Get shorty: how Clinuvel Pharmaceuticals beat the hedgies

The acrimonious battle between hedge fund short-sellers and Australian biopharma group Clinuvel Pharmaceuticals appears finally to be drawing to a close.

After a two-year struggle, during which short-sellers have focused on the company’s regulatory hurdles for its drugs and its steep valuation, the hedgies are in retreat.

Frequently the subject of debate on message boards and, improbably, a favourite stock of cigar-smoking German hedge fund manager Florian Homm, $1.1bn Clinuvel provides a treatment for erythropoietic protoporphyria.

EPP is a rare and serious inherited disease that leads to raised levels of a phototoxic molecule. When a patient’s skin is exposed to light the molecule reacts, leading to irritation or a visible burning within minutes. At worst, the pain is so extreme it can cause patients to scream.

Clinuvel, which has been profitable since 2017 after years of losses due to research spending, produces a drug called Scenesse to treat the condition. It has received approvals in the US, EU, and, most recently, in Israel. The company is now looking to expand its use to treat patients with other genetic or skin disorders, for instance vitiligo, a condition whereby a lack of melanin causes pale white skin patches to develop.

The battle with hedge funds started in spring 2019 when the stock, trading in the AS$20s, attracted the attention of short sellers ahead of a key ruling by the US Food and Drug Administration.

In April, short interest was less than 0.5 per cent, but steadily climbed to around 5.8 per cent by the time of the US FDA approval in October, which briefly sent the shares rocketing above A$45.

Undeterred, the short interest continued to grow, reaching nearly 10 per cent by April 2020. Stock out on loan, another way of measuring short selling, peaked at 12 per cent at the end of March, according to IHS Markit, shortly after Clinuvel shares hit an 18-month low during the pandemic-induced market turmoil.

At one point, the stock became the most shorted among 324 biotech and pharmaceutical stocks in Asia last summer, according to Bloomberg.

Most companies are not fans of short-sellers or their tactics, though many choose to ignore them. Clinuvel took a different approach. It began to note the level of short interest at the end of 2019 and into 2020, before ramping up the rhetoric last year.

“Some market participants see the opportunity fit to distort and short stocks within the gaze of regulatory oversight,” said CEO Philippe Wolgen in a July 2020 shareholder letter pulled from financial data site Sentieo, highlighting “those who disseminate negative and disparaging news on us”. A common tactic of short-sellers was, he said, to “infiltrate” retail shareholder websites and to spread “incorrect and often false rumours”.

Wolgen pointed Australian, German and US authorities towards “these . . . stock bashers and all who distort the Clinuvel narrative openly” and called for regulators to trace individuals involved in this.

Then, in its annual report in October, it devoted a section to attacking short-sellers, noting “an increase in false and misleading comment” in online forums. It also discussed how court orders could be used to force the identification of people posting defamatory comments anonymously.

For good measure, at the AGM in November, chair Willem Blijdorp took aim at “a small group of online investors” trying to influence new shareholders with “years of nonsense information”. “It’s value destruction in the most stupid form I have come across,” he added.

Precisely what exactly had irked Clinuvel management is hard to know for sure, but posts have taken aim at a range of subjects including Wolgen, the price of Scenesse, the company’s focus, the chairman’s independence and so on.

To be fair though, Clinuvel’s previous encounters with hedge funds may explain some of management’s wariness towards the shorties.

The group was a favoured stock of Florian Homm, the rogue financier who ran Absolute Capital and who this year has faced charges from Swiss prosecutors. Homm, described by Wolgen as being “very difficult to deal with”, was an early backer of Clinuvel and had become its biggest shareholder through his hedge fund by the time of the financial crisis.

Homm shocked the financial world by resigning from his hedge fund Absolute Capital in September 2007. With $500,000 stuffed into his underwear, briefcase and cigar box, he boarded his private jet and flew to Colombia, later going into hiding before being arrested at Florence’s Uffizi gallery.

Wolgen recalls Clinuvel’s shares falling in the wake of Homm’s exit and then finding out “a large percentage of our stock was shorted. We could never find out who was short”, he told the FT.

Wolgen added: “I was left with the aftermath, dealing with thousands of shareholders.” Years later, Homm told Wolgen by phone that backing Clinuvel had been one of his great achievements in life. In more recent years Homm has still been posting research on the stock via his website and YouTube channel.

As if that was not enough, in 2014 Clinuvel became a takeover target for Retrophin, the drugmaker set up and headed by Martin Shkreli, the infamous hedge fund manager later jailed for fraud.

This time around, Clinuvel is taking no chances. Wolgen, a former stock analyst who joined the company after writing a negative report and then being invited in by management to discuss it, said the company had hired investigators and lawyers to look into “posts that were blatantly false” on the message boards.

The company is frequently putting out news and correcting what it sees as fake posts on a website it has set up (which contains plenty of news on vitiligo, an area of focus for the company), he said.

Other actions include “the continuous construct of a legal dossier on false unsubstantiated news, reputational damage, smear and slander campaigns while forensic investigation takes place on the culprits: behind any anonymous poster lies a verum email account”, said Wolgen.

While the GameStop saga may have helped, the decision to fight back aggressively against the short sellers also appears to have been effective: short interest has dropped from nearly 10 per cent a year ago to less than 5 per cent of late. Chairmen Blijdorp recently felt he could declare that “short sellers are exiting their position . . . and the share price is increasing”.

The Reddit-driven frenzy in GameStop demonstrated the power of the message boards. Clinuvel’s story shows that power, perhaps, is not unlimited.

Homm did not respond to a request for comment.