Evolus, Inc. (EOLS) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Evolus Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would like to introduce your host for today’s conference, Ms. Carol Ruth with The Ruth Group. Ma’am, please go ahead.

Thanks, operator, and thanks, everyone, for participating in today’s call. This call is also being broadcast live over the Internet at www.evolus.com, and a replay of the call will be available on the company’s website for 30 days. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of the United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management’s current assumptions and expectations of future events and trends, which may affect the company’s business, strategy, operations or Financial performance. A detailed discussion of the risks and uncertainties that the company faces is contained in its Quarterly Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 29, 2018, and subsequent quarterly reports on Form 10-Q, current reports on Form 8-K, and our recent a final prospectus. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projections or forward-looking statements. Additionally, the discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found on our Investor Relations website at investors.evolus.com. With that said, I’ll hand the call over to David Moatazedi, President and CEO of Evolus. David?

Good morning, and thank you all for joining our update call. With me today are Lauren Silvernail, Chief Financial Officer and Executive Vice President, Corporate Development; and Rui Avelar, our Chief Medical Officer. Before I start with my prepared remarks, I’d like to comment on our exciting news this morning related to the early resubmission to the FDA of our Biologics License Application, or BLA, for our product candidate DWP-450 for the treatment of glabellar lines. This resubmission comes ahead of schedule and marks a major milestone achievement prior to commercialization. Since joining Evolus a few short months ago, I’ve had the pleasure of meeting many of you. For those of you who I’ve not met, I’d like to start by providing insight on why I joined the Evolus team, who we are as a company, and the significant accomplishments we’ve made to date. Evolus represents a novel and meaningful opportunity in the aesthetic space. We are nimble, fast-paced company, focused exclusively on cash-pay aesthetic medicine, and we’re well-positioned to launch a new chapter in aesthetics. Our first product candidate DWP-450 represents a strong anchor product to build the premier brand within one of the single largest and fastest growing categories in healthcare. If approved, we believe our toxin will be the first known 900 kilodalton molecule since BOTOX and will be the first aesthetic-only toxin on the market. In my first 90 days, we have been successful in executing on key initiatives ahead of schedule to position ourselves for U.S. commercial launch in the spring of 2019, and we have no intention of slowing down. We announced the early resubmission of our BLA to the FDA ahead of schedule. We have filled key positions to enable us to refine and advance our commercial strategy, most notably with the appointment of Mike Jafar as Chief Marketing Officer. Mike is an expert in the field and led the commercial launch of Juvederm Voluma, which has been recognized as not only one of the largest launches in the medical aesthetics category, but also one of the most successful, as measured by year one sales. Most recently, he led the entire marketing program for CoolSculpting. And in July, we completed a public equity offering, which together with proceeds from our IPO positions us well to initiate one of the highest impact launches of a new toxin to date. Looking ahead, I expect to build on these successes through the next several months. Relative to our early BLA resubmission, we maintain our line of sight toward regulatory approval of DWP-450. As a reminder, the resubmission follows the receipt of a Complete Response Letter, or CRL, from the FDA, which came in May and required the submission of additional data to the agency for the completion of review of the company’s BLA. Deficiencies cited by the FDA in the CRL were isolated to items related to Chemistry, Manufacturing and Controls or CMC processes. No deficiencies were related to clinical, non-clinical or safety matters. We now await the receipt of notice from the agency, accepting our resubmission, which will also classify the submission as Class I or Class II. We expect to receive the acceptance of the submission and a new FDA action date in approximately one month in September 2018. I’d like to reiterate that regardless of the classification of our submission, we e remain committed to working towards the planned commercial launch of DWP-450 in the spring of 2019. We are well-prepared from a product manufacturing standpoint. In May, our manufacturing partner, Daewoong Pharmaceuticals, received a favorable Establishment Inspection Report, or EIR, related to their manufacturing facility. This, combined with the more recently received clearances from regulatory bodies in Europe and Canada, marks a significant milestone achievement for the company. This EIR effectively cleared the facility to manufacture product. To best capitalize on expected DWP-450 approval, we will continue to work diligently to prepare for our spring 2019 launch. While we remain strategically quiet on our specific commercial plans for competitive reasons, I would like to outline our three phase launch plan at a high level. Through the first phase, we remain focused on building out our disruptive commercial plan and expanding our sales and marketing management team through the remainder of 2018. We are also frequently meeting with key opinion leaders and high volume injectors, as seek their input to build out our customer-centric organization. In the second phase, following FDA approval, we will quickly establish our company identity. While our leadership team is well known in the industry, our company is not. This phase will debut our company’s identify in our charter, as we continue to further build out our future customer base. Simultaneously, we expect to begin recruiting a specialized sales force. And finally, we will initial our commercial launch in spring 2019. The launch will focus on the flawless execution of go-to-market strategy to quickly establish our presence in the category, while simultaneously investing in growing the largely underpenetrated market. On the R&D side, we continue to make progress not only with our early resubmission but also with Rui Avelar and his team’s hard work to submit several manuscripts grounded on both our U.S. and European pivotal dataset. We expect these manuscripts to be published in peer-reviewed journals in early 2019, further validating our clinical data and marking another key milestone. While the U.S. toxin market represents the largest market opportunity and remains our priority in the near-term, we also look forward to commercializing DWP-450 to partners in Canada and Europe in 2019. Before turning the call over to Lauren, I’d like to thank our entire team for their dedication and hard work, which has allowed for early resubmission of our BLA ahead of our aggressive timeline. With that. I’d now like to turn the call over to Lauren, who will provide a review of our second quarter financial results and cash position.

