Newport Beach, California-based Evolus (NASDAQ:NASDAQ:EOLS) is the newest entrant in the injectable aesthetics market. The business is strategized around a single product, a botulinum toxin marketed as Jeuveau. Their strategy focuses solely on the self-pay portion of the market, which we see as a logical development within the medical aesthetics space.
By far the dominant player in the aesthetic injectables market is Botox (Allergan (NYSE:AGN)). It is a purified form of botulinum toxin A (BTX-A), a neurotoxic protein used to produce temporary muscular paralysis, derived from bacterial cultures. When injected subcutaneously, it can temporarily reduce the prominence of skin creases such as lines and wrinkles. Since approval for cosmetic use in 2002, it has succeeded in not only building a market, but becoming a household name synonymous with botulinum toxin. Since the early 2000s, the number of cosmetic procedures using botulinum toxin across the world has more than doubled every decade and Botox has grown into a key asset in Allergan’s portfolio, accounting for an estimated 40% of Allergan net revenue in 2019. However, not all revenue from Botox comes from the cosmetics market. While marketing it as a cosmetic product, Allergan’s strategy has been to also pursue FDA approvals for wide-ranging therapeutic applications for Botox.
Today, the drug is approved for use in indications ranging from overactive bladder and incontinence to limb spasticity and migraines. In 2018, net revenues from the therapeutic applications of Botox were roughly twice those of cosmetic applications. While the parallel strategy of pursuing both cosmetic and therapeutic applications has helped develop Botox into a blockbuster asset for Allergan, its success has turned aesthetic injectables into a relatively mature market, worth roughly $6 billion in 2019. At the moment, Botox controls almost 70% of this market, but new biosimilars are emerging, with increasingly persuasive claims to market-share. Chief among these is Evolus’ product, Jeuveau.
Both Botox and Jeuveau are forms of BTX-A protein. However, unlike Botox, Jeuveau is exclusively targeting the aesthetics space. This means that from regulatory strategy to marketing, pricing rationale and corporate structure, Evolus is developing Jeuveau as a cosmetic biotechnology rather than a biopharmaceutical with a cosmetic application. This is a key distinction and a logical step for the medical aesthetics market, which straddles the blurred lines between health care and consumer product. In the short-term, we argue that Evolus’ approach will produce cost and price incentives that will drive market adoption, while also improving customer experience. In the long-term, we see this as an early move towards the ultimate delineation of therapeutic and cosmetic biotechnologies. If Evolus can succeed in wresting significant market-share, it’s strategy might serve as a model for bringing new cosmetic biotechnologies to the market.
Is Botulinum Toxin a Commodity?
Yes. This is key to Evolus’ strategy, but not the only factor determining their ability to capture more of the market.
Evolus’ success depends on whether Jeuveau can come to be accepted as essentially a Botox analog with a better cost structure. It’s not the first company to attempt to undercut Botox. Dysport (Gladerma) and Xeomin (Merz Pharma) are also variations on BTX-A. However, in the roughly 10 years they’ve been on the US market, they’ve managed to capture 20% and 10% market-share, respectively. So why can Jeuveau succeed where Dysport and Xeomin have not?
To be a true substitute for Botox, Jeuveau needs to contain the same active pharmaceutical ingredients and provide a seamless transition for doctors administering it to patients. Dysport and Xeomin do not have the same storage, injection and dosing parameters as the 900 kDa BTX-A in Botox. Jeuveau does; essentially providing 1:1 parity in how it’s handled, dosed and administered to patients, thereby removing barriers to adoption. It should be noted that another potential player, Revance Therapeutics (NASDAQ:RVNC), is also expected to make a run for the market if its investigational drug, DAXI obtains FDA approval sometime in 2020. However, its longer duration of action and specific excipient system may face considerable adoption challenges versus Botox and other incumbents.
Jeuveau met all the primary and secondary endpoints in European and Canadian Phase III head-to-head studies vs. Botox, matching its efficacy with no serious drug-related adverse events reported. Interestingly, in non-inferiority comparisons, Jeuveau also produced a 4.5% increased favorability of consumer experience relative to Botox.
