Dave Johnson from Caligan Partners on Evolus (EOLS) (podcast #128)
Dave Johnson from Caligan Partners on Evolus (EOLS) (podcast #128)
Dave Johnson from Caligan Partners discusses his thesis on Evolus (EOLS). Evolus is a one product company. Their product, Jeuveau, is a Botox competitor exclusively focused on the cosmetics market, and Dave thinks the market is underpricing Jeuveau's strong growth potential.
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Transcript begins below
Andrew Walker: All right. Hello. Welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, and review it wherever you're getting it. With me today, I'm happy to have Dave Johnson. Dave is the founder and CIO at Callaghan Partners. Dave, how's it going?
Dave Johnson: Good. How are you doing, Andrew?
Andrew: I'm doing good. I'm really happy to have you on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. That's always true. But that's going to be particularly true here as Dave specializes in small and mid-cap kinds of Life Sciences companies, which obviously carry a higher degree of risk, so everyone should just remember, please do your own work. Do your own diligence. Consult a financial advisor. This isn't investing advice.
Then the second way I start every podcast is with a pitch for you my guest. I started talking to some of the people over at Callaghan a couple of weeks ago on Liquidia, where Callaghan is an affiliate, almost twenty percent shareholder. I believe you're on the board there. We're not going to talk about Liquidia here, but I was just really impressed by the depth of research there, and I was like, hey you guys got to come on the podcast at some point. We're going to talk about a different name but, in general, I've just been impressed by the depth of the research there. You guys do small, mid-cap Life Sciences quirky companies which is just what I want to have on the podcast, so really happy to have you on here.
That was quite the pitch. I don't know if you want to add any other background that you have or anything on Callaghan before we kind of dive into a name here.
Dave: No, Andrew. [inaudible] really appreciate you taking the time and having us on here. I really appreciate the introduction. If you don't mind, I like to try to put some quick background before we dig into today's subject matter which is Evolus. As everybody knows, I'm Dave Johnson. I'm the founder and CIO of Callaghan Partners. We're an SEC-registered investment firm focused on value investing within small and mid-cap life sciences companies. That really spans the gamut of therapeutics, tools, diagnostics, a little bit of medical devices, and some services. I try to kind of describe it, we're kind of two big teams that we see within a typical Callaghan investment, which are somewhat unique, is number one, we don't take a lot of scientific risks.
Practically every company we invest behind has largely de-risked from a clinical and regulatory standpoint, in therapeutics, this means kind of phase three and beyond. And the overwhelming majority of our companies involve approved revenue generating durable assets that represent kind of more than the enterprise value that the company is trading at today. Some of our companies also kind of have earlier-stage pipelines, but we view them more as call options and not necessarily integral to our thesis[?]. Having spent the majority of my career at kind of larger private equity firms, I generally tend to gravitate toward more mature businesses.
The second thing that I think you'll find at Callaghan, which is a little bit more atypical within life sciences, is our willingness to be pretty actively engaged with our portfolio companies. For example, we are currently the largest shareholder in four different companies, in all four situations where a 13D filer and two of them our ownership stake is in the teams percentage-wise.
Our goal is really to identify companies with good assets, and good balance sheets that are underperforming kind of their opportunity set for specific reasons that we think are fixable within a couple of years, and we think that opportunity is really apparent in life sciences, particularly in this mid-cap universe, to unlock value using money, the tools used by traditional activist investors. With the way we kind of think about it, there are three main levers that we like to pull.
The first is kind of improved capital allocation and the second is changes to the strategic direction of the company and the third kind of changes to the board and management team. All of our high conviction ideas, we pulled at least one of these levers, but we generally try to do it so in a collaborative manner behind the scenes. With regard to capital allocation, your portfolio companies all have budget constraints due to their sides, access to capital is always at a premium, and many still consumed cash instead of producing it. Two years ago when the amount of capital flowing into the sector was seemingly infinite, in addition to being cheap, most small-cap companies were able to raise equity, 52-week highs, and oversubscribed offerings, but the world is pretty different now, and the supply of capital is dried up, the cost of capital tire[?], valuations plummeted, and capital allocation has never been more important. You got to focus on your winners and starve your losers.
With regards to changes in strategy, one of the advantages an activist has when working with a small-cap life sciences company is the ability to effectuate transformative change pretty quickly. Many of these companies are really driven by human capital, small manufacturing or outsource manufacturing, and small geographic footprints, and that's kind of why our typical investment timeframe is somewhere between kind of one or two years.
Lastly, we come to changes to boards and management teams. At Callaghan, we're of the firm belief, great management teams lead to great outcomes. So simple. But it's true without a doubt, and talented leaders are really finite resources, especially in a sector where the number of public companies has quadrupled over the last 10 years. No, I'd say we always prefer to invest behind an existing team, where we trusted their ability to execute. Liquidia is a great example of that.
In other situations, we'll invest behind pretty good teams where we believe our involvement can help them go from good to great. And then there's always the occasional investment where we conclude the only path that success involves a new team that we recruit from the outside. Going down that path, the high bar for us, the juice has to be worth the squeeze, before causing that type of disruption. But in a company, we were involved with AMAG where we made the change and brought in Scott Myers, it was transformative to the outcome. Scott is a tremendous leader and really changed the whole trajectory of that organization. On that note, I think it's a great opportunity, and thanks for humoring me to let me go through that spiel. Good opportunity, talking about Evolus.
