Q3 2022 Evolus Inc Earnings Call
Greetings and welcome to the Evilness third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host David Erickson. Thank you you may begin.
Thank you operator, and welcome to everyone joining us on today's call.
With me today are David <unk>, President and Chief Executive Officer, and Sandra Beaver Chief Financial Officer.
Our prepared remarks today will include forward looking statements within the meaning of 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.
A detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K quarterly for 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 statements.
Additionally, todays discussion will include non-GAAP financial measures, which should be considered in addition to and not as a substitute for or in 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 at <unk> Dot com.
Lastly, following the conclusion of today's call a replay will be available on our website at <unk> dot com and with that I'll turn the call over to David Thank.
Thank you David.
We are very pleased to share with you our results for the third quarter, but before we get into the detail I'd like to highlight four key takeaways.
We are reiterating the top end of revenue guidance for the year coming off of a very strong quarter of growth, where we believe our unit market share is now approaching 10%.
Second our reduction in operating losses was driven by the significant drop in royalty rates and disciplined operating expense management.
Hearing the path to profitability with our current cash on hand.
Third we launched in Great Britain, this past quarter and our European expansion is well underway.
And lastly, we are uniquely positioned to attract commercial and development stage assets as we build out our product portfolio.
Now, let's get into the results for the quarter.
As reported revenue this quarter grew at an above market, 27% rate over last year and when taking into account the above normal incremental deferred revenue that resulted from the success of our switch your tox campaign year over year growth was much stronger.
Demand for <unk> remains strong this quarter, even with anticipated seasonality and the return of some of our travel and has positive momentum is continuing into the fourth quarter.
We continue to expect 2020 to be another year of strong growth for Atlas and remain confident in the resilience of the aesthetic neurotoxin market.
For this reason we are reiterating the top end of our full year 2022 sales guidance range of $143 million to $150 million.
This equates to a year over year growth rate approaching 50%, which has roughly tripled the projected toxin market growth rate.
Perhaps the most significant highlight of the third quarter was a highly successful launch of our switch or talks promotional campaign, which helped generate the largest number of new purchasing accounts since our initial product launch period and drove a record 100000 consumer redemptions in our loyalty program.
We expect switcher talks to result in as many as 70000, new patients, which could represent additional market share.
The switch program began in September and patients will continue to redeem their initial $80 switch savings by the December 31 deadline.
This will drive continued momentum into the fourth quarter, which gives us confidence and a strong finish to the year.
The success of the switch your Tox program requires that we defer are higher than normal amount of revenue to account for the reward that customers earn.
As reported sales for the third quarter grew 27% over last year to $33 9 million. If you consider the additional revenue we deferred our year over year growth rate would have been even stronger than our reported rate. This performance clearly demonstrates that we are continuing to gain market share.
Aided by switch in the third quarter, we added nearly 650, new accounts the highest number of new accounts since our initial product launch period.
This brings our total account base to more than 8800 purchasing customers with a reorder rate that remained steady at above 70%.
Our <unk> rewards program grew by almost 50000 in the quarter to nearly 450000 members, which puts us on track to exceed a half a million total members by year end.
Reward redemptions, among new and existing members were evenly split which demonstrates strong loyalty to GMO and illustrates the power of this program to motivate consumers.
One of the things that continue to set <unk> apart as our co branded marketing and we are continuing to use this program to strengthen partnerships with our customers while building the chabot grant through a combination of mediums, including Billboard digital and streaming TV customers can tailor their advertising program to maximize.
As awareness of their practices and generate patient interest in <unk> as we continue to expand this offering we not only benefit from economies of scale. While we also improve the effectiveness of the program.
Looking at the overall market during the third quarter many of our customers reported lower procedural volumes in the summer as patients took vacation, but so I'll talk to the appointment to begin to ramp back up towards the end of the quarter as people retard.
