Yet Another Value Podcast - Dave Johnson from Caligan Partners on Evolus (EOLS) (podcast #128)
Episode Date: September 30, 2022Dave 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, an...d Dave thinks the market is underpricing Jeuveau's strong growth potential.Caligan's website: https://www.caliganpartners.com/Chapters0:00 Intro2:15 Caligan background8:15 EOLS Overview13:00 What does Dave see in EOLS that the market is missing?19:30 Why can EOLS take share versus Botox26:00 Why is EOLS focusing only on Cosmetics29:30 Is M&A in EOLS's future?33:15 EOLS acquisition targets and funding one37:30 Getting operating leverage and hitting cash flow breakeven40:15 What happens if we go into a recession?43:25 What does pricing look like?47:45 Does Daxxify's approval impact the market?52:45 Will new entrants impact pricing for tox?57:15 Closing thoughts
Transcript
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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, review it wherever you're getting it.
With me today, I'm happy to have Dave Johnson, Dave.
is the founder and CIO at Callagin Partners. Dave, how's it going? Good, good. How are you doing,
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 in advice.
That's always true, but that's going to be particularly true here as Dave specializes in small
and mid-cap kind 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
an investing advice. And then the second way I start every podcast is with a pitch for you,
my guest, you know, I started talking to some of the people over at Calligan a couple of weeks
ago on Liquidia, where Calligan is a affiliate, almost 20% shareholder. I believe you're on the board
there. So we're not going to talk about liquidity here. But, you know, 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. So 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 know, 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.
I don't know. That was quite the pitch. I don't know if you want to add any other background that
you have or anything on Calligan before we kind of dive into a name here.
No, Andrew, listen, I 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, you know,
quick background before we dig into today's subject matter, which is evelace.
As everybody knows, I'm Dave Johnson.
I'm the founder and CIO, 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, tool, diagnostics, a little bit of medical
devices and some services.
And I'd like to kind of describe it, you know, we're kind of two big themes that we see within a typical Calligan investment, which are somewhat unique, is number one, we don't take a lot of scientific risk.
Practically, every company we invest behind has largely de-risk from a clinical and regulatory standpoint.
You know, in therapeutics, this means kind of phase three and beyond.
And the overwhelming majority of our companies involve, you know,
approve revenue generating durable assets that represent kind of more than the
enterprise value that the company's 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.
And, you know, having spent the majority of my career at kind of larger private equity
firms, you know, I generally tend to gravitate towards more mature businesses. You know,
the second thing that I think you'll find at Caligan, which is a little bit more atypical within
life sciences, is our willingness to be pretty actively engaged with our portfolio companies.
And for example, we are currently the largest shareholder in four different companies. In all four
situations, we're a 13D filer. And in two of them, our ownership stake, is, you know,
is in the teens percentage-wise.
And our goal is really to identify companies with good assets, good balance sheets that are
underperforming kind of their opportunity set for, you know, 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 the
Smitcalf universe, to unlock value using money of the tools used by traditional activist investors.
And the way where you kind of think about is there are three main levers that we like to pull.
The first is kind of improved capital allocation.
And the second, you know, changes to the strategic direction of the company.
And third, kind of changes to the board and management team.
And in all of our kind of high conviction ideas, we pulled at least one of these levers,
but we generally try to do if so in a collaborative manner behind the scenes.
And with regards to capital allocation, you know, our portfolio company,
companies all have budget constraints due to their size.
Access to capital is always at a premium.
And many still consume cash instead of producing it.
And 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,
you know, 52-week highs over-subscribed offerings, but the world's pretty different now.
And supply of capital is dried up.
The cost of capital is higher valuations plummeted.
And capital allocation has never been more important.
You've got to focus on your winners, starve your losers.
So, you know, with regards to changes in strategy, one of the advantages, you know, an activist has when working with a small cap life sciences company is the ability to effectuate, you know, transformative change pretty quickly.
Many of these companies are really driven by human capital, you know, small manufacturing
or outsource manufacturing, small geographic footprints.
And that's kind of why our typical investment time frame is somewhere between kind of one or
two years.
You know, lastly, we come to, you know, changes to boards and management teams.
And at Caligan, we're of the firm belief, great management teams lead to great outcomes.
It's 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 is quadrupled over the last 10 years.
You know, I'd say we always prefer to invest behind an existing team where we trusted their ability to execute liquidity is a great example of that in other situations, you know, we'll invest behind pretty good teams where we believe are involved.
can help them go from good to great.
And then there's always the occasional investment where we conclude the only path of success
involves the new team that we recruit from the outside.
Going down that path, the high bar for us, the Q has to be worth the squeeze before
causing that type of disruption.
But when we, in a company, we were involved with AMAG where we made change and brought
in Scott Myers.
It was transformative to the outcome.
Scott's a tremendous leader and really changed.
the whole trajectory of that organization.
So on that note, I think it's a great opportunity.
Thanks for humoring me to let me go through that spiel.
Good opportunity to talk about Avalis.
Yeah, exactly.
That out the way, let's turn to the company we're going to talk about.
The company is Avalis.
The ticker is E-O-L-S.
This is a really interesting company,
but I'll just turn it over to you.
What is Evelace and why are you so interested in them?
So Avalis markets one of five approved botulinum toxins or toxins.
You know, and the most common one you might know is Botox.
And so Avalis licensed their product from a Korean company, Diwoon, and began marketing their product, which is called Juveau, in the United States in 2019.
And what is really unique about evelace is a couple things is, number one, it's an aesthetic-only product.
So if you ever looked at Botox, Botox has 30-plus therapeutic uses, you know, under armpit, sweat, you know, migraines.
There's tons of things.
And what we'll talk about with evelace and differentiate with Chau is that that's very, it's great for patients,
but it's very limiting for what you can do from a pricing and kind of,
of marketing standpoint for the aesthetic market. The second thing that I think is very unique about
Evelace is they ran a head-to-head study for their approval in their phase three of Juveau versus
Botox. And what they were able to show in a very highly controlled setting, which is
Botox and Juveau perform pretty much exactly the same from an efficacy and safety perspective
on the glabolo lines, which are the lines in your forehead, which is kind of where all the toxins
that have been approved, have kind of proved there obviously.
And that we'll get into some important implications down the road.
But they've now had very good data that if you inject this properly, an esthetician does,
you're going to get the same effect and duration as Botox.
And, you know, the third thing is they stood up a company.
around a toxin, which is, is one person an ex-allergen employee described to me.
Toxins are beachfront, beachfront real estate and aesthetics.
Everybody needs to have a toxin.
Most used aesthetic procedure in the United States and globally, growing, you know, penetration going up.
And especially in the Zoom culture we have today, you know, people are pretty focused on their
appearance. I'm not as you go user. I should be probably. But the, uh, it's a, um, it's an, it's an,
it's an, it's an area that's kind of a bit, you know, people would view it as kind of a gateway
procedure to start to do a little bit more, uh, self-care anti-aging. So, um, you know,
that's, those are the kind of very interesting. And I think the fourth thing to mention,
and this is something very unique to toxins is every toxins made from a unique.
cell bank. So, you know, a botulinum is the same bacteria that can kill you if you eat it
and, you know, poorly processed foods that you get from the farmer's market, right? Well, that same
that same property causes, you know, it's a neuromodulator. It helps you relax all the nerves
and you're wherever you eject it. And what's been, to create one of these toxins, you need to go
get a basically the bacteria in the cell bank to be able to replicate that toxin to do it pretty
effective you know to do it consistently and stably for a very long period of time and so this is not
and this is not a part of pharmaceuticals that has the steep kind of genericization curve where you
see after the patent cliff you know the revenues fall off 90 percent Botox has been improved you know
for over 20 years in the United States, there's no, you can't replicate the Botax cell bank.
Nobody's going to be able to do it.
It's a trade secret.
It's a proprietary formula for Allergan or Abbey.
And that's the same thing with Avalis, same thing with all the other toxins out there.
So in terms of one thing we tend to invest in is a little bit more durable assets,
which are a little more unique within kind of pharma.
but it does have some, you know, the trade-off, you definitely have some trade-offs with that.
You know, you don't get small molecule margins, but you've got something that is going to outlast
a typical patent cliff.
Perfect.
Look, you hit 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? So what are you seeing here in Evelace that you think
the market is kind of missing that's going to lead this to be, you know, a risk-adjusted
alpha opportunity? That's what we're all doing, a risk-adjusted alpha to opportunity going
forward. Sure. So it helps to rewind history a little bit to go into how did Juveau come to market
it and because it definitely has some implications for why we think it's an alpha generator going forward.
So Alvillus licensed Jouvo from a Korean company called Dai Wung.
And Da Wung unfortunately got into a trade secret dispute with Meditox, who's partnered with Allergan.
And that led to an international trade commission lawsuit or ITC lawsuit between Allergan and Meditox and DiWoon and Avalis in kind of 2018, 2019, and in 2020.