Andrew: Yeah, exactly. That out the way, let's turn to the company we're going to talk about. The company's Evolus. The ticker is EOLS. It's a really interesting company but I'll just turn it over to you, what is Evolus, and why are you so interested in them?
Dave: Evolus market's one of five approved botulinum toxins and the most common one you might know is Botox. And so, Evolus licensed their product from a Korean company Daewoong and began marketing their product, which is called Jeuveau in the United States in 2019. What is really unique about Evolus is a couple of things, is number one, it's an aesthetic-only product. If you ever looked at Botox, Botox has 30 plus therapeutic uses, under armpits, sweat, migraine, there are tons of things. What we'll talk about with Evolus and differentiate with Jeuveau is that it's great for patients, but it's very limiting for what you can do from a pricing and kind of marketing standpoint for the aesthetic market.
The second thing that I think is very unique about Evolus is they ran a head-to-head study for their approval in their phase three of Jeuveau versus Botox, and what they were able to show in a very highly controlled setting, which is Botox and Jeuveau perform pretty much exactly the same from an efficacy and safety perspective on the Glabellar lines, which are the lines in your forehead, which is kind of where all the toxins that have been approved, if kind of proved their efficacy. We'll get at some important implications down the road, but they've now had very good data that if you inject this properly, as an esthetician do, you're going to get the same effect and duration as Botox.
The third thing is they stood up a company around a toxin. One person at [inaudible] employee described to me toxins or beachfront real estate and aesthetics. Everybody needs to have a toxin. Most used aesthetic procedures in the United States and globally growing, penetration going up, and especially in the Zoom culture we have today, people are pretty focused on their appearance. I'm not as you [inaudible], I should be probably but it's an area, that people would view as kind of a gateway procedure to start to do a little bit more self-care anti-aging. Those are the kinds of very interesting to me.
I think the fourth thing to mention and this is something very unique to toxins is every toxin's made from a unique cell bank. Botulinum is the same bacteria that can kill you if you eat it and poorly processed food that you get from the farmers' market, right? Well, it's a neuromodulator it helps you relax all the nerves wherever you inject it, and to create one of the toxins, you need to go get the bacteria and the cell bank to be able to replicate that toxin to do it consistently and stably for a very long period of time.
This is not a part of pharmaceuticals that has the steep kind of generic sedation curve where you see, after the patent cliff, the revenues fall off 90%. Botox has been improved for over 20 years in the United States. You can't replicate the Botox cell bank. Nobody's going to be able to do it. It's a trade secret. It's a proprietary formula for Allergan or AbbVie. The same thing with Evolus. It's the same thing with all the other toxins out there.
One thing we tend to invest in is a little bit more durable assets, which are a little more unique within pharma. You definitely have some trade-offs with that. You don't get small molecule margins, but you've got something that is going to outlast a typical patent cliff.
Andrew: Perfect. You get a lot there, and a lot there are the threads I want to pull on for the rest of this conversation. But I guess, just high level, you laid out a great overview of what EOLS is, what they do, and everything. But the first thing I always like to ask is the market is a really competitive place, right? What are you seeing here in Evolus that you think the market is kind of missing that's going to lead this to be a risk-adjusted Alpha opportunity? That's what we're all doing a risk-adjusted alpha opportunity going forward.
Dave: Sure. It helps to rewind history a little bit to go into how did Jeuveau come to market because it definitely has some implications for why we think it's an alpha generator going forward. Evolus licensed Jeuveau from a Korean company called Daewoong, and Daewoong, unfortunately, got into a trade secret dispute with MediTox, who's a partner with Allergan, and that led to an International Trade Commission lawsuit or ITC lawsuit between Allergen and MediTox, and Daewoong and Evolus in 2018, 2019, and 2020. What really happened was, this ended up getting settled, but it had very disruptive impacts on Evolus and its launch. They have launched Jeuveau. The ITC found that they had infringed. There were some questions about whether they stole the proprietary recipe for cell banks, and they had to go off the market at the beginning of 2020. They've had to relaunch this product in 2021.
I think what happened when they did the settlement was MediTox and Allergan got a mid-teens royalty that ran through September of this year 2022 on all Jeuveau, and MediTox got equity in Evolus. MediTox's Chairman actually bought shares in Evolus, when that happened too. We can talk about it. But effectively, you had this product Jeuveau that launched in 2019, with basic taken off the market for a couple of months before the settlement was reached nearly 2021 and then had to go out and relaunch the product in 2021. Since then, it's been a rocket ship, and I think what I think one of the things we think the market is missing is that the path to profitability here is a lot quicker than anybody thinks. This is on pace to do $150 million of revenue this year.
The second thing is that the gross margin profile is going to change materially. They're going to have a thousand basis points of margin uplift in the fourth quarter of this year because there are the royalty obligations to Allergan and MediTox stepped down from mid-teens to about 5%. The third thing is that we think that when they relaunched the product, and this is we'll get into some nuances here, they had to go out and retrain the injectors with how you use Jeuveau. Because when you use it in a controlled clinical setting, the nurses are all properly trained about how you inject it, where you inject it, and it's all in the forehead.
Well, people get Botox all over their face, or people get toxins all over their face, and when you use the toxin outside of the Glabellar Lines, you don't know how it's going to perform. And so, there's been a learning curve that Evolus has been very disciplined about in terms of training aestheticians and injectors on how to use this product, not just on the forehead, but all over the face, and how do you get the profile that you're really looking to achieve. That's actually been really important. I'll get into a little bit of the details. When you inject Jeuveau, what you really want to do is you put in the skin, then you need to go through the first layer of fascia, that little layer between your muscles here, you need to hear the pop. The injector needs to feel the pop, and then they inject it in, and you start to get the dissipation.
One of the things that differentiate Jeuveau is it's a higher molecular weight toxin, with bigger particles, so it doesn't spread as far as even a botox would. It's a very narrowly defined fact. You can get exactly what you're looking for in a very specific area of the face by injecting just like that. You have to hear the pop. They've gone out, and they've trained injectors that when you do that, people get results that are as good or better than Botox. And so, we think that, if you looked at Evolus, Evolus is basically in 25% of the potentially aesthetic accounts out there, they are rapidly gaining share, the aesthetic toxin to market is going to grow 12,13% this year. Evolus is going to grow 50, and they're only in [inaudible] accounts, and what they prove is that their ability to go in, get an account to put one of their Jeuveau in their bag, they can go take rapid amounts of share in that account, and become not the number two toxin, but the number one toxin and actually even displaced Botox.
Some of that marketing strategy, some of that co-brand immediately we'll get into, but we believe that consensus numbers for Evolus are still too low, long term 23 and 24, and for a durable asset like a toxin that obviously beachfront real estate in aesthetics, this is just undervalued. I mean, it's trading at, call it two and a half times forward revenue. The aesthetic companies, these things are traded. Allergan was a big buyer of them, right? These things generally trade four times revenue to high teens [inaudible]. And so, we think Evolus is well-undervalued relative to where it should be when they get through the execution that they've been doing and that they will do.
Andrew: Perfect. A lot of the threads that I want to pull out and you were just addressing there, but let's just start. For people who think Jeuveau, this is a one-product company, it's Jeuveau, and you mentioned they're coming into the market with Botox as the key player here, right, 60 to 70% plus of the market in the US and globally. But 60 to 70%. Botox is already out there. It's got a name-brand like Kleenex, right? When I hear my friends talking about it, they don't say, Oh, I'm going to go get a toxin in my face. Everyone says I go get Botox. They go to the doctor to give me Botox. All that type of stuff.
The first question anybody is going to have in looking at this is why is someone going to switch to Jeuveau, and I'm going to just add on that like, look, is it the consumer who's going to go to the prescriber and say, Hey, I really want Jeuveau, not Botox for X, Y, and Z reasons. I saw great marketing. I think it's a little cheaper, or is it this prescriber who somebody's going to come in and they're going to say, I want Botox and they say, actually, what you really want is Jeuveau because it's cheaper, it's more effective because the weight particles and you hear the pop and does disbursement[?]. What's kind of driving the decision that will lead to Jeuveau gaining market share?
Dave: That's a great question, and it's the push and pull. If we take a step back, Botox, they've got therapeutic uses, and they've got aesthetic uses, so that's limiting on the marketing, the FDA doesn't want you out promoting things that you're not supposed to be promoting for and it's limiting on pricing because you can't charge anybody less than you charge the government, and there's a big portion of the therapeutic uses of Botox there in Medicare or Medicaid. The way that Allergan has provided value to the plastic derms and med spas is through the bundle. They've got a ton of products [inaudible] they got fillers, they got cool sculpt, they got all these things that they go in and they say we got this portfolio products, you buy it from us, you're going to get the discount. But they can't do that exactly with toxin. They have to charge the same price for the toxin they do that they're given the government. They can't charge a lower price though. It's very set and very rigid.
Well, Jeuveau comes along, they're aesthetic only. They don't have to worry about the therapeutic uses. They don't have to worry about marketing and they can come to the aesthetician and say when you do this, we're going to give you something, we've got clinical data that shows you it's as safe as an application of Botox, we're going to charge you a lower price, going to charge the consumer a lower price, about 20% cheaper for them, 20% more profitable for you, and everybody wins. And we're going to offer co-branded media such that if you get to certain volume levels, where effectively Jeuveau is the number one toxin that you're giving, then you are going to be eligible to basically get a med spa-branded billboard paid for by Evolus that basically directs people to your clinic, and we're going to be able to tell you, how much did that billboard drive patient volume to your clinic? How much of that actually ended up getting Jeuveau, right?
And so, in a world where you might have some more kinds of "recessionary" pressures, this is actually pretty powerful for the aesthetician out there because that marketing is the open part of the funnel to try to drive customer traffic into a plastic derm or a med spa. You're absolutely right.
I think if you are a person in the demographic of 45 to 70 years old, and you've been using Botox for five decades plus, probably unlikely to switch your tox, and your aesthetician is probably reluctant because if they screw up and all of a sudden you've got a frozen face on the left side of your face, you're probably not going back. But for millennials, in particular, that 25 to 39-year-olds who don't want their mother's tox, they want to have a totally different experience, they will kind of be enticed by the fact that it's 20% cheaper, and when they have a good experience, they are going to be able to post about it on social media, and they're going to tell their friends, and they're the ones that have been probably most affected by the Zoom culture. That's pretty powerful. It's really interesting.
Evolus has this program, Evolus Rewards, which Allergan really struggles to be able to compete with. And what they've seen is that basically every quarter since 2021, when they relaunched the product, the percentage of repeat customers is increased by 200 to 300 percentage points per quarter. In a given quarter now, 40% of the people that are coming back, and getting Jeuveau are repeat users. Because every 90 days, they're getting a text from Evolus saying, hey, want to come in and claim your $40 reward and get Jeuveau? Time's up. That's actually proven to be a really interesting and recurring revenue model that I think Evolus is underappreciated, that Allergan can't have that same relationship with their customers that Evolus does today, and the practice too.
With the underlying injectors to being able to say, hey, this billboard that Evolus is paid for drove this amount of traffic to your establishment that had been resulted in this amount of increased toxin use, that's pretty compelling for the aestheticians, as well, that no other kind of toxins being able to offer them.
Andrew: I was kind of struck when I was reading all this sort of stuff. A lot of the skill sets or the way they're pitching it, does it remind you of a SaaS company, right? It's like, hey, we go out, and we've got to do this big upfront investment to go acquire the customer, to go acquire the prescriber, but then once we do that, yes, we've got to keep investing in the marketing stuff. But a lot of that initial upfront cost goes away, and then you've just got this once every three months, somebody comes and gets Jeuveau, so you've got this recurring revenue stream. But, I guess, to summarize what you just said, just to confirm, because one of the most common questions I got was from people who were looking at - [inaudible] is another competitor that I'm sure we'll talk about in a second, but who were looking at that company and they said, Look, I get that Jeuveau, they're just focused on cosmetics, but they're giving up half the markets of therapeutics, right?
You give up half the market. That seems like it's kind of crazy to give up half the market on a 70% plus gross margin business, and what you're saying is, yes, they've strategically chosen to give that up, but it's because that co-branded marketing stuff where they go pay for a billboard, it's a unique phone number on the Billboard so they can actually track, Hey, we got 100 calls here or something, we're bringing you patients. You can't do that if you've got therapeutics. As you said, can't adjust pricing because the government has to get the best pricing on therapeutics. I believe you couldn't do a customer loyalty program because that would impact pricing if you were doing therapeutic.
Dave: [inaudible] Allergan does is to the aesthetician to the plastic themselves, they can't do that to the customer.
Andrew: Yep. Basically what you're saying is, yes, they gave up half the therapeutics, but this is a strategic decision that's going to let them take, hopefully, an enormous share in the cosmetics market.
Dave: When you say enormous share, I think success here in a market that I think people have established is going to grow at least high single to low double digits. They could be a 20% market share player, I think everybody's going to be pretty happy. That's a $500 million company when you look at it a couple of years from now. That's a meaningful product. For us, that's a success. And then, when you think about what their optionality is, they've got the ability to add additional aesthetic products to the bag, and leverage with very high incremental margins on top of that, because you've got this commercial infrastructure that's supporting your flagship product, which is Jeuveau. I think strategically to go compete in the toxin market, I think this was absolutely the right decision, and I think it's proven out in the launch.
Andrew: Yep. I just think, as you said, they're approaching a 10% share in cosmetics right now. And if you look at Botox versus, now there are five competitors, but before Jeuveau and Daxxify, which again, we'll talk about in a second came on, there were three, and the other three had stalled at 20 and 10% for10 years, right? For Jeuveau, to go and get 10% and call it two years, three years, whatever, since launch, the two years includes COVID, when I think procedures were kind of funky. But to get that much in a short period of time really speaks to the power of the strategy. You mentioned beachfront property a few times, I just want to pull on that, since you've been mentioning it. This is currently a one-product company.
As you said, Allergan, a lot of these guys, I guess it's now AbbVie, but they're using Botox or toxin as the beachfront property to get in. Again, there are a lot of selling costs, a lot of advertising costs, and everything. They want to get in and then they just want to sell lots of other products, fillers, all sorts of other stuff. Right now, you've got a one-product company. That can go two ways. It seems like what they want to do is they want to go out, they just started ahead of business development less than nine months ago, I believe. They want to go out and they want to acquire other products kind of put in there, salesforce is bad, right? That's the classic thing. You get more in the bag, that's lots of incremental margins. The other way could go is, hey, we're a one-product company, we should just sell to somebody who can use us as their beachfront real estate, and then they can go in. Can you talk about them being a one-product company, like what would they be looking to add? What would the strategic value be if they ever decided to sell all of that?
Dave: Yeah. I think we've always been pretty adamant at Callaghan that companies are bought, not sold. What we always encourage management teams to do is you got to build a company that's more attractive, both the public markets and private markets, by just executing fundamental strategy, which is profitable growth, right? You just got to show that you can grow profitably and you've got a differentiated product, and that's going to lead to great results all around. The really interesting stat is that 70% of fillers are used with a toxin, and 40% of toxins have a filler attached to them. If someone comes in and gets a filler, 70% of the time they're also getting a toxin. But when 40% of the time when somebody's getting a toxin, they're also getting a filler.
Once you've relaxed part of the face, you maybe want to create some more definition and part of it, so fillers are incredibly complimentary. I think we would say you want to have something that's differentiated. I mean, having a Me2 hyaluronic acid filler like Juvederm and Allergan. Is that going to be complementary to Jeuveau or not? They're just not going to be as differentiated. Yeah, you've got the pricing strategy that you can implement but I think they've been pretty disciplined about how do you want to go out and execute with the next product in the bag. Because, as you said, [inaudible] it's going to be a very high incremental margin.
Before you had kind of Zeltiq out there and Allergan kind of swallowed a lot of these companies. Galderma, theoretically, which is the old Nestle business, which is owned by private equity, they're going to come public, so you will have some [inaudible] you've got beauty health out there, which is Brent Saunders, the former CEO of Allergan. He's got that platform out there with HydraFacial. There are going to be some more, I would say, companies that want to build an aesthetic portfolio of scale, and I think there are only a few toxins and you need to have a doctor. It's the most [inaudible] aesthetic procedure. But right now, I think what we're encouraging David and the team to see is really focus on growing Jeuveau, create that really strong brand loyalty from consumers and estheticians, and have something that it's going to be, again, viewed as a very durable product and then good things will happen.
Andrew: You mentioned beauty health which is skin on the public market. It's funny because when I first started talking to you guys about Evolus as soon as you guys said oh it's a botox [inaudible] said, oh well Skin's run by Allergan's ex-CEO and they don't have a botox, you'd have to think they want Botox-type products at some point. And when I tweeted out that I was doing this podcast, probably three of the first seven messages were Hey, Skin's going to buy those guys at some point, right? I said it [inaudible] but it does seem natural there. Let me just ask on the acquisition front, if they do choose to go out and buy a filler though. Is there anything out there left for them to buy a filler?
The company, they're still burning cash, they think they've got a clear path, they're funded to cash flow breakeven, they say. I saw one of their recent appearances at a conference, and they said, Hey, we want to do M&A, but we understand transformative M&A isn't in the cards with our stock price, which I'm sure is music to your ears as a shareholder. My question is, is there a filler product for them to buy, and given kind of the constraints of their market cap where their shares are trading, everything like that, do they have the financial capability to go buy a filler product?
Dave: Yeah. One of the things, I think, that really got us comfortable with Evolus at the end was in late last year, beginning of this year, they announced $125 million nondilutive financing with PharmaCann, and they drew 75 million upfront. That basically funded all the last payments to the settlement payments to MediTox and Allergan and gave them the cash to kind of invest for this year. And then, what's also unique is that they have a $50 million delayed draw tranche that they can use for m&a. I don't think they're going to go out and buy a product that's out there generating $100 million of revenue. But what David and the team have proven very competent and skilled at is taking a differentiated product like an Evolus and building a brand around it. I think they've been very disciplined about valuation, and they've also said, hey, if I'm growing my core product 50% this year, potentially another 30% next year, another 25% the year after that, where's my highest ROI dollars going?
The incremental dollar you can spend on Jeuveau has an incredibly high return. We've totally believed them. They [inaudible] kind of map out. They were cashflow net neutral in the second quarter. It doesn't take that much incremental growth at 150 of a run rate exiting the fourth quarter to say, yeah, they're pretty close to profitability, especially when you get that thousand basis point gross margin improvement from the elimination of the royalty payments to MediTox and Allergan in the fourth quarter of this year. We think profitability is not years away, we think it's quarters away.
Andrew: Just to confirm, they say our financing now, we were good to hit cash flow breakeven, and you obviously think that's the case. They're pretty close. They get the 10 basis point margin expansion. Sales are ramping.
Dave: Ten-percentage point.
Andrew: It was 10 in my head but it was one of the two. Just on the delay draw term loan. So, they drew 75 million, they've got 50 million left to draw. 50 million draw, I believe expires at the end of this year. Do you think that's kind of burning a hole in their pocket where they want to go use it? I mean, I think the only reason they draw is for some bolt-on M&A.
Dave: I think they could easily extend that too and probably go back and get an extension if they needed to. I think they've said PharmaCann has been a great partner. I think if they didn't find anything by 12-31, then they could probably extend it a little bit. I don't think there is anything but burning a hole in their pocket that they need to do something out of this. I trust that they are not going to do something stupid, just because the 50 million is theoretically only available until December 31.
Andrew: Let me ask two bare questions. I've mentioned Daxxify, [inaudible] we'll talk about. But two bare questions. I think the first bare question that a lot of people would get when they look at this is they say, Okay, this company grew 40% year over year. That's fantastic, right? You've got a product that after the royalties will be about 70% gross margin, you grow that 40%. That seems great. But if you just look at the SG&A line, that was up 40% year over year, as well. You might have some people who look at it and say, Okay, well, they're not getting any scale, they're just basically piling it all into this marketing. The SG&A is basically selling and marketing what's going up. You're getting this company that's piling it all on to selling and marketing. As soon as they dial that lever back, the growth is going to pull back as well. What would you say to someone who's just looking at the one-to-one correlation between those two and thinks that's kind of like not profitable growth if it's just all marketing driven and it will pull back once it goes away?
Dave: The one thing that I think they did really well is at the beginning of the year, they laid out revenue guidance, they laid out [inaudible] guidance, and so that call it kind of non-GAAP SG&A 35-ish a quarter. They basically said that's what we're going to be running every single quarter, and they've been pretty close to that. Every quarter, you've seen sequential revenue growth. The 35, or the 140 million bucks a year is table stakes. Gotta have that. That's what you need to put a commercial field force on the ground. That's what it's going to take on your marketing budget. Adamant marketing's not going to be greater than 15% of sales. They factor that all in. That's table stakes. Now, you've seen the quarter revenue growth, on a quarterly basis, you haven't seen that now. Annually, yes, they've made a step up. But going forward, I think they've got what they need on the ground, and they're going to be pretty disciplined about that marketing and spending in co-branded media.
The second thing, and I think David's talked about this pretty publicly is once they land an account, so once they get someone to say we're going to put Jeuveau in our bag, their ability to kind of incrementally drive volume through that account, which is not that expensive, has been pretty dramatic. To move them up from a tier four account to a tier three to a tier two, and eventually, to a tier one, where Jeuveau is becoming the primary toxin by that particular aesthetician.
Andrew: Yep. On their Q2-22, call again, I mentioned SAS Type characteristics and they said, look, new accounts, the quarter we land them, and even the quarter after that contribute very little to growth, right? So, they're putting all that marketing out now. And basically, as you're saying, it's not coming for six months, so you're getting that growth payoff. It's just coming later. It's not quite in the financials yet. This is a more simple bear question. But we're at the end of September, everyone's freaking out. [inaudible] Recession, all of this type of stuff.
Right now, it's a US-focused business. I don't think we need to talk too much about Europe and everything. But there are a lot of upsides, Europe later this year, Germany and Britain, Australia, and more Europe next year. But this U.S focus, if we go into a recession, what do you think volumes and numbers look like when we go into recession? Because I think a bear[?] would say, Hey, this is all cosmetic, cosmetic is the ultimate discretionary thing, right? If you lose your job, if your income goes down, the first thing you can do is cut out the cosmetics.
Dave: Yeah, absolutely. I think if you look at the category overall, in 2008-2009, it was down low single digits overall. David who's the CEO of Evolus, who was the head of the brand for Botox at Allergan at the time, has a lot of familiarity with the space. If you were going in, what they saw was not that customers stopped getting their treatment. But they saw was customers extending the duration between treatments. If you're going in once a quarter before, maybe you're going in once every four months. You don't stop. You just maybe take a little bit of a delay in duration pause. Again, from a category perspective, you said, the category overall next year is going to be down a couple of percentage points because of the inflationary [inaudible], the macroeconomic environment, because people are going to extend treatment. What I would say to you is Evolus, is still going to outpace our index, the growth. The category growth fall this year, they're going 50, category goes down to next year because they are taking share, they're still going to grow next year. The question, did they grow 30? Did they grow 40? I'll tell you both of those aren't priced in.
The second thing I would say to that is we talked about how it's cheaper for the customer. You could have some Botox customers say, hey, my aesthetician has been really pressing me on this, it's 20% cheaper. I can do my four treatments a year rather than pay Botox for the three treatments, so I was going to extend my duration. [inaudible] potentially the trade-down effect. And then secondly, for aestheticians plastics, and derms, this is 20% more profitable for them, and plus you get co-branded media, which might be more important in getting the funnel, so for them, the incentive to switch is even greater and more challenging, which, again, what David said is when you're growing this fast, it's tough to see what the overall market growth rate is, right? Because you are so taking so much share so quickly. You can't tell what's market growth and what's your share growth.
Andrew: We've mentioned pricing a few times, so I should have asked this earlier. Just come back to it. If I went to the derm right now, I'm starting to get into my mid to late 30s. As you said, maybe I should be doing [inaudible].
Dave: You look pretty good. I don't know if need a toxin yet.
Andrew: I appreciate that. That's why I paid you to come on this podcast. It's tough to say specific terms and everything but rough numbers, I go to derm Jeuveau versus Botox, what would I kind of be paying, and what would the margins that the Derm or Med Spa wherever I'm getting it, what would they be looking
at?
Dave: Yeah. It's a good question. You should think about it just on a rack rate basis before you get the discounts or whatnot. You're talking about Jeuveau, being about 375 bucks for treatment versus Botox 500 to 550, and then when you sign up for Evolus rewards, and you choose to get your first Jeuveau, you're getting a $40 plus credit. And then, if you go back and you're getting another 20 bucks. Again, there are longevity, duration, discounts, and all these really cool marketing techniques you've seen with consumer products that you can do. People can get this down to 325-ish in terms of cost versus Botox where it's 500 bucks. That's your cost. It's a pretty market difference to the consumer.
Now, for the ultimate aesthetician or the injector, if you were doing a Botox injection, [inaudible] do it on kind of a plastic, you're charging 500, you're getting a cost, maybe you're an Allergan bundle customer. Let's say you're making, probably, 350 a patient, and you do Jeuveau cheaper for the patient, and you're probably making 400 bucks for profit. [inaudible]. They dose it per area per unit. You probably are going to use more units than exactly the 375. You're probably going to get an 80% margin relative to a 70% margin or 65% margin if you're the doc. Sometimes you use more units, depending on where you do it in the face. That's all
Andrew: Let me just push back on that real quick. One thing I did worry about when I was looking at this is, I think I sent over to you, the mutual fund problem, right? Where you had this classic thing where a lot of financial advisors were incentivized to sell worse mutual funds because they paid higher fees. Even though they were selling a worse product, they would get more money on the back end, and I'm not here to say Botox is worse or better than Jeuveau. I'm just saying that look if Botox is charging $175 more, $200 more than Jeuveau, there's a lot of margin in there that could go to the practitioner that might incentivize them to say hey, why don't you stick with the brand name go with Botox, just stick with the brand name, [inaudible] and the practitioner kind of is incentivized to prescribe the more expensive product? Does that make sense?
Dave: Yeah. I guess what I'm trying to say is that, because the more Jeuveau you buy, the lower your unit cost per vial is. And the way that Evolus gives it to you is they give you more free vials. [inaudible] you're paying 30 cents on the $110 you've given out to the aesthetician because your cog[?] is going down faster than your revenue loss from your switch from Botox to Jeuveau, and the more you use, the more profitable the Jeuveau procedure becomes.
Andrew: I think this probably goes back to Jeuveau's focus on cosmetics where they can probably start discounting. I'm sure everyone gets bulk discounts, but they can probably play a lot more with it because they don't have the government, this is an all pharma, you can't sell stuff cheaper than you give it to the government, so they've probably got them. I think this last question then we can kind of wrap this up just earlier this month, Daxxify gets approved, that's Revance Therapeutics. That's a public company. 2 billion market cap, that's pretty revenue. They've got other stuff but [inaudible] I think everybody is going to be happy.
Daxxify. This is a botox competitor. New Drug. This lasts for six months versus Botox and Jeuveau kinda lasts for about three months based on how they [inaudible]. I just wanted to ask on Daxxify two things, a) when you see, hey, this is going to last six months instead of three. Do you see where customers come in and say, Oh, I can come in twice a year instead of four times a year? That's fantastic. I'll pause there and then I want to talk about new products coming onto the market.
Dave: There are a number of things I want to unpack in that statement. Number one is double the dose. Effectively it's double the dose of the toxin. What Brent Saunders, as you said, about in 2019 when somebody asked about this, are you worried about this? He said this is double the dose of a toxin. Don't you think we've thought about this? We've had Botox in our portfolio at this point for 17 years. Don't you think we know what doubling the dose of Botox does and do we get the duration effect? You should assume that Botox is running it, Evolus is running it, double the dose that people have [inaudible] idea of what it's going to do.
The second thing, I would say Daxxify is going to charge more. How much more efficient is this going to be for the patient and for the aesthetician? Nobody knows. The third thing and this is what Evolus would definitely say that there were big learnings between moving from a clinical study, which is a highly controlled environment where you're just doing it on the forehead to moving it all around the face and putting it in practice. And so, if you're a plastic, you've got 2000 bucks a year patient coming in four times a year for Botox, and they say, oh, I want to try this Daxi, you put it in, and it's a much smaller molecule, so it's a much more dispersed effect, put it in their cheek, because that's what they've been getting Botox, and all of a sudden, they've got a frozen face, on this time they got a droopy lip, how often do you think that customer is ever coming back?
One of the things that I think is going to be very interesting to see and maybe we are short a little Revance. But I'm sure the launch of this is that this is going to play out much more slowly. I think there's going to be a lot of challenges in getting people because you have theoretic duration impact, where I think plastics are going to be very cautious in terms of giving this to some of their new customers where you have the risk that the effect could be longer, you could not get the effect that you think you're getting because it's not the same as Botox, and that's not what the clinical study did. It was the first[?] placebo. This is going to be more expensive for your patient, and you might not get the same kind of margin profile you get with Jeuveau, where it's much more cost-effective to use. I think there are a number of things with Daxi.
The other thing I want to point out is that there's six-month marketing, that they're saying if you look at the lines, unlike the actual investigator and the customer, so go with the label, half their patients were less than six months. That was a median. You've got paid half their patients who got treated, and they basically got no better than what a Botox or Jeuveau provides you after doubling the dose.
Andrew: I guess the bottom line is you're skeptical. Obviously skeptical Daxi? Are you skeptical of Daxi for cosmetics? Do you think it's going to have more therapeutic use, or are you just skeptical of Daxi in general for as you said [inaudible]? Go ahead.
Dave: I think it's on the aesthetics that we believe it's going to be a slower ramp than what the market expects. Just because all the dynamics we just saw with Jeuveau, the injectors here in the pop go into the fascia, all those things. Those are all going to be barriers to seeing how this is going to perform.
