DS Healthcare (NASDAQ:DSKX) is becoming a new winner in the $24 billion hair and skin market, populated by ancient icons like Avon Products, Inc. (NYSE:AVP) and L'Oreal SA (OTCPK:LRLCY). Armed with a distinctive line of products using innovative ingredients to appeal to intelligent consumers, they are best described as a technology company with clinical trials to back their health and beauty claims.
Rapid revenue growth is the first thing that strikes you about DS Healthcare. Net sales of $9.6 million in 2011 were up almost 78% from the prior year and gained 54.7% in the September quarter, on track for posting over $12 million in 2012. Company organization is efficiently flat with continual interaction between manufacturing and development to ensure product quality. Centralized sales and distribution management keeps the flow of information tight and costs low. Board members come with strong pedigrees, most notably a former manufacturing manager from global healthcare giant Bayer AG (OTCPK:BAYRY) and the current CFO of MannKind Corp. (NASDAQ:MNKD). More than 28 distributors, including the company's Mexican partner acquired in a tidy vertical integration, sell products here and abroad.
The giant hair loss industry, $3.5 billion in the U.S. and growing as the worldwide population ages, is an open door to snake oil remedies where an estimated 99% of products are of a dubious nature. The best the industry has to offer is minoxidil, or Rogaine, made popular by Johnson & Johnson (NYSE:JNJ) years ago. This is a somewhat greasy formulation that at its standard 2% works in a little more than half of users.
DS Healthcare's meticulous formulations based on clinical research. Recent biochemical findings put its hair products in front of competition. To keep existing hair and grow more in key places on the scalp, Spectral DNC-L exploits the enzymatic action of procyanidin B-2 complex. This has shown in clinical studies to play a key role in hair cycle progression, inhibiting the resting stage and extending the growth stage.
Aimed at dysfunctioning follicles, Revita shampoo avoids cheap detergents like sodium lauryl sulfate that irritates hair roots. Caffeine is its key ingredient first observed by German scientists researching subjects whose hair loss was hormone-dependent; hair growth of 46% was recorded after using a gel emulsion containing pure caffeine. Copper peptides also used as an ingredient stimulates hair growth, a discovery by Dr. Loren Pickart a number of years ago during work into tissue remodeling after wound healing. Because blood-borne copper peptides decrease with human aging, he found they could be restored topically, opening a new science in skin repair. Revita and Spectral-DNC are the company's top-selling products accounting for 34% of total sales in the most recent quarter, a testament to the pent-up demand for a minoxidil alternative.
Two exceptional skin care products keeping with the philosophy of using high-tech materials are Viterol.A for aging, containing one of the hottest new peptides used in cosmetology, acetyl octapeptide-3 that mimics the action of botulinum neurotoxins (on which botox is based) that has shown to reduce facial wrinkle depth up to 30% after 30 days of treatment. Oligo.DX is an anti-cellulite cream with the phytosome escin known to modify the vascular permeability of capillaries helping to flush cellulite away.
The only recognizable cosmeceutical name in hair loss is Aveda by Estée Lauder (NYSE:EL) with Invati, a treatment collection selling for $108 claiming a 33% reduction in hair loss through turmeric and ginseng. Unfortunately, biochemical properties of turmeric are only known as an anti-inflammatory used for irritable bowel syndrome and as an anti-cancer aid. Regardless, Aveda's heralded move into the hair thinning market is really aimed at women to prevent hair breakage, as clarified in a footnote on its website.
The allure of progressive cosmetics saw Allergan Inc. (NYSE:AGN) recently pay $350 million for privately held SkinMedica, a maker of professional skin products, thus adding to its popular botox and collagen-like filler Juvederm offerings in advanced cosmetology. SkinMedica's products feature, among other things, hyaluronic acid, a proven component of tissue repair.
DS Healthcare's closest publicly traded peer is Obagi Medical Products, Inc. (NASDAQ:OMPI), which at a $240 million market cap does not offer the breadth of product categories nor innovative formulas. The closest upscale ingredient in Obagi's skin line is 4% hydroquinone for skin lightening and toning and this has the disadvantage of only being sold by prescription. Obagi's Professional Series is no more than ascorbic acid, or vitamin C, in grades of 5% to 20% despite being marketed as the only treatment that can effectively be absorbed into skin for fullest free radical protection.
The existing lines for hair and skin are just the beginning of this company's pipeline push into personal care. The acquisition of NutraOrigin adds a full line of omega-3 products and items for bone, joint, and organ health. The release of a new OTC pain reliever announced last summer could mean substantial revenue with only a tiny market share. I expect great success for DS Healthcare in Brazil, where its distributor just received approval to begin selling. Brazil is the fastest growing emerging market for personal care products estimated at $16.5 billion in 2010.
In addition to the basic risks linked to investing in retail with its transitory fashion whims, DS Healthcare's biggest specific risk is drawing the attention of the FDA for drug-like claims. Although infrequent, the agency recently pinched Lancome for insinuating that a product changed human stem cells that, in the eyes of the FDA, makes it a drug. As long as DS Healthcare does not claim treatment or prevention of disease, this risk is low.
I believe, DS Healthcare's small market value of $39 million does not begin to illustrate its potential in very broad industries both here and overseas, and should move up dramatically as investors become aware of how to best profit from cosmetics.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.