Armed with promising technology, in mid-2014 Oculus Innovative Sciences (NASDAQ: OCLS) was still self-described by chief executive Jim Schutz as “a mile wide and an inch deep.” After a strategic review, the company decided it was time to revise and rebuild the business model, which included overhauling the management team, making changes to the board of directors, revamping the sales plan, unveiling new products and committing to a long-term growth strategy that would add depth to the company and grow value. About a year and a half into the turnaround, it’s time to see how the program is working.
The New Plan
As part of the rebuild – and in addition to a new CEO and reshaped board – Oculus launched its new dermatology business, scrapped some distribution partners, added some others, and hired their own dedicated domestic dermatology sales force. In Mexico and Latin America, they gained a much bigger distribution partner last year in Laboratorios Sanfer when Sanfer acquired More Pharma, Oculus’ previous distributor in Mexico.
Sales outside the United States have historically outpaced domestic sales for Oculus. Bolstering U.S. Sales to be in more line with foreign transactions has become a prime initiative. The plan is to aggressively grow the U.S. derm business to be the dominant part of the company while using growing international sales to assist in generating cash to support that growth.
Oculus said that they intended to grow their U.S. dermatology revenue through four de-risked drivers: 1) growth by adding new sales people (targeting 1-2 new reps per quarter); 2) growth via new products; 3) growth via small, regular product price increases; and 4) growth by selling more of their current products. This is a low risk, high growth sales and marketing strategy as shown by the graphs below.
How Is It Going?
To address the drivers in order, Oculus has beefed up its sales force as it said it would. They started with 14 new sales people in the fall of 2014, and as of April 2016, they have increased that number to 19. Oculus says it intends to add four to eight more to its U.S. sales force over the next 12 months, following a systematic approach to target specific demographics where physicians write a high number of prescriptions for derm products.
As promised, Oculus has launched several new products and has created a strong product pipeline for the next 12 months. In the last quarter of 2014 when the new initiatives were just getting underway, three new products were introduced to the market. Since inception five new major prescription products were launched, including Alevicyn Spray Gel in July and Mondoxyne in October/November.
Looking at this year, Oculus is adding new products to its growing sales team’s bag. FDA and other regulatory clearances have been granted for Ceramax Skin Barrier Repair for children and adults with atopic dermatitis, with a launch planned this month. Ceramax is a new product based on collaboration with the Lipogrid Company of Sweden, utilizing Lipogrid-based products to deliver phospholipid building blocks to the dermis while protecting the skin. This is the latest in the Oculus arsenal addressing the indication, also known as eczema, which affects some 31.6 million people in the U.S. alone, according to the National Eczema Society. This technology is complementary with the use of the Alevicyn products in treatment of eczema. The relationship with Lipogrid was further entrenched recently, with Oculus and Lipogrid inking a strategic collaborative agreement to develop multiple topical drug delivery formulations based upon the Lipogrid Technology.
The FDA has also cleared SebuDerm, Oculus’ seborrheic dermatitis product, for marketing. Oculus expects the official launch this summer. Seborrheic dermatitis, also called dandruff, is a common skin condition that causes scaly patches and red skin, mainly on the scalp and other oily, hairy areas on the body. It’s usually a long-term condition and affects about 11.6 percent of the U.S. population and up to 70 percent of infants in the first three months of life.
Last week Oculus announced the FDA approval of Lasercyn Gel for the management of post-non-ablative laser therapy procedures, post-microdermabrasion therapy and following superficial chemical peels, slated for launch this fall.
In addition to any speculation about overseas growth in revenue, Oculus looks firmly on track to launch three new products in the near term into large addressable U.S. markets.
As for pricing, the third lever Oculus is pulling, Alevicyn and Celacyn prices were boosted in mid-February from $85 to $99 (170 grams). Still, Oculus is the low cost provider compared to competing products sold for wholesale acquisition cost (WAC), or the price paid by the wholesalers, in excess of $200 and ranging up to $800.