Andrew: Switching from Daxi to just the toxin market in general. We mentioned earlier for over a decade, well over a decade, there were three products. There was Botox, which had the vast majority of the share, and then there were two others which kind of frozen at 20 and 10% or so. All of a sudden you've got Jeuveau coming online. You've got Daxi coming online. I believe there are several other molecules that are promising, I don't know when those are all coming on everything. But you've got a lot of stuff coming online. The market has been growing, 8 to 10%. I believe most of that has been volume. But you go from three to five to seven at some point or even [inaudible].
At some point, it's gone from a very tight oligopoly, almost a monopoly with Botox to you get a lot of players, do you start seeing kind of price compression, and yes, even though volumes are going up nicely if you start having a pricing battle to the death, five companies, seven companies that could get pretty crazy. Do you worry about the pricing structure here?
Dave: I don't and I think the reason for that as you said obviously most of [inaudible] therapeutic uses. Got the same constraints that the Evolus doesn't have and Evolus has the ability to kind of play with that lever. But I think the more interesting thing is that if you went back three generations of women and you looked at the percentage of women that dyed their hair, and I don't mean to focus on women, but it was in the mid-single digits.
Andrew: Jeuveau. Go look at their website. They even say it's got that old, QVC does it, they scratch out like person and then they put her. They are focused on millennial women.
Dave: Yeah. If you look back a couple of generations, it was only about mid-single digits, the number of women that got their hair colors. Today, that number is 70%. And if you look at toxin penetration in the US relative to toxin penetration in a place like Korea, toxin penetration in Korea, [inaudible] Korea is, call it, mid-20s versus mid-single digits here. This market got a lot of growth. Allergan didn't care that someone else came in because getting people focused on self-care and aesthetic utilization, and getting them as the gateway procedure to more, that's going to grow the market. The fact that Daxi is going to be out there, preaching the gospel of why people should get toxin usage. I think that's great. I think it's great for Jeuveau because I think the more people and the more accepted it becomes in this millennial generation, the better it's going to be for the whole category.
Andrew: You use haircare which is interesting because, haircare, a lot of the beauty brands made a lot of money off that sort of stuff, and that was just with the brand loyalty in the marketing. Here, not only can you have brand loyalty, but this is a toxin, right? Even if you go from three to five to seven or whatever, there's not going to be 70 people answering this and it's plastic surgeons, which you do think over time, it's going to be somewhat sticky, right? Because as you said, you need to get the pop, everything's going to be a little bit differentiated. You could imagine if you can make billion-dollar businesses off of haircare growing from mid-single digits to 70%, I'm pretty sure you can make billion-dollar businesses off of control toxins growing from five to 20% or over.
Two last questions and then we'll wrap it up. First question. We talked a lot very bullishly about this. Obviously, there's a cash-burning company right now. Very small. What do you worry kills the company? Obviously, you do [inaudible] and life sciences, what keeps you up at night about a [inaudible]
in Evolus?
Dave: We talked pretty confidently about what happened in the last recession. I would say if you've looked at when we talk to the company this quarter, the company they've been pretty public, they have not seen any slowdown in terms [inaudible] iterator revenue guidance. You saw a bunch of directors and management buy shares in the open market, all very positive signs, despite the pullback. Listen, I think it's definitely going to have some short-term trading volatility because until they prove otherwise, I think people are going to say this is going to get impacted like lots of other consumer brands. I think it's going to be very telling in the third quarter earnings, and then, how they guide [inaudible]. How well they're going to do? I think on a short term, definitely about the about that, but I think we've got pretty good confidence they're going to get through it. On the long-term basis, I think we're very bullish on the category. There might be some ups and downs in 2022 or 2023. This is a good brand and a good management team. Good product and cash to get there.
Andrew: Perfect. You mentioned the director purchases at the start of September so not that long ago though it feels like a lifetime ago just in terms of Fed meeting, volatility, everything. Three directors each pony up 100 to 200,000 each to buy shares on the open market. Obviously, you'd love to see that, especially, with a company that's kind of growing. They certainly got more insights into the unit economics and everything than outside, so you love to see that.
Final question before we close. I think we did a great job. I know you guys were worried about how are we going to get an hour-long podcast [inaudible]. I told you the time would fly when you dive into the idea but we talked about a lot of stuff. Anything that we didn't talk about that you think investors should be thinking about or anything we kind of glanced over that you wish we had hit a little harder?
Dave: No. I really appreciate you taking the time and really listening to this one and that's when we got to high conviction in the large investment for us, and again, when you think about the variables we think about balanced [inaudible], great team, great product differentiated like this. This has a lot of the ingredients.
Andrew: Perfect.
Dave: Really appreciate it.
Andrew: I appreciate you coming on. I know that you've got the other 13 of these out there. We mentioned a lot of the company, so hoping to have you on again for another one. If anybody wants to find you, I'll include a link to CallaghanPartners.com, so they can go check out the website. There's a contact thing and everything there. Obviously, SEC, there are some restrictions but they can go on to the website and see everything. But, Dave Johnson, thanks so much for coming on, and looking forward to having you on again.
Dave: Andrew, we really appreciate it. Thanks very much for the time.
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