This suggests that we are beginning to see the return of the historical seasonal trends that are typical in the aesthetics industry <unk>.
Against an uncertain economic backdrop, we are continually continuing to closely monitor the degree to which our customers might be impacted by changes in consumer behavior and continue to see favorable demand for narrow toxins, despite softening trends for other aesthetic procedures.
Although aesthetic toxin procedures are discretionary we are reassured by two things first neurotoxins remain one of the most affordable static procedures and historical data shows that even during challenging economic times toxin use continues to grow second the talk to market is significantly underpenetrated and the.
Key growth driver of the future is a millennial demographic, which is an audience approaching a <unk> and one that <unk> is specifically targeting with our <unk> brand and extensive digital capabilities.
Today <unk> is in an enviable position with strong performance and a clear pathway to profitability and a seven short quarters since our relaunch we have grown to nearly 10% of the U S aesthetic toxin market and started building our footprint in Europe we.
We believe this has uniquely positioned us to attract both commercial and development stage assets that can expand our aesthetic footprint beyond neurotoxin.
Now turning to our international business.
Last month, we announced the launch of Vascepa in Europe , beginning in Great Britain and the team is off to a great start.
Interest among clinicians are strong we had the newest company to enter in nearly a decade and believe customers are ready to embrace our unique approach to this static market.
Most recently, we had a major presence at the CCR meeting in London, which is the UK flagship event for medical aesthetics over.
Over the course of the two day event, we engaged with a large number of potential customers and conducted several scientific symposia and presentation.
Expanding into Europe is a significant milestone for analysts and we look forward to broadening our overall geographic presence even further.
Before I turn the call over to Sandra I'd like to provide a brief update on our phase II extra shrank study.
As previously reported the last patient was enrolled at the end of the second quarter and patient follow up is ongoing at our study site based on our progress. We now plan to present, an interim data analysis in early 2023 and.
An abstract has been accepted for podium presentation at <unk> in Paris, one of the largest aesthetic meetings in the world, which will take place at the end of January we look forward to demonstrating the longevity of our extra strength dose within the next 90 days.
With that I'll hand, it over to our CFO , Andrew Beaver, who as you know joined <unk> about 10 weeks ago with our strong operational experience Sandra has been able to hit the ground running and quickly learn our business. She has already become an integral part of the team and we're thrilled to have her onboard Sandra.
Thank you David.
As I reflect on my decision to join the company in my experience.
My enthusiasm for Avalon has continued to grow.
<unk> unique cash pay business model, our digital solutions and co branded marketing the quality engine and ability to capture meaningful share or the experience and capacity of this management team my belief in <unk> is building both in the U S and abroad is reaffirmed each day.
And with our strong cash position and disciplined operating expense management I am confident we are on track to achieving profitability and feel fortunate to have joined such an exciting time on a growth journey and finally I will just add that I look forward to getting to know our analysts and shareholders in the days and weeks ahead.
Now turning to the numbers.
Global net revenues for the third quarter of this year were $33 9 million compared to $26 7 million a year ago, which was a growth of 27% and driven almost entirely by higher volume <unk>.
Included in sales this year with <unk> $7 million of sale to Canada, which are reflected as service revenues on the P&L.
Sales into Great Britain, which are included in product revenue were minimal this quarter.
Overall, the pricing environment for neurotoxin product in the U S remained strong and the average selling prices.
Consistent with Q2 and about 2021.
As David mentioned earlier, we believe our reported sales in the third quarter understate, the true strength of our business and I'd like to provide some additional detail.
In the third quarter, we deferred an incremental $3 $5 million of revenue compared to Q2, primarily related to the highly successful switch your Tox program.
Including this deferral, our sequential growth rate would have been nearly flat and what is typically the sequential down quarter due to seasonality.
You will recall that the switch program required customers to purchase at least 30 vials of <unk> in the third quarter.
And exchange customers received 60 consumer reward certificates or $80 off two consecutive treatment for a total of $160.