And what really happened was this ended up getting settled, but it had very disruptive impacts to Avalis.
and it's launched. So they had launched Dubo. The ITC found that they had infringed. And there was
some questions about whether or not they stole the proprietary recipe for the sell bank. And they had
to go off the market in the beginning of 2020. And so effectively they've had to relaunch, or 2021,
they've had to relaunch this product in 2021. And I think what happened when they did the settlement
was Meditox and Ed Allergan got a mid-teens royalty that ran through September of this year,
2022, on all jubo sales, and Medi-Tox got equity in Avelas.
Yep.
And Medi-Tox's chairman actually bought shares in Avalet's when that happened, too.
And so we'll talk about it.
But effectively, you had this product, Dubot that launched in 2019, got, was,
basically taken off the market for a couple of months before the settlement was reached
early 2021 and then had to go out and relaunch the product in 2021. And since then, it's been a
rocket ship. And 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. So they're going to have a thousand basis points of margin uplift in the fourth quarter of
this year because the royalty obligations, the Allergan and Meditox step down from mid-teens to about
5%. And the third thing is that we think that when they relaunch 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 JuVote. Because when
you use it in a controlled clinical setting, the nurses are all properly trained about how
do you, how do you inject it, where do 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 glabular lines, you don't know how it's going to form.
And so there's been a learning curve that Avalis has been very disciplined about in terms of training
aestheticians and injectors.
How do you 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?
And that's actually been really important.
And I'll get into the little bit of the details.
When you inject Joubeau, what you really want to do is you put it 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.
And one of the things that differentiates Chbeau is it's a higher molecular weight toxin, bigger particles.
And so the spread, it doesn't spread as far as even a Botox would.
It's a very narrowly defined effect.
So you can get exactly what you're looking for in a very specific area of the face.
by injecting just like that, got to hear the pop.
They've gone out and they've trained injectors,
but when you do that, people get results
that are as good or better than Botox.
And so we think that if you looked at Evelace,
Evelace is basically in 25% of the potentially aesthetic accounts out there,
they are rapidly gaining shares.
So in a market that's going to grow,
the aesthetic toxin market's going to grow 12%
12, 13 percent this year, Elvis is going to grow 50. And they've got, they're only in 25 percent
accounts. So what they've proven is that their ability to go in, get an account to put one of
their juveau in their bag, they can go take rapid amounts of share in that, in that account
and become, you know, not the number two toxin, but the number one toxin and actually even
displaced Botox. And, you know, some of that's a marketing strategy, some of that's a co-random
immediate it we'll get into, but we believe that consensus numbers for Avalis are still too
low, long term, 23 and 24, and for a durable asset like a toxin that is obviously beachfront
real estate in aesthetics, this is just undervalued. I mean, it's trading at, you know,
call it two and a half times forward, you know, revenue. And the aesthetic companies have
there's a pretty, these things have traded, Allergan was a big buyer.
these things generally trade, you know, four times revenue high teens divot. And so we think
Evelace is well undervalued relative to where it should be when they get through, you know,
the execution that they're going to, they've been doing and that they will do. Perfect. So a lot of
the threads that I want to pull in, you were just addressing there. But let you start. So for for people
who think Juveau, right, like this is a one company, this is a one product company. It's Juveau. Why
I, and you mentioned, they're coming into market, look, Botox is the key player here, right?
60 to 70% plus of the market in the U.S. and I guess globally, but 60, 70%, Botox is already out there.
It's got a name brand like Kleenex, right?
Like when I hear my friends talking about it, like they don't say, oh, I'm going to go get a toxin on my face.
Everyone says, I go get Botox.
They go to the doctor and say, give me Botox, all that type of stuff.
So the first question anybody is going to have in looking at this is, why is someone going to switch to
to Jebeau. 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 Javot, not Botox for X, Y, and Z reasons? I saw
great marketing. I think it's a little cheaper. Or is it the prescriber who someone is going
to come in and they're going to say, actually, what you really want is Javot because it's cheaper,
it's more effective because of the weight particles and you hear the pop and it doesn't spread
so what's kind of driving the decision that will lead to Javot gaining market share?
that's great question and it's it's the push and pull um so the value so 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 and Medicare or Medicaid.
So Allergan, you know, 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 that's ethics.
They've got fillers.
They got, you know, cool sculpt.
They got all these things that they go in.
They say, we've got this portfolio products.
You buy it from us.
You're going to get these discounts.
and but they can't do that exactly with toxin they got to charge the same price on the toxin they
do that they're given the government they can't charge a lower price there so it's very set
and very rigid well juveau comes along they're aesthetic only so they don't have to worry about
the therapeutic uses they have to worry about marketing and they can come they can come to the
esthetician and say when you do this we're going to give you something we're going to tell you
we're going to almost we've got clinical data it shows you it's as safe and as application
patients of Botox, we're going to charge you a lower price. We're 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 you are, where effectively juvot 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 Evelace that basically directs people to your clinic.
