The Enigma Surrounding Clinuvel

This story features CLINUVEL PHARMACEUTICALS LIMITED. For more info SHARE ANALYSIS: CUV

The company is included in ASX300 and ALL-ORDS

Clinuvel Pharmaceuticals posted a strong first half result, and offers significant upside in expanding the use of its flagship drug, but investors just aren’t excited.

-Ord Minnett initiates coverage of Clinuvel with a Buy rating
-First half result surprised to the upside, but with quality-related questions
-Significant opportunity to expand Scenesse use
-Spectre of competition weighs on investors’ appetite

By Greg Peel

Investment in biotech companies is inherently risky, as drug development typically carries binary risk. If a drug works, and through extensive regulatory testing is approved, the sky might be the limit. If not, it’s back to the drawing board, and a wallowing share price.

Clinuvel Pharmaceuticals ((CUV)) is one ASX-listed biotech that is already profitable, Ord Minnett points out, thanks to the success of its flagship product afamelanotide, marketed as Scenesse.

Scenesse is the only treatment approved by the US Food & Drug Administration (FDA) to treat erythropoietic protoporphyria (EPP), a rare genetic condition that causes extreme sensitivity to sunlight, leading to painful skin reactions that typically presents in early childhood.

Scenesse has been on the market for a decade.

Clinuvel is also well-advanced in extending the use of Scenesse through a drug that works by inducing pigmentation of the skin, thus reducing the level of photosensitivity to a much larger market in treating vitiligo, a cosmetic condition that causes skin to lose its colour or pigment in patches that usually get bigger with time.

Vitiligo’s most-famous sufferers include US actor Jon Hamm, Irish comedian Graham Norton, former Top Gear co-host Richard Hammond, and American talk-show host Joe Rogan. On Ord Minnett’s analysis, a vitiligo treatment offers the potential for peak sales of circa $1.4bn annually, more than ten times the broker’s peak sales estimate for Scenesse of $116m.

So successful has Scenesse been, Clinuvel finished the first half FY25 with $198m in net cash. However, one broker is not all that happy about the “lazy” balance sheet, with cash representing some 33% of market value.

First Half Beat

Said inherent risks in biotechs were illustrated by broker responses to Clinuvel’s first half result, and resultant target price settings. All three brokers monitored by FNArena dropped their target prices, but Wilsons cut to $30.00 from $30.16, Bell Potter to $21.75 from $22.25 and Morgans to $15.00 from $17.00.

At the time, the stock was trading at around $11.70. Yesterday, the shares closed just below $10.

Clinuvel reported revenues of $35.6m, up 10.5% year on year, in line with consensus, driven by moderate growth in the EU/US. Expense growth, or lack of it was the biggest surprise, up only 2%, with employee costs and R&D increasing by 34% and 277% respectively, offset by a -96.8% reduction in materials costs and -82.1% decline in share-based payments.

This led to a profit improvement of 28.7% to $14.1m, ahead of consensus on $10.1m.

Why then, has the stock failed to gain any traction post the result beat and through the second half?

Competition Risk

As noted, Scenesse has enjoyed a decade-long FDA-approval monopoly.

Wilsons suggested back in February the first half Scenesse result ought to renew faith in the EPP business. Wilsons was aware that would-be competitor Disc Medicine’s (US) attempts to pursue an accelerated approval for its bitopertin alternative this year had weighed on the stock. Wilsons still saw bitopertin’s secondary endpoint miss in its Phase II trial as a barrier to overcome.

Wilsons suggested it would be “surprised and shocked” if the FDA grants Disc Medicine accelerated approval, given that Clinuvel’s Scenesse remains the only approved agent that has satisfied the registration endpoint in the Phase III EPP setting. The broker’s EPP modelling anticipates and accommodates competition, which could be years distant in the broker’s view.

Bell Potter also noted its awareness of a second potential drug approval in EPP in around two years, but remained comfortable in its forecasts which assume peak Scenesse EPP sales in FY27 that are flat to FY29, based on (1) greater than 90% treatment persistence and high patient satisfaction with Scenesse, (2) financial incentives for prescribers, (3) potential combination use of both products, and (4) increased awareness/diagnosis overall.

Morgans noted the feedback from the FDA appears to suggest a willingness to work with Disc Medicine within the confines of what were the successful aspects of that company’s Phase II results. In the short term, the impact of a large and actively recruiting Phase III trial could potentially represent material competition for US patients looking for treatment.

Whether the longer-term threat is tangible or not, Morgans suggested the market clearly viewed any threat to Clinuvel’s position in EPP as not fully defensible, be it due to questions around “stickiness” of the patient, efficacy and side effect profile, pricing, or delivery mechanism most of which Morgans had previously raised as potential risks.

Competition is just part of pharmaceutical development, but it was clear to Morgans the unknowns and how this plays out continue to weigh on investors’ minds, looking past the current strong business metrics and adding risk to future performance.

And Another Thing

Aside from noting competition risk, Morgans also claimed Clinuvel’s surprise first half result to be of low quality, driven by the material decline in materials costs. The broker hus failed to see much in the results to get investors too fired up. The effective zeroing of materials purchased was labelled as “strange”, coming off a similarly low materials cost in the second half FY24 of -$1.1m.

This is low versus a three-year (full year) average costs of -$7.6m. With a fairly large inventory balance remaining, this might present some short-term upside to profit expectations but Morgans expected a “true-up” in time.

It was also Morgans that called out Clinuvel’s “lazy” balance sheet, calling the cash balance an elephant in the room which continues to grow while management opts to defy investor concerns.

Morgans’ response (and low-end price target) was accompanied by a rating downgrade, but only to Speculative Buy from Add. Bell Potter retained its Buy rating and Wilsons unsurprisingly stuck with Overweight.

Fast Forward To Now

This week Ord Minnett has initiated coverage of Clinuvel with a Buy rating and $22.60 target.

The extension of Scenesse to the treatment of vitiligo is significantly less risky, Ord Minnett notes, than developing a new drug and going through trials and approval processes again. This is thanks to the FDA’s previous approval of Clinuvel’s manufacturing process and the already submitted safety and clinical data, along with the company’s existing US distribution network and payment and reimbursement arrangements.

Scenesse as a treatment for EPP generates robust cash flows to fund R&D into therapies for vitiligo and other skin conditions. In Ord Minnett’s view, even a worst-case slowdown in sales growth in the EPP market as it matures will not affect the ability of Clinuvel’s balance sheet to fund its diversification plans.

Besides extending Scenesse’s use to vitiligo, these diversification plans include developing its afamelanotide therapy for use in some types of multiple sclerosis and infantile spasms, and a variant of afamelanotide in the treatment of strokes.

Back in February, Bell Potter noted Clinuvel’s core EPP franchise continues to grow and is delivering impressively high profit margins. The broker believes this franchise will continue to hold up in the mid-term, even if a second entrant comes to market.

The company was then trading at an undemanding enterprise value to earnings multiple of 7.5x EV/EBITDA multiple on FY25 forecasts, well below the global peer average. The stock price is lower today.

There is also a major catalyst approaching in early 2026, being the readout of the first vitiligo Phase III trial. A successful readout here would dramatically de-risk the vitiligo label expansion for Scenesse, Bell Potter noted, and expand the addressable market size many-fold.

There are now four monitored brokers carrying positive ratings on Clinuvel Pharmaceuticals, but a target spread of $15-30 underscores the speculative nature of the stock.

Over the decade past, the shares have traded between $2 and above $40, and between $25 and $10 over the three years past.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArenais proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms