Seeking Alpha
Biotech, healthcare, small-cap, special situations
Profile| Send Message|
( followers)  

With textbook-perfect market timing, DS Healthcare Group (NASDAQ:DSKX) just received regulatory consent to sell its distinctive products in beauty-obsessed Brazil. In conjunction with a prominent distributor partner, first to ship are items that have already achieved popularity here - the Revita shampoo line with third-party, research supported hair health stimulators caffeine and copper peptide, and the Spectral line for hair regrowth. Both of these accounted for 34% of sales in DS Healthcare's third quarter of 2012. I use these products and from personal testimony, they work.

Next to Japan, the country of Brazil is the biggest seller of beauty products where sales topped $43 billion in 2011 for astounding growth of 142% in a five-year period. By comparison, the market in Japan and the US rose 40% and 7.3%, respectively in the same time frame. Brazil is a nation fixated on hair. Shampoos and conditioners rank as the largest category with growth of 40% in 2012 and are expected to account for over 20% of total personal products sales in 2016.

Brazilians put a high premium on hair care, more so than other countries, because wide racial diversity there includes all eight hair types (categorized by degree of diameter and curliness), making control of hair a national pastime. Long, straight and smooth hair is the ultimate cultural approval in Brazil where racial discrimination is based on appearance and not on the origins of individuals. Symbols of racial identification evident in daily life are used to point to one's nearness or distance from an ethnic group, so much so that attention to hair is more than a beauty exercise, it is an attempt to move up the racial grouping scale.

Thus, an inbred loyalty to looks makes Brazil an abundant breeding ground for the beauty industry, where women use up to five products each morning to tame and style hair. Changing the hair is the Brazilian's quickest option to achieve an upgraded look. The moniker 'Brazilian' on hair merchandise has become like the word 'antioxidant' on vitamin bottles and can mean as little as adding keratin, a fiber-like protein, to hair gels (boosting its price point significantly), which testifies to the lure of things Brazilian. With a cultural push and an ecosystem of lush potential hair and skin ingredients, more advertising resources are planned by local beauty titans Natura and O Boticário as they respond to competition from heavyweights Unilever plc (NYSE:UL), Avon Products Inc. (NYSE:AVP), Procter & Gamble Co. (NYSE:PG), and L'Oréal SA (PINK:LRLCY.PK) entering the market with gusto, attracted by its appearance-conscious customer base with money to spend.

All the better for DS Healthcare and great timing for market entrance, particularly with its unusual recipes that blend naturally-derived plant and animal materials with vitamins and minerals. Euromonitor, observer of overseas marketing trends reports that Brazil's flush middle class demographic of working adults possessing no qualms about spending on designer beauty products is expected to trade up to more esoteric and advanced offerings over the next several years, shaping a new kind of growth in the Brazilian market through 2016.

The best bit of news surrounding the Brazilian launch is the void DS Healthcare will fill in the men's hair loss category. Statistics appear to be universal from the US to other countries of the world that 25% of men show signs of hair loss by the age of thirty; for Brazil, that comes to 54 million men of which 17%, or 9 million potential male customers, live in the two largest metropolitan areas - Sao Paulo and Rio de Janeiro.

The Brazilian hair regrowth market took a loss last year when Johnson & Johnson (NYSE:JNJ) suspended sales of minoxidil, or Regaine, through notification to country regulators ANVISA, with "no plans of returning to market". DS Healthcare's Spectral DNC-N is approved in Brazil at the same concentration as what's sold in the US and even better, the compound registered with ANVISA is nanoxidil, a new chemical entity more powerful than minoxidil but marketed as an OTC cosmetic, not a drug. This will allow retailing through salons and department stores, as well as pharmacies.

Another interesting item to begin sales in Brazil is Oligo.DX , a cream to improve cellulite with caffeine and escin in a lipid carrier. Pure caffeine without preservatives in a gel emulsion is documented to reduce cellulite through a 17% reduction in the diameter of fat cells associated with cellulite. The phytosome escin β-sitosterol, acting principally in capillaries, modifies vascular permeability helping to flush cellulite away. Again, DS Healthcare draws from inspired research backed by studies that show naturally-occurring ingredients have a clear effect on the beauty issues that plague men and women.

For a company its size, distribution reach outside the US is surprising - the EU, Canada, Japan, Hong Kong, Russia, Saudi Arabia, Turkey, Mexico and Austrailia make up 15 international outfits for a total of 28 both here and abroad. Sales and distribution is orchestrated by a long-time partner in North Carolina within a close-knit team without using specific territories, a smart strategy that keeps marketing information centralized and costs low.

Late last month acquisition of its Mexico distributor that has been on board since 2009 was completed and adds 40 people to DS Healthcare. Revenues from the division were over $1.3 million in the nine months ended in September 2012.

In penetrating markets outside of the US, I believe DS Healthcare has overcome a significant risk - that of country approval. Authorization to commercialize products in Brazil, with all-encompassing ANVISA as a watchdog, is no small hurdle to surmount and utilizing nanoxidil was a clever move. Other than that, risks applying to an investment in the company are the typical ones surrounding a retail product - market acceptance and an effective promotional campaign that produces good sales results without overburdening operating expenses.

DS Healthcare is indeed a name to watch. Thinning and receding hair will continue to trouble an aging population who desires its overall health and vitality to be reflected externally. I believe that considering its current revenue run rate of $12 million for all of 2012 and the size and growth of the personal care markets it caters to, DS Healthcare, at $34 million market capitalization is clearly undervalued.

Source: DS Healthcare Group Ready To Sizzle In The $43 Billion Brazilian Beauty Market