This reward which our customers gave the news you've outpatient represents a meaningful savings and we are confident that after Q treatments consumers will see and feel the benefits of <unk> and make the switch.
As outlined in the gross to net revenue adjustments note in our public filings.
Obligations related to our consumer loyalty programs are initially recorded as deferred revenue.
Evidence of this increased to four hours, reflecting a $3 5 million quarter over quarter change in accrued revenue contract liability part of accrued expenses on our balance sheet.
We expect the majority of this extraordinary amount of deferred revenue to be recognized in our Q4 results and alignment with at December 31 expiration date for the redemption of the first switch your tax treatment.
Finally, it's worth noting that customers will need to purchase additional product to treat the new consumer tool redeeming be redeeming rewards.
All of this supports our view of a strong finish to 2022 as reflected in the reaffirmation of the top end of our full year sales guidance.
Moving down the P&L.
As reported gross margin for the third quarter was 58% and our adjusted gross margin, which excludes the amortization of intangibles was 62%.
Beginning in mid September we had a material decrease in our settlement royalty obligations with the conclusion of our royalty to abbvie.
The royalty to <unk> decreasing to a mid single digit rate calculated on global net sales.
These changes will dramatically lift our fourth quarter adjusted gross margin to the range of 68% to 71%.
And resulted in a blended full year adjusted gross margin of 50, 861%.
Reported selling general and administrative expenses for the third quarter was $34 8 million compared to $36 9 million in the second quarter. This reduction in spending of $2 1 million related primarily to marketing and distribution expenses.
Demonstrates our ability to manage our operating cost structure. This.
This quarter SG&A expenses included 3 million of noncash stock based compensation.
Our GAAP operating expenses for the third quarter were $51 8 million compared to $58 5 million in the second quarter.
non-GAAP operating expenses for the third quarter reduced to $33 7 million from $35 4 million in the prior quarter.
For the full year, we now expect our non-GAAP operating expense to come in at the lower half of our previous guidance range of $135 million to $140 million.
Our non-GAAP loss from operations in the third quarter was $13 3 million compared to $14 1 million reported in the second quarter.
As a reminder, both non-GAAP operating expenses and non-GAAP loss from operations exclude product cost of sale.
R&D expense stock based compensation expense revaluation of the contingent royalty obligation and depreciation and amortization.
Turning to the balance sheet.
We ended the third quarter was $65 6 million in cash compared to $84 5 million at June 32022 for a difference of $19 million.
The major pieces in that $19 million include $14 million of inventory payments to support growth of the business.
<unk> 8 million of net royalty payments and interest payments of approximately $2 million.
In the third quarter net cash used for operating activities was $17 1 million, which was $3 8 million less than the amount used in the second quarter and a continuation of the favorable trend. We have seen this year keeping us on the path to achieving sustainable positive cash flow.
As a reminder, we have one final 5 million settlement payment due in the first quarter of 2023, which will satisfy our settlement milestone obligations.
And as we continue to expect that our existing cash balance will fund our current operations through cash flow breakeven.
Before I turn it back over to David I would like to summarize our 2022 guidance.
Full year sales at the top end of $143 million to $150 million, which includes a minimal contribution from international market.
These assumptions are based on anticipated success of the switch your Tox program and reflects our confidence in the resilient aesthetic neurotoxin market.
Full year, adjusted gross margin between 58% and 61% and a fourth quarter rate of 68% to 71% to reflect the decrease in settlement royalty rate.
And full year non-GAAP operating expenses in the lower half of our $135 to $140 million range.
Other modeling assumptions include quarterly interest expense of $2 6 million and full year weighted average shares outstanding of approximately $56 million.
Over to you David.
Thank you Sandra as 2022 comes to a close I want to acknowledge the great effort of our <unk> employees, who are on track for a strong finish to an outstanding year.
We are now seven quarters into the relaunch of <unk> and I'm proud to say that we remain the fastest growing neurotoxin in the U S. Today and are on track to achieving nearly 50% growth this year.
Our focus on the casualty market has enabled us to create a differentiated experience for our customers and in turn their consumers, resulting in Davao, earning the number one or number two share position within our purchasing accounts.
As we look forward to 2023, we continue to forecast a growth rate of at least double the market driven by our expanding share in existing customers and continued penetration of the remaining 2000 accounts in the U S that have not yet tried to vote.
We will also expand our footprint beyond great Britain into new European markets and expect to receive approval in Australia. Lastly, we expect a preliminary results from our extra strength phase III study to bring clarity to the market around the relationship between dose and longevity, which could uniquely positioned <unk> with two dose.
<unk> strength with that we're ready to take questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from Marc Goodman with SBB Securities. Please proceed with your question.
Yes, Hi, David you spoke a lot about <unk>, we got a lot of information on why it did what it did in the quarter, but can you talk about the broader market in the quarter.
Obviously.
Please everybody listens to what Abbvie has to say and saw their numbers.
It just seemed.
A little weaker than what would've been expected I think theres, a little bit of a concern that theres a slowdown going on in the broader market.
Talk about that a little bit how you're thinking about.
What was the sales for the broad market in the third quarter growth or whatever how you expected the year to play out and how are you thinking about 'twenty. Two 'twenty three are we going to have.
A market that flows into the low to mid single digits or how are you expecting this to play out. Thanks.
Thanks for the question Mark a couple.
A couple of comments on the quarter. The first is clearly seasonality took effect this year and we're wrapping around on a prior year, where consumers weren't traveling and so I think youre seeing that effect, resulting in.
Some dampening in terms of the procedural growth rate versus prior year, and I think that was something that others have commented on as well as it relates to the market slowing.
We mentioned in the opening comments, we've been looking very closely at our business we track.
<unk> reward redemptions and as you saw in our report the third quarter hit an all time high in terms of <unk> rewards participation. We haven't seen the slowing we have her of course that consumers are feeling a bit of the pension the pocket book and maybe trading down which as you know historically Marquis.
This category during the prior recession toxins are the most resilient because consumers will trade down to a neurotoxin in the $3 to $500 price range and trade off other procedures. So we may be seeing that but of course, given the majority of our growth. This year has come from market share gains versus actual market growth is.
Tough for us to get a sense for how thats playing out in the market, but we remain very confident and continue to see very strong trends on our business.
That being said of course, we are hearing about the pinch whether it's in the grocery store at the gas pump and we expect that of course in some level to impact the aesthetic market. Fortunately, we continue to benefit from the combination of share gain as well as a market that we do believe is continuing to grow may not be at the same clip as it was.
Fire, but continues to grow at a healthy rate and as we look forward I think our best analog is to look back and historically this market has grown at a high single low double digit growth rate.
It has the potential to continue to accelerate given the favorable macro trends towards the younger generation that have an interest in entering an aesthetic market and of course. This market has always rebounded, but when it goes through a period of slower growth and so for those reasons, we're really optimistic about 2023, and I think we've given some level of guidance.
And that we expect next year that our business will grow at more than two times. The market average. So it gives you a sense of our confidence in our ability to continue to expand our presence in the U S.
Thanks.
Our next question comes from Louise Chen with Cantor Fitzgerald. Please proceed with your question.
Hi, good afternoon.
The answer Luis from Cantor Congrats on strong execution this quarter and thank you for your questions first can you remind us of the market opportunity for the extra stream.
If successful how we're impacted wrangler.
Our strength if at all.
Second question is on the launch in Europe is a little bit more color.
On the uptake of <unk> in 2023, thank you.
Great.
Start with the extra strength.
Clearly, there's a lot of interest in the market around the role of dosing as it relates to longevity in the market and the research that we've done with existing <unk> customers.
86% of customers have said they are very interested in understanding the role of an extra strength product. When you dig a layer deeper beyond just the interest level and understand where the utility of the product might be it still represents a minority of the youth, meaning as we think further out over time. The continued dominance in use in this market is going to be the regular.
The strength of the product and so we continue to believe it is important to understand the relationship between dose and longevity and as I mentioned in my earlier comments, we will get a chance to share some of those results early in the year next year when we reveal that data in January at the <unk> meeting moving.
Moving on to the uptake ramp in Europe . This year, we said it was an investment year, we invested high single digit millions and we expected a nominal contribution from international clearly internationals contribution next year will continue to rise not just from the investment we've made in the UK, but also as we <unk>.
Span into other markets.
UK is our single largest market in Europe , followed by Germany, and we expect to be in both of those markets next year. It will provide more color in the new year around our expansion beyond those two key markets. So we'll provide some more color as we entered the new year, but we feel very good about.
Europe being a contributor to growth next year and of course over time presents a significant opportunity for us as Europe is the second largest market in the world after the U S for neurotoxin.
Great. Thank you so much and congrats on the progress.
Our next question comes from Annabel <unk> with Stifel. Please proceed with your question.
Hi, Thanks for taking my question.
I had a couple of here so just to go back to your other <unk>.
When it comes to the.
Higher dose or the extra strength dose would you say.
Yes, Theres a lot of interest in the high dose, but when you dig a little deeper it's still a minority.
Who might use it how do you tease that out.
And what pushback you get when you ask I guess, a little bit more of a detailed question. So I guess I want to understand that because most of the surveys we do.
So a high level of interest in.
A higher dose therefore longer duration.
First question the second is.
Maybe you can help us understand the mechanics of the switch the Thompson deferred revenues. So they buy 30 units during the quarter or they get 60 reward coupons is there a timeline as to when those consumers that need to use that.
And so just if you can help us with the confidence level you have been recognized.
$3 5 million deferred revenues.
Okay, Great, let me start with the extra strength data so.
What we did in our survey was we asked existing customers what their interest level was.
In an extra strength neurotoxin that provides greater longevity and as I mentioned earlier, 86% expressed a lot of interest in understanding how that works.
The next layer you again, which is you want to understand well, how often would you use this higher dose and what areas of the face would you use the higher dose thats, where the complexity enters.
The reality is if you pick areas that are outside of the approved label, which is a global area. You go to areas like the forehead today in the U S toxins are under dose relative to the label in the forehead and so the idea of increasing dose in an area. That's known for adverse events becomes challenging for customers to think through how they get.
As we do that meaning the tradeoff of longevity versus the look they receive or potentially the adverse event profile that may result from it. So I think it's fair to say there is a big learning curve, but what's important is we're uniquely positioned we have a 20 unit dose which is the flagship use of a 900 kilo dart molecule, which is what's any.
<unk> to us as a fourth entrant in the market now to command a 10% share of this category, which is meaningful given we've only been on the market less than two years.
Since we settled but then adding onto that with an extra strength dose with a company that's uniquely positioned to capitalize on the pricing dynamics of this category. We think gives us an opportunity to potentially explore both options of the original as well as the extra shrink those but ultimately I think it's fair to say anytime you are introducing a new language to a category.
Like an extra strength or doubling the dose there's going to be a learning curve associated with that and there is a lot that we don't know today and will have to learn that over time.
On the second question as it relates to the <unk> rewards program.
The timeline for consumers to redeem their rewards and December 31, So if a consumer has been redeemed our initial $80 reward than those coupons will expire, meaning we don't carry any further liability if the initial coupon hasnt been redeemed. So we'll have a great sense for the number of consumers that switch.
<unk>.
As a result of the switch your Tox program by the time, we come around to the end of the year, which is what gave us the confidence.
To make the comment that the majority of that revenue deferral will be realized in the fourth quarter.