Like Botox, Dysport and Xeomin have been approved for both aesthetic and therapeutic indications. Evolus’ only target indication is glabellar lines, severe to moderate frown lines which appear between the eyebrows. This cosmetic-only strategy gives it more flexibility in its pricing as it is not subject to government reimbursement, simplifying their cost structure and saving them the expense of pursuing multiple therapeutic trials. Evolus bases its manufacturing operation in South Korea, which also reduces costs versus locations such as Ireland (Botox), Germany (Xeomin) and North America (Dysport). We expect that these lower baseline costs will allow Evolus to offer larger profit margins to providers relative not only to Botox, but also Dysport and Xeomin. This would drive prescriptions, potentially translate into lower costs for consumers and increase accessibility.
Is Jeuveau a Good Bet for Evolus?
While Jeuveau received US approval in February of 2019, it has only been on the market since July. However, it has already seen commercial success in Korea, where it has been sold since 2014 under the name Nabota. In the US market, Evolus is predicted to erode market-share from Dysport and Xeomin, which it will also undercut in price.
Evolus is in the early ramp-up of its first product, Jeuveau. Until the end of Q3-2019, the company was selling the product exclusively in the U.S. However, they launched Jeuveau in Canada in October 2019 and plan to enter the European market in 2020. Beginning with the top line, the company started selling Jeuveau in May 2019 and recorded revenues of $2.3 million for Q2-2019. Revenues are projected to total $34 million for the full year 2019 and $110.5 million for 2020, a 225% year-over-year increase. Between 2019 and 2020 gross profit margin is projected to be steady between 70-72%, a positive sign of stability in their business model in light of their anticipated substantial ramp up in sales.
Moving down the income statement to their operating expenses, losses are projected to narrow from -$89.3 million in 2019 to -$52.9 million in 2020, a 41% year-over-year decrease. In recent quarters the company’s free cash flow has been almost exactly the same as their operating expenses, so we’ll use that to approximate their cash burn rate. The company ended Q4-2019 with $129.8 million in cash and equivalents after an equity raise in November that netted them $73.3 million. Using a forward-looking estimated annual cash burn rate through the end of 2020 of -$58 million, we project a cash run rate of over two years, putting to rest any near-term financial liquidity concerns. Furthermore, while the company has debt totaling $78.4 million, they are servicing interest-only on that debt until 2022. Consequently, the debt burden is not a concern for at least the next two years.
Summarizing their projected financial position for 2020, revenue growth is in the early ramp-up phase and projected to grow 225%, losses are projected to decrease by 41% and their cash run rate is expected to be sufficient for at least the next two years. Lastly, from a valuation point of view, using the 2020 sales projection and factoring in the recently issued shares, the stock is currently trading at a 3.2x forward price/sales ratio. That is an attractive valuation when compared to similar-stage biotech companies that currently trade at an average forward price/sales ratio of 5.2x.
Jeuveau is a Botox biosimilar and has been demonstrated to provide the same efficacy and safety profile. Its competing in a market dominated by Botox, but this also means that it doesn’t have to build a new market from the ground-up. If Jeuveau’s digital and social media-focused marketing campaign is any indication, Evolus is betting that it can drive new (i.e. millennial) consumers into the aesthetic injectables market. In the short-term, Evolus has an opportunity to leverage its superior cost structure within the existing network of patients and prescribers, offering the dual incentive of lower prices with higher profit margins, respectively. Critically, Jeuveau need not displace Botox to generate a healthy profit for Evolus. Simply offering a superior (and less expensive) alternative to Dysport and Xeomin would provide a substantial share of the the growing market and considerable tailwinds to establishing a solid second-place position behind Botox. Considering the size of this substantial market, capturing second place represents an inflection point for the value of Evolus.
Long-term, Evolus CEO David Moatazedi and its Chief Marketing Officer Michael Jafar, both with previous executive roles at Allergan, are expected to keep Botox’s market-share firmly in their sights. Jeuveau can continue to take advantage of its creative marketing to open a space between medicine and cosmetics which, along with its aesthetics-focused strategy, will give it a considerable opportunity to not just capture the existing market, but also grow the medical aesthetics space as a whole.
For all of these reasons, we view Evolus as a compelling opportunity with significant upside in the next 12 months.