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Evolus Takes Trade Hit Against Allergan

Newport Beach’s Evolus Inc., a relative newcomer in the medical aesthetics industry, experienced a lot of frowning earlier this month after losing an initial battle against larger and more established rival Allergan.

Administrative Law Judge David Shaw of the U.S. International Trade Commission (USITC) on July 6 issued a ruling in favor of Allergan and its partner, South Korean drugmaker Medytox, that Evolus’ principal product, Jeuveau, was developed using trade secrets stolen by a former Medytox employee.

Even though the ruling is nonbinding and awaits a full ITC commission vote due in November, it’s a worrisome setback for Evolus, which touts itself as making a cheaper, more effective version of Allergan’s Botox that removes frown lines from faces.

Evolus, which went public in 2018 and last year began generating revenue, and its South Korean partner Daewoong Pharmaceutical Co., could be banned from the U.S. market for 10 years if the ruling gets confirmed.

Since that ruling, shares of Evolus (Nasdaq: EOLS) have dropped 40% to $3.33 at press time and a $112 million market cap. Its stock price is about a tenth of its all-time high from two years ago.

There’s been some room for smiles as of late, though. On the same day the judge’s ruling was announced, Evolus said it received a $40 million investment from Daewoong in the form of a five-year, unsecured, subordinated, 3% convertible note at a conversion price of $13 a share.

Evolus now has about $125 million in cash, more than enough for the next year of operations.

“This investment signals our partner’s long-term commitment to Evolus and the U.S. aesthetic neurotoxin market and confidence in the strength of our intellectual property,” Evolus Chief Executive David Moatazedi said in a statement.

The Ties that Bind

Allergan, which was headquartered in Orange County for many years, is trying to protect its prized Botox, which according to Statista marketing firm, generated an estimated $3.8 billion of sales in 2019.

Evolus and Allergan’s connections run deep.

Allergan, which was purchased by Chicago’s AbbVie Inc. (NYSE: ABBV) in May, named Carrie Strom to lead its worldwide aesthetics unit based in Irvine.

Strom previously worked for Moatazedi, who spent 13 years at Allergan, rising to senior vice president of U.S. Medical Aesthetics, where he led brands like Botox and Juvéderm and oversaw acquisitions such as LifeCell for $2.9 billion and Zeltiq Aesthetics for $2.5 billion.

In 2018, Moatazedi jumped to Evolus. A year ago, he oversaw the launch of Jeuveau, which rhymes with hello and comes from the French word “nouveau” that means modern or up to date.

“This is not your mother’s Botox,” Moatazedi told the Business Journal during an hour-long interview in January.

“Botox can’t spend enough to create a perception with millennials that will overcome what exists in the back of their minds around this old product,” he added. “Toxin is in the name. The name Jeuveau is so benign—it’s a beauty name.”

Neither Moatazedi nor Strom were able to comment on this legal issue, their spokespeople said.

Sales Hit Hard

Even though the company didn’t begin selling Jeuveau until last June, Evolus racked up $34.9 million in revenue for 2019.

It also reached the No. 3 position in terms of market share for its aesthetic product, and said it was well on its way to reaching the second position in an industry dominated by Allergan.

In January, Wall Street expected Evolus’ sales to explode threefold this year to $105 million, according to the average estimate of 10 analysts who cover the company.

As of July, analysts have pushed down that average estimate to $39.1 million because of the coronavirus, as well as the unfavorable ruling.

“Evolus shares have been pressured both by the overhang of this ITC case and the challenges the aesthetics market is facing due to the COVID-19 pandemic,” Mizuho Securities USA LLC wrote in an analyst report. “We continue to see the aesthetics market as an attractive one and believe Evolus could have an important role in the market as an aesthetics-only player, but, again, we need greater visibility on Evolus’ ability to commercialize Jeuveau in the market over the long term before we can become more comfortable with the story.”

Mizuho downgraded its Evolus rating from buy to neutral and lowered its price target from $8 to $3. 

In April, Evolus said the coronavirus caused it to significantly reduce its operating expenses to conserve its cash resources. Moves included cutting its workforce by 100 employees to now about 130 and temporarily cutting pay by 20% for board members and senior executives, including Moatazedi.

Question of Jurisdiction

Evolus said it “strongly disagrees” with the preliminary decision.

“This investigation represents an improper attempt to use the USITC as a means to litigate a dispute between two Korean competitors that is completely disconnected from the United States,” the company said in a statement. “The trade secrets asserted by Allergan and its Korean partner Medytox have never been used in the United States.” 

Medytox, which provides a botulinum toxin strain to Allergan, is accusing Daewoong, which also provides a botulinum toxin strain that Evolus uses to make its wrinkle smoothing product, of copying its product.

In August of last year, Daewoong said tests conducted by appraisers determined that its toxin “is a different strain” than Medytox’s. The differences were corroborated by two independent labs in South Korea and France, Daewoong said.

Medytox argued that Daewoong’s claim “is only a narrow interpretation” and said it expected the manufacturing process to be “fully clarified” when the results of the two companies’ strains were submitted in September to the USITC.

Allergan and Evolus’ sparing spans more than a single case.

In December 2018, Allergan and Medytox filed a citizen’s petition with the Food and Drug Administration against Evolus, raising questions about the source of its botulinum toxin. The FDA reportedly rejected the petition on Feb. 1, 2019, the same day it approved Jeuveau, according to the Fierce Pharma website.

Local IP lawyers familiar with the battle between Evolus and Allergan tell the Business Journal that the ITC proceedings are serving as a proxy war between two U.S. companies, over a theft alleged by two international partners.

They said it’s a different type of matter than what the ITC usually presides over. While most trade secret cases brought before the commission have an interest in protecting a market, this case simply helps one American company and hurts another, which could ultimately bolster Evolus’ defense.

While many preliminary ITC decisions are upheld by the full commission, the case presents a serious standing question—one that gives Evolus leverage—about Allergan’s interest in its partners’ trade secrets, legal sources tell the Business Journal.

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