Welcome to the Evolus Q2 Earnings Conference Call. At this time, all participants on the listen only mode. Later, we'll conduct a question- and- answer session, and instructions will be given at that time. If anyone should require assistance during the call, please press star then zero on your touch- tone telephone. As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Ashwin Agarwal, Vice President, Finance, Investor Relations, and Treasury. Sir, please go ahead.
Thank you, operator, and welcome to everyone participating on today's call. This call is also being broadcast live over the internet at evolus.com, and a replay of the call will be available on the company's website for 30 days. On today's call are David Moatazedi, President and Chief Executive Officer, Lauren Silvernail, Chief Financial Officer and Executive Vice President, Corporate Development, Michael Jafar, Chief Marketing Officer, and Rui Avelar, Chief Medical Officer and Head of R&D. In our remarks today, we will include statements that are considered forward-looking statements within the meaning of United States securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current assumptions and expectations of future events and trends which may affect the company's business, strategy, operations or financial performance.
A detailed discussion of the risks and uncertainties that the company faces is contained in its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projection, or forward-looking statement. The discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for, or in isolation from, our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found on our investor relations website at investors.evolus.com. Now let me hand the call over to David.
Good morning. Thank you all for joining our second quarter 2019 earnings and business update call. Let me start by saying that it's a very exciting time at Evolus. As you may recall from our investor day, we outlined three phases to our launch. The first phase was pre-launch and included a high-touch customer engagement strategy to prepare the market, the hiring of a specialized sales force of 140 representatives, and the scientific support from two publications in key medical journals, including the largest aesthetic pivotal head-to-head trial versus the market leader. On May 15th, we entered the second phase of our launch, a 90-day focused effort against a single program named Jet. We believe Jet to be the largest experience program to hit the U.S. aesthetics market. Jet offers aesthetic providers the opportunity to receive up to three shipments of Jeuveau.
Our goal was to rapidly build a large base of experience and confidence in the market to maximize our launch trajectory. I'm pleased to report through last week we have achieved several key highlights. More than 5,000 aesthetic practices are now enrolled in Jet, exceeding our target by over 2,000 accounts. Within Jet, over 23,000 patients have completed the Jet survey, and the results reflect an influx of toxin-naive patients representing 25% of surveyed users. We also saw a high rate of satisfaction amongst treated patients and their willingness to continue with Jeuveau and refer it to a friend. These metrics are in line with what we expected, factoring in the performance of Jeuveau in our head-to-head study versus BOTOX. To date, over 5,000 accounts received Jet product, which on average included more than 10 vials per account.
Given the scale and the pace of Jet, we were pleased to see accounts purchasing product in the second quarter. We reported $2.3 million of Q2 net revenue, which came from early adopters and accounts that completed the Jet program. We expect customer shipments to shift from Jet units to revenue-generating units as we progress through the third quarter and into Q4. As such, you can expect 2019 revenue to be back-loaded towards the fourth quarter. Now I'd like to hand the call over to Mike to provide an update on the U.S. commercial launch.
Thank you, David. Let me start by stating that we are very pleased with the initial reception to Jeuveau. We believe our singularity and focus on one product and one program is a competitive advantage. It's also important to recognize that prior to launch, we wired the organization to enable a rapid uptake against established competitors. We hired a highly specialized sales force with over 80% having prior aesthetic experience, thereby minimizing friction of introducing a new company and product. We empowered the sales force with two peer-reviewed publications, one of which is a head-to-head trial comparing Jeuveau to the market leader out to 150 days. These publications drove immediate confidence and adoption with providers. We engaged a board and broad, diverse set of key opinion leaders and high-volume injectors across specialties and regions, which quickly validated Evolus in the medical community.
Lastly, we used the power of design to launch an experience by way of product, content, and technology. Jet was that first experience. Our team's strategic approach set us up for success before the first vial was shipped. Our early performance was driven by three factors: consumer satisfaction, ability to convert patients, and optimizing physician experience. First and foremost, at day 30, patients surveyed in Jet were highly satisfied with their results, with over 70% planning to continue on Jeuveau and willing to refer a friend. This is a strong signal of consumer interest and a trend we expect to play out over time. Second, we've been able to answer one of the key questions on everyone's mind, which is the difficulties of switching from BOTOX. Early feedback from Jet shows we've done just that. Of consumers switched from other toxins to Jeuveau, approximately 70% came from BOTOX Cosmetic.
