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Holding the Course, Oculus Innovative Sciences Delivers Revenue Growth Again
Published Tuesday, February 09, 2016 by Fred Zucker
2016 has been brutal for many sectors, but perhaps none so much as for biotechnology and pharmaceutical companies.  For instance, the Nasdaq Biotechnology Index has been clubbed from 3,550 at the end of December to around 2,550, for a loss of roughly 28 percent.  A wider view shows that this sector has been languishing since NBI hit an all-time high of 4,195 in July 2015.  Given a $200 million market cap minimum for the index, components are diverse in size, ranging from a giant like Celgene (NASDAQ: CELG) to much smaller companies, such as NeuroDerm (NASDAQ: NDRM) and Flexion Therapeutics (NASDAQ: FLXN), demonstrating how broad the sell-off has been.

Investors have been hitting the sell button with little discrimination, employing the adage of the baby being thrown away with the bath water.  So what’s driving the epic sell-off?  A portion can likely can be attributed to rhetoric on Capitol Hill over pricing power of biotechnology companies, which has many traders on the sidelines until elections provide some clarity.  Analysts also cite sluggishness in innovation as a possible culprit.  Amid this environment, the case can still be made that investors who stay calm can discern companies that will grow through this weakness in the coming months and years.

About two years ago, Oculus Innovative Sciences (NASDAQ: OCLS) made the decision to restructure its business model.  By spinning off its biotechnology unit into and subsequently cashing-out on its investment, Oculus put some money in the bank to execute a new strategy focused on its Microcyn-based dermatology products.  Less than a year later, the plan started moving forward with an old distribution partner dismissed and a direct sales force hired, deployed to target select U.S. markets and tasked with improving sales with three unique dermatology products in their bag.

Since then, three more products have entered the market following clearance from the U.S. Food and Drug Administration and additional sales members were added to the team to cover more target markets in the U.S.  As it stands, Oculus now has products approved for sale in either in the U.S. or internationally (or both) for atopic dermatitis (eczema), severe acne, scars, seborrheic dermatitis, and advanced wound care.

The efforts are taking shape for Oculus as measured by increasing product sales.  The company recently released the results from the third quarter of fiscal 2016, ended December 31, 2015, showing total revenue improved 19 percent to $3.8 million from $3.2 million in the year prior quarter.  Total revenue includes money from product sales, as well as product licensing fees and royalty revenues.  Product sales make up the majority of revenues and are the point of focus as a proxy for growth.

Product sales climbed 40 percent from Q3 fiscal 2015 to $3.5 million, boosted by gains in the U.S.  Sales in the U.S. represent the greatest growth opportunity for Oculus, not only because of higher profit margins, but also because they took a substantial hit as part of the new sales model.  In the latest quarter, product sales in the States totaled $1.0 million, versus $647,000 in the year earlier quarter.  In the first three quarters of fiscal 2016, product sales in the United States were $2.99 million, compared to $1.36 million in the same period of fiscal 2015, an increase of 120 percent.

In Latin America, new distribution partner Laboratorios Sanfer SA continues to show its reach, as sales rose $185,000 (+18%) year-over-year to $1.3 million.  Some shine was taken off of the increase due to a 22 percent decline in the value of the peso compared to a year earlier.  Stripping out that effect, sales were up by 43 percent.  Sales were up 60 percent to $1.2 million in Europe and the rest of the world.

Total revenues for the first nine months of fiscal 2016 of $11.6 million increased by $1.7 million, or 17%, as compared to $9.9 million for the nine months ended December 31, 2014.  Product revenue of $9.8 million increased $3.1 million (+47%), with strong growth in all major segments, paced by the U.S.  Latin America’s revenue was up 22 percent, despite a 21 percent decline in the peso and rest of world’s revenue was up 38 percent with strong growth in Asia.

Gross profit as a percentage of revenue declined as license and royalty revenue was phased out, with the decline only being partially offset by the higher product revenue.  In the nine-month period, Oculus reported gross profit of $5.5 million, or 47 percent, compared to $5.3 million, or 54 percent.

Oculus is still operating with a net loss, to the tune of $3.15 million, or 19 cents per share, in the third quarter, compared to $5.91 million, or 69 cents per share, in the year earlier quarter.  For the nine-month period, net loss was $7.25 million, or 45 cents per share, this year, versus $6.7 million, or 79 cents per share, in the fiscal 2015 period.  The company also reported $6.1 million in cash at the close of the quarter. Shares of OCLS moved lower following the report, suggesting traders lamented the loss and disregarded the corporate development and sales growth.  In the investor call discussing the latest quarter, Oculus management noted that it “conservatively” expects annual sales to rise to a range of $28 million to $35 million in the next 18 to 30 months, a point at which they believe they will be breakeven.  Extrapolating from available data and guidance, Oculus management is forecasting a very strong growth pace (mid-double digits) over the next couple years.

This is an early growth story in the making, only four quarters into its dermatology direct sales efforts in the U.S.  Looking ahead, Oculus has two more products, Ceramax and SebDerm Gel, which are being commercialized this spring and summer, respectively.  Further, management has regularly expressed their goal to bring a new product to market every quarter, which will fuel future sales.  To meet these goals, the scientists at Oculus are developing new products in-house and the company has gone outside its own walls to in-license new products from European pharmaceutical companies.  Much of the information on new products – including plans for proof of concept clinical trials – is being kept close to the vest right now by Oculus.  However, the company advised it will be releasing more details when the timing is correct.  Given the fact that the turnaround plan is still holding the expected course and Oculus management remains transparent, there’s no reason to suspect that they won’t deliver on these initiatives as well.

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