Brett Schafer
Deep Dive: Evolus
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Show Notes
(Ryan) What they do: Evolus is a performance beauty company. They develop neurotoxins to help people look better and remove frown lines. Their first commercial product is Jeuveau. It was FDA cleared in the US in early 2019 and it’s an injectable liquid used to temporary reduce wrinkles or frown lines between the eyebrows.
Jeuveau is actually manufactured and supplied by Daewoong and their primary customers is the self pay aesthetics market (so physicians or other customers) who then administer the injection or recommend them to the end customers. These payments are not reimbursed by third parties. So it’s not covered by insurance.
(Ryan) History: Evolus was founded in 2012 by Scott Cannizzaro, they’re headquartered in Newport Beach, CA. In Jeuveau’s development it seems to have had a few rejections, but was first approved in the US in February of 2019 and was commercially launched in May. So Evolus went public in May 2018, which means they were public for about a year before they were selling a product.
They hired David Moatazedi in 2018 as the CEO, and prior to that he served as Senior VP of Allergen (one of their largest competitors) for 13 years.
Jan 30, 2019, Allergan (owner of BOTOX) filed a complaint against Evolus and Daewoong Pharma claiming Jeuveau misappropriated trade secrets
February 2019 received FDA approval for Jeuveau
Launch was in May of 2019
Dec 16, 2020, the ITC prohibited importation and sale of Jeuveau
Feb 18 2021, they settled with Allergan and Medytox
Outcome of the settlement With Allergan/Medytox:
Dismissal of outstanding litigation
A license to commercialize, manufacturer Jeuveau
Release of claims against Evolus
Evolus pays $35 mil to Allergan and Medytox over 2 years
Evolus pays a “dollar per vial” royalty to Allergan/Medytox through Sep 2022
Pay Medytox a low double-digit royalty for sales outside of the U.S. through 2022
Pay Medytox a mid single digit royalty on net sales of Jeuveau from 2022 through 2032
Issued 6.76 million shares of stock to Medytox
Mar 23, 2021, entered into settlement agreement with Daewoong Pharma
Outcome of Daewoong Settlement:
Daewoong pays them $25.5 mil, legal fees
Convertible not Daewoong owned got converted to common stock
(Brett) Industry/Landscape/Competition:
Global “facial injectables” market is valued at $13.4 billion in 2020, expecting to grow at a 8.8% rate over the next decade
Majority of the market is expected to be in the neurotoxin that Evolus plays in
Competitors are Botox, Dysport, and Xeomin (Botox is the market leader from Allergan). Apparently Revance Therapeutics has stuff coming in the pipeline too
Right now Jeuveau is only on forehead injections, so they are currently playing in a niche of this market (but seems like a popular one). They estimate this market to be $1.3 billion currently but growing quickly
(Brad) Management:
Management
– CEO (not the founder) Dave Moatazedi
o Former SVP at Allergan
led U.S Medical aesthetics division
o Former Manager at Novartis
– CFO Lauren Silvernail
o also a former SVP at Allergan
o Former CFO of Revance which is a development stage biotech company
– Chief Medical Officer is an original executive so good to see him still on board
Ownership
Institutions own 27% of the float
– Blackrock Vanguard etc.
Insiders own 17% of the float
– CEO Dave Moatazedi owns about 1% of the company with some options incentives mixed in as well
General pattern of accumulation over the last 12 months…. virtually 0 selling
(Brett) Valuation:
Market cap of $735 million, ticker EOLS
EV is very close to market cap
EV/sales of 12.6 (would note this is inflated because of the litigation this winter)
EV/GP of 18.7
5.5 million in options/RSUs outstanding, so some dilution is coming
(Ryan) Earnings: Going to go through Q1 numbers, since results were abnormal last year
Q1 they had $12.2M in revenue, up 16% YoY
Non-GAAP gross margin of ~60%
Had $8M in operating income for the quarter which puts them at a 65% OM but that includes a $25M settlement payment from a company called Daewoong.
Without the $25M settlement, they would have had worse than -100% OM
At the end of the quarter the company had about 54.1M shares outstanding
Had all-time high reorder rates at 73%
Expects to reach a $100M revenue run rate in Q2
(Brad) Balance sheet and liquidity — hit on the options dilution coming
– $22 million in cash vs. $102 million year over year
– Raised another $85.5 million from a secondary in April to fund Jeuvau growth
– Picked up roughly $25 million in Dawwoong receivables
– Paid off a $74 million term loan
– $38 million in contingent royalties to be paid to founders
– Virtually 0 interest expense but -$8 million in cash from operations so really not a lot of wiggle room here
(Ad)
Anecdotal Evidence/Customer Stories:
(Ryan) none. Didn’t know Botox was an actual product, thought it was a type of procedure.
(Brett) The projections for the growth of the industry rings true. Reviews are that people/doctors like it more than BOTOX https://twitter.com/eddytorriente/status/1402328903578886152?s=20
(Brad) None
Future growth opportunities:
(Ryan) Approval in Europe and Canada. Just had their Phase 3 testing on safety and efficacy in both these areas. They use a distribution partner in Canada, which I think is the right strategy for international sales even if it means sacrificing a few points of margin.
(Brett) The tailwind of the industry, and the continued proliferation of digital filters which causes more and more people to have irrational expectations for how their skin should look
(Brad) Development of new products when . They’re spending virtually nothing on R&D at this point in time but generics will be a thing at some point (couldn’t find exact year but usually 7 to 12 years)
Highlights and lowlights:
(Ryan) Highlights: Industry tailwinds, no reimbursement risk thanks to cash pay model, reorder rates have grown every quarter since approval. Lowlights: Approval risk abroad. Susceptible to physician preferences/existing relationships.
(Brett) Highlights: Industry, great unit economics especially once most of the kickbacks end in 2022, and recurring nature of customers could lead to consistent cash generation for many years. The loyalty program seems smart, now at 160k clients. Lowlights: Looks like they totally copied BOTOX which is why Allergan was able to gut them with the lawsuit, so not sure I am confident in management. There is a chance the market gets crowded with what some of the competitors are coming out with, so will need to build the leading brand which is tough.
(Brad) Lowlights: This is pretty far outside of my circle of competence. I generally stay away from biotech. Also Virtually 0 R&D spend is a little worrying. Is this a product or a company? Highlight: Looks like they have a decent product that’s selling well
Bull case:
(Ryan) Strong continued adoption. Grows as a better alternative to Botox and Jeaveau becomes a cash cow.
(Brett) With all the litigation behind them and the settlements with Allergan and Daewoong, the green light is there for rapid growth in the product. This leads to getting to hundreds of millions in annual revenue rather quickly
(Brad) Jeaveau is a block buster, the company is able to roll it out World Wide to great success & hopefully has more products in the pipeline when this patent does expire
Bear case:
(Ryan) There’s big time terminal risk here. Only one product available right now, so if it turns out to have some sort of huge negative news or press about it, there’s a chance of losing nearly all of an investment.
(Brett) Marketplace becomes more crowded as some people expect, and/or the category is not as primed for growth as investors are speculating. The regulatory capture gives them an advantage, but some growth is priced in
(Brad) Better, cheaper substitutes not interfering with the IP hit the market and this fades quickly
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.