Pharma IPO: Highlights from Obagi Medical's S-1 Filing

Includes: AGN, OMPI, PHMD, VRX
by: Evelyn Rubin

Skincare products manufacturer Obagi Medical filed an S-1 with the SEC this week. Highlights and excerpts from the company's filing:

Proposed Ticker: (NASDAQ:OMPI)

Underwriters: JPMorgan, CIBC World Markets, Thomas Weisel, Robert W. Baird

Maximum Offering: $86.25 million

Business Overview:

We are a specialty pharmaceutical company focused on the aesthetic and therapeutic skin health markets. We develop and commercialize prescription-based, topical skin health systems that enable physicians to treat a range of skin conditions, including pre-mature aging, photo-damage, hyperpigmentation, acne and soft tissue deficits, such as fine lines and wrinkles. Our leading product line is the Obagi Nu-Derm System, which we believe is the only clinically proven, prescription-based, topical skin health system on the market that has been shown to enhance the skin's overall health by correcting photo-damage at the cellular level. We also believe that many of our products have applications in areas beyond their current uses. For example, we are conducting studies to evaluate the adjunctive use of our systems with commonly performed cosmetic procedures such as laser therapy, Botox (a registered trademark of Allergan, Inc.) injections and basal cell carcinoma excisions. In July 2006, we launched our Nu-Derm Condition and Enhance System, for use primarily with Botox injections.

We focus our research and new product development activities on improving the efficacy of established prescription and over-the-counter, or OTC, therapeutic agents by enhancing the penetration of these agents across the skin barrier using our proprietary technologies collectively known as Penetrating Therapeutics. We are currently evaluating new systems to address acne and skin elasticity and, based on early positive clinical results, we plan to introduce them to the market in late 2006 or early 2007.

We are the market leader with the most prominent brand in the growing physician-dispensed skin care channel, according to an independent 2005 study by Kline & Co. We market and sell our skin care systems and complementary products through plastic surgeons, dermatologists and other physicians who are focused on aesthetic skin care. In the United States, we use our own team of 85 dedicated sales professionals, while outside the United States, we utilize experienced distribution partners.

Financial Highlights: Net sales for the first six months of the year were $35.9 million, an increase of 16% over the same period last year. The majority (82%) of sales were in the U.S. One product--NuDerm--represented the bulk of sales ($25.1 million). Gross margins increased from 82.7% in the first half of 2005 to 83.9% for the six months of 2006. The company does not break out R&D expenses; SG&A increased from $14.4 million to $22.7 million in this period, and net income fell from $5.5 million to $2.6 million.

For 2005, sales grew 15% over 2004 to $64.9 million, while gross margins fell from 83.1% to 82.2%. According to the S-1, "The decline is primarily a result of Nu-Derm product line gross margin percentage for the year ended December 31, 2005, which declined when compared to the year ended December 31, 2004, and the $1.5 million increase in Vitamin C and Other, due to launching two new concentrations of our own branded product, which has a higher margin than the third-party product that was replaced and Other sales, which have a lower gross margin percentage than our Nu-Derm sales." SG&A increased from $25.4 million in 2004 to $32.3 million in 2005, and net income fell from $14.1 million to $9 million.

At the end of June, the company had just over $3 million of cash. There is quite a bit of long term debt in the company: in January of 2005, they entered into an $80 million credit agreement consisting of two loans for $20 million and $50 million; they also have a $10 million credit facility, unutilized as of June 30th.

Use of Proceeds: The company aims to use an unnamed amount from the financing to repay debt, as well as to invest in R&D and general corporate purposes.

The company lists as direct competitors La-Roche Posay, Skin Medica, Valeant (NYSE:VRX), SkinCeuticals a division of L'Oreal, Allergan (NYSE:AGN), and PhotoMedex (NASDAQ:PHMD) among others.

Employees & Management: At the end of June, the company had 132 employees, 95 of whom were in sales and marketing. Steve Carlson is the company's CEO:

Steven R. Carlson has served as our chief executive officer and president since July 2005 and one of our directors since May 2006. From March 2005 until July 2005, he served as our president. Prior joining us, Mr. Carlson held senior executive positions with several start-up ventures including ReVance Therapeutics (formerly Essentia Biosystems) from 2004 to 2005, and Orquest Inc. (acquired by Johnson and Johnson) from 1995 to 2003. Mr. Carlson began his career with 15 years at Allergan, where his management experience included Senior Vice President of Marketing and General Manager responsible for building the Botox Global business from 1987 to 1995. Mr. Carlson received his B.S. in biology and chemistry from the University of Minnesota.

Current Ownership:
Stonington Partners, a New York based private equity firm, currently holds 60.7% of the firm. An entity controlled by former medical director Dr. Ogabi holds 25.1%, and affiliates of former CEO Austin McNamara (see below) hold 10.5%.


  • Seasonality: "Sales of our products have historically been higher between September and March. We believe this is due to increased product use and patient compliance during these months. We believe this increased usage and compliance relates to several factors such as higher patient tendencies toward daily compliance inversely proportionate to their tendency to travel and/or engaged in other disruptive activities during summer months."
  • Lawsuit from Former CEO: In March of this year, Austin McNamara, the former chairman, president and CEO filed a discrimination suit against the company alleging that "we demoted, harassed and otherwise discriminated against him due to his purported physical disability and medical condition. Mr. McNamara requested an immediate right-to-sue notice. On March 20, 2006, the DFEH closed its case. The DFEH did not conduct an investigation or make a determination on the merits of the complaint. Mr. McNamara has also threatened to file a wage claim with the California Labor Commissioner. Mr. McNamara alleges that we have not paid all wages, bonuses, and severance owed to him. Mr. McNamara served as the chief executive officer from September 2001 until July 2005, and as president from September 2001 until March 2005. He also served on our board of directors and as chairman from September 2001 until May 2006. We cannot determine the outcome of these matters at this time."
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