Evolus: Progress As Management Targets $700m Aesthetics Franchise Revenues By 2028 (EOLS)

Investment Overview

Evolus (NASDAQ:EOLS) went public in February 2018, its initial public offering (“IPO”) raising ~$60m in gross proceeds, at a price of $12 per share.

The company describes itself as “global performance beauty company with a customer-centric approach to delivering breakthrough products”, in its 2023 annual report/10K submission, and its first and only commercial product, Jeuveau, was approved in the US and most European territories (where it is marketed and sold as Nuceiva) in 2019.

Jeuveau is an injectable botulinum toxin Type A product, described by the company (in its 10K) as follows:

Jeuveau® is our commercially available proprietary 900 kilodalton, or kDa, purified botulinum toxin type A formulation indicated for the temporary improvement in the appearance of moderate to severe glabellar lines, also known as “frown lines,” in adults.

Jeuveau® offers a 900kDa botulinum toxin alternative to BOTOX (onabotulinumtoxinA). We believe aesthetic practitioners generally prefer the performance characteristics of the complete 900 kDa neurotoxin complex and are accustomed to injecting this formulation.

Jeuveau® is bolstered by the results from our TRANSPARENCY global clinical program which included more than 2,100 patients and provides robust data to physicians evaluating the purchase of Jeuveau®.

We believe the comprehensive TRANSPARENCY clinical data set, including a head-to-head Phase III study comparing Jeuveau® and BOTOX, provides physicians with confidence in recommending Jeuveau® to their patients.

Botox, acquired by the “Big Pharma” company AbbVie (ABBV) as part of its ~$66bn takeover of medical aesthetics giant Allergan, has been marketed and sold in the same indication since 2002, and, not surprisingly, given the similarity between the two products, Allergan filed a lawsuit against Evolus almost as soon as its product was approved, alleging that Evolus misappropriated trade secrets in order to discover the manufacturing secrets that turn botulinum into an effective drug.

At the beginning of 2021, Evolus’s share price had sunk to a low below $3.50, down over 70% since IPO. Soon after, however, the dispute was resolved – according to an AbbVie press release dated February, 2021:

Under the terms of the settlement agreements, AbbVie and Medytox will release all claims against Evolus related to the alleged misappropriation of Medytox’s trade secrets and grant a license to Evolus to continue to commercialize Jeuveau® in the United States and Nuceiva™ in all other territories in which Evolus has licensing rights. AbbVie and Medytox will receive milestone and royalty payments from Evolus. In addition, Evolus will issue common stock to Medytox.

Evolus says it has paid AbbVie and its development partner Medytox $35m, plus royalties through to late 2022, and its only remaining obligation is to pay a “mid single digit royalty” on net sales of Jeuveau to Medytox.

Having settled litigation with AbbVie, Evolus has been able to switch its focus purely to taking on Botox in the commercial markets. Evolus is “pursuing an aesthetic-only non-reimbursed product strategy”, which means its “primary market is the cash-pay aesthetic market, which consists of medical products that consumers pay for directly out of pocket”, the company says.

In 2021 and 2022, Evolus drove $100m and $149m of revenues, respectively, and made a net loss of $(64m) and $(58m) respectively, and by October last year, its share price had slipped below $8. Across the past six months, however, its share price has been rising, reaching a high over $15 this month, due to several factors.

Firstly, AbbVie reported robust revenues of $2.68bn for Botox in 2023, up from $2.62bn in the prior year, signaling that the market for botulinum toxin products remains strong and has recovered from setbacks experienced during the pandemic. Secondly, Evolus is focused on bringing a second product to market in Evolysse, a portfolio of injectable hyaluronic acid-based dermal fillers, hoping to launch in Europe this year, and the US in 2025.

Finally, the company posted a solid set of earnings earlier this month, with revenues up 36% year-on-year, to $202m, and has guided for $255m-$265m of revenues in 2024. With some favourable catalysts in play, but also contending with some new competitive threats, this feels like a good time to take a deeper dive look at the company, and whether its stock represents a “buy”, “sell”, or “hold” opportunity at this time.

Let’s begin by reviewing 2023 earnings and 2024 guidance in some more detail.

Evolus 2023 Earnings, Forward Guidance – Smoothing Over Cracks In Business Model

Evolus earned a record $61m of revenues from Jeuveau in Q4 2023, while also recording its lowest ever quarterly operating loss, of $(3.7m) on a non-GAAP basis – GAAP net loss was reported as $(10.6m).

As mentioned, across the full year, Evolus earned $202m, beating its own guidance for $194m-$198m, while operating expenses increased only marginally, to $251m, versus $214m in the prior year, and net loss fell to $(49.2m). The vast majority of costs were related to SG&A – $165m – while Evolus spent just $6.5m on R&D, and $8.9m on in-process R&D, despite bringing through its new line of dermal fillers.

Better still, management has guided for 2024 revenues of $255-$265m, up 26-31% year-on-year, with a gross profit margin of 68%-71%, and operating expenses of $185-$190m. As such, 2024 will see Evolus become profitable for the first time (provided guidance is met) in quarter four.

Going into 2025, management has warned that “profitability may not be sustained every quarter due to the filler launch”, but looking further ahead, it:

… projects its total net revenue can reach at least $700 million by 2028, a compound annual growth rate of 28% from 2023, based on the combination of its existing aesthetic neurotoxin business and anticipated launch of the Evolysse™ HA dermal filler product line beginning in 2025.

If this guidance is met, it seems almost inevitable that Evolus’ share price and market cap valuation will rise, given market cap today is just $850m, only ~$150m higher than projected 2028 revenues.

It is unusual for a commercial stage Pharma to be valued at less than 1.5x forward sales, unless the company is expected to be heavily loss making, which does not seem to apply to Evolus, although it is worth noting management has not provided any guidance on long-term profitability.

Having emerged relatively unscathed from its skirmish with AbbVie, Evolus appears to have brought a strong product to market, with a substantial and growing addressable market. Evolus CEO David Moatazedi told analysts on the Q4 earnings call that:

Our differentiated approach has resulted in Jeuveau becoming the fastest-growing toxin in the United States aesthetic market for the third consecutive year.

He broke down the market opportunity for Jeuveau as follows:

We now view our addressable market to be approximately $6 billion and comprised of three distinct segments, including two segments where we currently have little to no penetration.

The first segment is the U.S. neurotoxin market of $2.6 billion value, which is projected to grow at high single to low double-digit growth rates for the upcoming five years. We are celebrating our fifth year of Jeuveau being on the market in May, and are proud to have achieved double-digit market share despite new competitive entrants.

The second segment we plan to enter in 2025 is the U.S. filler market, which we estimate is a $1.6 billion market growing at a similar rate to toxins with a clear overlap in our current customer base.

And the last segment is the international market, which represents $1.8 billion, having doubled with the addition of the dermal filler product line, and we expect to have a presence in countries representing more than 90% of the total addressable market by 2028.

I would broadly agree with most of these statements – the aesthetics market is enjoying a renaissance as economic conditions improve (although it is worth bearing in mind, that, due to its non-essential nature, it tends to perform poorly when patient budgets are strained), Jeuveau has been able to capture an impressive amount of market share, without being too much of a threat to Botox, and the opportunity to bundle sales of Jeuveau with the new dermal fillers product line seems promising given their synergy.

Threats to Evolus Long Term Plans – New Competition, Better Products?

In its 10K submission, Evolus lists the five other approved injectable botulinum toxin type A neurotoxins it competes against as follows:

• BOTOX, marketed by AbbVie, received FDA approval in 2002 for glabellar lines.
• Dysport, marketed by Galderma S.A., or Galderma, received FDA approval in 2009 for glabellar lines.
• Xeomin, marketed by Merz Pharma GmbH & Co., or Merz, received FDA approval in 2011 for glabellar lines.
• Daxxify, marketed by Revance Therapeutics, Inc., or Revance, received FDA approval in late 2022 for glabellar lines.
• Letybo, marketed by Hugel, Inc., or Hugel, received FDA approval in February 2024 for glabellar lines.

Galderma markets and sells a host of dermatology brands, and earned over $3bn in 2023 to the end of Q3, while Xeomin revenues have not been disclosed (as far as I am aware), but both have been around for some time and have been unable to prevent the rise of Jeuveau, which has been marketed smartly by Evolus as a beauty, as opposed to a medical product. Botox continues to dominate, having ~70% market share.

The new kids on the block are Daxxify and Letybo. I recently changed my rating on Revance, the marketer and seller of Daxxify, from “sell”, to “hold”, as the company finally seems to be making headway, earning $24m of revenues in Q4 2023. That is way short of Jeuveau, however, plus Revance is still embroiled in litigation with AbbVie, while AbbVie receives royalties from sales of Jeuveau.

