Evolus And The U.S. Cosmetic Neurotoxin Landscape

About: Evolus, Inc. (EOLS), Includes: AGN
by: BioTrench

EOLS is in the midst of launching their Botox alternative in North America and will be competing with Botox, Xeomin and Dysport.

EOLS will be pricing Jeuveau at a premium and marketing it as a modern high-end product.

EOLS appears to be valued at a premium and the current risks outweigh possible rewards.

Evolus (EOLS) is a one drug company that is gearing up to enter the personal aesthetics arena. They look to compete against the market leader, Allergan (AGN), with their own version of Botox, which will be branded as Jeuveau in the US. They have also recently received a positive opinion from the CHMP in the EU for their product and are awaiting the final decision, which should come in the middle of 2019.

Beyond North America and Europe, EOLS will also have the rights to Russia, Australia, and South Africa, along with co-distribution rights with Daewoong Pharmaceuticals in Japan; however, these are not as relevant for the near-term. While Jeuveau certainly has market potential, we will be discussing possible pitfalls that may make EOLS less attractive at current prices.

Quick overview of the neurotoxin market

Botulinum toxin for cosmetic use is a high growth segment and EOLS is ready to join the fray.

Source: Allergan 2018 Q4 Presentation

As can be seen above, AGN generates over a billion in revenue annually on cosmetic Botox sales, with approximately two-thirds stemming from the US ($907 million) in 2018. Moreover, this segment has been growing at a fast pace (high single digits/low double digits) for the past few quarters, and is projected to continue rapidly growing for the foreseeable future.

While traditionally Botox usage has been associated with an older cohort, according to AGN's CEO,

But the age cohort for BOTOX has been trending younger and younger given as you know this millennial movement, in the past five years a number of millennial users in aesthetics has tripled from our estimation just under 300,000 to over 1 million. I would say in the next five years millennials will be the largest consumer aesthetics products and services replacing the generation X.

Source: 2018 Q4 conference call

While there have been other Botox substitutes approved by the FDA, such as Xeomin (approved 2011) and Dysport (approved 2009), Jeuveau is the first 900 kDa alternative. The term “900 kDa” refers to its molecular size/weight, which can affect a compounds clinical activity.

Launching Jeuveau

The official launch date for Jeuveau is May 15, and EOLS is off to a strong start. From the EOLS investor's day presentation on May 8, 2019, it was mentioned that EOLS already opened 2100 accounts and was looking to push it out to 3000 in a short period of time. To put it in perspective, there are approximately 30-40,000 accounts in the US, according to the Q&A session. They look to push forward with a modern, stylish-looking design, premium feel, and social media strategy (#NEWTOX). Combined, this gives EOLS a young, vibrant image. From profit calculators to apps for easy ordering and tracking, EOLS looks to make purchasing and using Jeuveau as easy and frictionless as possible. Moreover, the entire launch is designed to be scalable. While the launch foundation looks nice, there are a number of factors to keep in mind.

Quick look at the competition

The fight for cosmetic neurotoxin market share has been getting more heated over time as competitors have been eating away at AGN's dominance.

In 2016, BOTOX sales represented 84.5% of the U.S. market share and 73.1% of the worldwide market share, and generated approximately $729.2 million of revenue in the United States. In the same year, Dysport and Xeomin sales represented 13.5% and 2.0% of the U.S. market share, respectively, and 17.5% and 7.1% of the worldwide market share.

Source: 2018 EOLS S-1 Registration Statement

Since then, according to new EOLS estimates, Botox's position in the US has been reduced to approximately 70-75%, while Dysport and Xeomin have around 20% and 5-10% of US market share, respectively.

Comparison of toxins Source: 2019 EOLS investor presentation

While relative efficacy can be debated, part of the competition's success story may be attributable to the fact that Xeomin and Dysport treatments appear to cost less than Botox. According to this review site, while regional costs can vary quite widely, the average cost for Botox treatment is ~$550, while Xeomin and Dysport treatments come out to around ~$450. The assumption here is that all three drugs are used to treat a similar ratio of cosmetic touch-ups.

Pricing Jeuveau

EOLS is trying to build a premium brand, and they've signified this with their list price. To quote their CEO, David Moatazedi,

Today, we are now seeing a list price of $610 for a 100 unit vial of Jeuveau. This price represents a slight premium to the market leader and is a direct reflection of its premium value as Jeuveau is the first neurotoxin to enter the market in nearly a decade.