And we're going to be able to tell you how much of that billboard drive patient volume
to your clinic, how much of that actually ended up giving Jubo, right?
And so in a world where you might have some more kind of quote unquote recessionary pressures
and then then this is actually pretty powerful.
for the aestheticians out there because that marketing is the open part of the funnel to try
to drive customer traffic into a plastic, a derm, or a med spot. And 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, you know, decades plus, probably unlikely to switch your talks.
You know, you're not, you've got, and your aesthetician is probably to be reluctant because if they
screw up and all of a sudden you've got frozen face on the left side of your face, you know,
you're probably not going back. But for millennials in particular, the 25 to 39 year olds who don't
want their mother's talks, right, 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
They're going to be able to post about it in 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.
You know, that's pretty powerful.
And it's really interesting.
So Evelist has this program, Evelace 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 relaunch the product,
the percentage of repeat customers is increased by 200 to 300 percentage points per quarter.
So they, you know, in a given quarter now, 40% of the people that are coming back and getting Juveau are repeat users.
Because every 90 days, they're getting a text from Evelace saying, hey, you know, want to come in and claim your $40 reward and get Juveau, you know, time's up.
So that's actually proven to be a really interesting and recurring revenue model that I think
Evel is underappreciated that Allergan can't have that same relationship with their customers
that Evelace does today.
And the practices too.
And with the underlying injectors, too, being able to say, hey, this billboard that Evelas paid for drove this amount of traffic to your establishment
that has then, you know, resulted in this amount of increased toxin use.
I mean, that's pretty compelling for the aestheticians as well, that they, that no other kind
of toxins being able to offer them.
You know, I was kind of struck just when I was reading all this sort of stuff.
Like a lot of the, a lot of the skill sets are the way they're pitching it.
It does, it reminds 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.
And once we do that, like, you know, yes, we've got to keep investing in the marketing and 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 Jubeau.
So you've got this recurring revenue stream from.
But I guess just 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 Daxify as 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 Jubeau, they're just focused on cosmetics.
but they're giving up half the markets of therapeutics, right?
So you give up half the markets.
It 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
with a unique, it's a unique phone number on the billboard.
So they can actually track, hey, we've 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
therapeutic. So you can't do, I believe you couldn't do a customer loyalty program because that would
impact pricing if you were doing therapeutic. So it's just, the only alleging, the only way Allergan
does that is to, to the aesthetician to the plastic themselves. They can't do that to the customer.
Yep. So 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 enormous share in the cosmetics market.
I think it's, you know, when you say enormous share, I think success here.
In a market that I think people have kind of established is going to grow, you know,
at least high single, the low double digits, you know, if they could be a 20, 20% market share
player, I think that that's going to be, everybody's going to be pretty happy.
You know, that's a $500 million company when you look out a couple of years from now.
Yeah.
That's, that's a meaningful product, you know.
So for us, that's success.
And then when you think about it, what their optionality is, is, you know, they've got the ability to add additional aesthetic products to the bag and leverage, you know, with very high incremental margins on top of that because you've got this commercial infrastructure that's supporting, you know, your flagship product, which should go.
But I think strategically, to go compete in the toxins.
market, I think this was absolutely the right decision. And I think it's, it's proven out in the,
in the launch. Yep. I mean, I just think, you know, as you said, they're approaching 10% share
in cosmetics right now. And if you look at Botox versus now there's five competitors, but before
Joubeau and Dax Spy, which again, we'll talk about in a second came on, there were three. And the other
three had stalled at 20 and 10% for like 10 years, right? So for Javot to go and get 10% in
call it two years, three years, whatever, since launch.
You know, 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,
it really speaks to the power of the strategy.
Well, let me just, you mentioned beachfront property a few times.
I just want to pull on that since you've been mentioning it.
You know, this is currently a one-company product, one-product company,
and as you said, Allergan, a lot of these guys, I guess it's now Abb-Bee,
but they're using Botox or a toxin as the beachfront property to get in.
Again, there's a lot of selling costs, a lot of marketing costs and everything.
So 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.
So that can go two ways.
It seems like what they want to do is they want to go out.
They just hired a head of business development less than nine months ago, I believe.
They want to go out and they want to acquire other products to kind of put in their sales force is bad, right?
that's the classic thing. You get more in the bag. That's lots of incremental margin.
The other way it could go is, hey, we're a one-company product. 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.
So can you talk about them being a one-product company? Like, what would they be looking to add?
