Evolus is a facial beauty company that specializes in aesthetic neurotoxins, with its flagship product being Jeuveau. The company is expanding its product portfolio by adding dermal fillers through exclusive agreements with Evolysse and Estyme.

The market opportunity for Evolus is significant, with the neurotoxin market estimated at $3.5 billion and the dermal fillers market at $2.5 billion. Strong revenue growth, expanding product line, and imminent profitability present an attractive opportunity for a speculative small-cap stock that can potentially double.

Overview

Evolus (EOLS) is a facial beauty company in the aesthetic neurotoxin market. The flagship product at this time is Jeuveau (prabotulinumtoxinA-xvfs), the first approved neurotoxin exclusively for aesthetic use. Jeuveau is a 900 kDa purified botulinum toxin type A formulation, designed to temporarily improve moderate to severe frown lines (the vertical lines between the eyebrows).

The company's market consists of self-paying customers who pay out-of-pocket, without reimbursement from third parties. Launched in May 2019, Jeuveau is sold through licensed aesthetic practitioners. It competes with Botox from AbbVie (ABBV), and is supported by clinical data from a head-to-head Phase III study comparing the two products.

Jeuveau is available in the U.S. and is marketed under the brand name Nuceiva in Canada and a few European countries, with plans for further expansion. Evolus is also conducting trials for a stronger version of Jeuveau, with Phase 2 trial data showing effects lasting up to six months, compared to four months for the present version.

Market Opportunity and Expanding Product Line

Evolus presently targets the injectable neurotoxins market segment within the medical aesthetics market. The market size for its sole product, Jeuveau, was estimated by the company to be $3.5 billion in 2023, growing to $6 billion in 2028. The company is close to launching a second product line, dermal fillers, next year.

The dermal fillers product line is expected to have five products over time, and the first filler is expected to be launched in the U.S., in 2025 after regulatory approvals. The dermal filler market opportunity was estimated to be $2.5 billion in 2023, growing to $4 billion in 2028, as per company estimates and market study.

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The company is expanding its product portfolio by adding dermal fillers through exclusive agreements as a distributor for Evolysse in the US and as a European distributor for Estyme. The line of dermal fillers is currently in late-stage development and the Evolysse line of dermal fillers is expected to be approved in the U.S. in 2025, with applications for two products to be submitted by mid-2024 by Evolus.

The Evolysse product line of dermal fillers will complement Jeuveau and equip the company to address a broader spectrum of facial treatments while leveraging cross-selling opportunities.

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Business Growth

The company's first-quarter earnings for March 2024 registered a 42% year-over-year revenue increase, with a non-GAAP operating loss of $0.9 million. It has grown its customer base to over 13,000 customers with a reorder rate of approximately 70%. Repeat revenue enhances consistency and predictability as the company matures.

Cash and cash equivalents stood at $97 million and include a recent secondary offering. The company believes its balance sheet liquidity is sufficient to fund operations until it reaches profitability in Q4 of 2024. The long-term debt consists of a term loan in various tranches from investment manager Pharmakon Advisors totaling about $120 million, of which $42 million will mature in 2026 and $83 million in 2027.

Revenues are expected to gain further momentum as the product line fills out next year. The company is targeting $700 million in revenues in 2028, up from about $200 million last year.

It's the Economy

The aesthetic segment is highly correlated to economic growth. Since the treatment is an out-of-pocket expense, it is sensitive to discretionary personal spending. Evolus targets higher-income demographics, which are more resilient to economic fluctuations. However, an economic slowdown could impact the industry, though current growth remains robust with no significant slowdown in sight.

Some Other Risks

Besides being highly sensitive to the economic outlook, Evolus is exposed to any delays in launching its second product line of derma fillers. The company has a single product approved for a single indication at this time. It is relying on its partner Symatese to obtain regulatory approval for the Evolysse line of dermal fillers.

Though Evolysse fillers have performed well in trials thus far, the derma fillers market is a highly competitive one with continuous innovation and competitive announcements of new products.

AbbVie remains a dominant competitor in the aesthetic neurotoxin market with its Botox product acquired through an acquisition of Allergan. In the dermal filler market, AbbVie and Galderma (GDERF) are experienced market competitors. Any of the competitors can expand the indications that are approved for the product, which can make it more appealing to customers.

Evolus also needs to reach stable profitability in 2025, after launching its second product line. This is important as the business needs to turn operating cash flow positive to eventually pay down the debt.

Litigation risk around intellectual property has diminished following the resolution of AbbVie's litigation in 2021.

Conclusion

Evolus is a high-growth company with a compelling product gaining traction, an expanding product line next year driving significant cross-selling opportunities, a millennial customer base with higher spending power, and strong revenue momentum. The company expects to turn profitable in Q4 this year, though the launch of the second product line in 2025 may temporarily impact profitability next year.

The immediate growth driver for Evolus is its market niche, while the long-term potential lies in an enhanced Jeuveau version, repeat revenues, and an expanding product line in high-growth segments. Evolus can be an attractive acquisition target if Jeuveau continues to gain market share and leverage its cross-selling opportunities by adding new products and additional indications for Jeuveau.

Economic growth and interest rates significantly influence small-cap stocks. Higher yields can be a drag on the valuation of such high-revenue growth but unprofitable companies. Conversely, a lower interest rate environment in the second half could boost valuations for high-growth small caps like Evolus, provided rate cuts are driven by progress on controlling inflation rather than an economic slowdown.

We believe the combination of Evolus' rapid revenue growth and a potentially favorable lower interest rate environment later this year creates an opportunity for this small-cap stock to advance to around the $25 to $30 range over the next 12 months.

The Prudent Healthcare and Prudent Small Cap model portfolios currently hold a position in Evolus. The position can be closed at any time, and our company opinion can change without public notification. Investors should conduct their due diligence and understand the risks inherent in investing in small cap speculative stocks.

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