The combination of the first FDA-approved 900 kDa molecule since the launch of BOTOX, coupled with a differentiated marketing effort, is driving awareness and conversion. I'm pleased to report that we generated over 190 million social and media impressions with 27,000 posts against #NewTox, Jeuveau, and Evolus. Third, we're encouraged by physician interest. In a short window of six weeks, we booked $2.3 million of net revenue in Q2, and the majority of that revenue came from accounts that completed Jet. We're now closely monitoring these metrics as accounts transition from Jet into active purchasing. What I'm most proud of is the way we've reinvented customer interaction with aesthetic companies. The combination of a highly specialized sales force and an effective digital platform is making for a great first impression and experience. While still early, we are starting to see the value of our digital investment.
By the end of Q2, approximately 90% of orders have come through the Evolus Practice app, which frees up our sales force to focus on driving value for their accounts. Thousands of customers have engaged with us through our chat function with an average response time under two minutes. Overall, customers are extremely satisfied with the Evolus Practice app and broader digital experience. In Q2, we laid a broad foundation and energized the toxin market. With a significant account base established earlier than expected, we made the strategic decision to accelerate the value for our consumers by launching #NewToxNow. This is a $75 coupon that is available only through participating providers, which started on July 1st. The launch of #NewToxNow is designed to provide a competitive value proposition for consumers considering Jeuveau. The next chapter will be the release of our consumer and professional loyalty program.
For competitive reasons, we will share the details at a later time, but you can expect the experience to be simple, personal, and connected. At Evolus, we're committed to making the beauty experience delightful and achievable. I'll close by saying I've been a part of many product launches in this space, and I haven't seen one that scaled as quickly or garnered as much attention from the market, the industry, and consumers. Thank you for your time. I'll now pass the call over to Lauren, who'll provide a review of our Q2 2019 financial highlights.
Thank you, Mike. Good morning, everyone. As previously mentioned, Jeuveau launched on May 15th, and during the second quarter, we booked net revenue from Jeuveau of $2.3 million. We recognized revenue upon delivery to customers, and we deferred no revenue to future periods. For the second quarter ended June 30, gross margin was 71.4%. Please note we expect our gross margin percentage to fluctuate on a quarterly basis as we implement various marketing programs that may affect the average selling price of Jeuveau. At the end of the second quarter, we had approximately $100 million in cash equivalents, and short-term investments compared to about $134 million as of the end of March 31, 2019. The change in cash equivalents, and short-term investments is primarily driven by the U.S. launch of Jeuveau, including $10.5 million of cash used to purchase inventory for our Jet program and commercial sales.
Our existing cash equivalents, and short-term investments are expected to fund our operations for at least the next 12 months. As a reminder, earlier this year, we entered into a $100 million credit facility with Oxford Finance and have $25 million remaining available to us on the facility upon achievement of certain milestones. Operating expenses for the second quarter 2019 included the cost of our sales organization and increased marketing expenses, including the Jet program. GAAP loss from operations for the second quarter ended June 30, 2019, was $36 million, compared with a GAAP loss from operations of $16 million for the second quarter of 2018.
Our non-GAAP loss from operations for Q2 2019 was $31.2 million. As a result, we are providing a non-GAAP metric to make it easier to track our performance, excluding $4.8 million in non-cash items, all of which impacted the operating loss line of our P&L. These were stock-based compensation of $2.5 million, revaluation of the contingent royalty obligation expense of $1.3 million, and depreciation and amortization of $1.0 million. As stated on our Q1 earnings call, we've decided not to provide you with detailed guidance during this launch year. To help you with your financial models, we continue to expect revenue to be back-loaded towards the fourth quarter of 2019 as we continue to build trial and experience with our customers. As discussed earlier, there may be variability in gross margin percentage in future quarters as we're in the launch phase at Jeuveau.
With that, I'll turn the call back to David.
Thank you, Lauren. A few comments before we open the call for Q&A. In addition to our early commercial success, we continue to make progress on multiple fronts. In the quarter, we added two new independent board members, Peter Farrell, the successful founder of ResMed, who brings a wealth of experience to the board, and Karah Parschauer, who has a proven track record of success in the life sciences industry, including medical aesthetics. On the international side, we are working closely with our partner, Clarion, as they prepare for Canadian launch later this year. In Europe, we recently received a revised positive opinion from CHMP, and we now expect approval in the second half of 2019. We believe we have a unique opportunity to reshape this market and remain on track to achieve the number two market position within 24 months of launch.
I'd like to thank the entire Evolus organization for exceeding all expectations in this critical launch phase, and I'd also like to thank our partners and the thousands of customers and consumers who started their journey with us and for their trust in our team, our product, and our vision. With that, I'll turn the call over for Q&A. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star one on your touch- tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. One moment, please. Our first question comes from Louise Chen from Cantor. Your line is open.
Hi. Congratulations on the quarter, and thanks for taking my questions. My first question is here, how do we think about the sales progression from second quarter to third quarter? Is it going to be up? Is it down? Is it not clear at this point? Secondly, in terms of fast adopters, what percentage do they make of the switch? Are some of these from Alphaeon or is that not a deciding factor? The doctors said they wanted to see repeat customers. Is it just too early for that right now? The last question I had was just, in terms of the upcoming acquisition of one of your key competitors, has there been any change in the counter detail or has that pretty much stayed the same? Thank you.
Great. Thanks for the questions, Louise, and appreciate you joining the call. Starting out with the sales progression quarter-over-quarter. Look, in the second quarter, as you saw in the release, we launched mid-quarter, May 15th, so you only have six weeks where we were on the market. As you look at the third quarter, you've got a full quarter where the product's launched, and you have the benefit now of more accounts working through the Jet program. As you think about revenue in the third quarter, although we're not guiding at this point, those are some of the factors for you to consider as you think about the sequential moves on revenue.
As it relates to fast adopters, look, we're very pleased that overall the bell curve of the launch is right shifted from what we would have assumed, that there's a number of fast adopters with 5,000 accounts now in Jet that we're seeing working through the program quickly and that have a high degree of interest in continuing on beyond that. As you can imagine, we spend a significant amount of time measuring every aspect of the Jet program on through to the purchasing patterns of these accounts. Across the board, we feel confident with the sales force's ability to keep the accounts engaged through Jet and to pull through the orders once the Jet program is complete. On the last question, you had asked about the acquisition. Look, we're in a unique environment today in aesthetics.
I don't think this market has faced this sort of scenario where you've got both the number one player and the second undergoing a transaction. That being said, look, our launch strategy is unchanged from what we had outlined. We feel that we're making significant inroads in this market, and frankly, we're adding a lot of value to the category, as evidenced by the 25% of patients that were enrolled in Jet that are naive to the category. We've always believed that our investment and entrance in this category would drive increased interest from both doctors and consumers, and we're starting to see early evidence of that. We're going to continue to maintain our singularity and focus as we launch the Jet program and pull it through.
Thank you.
Our next question comes from Gregg Gilbert from SunTrust. Your line is open.
Thanks. Good morning. I have a couple. First for Lauren, can you help us think about SG&A sequentially over the course of the year? Maybe talk about, in this quarter, how much was ongoing types of spend versus launch related. Maybe for Mike, on the 25% of patients that are naive to toxins that you're seeing, that stat you provided, how does that compare with historical patient flow into the market in terms of the 25% being toxin naive? Lastly, just any update on the EU opportunity and potential discussions. Thanks.
Great. Gregg, why don't I start with the update on EU, and then I'll turn it over to Lauren and then Mike for the other two questions. As far as EU, as you may recall, we originally received a positive opinion from EU late last year, and then the EC was another step in the approval process, and the EC had additional questions, the European Commission. Those questions were sent back to CHMP. We believe that CHMP addressed those questions, and once again, had a vote, and there was a positive opinion. Of course, now it'll go back through the approval process to the European Commission, and as we've guided, we expect to have approval in the back half of this year. I'll turn it over to Lauren for the next question.
