Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Evolus 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 follow at that time. As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Ms.
Carol Ruth with The Ruth Group. Ma'am, please go ahead.
Thanks, operator, and thanks everyone for Internet at www.evolus. Dotcom and a replay of the call will be available on the company's website for 30 days. In our remarks today, we will include statements that are considered forward looking statements within the meaning of the 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 quarterly report on Form 10 ks for the year ended December 31, 2017, filed with the SEC on March 29, 2018, and subsequent quarterly reports on Form 10 Q, current reports on Form 8 ks and our recent final prospectus. 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. With that said, I'll hand the call over David Morozetti, President and CEO of Evolus. David?
Good morning, and thank you all for joining our update call. With me today are Lauren Silvernail, Chief Financial Officer and Executive Vice President, Corporate Development and Rui Avelar, our Chief Medical Officer. Before I start with my prepared remarks, I'd like to comment on our exciting news this morning related to the early resubmission to the FDA of our Biologics License Application or BLA for our product candidate DWP450 for the treatment of glabellar lines. This resubmission comes ahead of schedule and marks a major milestone achievement prior to commercialization. Since joining Evolus a few short months ago, I've had the pleasure of meeting many of you.
For those of you who I have not met, I'd like to start by providing insight on why I joined the Evolus team, who we are as a company and the significant accomplishments we've made to date. Evolus represents a novel and meaningful opportunity in the aesthetic space. We are a nimble, fast paced company focused exclusively on cash pay aesthetic medicine, and we are well positioned to launch a new chapter in aesthetics. Our first product candidate DWP450 represents a strong anchor product to build a premier brand within 1 of the single largest and fastest growing categories in healthcare. If approved, we believe our toxin will be the first known 900 kilodalton molecule since BOTOX and will be the 1st aesthetic only toxin on the market.
In my 1st 90 days, we have been successful in executing on key initiatives ahead of schedule to position ourselves for U. S. Commercial launch in the spring of 2019, and we have no intention of slowing down. We announced the early resubmission of our BLA to the FDA ahead of schedule. We have filled key positions to enable us to refine and advance our commercial strategy, most notably with the appointment of Mike Jafar as Chief Marketing Officer.
Mike is an expert in the field and led the commercial launch of JUVEDERM VOLUMA, which has been recognized as not only one of the largest launches in the medical aesthetics category, but also one of the most successful as measured by year 1 sales. Most recently, he led the entire marketing program for CoolSculpting. And in July, we completed a public equity offering, which together with proceeds from our IPO positions us well to initiate one of the highest impact launches of a new toxin to date. Looking ahead, I expect to build on these successes through the next several months. Relative to our early BLA resubmission, we maintain our line of sight toward regulatory approval of DWP450.
As a reminder, the resubmission follows the receipt of a complete response letter or CRL from the FDA, which came in May and required the submission of additional data to the agency for the completion of review of the company's BLA. Deficiencies cited by the FDA in the CRL were isolated to items related to chemistry, manufacturing and controls or CMC processes. No deficiencies were related to clinical, non clinical or safety matters. We now await the receipt of notice from the agency accepting our resubmission, which will also classify the submission as Class 1 or Class 2. We expect to receive the acceptance of the submission and a new FDA action date in approximately 1 month in September 2018.
I'd like to reiterate that regardless of the classification of our submission, we remain committed to working towards a planned commercial launch of DWP450 in the spring of 2019. We are well prepared from a product manufacturing standpoint. In May, our manufacturing partner, Daewoong Pharmaceuticals, received a favorable establishment inspection report, or EIR related to their manufacturing facility. This combined with the more recently received clearances from regulatory bodies in Europe and Canada marked a significant milestone achievement for the company. This EIR effectively cleared the facility to manufacture product.
To best capitalize on expected DWP450 approval, we will continue to work diligently to prepare for our spring 2019 launch. While we remain strategically quiet on our specific commercial plans for competitive reasons, I would like to outline our 3 phase launch plan at a high level. Through the first phase, we remain focused on building out our disruptive commercial plan and expanding our sales and marketing management team through the remainder of 2018. We are also frequently meeting with key opinion leaders and high volume injectors as we seek their input to build out our customer centric organization. In the 2nd phase following FDA approval, we will quickly establish our company identity.
While our leadership team is well known in the industry, our company is not. This phase will debut our company's identity in our charter as we continue to further build out our future customer base. Simultaneously, we expect to begin recruiting a specialized sales force. And finally, we will initiate our commercial launch in spring 2019. The launch will focus on the flawless execution of our go to market strategy to quickly establish our presence in the category, while simultaneously investing in growing the large underpenetrated market.
On the R and D side, we continue to make progress not only with our early resubmission, but also with Rui Avelar and his team's hard work to submit several manuscripts grounded on both our U. S. And European pivotal datasets. We expect these manuscripts to published in peer reviewed journals in early 2019, further validating our clinical data and marking another key milestone. While the U.
S. Toxin market represents the largest market opportunity and remains our priority in the near term, we also look forward to commercializing DWP-four fifty through partners in Canada and Europe in 2019. Before turning the call over to Lauren, I'd like to thank our entire team for their dedication and hard work, which has allowed for early submission of our BLA ahead of our aggressive timeline. With that, I'd now like to turn the call over to Lauren, who will provide a review of our Q2 financial results and cash position.
Thank you, David, and good morning, everyone. As David mentioned, we completed an equity offering in July with net proceeds to the company of approximately $56,000,000 As of June 30, 2018, Evolus had $43,000,000 in cash. Combining our cash at the end of the 2nd quarter with the proceeds from our recent offering gives us a pro form a cash position of nearly $100,000,000 We now believe we are well funded to take us through our early commercial stage. As this is my first earnings call as CFO of Evolus, I would like to share some perspectives on the quarter and our approach to growth going forward. We remain highly focused on using our cash to fund our commercial build out on a measured basis.
We used about $6,000,000 of cash in each of the first two quarters of 2018. Today, rather than offer detailed guidance, I will make a few directional comments. You should expect us to manage our cash conservatively. For the Q3, we anticipate non GAAP operating expense will increase as we bring additional sales and marketing leadership on board and begin to execute our commercial plans. We also expect non GAAP operating expense to be higher in the 4th quarter than the 3rd quarter, and we expect provide an update on those trends on our Q3 call.
For the first time, we are reporting non GAAP operating expense. We have started doing this to make it easier for you to track our operating expenses excluding 2 non cash items, stock based compensation and royalty revaluation expense. On the royalty revaluation expense, our balance sheet includes a contingent royalty liability of $48,800,000 relating to a low single digit royalty on sales we expect to pay to the Evolus founders upon commercial launch. This contingent royalty obligation is revalued on a quarterly basis driven by changes in assumptions such as the timing and magnitude of projected revenues and the discount rate. Our non GAAP operating expense for Q2 ended June 30, 2018 was 5,300,000 dollars excluding stock based compensation of $2,600,000 and royalty revaluation expense of 8,200,000 dollars Stock based compensation split $2,200,000 in G and A $400,000 to R and D.
The $8,200,000 expense from royalty revaluation expense was primarily the result of derisking DWP-four fifty following our partners receipt of a favorable EIR from the FDA, essentially clearing the plant for manufacturing. With that, I'll turn the call back to David.
Thank you, Lauren. In closing, I'd like to outline our near term focus for the duration of 2018 early 2019 by reiterating my confidence in our ability from a financial and operational perspective to work closely with the FDA to gain approval, continue hiring a world class team and be fully prepared for a spring 2019 launch and finally, to execute on our launch to establish Evolus as a premier aesthetic company. I want to thank everyone at Evolus for their diligent work, and I'm excited to continue to build on our momentum as we approach our spring 2019 launch of DWP450. I'd also like to add that I look forward to speaking with many of in the coming days and weeks, especially through the fall conference season. If interested in arranging a call or meeting, please reach out to The Root Group.
With that, I will now turn the call over for Q and A.
Thank Our first question comes from the line of Louise Chen with Cantor Fitzgerald. Your line is open. Please go ahead.
Hi, thanks. This is Jennifer Kim on for Louise. Congrats on the early Congrats on the early submission. I have two questions. So first, I know you mentioned looking for commercial partners for a Canada and EU launch in 2019.
I was just wondering if you could give any more color on how big the opportunities are in those markets. And then my second question is, just looking ahead, what do you think would be the higher priority following commercialization of DWP? Would it be getting more aesthetic indications for DWP or more focusing on expanding the portfolio into other markets or other assets? And what would that timeline be like? Thanks.
Great and good morning. Thanks for the question. I'll start with your first question related to partners outside of the U. S. And I'll start by saying our focus, as I mentioned earlier, is on getting to the approval in the U.
S. As that is clearly the largest market opportunity. We believe north of $1,000,000,000 in the U. S. Is the dollar value of the toxin market.
In Canada, in particular, we do have a partner by the name of Clarion. Clarion is a distributor of other facial aesthetic products and devices and they've been a great partner to work through the development process and we'll continue to stay close with them as they prepare for the approval and commercialization of DWP450. In Europe, we're actively engaged in assessing partners. And as we make further progress, we'll share that with you. As it relates to the second part to your question, whether it's a focus on expansion of the market or indication expansion, rather expansion of our portfolio versus expansion of future indication, I would say that first, we are committed to building out a world class aesthetic portfolio.
We believe that DWP450 is the anchor brand that we can build around. And we're very confident that we can launch with our anchor brand alone. At the same time, we are constantly assessing the market for high quality assets. And when we have more information surrounding that, we'll certainly share that with all of you. As it relates to additional indications, at this time, we're focused on the launch in the glabellar area.
We've spent time with key opinion leaders and they feel confident in the quality of our science as well as our clinical data that what we have with a glabella indication is sufficient to actively launch this product and promote it and make meaningful impact in this market today. If something changes in the future, we'll certainly share that with you.
Thank you. And our next question comes from the line of Steven Reagor with Mizuho. Your line is open. Please go ahead.
Hey, good morning. Thanks for taking my questions. So with your early expedited response to FDA, can you talk about assumptions around timing of launch? Is it fair to categorize it towards the early part of the spring?
Yes. So as we talked about on the call, we expect to hear back from the FDA in September. That's roughly within their 30 day timeframe that they'll take to assess this filing. And at that time, we expect to get a revised date from the FDA for approval. As we get out to the 30 day mark and we receive that revised date, we'll certainly share that with all of you so that you can plan against that.
And you can expect that shortly within months after, we'll be prepared to commercialize and launch this product.
Great. Thank you.
Thank you. And our next question comes from the line of John Borris with SunTrust. Your line is open. Please go ahead.
Thanks for taking the questions and congrats to you for calling out the CRL and the BLA filing. First question just on OpEx, obviously 14,400,000 in the quarter, a lot higher than we'd anticipated. Just some color on some of the pre launch planning that you've done on that line to date? And then just have a couple of follow ups.
Sure. This is Lauren. Good morning, John. Thanks the comments and questions. Important when you look at the OpEx to peel out about $8,200,000 of contingent royalty obligations due to the founders of the company at low single digits.
And that pulls you back right in line along with total stock based compensation of 2,600,000 dollars When you pull those 2 back, you'll see that our burn rate for the quarter matches the Q1. With regard to pre launch, let me turn it over to David to address some of the activities and things that we've been doing.
Yes. And good morning. Thanks for the question. As I mentioned earlier, our commercial launch strategy, we are actively developing. I think we're working closely with Mike Jafar, and I'm very confident in plans that are coming together and we expect to finalize those here in the very near future.
Simultaneously, we are not slowing down with our engagement around customers. We've actively engaged in multiple advisory board meetings and spent a significant amount of time both in offices as well as on the phone with key customers in this market because we all believe that the best companies have been built around the input of customers. In the end, this company is going to be wrapped around the individual customer and we're going to be thinking about their needs today and we're focused on what the unmet needs are in the market as well. And as we build out our plan, it's going to be built in context of the market as it stands today and those unmet needs.
So just one follow-up then, since you've had some advisory boards, not sure if you've done product concept testing, but what have physicians said about the product and the value it brings? And certainly, how are you thinking about the value in price going forward and potential discount that may be needed to break bundle?
That's another great question. And we have we spent actually just last month, we had an advisory board meeting at the cosmetic boot camp in Colorado. And we had a number of high volume injectors of aesthetic products across the different specialties that were in the room, many of which were being exposed to the Evolus story for the first time and seeing both the U. S. As well as the European clinical data for the product.
And what was consistent as we went around the room with the different attendees was that this is one of the cleanest data sets that they've seen for any product that is entering the market. And that's because when you look at the U. S. Data, the data is reflective of what you would expect to see with the 900 kilodalt molecule in both its duration as well as its safety profile and its predictability. What's more interesting as well is that no other toxin has had the benefit of introducing themselves with comparative clinical data.
And we shared the European trials, which compare DWP-four fifty directly to the market leader and follow patients out for 5 months. And the results that we shared related to that were equally impressive to the attendees. And they left with a high degree of optimism around both the company's platform, which they felt met a void in the market today of a nimble customer centric company and the idea of being aesthetic only, raised the opportunity to do things that are different and unique in this space, things that perhaps companies in the past had done and no longer engage with. That coupled with the comprehensive clinical data from both the U. S.
And the European trial left many attendees feeling that Evolus is a company that could make meaningful impact in this market. And it's exactly what gave me the confidence to join this company and others that have joined the leadership team since. And we look forward to unveiling not just the data that we shared at that advisory board, but unveiling our marketing plans and promotions to the market as we get closer to approval.
Thanks. And again, congrats on the execution on the manufacturing side.
Thanks, John.
Thank you. And our next question comes from the line of Donald Ellis with JMP Securities. Your line is open. Please go ahead.
Thank you. Good morning. I have two questions. First one is for David, second one for Lauren. Regarding the Class I versus Class II, the delta between approvals could be as much as 4 months, Yet you're still forecasting a spring launch.
So other activities that have to be accomplished other than the approval that would drive your spring launch forecast? And then secondly for Lauren, I got your input on Q3 and Q4 OpEx. When should we start thinking about including hiring of a sales force in our models? Thank you.
Great. Thanks, Don, and thanks for joining the call. I'll start with the launch of DWP-four fifty. As you can imagine, ramping up an organization from no commercial infrastructure all the way through to a place where we're a premier aesthetic company is a process. And regardless of the approval date, we're guiding towards the spring 2019 launch of DWP450.
And we're doing that because we know that you only have one opportunity as a company to launch and we want to make sure that launch is high impact and that we're well prepared and that our teams are well trained and well prepared in order to meet the needs of this market. And so we'll wait the FDA's response in 30 days to determine whether it's a Class I or Class II. At the same time, for planning purposes, I would assume that we would be prepared to launch in spring of 2019 regardless of the outcome.
And this is Lauren Don. On the sales force expense, we've said previously that through this year, we are building out our leadership team in sales and marketing first with the hire of Mike Jafar and more to come. And what that team will be doing is all the planning and the prep to put the sales force on board right early next year as we get ready for launch in the spring.
Great. Thank you very much.
You're welcome.
Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to David Moatazedi for any closing remarks. Great.
Well, thank you all for joining the call this morning. We look forward to meeting you over the course of the next few months as Lauren and I spend some time with Rui on the East Coast. And have a great day.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.