A Turnaround Story Wall Street Hasn’t Caught Onto Yet
Published Wednesday, January 20, 2016 by Fred Zucker
With oil cratering and miners struggling amid depressed metal prices, there is no shortfall of “turnaround” talk on Wall Street for resource and energy companies that have suffered a beat-down in valuations in recent years.  Broadly, you don’t have to look around very many corners to hear turnaround speculation for companies in an array of sectors.  GoPro (NASDAQ: GPRO) was a darling of Wall Street with its IPO in June 2014, taking shares as high as $98.47 in October.  The stock has since plunged almost 90 percent since, with analysts promulgating changes that need to be effected to right the action camera maker’s ship.  Underscored by the onset of the digital age, several retailers have languished against online competition, including small caps Bebe Stores (NASDAQ: BEBE) and Destination XL Group (Nasdaq: DXLG), leading to talk about requisite moves to restore shareholder confidence.

While certainly a challenge, turnarounds do happen.  Sure, there have been high profile, “too big to fail” companies that have garnered the most attention.  But, don’t forget that even Apple (NASDAQ: AAPL) in its early days fired and re-hired founder Steve Jobs to get the company on track as the stock floundered before becoming the tech behemoth it is today.  Many were writing off struggling NutriSystem (NASDAQ: NTRI) until Dawn Zier became president and CEO in 2012, reviving corporate spirit and reverse a trend of shrinking revenue and profitability.

There is no exact secret sauce to a successful turnaround, but there are certainly specific actions are often part and parcel, including a management change, a focus on core business, and turnaround milestones giving investors a proxy to measure success.  After years of sliding share value, Oculus Innovative Sciences (NASDAQ: OCLS) has adopted these themes and so far is holding the course and trading higher subsequent to an all-time low of 65 cents last May when the turnaround efforts were starting to take shape.

The Winds of Change at Oculus

In 2013, it was time for a change.  Oculus spun off its novel biotechnology business, Ruthigen, Inc., into a new public entity, sending with it Oculus board members and its chief executive.  With the spin out, then-COO and director Jim Schutz took the position of Oculus CEO.  Schutz was tasked by a re-vamped board with executing a clear plan on a re-focused business model centered on developing and marketing the company’s core portfolio of Microcyn-based dermatology products.  Microcyn is Oculus’ flagship technology utilizing a patented small molecule oxychlorine formulation to generate a family of products containing a hypochlorous acid that is similar to the natural hypochlorous acid produced by the body.  The steroid-free products are used for a range of dermatology applications for humans and animals, leveraging their benefits in treating skin conditions, scar management, wound healing and microbial eradication without cytotoxicity.

To house and develop these and other products, a new division, called IntraDerm Pharmaceuticals, was formed early in 2015.  As promised, new products were coming down the pipeline.  Intraderm rolled out its first two initial products in the U.S.: Alevicyn Antipruritic Gel, which is used to manage pain, burning, and itching associated with various dermatoses; and Alevicyn Dermal Spray, which is used in the management of debridement of surgical wounds from dermatological procedures.  Those were followed shortly after by the launch of Alevicyn Antipruritics SG, a spray gel formulation that has the advantage of being administered as a spray, but adheres as a gel, and Celacyn Prescription Scar Management Gel, the only prescription product on the market for treating scars.

Oculus’ decision to focus on dermatology, or derm, was the best move to point the company in the direction of profitability.  Amongst other things, derm products have shorter developmental timelines, lower clinical trial expenses, strong margins and insurance coverage and fast sales ramps.  Oculus already had an international presence (distribution partners in Europe, Middle East, India and China) that it could lean on for short-term growth, while restructuring its domestic operations to bolster sales while it worked to achieve marketing clearance to launch new products for long-term growth.

To achieve this, Oculus moved sales in-house with new dermatology management and a seasoned sales force.  They launched a new animal healthcare division, cut ties with animal health care partner, Innovacyn, and partnered with a leading sales firm to foster expansion on that front.  With the new partnership, Oculus originally rolled out six new MicrocynAH advanced all-animal healthcare products in the U.S. and Canada to treat wounds, skin and eyes.  With the recent addition of two animal healthcare SKUs for the treatment of dermatological conditions in animals, the MicrocynAH portfolio now includes 13 products.

In Mexico, historically the largest revenue-generating market for Oculus, Laboratorios Sanfer acquired its former distribution partner.  Sanfer’s much larger size expanded Oculus’ market opportunity from Mexico to across Mexico, Latin America and Caribbean.

Meeting Turnaround Milestones

Instead of being a mile wide and an inch deep, Oculus made substantive changes to create a company more fundamentally sound with a better foothold than ever before.  Coming off an inflection point, the company forecast more regulatory approvals as milestones to continue to grow momentum.  As 2015 came to a close and 2106 got underway, Oculus made good on these projections.

OCLS promised an FDA approval or clearance in the first calendar quarter of 2016 and came in early by a quarter.  On November 30, Oculus received a FDA 510(k) premarket notification for Ceramax, a skin barrier cream intended as a topical skin preparation to relieve and manage the burning and itching associated with various dermatoses including atopic dermatitis (eczema), irritant contact dermatitis, radiation dermatitis and other dry skin conditions.  A product launch should be coming late this quarter or early in Q2.

Oculus guided that the prescription product SebDerm Gel would garner the FDA’s blessing in the spring of 2016.  This milestone was met earlier than expected, with a 510(k) clearance from the FDA on December 17.  The gel is intended to manage and relieve the burning, itching, erythema, scaling, and pain experienced with seborrhea and seborrheic dermatitis, also known as “cradle cap” in infants and “dandruff” in adolescents.  Oculus plans to launch SebDerm Gel in June 2016.

Oculus also promised to secure their eleventh CE mark next month and this too came ahead of schedule.  On January 14, the company disclosed approval for MucoClyns, a solution intended for use in emergencies on mucous membranes, cuts, abrasions, burns and body surfaces to treat immediately after exposure to infection risk.  Oculus says it is currently negotiating with potential partners in Europe about distribution.

Show Me

Regardless of plan, every turnaround is a “show me” story.  Investors want to hear the plan and see the execution.  Oculus has shown that there has been little impeding their turnaround so far as they meet their milestones.  As expected, sales are picking up in the U.S., showing the plan is being effective.  In the latest quarter reported, ended September 30, 2015, product revenue in the States was $1.2 million, versus $356,000 in the year prior quarter, a 233 percent improvement.  In spite of a 26 percent plunge in the value of the peso, year-on-year gains in Latin America were 8 percent at $1.3 million during the quarter.  Oculus still posted a net loss during the quarter, but it’s relatively unrealistic to expect anything different until the turnaround is a little longer in the tooth.  With no debt and roughly $8 million in cash and cash equivalents as of the end of September, the company has the resources to continue to execute and move toward the black as it rolls out more products through its improved sales force and larger distribution network throughout 2016.

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