Late in 2014, Oculus Innovative Sciences (NASDAQ: OCLS) incorporated a new business model to better position the company for future growth. As part of the plan, Oculus divested its stake in Ruthigen, a spin-out of Oculus’ surgical products assets later acquired by Pulmatrix (NASDAQ: PULM), and channeled its efforts in the dermatology space. In order to re-shape its business, Oculus needed to re-vamp its distribution, develop and/or acquire new products, make some management moves and set a clear path towards breakeven.
The derm industry is competitive, but compelling due to expected growth. The research group Researchmoz Global Pvt. Ltd. estimated
this month that the global dermatology market (for which the U.S. is the biggest segment) will grow at a 7.7% compound annual growth rate from $20.0 billion in 2015 to $33.7 billion in 2022. In particular, the analysts focus on atopic dermatitis, acne vulgaris and psoriasis as conditions with the highest frequency of diagnosis.
These are also the conditions that Oculus has products for on the market, with more in development.
The Promises: Pillars of Growth
Oculus chalked out its plan based on four key initiatives, headlined by the main goal of penetrating the U.S. dermatology space as the core market. As part of reaching that goal, Oculus promised to bring its non-core markets to breakeven. Non-core markets include the company’s sales in Latin America, Europe and Asia, as well as their animal health and advanced wound care businesses. “Non-core” sounds a little benign, given that these markets are still important growth drivers for Oculus; they just happen to be outside the domestic market that is the largest revenue opportunity. Oculus says that the breakeven goal for non-core markets will be met this quarter. A third promise was to diversify the portfolio to include products not built upon the company’s proprietary Microcyn technology. Lastly, Oculus pledged to identify orphan drug or low-cost new drug application opportunities.
During the recent quarterly conference call
discussing the results from fourth quarter and fiscal year 2016 results ended March 31, 2016, it was evident that Oculus has been executing on its plan. First and foremost, salespeople were needed, as Oculus ditched its outside distribution sales team with the new initiatives. After only a few initial hires, Oculus now has a 20-person salesforce located in key geographic regions across the U.S. The company wants to get to 35 sales reps by steadily adding one or two every quarter.
If you have sales reps, you need products and Oculus has brought seven unique products to market. Starting basically from scratch with the new sales team, the products are now prescribed by more than 550 U.S. dermatologists. These products include Alevicyn and Ceramax products for atopic dermatitis (eczema), Celacyn for scar management and Mondoxyne for severe acne. In April, the FDA cleared Lasercyn Gel for treatments related to laser therapy, post-microdermabrasion therapy, superficial chemical peels and a variety of other skin irritations. This product should hit the market early next quarter, putting eight items in the product bag.
Take note that Alevicyn and Celacyn are products of the company’s Microcyn-based technology. Ceramax Skin Barrier Cream was licensed from Lipogrid Company of Sweden in March, followed quickly by securing FDA marketing clearance and product launch in April. Mondoxyne is also a product licensed by Oculus, showing the company’s mindfulness to diversify its portfolio. The company doesn’t break out individual sales, but did say that Mondoxyne is its best-selling product by dollar volume. Without going into great detail, Oculus CEO Jim Schultz said that the company has licensed the rights of a de-scaler for eczema – and eventually psoriasis – from a German pharma and two other products from European companies. An application is expected this summer seeking FDA clearance for the de-scaler.
The plan to launch a new product every quarter looks to be on pace for at least the next six months.
Further in the pipeline, Oculus this spring filed for an FDA Orphan Drug designation for one of its products to treat rashes associated with chemotherapy. Separately, patients are being enrolled in North Carolina in a proof-of-concept clinical trial evaluating a new topical hypochlorous acid-based treatment for moderate acne. Check off promise number four to pursue additional FDA pathways.
What About the First Promise of U.S. Market Penetration?
U.S. market penetration can be measured a few different ways. The large, growing base of dermatology prescribers is a basic metric. “Demand dollars” is another common analysis method. Demand dollars are defined as the number of prescriptions written multiplied by the average wholesale price paid for all Oculus products. The final figure does not account for rebates, wholesaler fees or product returns, but gives a gauge of market penetration. According to data from Symphony, Oculus has been showing quarter-over-quarter growth in demand dollars. In Q4 fiscal 2015 demand dollars for Oculus was $151,000, followed by $227,000 in Q1 fiscal 2016, $331,000 in Q2, $631,000 in Q3 and $1.0 million for Q4. That represents quarter-over-quarter growth of 62 percent.
As for product revenue in the U.S., Oculus reported $2.4 million in sales for fiscal 2016, an increase of 121% from fiscal 2015. It is safe to say the goal of U.S. market penetration is happening.
Nailed Guidance Too
During the conference call discussing results from Q3 fiscal 2016, Oculus provided guidance for the latest quarter of total revenue under $3.8 million, as it foresaw sales dampened by weakness in the Mexican peso, the winding down of royalties and licensing revenue (part of the old business model) and warehouse consolidation in Mexico based upon Sanfer Laboratorios acquiring More Pharma and closing some of their warehouses. Oculus also forecast at least a 50 percent improvement in U.S. product sales compared to the year earlier quarter. As it turns out, total revenue for the quarter was $3.5 million due to the aforementioned factors and U.S. product revenues jumped by 123% versus Q4 fiscal 2015.
For the current quarter, Oculus provided guidance of revenue in the area of $4.0 million and, once again product revenue growth in the U.S. in excess of 50% compared to the year earlier quarter. Total revenues during Q1 fiscal 2016 were $3.7 million and U.S. product revenue was $787,000.
Total revenue for Oculus during fiscal 2016 was $15.1 million, up by 9% from $13.9 million in fiscal 2015. Importantly, the figures reflected $13.9 million in product sales, up 31% from the year prior, showing that Oculus is relying less on royalties and licensing and taking more control of their own future. Gross profit for the year was $7.2 million, or 48% of revenue, down from $7.3 million, or 53% or revenue, the result of the fact that margins are higher for royalties and licensing. Some initial sacrifices have to be made with bringing the sales in-house. Oculus intends to overcome this through higher total sales of existing and new products and slow price increases across time. Operating expenses also increased with all the additional sales reps, widening the net loss for fiscal 2016 to $10.2 million, or 62 cents per share, from $8.2 million, or 85 cents per share, in fiscal 2015.
Oculus ended the quarter with cash and cash equivalents of $7.5 million and no debt outstanding.
Oculus announced a 5-to-1 reverse split on Wednesday that took effect after Friday’s closing bell. The split and an upcoming name change are both part of the company's new strategic direction and dovetail with the moves in the past 18 months. The company has more depth than ever before and is aiming to draw investment from larger Wall Street institutions, who often times steer clear of companies priced under $5 per share. The split will take Oculus stock near that level. Unfortunately, retail traders often do not respond well to news of a reverse split and such is the case with shares of OCLS. Institutional investors, however, are likely to notice the revenue-to-market cap ratio of Oculus, which has gotten even more attractive with the drop in the stock price in recent days. Deducting the $7.5 million in cash that the company has on hand from the market cap of about $18 million (depending on which site's data is used) leaves an adjusted market cap of only $10.5 million. The typical derm company trades at a revenue/adjusted market cap ratio between 3:1 and 5:1. Oculus is at a paltry 0.7:1 ratio, explaining why OCLS executives are not afraid to say that they are a good choice for value investors.