Evolus: Jeuveau Can Weather The Coronavirus Storm

Jun. 17, 2020 6:04 PM ETEvolus, Inc. (EOLS)ABBV, AGN10 Comments4 Likes
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Summary

  • The company is well-positioned to capture the return of customers, which are going to undergo facial aesthetics treatment, as the US economy reopens.
  • Practices are facing a lower number of patients per hour, which creates a unique opportunity for Evolus to offer a more affordable price of Jeuveu compared to Botox.
  • The stock price and revenue growth have been both negatively impacted by the coronavirus crisis earlier this year.

Evolus, Inc. (NASDAQ:EOLS) is a biotech company that has gained FDA approval for its lead product Jeuveau, which is the only known Neurotoxin dedicated to the aesthetics or more specific treatment of glabellar lines. Ever since the commercial launch, everyone in the aesthetics treatment industry has been curious whether the company can take away a larger market share from Botox. The company has been successful so far to reach new accounts and drive revenue growth over the last couple of quarters, but the most recent coronavirus related crisis resulted in the complete loss of revenue over a lockdown period. In our view, the company is well-positioned to absorb this negative impact in the future, due to a positive long-term secular trend of the U.S. aesthetics treatment market. We find the key bullish catalysts as the following: (1) ramped-up demand for neurotoxin treatments as the US economy reopens, (2) digital strategy to penetrate a target audience including millennials through social media campaigns, (3) consumer loyalty programs and coupons to provide consumers and practices a larger degree of flexibility to deal with coronavirus related restrictions.

The Coronavirus Storm Impact

The coronavirus crisis had a significant impact on the aesthetics treatment business as patients were labeled as "non-essential" and "non-COVID," therefore they were not allowed to undergo neurotoxin related treatments. Consequently, practices had to shut-down their operations. After the reopening of the US economy, practices will most likely have to extend their operating hours because of the following: (1) social distancing rules which limit the number of patients that can undergo Jeuveau treatment at the same time, (2) newly established health and safety protocols like thorough cleaning of all equipment after treatment of each patient, (3) pent-up demand as the U.S. economy reopens.

CEO David Moatazedi stated the following:

“And of course now that the time interval between patient treatments is being extended, that means the amount of revenue that can generate in a given amount of time will obviously be reduced by that. Some of that can be offset by increasing hours. Others they're looking to offset by reducing some of their costs within the practice. “

(Source: Earnings Call)

We believe that as revenue per hour might be limited because of the coronavirus related guidelines for reopening, cost efficiency will be the key to practices’ profitability. Therefore, Jeuveau is well-positioned to reduce costs for practices, as it has declared a lower price and additional consumer loyalty and coupon programs to take market share away from its key competitor Botox. The company has also enabled its customers and consumers to use unredeemed $100 coupons at the end of Q2 2020 from the initial Q1 2020. In addition, customers were also able to redeem coupons during a lockdown period to book future treatments once practices reopen. We believe that as the U.S. economy fully reopens customers will be able to redeem those coupons. That should help the company to return to its pre-COVID revenue growth faster than expected and weather the coronavirus storm successfully.

(Source: Investor Presentation)

In addition, the company has recently launched a consumer loyalty program - Evolus 350 in May 2020, that basically helps both practices and consumers to calculate their savings of using Jeuveau over a longer period of time. We find this as highly positive as that will create a sticky customer base, which will be of crucial importance during the post-COVID environment. Unfortunately, the U.S. economy faces a double-digit unemployment rate at the moment, which might result in higher sales-related and marketing costs for the company to reach and penetrate new customers. Therefore we believe that it should be more efficient for the company to have a higher number of returning consumers through its consumer loyalty program. The company has put a lot of emphasis and resources on its digitalization capabilities by developing an Evolus Practice app even before the coronavirus crisis.

CEO David Moatazedi stated the following:

“We can successfully conduct business with accounts virtually through our Evolus Practice app, placing an order, tracking a shipment, chatting with our customer experience team or medical affairs representative and checking your loyalty status attainment can all be done with a simple click or swipe. “

(Source: Earnings Call)

After the crisis, the company will be reliant even more on its digital experience for end customers, as doctors might be unwilling to have, or even restricted from having, direct communication with the company’s sales reps. Therefore the company might cut its salesforce in the near future and might feel some negative impact because of a lack of human interaction between customers and sales reps. For instance, a veteran sales rep might have a better chance to close a deal and build a strong rapport during a direct meeting with a customer using his experience or body language skills. However, things might become more difficult now to reach the same result through a Zoom video call (ZM) or a phone call.

The company has also decided to lower its price to $350 per vial for all customers regardless of their account size who purchase Jeuveau through the Evolus Practice app. In addition, Evolus management stated that key competitors offer a price tied to volume, which definitely puts Evolus in a strong competitive advantage when targeting small to mid-sized accounts. For instance, a smaller practice will most likely have to deal with more severe negative consequences because of a pandemic in terms of both reduced number of patients per hour as well as higher costs related to masks or disinfectants. Therefore a more affordable price of neurotoxin like Jeuveau will definitely help smaller practices to remain profitable or at least to operate in the post-COVID environment.

Competitive Dynamics

In terms of competitive dynamics, Abbvie (ABBV) completed an acquisition of Allergan (AGN) on May 08, 2020. CEO Rick Gonzalez stated the following during Abbvie's earning call about the impact of a pandemic on BOTOX and Allergan’s therapeutic business:

“We expect Allergan's therapeutic business except for BOTOX Therapeutics to be impacted and recover from the COVID crisis in a manner very similar to the AbbVie business I outlined earlier. There is likely to be a more significant impact on BOTOX therapeutics because about half of its volume comes from hospitals. And -- but we would expect that to bounce back once those hospitals start accepting non-emergency non-COVID patients.”

(Source: Earnings Call Q1 2020 - Abbvie)

As expected, Abbvie has provided a similar market recovery outlook as Evolous. In terms of competitive pricing, Botox has a variable price of approximately $10 - $20 per unit and it really depends upon which surgeon you visit.

(Source: Minars Dermatology)

For instance, a Botox treatment for Glabellar lines costs around $325, while a Jeuveau treatment comes at $350 per vial. We can easily identify how important is the recently announced consumer loyalty program combined with a $100 coupon offering to bid end-consumers a cheaper alternative compared to Botox. Given the positive underlying secular trends for the neurotoxin market in the US, we anticipate that there is enough space for both companies to penetrate new consumers and there is no need for a fierce head-to-head competition. Nevertheless, we still believe that a mere lower price will not enable EOLS to take away a significant market share from Abbvie. Therefore an entire digital consumer experience, as well as customer satisfaction after the completed surgery, will be of crucial importance. Here we definitely count on the potential positive customer reviews posted on Instagram under a #NEWTOX. Our readers can find more information about the overall U.S. neurotoxin market in our previous articles on EOLS here.

Near-Term Risk: ITC Case

One of the biggest near term risks, is the potential negative result of the International Trade Commission case, as the South Korean company Medtyox filed a lawsuit over IP theft earlier in 2017.

(Source: 10-K Filing)

The South Korean press has apparently reported Medytox comments and apparent settlement discussions between Medytox and Evolus/Daewoong regarding this lawsuit earlier this year.

“In several media reports this week, Medytox has made comments on the International Trade Commission (ITC) case, which Evolus believes are speculative and intended to create confusion in the U.S. market ahead of the ITC Judge’s initial determination in June 2020 and the ITC’s final determination, which is targeted for October 2020.”

In addition, numerous claims have been made in the Korean press regarding settlement discussions related to the ITC proceedings. It is the company’s policy to not confirm or comment on settlement discussions.”

(Source: Press Release)

Even though nothing has been officially reported about this case we would still like to warn our readers that a possible negative result of this lawsuit in June or later in October might have a major impact on the stock price. On the other hand, a positive one might have a short-term positive impact on the stock price as investors might write-off a discount of this risk from the current stock valuation.

