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

CUV Rides on Geographical Diversification & Robust Adoption of SCENESSE®: A global biopharmaceutical company, Clinuvel Pharmaceuticals Limited (ASX: CUV) is engaged in the development of drugs to treat the patients with a wide array of severe skin & genetic ailments. 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). In the year 2014, 2019, and 2020, the European Medicines Agency (EMA), US Food and Drug Administration (FDA) and Australia’s Therapeutic Goods Administration (TGA) approved SCENESSE® for adult EPP patients, respectively. In the month of April 2020, the company commenced the distribution of SCENESSE® in the USA. The company continued the expansion of its SCENESSE® supply in Europe. Notably, commercial distribution began in the European Union in June 2016. The company has witnessed strong demand for SCENESSE® in Europe with patient retention being increased to 97% from 94%. This depicts that the company has built a sustainable business, after 4 years of robust commercial operations, in the USA and Europe, thereby generating positive cashflow and profit, along with decent liquidity position and cash reserves.

Clinical demand remains robust, indicating the benefits earned out of investment for the development of SCENESSE®. The company is making higher investments to offer a platform to chase its goal to include SCENESSE® as a treatment for skin depigmentation disorder, vitiligo, in the USA and Singapore, and to further progress its product development pipeline. Eventually, the expenses incurred to support these strategic initiatives are likely to result in new sources of revenue for the company in the near future.

Strategy & Strength of CUV (Source: Company Reports)

Looking at the past performance, CUV witnessed a compound annual growth rate of 31% in FY20, with an average of greater than 30% in the past four years. The company has been investing in new technology and service enhancement. The company is witnessing higher recognition from its customers in relation to CUV’s industry-leading supply performance amid the COVID-19 led disruptions. In addition, with a robust research and development (R&D) pipeline, commercial and operations excellence, global reputation as a leading biotechnology company, CUV has delivered an upward trend in its overall results. Basic earnings per share stood at 33.8 cents per share, as compared to a loss of 7 cents per share reported in FY16. Profit attributable to shareholders over the same time span increased from a loss of ~$3.1 million in FY16 to ~$16.6 million reported in FY20.

Revenue and Expenses Trends (Source: Company Reports)

Sneak Peek at FY20’s Key Results: For the period ended 30 June 2020, the company reported a growth of 5% in revenue to ~$32.6 million. The company has also delivered an increase of 23% in cash reserves and reported a net profit before tax result of A$13.136 million, a fourth consecutive year of annual profit. The upside in revenues can primarily be attributed to the company’s approach to supply SCENESSE® to patients in Europe and the USA. Further, EPP expert centres in Europe persisted to prescribe SCENESSE® to a higher number of new and existing patients for their skin treatment, which is a key catalyst. The company has declared an unfranked dividend of A$0.025 per share, thereby providing support to its long-term investors. 

1QFY21 Key Highlights: During the September quarter, cash receipts stood at $12,015,000, depicting a rise of 22.8% on a year over year basis. The rise in cash receipt was primarily due to higher distribution of SCENESSE® in Europe and the USA. 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’s cash reserves have gradually improved since the beginning of commercial operations in June 2016. Subsequent to an increase of 23% year over year in FY20, cash reserves of CUV rose a further by 9% to $72,759,000, across the September 2020 quarter, continuing the positive trend of cash flows generated from operating activities. Notably, the company has declared three consecutive annual dividends to shareholders, the first in 2018 of A$0.02 per share, followed by A$0.025 per share in 2019 and 2020, each.

Increasing Trend of Cash Balance (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 23.21% of the total shareholdings while the Top 4 constitutes the maximum holding. ACN 108 768 896 Pty. Ltd. and Ender 1, L.L.C. are holding a maximum stake in the company at 5.93% and 5.24%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Healthy Balance Sheet and Decent Liquidity Position:  The company has reported a robust balance sheet, that will help in financing its growth with cash and cash equivalents of $66.75 million at the end of 30 June 2020, up from $54.267 million at the end of 30 June 2019. Net tangibles assets of the company as at 30 June 2020 came in at $73.67 million, up from $57.18 million as at 30^th June 2019. The company did not raise any capital via equity or debt, representing a robust financial position for investing in future performance. Operating cash inflow for the year stood at $14.19 million, as compared to operating cash inflow of $18.56 million in FY19. 

In FY20, EBITDA margin/operating margin/net margin of the company stood at 38.7%, 37.8%, 50.2%, respectively. The company had negligible debt during the year with a debt-to-equity ratio of 0.02x. ROE of the company stood at 25.4% during FY20, higher than the industry median of 9.4%. There was an improvement in the liquidity of the company too to 11.28x in FY20, as compared to 3.47x of Industry Median. 

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risk: The company is sensitive to material business, which includes technology, supply, and drug pricing. These business risks may affect the achievement of the business goals of the company. The company is also exposed to market risk, which arises from the change in interest rates and foreign exchange rates. This can affect the earnings, cash flows and carrying values of its financial statements.

The company is also exposed to risks inherent in the worldwide pharmaceutical industry, along with risk of government inspection of high drug costs, pricing, and competitive stress, as well as with major pipeline setbacks. Also, disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak adds to the woes.

Outlook: CUV expects to continue to grow via developing differentiated products and expanding its market presence. The company remains on track to achieve its long- term goal and maintain profitability. Going forward, the company anticipates that its European business is likely to generate healthy earnings to finance its growth by boosting skin-related products in the pipeline. This is turn will strengthen its foothold in the European distribution market. The DNA Repair Program is likely 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. It is worth stating that the company stands to benefit from encouraging trends, which includes new drug approvals, an accelerated pace of innovation, promising drug launches, growing importance of biosimilars, and cost-cutting initiatives.

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: CUV’s stock price has increased by ~4% in the past six months. At the current price, annual dividend yield stands at 0.11%. Currently, the stock is trading above the average of its 52-week high and low level of $28.515 and $12.92, respectively. On a technical front, the stock of CUV has a support level of ~ $20.35 and a resistance level of ~$24.48. Despite economic uncertainties, the company has shown various trails to offer robust earnings and remains on track to continue its growth trajectory via commercialisation of its flagship product, SCENESSE®. We have valued the stock based on a 3-year average Price/Sales market multiple of ~30.38x to FY21E consensus sales of $43.65 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, decent long-term outlook, and geographical diversification, we recommend a ‘Buy’ rating on the stock at the current market price of $22.3, up by 0.667% on 27 January 2021. 

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

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