Last Updated on June 27, 2019 by Sultan Beardsley
To recap, in part 1 we talked about Evolus (Nasdaq: EOLS), a relatively young company (no pun intended) entering the medical aesthetics market. Their first product Jeuveau was approved by FDA in February 2019 despite a citizens petition filed by Evolus’s competitors in an attempt to derail them. Jeuveau is a neurotoxin approved for the improvement of glabellar line (i.e. frown lines between the eyebrows) and is supposed to rival the long-time market leader Botox. Medical aesthetics is a highly competitive space. Its comes as no surprise that since approval several lawsuits against Evolus and their partner Daewoong Pharmaceuticals have emerged. In the U.S and Europe there are 3 products on the market right now. More are in clinical development and are expected to trickle out over the next couple of years. Frankly speaking, its not an easy road to the top of the neurotoxin market in the U.S, or elsewhere for that matter. As I will discuss in the rest of this article Evolus should succeed in their ambitious goal of becoming number two in the industry by 2021.
The Right Strategy
As I said in Part 1, Evolus is different by design. They realize a fundamental component of what makes a business successful is the creation of a product or service that makes peoples lives better and or easier. With this in mind EOLS conducted research to identify the pain-points that customers face and then innovated solutions. More to this point, there are many people who are not yet users of neurotoxins, but easily could be. By framing Jeuveau as a performance beauty product instead of a medical one it makes it much more approachable. Combine this with an attractive brand and playful digital marketing and I think we will see a lot of the stigma around Botox-like-treatments erode. For the doctors, pricing transparency has been a long-standing issue.
If you go into any cosmetic surgery office and ask the doctor how much they pay for neurotoxin chances are they do not know. Companies that doctors get their supply from all sell more than just neurotoxins. Aside from other beauty products like fillers, Allergan (NYSE: AGN) sells therapeutic products. Even neurotoxins like Botox have therapeutic applications like treating migraines. Therefore, practices buy their neurotoxins in what are called “bundles” where they get a variable price depending on the assortment of products they buy and at what volumes. As you can imagine, what prices that are paid for what products gets convoluted quickly.
The solution EOLS designed was transparent pricing where doctors see exactly how much they are spending when they order. EOLS is solely dedicated to a single product-Jeuveau. You could rightly argue that is a disadvantage. But, with the strategy being deployed, their lean structure and singular focus should be advantageous. For one there is no third parties or reimbursement to navigate. The proposition to doctors is simple: Here is exactly how much you are paying for your Botox or Dysport right now and if you switch X percentage of your business over to us you’ll save this much. EOLS equipped their sale team with a calculator built into an app doctors can use for this purpose. Of course, transparent pricing is only effective if the price is competitive. To price effectively EOLS has taken a two pronged approach.
First, they priced Jeuveau at a slight premium to Botox ($610 vs. $601). This reinforces the concept of a ‘premium brand’ and reflects the quality of Jeuveau as on par with Botox, and potentially even a little better. And Second, EOLS implemented an ‘Index Pricing’ strategy where they price-match what the doctor is paying, and then slash that down up to another 25% depending on the volume of the order. By doing this it gives the doctors an incentive to switch by saving money on the back end while charging the same, or marginally less, on the front end increasing overall profitability. The next thing doctors asked for was something to give their patients.
The first step in accomplishing this ties back to my last point. EOLS created a premium brand that demonstrated non-inferiority to Botox in a head-to-head clinical study. This enables doctors to pitch a safe and efficacious product to their patients. Without customer satisfaction nothing else matters. To solidify the value proposition EOLS is offering coupons to doctors to hand down to patients that save them up to $75 on their injection. This is the second phase of product launch and is set to begin ahead of schedule in a couple weeks.
The Right Product For The Right Market
70-80% of practices use Botox vs. Dysport or Xeomin. The main reason being that it is the provides the most durable efficacy. The latter compounds are not priced as high, but have drawbacks for patients and doctors. The results from Xeomin and Botox last roughly the same amount of time (3-6 months), but the former takes a week to kick in while Botox takes about 72-hours. Dysport on the other hand takes effect even faster than Botox but does not last as long. Furthermore, the dilution ratios for toxin reconstitution is different. These differences are significant because they mean doctors and their staff must be trained and equipped uniquely for each product. A doctor on EOLS’s medical panel at its Investor and Analyst Day stated that switching between products is like learning new languages.
Jeuveau is the first 900 kDa neurotoxin to hit the market in a decade. As such it is chemically identical to Botox. Therefore, when doctors use it they can speak effectively the same language as with Botox. Equally important, Jeuveau is backed by compelling data. Through the developmental process 2100 patients (men and women) have been treated with Jeuveau. In collaboration with U.S and Canadian regulator bodies EOLS has conducted three phase 3 studies and two open label long-term phase 2 studies. All of which met their primary endpoints, including the head-to-head non-inferiority study with Botox, and had a comparable safety profiles.
As demonstrated in the figure below, Jeuveau™ contains a 900 kDa botulinum toxin type A complex produced by the bacterium Clostridium botulinum. The active part of the neurotoxin is the 150 kDa component, and the remaining 750 kDA of the complex is made up of accessory proteins that we believe help with the function of the active portion of the toxin. Jeuveau™ has the same mechanism of action as other type A botulinum toxins. When injected intramuscularly at therapeutic doses, botulinum toxin causes a chemical denervation of the muscle resulting in localized reduction of muscle activity. Botulinum toxin type A specifically blocks peripheral acetylcholine release at presynaptic cholinergic nerve terminals by cleaving SNAP-25, a protein integral to the successful docking and release of acetylcholine from vesicles situated within the nerve endings leading to denervation and relaxation of the muscle.
