Clinuvel Pharmaceuticals Limited (CUV) Earnings Call Transcript & Summary

Good evening. I'm Verity Wai-Smith from Monsoon Communications. Thank you for joining us for Clinuvel's full year results investor presentation. Please note that this webinar is currently being recorded. I'll now hand over to Malcolm Bull, Head of Australian Operations and Investor Relations, to begin the presentation.

Thank you, Verity, and welcome to everyone joining us today for Clinuvel's investor webinar on the results for the 2023 financial year. As Verity said, I'm Malcolm Bull, Head of Australian Operations and Investor Relations, and I'm joined by our Managing Director, Philippe Wolgen; and Chief Financial Officer, Darren Keamy. Welcome, gentlemen. Today's focus is very much on the great results achieved in the financial year ended 30 June 2023, while addressing also some of the questions asked by investors. I want to just cover some headlines first, then recap the strategy and activities that have delivered the results before doving into the results themselves. Since we will be looking forward, I draw everyone's attention to the slide currently on screen is our forward-looking statement. This highlights that investors need to remain aware of various business risks that can arise affecting the realization of planned outcomes. And a copy of this statement is also available on the company's website. With that said, Darren, could you please tell us the headline results?

Thanks, Malcolm. In terms of headlines, revenues and other income for the year rose 24% to AUD 83 million. The profit before tax rose by 33% to AUD 45.6 million, and the profit after tax 80 -- sorry, 47% increased to AUD 30.6 million. It's marking the seventh consecutive annual profit since the commencement of our commercial and distribution of our drug product SCENESSE. These results reflect a group performing well in the prevailing operating environment.

Thanks, Darren. They are impressive results. Now before we discuss the results, I'd like to turn to Philippe to summarize the company's strategy and overview of the activities of the year because this provides context to the results achieved.

Sure. Thank you, Malcolm and Darren. Good morning to all of you. So let's cover the company's strategy and activities first. I would need to acknowledge from this place the outstanding results, which are owing to the hard work of the Clinuvel team who made this all possible, no exception. And these results are really not a constant. We take that -- not take that for granted at all. Each patient, each physician, each shipment is subject to intense labor and scrutiny and the year-on-year growth is entirely attributable to the work of the growing teams. Now on Clinuvel strategy, its evolution should well be understood by now. We've developed business over the years from 2005 to '16 to focus on development of a family of melanocortins hormones, which would need to be used with care and certain diseases. And from '16 to 2023, we focused on increasing the commercial foothold of the company in Europe, U.S., Israel and recently Canada. In summarizing our strategy, we started off by developing the lead product in a relatively new field for the medicine and gradually expanded from skin to brain disorders. In essence, our chosen path is to concentrically expand our activities around the family of hormones, making us specialists in this field and thereby adding a specialized consumer business to our quiver, what we call that PhotoCosmetics. So photomedicine and PhotoCosmetics go hand in hand. These are 2 domains that complement each other. And our long-term objectives are to expand on the use of melanocortins with SCENESSE, PRÉNUMBRA Instant and NEURACTHEL Instant and more melanocortins to come from our Pharmaceutical division, the use of new formulations. That's the ways delivering molecules to our body. And third, the venturing into specialized PhotoCosmetics and giving us an advantage of using the peptides in consumer products for 3 categories, people with highest need for the protection, those that needs a DNA assisted repair and those that seek an MSH response. So in contrast to many other biopharmaceutical companies, we did not open our R&D register from the word go, but gradually turned Clinuvel profitable and thereby diversified our business from our core competencies. It's almost a reverse strategy for -- of what one is used to in our industry. We focused in the beginning. We widened our register midway when the earnings allowed and then full throttle on R&D towards the endgame. So another way to summarize really the strategy and activities for the past year '23 is that we focused on the ongoing distribution of SCENESSE in Europe, Switzerland, Israel, U.S. and now Canada. We advanced the use of afamelanotide in clinical trials for DNA repair, repigmentation and the central nervous system disorders, stroke. The development of the melanocortin drug portfolio, its expansion. The ongoing development of the PhotoCosmetic product range and we needed a discipline to advance portfolio, grow the company with the increasing profitability annually. And to put all this in context, we spent around AUD 10 million in 2017. The revenues were at a time AUD 16 million and 7 years on, we have increased our expenses by factor 3.7, while the revenues grew by factor 5. So that summarizes Malcolm, the strategy and the direction of the company.