Great. Thanks, David, and good morning, Gregg. Thanks for the question. With regard to SG&A and expenses in general, we didn't provide guidance, as you heard, but let me give a little bit of color on that. For the second quarter, our sales force of 140 persons was on board. We did launch on May 15th with a very large Jet program. Both of those expenses, of course, continue on into the third quarter as we are winding down Jet this month. We expect our launch expenses to continue this year without providing guidance. Something to keep in mind, and I think we mentioned this on the call, is revenue is back-loaded, so we expect cash generation from the business in the fourth quarter and beyond.
Yeah, Gregg, I'll take your question in terms of the patient growth. If you look at procedural data that's been reported out over the years by ASDS or ASAPS, you see that ranging anywhere between nine, 11, probably I've seen it as high as 15%, 16% year-over-year in terms of treatment growth. We're really pleased to see the influx of patients coming onto Jeuveau with a 25% of patients being naive to this category.
Our next question comes from Annabel Samimy from Stifel. Your line is open.
Hi. Thanks for taking my question. Congratulations on a good quarter. You mentioned the majority of purchases that you saw were from physicians in the Jet program. Could you give us any kind of sense of the conversion rate you saw of these practices that were from Jet into actually purchasing customers? For those that were not in the Jet program, since your sales force is freed up to engage with practices, do you have any intention to expand the target audience? Another question that we get often is what happens when the $75 coupon program is over for the patients? Is there an end to this promotional program? Will there be something else to keep these patients and new patients engaged? I know you have a professional loyalty program, anything else on the patient side? Thank you.
All good questions. Thanks, Annabel. I'll take the first one, then I'll turn it over to Mike to take your second and third questions. It's a fair question asked about pull-through of accounts once they complete Jet. At this point, we're not providing that level of color because keep in mind, we only had six weeks of being in the market in the second quarter, and so as we get through the third quarter, we'll have a better sense for the 5,000 accounts and how they work through the product. As we've said, we anticipate that some of the Jet product will continue early into Q4. We'll continue to watch those trends, and as we feel that there are trends that we can report out on and feel confident behind, we'll share those with you. Turn it over to Mike for the others.
Yeah, in terms of the $75 program, we publicly stated that that program will end at the end of Q3. In terms of our consumer loyalty, that's something that we'll be releasing at a later time. As stated, for competitive reasons, both the consumer and the customer loyalty program, we'll share further details. Do know that we realize the journey here, and every journey begins with a few steps. Luckily here, David and I have taken this journey before, so the consumer value proposition is near and dear to our heart. We know that that's a meaningful component to conversion, and we'll have something, as stated, very simple and very personal to the point that when customers are looking to convert consumers we'll have something at the point of sale. More details to come on that over time.
Expansion of the sales to other target audiences, perhaps?
Yes. The combination of the sales force and our digital platform is working very much in our favor. Obviously, our sales force have a set target. I'll tell you, the inbound interest that's come by way of the broader market has been surprising to us. That's come by way of our chat. We've had thousands of customers go online or download our app and inquire about purchasing the product. As we look at the efficiencies behind manpower versus non-manpower activity, we'll gauge on where the sales force should be deployed or redeployed. Right now, we find that we're in a good stride between the technology and the sales force.
Annabel, maybe I'll add one additional piece of color here.
Sure.
Of course, it's a question around what's the quality of the 5,000 accounts that are enrolled in Jet and whether those 5,000 accounts represent a significant part of the market, and we believe that they do. Now, we'll continue to be opportunistic as it relates to expanding our customer set. At the same time, we are very pleased with the 5,000 account, the composition of those practices, and we believe that our sales force is targeted very well across the country, and we'll continue to explore that. As Mike talked about, our digital platform gives us an efficiency as we scale that would not require us to continue to expand our footprint.
Great. Thank you.
Next question comes from David Maris from Wells Fargo. Your line is open.
Hi, good morning. A couple questions. First is, was the 70% coming from BOTOX higher or lower than what you expected before launching the program, or was it as expected since that's about their market share anyway? The other is, can you just give us an update on the current Korea situation, and what's the next information we're going to hear from that? What's the timeline, and what should we hear? Thank you.
Sure. Thanks, David, for the question. First off, as relates to the share, I think if you look at the toxin users, we're getting share at an equal distribution of the share you see of the existing toxins. We're not over-indexing against one product over another, which is a strong early sign that across the board, doctors are willing to try this product. I think the one data point that was surprising to us was the number of naive patients that were trialed on the product. Which is a sign of the health of this category, and that as new end products enter the market, it represents an opportunity for the potential for the category to accelerate.
We've always talked about the opportunity that less than one out of 10 patients that are interested in getting a treatment are in the office today, and that leaves a significant untapped potential, and we're starting to see early results of our effort and our contribution to that. Second, as it relates to the legal case, couple things to update you there. First off, as you know, we don't comment on the specifics of the case. However, there are new timelines, and now the final resolution date has been pushed out by the courts to October of 2020. We continue to remain confident in our IP, but of course, we'll let the case continue to play out.
Okay, great. Thank you very much.
Our next question comes from Donald Ellis from JMP Securities. Your line is open.
Good morning, thanks for taking the questions. Just a couple quick questions. First one is for Lauren. I know you're not going to provide guidance for the second half operating expenses, but what about royalty contingency? We were assuming 3%. It was higher this quarter. Is that 3% still a good assumption? The next question, I may not have heard this correctly, but regarding the Jet trials, someone mentioned that 70% of the patients chose to continue, which is a very strong number and not surprising. What is surprising, that would mean that 30% of the patients chose not to continue with Jeuveau. What were some of the reasons why patients wouldn't continue? Thanks.
Hi, Don. Thanks for the question. This is Lauren. With regard to royalty, our royalty on net sales is in the low single digits. Royalty contingency is actually the revaluation of the balance sheet asset, and that depends on a number of factors, including time value of money, forecasts, and a number of issues. You are correct, though, on the actual royalty rate we do pay.
Mike, do you want to take a second?
Yeah, Don, this is Mike. Thanks for your question. I appreciate you recognizing that in this category, a 70% caller retention rate is extremely high. We've been around this space for many years. Over the years in having launched several products in this space, you tend to see products that perform as expected range in that 65%-75%. For other products have much lower retention. We're pleased with this interest and willingness to continue on the product. More importantly, we're pleased that these patients surveyed are also willing to refer others to this product. For us, that's great directional interest behind Jeuveau.
Would it be fair, Mike, to say that the other 30% are not those that are not willing to try, they're probably a combination of neutral primarily and then the rest, right?
That's right.
Is that the right way to think about it?
That's right.
Great. Thank you.
Our next question comes from Balaji Prasad from Barclays. Your line is open.
Hi, good morning, and congratulations on the progress. You did address this partially on the litigations front with you and your peers. Coming specifically to the implications of the update we saw on Friday, where the district court seems to have ruled in your favor, help me understand this, please. While I can't ask you if you see Allergan turning over the BOTOX manufacturing secrets to you, can you help us understand what happens if they do or if they don't, and what will be the next steps?
Hi, Balaji. Thanks for the question. I know there's a lot of interest around the legal case. Look, we're not going to be in a position to comment about the specifics as the case continues to unfold. As we've said from the beginning, we remain very confident in our IP, and we'll let the court system continue to work through the case.
Okay. My second question is on the cash flow. My apologies if I ask it repeated, but did you state that you'll be generating cash from the fourth quarter onwards?
That's a very good question. Thanks for that clarification. This is Lauren Silvernail now. With regard to our cash runway, there is more cash generated in the fourth quarter than any other quarter this year due to the fact that our sales are backloaded in Q4. We do not anticipate being cash flow positive in the fourth quarter.
Understood. Thank you.
Next question comes from Douglas Tsao from H.C. Wainwright & Co. Your line is open