhaps it has even become an asset of the Company, attracting to CLINUVEL new talented professionals with the same attitude. The reality of the viral threat puts the CLINUVEL team to the test – our output, financial results and handling of suppliers and hospitals during these sensitive times speaks volumes and I am proud of our staff’s resolve and perseverance exhibited during these challenging times .
I assign the current success to the discipline bonding the Company across staff and Board. Many of the features of our team over the past months have reminded me how our key managers handled the 2007-2009 crisis. It certainly gives me courage that this assembly of professionals will be able to weather unexpected events in the future. While in 2007, the loss of CUV value was due to the managers of a hedge fund dumping their portfolio of illiquid stocks on the open market, causing a steep decline in share price, the current crisis has been triggered by global events causing externalities. The management of these seismic events is not new to our team. In effect, crisis management is part of our fire-drills across many disciplines of the Group, such as in pharmacovigilance and quality control, acted out as simulation exercises.
CLINUVEL’S EXPANSION
In a discussion first initiated by analyst Sarah Mann (of Moelis Australia Securities), other colleagues had debated the value of diversification versus focus, whereby CLINUVEL has been taken as an example with a long-term business focus. I have written about this in various News Communiqués in past years. There is no absolute answer whether this is right or wrong or whether one increases inherent business risks by focussing a company on one technology and expanding onwards. Each project, each company needs to be evaluated on its own merits, as a separate business case with specific characteristics which do not lend themselves to equal comparison. However, specialisation originating from dedication and focus often leads to domination in one area of technology, science, and operations. Naturally, success attracts others to the space, and unsurprisingly CLINUVEL will have its competitors in time to come. However, focus is difficult to replicate. Diversified companies will most likely not commit to causes like focussed entities are able to do, and whether this advantage translates to long-term sustainable value will be played out in time. Furthermore, concentration on business segments generally leads to translational use of technology and more opportunities to open-up.
Under this scenario, CLINUVEL scaled up its R&D activities in-house in Singapore (VALLAURIX PTE LTD). The Singaporean government, through the Economic Development Board, recognised our investment and decided in February to contribute up to S$500,000 in funding allocated to equipment and the hiring of local personnel.
At the time of going to print, the state-of-the-art VALLAURIX Research & Development Centre has been delivered to our Group, albeit still working in shifts under the circuit breakers put in place by Lee Hsien Loong, Singapore’s ‘Chief-in-Command’. The laboratories are being equipped with modern technology, whereby both a biological and analytical laboratory are at the centre of our facilities. With this R&D hub, we have attracted a pool of talented individuals, scientists with a drive to develop Singapore’s first commercial pharmaceutical products to market. As VALLAURIX is expanding, daily coordination between our Singapore and global teams take place by various channels to ensure total integration within the Company. The VALLAURIX Research & Development Centre is part of our aim to vertically integrate all facilities in-house. This will require a further diversification of disciplines across the Group in a controlled manner. I intimated before that expansion too fast carries the risk of loss of focus and eventually failure, too slow a lack of targeted progress. Two more disciplines will be added to CLINUVEL’s armamentarium before the foundations of the house can be considered complete.
The pipeline of molecules and products coming out of VALLAURIX aims to address various markets ranging from acute diseases to over-the-counter markets complementing our current treatment and providing name recognition among wider consumer communities. The first follow-on product, the liquid formulation of afamelanotide, PRÉNUMBRA® was announced in July 2020. By working on several fronts, I am certain our research teams will continue to surprise us all with further output the next year.
Diversification from within is the mantra, and expansion of pharmaceutical products originating from the knowledge and progressive insights from our professionals is the safest way to bring CLINUVEL forward. Under the authority of Chief Scientific Officer Dr Dennis Wright, VP Scientific Affairs Dr Tim Zhao, and Head of our R&D Centre Dr Uma Rai, we have ample to look forward to. Our teams have chosen the least degree of risk in diversifying yet staying within the field of melanocortins.
In planning all the Group’s activities, Board and management is cautiously balancing receipts, profits versus investments. The past year we discreetly invested up to 20% of annual turnover in related technology and more in personnel but stayed well within our preferred financial parameters. Here, risk versus rate of progress is reviewed periodically to balance the company between prudent expansion and financial strength.
When entering a recession, the learnings from past downturns are multi-fold. Firstly, adverse market reactions last longer than most analysts predict, the economic reverberations run deeper. The current European plunge into recession will affect many sectors permanently: hospitality, travel, and catering, but also healthcare. A second take-away is that each company and business unit must keep its output high. Economic output is partially determined by the supply side, and of course the demand originating from the market served. Third, the ability to manage cash receipts obviates the need for capital, an invaluable protection of value. Although much jubilation exists about the records booked on US exchanges and the ASX, we remain cautious as to the possibility of major market corrections and its impact on shareholder sentiment. Our IR manager and finance team have had a plentiful year engaging actively with major institutions, and subsequently we have seen the emergence of two new and large US institutions on CLINUVEL’s register, holding collectively over 6%. As CLINUVEL consolidates its financial position and expands its offerings, it will attract new international investors.
