Evolus, Inc. (EOLS) Q2 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Evolus Second Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Erickson, Vice President Investor Relations. Please go ahead, sir.

Thank you, operator and welcome to everyone joining us on today's call. With me today are David Moatazedi, President and Chief Executive Officer and Lauren Silvernail, Chief Financial Officer and Executive Vice President, Corporate Development. Our prepared remarks today will include forward-looking statements within the meaning of the United States Securities Laws and 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. The detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. 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 projection or forward-looking statement. Additionally, our 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 an 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 on our Investor Relations website evolus.com. Lastly, following the conclusion of today's call, a replay will be available on our website at evolus.com. And with that, I'll turn the call over to David.

Good afternoon. And thank you, David. We are very pleased to share with you our results for the second quarter of 2021. This quarter is notable for several reasons. Not only is it our first full quarter of results following this successful resolution of our legal matters. More importantly, it is a quarter that clearly demonstrates both the resilience of Evolus as a company and a strong underlying demand for Jeuveau. Thanks to the unwavering support of our customers and dedication of our employees, we reported $26.1 million of net revenue in the second quarter and delivered on our goal of achieving $100 million annualized run rate. We remain very encouraged by the strong recovery of the U.S. aesthetics market, and the increasing demand for toxin products among existing and new patients. This quarter, our primary focus was on re-engaging our existing account base following the settlement. And we were pleased to see the majority of customers who purchased in the fourth quarter of 2020 have since reordered. This validates their commitment to Jeuveau and was a key driver of our strong second quarter revenue. In addition, we added over 300 new accounts, bringing our total account base to more than 6000 purchasing customers. We also observe continued strength behind our Evolus rewards program, which has seen a 66% increase in registrations compared to year end 2020 and now stands at more than 200,000 consumers. In the second quarter, we maintain a prominent presence in both digital advertising and billboards. These marketing initiatives are designed to elevate the visibility of our brand and our customers while maximizing the efficiency of our investments. Our co-branded advertising is first in class, and another example of how we are working with our customers to build a toxin category together. We are continuing to innovate around the advertising model to broaden our offering using localized targeted spending across a range of advertising vehicle that focus on the injector. As an example, we will be piloting streaming television spots in local markets with key customers during the third quarter. Overall, our strong second quarter results reinforce our belief that our differentiated approach of partnering with customers through advanced technology to targeting younger demographic will fuel our strong momentum going forward. While the ongoing pandemic adds an element of uncertainty, our competence remains high that procedural volumes will continue to grow in the back half of 2021 which positions us to achieve record sales in the second half of the year. As we continue to build our company, we are adding key senior talent. And we recently welcome two leaders to the team. David Erickson, who has extensive healthcare industry and Investor Relations experience came on board to lead our Investor Relations function. We also added the Dan Stewart as Head of our International Business. Dan has considerable industry experience having held sales leadership roles in several medical aesthetics companies, and his first task is to spearhead our global expansion into Europe. We look forward to the many contributions both individuals will make as we execute our growth strategy. Speaking of Europe, we continue to make progress preparing for our launch there, which remains on track for early 2022. Europe represents a $470 million market opportunity. And we believe our digital capabilities offer a unique advantage to build a strong presence in what is the second largest global market for aesthetic neurotoxins. The launch of Nuceiva which is a brand name of our products internationally, opened in 31 new countries and significantly increases our global footprint. We expect to be the fourth entrant to the European market just as we were in the U.S., and we look forward to applying key learnings from our U.S. launch to help drive the rapid uptake of Nuceiva. We will provide further updates as we get closer to our launch. Before I turn it over to Lauren, as you saw the June press release, we were proud to announce the publication of a peer reviewed article highlighting the efficacy and safety of Jeuveau in patients with skin of color. As the article noted, clinical data involving non-Caucasian patients is quite limited. Yet this demographic comprises a significant percentage of the population today and a growing segment seeking neurotoxin treatments. Articles such as this add to the body of strong clinical data that helps support injector and patient confidence in Jeuveau. Now, I'll turn the call over to Lauren for some additional financial information.