Source: 2018 Q4 Conference Call

At the same time, they have mentioned that models should account for 20-25% discount relative to the market leader in their 2019 Q1 conference call, which was reiterated during their investor's conference on May 8. However, this discount seems to be targeted at injectors and not patients.

EOLS investor presentation - model slide Source: EOLS investor's day presentation

In essence, practitioners will receive a volume discount for Jeuveau, but will be able to bill patients at Botox rates, which is set through the list price. The delta from the discount will be going towards the clinics bottom line. This is likely in part to offset savings that the practitioner would otherwise have received for fillers and other bundled cosmetic surgery goods. As a result of this, it seems unlikely that the clinics would pass the savings on to patients.

In the long term, consumers will also likely receive discounts through a loyalty program; however, the program will be launched at the end of the year, so details are still lacking. At the same time, it is interesting to note that back in March 2019, during the Q4 conference call, their CEO stated:

We anticipate that the market will price Jeuveau at parity to the market leader or slightly above in some cases as we’ve heard that patients should not expect to pay less for Jeuveau given the quality of data that we’ve generated and the premium brand that we are bringing to the market.

Source: 2018 Q4 Conference Call

While it may incentivize clinic adoption, it's unclear how patients will react.

Reviewing revenue streams

Pricing intricacies and structure aside, a crude estimate suggests that EOLS is currently valued at a premium. As a point of reference, AGN generated ~$900M in the US for cosmetic Botox in 2018. With a 70% market share, this suggests a possible market size of ~$1.28B for AGN. Assuming ~10% growth, this would equate to a value of ~$1.5B in 2-3 years. Part of the reason for limiting it to the next two years or so is because additional alternatives are gradually trying to work their way in to the market, so the situation may be quite different by that point in time.

We will not focus heavily on the ex-US market, given that it will likely have a far smaller impact on EOLS' earnings. While there is certainly a large market ex-US, EOLS will not have access to Asian countries, with the exception being partial access to Japan, as mentioned earlier. This essentially means that a significant segment of the Botox market will be unavailable to EOLS. So while EOLS may be estimating that the ex-US market is worth $2 billion in 2021, they will likely have access to less than $1 billion of the total ex-US market. Moreover, it seems that they will be partnering up for ex-US opportunities, so EOLS will likely only be receiving a percentage of net sales. This will likely translate to a value well below $50 million (e.g. 20% of $1B market (ex-Asia), 10% of gross sales = $20M).

Moreover, per a comment during the recent Q1 conference call:

One comment on modeling as well. Doug this is Lauren Silvernail. As you are looking at modeling it's important to understand that our arrangements when we partner in Europe involve us and Daewoong in a partner.

So from a modeling standpoint we ask everyone to make sure you are very modest on including OUS or outside the U.S. because it is a three-way split. So the impact on our P&L at this point of international arrangements outside of Canada is pretty modest.

Source: 2019 Q1 conference call

As such, the ex-US market can literally be a rounding error for our cursory analysis of the US market.

Focusing back on the US, if EOLS manages to gain 10-20% of the market share, and assuming that they charge the same price as Botox, this would equate to $150-300M in revenue. However, after accounting for a 20-25% discount in price vs Botox, this would translate to ~$120-240M. Taking an average of $180M and an industry P/S of ~4-5 (and assuming the market does not sink), would suggest a possible market cap of ~$800-900M. While this may suggest that EOLS has room to grow from its current market cap of ~ $680-700M, there are additional considerations: royalties, dilution and landscape.

The first point to note is that the EOLS contributors/founders will be receiving a low single digit royalty on net sales in the US (applicable to ex-US as well), for a decade after the launch of Jeuveau. This would lead to a notable impact on net earnings and P/E ratios. To illustrate the point with a contrived example, let us create a simple model where we look at the royalties and operational margins separately. If we assume net sales of $200M, 50% margin over all sales and 5% royalty on net sales, the final earnings would be $90M, as opposed to $100M, a 10% difference. Admittedly, the actual margins will likely be far lower than the above exercise. As such, the cost of the royalty will likely account for a sizable portion of the final earnings, which would likely reduce subsequent valuations.

Watching the burn and possible dilution

EOLS has filed a prospectus for a $250M shelf offering, which they will likely draw on, in part or in whole, within a year, leading to dilution. As EOLS will not be providing expense or revenue guidance during the launch, there is a fair amount of speculation involved below.

