REDONDO BEACH, CA / ACCESSWIRE / August 5, 2015 / Earnings season is in full swing again and just like every other quarter, Wall Street is evaluating a deluge of data, including performances of turnaround stocks to see if new business models are working or not. