Company Overview: Clinuvel Pharmaceuticals Limited (ASX: CUV) is devoted to the development of drugs for the treatment of a broad range of severe skin illnesses. The company is engaged in developing and commercialising the world’s first photoprotective drug, SCENESSE® in the US & Europe for the treatment of phototoxicity in adult patients with EPP.

CUV Details

Enhancing Shareholder’s Value & Commercial Distribution of SCENESSE® Product Aids CUV: Clinuvel Pharmaceuticals Limited (ASX: CUV) is a global biopharmaceutical company, which is engaged in the development of drugs to treat patients with a wide range of various skin & genetic diseases. The company’s branded first-in-class photoprotective drug called SCENESSE®, is utilised for the treatment of phototoxicity in adult patients with erythropoietic protoporphyria (EPP). The company remains on track to continue progressing its commercial distribution of SCENESSE® (afamelanotide 16mg) in Europe and the USA during the September 2020 quarter, despite facing an uncertain environment induced by COVID-19 virus outbreak. The quarter marks a phase in the northern hemisphere where people are exposed to visible (HEV) and ultraviolet (UV) light, thus posing threat to patients with EPP. This is where CUV’s key flagship product comes into picture, where the demand for the treatment is generally higher.

During the September quarter, cash receipts stood at $12,015,000, depicting a rise of 22.8% on a year over year basis. Net cash flow from operating activities remained strong and came in at $7,881,000 during the quarter. The quarterly results replicate the first receipts from the commercial distribution of SCENESSE® in the US. Also, the quarter was marked with higher European orders for SCENESSE® products, due to the impact of COVID-19 outbreak. The company began its commercial operations in Europe in June 2016. Since then, the company has witnessed an increase of 5% year over year from operations in FY20, which came in at~32.6 million. For the period ended 30 June 2020, cash reserves increased 23% year over year. Notably, during the September 2020 quarter, the company’s cash reserves saw an increase of 9%, which came in at $72,759,000, thereby continuing the trend of cash flows generated from operating activities. During the full year, the company also distributed dividend to shareholders of $0.025 per ordinary share, depicting the third consecutive full-year dividend paid to shareholders.

As already mentioned, the company witnessed a continuous increase in demand for its flagship product post the commercial operations in Europe and the USA, and expanded the research and development activities to focus more on the novel treatments for patients with severe genetic, skin and vascular disorders. Despite the continuing ambiguity surrounding the pandemic, patient demand for SCENESSE® has stayed high. Notably, in the USA, the distribution of SCENESSE® has evolved ahead of its planning. The company also stated that its SCENESSE® product has been utilised for treatment for the first time to a patient detected with xeroderma pigmentosum (XP) under a Special Access Program. The company expects the first results from the use of SCENESSE® in XP patients in 2021. As a result of planned program and execution of commercial distribution of its key product, the company’s enterprise value rose from A$45 million in 2005 to more than A$1B in 2020, depicting a 20-fold increase during the time span. The company remains on track to build countercyclical buffers in economic downturns, minimise equity dilution, maintain profitability, manage costs, retain and attract talent, and vertically integrate all business functions.

Estimated Expenditure (Source: Company Reports)

Commercialisation of SCENESSE® Remains a Key Catalyst: The below picture depicts the company’s efforts to increase performance at a compounded annual growth rate of 31% in 2020, with an average of greater than 30% in the past four years. In FY20, CUV increased expenditures by 44%, owing to greater diversification of SCENESSE® product. Further, in FY20, the group have performed exceptionally and recorded an increase in its revenues on a year over year basis, owing to its efforts to supply SCENESSE® to patients in Europe and the USA. Notably, revenues in FY20 went up by 4.9% and the company recorded a profit after tax of A$16.6 million, which led to an increase of cash reserves by 23%.

Key Financial Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Position: The company exited FY20 with total cash balance of $66.7 million. Net assets of the company as at 30^th June 2020 came in at $73.67 million, up from $57.18 million as at 30 June 2019, reflecting an increase of ~29% due to higher cash reserves generated from operations. The company did not raise any capital via equity or debt, representing a robust financial position for investing in future performance. During the period, the company declared an unfranked dividend of 2.5 cents per share, depicting its third year in a row of issuing dividend to shareholders. With the year led by up and downs due to global turmoil, distributing dividend depicts a good way to enhance the overall long-term shareholders’ value. Operating cash inflow for the year stood at $14.19 million. Net cash outflow from investing activities amounted to $0.888 million, and financing activities during the year led to an outflow of $1.49 million.

Cash Flow (Source: Company Reports)

Recent Key Updates: 

1. Recently, the company announced that the Australian Therapeutic Goods Administration (TGA) has given a nod for the registration of its drug SCENESSE® (afamelanotide) for the prevention of phototoxicity in adult patients with EPP.
2. In another update, the company also informed the market regarding the usage of its SCENESSE® drug in the first xeroderma pigmentosum (XP-C) patient getting treatment as part of the company’s DNA Repair Program.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 28.22% of the total shareholding. ACN 108 768 896 Pty. Ltd. held the maximum number of shares with a percentage holding of 9.16%, followed by Ender 1, L.L.C., with a holding of 5.24%.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had an EBITDA margin of 38.7%, against the industry median of -190.7%. Operating margin for FY20 stood at 37.8%, against the industry median of -224.2%. Net Margin of the company was reported at 50.2%, against the industry median of 200.3%. The company had negligible debt during the year with a debt-to-equity ratio of 0.02x, as compared to the industry median of 0.09x, demonstrating a better leverage position in comparison to peers.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company’s investment in listed shares is exposed to equity securities price risk and their fair values are exposed to fluctuations as a result of changes in market prices. Also, the increased costs related to developing a drug using a costly technology and pipeline setbacks are few major headwinds. The company is exposed to shorter-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, CUV also faces stiff competition from peers, which adds to the woes.

Outlook: The company anticipates that its European business is likely to generate healthy earnings to finance its growth regarding activities like boosting products in the pipeline related to skin symptoms. This, in turn, will strengthen its foothold further in the European distribution market. Notably, CUV stands to benefit from encouraging trends, which includes new drug approvals, an accelerated pace of innovation, encouraging drug launches, cost-reduction initiatives, increasing insurance coverage, an aging population, and an ever-increasing health care spending. The DNA Repair Program is expected to give positive outcome in Q1 2021, along with positive results from the XP study (CUV150, a Phase II study), and in healthy subjects (CUV151 study) in 2021.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Sales Based Market Multiple Valuation Method (Illustrative)

Price to Sales Based Market Multiple Valuation Method (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters

Stock Recommendation: The company has a market capitalisation of ~$1.00 billion. Currently, the stock is trading below the average of 52-week high and low of $32.00 and $12.92, respectively, proffering an opportunity for share accumulation. The stock of the company has corrected ~5.76% in the past three months. The company has a P/E multiple of 65.1x with an annual dividend yield of 0.12%. On a technical analysis front, the stock has a support level of ~$19.97 and an immediate resistance level of ~$22.405. From the analysis standpoint, the company has recorded revenue growth at CAGR of ~50.1% over the last four years (2016-2020). RoE stood at ~25.4% in FY20, as compared to the industry average of negative 30.2%. We have valued the stock based on a 3-year average Price/Sales market multiple of ~30.77x to FY21E consensus sales of $45.15 Mn and arrived at an indicative target price of low double-digit growth (in % terms). Hence, considering the recent developments with respect to the key product SCENESSE®, healthy balance sheet, and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $20.64, up by 1.325% on 18 November 2020.

CUV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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