[ Early to escalate, ] but with reference to these areas of activity, can I ask you what achievements stood out this year for you, Philippe.

While there are many activities that stood out, some of them are public. Some of them are in-house since they are commercially sensitive, but some of the highlights were we established a standard of care in EPP with SCENESSE with an increasing demand year-on-year, more centers, more physicians, more patients, the average number of prescriptions has gone up. It was also very encouraging to see the first case reports on the use of the drug in adolescent EPP patients in Europe, and we're now working to enable the broader access for the drug to these patients. We progressed studies in DNA repair, XP and stroke and vitiligo, with sort of first stride made towards the CUV105, the large vitiligo study in Europe and U.S. PRÉNUMBRA Instant formulation was first used in the second stroke study, 803. We progressed key manufacturing steps for the program ACTH and NEURACTHEL. We launched the first pilot study for PhotoCosmetic product, CYACÊLLE, a polychromatic photoprotection. And on the communications front, the company maintained a peer-leading frequency and diversified its communications avenues. So all in all, it has been a pretty successful year so far.

Thanks, Philippe. So let's turn back to the financial results because I know, Darren, you'd like to provide us some more details. So please go ahead.

Yes, certainly, Mel. Look, I'll take some time to highlight some of the key elements. Please bear in mind that the figures are expressed in Australian dollars, and they are rounded for ease of reference. So look, as mentioned earlier, that in addition to the total revenues and the profit outcomes, our total expenses of the business rose 15% to AUD 37.4 million. Net assets increased by 31% to AUD 164.6 million. With the key change to the balance sheet being the substantial rise in the cash balances where there was a 29% increase to AUD 156.8 million. Two other key measures of performance that are worth mentioning is the return of equity result of 19% as well as earnings per share of AUD 0.62. To cap off these results and to recognize the support of our shareholders as the Board has declared another annual dividend, this is the sixth year running. This year, it is AUD 0.05 per share. So that's a 25% increase to last year's dividend distribution result, which was in turn a 60% increase to AUD 0.025 per share back in financial year 2021.

Right. Thanks, Darren. So yes, 7 consecutive annual profits and 6 consecutive annual dividends. I'd say the results to be proud of. What are your thoughts on the results?

Yes, I'm happy with the outcome. And it certainly is an outcome that has exceeded our own internal expectations. And I would take this opportunity, too, to say thanks to my finance team who worked very hard to pull these results together, but also to thank my colleagues across Clinuvel who worked extremely hard throughout the year to deliver these results.

Yes. This is very much a team result. Can you talk to the details on revenues, expenses and profit for the year. But as you do, also the trend over the past 7 years since the commencement of commercial distribution of SCENESSE.

Okay. Okay. So well, with revenues, there was continuing growth through the year, and that was driven by further progress in increasing our patient base and a number of treatment centers and continuing high patient retention throughout not only in Europe but also in the U.S. Other revenues was also boosted by higher returns through our passive income from our high returns on our cash balances in an environment of increasing interest rate yields. And in turn, from the expense side of things with an increase of 15%, as previously noted, the increases is really across all of our expense categories and that is reflective of the group's growth and expansion initiatives. So consequently, our profits have increased with both the net profit before and after tax. And those levels were at the highest that the company has achieved on an annual basis. So when you talk about over the longer term, the past several years, we've seen from the time of our commencement of our commercial distribution programs that the Group has achieved a consistent growth, not only in revenues, but also in profits. And in turn, that has seen our cash balances consistently increased through our net cash inflows. Our compound annual growth rate over the last 7 years has been 42% for our revenues and 20% growth for our expenses. And this growth reflects the increase in the number of patients treated, more physicians that are prescribing, high patient retention and more demand. It also reflects the efficiencies that have been gained throughout the Clinuvel business and of its team to proactively support our distribution through active collaboration with our physicians. But also with the ultimate payers, the insurers, the accredited centers and to the patients themselves. So this control of the value chain is the consequence of our integrated business model, which is really to ensure that we undertake as much of the key functions in-house. And ultimately, with the aim to translate to better results than what would have otherwise been incurred had we utilized more of an outsourced business model.