What would this strategic value would be if they ever decided to sell, all of that?
Yeah. No, I think, listen, I think we've always been pretty adamant at Calligan that companies are
bought, not sold. And so what we always encourage management team to do is you got to build
a company that's more attractive, both the public markets and private markets, by just
executing fundamentally strategy, which is profitable growth, right? Like, 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. So the really interesting stat is
70% of fillers are used with a toxin, and 40% of toxins have a filler attached to it.
So if someone comes in and is getting a filler, 70% of the time, they're also getting a toxin.
But when 40% of time, when someone's getting a toxin, they're also getting a filler.
So fillers are kind of the natural, you know, once you've relaxed part of the face, you maybe want to create some more definition and part of it.
So it's a, fillers are incredibly complimentary.
I think we would have, we would say you want to have something that's differentiated.
I mean, having a me too hyaluronic acid filler like a juvoderm at Allergan, you know,
is that going to be complimentary to juveau or not, right?
Is there just not going to be as differentiated, you know, yeah, you've got the pricing
strategy you can implement, but, you know, I think they've been pretty disciplined about
how do you want to go out and execute with what the next product in the bag?
Because, as you said, right, it's going to be very high incremental margin.
And, you know, before you had kind of Zeltique out there and Allergan kind of swallowed a lot of these companies.
You know, is there, you know, gal dermas theoretically, which is the old Nestle business, which is owned by private equity.
They're going to come public.
So you will have some.
You've got beauty health out there, which is Brent Saunders, the former CEO of Alist.
He's got that platform out there with hydrofacial.
You know, there is 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 really need to have a toxin.
It's the most use of aesthetic procedure.
So, but right now, I think what we want, what we're encouraging David and the team to see is really focus on growing jubeau, create that.
that really strong brand loyalty from consumers and
asceticians and have something that it's going to be, you know, again,
viewed as a very durable product and then good things will happen.
You mentioned beauty health, which is skin on the public market.
It's funny because when I first started talking to you guys about Evelace,
as soon as you guys said, oh, it's a Botox better.
I said, oh, well, skins run by Allergan's ex-CEO and they don't have a Botox.
Like, you'd have to think they want a Botox type product at some point.
And when I tweeted out that I was doing this podcast, like probably three of the first seven
messages were, hey, skin's going to buy those guys at some point, right? So I said it, you didn't,
but it does seem like natural there. Let me just ask on the acquisition front, if they do
truce to go out and buy a filler, though. Is there anything out there left for them to buy
a filler? Like, that and, you know, the company, they're still burning cash. They think they've got
a clear path to, they're funded to cash flow break even. They say, I saw one of their recent
appearances at a conference. 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. But so my question is just, is there a filler product for them to buy
and given kind of the constraints of their market cap, where their shares are trading
and everything like that? Do they have the financial capability to go buy a filler product?
Yeah, one of the things that was really, I think that really got us comfortable with Avalis
at the end was in late last year, beginning of this year, they announced a $125 million
non-diluted financing with Pharmacom.
And they drew $75 million up front.
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.
a delayed draw tranche that they could use for M&A.
So, you know, 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 Evalitz and building a brand around it.
So I think that they'll, they will, and 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, you know, another 25% the year after that, where's my highest ROI dollars going to go?
And it's obviously going to be the incremental dollar you can spend on juveau has an incredibly high return.
So, and again, we totally believe them.
They, and you just run the kind of math out, they were, they were cash flow 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 payment, Medi Tox, and Allergan in the fourth quarter this year.
So, you know, we think profitability is not, you know, years away. We think it's quarters away.
So just to confirm, they say we think we're our financing now, we're good to hit cash.
flow break even, and you obviously think that's the case. They're pretty close. They get the 10
basis point margin expansion. Sales are ramping. You know, hopefully. 10 percentage point. So,
10 percentage points. 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. That 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? Or do you think, I mean, I think the only reason they draw it is for some
some bolts on M&A, but if they don't find it...
But I think they could easily extend that, too.
And they could probably go back and get an extension if they needed to.
I think they've said pharmacon's been a great partner.
And, you know, I think if they didn't find anything by 1231, then, you know, they could
probably extend it a little bit.
I mean, again, no, I don't think there is anything burning a hole in their pocket that
they need to do something.
I would this, I trust that they are not going to do something stupid just because the 50
million, theoretically only available to December 31st.
Let me ask two bare questions.
And then I just want to talk about, I've mentioned Dax Fy.
Yeah, yeah, of course.
We'll talk about it.
But two bare questions.
I think the first bear 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, right, that was up 40% year over year as well.
