In 2018, Evolus (NASDAQ: EOLS) was spun off of Alphaeon, a healthcare products and services technology company, to pursue commercialization of Jeuveau, an aesthetic drug for the treatment of frown lines.
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On March 16, Alphaeon announced it will sell 4 million of its shares in a public offering, a move that will reduce its ownership of Evolus below 50%. Its decision to sell so many shares sent Evolus stock reeling 17.4% on Thursday.
Alphaeon's decision to sell shares is a bit curious given that Evolus recently secured Food and Drug Administration approval to market Jeuveau as an alternative to Allergan's (NYSE: AGN) blockbuster Botox for the treatment of frown lines.
The market opportunity for Jeuveau is significant. Although Botox is used in many indications, it's the leading treatment for frown lines with a roughly 70% share of what Evolus estimates is a $1.2 billion market in the U.S. alone.
In studies, Jeuveau matched Botox's efficacy and safety. Because Evolus didn't pursue approval for a therapeutic indication, it has more pricing flexibility and less restrictions when it comes to working with physicians, advantages that management believes can turn Jeuveau into a top seller.
Although Evolus began selling Jeuveau this week, it seems Alphaeon prefers to sell some of its shares now, rather than wait to see how much of this opportunity Evolus captures.
Alphaeon will use proceeds from selling its 4 million shares to pay down debt. Seeing so many shares get sold just as commercial sales are commencing is disappointing, but investors should remember Alphaeon isn't unloading its entire position. It will still own between 10.6 million and 11.2 million Evolus shares, or roughly 39% to 41% of the company, depending if underwriters fully exercise their over-allotment option.
Since it will no longer be majority owned, it won't be able to claim exemptions as a controlled company. As a result, Evolus will have one year to appoint more independent directors to its board who will be responsible for corporate governance and compensation. Evolus intends to do this, but investors should keep tabs on its progress.
A bigger question may be whether Alphaeon plans on selling more shares. Given how many shares it still owns, additional sales could create headwinds to Evolus' stock price down the line.
Overall, Evolus has an experienced management team that includes former Allergan executives, so it knows this industry well. If it leverages those relationships successfully, then Jeuveau could dent Botox's market share, resulting in annual sales into the nine figures. There's no guarantee that happens, but if it does, Evolus' $600 million market cap may be too conservative. Thus, this sell-off may offer a good opportunity to buy shares.
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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.