EOLS - Evolus: Botox Copy Cat In A Challenging Aesthetic Market

2023-06-29 14:51:32 ET

Summary

• Evolus, Inc., a pharmaceutical company specializing in aesthetic products, faces significant challenges with its lead product Jeuveau, a treatment for frown lines.
• Jeuveau's undifferentiated clinical data compared to established competitor Botox, aggressive pricing strategies in the market, and the entry of long-acting neurotoxins like Daxxify from Revance make its launch and market penetration difficult.
• The company's financial position is precarious, with only $31m cash on hand and a quarterly cash burn rate of $15m. The company's value is heavily reliant on Jeuveau, making it vulnerable to market shifts and changes in consumer preference.
• We initiate Evolus with a sell rating.

Company background

Evolus, Inc ( EOLS ) is an interesting US pharmaceutical company that focuses on developing and commercializing aesthetic products. The company is headquartered in Newport Beach, California, and was founded in 2012. Evolus's lead product (or only meaningful value driver) is Jeuveau (prabotulinumtoxinA-xvfs), a prescription medicine used to temporarily improve the appearance of moderate to severe glabellar lines (frown lines) between the eyebrows.

Pipeline: not differentiated

Jeuveau (prabotulinumtoxinA-xvfs) is a proprietary 900 kDa purified botulinum toxin type A formulation developed by Evolus, Inc. It was approved in major markets as an aesthetic product (pretty much as a cheap alternative to Botox) by: FDA in February 2019, Health Canada in August 2018, European Commission in September 2019, and the Australian TGA in January 2023.

The company claims that Jeuveau is differentiated from other neurotoxins, such as BOTOX, Dysport, and Xeomin, in several ways.

Firstly, Jeuveau is the only known neurotoxin product in the United States with a 900 kDa complex other than BOTOX. This unique formulation is believed to provide a more targeted and precise treatment of frown lines, resulting in a more natural-looking appearance. Additionally, Jeuveau is produced using a proprietary manufacturing process that is designed to minimize the presence of complexing proteins, which can potentially cause an immune response in patients. Furthermore, Evolus has positioned Jeuveau as an aesthetic-only, non-reimbursed product, which allows for pricing and marketing flexibility.

We believe the kDa of neurotoxins is not a big differentiator , and similar to other consumer health products (like lotions), the key driver of sales revolves around product marketing and pricing. In terms of product marketing, we believe Botox would continuously be a formidable competitor due to its established brand recognition (it almost became a noun by itself) and strong marketer (Allergan). We believe the pricing is the only area where Jeuveau can compete, where all neurotoxin manufacturers are reducing the price, as we can see with Xeomin's low-price strategy. This dynamic is unique to aesthetic space as the payers do not reimburse it, and many times, companies are not able to have differential pricing in their medical indications (i.e., migraines, CD, ULS, etc.).

Launch - steady launch in the aesthetics space, but the future is uncertain

We must examine the product launch of Jeuveau in light of the current market dynamics dominated by established players like Botox, and the recently introduced long-acting neurotoxins, such as Daxxify from Revance ( RVNC ). While the entry of a new product inherently poses its unique set of challenges, in this case, the issues are compounded by two major factors – aggressive pricing strategies adopted by competitors and Jeuveau's undifferentiated clinical data.

Starting with the pricing dynamics, it appears that the current players in the neurotoxins market are implementing aggressive pricing strategies as they lower their prices and offer large kickbacks to maintain their market share (this is legal in the aesthetics space). This has created a heavily competitive market environment where any newcomer, like Jeuveau, will continuously have to lower their pricing to a similar or even greater extent to penetrate the market and secure a client base (plastic surgeons and nurse practitioners). However, this puts the company in a precarious position, making the market less attractive due to thinning profit margins, especially considering the small company size and the high cost of aesthetics sales rep (even more than medical sales reps).

Moreover, it is worth noting that introducing long-acting neurotoxins adds another layer of complexity to this pricing conundrum. These new products tend to carry a higher initial cost but offer value over the longer term due to their extended efficacy. Consequently, they can potentially reshape the entire pricing dynamically, thereby further challenging Jeuveau’s entry into the market.

Secondly, the concern with Jeuveau's clinical data is its undifferentiated nature when compared to Botox. From an investor perspective, differentiation is key in any market. The unique selling proposition is what defines a product and offers it a competitive advantage. Unfortunately, the clinical data for Jeuveau does not showcase any significant differences or improvements in efficacy or safety profile over Botox. Without distinctive clinical data, Jeuveau is likely to face an uphill battle in differentiating itself from the already trusted and established product – Botox (the first neurotoxin to be approved in this space).

To make matters more complex, the aesthetics market is heavily driven by branding and trust. With Botox being the household name that it is, coupled with its successful clinical history, convincing consumers to switch to a new product like Jeuveau will be a formidable task. Taken together, the unfavorable pricing dynamics and the undifferentiated nature of Jeuveau's clinical data relative to Botox make the product's launch particularly challenging. As a result, investors should exercise caution when considering investment opportunities related to this product launch.

The financial position of the company is precarious

We highlight that the company currently holds only $31m cash, and it is burning around US$15m cash each quarter, which means that the company may have to raise in the short future. Furthermore, we believe the operating expense for the company to spiral up (need to hire more sales reps and offer bigger discounts to prescribers) with the market getting more and more competitive, especially with Daxxify's entry.

Risks

1. Limited Product Pipeline and Over-reliance on Jeuveau : The company's value seems to be driven primarily by a single product, Jeuveau. If this product fails to gain market share or maintain profitability, the entire company could suffer significantly. A lack of a diversified product pipeline can make the company highly vulnerable to market shifts and changes in consumer preference.

2. High Market Competition and Aggressive Pricing Strategies : Jeuveau enters an already saturated market with established competitors like Botox, which has built brand recognition over the years. These competitors are not only reducing their prices but also offering large kickbacks, leading to an aggressive pricing environment. This dynamic can squeeze profit margins, making the market less attractive for newcomers like Jeuveau.

3. Undifferentiated Clinical Data : Jeuveau's clinical data does not showcase any significant differences or improvements in efficacy or safety profile over Botox. Without distinctive clinical data, Jeuveau may face difficulty differentiating itself from established competitors, which could impact its market penetration and overall performance.

4. Entry of Long-Acting Neurotoxins : The introduction of long-acting neurotoxins, such as Daxxify from Revance, adds another layer of complexity to the pricing and market dynamics. These products may reshape the market, offering more value over the long term due to their extended efficacy, thereby further challenging Jeuveau’s market entry and potential growth.

Conclusion

We initiate Evolus with a sell rating due to a) undifferentiated product vs. Botox and another neurotoxin, b) a highly competitive market with ever-declining price expected, and c) the company's limited cash runway and high cash burn expected with Daxxify entering the space. Furthermore, we believe it is uncertain if Jeuveau's strategy in focusing primarily on the aesthetic space is sound (due to the saturated market dynamic with Allergan's product Botox which is a category killer dominating the market) and undifferentiated clinical data of Jeuveau (similar duration of action, efficacy, and safety). This makes it vulnerable to potential competitor entry from Revance's Daxxify. The entry of Revance's Daxxify with the long-acting formulation and potentially a lower dysphagia and muscle weakness level (shown in the CD indication) makes Evolus's positioning uncertain. We see the glabellar lines neurotoxin market seems closer to skin care products than a pharmaceutical market, where it is more susceptible to price war (it is almost a race to the bottom), as we can see with Xeomin constantly offering more and more aggressive discounts to capture larger volume and appeal to high volume prescribers.

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