So 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 these marketing.
And like the SG&A is basically selling and marketing is what's going up.
You're getting this company that's piling it all into selling and marketing.
As soon as they dial that lever back, the growth's going to pull back as well.
So what would you say to someone who's just looking at the one-to-one correlation between those two
and thinks that it's all, you know, that's kind of like not profitable growth if it's just all marketing driven
and it'll pull back once it goes away.
So they were pretty, 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 of Apex guidance.
And so that call it kind of non-gap SG&A of 35-ish quarter, they basically said, that's what
we're going to be running every single quarter.
And they've been pretty close to that.
And every quarter, you've seen sequential revenue growth.
So, you know, the 35 or the 140 million bucks a year is table stakes.
You've got to 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.
They've been pretty adamant marketing.
It's not going to be greater than 15% of sales.
So they factor that all in.
That's table stakes.
And so then you've seen the quarter or quarter of revenue growth.
They haven't, on a quarterly basis, you haven't seen it.
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 spend in co-branded media.
And I think 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 Juveau 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 three,
to a tier two to eventually to a tier one, where they're using the primary, that, you know,
Dubot is becoming the primary toxin by that particular aesthetician.
Yeah, the only thing I, on their Q222 call, again, I mentioned SaaS 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 kind of get that, you're getting that growth payoff, it's just coming later.
quite in the financials yet. I've got to ask, this is a more simple bear question, but,
you know, we're at the end of September. Everyone's freaking out. Fed, recession, all of this type
of stuff. This is, right now it's a U.S. focus business. I don't think we need to talk too much
Europe and everything, but there's a lot of upside Europe later this year, Germany and Britain,
Australia, and more Europe next year. But this is U.S. focus. If we go into a recession,
you know, what do you think volumes and numbers look like when we go into a recession?
because I think a bear would say, hey, this is all cosmetic.
Cosmatic 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.
Yeah, absolutely.
So I think if you look at the category overall in 2008, 2009, it was down low single digits overall.
and what and David who's the CEO of Evelitz who was the head of the brand for Botox at
Allergan at the time again 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 with customers
extending the duration between treatment so if you were 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. And that, again, from a category perspective,
if you said the category overall next year, it's going to be down a couple percentage points
because of the inflationary pesters, the macroeconomic environment, because people are going to
extend treatment, what I would say to you is, Avalis is still going to outpace, out-index the growth.
So if the category grow 12 this year, they're growing 50, category goes down to next year.
Because they are taking share, they are going to out index the, 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.
And the second thing I would say to that is we talked about how it's cheaper for the customer.
So you could have some Botox customers say, hey, my ascetician's 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.
I was going to extend my duration.
Get potentially the trade down effect.
And then secondly, for asceticians, plastics, and derms, you know, this is 20% more
profitable for them.
And plus you get co-branded media, which might be more important in giving the funnel.
So for them, the incentive to switch.
is even greater. And the 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 taking,
you are taking so much share so quickly. You can't tell what's market growth and what's your share
growth. We've mentioned pricing a few times. So I should have asked this earlier, just to come back to
it. Like, if I went to the Derm right now, you know, I'm starting to get into my mid to late 30s.
Maybe, as you said, maybe I should be looking at that.
I don't know if you need toxic yet.
I appreciate that.
That's why I paid you to come on this podcast, too.
But if I went to the derm, you know, if I was just pricing, it's tough to say specific
germs, everything, but rough numbers, I go to the derm, juvo 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?
Yeah, it's a good, good question.
So you should think about it as just on a rack rate basis before.
you get, you know, at the discounts or whatnot, you're talking about juveau being about
$375 for treatment versus Botox 500 to 550. And then when you sign up Breville's rewards
and you choose to get your first juveau, you're getting a $40 plus credit. And then if you
go back and you start, you're getting another $20. So people can get, and again, there's
longevity duration discounts, all these really cool marketing techniques.
seen with the consumer product that you can do you know people can get this down to 325-ish
in in terms of a cost versus Botox where you're you know it's 500 bucks like that's that's your
cost yeah so you know that it's a pretty market difference to the consumer now for the for the
ultimate um a physician or the injector you know if you were doing a Botox if you were doing a Botox
injection, let's do it on kind of a plastic.
You know, you probably were, you're charging 500, you've got the cost, you're getting
a cost, maybe you're a good reward, you know, Allergan bundle customers who, let's say
you're making probably $350 a patient, and you do jubeau, cheaper for the patient, and you're
probably making $400, $400.00 per person.
process. So you got to, they dose it per area per unit. And so when you, if you did that, you,
you probably are going to use more units than exactly the 375. But so you're probably going to get an 80%
margin relative to kind of like a 70% margin or 65% margin if you're the, you're the doc.