Source
Jeuveau is hitting the market at the perfect time. The age demographic has shifted now that millennials are reaching their late 20’s and early 30’s. Ten-years ago most people getting Botox were 35 to 45 years of age. Today its shifting down. Around 21-years old a woman first starts to notice wrinkle lines. As stigmas are shattered with social media campaigns like #NEWTOX more women of this age will start to seek beautification regimens of this nature. Starting earlier means an increased value per customer because they comes back again and again throughout their life. Current estimations put penetration of the market opportunity at 7-9%. The bottom line is there is market share to support 3 companies.
What Allergan Had To Say
An analysts at Jefferies Healthcare Investor conference earlier this month asked an Allergan executive about emerging competition from Evolus. He played it cool and confident as you’d expect. He stated that although, similar, the two are not interchangeable that subtle differences can be meaningful. How meaningful will be unclear until Jeuveau has been in the field longer. Moreover, he emphasized that the jury is still out on Jeuveau. This is a valid point. High quality clinical data is great to have and piques clinician’s interest, but it’ll take repeated performance in the intended setting for Jeuveau to be fully validated as equivalent to Botox. Additionally, he touted the size of Allergan’s sales force (350 sales reps), customer service team (~350 reps), and customer base (30K-40K accounts). A final difference he pointed out was that the label for Botox is much broader than Jeuveau. Meaning its FDA approved for more uses. This is actually pretty insignificant in my opinion. Doctors on the aforementioned panel affirmed they would use Jeuveau off label just as they had used Botox off label in the past. The most intimidating thing he said was that Allergan has several neurotoxins in their pipeline as well as new bundle packages. What was interesting to me was that he reiterated several things that Evolus and their medical panel said. Both sides acknowledged Botox is going to remain on top. Both sides also agree that neurotoxins/face injectables is one of the most rapidly expanding segments of healthcare. Allergan agrees that there will be three players, but did not specify who they would be. When asked about up future competition, most notably from Revance Therapeutics who is believed to have a neurotoxin that is just as effective as Botox at half the price, the responses from Allergan and Evolus were similar. To summarize, they took a “lets cross that bridge if/when we get to it” position and emphasized that what patients are paying for is a premium product as much a premium experience.
Financials And Risks
As of March 31st Evolus had $133.7 million in cash and short-term investments. This slightly less than their total liabilities which is less than ideal. EOLS additionally has $25 million they can draw down from a $100 million loan facility secured earlier this year from Oxford Finance LLC. The company is not expecting much in term of revenue for the second and third quarter of 2019. These periods are dedicated more to market penetration and locking down a customer base. So far they are executing with precision. Over 3000 accounts have been opened since launching Jeuveau last month. As you have probably noticed, EOLS is giving a lot of discounts for Jeuveau in an effort to switch practices over from Botox. This is a great short-term practice but eventually they are gonna have to charge enough so the company can turn a profit. I could see EOLS and Allergan getting into a pricing battle, and the latter company has greater resources and pain threshold. There is actually quite a bit of room for prices to come down. In the past decade the price doctors pay for neurotoxins has went up 50% while what patients are charged has only went up 15%. Most likely a new pricing equilibrium will be found that boosts profitability for doctors. As we discussed above, there is enormous room for market growth. Ultimately, the biggest risk I see aside from failure to compete effectively is the outstanding lawsuits. In short, Medytox (an pharmaceutical company in Asia) together with Allergan, filed lawsuits against Evolus and their partner Daewoong claiming their neurotoxin strain was developed with stolen intellectual property. This is a serious concern, but I ultimately think it’ll amount to a failed attempt to impede the duos success.
Investment Summary
Evolus has positioned itself well to accomplish its goal of becoming number two in the facial neurotoxin space in 2-years. They do not have to beat Botox to succeed. They just have to beat Dysport and Xeomin. As a 900 kDa toxin they have key advantages over the latter compounds. Its important to keep in mind that as part of Evolus’s strategy they are trying to grow the entire market which will benefit all players. Out of the 10K patients treated with Jeuveau 24% of them had never tried a toxin before. Furthermore, 70% of those who had previously used Botox responded they would switch.
In the past two months EOLS share price has been punished severely and trades today at a -50% discount ($13.95 vs. $28.0) from it’s highs in May. Collectively, the new developments during this time frame have been bullish for the company. The most hurtful thing to investor morale was the selling of 4 million shares by ALPHAEON on May 15th in order to down debt obligation. The lawsuits really are not new, but have gotten more publicity lately. On June 25th Abbvie (NYSE: ABBV) and Allergan announced a definitive transaction agreement for ABBV to buy AGN for ~$63 billion. If anything this should work in EOLS’s favor in the short-term because with mergers comes chaos. With it’s share price capitulated and Jeuveau’s launch performance validating the company’s commercial strategy thus far, EOLS offers a great growth opportunity for investors.
I am/we are long EOLS.
Sultan Beardsley is the Chief Operating Officer at MS Money Moves, an informational and educational service that delivers biotech equity analysis and daily trade ideas. Look into premium membership to learn about all our service offers.
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