Chairman of Aurinia’s largest shareholder, ILJIN, makes case for changing board
As chairman of ILJIN Group, a leading business conglomerate based in Korea, Dr. Chin Kyu Huh made waves this month, unveiling a proxy contest to elect three independent directors to the board of Aurinia Pharmaceuticals (NASDAQ:AUPH; TSX:AUP) at its annual meeting on June 26. Aurinia’s claim to fame is a Phase 3 drug candidate named, voclosporin, which is in development for lupus nephritis, an inflammation of the kidneys, and could be ready for commercialization in 2021. Voclosporin also is in early development to treat dry eye syndrome and focal segmental glomerulosclerosis. So, who is Dr. Huh? Under his leadership, ILJIN Group has grown to become one of the 50 largest business conglomerates in Korea, with annual revenue of some $3-billion. The group has 28 business affiliates, of which five are publicly traded and 23 are privately held. Since founding ILJIN Group more than 50 years ago, Dr. Huh has played active roles in growing small ventures into established commercial organizations, effectively managing multibillion-dollar commercial operations. He has identified promising new technologies and successfully commercialized them into world-class industrial products. In this interview with BioTuesdays.com, Dr. Huh discusses the history of ILJIN’s investment in Aurinia and a predecessor company, attempts to reform the board and the reasons ILJIN feels Aurinia has failed its shareholders.
Let’s begin with a brief history of ILJIN.
We were established in 1967 and today, have more than 4,000 employees. In addition to medical equipment and biopharmaceuticals, we are engaged in diverse areas of industry, including heavy electric power machinery, high voltage electric cables, aluminum and steel tubing products, synthetic industrial diamonds, advanced industrial materials, curtain wall and construction, touch panels and electronic devices, compressed natural gas cylinders, information technology, television broadcasting and investments.
Can you outline how ILJIN established its current position in Aurinia?
We are long-time enthusiastic believers in the commercial potential of voclosporin, having first become involved with the drug through a 2010 development, distribution and licensing arrangement with Isotechnika Pharma, a predecessor company to Aurinia. As part of the transactions by which Isotechnika and Aurinia merged in 2013 and continued under the name Aurinia Pharmaceuticals, we became the largest single shareholder in Aurinia when it reacquired full rights to voclosporin from us. No shareholder has been more committed to Aurinia’s success and shown more patience with Aurinia’s board and management than ILJIN. We currently own about 14% of Aurinia and, to- date, have invested $58-million in Aurinia and the future of voclosporin. But enough is enough. It is abundantly clear that Aurinia shareholders require a board of directors that aligns with them and can guide the company toward successful commercialization of voclosporin. For this reason, we have identified three nominees that will act in the interest of all shareholders to realize voclosporin’s full potential.
What do you see as investor sentiment towards Aurinia?
While other shareholders have reduced their exposure to Aurinia significantly or exited entirely over the past several years, we have participated in incremental offerings by Aurinia to help it achieve its objectives and voclosporin’s unrealized potential. In 2018 and so far in 2019, we have acquired an additional 827,641 new common shares of Aurinia for about $2.3-million. We have been patient investors. For example, when Aurinia initially announced what were really very positive long-term outcomes from its Phase 2b trial of voclosporin in lupus nephritis patients, the investment community was confused by the company’s corporate communications and reacted negatively. This temporarily put a great deal of downward pressure on Aurinia’s stock price as many investors sold on the news.
In contrast, ILJIN held strong. Later in March 2017, after the stock had recovered and then moved to new highs, Aurinia completed a significant public stock offering in which ILJIN participated. Since then, Aurinia has failed to communicate or execute a coherent strategy to maintain its momentum and realize the tremendous potential of voclosporin. Shareholders, ILJIN included, are losing confidence in a board of directors and management team whose interests are increasingly at odds with shareholders, as reflected in rising executive compensation, minimal stock ownership and an egregious lack of independence. There can be no other explanation for the fact that Aurinia’s share price has failed to move materially over the past two years.
AUPH vs NASDAQ Biotech Index: 2 YR Stock Chart
What is the objective of seeking three nominees to the board?
ILJIN does not want to take control of Aurinia, nor can it with a minority slate of three directors on an eight-member board. [Editor’s Note: ILJIN currently has one representative on the board but is not supporting him for reelection.] We, along with all Aurinia shareholders, have waited patiently for current leadership to not only advance the commercialization of voclosporin, but to do so in a way that shows respect for its public shareholders, in terms of financial discipline, proper corporate governance, and prudent capital raising. Unfortunately, the current board has repeatedly failed to meet these responsibilities, and change is needed.
