From a recently published PhD thesis:
Clinuvel
In some ways, Clinuvel succeeded against the odds. Its initial focus was on a drug to promote artificial tanning. It was thwarted in that plan, but was able to pivot and refocus the drug on a niche drug therapeutic indication, called EPP. By 2014, this provided a pathway to an approval in Europe, yielding some early revenues through limited distribution to a handful of European treatment centres. Even with limited sales, because the drug sells for between €56,000-84,600 per treatment course, it was able to generate $46 million in sales in 2018 and is projected to generate $133 million in 2019, based on a recent analyst report11. This continued sales growth, combined with the possibility of FDA approval in the US during 2019, puts Clinuvel in a strong position for future success.
Clinuvel’s drug, afamelanotide (Scenesse), is one of the few Australian-developed drugs ever to succeed in a Phase 3 trial, gain regulatory approval and generate sales. That alone is a mark of success. However, it is now also succeeding from an investor returns perspective. In September 2015, Clinuvel was trading under $3.00 per share. Three years later in September 2018, Clinuvel became the first Australian DDB to traverse $20 per share, breaking the $1 billion MV barrier. In a 2018 analyst report, it was predicted to reach a price of $31.70 per share in 2019, which would imply a valuation of $1.5 billion11. By April 2019, its market value was already approaching $1.2 billion and likely by the end of 2019, Clinuvel likely will be heralded as an unequivocal DDB success story.
Perhaps one of the reasons for Clinuvel’s success has been its leadership and culture. Dr Wolgen started as CEO in 2006 and implemented the strategic pivot that saw the company successfully pursue a niche therapeutic indication over the subsequent 10 years. In a 2009 ‘Open Briefing’ interview (Clinuvel ASX release, April 16, 2009), Dr Wolgen stated: “The key competency of my team is its resilience in professional adversities when encountered.” Finding ways to navigate
setbacks has certainly been a feature of Clinuvel over the years. In a recent article, Dr Wolgen reportedly described Clinuvel’s pathway to success as “tortuous”12:
“Rather than traversing along the fastest imaginable and plotted route to success, we have frequently been impelled to take tortuous avenues to achieve our objectives,” he told shareholders recently...Unlike the majority of ASX-listed drug plays, at least Clinuvel (ASX: CUV) has navigated these tortuous routes. It actually has a drug on market — to treat a rare skin intolerance to sunlight — which makes the company a rarity in itself.
The article went on to give Dr Wolgen much of the credit for the success of the firm. As an exercise, I calculated the IRR since 2006, when Dr Wolgen started; it was 10.6%. If Clinuvel achieves the projected $1.5 billion MV in 2019, that figure grows to 16%, which starts to approach a meritorious performance for a biotech firm.
In its 2015 annual report, Clinuvel declared the firm was making the transition to a ‘commercial’ firm. However, Clinuvel is still a DDB and far from being a commercial-stage DDC. Based on the 2016-2018 annual reports, it was evident that the focus was still on R&D, with commercialisation limited to generating a low volume of direct sales to 44 EPP ‘expert centres’ in Europe. Indeed, in its 2018 profit and loss statement, ‘business marketing & listing’, which was the only expense category that approximated commercialisation expenses, accounted for only 8% of the firm’s expenses, with the bulk of expenses associated with R&D and personnel.
Successful DDBs in the US have gone down the same path – using a niche market opportunity to generate early revenues to establish commercial proof-of-concept and make the product attractive to global commercial partners. While the EPP approval is a great regulatory breakthrough for Clinuvel and generates modest but useful sales, EPP is only one small indication for the drug. Its successful adoption by doctors for EPP will signal reduced risk as the company pursues much larger therapeutic opportunities in the future, such as vitiligo – the skin-whitening disease that affects up to 2% of the world’s population and is a significant unmet medical need in the US, especially among African Americans.
What Clinuvel is currently doing with EPP is effectively a pilot-commercialisation program that is logistically manageable for a small firm with limited real pharmaceutical commercialisation capability. Going forward, that capability may be tested, especially once FDA approval is obtained. Nevertheless, in the short-term, it has allowed the company to deliver to the sceptical Australian market a ‘commercial’ success story, even to the extent of posting a profit in 2018 and extracting a dividend to underscore the narrative. In terms of growing future shareholder value, it could be argued
that that dividend may have been better invested in more R&D to expand the future indications of the drug.
Over the next few years, as the indications grow for Scenesse, along with its potential launch in the US and the massive logistical challenge that represents, Clinuvel is going to need to rapidly expand its commercial capabilities. As noted in the 2018 analyst report: “Turning Clinuvel from a research driven company into a commercial global entity entails certain organizational risks, which could endanger the profitability of the company and therefore our price target”11.
The 2018 analyst report projected a dramatic growth in commercial costs from 2019, assuming a US approval. While it is feasible for a small Australian firm with no commercial experience or infrastructure to manage a handful of customers in Europe and without the help of a pharmaceutical partner or distributor, marketing in the US is a much more challenging proposition. Add to this, the potential expansion of the use of the drug beyond the extremely narrow condition of EPP to broader indications, and the challenge is amplified. As previously noted, infrastructure, management skills and culture are substantial barriers for a DDB seeking to migrate to a DDC. Life is much more complex at the commercial interface of the pharmaceutical industry and a large, multinational and highly-functional regulatory, logistical and marketing infrastructure is needed. Clinuvel may be able to make the transition to a DDC in the future, but to attempt it could represent a strategic ‘commercial focus’ error and might even threaten the survival of the firm. If it succeeds, it will take many years and Clinuvel would become a rare DDC transition success outside the US. More likely, Clinuvel will realise the capabilities challenge in front of it and seek a global licensing partner to manage international commercialisation. It may even choose to be acquired by that partner, monetising a multi-billion valuation for its shareholders.
Fortunately, Clinuvel has found a way to avoid the Red Queen, despite its aging patent portfolio. The original patent on afamelanotide expires in the early 2020s, which is theoretically an insufficient ‘runway’ to attract a pharmaceutical partner. Moreover, because the drug is a small-molecule, it does not have the Red Queen immunity enjoyed by biologic drugs (see section 10.1.6). So far, Clinuvel has circumvented this problem by selling the product itself for EPP in Europe, rather than relying on a pharmaceutical partner. It has also filed a number of follow-on patents covering specific uses of the drug and its specific drug delivery system. The other commercial protection it has is that afamelanotide is not a simple pill that can be easily copied, but a drug delivery device that is implanted under the skin and slowly releases drug over time.
On top of that, EPP is also commercially-protected by its ‘orphan drug’ status in Europe and the US. This is another measure to avoid the patent Red Queen. In order to stimulate pharmaceutical industry development of drugs for rare (orphan) diseases, the US FDA and the equivalent authority in Europe (EMA) introduced orphan drug legislation, which gives post-approval commercial protection for a
drug’s use in a specific ‘rare disease. In the US, the orphan drug exclusivity is for seven years after approval, while in Europe, it is 10 years. This confers a relatively weak form of Red Queen immunity, because it is limited to the first approved indication of the drug.
Again, Clinuvel’s other patents and its delivery system may provide adequate protection for the other indications, but once a drug is approved in the US and starts to generate substantial sales, patents are typically challenged by competitors and such challenges are encouraged and rewarded by the FDA. While competitors will probably avoid EPP, because it is a very limited indication and is protected by orphan drug exclusivity, they will almost certainly challenge the use patent for vitiligo and if that patent falls, Clinuvel’s long-term value proposition may fall.
Regardless of these challenges, the Clinuvel experience doubtless could provide some valuable lessons for other DDB firms. That would require a detailed case study analysis, which is beyond the scope of the current research. However, it would be a worthwhile future research project.
Unfortunately, the Clinuvel story cannot be held up as an example of successful Australian science, as afamelanotide was not the product of Australian research. It was licensed from the University of Arizona (Hadley and Dorr, 2006).
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