Evolus, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 12, 2019. Unaudited interim results. Evolus is an early-stage aesthetics company whose sole product is Jeuveau (prabotulinumtoxinA-xvfs), approved by the FDA on February 1 and launched in the United States in May 2019.
Key financial results
| Metric | Q2 2019 | Six months 2019 | Prior comparable period |
|---|---|---|---|
| Net revenue | $2.3 million | $2.3 million | $0 in 2018 |
| Gross profit / margin | $1.7 million / 71.4% | $1.7 million / 71.4% | No product sales in 2018 |
| Operating expenses | $37.6 million | $62.9 million | $16.1 million / $22.1 million in 2018 |
| Net loss | $37.6 million | $48.5 million | $16.4 million / $22.6 million in 2018 |
| Operating cash used | Not separately stated | $52.4 million | $7.9 million in 2018 |
Q2 selling, general and administrative expense was $34.9 million, up from $6.2 million, mainly reflecting the U.S. launch, commercial infrastructure, an approximately 140-person sales force, and marketing, including the J.E.T. program. Research and development expense fell to $0.5 million from $1.6 million as U.S. Jeuveau clinical trials had been completed. The company recognized no revenue from J.E.T. program shipments. The 71.4% gross margin excludes intangible-asset amortization.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $30.3 million and short-term U.S. Treasury investments were $69.6 million, totaling approximately $99.9 million. Working capital was $92.7 million; stockholders’ equity was $41.2 million; accumulated deficit was $171.6 million.
- Cash and cash equivalents declined by $62.9 million in the first half. Investing activities used $71.8 million, chiefly from purchases of short-term investments net of maturities and capitalized software. Financing activities provided $61.3 million, principally from the Oxford loan, offset in part by founder royalty and Daewoong payments.
- Oxford’s facility provides up to $100 million: $75 million funded in March and a further $25 million potentially available through September 30, 2020, subject to sales milestones and other conditions. The facility is secured by substantially all company assets; reported debt, net of discounts and issuance costs, was $72.9 million. The stated rate is the greater of 9.5% or 30-day U.S. dollar LIBOR plus 7.0%; the effective rate was approximately 11.6%. Interest-only payments initially run through May 2022, subject to possible extension if conditions are met. The company reported covenant compliance at June 30.
- Other significant obligations include a $47.2 million fair-value contingent royalty liability to the Evolus Founders, a $17.4 million carrying value contingent promissory note payable to the Founders, and approximately $9.7 million of purchase commitments. Daewoong could receive up to approximately $11.5 million in remaining contingent milestone payments.
Changes, outlook and material risks
- Compared with 2018, revenue began only after the May launch, while first-half operating cash use rose substantially. Launch-related spending and interest expense also increased. A $14.8 million first-half income tax benefit, primarily from a partial valuation-allowance release following reclassification of the Jeuveau intangible asset, reduced the reported net loss; it was a noncash item.
- Management expected existing cash, cash equivalents and investments to fund operations for at least 12 months from issuance, based on expected cash burn. It also anticipated continued significant expenses and higher operating cash use as commercialization continued. No specific revenue or earnings guidance was provided.
- Management planned to begin Canadian marketing in the second half of 2019 through Clarion. For Europe, the EC had requested supplementary information; in July 2019 the CHMP adopted a revised positive opinion, and management anticipated EC approval in the second half of 2019. These were expectations, not guaranteed outcomes.
- Jeuveau is the company’s only product, has a very limited sales history, and faces established competitors and uncertainty about physician and consumer adoption, pricing, and discretionary demand. The product is manufactured solely by Daewoong in South Korea, creating supply and manufacturing concentration risk.
- Medytox’s trade-secret claims remain in litigation, and Medytox and Allergan also brought an ITC complaint seeking to bar imports and sales of Jeuveau in the United States. The company said it could not estimate the likelihood of loss or possible loss amount. An adverse outcome could materially impair or halt commercialization; the company’s Daewoong agreement and Oxford facility may also be affected.
- The filing reports no material developments in the previously reported legal proceedings. It also includes a July 18, 2019 amendment to the Oxford loan agreement as an exhibit, but the supplied filing text does not explain the amendment’s terms.
Investor facts to verify
- Commercial demand, repeat ordering and revenue conversion after the J.E.T. launch program, along with net pricing, rebates and coupon costs.
- Cash burn and runway against the approximately $99.9 million of cash and short-term investments, and whether the $25 million Oxford tranche’s sales conditions can be met.
- Oxford debt terms, covenants and the July 18 amendment, including collateral exposure and repayment schedule.
- Developments in the Medytox litigation and ITC investigation, including any ruling that could restrict Jeuveau imports or sales.
- Daewoong supply capacity and exclusivity requirements, and progress toward Canadian and European approvals and commercialization.