What makes your dissident slate different?
We want to give all shareholders more control. Unlike the complicated web of relationships that bind current board members together via allegiances and loyalties that conflict with their duties to shareholders, our nominees have no prior relationships with each other, of any nature, and have been selected because they have the requisite expertise and can be expected to act independently of each other and of ILJIN.
You have given the current Aurinia board a failing grade on accountability. Could you briefly touch on the reasons?
The Aurinia board has failed to properly manage executive compensation and align itself with shareholder interests. Executive compensation and option grants are bloated relative both to historical compensation and relevant industry peers. Aurinia has failed on other governance matters. For example, there are no stock ownership requirements for the CEO, executive officers and directors, all of whom currently have minimal or no investment in Aurinia, nor risk associated with the company’s success or failure. The existing board has failed to properly ensure independence. Plain and simple, this is not an independent board. It is the former chairman’s legacy of relationships. And finally, the board has failed to properly oversee and control expenditures, leading to explosive increases relative to Aurinia’s peer group.
You have criticized Aurinia for failing to realize future expectations. Can you explain?
As I have mentioned, Aurinia’s share price has failed to reflect the positive developments to-date for the three target indications in voclosporin’s clinical pipeline. This is both an indictment of past shareholder engagement and investor relations initiatives, as well as an inability to effectively communicate the implications of successes on the future direction of the company. The Phase 2b data release in lupus nephritis is perhaps the starkest example of this. But, it’s not the only one, as demonstrated by shareholder reaction to Aurinia’s announcement of Phase 2 data of voclosporin in dry eye syndrome. Overall, this reflects a failure of the board of directors to develop and articulate a long-term strategy. In addition, Aurinia appears to be recognized in the market largely as a binary investment, primarily focused on its lupus nephritis program approaching commercialization. Those risks are being priced into the current trading price. Aurinia needs to recognize the impediments to share price appreciation and magnify the considerable potential of its pipeline. And finally, Aurinia lacks a long-term strategy and the ability to convey to the market the underlying intrinsic value of the company. Aurinia needs a board of directors ready to take charge and focus their efforts on developing a clear, understandable and achievable long-term strategy that investors and the market can value and place reliance on.
Can you explain how executive compensation is not aligned with shareholder interests?
While shareholders should pay for quality management, the rampant escalation in total compensation relative to Aurinia’s middling share price performance is hard to reconcile. You might be surprised to realize that since its first full year following the merger with Isotechnika through to and including 2018, total compensation to Aurinia’s five highest paid executive officers grew approximately 23% to over $5-million. Over the same period, there was only modest growth in the share price. Regrettably, this trend has continued. With the hiring of Aurinia’s new CEO, Peter Greenleaf, the base salary for the CEO has gone to $650,000 from $504,000, plus a one-time potential cash bonus of $250,000. In addition, equity compensation increased to 1.6 million stock options from 1.05 million. This represents a single year increase of nearly 30% on salary and more than 50% on equity compensation.
Moreover, Mr. Greenleaf currently sits on the boards of four additional NASDAQ- listed companies. Proxy advisors and institutional shareholders have long discouraged this kind of overstretching of time and attention. Shareholders should rightly question why the board has not implemented policies to manage these over commitments.
Are there other governance practices that you take issue with?
Aurinia has no policy that covers share ownership of directors and officers. Currently, only one director, Dr. Daniel Billen, owns shares of Aurinia, and only 20,000. If directors really believed in Aurinia, their own self-interest should compel them to buy stock. However, it is clear that this group is interested only in receiving cash and free stock. The picture is no better with shareholdings of executive officers. Excluding the new CEO, remaining senior officers collectively hold 726,013 common shares or approximately 0.79% of Aurinia’s outstanding shares as of May 31, 2019. If elected, our nominees will move to implement a more appropriate governance structure, including introduction of mechanisms to ensure the appropriate alignment between the interests of directors and senior officers and those of Aurinia’s shareholders. It’s about time those directly responsible for charting Aurinia’s pathway to success had some stake in the achievement of its objectives.
How would you describe the makeup of the current board?
Aurinia does not have an independent board; it is a legacy of relationships of former chairman, Dr. Richard Glickman, and his legacy of relationships, which calls into question any expectation of independence. None of our proposed nominees has any prior relationship with any of the current members of the board. Nor do any of our nominees have any prior relationship with each other. Our nominees are qualified, competent and professional and prepared to bring their considerable expertise and independent judgment to bear on matters of material importance to Aurinia. Such independence is absolutely critical in view of the historical poor governance practices of the current board, especially at this very important juncture in Aurinia’s development, as it transitions from a clinical-stage to commercial-stage pharmaceutical company.
Has ILJIN had an opportunity to discuss its issues with the current board?
Over the course of the past year, we has made numerous inquiries and attempted to discuss a number of matters critical to the proper oversight of Aurinia and the management of its corporate resources. These have included concerns about the escalation of operating expenses without justification; executive and equity compensation; and concerns about board governance and procedures, in general. No serious efforts were made to allay our concerns. While we have been an incredibly patient shareholder, the lack of respect for our concerns and unwillingness to engage has left us with no other choice but to take our concerns to other shareholders and attempt to introduce change through our nominees. What became clear during the course of the preceding year is that the existing governance and nomination committee was only prepared to make token gestures, which cannot effect the changes necessary to reset the governance balance at Aurinia that is so sorely needed.
What can you tell us about your nominees?
Dr. Robert Foster, together with a core team, discovered voclosporin in 2002. He was the founder and former CEO of both Isotechnika Pharma, a predecessor to Aurinia, and Aurinia itself. He is one of the most respected pharmaceutical scientists in the world and brings a proven ability in the discovery, development and commercialization of pharmaceuticals. Dr. Foster is currently President, CEO and a director of ContraVir Pharmaceuticals, a NASDAQ-listed biopharmaceutical company focused on the development of pleiotropic drug therapy for the treatment of chronic liver disease. With more than 30 years of pharmaceutical and biotech experience, Dr. Foster has published some 170 scientific papers and has been an honorary professor in the faculty of pharmacy and pharmaceutical sciences at the University of Alberta since 2016. He is named as an inventor on 242 patents, of which 216 are currently active and granted and was named one of Alberta, Canada’s 50 most influence people in 2012.
Mr. Soon-Yub (Samuel) Kwon is a senior attorney with, and heads, the International Practice Group of Lee & Ko, a premier law firm formed in Korea in 1977. It provides a full range of legal expertise, notably in the areas of intellectual property and life sciences and pharmaceuticals. Mr. Kwon has extensive experience advising both domestic and international healthcare-related companies over a broad range of transactional and regulatory matters, bringing more than 30 years of legal and business expertise to his role as a director.
Dr. Myeong-Hee Yu has been a principal research scientist at the Biomedical Research Institute of the Korea Institute of Science and Technology since 2000. She has more than 30 years of extensive international biotechnology experience, both as a researcher and through numerous advisory and committee roles within government and private industry. Dr. Yu has played a key role in the development of Korea’s biotechnology industry, earning numerous national and international awards, and publishing more than 120 articles in major scientific journals.
What has been Aurinia’s policy on gender diversity at the board level?
In 2015, Aurinia adopted a diversity policy respecting nomination of female directors. The fact that, four years later, that policy has failed to identify a single candidate for election strongly suggests that it was adopted purely as window-dressing intended to obscure what remains an old boys’ club of Dr. Glickman’s colleagues. The diversity policy is simply a mirage to persuade the proxy advisory firms into providing positive voting recommendations and nothing more. On the other hand, ILJIN has identified an eminently qualified female director in Dr. Yu, with years of relevant experience and expertise that will be immediately beneficial to the board and unencumbered by any conflicting loyalties either to ILJIN or Aurinia’s prior chairman and CEO.
Did any negotiations on a compromise slate of directors take place after you delivered Aurinia your proxy statement?
We have been a long-term shareholder of Aurinia’s stock and see no change for the foreseeable future; so preserving an amicable relationship while addressing our concerns was as much in our interest as Aurinia’s. Nonetheless, and to our great disappointment, we received no contact whatsoever from Aurinia after we delivered advance notice of our intention to nominate our slate of nominees. As it turned out, Aurinia informed Dr. Glickman, its former chairman and CEO, of our confidential advance notice and he contacted Dr. Foster, one of our nominees, to berate him for agreeing to stand for election. If you need confirmation as to the patriarch to whom the Aurinia board remains beholden, you need look no further.
Cautionary Note: While neither BioTuesdays Publishing Corporation nor its parent, Kilmer Lucas Inc. (collectively, “BT/KL”), have any business relationship with ILJIN Group, past or present, BT/KL was engaged by Aurinia Pharmaceuticals Inc. and predecessor company, Isotechnika Pharma Inc., for select investor relations services from October 2011 through June 2014. In addition, BT/KL is currently engaged to provide select investor relations services to ContraVir Pharmaceuticals, Inc. Dr. Foster, one of ILJIN’s nominees to the Aurinia Board, serves as President, CEO and a director for ContraVir. So, while BT/KL is not conflicted, it would be fair to say that it is biased.
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