EOLS ended 2018 with $93 million in cash. On March 18, 2019, EOLS announced that they had secured a $100 million loan from Oxford Finance LLC. While the first tranche of $75 million was available without restrictions, the remaining $25 million will be subject to a number of requirements, including sales milestones.

During the Q4 conference call, it was stated that

We closed 2018 with pro forma cash of approximately $168 million, which includes proceeds received from the authored debt financing announced earlier today.

Source: 2018 Q4 conference call

Note that the $75M was actually closer to $72M net of discounts and related costs. In the 2019 Q1 press release, EOLS stated that they ended 2019 Q1 with ~$133 million. Of the $31 million spent, approximately $18M was for corporate related activities. The remaining ~$13M was paid out as royalties to Daewoong (~$2M) and the EOLS founders for the FDA approval.

As Q1 was essentially the sales leadership team, expenses were lower. Assuming ramp up in sales-related expenses and inventory as the launch progresses, quarterly spending will likely go well over $20M, depending on how aggressive their promotional approach is. Moreover, EOLS had mentioned to not expect much in terms of revenue until Q4, so there will unlikely be much to offset expenses in the near term. In addition, there will be at least one more milestone payment for EU approval, along with other possible technical and sales milestones that have not been detailed. As such, it is a possibility that they burn through $100M in approximately a year. Hence their is a moderate to high likelihood that EOLS will draw on the shelf offering, which has the potential to dilute current shareholders.

EOLS has been trading at ~$24-26 for the past period (at the time of writing), which translates to a market cap of ~$700M at $25. If they managed to raise $100M (40% of registration) at current prices, this would translate to a 10-15% increase in shares, which brings us fairly close to our simple valuation given above.

Considerations for EOLS' shelf offering

Beyond the prospects of potential dilution, there is also a statement within the prospectus that states that existing shareholders may sale up to 15,700,376 shares. This accounts for approximately 58% of available shares. In fact, the bulk of the shares will come from a single entity – EOLS' parent company ALPHAEON, which currently holds 15,268,987 shares. While one can only guess at the reason behind why ALPHAEON provided itself with the option of releasing all its shares, it may be worth keeping an eye on how they choose to unwind their position.

Competition on the horizon

EOLS is going with an aggressive strategy to gather market share in the US, but how stable it will be post-accrual is questionable.

With the addition of Jeuveau, there will be four neurotoxin options in the US as of 2019. However, Revance (RVNC) is working on a longer lasting variant and are looking to submit a BLA for glabellar lines in 2019. Meanwhile, Medytox/AGN is working on a liquid injectable, as opposed to current lyophilized variants, and are looking for approval in 2022. At the same time, AGN is looking to push forward with a quick acting (<24 hr), short duration (2-4 wks) variant, which they hope to have approved in 2024.

Similarly, Hugel is looking to enter the US market as well, and is investing $90M to build an off-shoot in collaboration with Croma. Moreover, Hugel may be playing rather aggressively once they make their entry into the US, seeing as they had disrupted the Korean market by under pricing their solution compared to competitors and gaining a large market share. However, the road map for Hugel's progression is not entirely clear, although it could be in the near future, seeing as 1) Croma completed the re-branding for its filler, which is to be distributed through the joint venture and 2) Hugel had a double blinded head-to-head trial against Botox for Crow's feet, which should have been completed late 2018.

With a number of new alternatives possibly being available within the next 5 years growth, the market may undergo a number of shifts that are difficult to predict.

Concluding remarks

EOLS has the potential to grow in an attractive market segment; however, at this point in time, it would appear that the risks outweigh the rewards. Part of the problem at hand is that EOLS' price has a premium built in when considering additional risks. As EOLS' is near the peak of what we consider a reasonable market cap, additional appreciation may be blunted due to a highly probable dilutive event. Likewise, royalties paid out over the next decade may dampen valuations due to its probable impact on profit margins. Lastly, the cosmetic neurotoxin scene will likely see more entrants over the next few years, which may further disrupt the landscape; however, the eventual outcome of this is difficult to predict. While EOLS may add to their cosmetic portfolio at some point, this will likely be further out in time, as they will likely want to focus on getting adoption for Jeuveau first. On the flip side, EOLS may be worth a revisit later depending on its price movement.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.