Sometimes you use more units depending on where you do it in the face. That's all. Let me just
push back on that real quick. So, you know, one thing I did worry about when I was looking at this.
is you get kind of what I, 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.
So 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 Jebeau.
I'm just saying that, look, if Botox is charging $175 more, $200 more than Jubeau,
there's a lot of margin in there that might, 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,
even though it's more, just stick with the brand name, be safe. And the practitioner
kind of is incentivized to prescribe the more expensive product. Does that make sense?
Yeah. And I guess what I'm trying to say is that because the more juvot you buy,
the lower your unit cost per vial is. And the more, and the way that Avelis gives it to you
is they give you more free vials.
So it's actually like a, you know,
effectively you're getting 30,
you're paying 30 cents on the 100 cent dollars you're given out.
Yep.
To the,
to the,
to the,
and so because your cog is,
your cog is going down faster than your revenue loss from your switch
from Botox to Juveau.
And to the more you use,
that more profitable that Juveau procedure becomes.
And I think this probably goes back.
to Joubeau's focus on cosmetics, right, 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, hey, you can't sell, this is in 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, right, Daxify gets approved.
That's Revenants Therapeutics.
That's a public company.
Two billion market cap, which, you know, that's free revenue.
They've got other stuff.
But if Hevel said a $2 million, I think everybody would be happy.
But DaxFai, this is a Botox competitor, new drug.
This lasts for six months versus you talk to Botox and Javot kind of lasts for about three months based on how they press.
So I just wanted to ask on Daxify two things.
A, when you see, hey, this is going to last six months instead of three, do you see worries where, you know, customers come in and say, oh, I can come in twice a year instead of four times a year.
That's fantastic.
And then I'll pause there.
and then I want to talk about new products coming on to the market.
So, Daxie, there's a number of things I want to unpick in that statement.
So the six months is, so number one is double the dose.
Effectively, it's the double the dose of the toxin.
And 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?
Like we've had Botox in our portfolio at this point for 17 years.
We don't you think we know what doubling the dose of Botox does?
And do we get the duration effect?
And so you should assume and then, oh, Botox is running it,
and Avelace is running it double the dose that people have a reasonable idea of what it's going to do.
The second thing I would say, Daxify is going to charge more.
So how much more efficient is this going to?
to be for the patient and for the espetition, nobody knows. The third thing, and this is what
Avelace would definitely say is 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,
how about this, you've been doing, you've got a $2,000 a year patient coming in four times of your
Botox, and they say, oh, I want to try this taxi. You put it in, and it's a much smaller molecule,
so it's a much more dispersive effect, put it in their cheek, because that's what they've been getting Botox,
and all of a sudden they've got frozen face on this side and they've got a droopy lip,
how often do you think that customers ever coming back?
And so one of the things that I think is going to be very interesting to see, and I would be,
we're not, maybe we are short a little revance, but I'll short 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,
have this theoretic duration impact where people, 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 a versus placebo.
And, you know, this is going to be more expensive for your patient. And you might not get the same
kind of margin profile you get with Joubeau where it's a much more cost-effective to you.
So I think there's a number of things with Daxson.
The other thing I want to point out is that there's six-month, there's six-month
marketing that they're saying, if you look at the lines on like the actual investigator
and the customers, to go look at the label, you know, half their patients were less than six
months. So that was a median. So you've got half their patients who got treated and they basically
got no better than, you know, what a Botox or Juveau provides you after doubling the dose.
So I guess bottom line, you're skeptical. Can I just ask, so obviously skeptical of Daxi,
are you skeptical of Daxi for cosmetics? Do you think it's going to have more therapeutic use?
Are you just skeptical of Daxi in general for, as you said, the breakdowners?
Go ahead.
I think it's on the aesthetics that we believe it's going to be, it's going to be a slower ramp than what the market expects.
Just because all the dynamics we just saw with Juveau, the injectors, hearing the pop going through the fascia, you know, all those things, you know, those are all going to be barriers to seeing this, how this is going to perform.
Switching from Daxi to just the toxin market in general, right?
We mentioned earlier for over a decade, well over a decade, there were three products, right?
There was Botox, which had the vast majority of the share, and then there were two others, which kind of froze in at 20 and 10 percent or so.
All of a sudden, you've got Jubeau coming online.
You've got DASI coming online.
I believe there are several other molecules that are promising.
I don't know when those are all coming out and everything, but you've got a lot of stuff coming online.
The market's been growing 8 to 10 percent.