In order to try and get a little more clarity on physician adoption, we accessed the public for-pay database of Symphony Health Solutions to dig into OCLS’ pull through numbers regarding their U.S. derm efforts. Symphony data doesn’t tell us anything about recognizable revenue nor does it include ex-U.S. sales or information on the nascent reboot of the animal healthcare business. It does, however, provide a detailed look at the pricing and number of units actually filled by patients at the pharmacy counter. This is a solid analog to growth in the U.S., and an important component in Oculus’ turnaround.
Oculus will not release the accounting results for the quarter and fiscal year ended March 31, 2016 until roughly mid-June. Oculus provided guidance that the total revenue for the quarter ending March 31, 2016, would be less than $3.8 million due to a decline in Mexico’s revenue related to the weak peso and a warehouse consolidation. However, a good way to evaluate the dermatology sales performance of Oculus is to track the total demand dollars of the number of prescriptions filled by the pharmacies (tabulated and reported by Symphony), calculated by the number of prescriptions written times the wholesale acquisition cost (WAC). This in effect is the amount of gross revenue, based on prescriptions filled, but not the gross revenue recognized upon shipment to the wholesalers, which is how Oculus currently recognizes revenue, as do many of its peers. Furthermore, any gross revenue has deductions for wholesaler fees, and the return, rebate and other reserves to calculate the accounting net revenue.
The Symphony data shows that U.S. dermatology sales for Oculus are growing based on prescriptions filled for all of the dermatology prescription products launched by the company. For the quarter ended March 31, 2016 compared to the quarter ended December 31, 2015, the quarterly growth of demand dollars for some of the key products was Mondoxyne at 267%, Celacyn at 28% and Alevicyn Gel at 28% as well. While this shows that the highest percentage of growth tends to occur in the first two quarters after the launch of the product, the better gauge of percent growth is looking at growth after the initial launch phase. One fair measurement of longer-term growth is the average quarterly growth over the last four quarters from the March quarter last year to the 2016 March quarter. The average quarterly growth for the last four quarters for Celacyn, Alevicyn Gel and Alevicyn Spray was 68%, 31% and 36% respectively.
Mondoxyne has been very well received and has supplanted Celacyn as the top product on the list. At $97,680 in its introductory quarter ended December 31, 2015, sales have jumped 267% in the first full quarter of sales to $358,800.
Again, this is a specific view to bring a visual to growth. All dollar amounts are in TRx dollars, which represents the number of new and refilled prescriptions (reported by Symphony) multiplied by the price paid to Oculus by the wholesalers (or “WAC”), and does not include prompt pay or other discounts, rebates or reductions in price.
The chart below provides a graphic as to how total Oculus sales have increased based upon these metrics.
The result is that the direct sales dermatology business has grown from $0 in September 2014 to gross demand dollars of about $1.114 million for the quarter ended March 31, 2016, up from $658,000 for the quarter ended December 31, 2015. That’s quarter-over-quarter growth of 69%. Over a longer time period, the average quarterly growth for the last four quarters, ending March 31, 2016, for total demand dollars of all products was 66%. If the last two product launches (Mondoxyne and Alevicyn Spray Gel) were excluded from that calculation, the average quarterly growth for the last four quarters, would have been 44% – demonstrating the impact of successful, periodic product launches on the longer term growth. Looking at the bigger picture and stating the obvious, due to starting with relatively small numbers, the growth rates are magnified. As the dollar amounts grow, the percentage growth will decline. However, since the total revenue of the Company is about $15 million and the market cap is likewise relatively small, the fast growth of this low risk, high growth strategy should have a significant impact on the Company – even with a smaller growth rate on larger numbers.
It is evident that Oculus is executing on the four pillars of growth that management laid out late in 2014 by looking at the U.S. dermatology business as a key catalyst for durable expansion to drive the company to its goal of breakeven EBITDAS. In six quarters, the model is clearly working to improve domestic sales. As three new products hit the market in coming months (both Microcyn-based and now non-Microcyn based as well), and Oculus continues to execute on its four primary drivers, sales should continue to accelerate to deliver the ultimate goal of growing shareholder value.