Thank you, David, and good morning, everyone. As David mentioned, we completed an equity offering in July with net proceeds to the company of approximately $56 million. As of June 30, 2018, Evolus had $43-point-million in cash. Combining our cash at the end of the second quarter with the proceeds from our recent offering gives us a pro forma cash position of nearly $100 million. We now believe we are well-funded to take us through our early commercial stage. As this is my first earnings call as CFO of Evolus, I would like to share some perspectives on the quarter and our approach to growth going forward. We remain highly focused on using our cash to fund our commercial build out on a measured basis. We used about $6 million of cash in each of the first two quarters of 2018. Today, rather than offer detailed guidance, I will make a few directional comments. You should expect us to manage our cash conservatively. For the third quarter, we anticipate non-GAAP operating expense will increase as we bring additional sales and marketing leadership onboard and begin to execute our commercial plans. We also expect non-GAAP operating expense to be higher in the fourth quarter than the third quarter, and we expect to provide an update on those trends on our third quarter call. For the first time, we are reporting non-GAAP operating expense. We have started doing this to make it easier for you to track our operating expenses, excluding two non-cash items: stock-based compensation and royalty revaluation expense. On the royalty revaluation expense, our balance sheet includes a contingent royalty liability of $48.8 million relating to a low single-digit royalty on sales we expect to pay to the Evolus founders upon commercial launch. This contingent royalty obligation is revalued on a quarterly basis, driven by changes in assumptions such as the timing and magnitude of projected revenues and the discount rate. Our non-GAAP operating expense for second quarter ended June 30, 2018 was $5.3 million, excluding stock-based compensation of $2.6 million and royalty revaluation expense of $8.2 million. Stock-based compensation split $2.2 million in G&A and $0.4 million to R&D. The $8.2 million expense from royalty revaluation expense was primarily the result of derisking DWP-450 following our partner’s receipt of a favorable EIR from the FDA, essentially clearing the plant for manufacturing. With that, I’ll turn the call back to David.

Thank you, Lauren. In closing, I’d like to outline our near term focus for the duration of 2018 and early 2019 by reiterating my confidence in our ability from a financial and operational perspective to work closely with the FDA to gain approval, continue hiring a world-class and be fully prepared for a spring 2019 launch, and finally, to execute on our launch to establish Evolus as a premiere aesthetic company. I want to thank everyone at Evolus for their diligent work and I’m excited to continue to build on our momentum, as we approach our spring 2019 launch of DWP-450.. I’d also like to add that I look forward to speaking with many of you in the coming days and weeks, especially through the fall conference season. If interested in arranging a call and meeting, please reach out to the Ruth Group. With that, I’ll now turn the call over for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Louise Chen with Cantor Fitzgerald. Your line is open. Please go ahead.