I believe most of that has been volume.
But you go from three to five to seven at some point or even at five.
At some point, do you start seeing, you know, it's gone from a very tight oligopoly,
almost a monopoly with both types to you get a lot of players.
Do you start seeing kind of price compression?
And yes, even though volumes are going up nicely, like if you start having a pricing battle
to the death, five companies, seven companies, like that could get pretty crazy.
Do you worry about the pricing structure here?
I don't and I think the reason for that is you said that you obviously most of those have
therapeutic uses so got the same constraints that you know that Avalis doesn't have and you know
Evelace has the ability to kind of play with that lever but I think the the more interesting
thing is that if you went back three generations of women and you looked at the percentage of women
percentage of women that dyed their hair. And I don't mean to focus this on women, but it was,
it was in the mid single digits. Hey, and Juveau, go look at their website. They even say it's got that
old, QVC does it. They scratch out like person and they put her. Like they are focused on
millennial women. In their case, millennial women. Yes. Yeah. And so, so if you look back like,
you know, a couple 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 U.S. relative toxin penetration in a place like Korea, you know, toxin penetration
in Korea, toxic fusion in Korea is, call it, you know, mid-20s versus mid-s single-digit
here. This market's got a lot of growth. And that's, and the more players you have, like,
Allergan didn't care that somebody else came in because they're like, this is going to, getting people
focused on self-care and aesthetic utilization and getting them as a gateway procedure to more,
that's going to grow the market. And so, you know, the fact that Dax is going to be out there
preaching the gospel of why people should get there, get toxin usage, I think that's great.
I think it's great for Javot because I think the more the more people and the more accepted it
becomes in this millennial generation, the better it's going to be for the whole category.
And you use hair care, which is interesting because, you know, hair care, a lot of the beauty
brands made a lot of money off that sort of stuff. And that was just with the brand loyalty and
the marketing like here not only can you have brand loyalty but this is a toxin right so even if you go
from three to five to seven or whatever like there's not going to be 70 people entering this and
it's plastic surgeons which you do think over time it's 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 so you could imagine
if if you can make billion dollar businesses off of hair care growing from mid single digits to 70
percent. I'm pretty sure you can make a billion dollar businesses off of controlled toxins growing
from five to 20 percent or whatever it's going to be. Two last questions, and then we'll wrap
it up. First question. We talked a lot, very bullishly about this. Obviously, this is a cash burning
company right now, very small. What do you worry kills the company? What keeps you up at night
about it? Obviously, you do chunky steaks in life senses. What keeps you up at night about
a chunky steak in Evelace?
Listen, I think right now, the only, you know, the only, you know, the, you know, I thought,
we talked pretty confidently about what happened in the last recession.
And I would say if you've looked at when we talked to the company this quarter, the company, I think,
has been pretty public.
They have not seen any slowdown in terms of the trajectory of reiterated revenue guidance.
You saw a bunch of directors and management buy shares.
in the open market, all very positive signs, despite the pullback.
But, you know, listen, I think it's definitely going to have some short-term trading volatility
because people are going to, 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 was going to be very telling in the third quarter earnings, you know,
and then how they guide for 4Q, you know, how well is it going to do?
do. So I think on a short term, you know, definitely 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. And so, yeah, there might be some ups and downs in 2022, early 2023. This is a good
brand, good management team, good product, you know, and cash to get there. So,
Perfect. And just to follow, 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.
So obviously you'd love to see that, especially with a company that's kind of growing.
They've certainly got more insights to the unique economics and everything than outside.
So you love to see that. Final question before we close, just look, I think we did a great job.
you guys were worried, how are we going to get an hour-long podcast and one idea? I told you the time
would fly when you dive into a 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? No. I mean, I think it's been a really,
really appreciate you taking the time and really listening to this one. And it's one where you
got a high conviction in, it's a large, you know, a large investment for us. And one where, you know,
Again, when you think about the variables, we think about, you know, balance,
deep, great team, great product, differentiated.
Like, this has a lot of the ingredients.
So, you know, really appreciate it.
I appreciate you coming on.
I know that you guys, look, you've got other 13 news 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 callaginpartners.com so they can go check
out the website.
There's a contact thing and everything there.
Obviously, SEC.
So there's some restrictions, but they can go on the website and see everything.
But Dave Johnson, thanks so much for coming on and looking forward to having you on again.
Andrew, we really appreciate it.
Thanks very much at the time.
A quick disclaimer, nothing on this podcast should be considered an investment advice.
Guests or the hosts may have positions in any of the stocks mentioned during this podcast.
Please do your own work and consult a financial advisor.
Thanks.