Thank you, David. And good afternoon, everyone. I'm extremely pleased with how much the team of Evolus has accomplished in the first half of this year. We successfully restructured our balance sheet eliminating $117 million on senior and convertible debt. We raised $92.4 million from a public stock offering and $25.5 million from a partner settlement payment. We also tightly and mindfully managed our operating expenses, which has enabled us to increase investment in customer programs. These initiatives have resulted in a more efficient organization focused on driving revenue growth, and a strong cash balance of $131.7 million at June 30, 2021. We believe this will fund our operations for at least the next 12 months. As David mentioned, we have reported strong net revenues of $26.1 million for the second quarter, up more than 200% from a year ago when our sales were impacted by COVID. Included in that amount was $0.7 million of net service revenue related to international sales. As you model out the back half of 2021, there are two things to keep in mind. First, due to the purchasing patterns of our Canadian partner, net service revenues are not recorded every quarter. And at this time, we don't anticipate recording any service revenue for the balance of 2021. And second, please keep in mind that while Q4 is the seasonally strongest revenue quarter, Q3 is the lowest. Overall, the pricing environment for neurotoxin products in the U.S. is quite stable. In fact, we are seeing some competitors raise prices. While the majority of our growth this quarter was driven by higher volumes, net revenue was also aided by a higher net average selling price following the sunsetting of 2020 COVID promotional pricing. Now moving down to P&L, our reported gross margin in the second quarter was 53.9%. Our adjusted gross margin in the second quarter, excluding the amortization of intangibles was 56.7% and consistent with the first quarter of this year. Based on our year-to-date performance we are increasing and tightening our full year 2021 adjusted gross margin target to a range of 54% to 57%. The full year adjusted gross margin includes settlement royalties, and excludes a one-time payment from our partner starting in September 2022, I'll remind you that the royalty on net sales drops significantly to a mid-single digit rate. As a result, beginning in the fourth quarter of 2022, we expect our gross margins will exceed 70%. Selling general and administrative expenses on a GAAP basis for the second quarter of 2021 were $26.4 million, up from $17.6 million during the second quarter of 2020, which was an unusually low level due to COVID. While we are carefully managing operating expenses overall, we continue to make investments to drive U.S. revenue growth, support our plan market expansion into Europe and further strengthen our internal capabilities. For the second quarter of 2021, SG&A expenses on a GAAP basis included $2.8 million of non-cash stock-based compensation expense. Following COVID and the settlement of the ITC and related litigation, we continue to improve our profitability. Specifically, our non-GAAP loss from operations improved by 25% to $9.3 million in the second quarter of 2021, compared to $12.4 million in the second quarter of last year, driven largely by higher sales this quarter and a $3 million COVID related restructuring charge in the second quarter of 2020. Non-GAAP loss from operations excludes stock-based compensation, revaluation of the contingent loyalty obligation and depreciation and amortization. For your models, I also want to remind you of some previously disclosed cash obligations coming up later this year. These include a $15 million settlement payment in the third quarter, and a $20 million payment to the Evolus founders in the fourth quarter. Also, in the third quarter of this year, we begin paying quarterly settlement royalties. For the second quarter, our weighted average shares outstanding were 51.2 million. And for modeling purposes, we suggest to use approximately 49.6 million shares for the full year 2021. And with that, I'll turn the call back over to David.

Thank you, Lauren. In closing, I'd like to make a few comments about the quarter what it means for the rest of the year, and the long-term prospects for Evolus. On the quarter, we set a new revenue baseline from which we plan to grow. And we now have the wind at our back as we look forward to robust growth ahead. Evolus has emerged very strongly from the events in our path, and we are focused on becoming a global leader in the aesthetics industry. For the company, we intend to execute with excellence around Jeuveau in the U.S., and launch of Nuceiva in Europe next year. We have made significant progress this year in transforming our balance sheet and leaning more heavily into our digital platform to drive efficiency and impactful customer engagement. As we look beyond 2021, we are committed to expanding our presence beyond neurotoxins, and have prioritized business development to transform the long-term prospects for Evolus. Lastly, I would like to thank the growing ranks of Evolus customers who have committed a greater portion of their patient base to Jeuveau and recognize the value we bring to their practices. Our commitment to you remains firm. To our shareholders, thank you for your confidence and support as we continue to grow our company. To the Evolus team, a special thank you. It's clear to me that we have the best team in the business. Look at what we've weathered, and what you all have delivered. With that, we're ready to take questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question comes from line of Annabel Samimy with Stifel. Please proceed with your question.

Hi, everyone, and congratulations on a solid quarter. So, a few from me here. So last week, we saw a huge beat for the anesthetics both on the filler and the neuromodulator side. So that's obviously pointing to demand rebound and market expansion. So maybe you can sort of provide some car and how you're participating in this market expansion and rebound? Are you seeing new patients or primarily switches? Are you seeing same store sales from the accounts you've built loyalty around? Are you in the right target demographic that you've been seeking specifically the millennial? So, I guess, what I want to know is what kind of stickiness are you finding in your product? Do you find a lot of switching between the products and loyalty programs? And so that was long winded, I apologize for that. But the second question I have is, maybe you can share some of the metrics with regard to specifically your co-marketing campaign, if it's bringing the patient in, directly tied to the ads, billboards, et cetera? And what kind of usage have you had of the consumer loyalty programs? Sorry, too long within questions. I apologize.

Annabel this is David, thank you for the questions. I think all three questions are interrelated. I think what you're getting at are, are questions on broadly the market and what we're seeing there, and what role we're playing in shaping that market both around the injector, the customer, as well as the consumer what that might mean going forward. Just starting out with the market, we were pleased to see the market leader reported last Friday, and they posted very strong growth, as you saw over 100% growth. And of course, we've announced now over 200% growth, which is very healthy to see mature product that's been in category for 20 years growing at that clip. Now we all recognize it's on a depressed baseline year on year. That being said, there is strong momentum in the market. And we do believe that we're playing a significant role in contributing to that. There are two things that I point out in the quarter that I think are meaningful to focus on. The first is the record revenue that we drove, came off of the same customer base, largely that we had in 2020. It did not come from a large portion of it - sorry, a very small portion of it came from new accounts. So, that shows you that number one, accounts are growing faster but we're also seeing that as a result of our co-branding initiative, customers are willing to commit a larger portion of their business to Jeuveau. And that is giving us greater confidence as we make further investments into the back half of the year. In addition to that, our consumer loyalty program continues to perform very well. As you know, we finished the year last year with just over 100,000 consumers in the loyalty program. And now we're reporting in the front half of the year having eclipsed 200,000 consumers in the program. So, we feel very good about the momentum that we're on, and the demand for our product amongst the injector universe is high. But the consumer demand is also moving along very strongly. That's all happening in a backdrop were today, we're up in only 6000 accounts. There's 30,000 customers or greater in this aesthetic universe. And as we now get to the back half of the year, we believe the wind is at our back, because we're going to continue to expand on the opportunity within our existing customer sets, while we also go wider. And we think with the market continuing to grow at a fast clip, as we focus on that millennial segment, which we believe will be the fastest growing segment as category the combination of those activities give us a lot of tailwind to continue to build on.

Great. And are you seeing repeat usage of the of the consumer loyalty program? I know you've got 200,000 in there, but are you seeing repeat usage of the $40 discount every quarter that they have up to like $160 or something?

Yeah, Anabel, we are. We're seeing very good return on visits for these patients that were treated the back half last year. We haven't reported out on those metrics. We want to get more quarters under our belts before we report out on some of those return metrics. But we're seeing what you would expect to see out of a consumer loyalty program, which is patients that are in them tend to come back more often. We just want to have a few more quarters experience in our belt before we start sharing some of that detail.

Got it. And one last question, if I may. As far as the customer side, are you well, not customer side, but I guess it is a consumer side in the end. Are you still over indexing to the millennial population relative to the market?

Yes, we believe we are. We are now tracking our consumer loyalty program as the lead indicator of the demographic mix. And what we're seeing is nearly 40% of consumers in our loyalty program are millennial generation or younger. And we think that's a very strong trend, clearly over indexing against the broader market. It has been since locked.

Right. Thank you so much.

Thank you.

Your next question comes from line of Marc Goodman with SVB Leerink. Please proceed with your question.

Hey everyone, thanks for taking my question. So, this is Rudy on the line for Mark. Congrats on the quarter. I have one question. You mentioned that the procedure values will continue to increase in the second half the year. So, can you provide more color on the second quarter-on-quarter, given the worsening pandemic conditions?

Hi Rudy, I would love to give you a lot more color around the quarter-on-quarter views. Unfortunately, given we had a tough quarter in the first quarter, and then now we're entering the second, it's hard for me to have a great gauge on it. We do look at third party reports. Clearly, I think when you dollarized, what we reported now and the other public company that's reported date, you get a sense for the market itself that it certainly has grown sequentially over the first quarter. And clearly the second quarter is a market likely all-time high. So, I think all those things point to very high growth in the second quarter. And we believe that that trend will carry into the back half of the year and some of the reports that we've seen continue to believe that the procedural volume will be strong. Now, of course, we're all watching the pandemic as it evolves. But we feel confident that if there's any customer group or any segment, frankly, that could weather through it, it would be the medical aesthetics group of customers. We think they have the proper protocols in place around their practice to continue to treat patients. And barring any broader shutdown, we believe this market will continue to be resilient the back half of the year.

Got it, that makes a lot of sense. And regarding the market share, are we still in mid to high single digits?

Yeah, look, it's hard to predict exact shares. I think you've got a sense now for where we are. I think you're probably thinking about it the right way.

Got it. Got it. Thanks. Congrats on the quarter again.

Thank you.

Your next question comes from the line of Louise Chen with Cantor Fitzgerald. Please proceed with your question.

Hi, good afternoon. This is Carvey in for Louise. Congratulations on the quarter. Thank you for taking my questions. First question, how do you think about the OpEx for the rest of the year? Is second quarter OpEx a good run rate for the rest of the year? And also, what do you think additional penetration could come from for toxins to treat aesthetic indications? Lastly, more on your kind of product portfolio. Any plans to add on new product by the end of this year and potentially maybe next year 2022? Thank you so much.

Great. Thank you for the questions Carvey. Let me turn it over to Lauren to address the operating expense question you have. And I'll take the other.

Hi Carvey, nice to catch up with you. Thanks for asking. On our non-GAAP operating expense, when you look at that we were right in the if you take out the product costs that we include in those under GAAP, we're right around $24 million this quarter. And what we plan to do is to continue to invest into the growth of the business on a very measured basis. So, we will continue to move it up a little bit throughout the quarters this year, but not raising it dramatically. Let me turn it back to David.

Great. On the second question around penetration, it's a great question because that really is the predictor of the long-term growth prospects for this market. We believe this market is highly under penetrated. It's a single digit percent of consumers that are interested in getting neurotoxin in the U.S. today are actually in the offices. We believe that the continued focus around that millennial segment, that segment in particular is critical to the long term, driving this penetration into double digits. And the reason we believe that is number one, millennials are obviously the largest consumer demographic in the U.S., but they're also the fastest growing as relates to neurotoxin treatments. And they're more likely to seek treatment, the barriers for them to access and willingness to spend on beauty procedures is much greater than the prior generations that have existed. So, we feel very good about the long-term prospects or the macro trends, if you will, around the consumer willingness to seek a neurotoxin treatment. And that's why we positioned both the company and the product where we did. It's not an idea for the next 12 months or 24 months. It's a long-term investment strategy. And you're seeing that reflected in our co-branded approach where we partner the injector directly with this youthful brand. And we put that advertising unit within a radius of the practice, so that we can eliminate the steps required for that consumer to seek treatment. And we believe that number one, we are in the early innings of advertising around the consumer. But we believe building a consumer brand that millennials gravitate to is one key to our future success. And we're committed to investing the building. And then lastly, around new products. I'll start by saying, we really like our singularity of focus. We have a single product with a technology platform that powers it, that's focused against this millennial segment. And we're starting to show what the potential is. And we've been on the market two years. And we are just now getting to the point where our value proposition is very clear, and it's continuing to build within the market. That being said, clearly, we have aspirations to build a company beyond a single product. We view Jeuveau as our flagship brand. And any asset we add in and around Jeuveau we'd have to add value to that flagship product. And so, we're very active on that side. And when we have more to share, we'll certainly provide that detail for you. Thank you for the question.

Your next question comes from line of Douglas Tsao with H.C. Wainwright. Please proceed with your question.

Hi. Good afternoon. Thanks for taking the questions. Just curious, obviously, there was interruption because of the ITC issue. I think you highlighted you're up to 6000 accounts. Just are you seeing orders from the entire account base? And are you fully back? Or is that going to be a driver over time, as it just takes time to sort of rebuild those relationships and just get them ordering? I mean, obviously not just the ITC issue, but as well as COVID. Thanks.

Hi, Doug, as you can imagine, once we settled the ITC case, we put a magnifying glass on our customer base that was ordering in 2020. And that was the focus for the entire commercial organization, both in the back half of the first quarter, and the entire second quarter. And I'm very pleased with the progress the team has made. Frankly, to their credit, this team is resilient, they're focused. And the value proposition we have is incredibly valuable. Because despite everything that this company has gone through, the majority of employees stayed with the company through these challenges. And the majority of customers have since reordered. And that's the only reason why we delivered a record quarter in terms of revenue. We feel very good about the space, it's obviously very sticky. The customer base, given everything we just went through that this customer base dealt with and stuck with us. And I can tell you, there's an intimacy with these customers, we may be a new company to the space two years in, but the relationships that we have with these customers are very deep. And the same applies to our employee base. And we feel that we've built something very significant in the foundation. But I think across the board in this company, we all feel that we have a lot more to do as we go wider, and introduce this value proposition to the rest of the market. So, we overall, Doug, I think we feel great about what we've done thus far. But to your point, we haven't gone wider and the front half of this year has really been focused on getting back to the customers we had last year, the back out now allows us to shift and expand our focus.

And just as a quick follow up. I mean, is there a type of practice that you are going to be focused on sort of going forward as that sort of key expansion driver?

We have a deployment across the country, and our sales reps are focused on the different specialties, as well as those that are outside of the specialties to do aesthetic procedures. Of course, in our stage, we're an opportunistic company. And so, we service those customers who are interested in expanding their business, especially around that younger demographic. And I can tell you that more whether it's billboards, or digital ads that go up around the country, the more the interest level around those practices rises to partner with us. And we always believed that this would be a building effect, and over time, it would begin to snowball and I believe we're in the early innings of that process.

Okay, great. Thank you.

Your next question comes from line of Greg Fraser with Truist Securities. Please proceed with your question.

Hey, guys, thanks for taking the questions. Firstly, for large Boston users who have not yet adopted Jeuveau, what have been the reason that you've heard as to why?

Well, look so, I think one of the earlier questions was what do you think your market share is. Just assume for a minute, we're mid to high single digits, I think you're getting after 9 out of 10 customers in the U.S. are probably not using Jeuveau versus those that are, or at least 9 out of 10 patients aren't getting Jeuveau. So, I think there's a list of reasons why they vary by customer. In the end, these are some of the same issues that we faced and the customers that are now users. There's nothing unique there. It's just a matter of taking our value proposition and spending time with the customers for them to understand it. And then there's the natural adoption curve that happens with any product in any category, that you'll have your early adopters, and then you'll continue to build from there. We've demonstrated now we're far beyond early adopters, and we're likely entering the later stages of the early majority. And from there, we'll continue to expand our presence. But there's no doubt that as we build a consumer brand, that consumers are asking for that as we create interest around that millennial segment. And in these pockets, where we have a greater presence, where their peers are using our products in a much larger level. I can give you an example last week. Last weekend, I attended plastic surgery meeting here in California. And two of the leaders of that meeting, they were the co-presidents, if you will, of the meeting. They both have billboards in their respective markets. They're using Jeuveau predominantly as their toxin of choice. And when they stand up the podium, and they share that information, the audience listens. And so, there's always a spillover effect. So, I'd love to give you one answer, or point to one or two things. The reality of it is we have a lot of work to do. We like our starting point. This revenue is a good place to be today. It's not the place where we want to be over time. But we think we have the right recipe. And now it's just a question of investing and executing behind it. And so we look forward to giving the updates as we do that.

Got it. That's very helpful. Given the strength in the U.S. past the market and the tailwind from pent up demand and Jeuveau still being in the early stages of growth, could Q3 sales be up quarter over quarter? I know you mentioned seasonality of talks in the market and that Q3 tends to be the lowest revenue quarter. Just hoping you can comment further on how you're thinking about the third quarter?

Sure. Yeah, Greg so, we really try to look a little further out than any single quarter, right. So, as we build a business, we do believe that as you know Q3 is the lowest seasonal period of the year for toxins and Q4 happens to be the highest, so as you sort of aggregate those two, we felt very confident that when we think about penetration in the market, we're gaining. This product in terms of procedural volume relative to other brands will gain share in the back half of the year. The part that makes it challenging is anticipating what next quarter's procedural volume will be, which is what you're asking. Generally procedural volume has been down 10% 15%, as high as 20% seasonally when you look at the third quarter over the second quarter. So, at this point, we aren't guiding on that. We have provided some color that we feel very confident that the back half of the year will be very strong for us and we'll continue to build on those trends. And we're very focused on building that and we remain very encouraged by what we're seeing in terms of the strength of the business.

Got it. Thank you.

Your final question comes from Vamil Divan with Mizuho Securities. Please proceed with your question.

Hey, guys, this is Oii [ph] for Vamil. Congrats on the quarter. And thanks for taking my question. So, some quick one. Previously, you guys have sort of indicated that I think within two years or so you could be the number two player in the market. And understandably, there's been a reset. And so, with this reset, just wondering what your thinking is now in terms of where you think you could be in a couple of years? Thanks.

Sure. You're right, in the sense that certainly the second quarter was a reset. And we think about it as the baseline by which we build from. At the same time, I think what is also proven is that we have an incredibly resilient product and one that, frankly, this management team joined because we believe it has the potential to be a high-quality product to command a significant portion of the market over time. And we're committed to building that. That being said, it's been a quarter and a half and since we've settled all outstanding issues, and we've been on the market for two years, this is our first full quarter on the market without any of the outstanding issues present. So, we feel very good about where we stand. As we think about long term, we also believe that the potential is intact, just as we originally thought it would be as it relates to guiding towards any of those long term prospects. I think that's something I'll reserve till we get a few more quarters under our belt.

Okay, thanks. And you also indicated that a majority of revenues from this quarter was from reorders of your customer base - your current customer base. Just wondering, would you be able to share like, perhaps on the days of inventory or anything to that effect, just trying to get a better sense on how many of those customers could reorder in the coming quarter?

Sure. Look, we don't have a clear indicator of inventory on hand, I don't think - I'm not aware of any manufacturer that does. Unfortunately, that's not something that we have visibility to. That being said, we have a disciplined pricing program where each of our tiers unlock certain value. That value is built on price, just like other customers based on volume. But what we do in addition to that is it's also built on our co-branded advertising dollars. So, we actually advertise more around the customer who buys more, which we believe is critical to pulling through product more quickly. And that's above and beyond our consumer loyalty program, which is very rich in terms of the offering to the consumer, which is $40 off per treatment, which we understand to be meaningfully above the market leader as it relates to the savings to that consumer. The combination of those programs is designed to drive consistency in buying patterns over time with these customers. So, as we think about buying patterns, our goal is to continue to drive higher frequency over time. And it's not designed to create any sort of shelf stocking or bulk type of selling with this product. And we think over, you'll obviously see that as we execute over multiple quarters but that's how we designed it.

Thanks so much.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.