Hi, thanks. This is Jennifer Kim on for Louise. Congrats on the early resubmission. I have two questions. So first, I know you mentioned looking for commercial partners for a Canada and EU launch in 2019. I was just wondering if you could give any more color on how big the opportunities are in those markets? And then my second question is, just looking ahead, what do you would be the higher priority following commercialization of DWP? Would it be getting more aesthetic indications for DWP or more focusing on expanding the portfolio into other markets or other assets? And what would that timeline be like?

Great and good morning. Thanks for the questions. I’ll start with your first question related to partners outside of the U.S. And I’ll start by saying our focus, as I mentioned earlier, is on getting to the approval in the U.S. as that is clearly the largest market opportunity we believe north of $1 billion in the U.S. is the dollar value of the toxin market. In Canada, in particular, we do have a partner by the name of Clarion. Clarion is a distributor of other facial aesthetic products and devices and they’ve been a great partner to work through the development process, and we’ll continue to stay close with them as they prepare for the approval and commercialization of DWP-450. In Europe, we’re actively engaged in assessing partners. And as we make further progress, we’ll share that with you. As it relates to second part of your question, whether it’s a focus on expansion of the market or indication expansion rather expansion of our portfolio versus expansion of future indication, I would say that, first, we are committed to building out a world-class aesthetic portfolio. We believe the DWP-450 is the anchor brand that can build around, and we’re very confident that we can launch with our anchor brand alone at the same time, we are constantly assessing the market for high-quality assets. And when we have more information surrounding that, we’ll certainly share that with all of you. As it relates to additional indication, at this time, we’re focused on the launch in the glabellar area. We’ve spent time with key opinion leaders and they feel confident in the quality of our science, s well as our clinical data that what we have in – with a glabellar indication, it’s sufficient to actively launch this product and promote it and make meaningful impact in this market today. If something changes in the future, we’ll certainly share that with you.

Thank you. And our next question comes from the line of Steven Rigor [ph] with Mizuho. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking my questions. So with your early expedited response to FDA, can you talk about assumptions around timing of launch? Is it fair to categorize it towards the early part of the spring?

Yes. So as we talked about on the call, we expect to hear back from the FDA in September, that’s roughly within their 30-day time frame that they’ll take to assess this filing. And at that time, we expect to get a revised date from the FDA for approval. As we get up to the 30-day mark and receive that revised date, we’ll certainly share that with all of you, so that you can plan against that. And you can expect that shortly within months after we’ll be prepared to commercialize and launch this product.

Great. Thank you.

Thank you. And our next question comes from the line of John Boris with SunTrust. Your line is open. Please go ahead.

Thanks for taking the questions and congrats to you for clearing out the CRL and the BLA filing. First question just on OpEx, obviously, $14.4 million in the quarter, a lot higher than we had anticipated. Just some color on some of the pre-launch planning that you’ve done on that line to date? And then, just have a couple of follow-ups.

Sure. This is Lauren. Good morning, John. Thanks for the comments and questions. Important, when you look at the OpEx to peel out about $8.2 million of contingent royalty obligations due to the founders of the company at low single digits, and that pulls you back right in line along with the total stock-based compensation of $2.6 million. When you pull those two back, you’ll see that our burn rate for the quarter matches the first quarter. With regard to pre-launch, let me turn it over to David to address some of the activities and things that we’ve been doing.