Okay. On expenses end Darren, what drove that 15% increase?

Well, the 15% increase was really driven across all of our expense categories. And that's certainly to support the expansion of the group's activities, embedded within all that is the general inflationary impacts. [ The case of ] personnel that we've required to bring in new skills and related expenses is clearly continues to be our largest category and that rose by 17%. And we also saw a large increase in the materials and related expenses throughout the business that was offset by our changes in inventories. In addition to all of that, our commercial distribution expense category as well as our finance in general rose by 26% and 40%, respectively.

Okay. So sticking with expenses, as you know, we've projected a positive trend in expenses over the 5 years to the 30th of June 2025 to support growth and expansion. We've now completed 3 of the 5 years. So where do we stand down in relation to the plan to incur the expenses up to AUD 175 million by June 2025.

Well, we had incurred AUD 93 million or 53% of the projected amount. We're at the end of year 3 of the 5-year plan. So we are on track, on hitting the target of AUD 175 million. Please bear in mind that this does not include CapEx nor expenses that might be associated with the branding and marketing of the PhotoCosmetic product range. Also bear in mind that when the plan was formed, the inflation rate was far more modest than what we see now, and this has increased higher than what we had originally anticipated.

All right. Now turning to the balance sheet and a very strong one of that, what you would like to say about it.

Well, this time last year, our balance sheet saw our assets certainly tower over our liabilities and it's much the same this year. In fact, it's accentuated. We've increased our net assets by 31% in the past year, and that's predominantly being driven by our increase in cash reserves. The balance sheet is -- continues to be absent of any debt or leverage and high liquidities really due to all of our cash reserves. Our liabilities has certainly grown. That is predominantly reflected in trade payables and our short-term tax obligations, and this is clearly more than covered by our cash reserves. We actively manage the balance sheet with a particular focus on our trade receivables and our trade payables and we certainly focus on ensuring that our accumulated cash reserves works well for us through our term deposits, and that's certainly working to aid in funding our future business growth.

Great. So looking forward, we've been asked about the key catalysts for 2024 and beyond, and there are a few that I want to highlight. Philippe mentioned the use of SCENESSE in adolescent patients, and we do expect updates on the proposed European label expansion. Clinically, there's all coming on, there should be further results from the DNA repair and stroke programs and the commencement of progress of something I'm very interested in, and I know that many of our shareholders are CUV105, a late-stage study in vitiligo. In PhotoCosmetics, there will be global launch of events of CYACÊLLE and ongoing development of the DNA repair and melanogenesis product lines. And all of this will crystallize to ensure that Clinuvel becomes a widely disseminated name.

Now we can now turn to some specific questions, and I'll get straight to them. First, for you, Philippe, on the pace of commercial growth. What can be expected is the questions. Given similar questions were posed last year, I guess you can say growth is always on the mind of our investments and our analysts. So can you address this, please?

Well, the appreciation is there to focus on growth. And then I stress again, although we don't provide forward guidance, we believe that we can see robust growth path ahead of us in the distribution of SCENESSE in EPP. And that goes for all markets. We continue to expect growth in patient numbers, prescribing doctors, treatment centers. So at this stage, there is no information. There's no reason to believe that growth should stagnate or flatten out at all.

Okay. We've also received questions on the pace of scientific growth and research and development. So can you comment on what we can expect from CUV in the next few years, Philippe?