For the third year in a row we have issued a dividend. With the year dominated by global turmoil we wanted to demonstrate our gratitude to the long-term shareholders staying with the CLINUVEL story. The success of this program started with a detailed planned financial strategy and under the auspices of Darren Keamy, it has been well executed. In my last period as Managing Director, I intend to see the financial management continue for the Company to secure its longevity. With that objective, we will exert our maximum effort to diversify and generate profits within the group of companies.
As Managing Director, I see it as my principal task to enable staff to excel in their performance by creating and maintaining a positive and conducive professional environment. Remaining close to my beliefs, we demand much from our staff, but take a constructive and supportive approach when it comes to the time needed to adapt and learn new skills. With that hybrid approach to the business, we pride ourselves to attract unique talent, retain staff for the longer term and thereby increase the knowhow within the Company. In 2020, there has been a balanced mix of new professionals and seasoned managers who had reached their career objectives at CLINUVEL. Some of these managers left CLINUVEL not only as accomplished professionals, but also as shareholders with substantial experience to be used in life sciences elsewhere.
At this point in time, the Company is in the best financial position since its inception.
CONCLUSION
I see it as my duty to direct an orchestra of gifted individuals, reacting and putting measures in place to secure a future for patients, staff members and shareholders in times of desperate economic conditions. The past months, we have effectively secured the supply of product and cashflow to the Company.
At this point in time, the Company is in the best financial position since its inception. The financial strategy has been executed with accuracy and expansion has supported the growth in earnings.
An increasing percentage of patients is receiving SCENESSE® treatment in more countries, and in April 2020 the distribution of the pharmaceutical product started in the United States. Our teams have been active in Europe, the United States and China, and are awaiting the Australian regulatory outcome. R&D output is forthcoming, while the second product PRÉNUMBRA® was announced in July. While I daily observe sufficient areas for improvement within the Group, we have also arrived at a point where many of us at the start of the journey could not have predicted the current position. Of course, success is a fickle definition and can be measured by various parameters such as stock price, products in pipeline and rate of expansion: higher, bigger, and more. Realistically, the success of CLINUVEL is one to build and reflect on.
I am more optimistic than ever on the future of the Company and that all our teams are collectively working towards the same objectives, (first published in 2019) outlined below:
| RATIONALE | OBJECTIVES (See the 2019 Notice of Meeting for further Details | |
|---|---|---|
|
1 |
To promote growth in value of the Company |
Market Cap ranging from A$1.7B to A$7.5B (i.e. a share price +/- A$34 to A$151) |
|
2 |
To provide financial stability and protection |
A$60 million to A$150 million in cash for minimum of two quarters |
|
3 |
To diversify the Company while maintaining profitability |
Successful acquisition, profitable within 3 years |
|
4 |
To increase the revenue base |
US revenues, increasing 10%, >$10 million p/a |
|
5 |
To build further value from internal product development |
OTC product line, topical formulation, paediatric formulation |
|
6 |
To expand the use of the lead pharmaceutical product, entering new markets |
Vitiligo or other indication/molecule progressing to Phase IIb and Phase III, with results published |
|
7 |
New products, markets, revenue base |
New regulatory approvals in EU, US, AU, JP, or CH |
|
8 |
Unanticipated opportunities, which are value accretive |
Extraordinary and unanticipated value accretive achievements |
To all those who wished us well in the weeks following the announcement of the quarterly and annual financial results, I reciprocate and wish you a healthy and prosperous year ahead in holding CLINUVEL in your portfolio. To the patients and families who have long waited for SCENESSE® in the United States, we express our appreciation for your patience. On behalf of CLINUVEL’s Board of Directors, we express our appreciation for your continued support.
MANAGING DIRECTOR’S MESSAGE TO GERMAN SPEAKING SHAREHOLDERS
Mein besonderer Dank gilt allen deutschsprachigen Aktionaeren fuer die Unterstuetzung von CLINUVEL. Wir haben von Ihnen ein gutes Feedback zu unseren deutschen Nachrichtenmitteilungen erhalten und werden diese auch weiterhin veroeffentlichen. Der diesjaehrige Geschaeftsbericht befasst sich mit Wachstum und Expansion und spiegelt den Wendepunkt in der Unternehmensgeschichte wider, der durch die Zulassung von SCENESSE® durch die US amerikanische FDA fuer die Behandlung von erwachsenen EPP-Patienten im vergangenen Oktober gekennzeichnet ist. Diese Meilensteinentscheidung ist der Katalysator, der CLINUVEL das Potenzial eroeffnet, SCENESSE® und seine Derivate auf ein breiteres Spektrum von Patientengruppen zu diversifizieren. Als langjaehrige Aktionaere wissen Sie, dass der Weg der Produktentwicklung im Pharmasektor lang sein kann. Wie in meinem Schreiben dargelegt, ist das CLINUVEL-Team entschlossen und fokussiert, diese Behandlungen fuer Patienten mit Prioritaet zum Nutzen aller voranzutreiben. Vielen Dank.
Philippe Wolgen
Managing Director, CLINUVEL Group