Evolus, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Evolus is a pre-commercial medical aesthetics company developing DWP-450, an injectable botulinum toxin product candidate. It had not generated product revenue and reported no commercial sales.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $2.0 million | $1.5 million | $5.3 million | $5.5 million |
| General and administrative expense | $7.2 million | $1.2 million | $16.9 million | $3.2 million |
| Total operating expense | $11.5 million | $2.6 million | $33.6 million | $8.9 million |
| Net loss | $11.8 million | $2.6 million | $34.4 million | $8.9 million |
| Basic and diluted loss per share | $0.48 | $0.16 | $1.47 | $0.54 |
Margins: Not meaningful because the company had no revenue. Q3 net loss widened by $9.2 million year over year; nine-month net loss widened by $25.5 million.
Cash flow: Cash used in operations was $13.7 million in the first nine months of 2018, versus $12.2 million in the comparable 2017 period. Investing used $9,000. Financing provided $118.8 million, principally from IPO and follow-on offering proceeds. Cash at September 30 was $105.2 million.
Liquidity and obligations: Current assets were $106.1 million, current liabilities $5.5 million, and working capital $100.6 million. Total liabilities were $88.4 million; stockholders’ equity was $95.0 million. The balance sheet included a $51.1 million contingent royalty obligation and a $16.8 million contingent promissory note payable to the Evolus Founders. The company reported no remaining related-party debt to ALPHAEON and no credit facility or committed capital sources.
Material changes and unusual items
- General and administrative expense increased substantially as Evolus hired personnel and incurred public-company, professional-services, and pre-commercialization costs. Management expected these costs to rise as commercialization approached.
- Nine-month research and development expense declined modestly, mainly because clinical trials completed in 2017 reduced trial costs; Q3 research and development expense increased, primarily due to personnel costs and stock compensation.
- Revaluation of the contingent royalty obligation added $2.3 million of expense in Q3 and $11.4 million in the first nine months. This was a non-cash charge, driven by changes in assumptions including timing of payments and discount rates.
- Stock-based compensation was $5.1 million for the first nine months. Separation arrangements for the former CEO included approximately $1.4 million of non-cash compensation charges from accelerated vesting and share issuance.
- The February IPO generated $56.3 million in net proceeds and the July/August follow-on offering generated $67.7 million. These offerings increased shares outstanding and funded operations.
Outlook, regulatory developments, and risks
- The FDA issued a complete response letter on May 15, 2018, citing deficiencies related to chemistry, manufacturing, and controls; the filing reported no clinical or nonclinical deficiencies. Evolus resubmitted its application on August 2, and the FDA set a February 2, 2019 action date. The company planned a U.S. launch in spring 2019 if approved.
- Health Canada approved DWP-450 in August 2018 for temporary improvement of moderate-to-severe glabellar lines in adults under 65. Evolus planned a Canadian launch in the first half of 2019 through Clarion. The European review was ongoing; management expected a committee opinion in the first half of 2019 and, if favorable, approval later in that half.
- Management believed available capital would fund operations for at least twelve months from issuance of the financial statements, and stated that existing cash and offering proceeds were expected to support the plan through launch and initial commercialization if approved. Additional capital may nevertheless be required; financing may be unavailable or dilutive. Management anticipated higher operating losses and cash use as commercialization proceeds.
- Key risks include dependence on a single product candidate and sole manufacturer Daewoong; FDA approval and launch uncertainty; commercial adoption, pricing, and competition; and the need to build a sales organization. Evolus also disclosed Medytox litigation alleging misappropriation of a botulinum strain and trade secrets, and a related FDA citizen petition seeking delay of approval. The company said it could not estimate the likelihood or range of loss; it asserted defenses and noted its Daewoong indemnity may be insufficient.
- ALPHAEON owned 58.1% of the company’s outstanding shares as of November 1, 2018, giving it voting control. The filing also described potential conflicts, reliance on ALPHAEON services, and risks from the controlling stockholder’s related-party arrangements.
Important facts for investors to verify
- Whether the FDA accepts the CMC response and acts by the February 2, 2019 date, and whether any further deficiencies or restrictions arise.
- Timing and terms of U.S., European, and Canadian commercialization, including launch readiness, sales-force buildout, and supply capacity from Daewoong.
- Actual cash burn relative to management’s runway estimate and whether additional financing will be needed.
- Changes in the fair value and payment terms of Founder royalties and the contingent promissory note, which depend on sales expectations, launch timing, and discount rates.
- Developments in the Medytox litigation and citizen petition, including potential impact on the license, manufacturing rights, and regulatory review.
- Commercial uptake, competitive response, and the company’s ability to operate independently while ALPHAEON remains its controlling stockholder.