Financials

(Source: Earnings Presentation)

The company reported Jeuveau net revenue of $10.5 million in Q1 20 or down $9 million q/q, as a result of the negative impact of a pandemic. Nevertheless, we are optimistic that noticeable revenue will come into account later in H2 20, as patients return back to practices. The company doesn’t expect any sales from Europe in 2020, even though the initial launch was projected for H2 2020. The Jeuveau drug under a brand name Nuceiva has already been approved by EMA earlier in September 2019. We are confident that an international expansion into Canada and Europe can be a major growth driver later in 2021 and onwards. Gross Margin came out at 60% or down 17% q/q as a result of a high coupon activity, given that patients couldn’t undergo treatments because of a nationwide lockdown.

The company reported cash and cash equivalents plus marketable investment securities of $99.6 million as of June 30, 2019, which makes the company adequately funded over the next twelve months. Our readers should keep in mind that the company issued approximately 5.2 million new shares at $13.00 per share in November 2019 and a share dilution remains the risk in the near future. We are concerned that in the case of a second wave in the US, the company might face a major drop in revenue and higher incurred costs due to additional coupon offerings for future treatments. That would have a negative impact on the overall business and stock performance over the next couple of quarters. In addition, Abbvie might even intensify its competitive practices compared to prior Allergan’s policy as it prioritizes all non-Humira segments to reach a desired level of diversification away from Humira. Consequently, Evolus might be forced to issue additional shares to prop up its sales & marketing and digital development spending.

Technical Analysis

The stock has been very volatile since its IPO in 2018 by trading in the range of $5.0-$30.0 over the last two years. After the positive Jeuveaue phase III results in early 2019 and following the commercial market launch in the US in May 2019, plenty of investors were expecting a major stock price increase. It is actually the first company to be a head-to-head competitor to Botox over the last decade, as it has created a product that has similar characteristics and even better phase III clinical data results. Nevertheless, the stock price entered a major bearish downtrend in November 2019, which has even intensified because of a coronavirus crisis. In fact, the stock price has declined from around $18 in September 2019 to as low as $3.12 per share in March 2020. Nevertheless, the stock price has slightly recovered as the result of a strong market pull-back because of the FED and Treasury stimulus to support the U.S. economy.

(Source: Finviz)

Based on our Technical Analysis, we expect the stock price is ready to break the existing major downtrend line at around $6 per share labeled by the purple line on the chart above. We see as the major bullish catalyst a better than expected Q2 2020 Earnings results, as management of the company might report better than expected revenue growth triggered by a reopening of the U.S. economy. On the bullish side, we find the near-term price target a key psychological level of $10. In fact, if the stock price breaks this target supported by the additional positive financial data, then the stock price can reach back the previous trading range of $15-$20. On the bearish side, we find the key psychological support level at around $3.00, which is also close to the 12-month low of $3.12. Therefore, we recommend setting up a stop-loss slightly below this level. The analyst consensus price target was lowered from $30.50 after the publication of our first article in February 2019, to $24.90 after the publication of our second article in September 2019, while now it is as low as $16.44.

Takeaways

Evolus is well-positioned to weather the coronavirus storm as patients are expected to return back to practices to undergo neurotoxin related treatments after the reopening of the US economy. The company should be able to capitalize on this trend as it has already in place a long-term digitalization strategy to reach new customers through social media and to offer full customer service and support through the Evolus Practice app. In addition, we anticipate that both consumer loyalty programs and coupons position the company well to compete against Botox in the US facial aesthetics business and reach a goal to establish the second-largest market share within the next 24 months. In fact, new changes in the health and safety protocols and guidelines position the company well to offer a better value proposition to doctors and practices through digital experience and lower pricing with coupons compared to Botox. However, key risks to the investment thesis are a potential upcoming negative determination of the ITC case, additional financing through a new share offering, the second wave of coronavirus infections or lower than expected commercial success of Jeuveau after the reopening of the US economy.

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