Yes. Again, so the keyword growth in pharmaceuticals comes with considerable risk, assuming when it comes in concerns in innovation and the innovative technologies. Failing in innovation comes at a high price value disruption and then often irreversible loss of confidence. So therefore, we've always tried and do that now to minimize the development risks by gradually increasing our knowledge and data and trying to find solutions to technological problems, which we believe can and need to be solved in time. We've recently seen in Australia life science markets and also the U.S. house failure to deliver novel technology and [indiscernible] one day. And then we call them really different from that position. So therefore, risks of innovation should better be taken when the balance sheet can afford it. In other words, when one is not dependent on equity or debt, and when the share price is not exuberantly priced. So the pace of R&D can and should be higher, for sure, but it's more a function of the complexity of the work [indiscernible] importance and its bioavailability and resources. So I'm pretty confident the team will continue to deliver that -- these 3 pharmaceutical products, threefold cosmetic products in new markets. And vitiligo XP will be the new additions to our existing market, yes.

So some questions have been on our clinical progress and time lines. So sticking with you, Philippe, what can you say or what would you like to say about that?

Well, [indiscernible] comments are not always in best position to appreciate the issues associated with undertaking clinical studies involving healed people and the external factors that can impact the pace of the studies. As a matter of fact, we carefully select with whom the company wishes to work because of the prescribing physicians in clinical trials. We may well become the prescribers commercially when the drug comes to market. So to give you a concrete example, and the word strategy is loaded in that with important notion. In the U.S., we've chosen for a direct distribution business, unlike most pharmaceuticals that has both advantages and disadvantages, but it played out well for us. In the EPP market, we selected and trained accredited prescribing centers. And each center requires diligence, careful qualification selection, and we now have over 60-center strength in the accreditor to prescribe SCENESSE. But in addition, we anticipate the vitiligo market. So in expanding our foothold in the EPP, we were already thinking about vitiligo and the distribution of SCENESSE once it will come to market for the second indication vitiligo. So whereas most market experts have said that we would not be able to set up this and distribute, negotiated pricing in U.S. and Europe, our teams have delivered on both fronts. So the same critic we've heard about the vitiligo market but our aim is to train and accredit 120 center spread over the U.S. such that we actually will be able to directly distribute SCENESSE to vitiligo centers worldwide. And in doing so, you try to steer away from the current and future competitors. So yes, yes, that's an important part of the strategy. And there's execution along -- under adjustable path until we reach our target, and then we proceed to the next set of our objectives. Time is of essence for sure, since we are moving on in time that is observing to the objectives to build intrinsic value. So for instance, having 120 prescribers believing in the product and willing to prescribe it is perhaps not reflected in one share price, but it surely provide much value to a company. So I hope that this explicit example gives you an idea of how we think and how we work.

I'm going to return to expenses, and that's focused on you, Darren. Can you tell us what proportion of our total expenses is R&D and why we don't report our R&D expenses as a separate line item.

Well, Clinuvel's R&D expenses is not just the clinical and nonclinical research and development line that appears in the income statement within our annual report. Our R&D expenses are really spread across a number of different categories. That's -- for example, we can reflect that the R&D center in Singapore is really wholly R&D in nature and the expenses that is incurred within that business is spread across a range of the line items, materials and related expenses, depreciation, finance, corporate and general and most notably personnel expenses. So this reflects our integrated business model, which we've got few functions undertaken in-house and a raise in [ salary ] and many of these functions do harbor R&D components in it. So this gives us more control over our costs. And we believe it heightens the quality of outcomes that is achieved, so our R&D-related expenses in the given year can range from between 20% to 40% of total annual expenses, and that just depends on the intensity of the activities in that particular year and -- along with the timing of the expenses. Thank you.

So you just broke up a little bit there. So you said that R&D can range from 30% to 40% of total annual expenses, usually depending on the intensity...

Yes.