Okay, great. Thank you.
Our next question comes from the line of Douglas Tsao with H C. Wainwright. Please proceed with your question.
Good afternoon, and thanks, Thanks for taking my questions I guess, David you just to your point consumers, perhaps feeling the pinch.
Have you thought about ways to sort of provide some relief.
Centralized stations to continue to move ahead with the aesthetic procedures. I know you, obviously don't want to sort of disruptive pricing strategy is this extra core customers. So.
Are there sort of consumer oriented.
Promotions that you might think about pursuing.
If we do see sort of a little bit longer period.
<unk> pressures.
Doug Thanks for the question and I know you know this category well because you covered it during the last recession and consumer behaviors do change at a time when they feel the pocketbook pitch and you see that reflected in product choices on all consumer goods and certainly aesthetic products are no different than other consumer retail items.
As a matter of fact, we think we're very well positioned in the event that the market were to slow down.
Product of course improves the profitability profile of the number one procedure for practices in aesthetics, which makes us an attractive option to consider as we pointed out we're only in about a third of accounts across the U S. Today and have plenty of opportunity to open new accounts and engage with customers. The second is because we are a cash pay business.
We're able to engage with customers in a way thats unique co branded media when we enter practices and we offer co branded media, whether that's digital TV or billboards that replaces some of their own marketing spend and during a time, where they are feeling the pinch on the bottom line our investment in marketing and media is a wafer after help.
Fuel their growth, while they pull back on that spend and we've heard that consistently from some of our top customers that see the benefits of that of course, there are competitors that are down the street to see the benefits of our advertising as well and that has helped fuel the growth you've seen in the new accounts and then lastly.
The <unk> rewards program was designed specifically for us to be able to address some of the price elements related to what the consumers paying out of pocket. The switch. Your Tox program was deliberate it was an opportunity for us to make an investment at a time, where we felt that we could gain not only market share in the category, but to help offset.
Some of the cost to consumers as you know right around the time, we launched this in the middle of the year. We said the summer season was going to be unique for the for this market. This year because of the wrap around effect. So we think we made the investment at the right time, we're seeing it reflected in our unit share gains and we believe those share gains will continue into next year.
And we're going to continue to deploy the types of consumer reward benefits to keep these patients coming back more often with a preference towards you, though we've seen some early signs that we can move the needle and because of our digital platform. We can provide customized rewards to consumers depending on where they are there.
And how far out it's been since our last one so.
We feel we're well suited and positioned overall to continue to capitalize on the market whether it continues to be at healthy growth, which we do believe it is a healthy market or ultimately if the market does slow down a bit we think that we had some very favorable positioning in this category to benefit from that.
And maybe just as a quick follow up any David have you seen sort of an increase in any accounts that might be sort of now thinking about just given your economic profile and what you offer them an interest and you sort of maybe in the past is that you know not sure happy with Thompsons and I'm, having now but sort of.
Considering that in light of macro conditions. Thank you.
Yes, I think you look at the third quarter here, we are in the third year. Since we originally launched this product and we're hitting an all time high in terms of new accounts purchasing since that initial launch phase. So I think we are seeing that the programs that we're deploying are helping bring that to life.
And we do believe that that's a sustainable trend in the sense that the market continues to see us as a favorable option to other neurotoxins that have continued to raise price and put pressure on the profitability of the procedure and we deliver a very high quality outcome with a 900 kilo dart molecule that they are very used to use.
That is the gold standard in this category and these doctors know how to inject the 900 kilo Dalton toxin and that makes that transition foreign account as well as our consumer much easier because they understand how these products perform.
Great. Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
There are no questions at this time I'd like to turn the call back over to management for closing comments.
Thank you operator, if you missed any portion of this call a replay will be posted to our website later today.
Thanks to everyone for joining us we appreciate your interest in <unk> and will be available if you have additional questions.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Yes pretty much.