Meanwhile, Letybo is the leading neurotoxin brand in South Korea, and will not launch in the US market until later this year. All things considered, in such a large market, the current level of competition does not seem overwhelming for Jeuveau, and in fact, competing products may help increase the overall market opportunity as customers are attracted by a broader product range.

Revance attempted to market Daxxify as a superior product to Botox with a higher price point, thanks to its longer lasting effect, but that did not go over well with customers, who seemingly have few issues with the 3-monthly administration, and may even prefer it to Daxxify’s one-every six months regime owing to concerns around a longer-lasting negative effect, if the product is not administered optimally.

Evolus has apparently done the opposite, making its product cheaper than Botox, and importantly, making no attempt to challenge Botox in its other markets i.e. migraine treatment. In a head-to-head comparison, albeit small, Jeuveau slightly outperformed Botox – according to a press release:

Compared with BOTOX-treated males, percentages of males treated with Jeuveau^® who had a ≥1 point improvement on the glabellar line severity scale at maximum frown were higher at all post-baseline time points by an average of 10.1% across nearly all visits, though with the small sample size, results did not reach statistical significance. Similar trends were observed for efficacy endpoints based on the global aesthetic improvement and subject satisfaction scales, and no serious adverse events were related to either toxin.

In terms of its new product, dermal fillers, AbbVie is once again the most significant competition, marketing and selling its Juvederm products, with Galderma and Merz also providing competition, as well as Revance.

In a head to head European nasolabial study against Galderma’s Restylane-L, Evolus’ Evolysse™/Estyme lift filler showed non-inferiority, and arguably, emerged as the stronger product. On the Q4 earnings call, Evolus’ Chief Medical Officer (“CMO”) Rui Avelar noted that:

The primary endpoint was non-inferiority comparing the improvement in the NLF severity scores at 4 weeks between the two products. The difference was minus 0.16 in favor of Evolysse Lift and the upper bound of the 95% confidence interval was 0.03, successfully passing the primary endpoint. Of note, the confidence intervals cross 0, demonstrating equivalence between the two products.

Despite similar volumes injected at the initial treatment, Evolysse Lift seems to have more pronounced effect at all time points, numerically and reach a statistical superiority at three and six months.

(in terms of) the percent of responders with at least a 1-point improvement over time using the NLF scale as assessed by the investigator. At nine months, the patient responder rate was 31% for Restylane-L and 46.7% for Evolysse Lift.

In summary, although Evolus is a late-comer to this market compared to its direct rivals, it seems to be in position to hit the ground running with an effective and safe product, and the ability to bundle its new product with Jeuveau – every customer that uses Jeuveau is likely to be a warm lead for the Evolysse™/Estyme product range.

Evolysse targets the US, and Estyme Europe, and Evolus hopes to expand the number of indications from the current two (smooth and lift) to five by 2027 in the US, and to cover five indications (smooth, lift, sculpt, lips and perioral fine lines).

Concluding Thoughts – A Relatively Straightforward Buy Opportunity – If Progress Is As Smooth As Management Promises

To be successful in the aesthetics industry, there are various hurdles to overcome – perfecting a complex product, securing approval, evading litigation from the 800 pound gorilla AbbVie, and getting the marketing right.

On all four fronts, Evolus – despite a few scares – appears to have succeeded, and that has resulted in the fastest growing market share of any product. With its more niche indication and marketing tactics – e.g. no reimbursement, selling as a beauty product – management appears to have found a strong formula for success, and the senior team has been together for long period of time – CEO Moatazedi since 2018, and CMO Avelar since 2014 – providing continuity and experience.

As such, I find management’s long term revenue targets to be reasonable, and achievable, and although the company is not yet profitable, and is not flush with cash (reporting a position of $63m as of FY23), that may be achieved by the end of this year, and, more permanently, after 2025 when Evolysse and Estyme have been fully launched.

As such, I find Evolus to be a relatively straightforward “Buy” opportunity at this time, with a strong product, and nicely carved out niche market within an industry that offers a long term market opportunity in the double digit billions. If, say, the company guides for over $500m revenues in 2026, I could see its market cap valuation trending towards $1.5bn.

To be on the safer side, factoring in risks inherent in forward revenue projections, I’d say there is a ~50% upside opportunity for the share price over the next two years.