Biotech focus

Oculus Innovative Sciences Keeping in Step with Innovation and US Dermatology Market Penetration

Shares of Oculus Innovative Sciences (NASDAQ: OCLS) are often volatile around earnings time and this time the reaction was to the downside, even though the company delivered on its guidance from the prior earnings report.  More importantly, the company is methodically executing on its business model, underscored by four cornerstones of growth:  growing its current U.S. dermatology products, introduction of new products, gentle price increases and building a larger domestic sales force.

For the first quarter of the fiscal year 2017, ended June 30, 2016, Oculus guided revenue in the area of $4 million and growth in its dermatology revenues of at least 50 percent compared to the year prior quarter.  Revenues for the quarter were on the low end of guidance at $3.81 million, although, according to consensus estimates on Seeking Alpha, that still topped expectations of $3.53 million.  At $3.5 million, product revenues rose 20% compared to Q1 fiscal 2016, in spite of a 19% decline in the value of the peso and an exceedingly strong first quarter last year in Latin America.

In the U.S., product revenues improved 74% from the year earlier quarter to $1.4 million.  This was the first full quarter for sales of Oculus’ skin repair product Ceramax, which is expected to transition into the company’s top selling product.  Launched at the end of March, 1,084 Ceramax prescriptions were filled last quarter at an average wholesale acquisition price of $214, marking the best and fastest sales ramp for a company product ever.

By all counts from Symphony monthly data, Oculus continues to penetrate the U.S. derm market as it planned.  This is demonstrated by demand dollars, a common industry calculation of multiplying the total number of prescriptions sold to patients via pharmacies by the average price paid by wholesalers for the complete line of Oculus products.  When Oculus stripped its business down to essentially nothing and began rebuilding in late 2014, the demand dollars for the first quarter of fiscal 2015 was only $151,000.  Across the five subsequent quarters, Oculus has grown the total to $1.7 million, including an average 65% quarter-over-quarter growth in the last year.

Total prescriptions filled for Oculus products during the latest quarter surged to 11,700 from 8,600 in the quarter ended only 90 days earlier.  A look at preliminary data for July indicates signs of strength in the number of prescriptions being written at the start of the current quarter.  This data tends to run about a week or so behind and is subject to revisions, so investors may want to be attentive to final July data in about a week to better gauge July’s performance.

As far as top line growth, Oculus is on track, with increasing sales spearheaded by a growing product portfolio and sales staff.  Starting with only a handful of in-house sales members at the end of 2014, Oculus now has over 20 sales reps led by three seasoned managers, each with over fifteen years in the derm industry.  Over the next two years, the company intends to basically double the sales force, positioning them in strategic areas known for strong dermatology sales.

With the launch of Ceramax in March, Oculus now has seven marketed derm products, including the Alevicyn line and Ceramax concentrated on atopic dermatitis (eczema), Mondoxyne for systemic acne and Celacyn for scar management.  Celacyn Scar Gel is the company’s top seller by demand dollars, growing 50% quarter-over-quarter for the last year.  As Oculus salespeople begin making headway into the static dermatology space, Celacyn sales should continue to grow at a robust pace.

Up first for new products on the horizon for Oculus to launch is SebuDerm for seborrheic dermatitis, which is anticipated for next month.  After that, is Lasercyn for post-laser procedures, and other procedures such as surgeries, chemical peels and dermabrasions.  The FDA cleared Lasercyn for commercialization in April and the product is currently being manufactured.  It will be launched this quarter into the esthetic dermatology market.

After that is Loyon, a prescription product for skin descaling licensed from a German pharma.  Oculus believes Loyon should garner FDA approval late this year or early in 2017 with a launch shortly after.  Along the same time frame is RBO-68126 for post-Mohs procedures, with a launch targeted for the spring of 2017.  In the second half of 2017, Oculus is planning to bring to market two more atopic dermatitis products licensed from a European formulator, meaning that in the next year and a half, the company’s sales bag could grow from seven to 13 products.

In the recent shareholder call discussing the recent quarter, Oculus Chief Financial Officer Bob Miller provided some color as to the company’s strategy for slowly raising prices for their products.  Mr. Miller explained that Microcyn based products were increased to $122 per unit and that there are plans to slowly lift the prices in the future.  Ceramax is currently priced at $214, above the Microcyn based products while well below the competitors' products, still providing Oculus some pricing flexibility. Mondoxyne commands prices of $480 to $600 currently, similar to generic pricing and well below other similar branded products.  As Miller noted, “[What's] happening is that our average price per script is going up.   [It’s] not just the price increases, but because of the mix and especially the growth of the Ceramax business – which has been very strong – is that every price has gone up, goes up and has been going up almost every quarter.”  In summary, the average price per unit has been going up every quarter, driven by and related to the launch and growth of higher priced products as well as gentle price increases in the Microcyn based products.

There is no rushing this type of business model; there is only consistent quarterly execution.  Since laying this plan out late in 2014 to add depth and value to the company, Oculus has wavered little in its execution.  For the current quarter, the company again expects U.S. derm revenue to grow by at least 50% from the year earlier.   Total revenue is forecast in the area of $4 million as it deals with the stubborn weakness of the peso and waits for its Mexican distributor Sanfer to expand into additional Latin American countries and launch additional Oculus products.

The recent decline in share value to $3.65 equates to Oculus trading at a market capitalization of only $15.3 million.  Subtracting the $5 million in cash on hand Oculus has and that’s an adjusted market cap of roughly $10 million, equating to a adjusted market cap to revenue ratio of  (calculated by Oculus generating $15 million in revenue in fiscal 2017) of 0.67:1.  Considering that typical dermatology-focused company trade at a much higher ratio (usually 3:1 – 6:1), the price fallout in OCLS seems exaggerated, especially given the fact that the company is doing precisely what it said it was going to do.