That answers the question. And I'm going to turn back to you, Philippe, because we've had questions generally on how we are managing the diversification strategy. Some take on your point about the risk associated with that. So comment on how we're managing our diversification.

Well, with great care, but also remaining bunches of the risks that cause rapid expansion, yet we are advancing a lot front against our own score cards. I think that the key success lies in the people, we attract the new skills, engineers, biochemists, financial managers, [ composers, ] in-house lawyer, specialists, and that talent needs to have its time to learn the ropes within the company and grow into the specific subjects and be retained over a longer period of time. And once that foundation is laid, the rest is positive, please.

All right. So a comment also on the expansion of our business. Some investors are a bit uncertain about the direction of the business. So give you the opportunity to clarify that, Philippe.

There should not be any reason to be uncertain. I'm happy to speak about direction expansion and diversification of the pharmaceutical companies and exactly how we're doing and what we're doing. And we've divided that amongst management and board into 9 steps. And we first undertook the launch of the first-in-class molecule [indiscernible] genetic disorder. The second, we diversified by working the life cycle of the molecule and coming up with next generations of the molecule in new formulations. Third, we expanded by bringing in generic melanocortin, NEURACTHEL ACTH, which gives us exposure to larger markets. And the fourth step, we introduced smaller molecules for transdermal use. Fifth, reentering consumer markets as a pharmaceutical company. And the sixth step, we enhance our skill base by growing the company organically from within. And seventh, we bring in manufacturing. The eighth step is we set up a communication branding marketing team, which is pretty specific to Clinuvel, in order to reach more audiences and turn Clinuvel into a globally recognized name in consumer markets; and ninth, diversify by merging acquisition. So there's a step-wise and gradual expansion. And this is in our view, the way to withstand market oscillations. And in doing so, we are at the same time, increasing our cash buffers for further investments. And the one word that then jumps out is discipline across all functions, and our teams have shown this now for 2 decades, and there's no reason why it shouldn't continue. So this is a moment to answer the risk and not answering it in the previous perception of building a company or one product company needed to be mitigated. And we stepped away from this risk and now building a group in a deliberate manner by having 9 different avenues of expansion. And thereby, you lower the business risk, which is notoriously high in BIO innovators, so our people count has increased by 95% over the last 4 years. We will expand [indiscernible] with a median tenure of 16 years, and then it's up to us in the next generation talent to integrate them across all the functions. And for all this to occur, you need focus, discipline and the continuity, as we've shown in the last 2 decades.

Well, that is a comprehensive answer. So thanks for that, Philippe. And I move to a final question, and it's to you, Philippe, about your tenure as CEO, which expires 30 June 2025. Many would like an update on your position and/or replacement.

Well, first of all, I tend to serve out my employment agreement, which ends on the 30th of June '25. And thereafter, the Board will find its successor and that work will be ongoing. So there's a smooth transition. There's much, much more to say about it. We've got a task ahead. We've got a painting to complete, and we're well on track. So it's probably the best day to talk about it, but we are talking at the day of it's -- the greatest achievement of the company in its history. So I'm looking forward.

Yes, I know you are. But it is time now for us to conclude the investor webinar with thanks to Darren and Philippe for their informative comments and frank answers to questions.

Thanks, Bull.

Pleasure.

Thank you, Malcolm, to hosting it.

My pleasure, and thank you to all attendees of the webinar and to those who submitted questions. We group them together, put them in themes and try to address as many of them as we could. We do appreciate your support throughout the year, and we trust all shareholders welcome to dividend payment coming your way. A transcript of this investor webinar will be released to the Australian Securities Exchange for all stakeholders to read at their convenience. Now the next key shareholder event is the Annual General Meeting, 2023, which will be held late in October in Melbourne. And this will be an in-person meeting and provide an opportunity for shareholders, wherever they are to dial in and view the meeting. So at this time, we wish you all good health and progress in your individual objectives, and thank you again for your support of Clinuvel.

Thank you.

Thank you very much.