Botox Knock-Off Could Change Fortunes For Evolus

Evolus’s attempt to get approval for its Botox knock-off DWP-450 will be delayed for a few months.

The U.S. Botox market is large, and DWP-450 could change Evolus’s fortunes.

Any risk to Botox could hurt sentiment for AGN.

Source: pulsenews.co.kr

All eyes were on Evolus (EOLS) Wednesday as the market awaited a U.S. Food and Drug Administration decision pursuant to PrabotulinumtoxinA (DWP-450), the company’s injectable 900 kDa botulinum toxin type A complex designed to address the needs of the facial aesthetics market. The results were anticlimactic as the FDA issued a Complete Response Letter (“CRL”), delaying the drug’s potential launch:

The FDA has issued a Complete Response Letter (“CRL”) to Evolus related to its BLA for DWP-450 for the treatment of glabellar lines, also known as frown lines, in adult patients.

In the CRL, deficiencies cited by the FDA were isolated to items related to Chemistry, Manufacturing, and Controls (“CMC”) processes. No deficiencies were related to clinical or non-clinical matters. Evolus expects to respond with a complete submission to the FDA within 90 days.

Mr. Moatazedi, President and Chief Executive Officer of Evolus, commented, “The successful completion of the FDA inspection of the manufacturing facility and issuance of the EIR represents a key operational milestone and entirely concludes the pre-approval inspection process by the FDA.”

EOLS fell over 25% on the news. Allergan (AGN), whose Botox is the industry leader for neurotoxins, rose nearly 2%. Below I will parse through the implications of the CRL for Evolus and Allergan.

Botulin Toxin Could Change Evolus’s Fortunes

DWP-450 phase 3 clinical trials showed the drug was capable of competing on par with Botox. However, showing strong efficacy in clinical trials and actually getting the drug approved are two different things. A successful review of the company’s Biologics License Application (“BLA”) was never a slam dunk. The FDA had previously performed a pre-approval inspection of the Daewoong Pharmaceutical plant in South Korea that manufactures DWP-450. The FDA issued a Form 483 with 10 observations.

There could be a silver lining in the CRL. The fact that no deficiencies were cited could imply the drug can deliver on the efficacy intimated by the clinical trials:

CEO David Moatazedi — an Allergen vet who took the job just a little more than a week ago — says the rejection has nothing to do with data, statistics, safety or pharmacology of their product. “The remaining questions are manageable,” he told investors on a call this morning.

Now all the company and Daewoong have to do is bring the manufacturing process up to par and it could potentially clear a path for a DWP-450 launch early next year.

More Drama In 90 Days

Evolus plans to respond with a complete submission to the FDA in 90 days. I expect all eyes to be on the company again in advance of any FDA action. An FDA approval and eventual DWP-450 launch by Evolus could change the company’s fortunes. Run-rate revenue for Botox in the U.S. is around $2.3 billion per year. If Allergan controls 90% of the market, that would put the entire market size at around $2.5 billion. Evolus will likely have to offer steep discounts to get customers to switch from Botox. If it garnered 5% of the market at a 30% discount it could potentially generate about $85 million in revenue per year.

The company is still in the clinical stage. It needs to commercialize DWP-450 as soon as possible. In Q1 2018, the company suffered an operating loss of $6 million. Consistent cash burn will cause its $50 million in liquidity to dwindle until DWP-450 finally reaches the market.

Allergan Gets A Reprieve

Botox is Allergan’s top-selling product and represents more than 20% of its total revenue. The company’s organic revenue growth is practically dead. It is facing a loss of exclusivity (“LOE”) for key products within its U.S. General Medicine segment. Its second-leading drug, Restasis, is facing patent challenges from Mylan (MYL) and Teva (TEVA). Allergan’s total Q1 revenue was up 3% Y/Y, yet organic growth was practically nil. I believe Q2 results will show a decline in revenue, which could hurt sentiment for the stock.

Management is seeking strategic options before the market realizes it is no longer a growth company and its 12x EBITDA multiple is unwarranted. I believe it will attempt to monetize Botox-related product lines like Medical Aesthetics or Neuroscience which are growing in the high double-digit range. Any competition from Evolus’s DWP-450 – real or perceived – could cause investors to sour on Botox’s future revenue growth and punish AGN.

Conclusion

DWP-450 sounds promising and could change Evolus’s fortunes. Meanwhile, LOE could stymie Allergan regardless of its strategic review. Buy EOLS and sell AGN.

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