Yes, and god morning. Thanks for the question. As I mentioned earlier, our commercial launch strategy, we are actively developing. I think, I’ve been working closely with Mike Jafar and I’m very confident in plans that are coming together, and we expect to finalize those here in the very near future. Simultaneously, we are not going down with our engagement around customers. We’ve actively engaged in multiple advisory board meetings and spent a significant amount of time both in offices, as well as on the phone with key customers in this market, because we all believe that the best companies have been built around the input of customers. In the end, this company is going to be wrapped around the individual customer, and we’re going to be thinking about their needs today, and we’re focused on what the unmet needs are in the market as well. And as we build out our plan, it’s going to be built in context of the market as it stands today in those unmet needs.

So just one follow-up. And since you’ve had some advisory boards, not sure if you’ve done product concept testing, but what have physicians said about the product and the value it brings? And certainly, how are you thinking about the value and price going forward and potential discount that maybe needed to break bundle?

Another great question. And we have – we’ve spent actually just last month, we had an advisor board meeting at The Cosmetic Bootcamp in Colorado. And we had a number of high volume injectors of aesthetic products across the different specialties that were in the room, many of which were being exposed to the Evolus story for the first time and seeing both the U.S. as well as the European clinical data for the product. And what was consistent, as went around the room with the different attendees was that, this is one of the cleanest datasets that they’ve seen for any product that is entering the market, and that’s because when you look at the U.S. data, the data is reflective of what you would expect to see with the 900 kilodalton molecule in both its duration, as well as its safety profile and its predictability. What’s more interesting as well is that, no other toxin has had the benefit of introducing themselves with comparative clinical data, and we shared the European trials, which compared DWP-450 directly to the market leader and follow patients out for 5 months, and the results that we shared related to that were equally impressive to the attendees. And they left with a high degree of optimism around both the company’s platform, which they felt met a void in the market today of a nimble, customer-centric company, and idea being aesthetic-only raised the opportunity to do things that are different and unique in the space, things that perhaps companies in the past had done and no longer engage with. That coupled with the comprehensive clinical data from both the U.S. and the European trial left many attendees feeling that Evolus is a company that could make meaningful impact in this market and it’s exactly what gave me the confidence to join this company and others that have joined the leadership team since. And we look forward to unveiling not just the data that we shared at that advisory board, but unveiling our marketing plans and promotions to the market as we get closer to approval.

Thanks. And again, congrats on the execution on the manufacturing side.

Thanks, John.

Thank you. And our next question comes from the line of Donald Ellis with JMP Securities. Your line is open. Please go ahead.

Thank you. Good morning. I have two questions, first one for David; second one for Lauren. Regarding the Class I versus Class II, the delta between approvals could be as much as four months. You’re still forecasting a spring launch. So are there other activities that have to be accomplished other than the approval that would drive your spring launch forecast? And then, secondly, for Lauren, I got your input on third quarter and fourth quarter OpEx. When should we start thinking about including hiring of a sales force in our models? Thank you.

Great. Thanks, Don, and thanks for joining the call. I’ll start with the launch of DWP-450. As you can imagine, ramping up an organization from no commercial infrastructure all the way through to a place where premier aesthetic company is a process. And regardless of the approval date, we’re guiding towards a spring 2019 launch of DWP-450. And we’re doing that, because we know that you only have one opportunity as a company to launch, and we want to make sure that launch is high-impact and that we’re well-prepared and that our teams are well-trained and well prepared in order to meet the needs of this market. And so, we’ll await the FDA’s response in 30 days to determine whether it’s a Class I or Class II. At the same time, for planning purposes, I would assume that we would be prepared to launch in spring of 2019, regardless of the outcome.

And this is Lauren, Don. On the sales force expense, we’ve said previously that through this year, we are building out our leadership team in sales and marketing first with the hire of Mike Jafar and more to come. And what that team will be doing is all the planning and the prep to put the sales force onboard right early next year as we get ready for launch in the spring.

All right. Thank you very much.

You’re welcome.

Thank you. And I’m showing no further questions at this time. And I would like to turn the conference back over to David Moatazedi for any closing remarks.

Great. Well, thank you all for joining the call this morning. We look forward to meeting you over the course of the next few months as Lauren and I spend some time with Rui on the East Coast, and have a great day.

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect.