welcome to the Ellis Q2 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. 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 EVP, Corporate Development Mike Jafar, Chief Marketing Officer and Rui Avelar, Chief Medical Officer and Head of R and 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 ks, quarterly reports on Form 10 Q and current reports on Form 8 ks. 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. Additionally, 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 ks filed today with the SEC and may also be found on our Investor Relations website at investors. Evolus.com. And now let me hand the call over to David.
Good morning, and thank you all for joining our Q2 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 3 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 2 publications in key medical journals, including the largest aesthetic pivotal head to head trial versus the market leader. On May 15, we entered the 2nd phase of our launch, a 90 day focused effort against a single program named JET.
We believe JET to be the largest experienced program to hit the U. S. Aesthetics market. JET offers aesthetic providers the opportunity to receive up to 3 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 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 2nd quarter. We reported $2,300,000 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 Q3 and into Q4. As such, you can expect 2019 revenue to be backloaded towards the 4th 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 2 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 use 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 3 factors consumer satisfaction, ability to convert patients and optimizing physician experience. 1st 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. 2nd, 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. As consumers switch from other toxins to Jeuveau, approximately 70% came from BOTOX Cosmetics. The combination of the first FDA approved 900 kilodalton 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 190,000,000 social and media impressions with 27,000 posts against hashtag new talks, Jeuveau and Evolus. 3rd, we're encouraged by physician interest.
In a short window of 6 weeks, we booked $2,300,000 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 2 minutes. Overall, customers are extremely satisfied with the Evolus practice app and broader digital experience. In Q2, we laid a broad foundation and energize 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 newtalksnow.
This is a $75 coupon that is available only through participating providers, which started on July 1. The launch of newtalksnow 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, and good morning, everyone. As previously mentioned, Jeuveau launched on May 15 during the second and during the Q2, we booked net revenue from Jeuveau of $2,300,000 We recognized revenue upon delivery to customers, and we deferred no revenue for future periods. For the Q2 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 $100,000,000 in cash, cash equivalents and short term investments compared to about $134,000,000 as of the end of March 31, 2019.
The change in cash, cash equivalents and short term investments is primarily driven by the U. S. Launch of Jeuveau, including $10,500,000 of cash used to purchase inventory for our JET program and commercial sales. Our existing cash, 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 $100,000,000 credit facility with Oxford Finance and have $25,000,000 remaining available to us on the facility upon achievement of certain milestones.
Operating expenses for the Q2 2019 included the cost of our sales organization and increased marketing expenses, including the JET program. GAAP loss from operations for the Q2 ended June 30, 2019 was $36,000,000 compared with a GAAP loss from operations of $16,000,000 for the Q2 of 2018. Our non GAAP loss from operations for Q2 2019 was $31,200,000 As a result, we are providing a non GAAP metric to make it easier to track our performance excluding $4,800,000 in non cash items, all of which impacted the operating loss line of our P and L. These were stock based compensation of 2,500,000 dollars revaluation of the contingent royalty obligation expense of $1,300,000 and depreciation and amortization of 1,000,000 dollars As stated on our Q1 earnings call, we've decided not to provide you with detailed guidance during this launch year. However, to help you with your financial models, we continue to expect revenue to be backloaded towards the Q4 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. And with that, I'll turn the call back to David.
Thank you, Lauren. A few comments before we open the call for Q and A. In addition to our early commercial success, we continue to make progress on multiple fronts. In the quarter, we added 2 new independent board members: Peter Farrell, the successful founder of ResMed, who brings a wealth of experience to the board and Kara Parshauer, 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 twenty nineteen. We believe we have a unique opportunity to reshape this market and remain on track to achieve the number 2 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 and A. Operator?
Thank Our first question comes from Louise Chen from Cantor. Your line is open.
Hi, congratulations on the quarter and thanks for taking my questions. So my first question is here, how do we think about the sales progression from Q2 to Q3? Is it going to be up? Is it down? Or is it not clear at this point?
And then secondly, in terms of fast adopters, what percentage did they make of the switch? Are some of these from Alfeon? Or is that not a deciding factor? And then doctors said they wanted to see repeat customers. Is it just too early for that right now?
And 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 is it pretty much stayed the same? Thank
you. Great. Thanks for the questions, Elyse, and appreciate you joining the call. Starting out with the sales progression quarter over quarter. Look, in the Q2, as you saw in the release, we launched mid quarter May 15.
So you only have 6 weeks, where we were on the market. As you look at the Q3, you've got a full quarter where the products launched and you have the benefit now of more accounts working through the JET program. And so as you think about revenue in the Q3, 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. And then 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.
And 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. And then 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. And we're going to continue to maintain our singularity and focus as we launch the JET program and pull it through.
Our next question comes from Greg Gilbert from SunTrust. Your line is open.
Thanks. Good morning. I have a couple. First for Lauren, can you help us think about SG and A sequentially over the course of the year and maybe talk about in this quarter how much was ongoing types of spend versus launch related? And then maybe for Mike, on the 25% of patients that are naive to toxins that you're seeing that's that you provided, how does that prepare I'm sorry, compare with historical patient flow into the market in terms of the 25% being toxin naive?
And lastly, just any update on the EU opportunity and potential discussions? Thanks.
Great. Greg, 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. So 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 to European Commission. And 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 will go back through the approval process to the European Commission. And as we've guided, we expect that we will have approval 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, Greg. Thanks for the questions. With regard to SG and 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 Q2, our sales force of 140 persons was on board.
We did launch on May 15 with a very large jet program. Those both of those expenses, of course, continue on into the Q3 as we are winding down JET this month. And 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 Q4 and beyond.
Yes, Greg, and 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 ASAP, do you see that ranging anywhere between 9%, 11%, I've seen it as high as 15%, 16% year over year in terms of treatment growth. So we're really pleased to see the influx of patients coming on to Jeuveau with a 25% of patients being naive to this category.
Our next question comes from Annabel Demianna from Stifel. Your line is open.
Hi, thanks for taking my question and congratulations on a good quarter. So 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? And 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? And then 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, but 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 question. It's a fair question to ask 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 6 weeks of being in the market in the Q2.
And so as we get through the Q3, we'll have a better sense for the 5,000 accounts and how they work through the product. And as we've said, we anticipate that some of the JET product will continue early into Q4. So 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 over to Mike for the others.
Yes. 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 will be releasing at a later time as stated for competitive reasons, both the consumer and the customer loyalty program. We'll share further details. But 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. And we know that that's a meaningful component to conversion and we'll have something stated very simple and very personal to the point that when customers are looking to convert consumers will have something at the point of sale. More details to come on that over time.
And 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, but I'll tell you the inbound interest that's come by way of the broader market has been surprising to us. And 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.
So as we look at the efficiencies behind manpowers versus non manpower activity, we'll gauge on where the sales force should be deployed or redeployed. But 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. 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.
Our next question comes from David Maris from Wells Fargo. Your line is open.
Hi, good morning. A couple of questions. The 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 it relates to the share, I think, look, if you look at the toxin users, we're getting share at an equal distribution of the share you see of the existing toxin. So 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 products enter the market, it represents an opportunity treatment are in 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. 2nd, as it relates to the legal case, a couple of things to update you there. First off, as you know, we don't comment on the specifics of the case. But 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 of quick questions. First one is for Lauren. I know you're not going to provide guidance for the second half of operating expenses, but what about royalty contingency?
We were assuming 3%. It was higher this quarter. So is that 3% still a good assumption? And the next question, I may not have heard this correctly, but regarding the JET trial, 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, Dawn. 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.
So, you are correct though on the actual royalty rate we do pay.
Mike, do you want to
take a second? Yes, Don, this is Mike. Thanks for your question and I appreciate you recognizing that. In this category, a 70% call it retention rate is extremely high. We've been around this space for many years.
And over the years and having launched several products in this space, you tend to see products that perform as expected range in that 65 to 75 and then for other products have much lower retention. So 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. So for us, that's great directional interest behind Jeuveau. And 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?
Is that
the right way to think about it?
Great. Thank you.
Our next question comes from Bhaleedji Desai from Barclays. Your line is open.
Hi, good morning and congratulations on the progress. So you did address this partially on the litigation front with you and your peers. So coming specifically to the implications of the update we saw on Friday where the district court seems to have ruled in your favor, can you help us understand what happens if they do? Or Can you help us understand what happens if they do or if they don't? And what would be the next steps?
Hi, Balaji. Thanks for the question. And 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 you to repeat it, but did you state that you'll be generating cash from the Q4 onwards?
That's a very good question. Thanks for that clarification. This is Lauren Silver now. With regard to our cash runway, there is more cash generated in the 4th quarter than any other quarter this year due to the fact that our sales are backloaded in Q4, but we do not anticipate being cash flow positive in the 4th quarter.
Understood. Thank you.
Next question comes from Douglas Tsao from H. C. Wainwright. Your line is open.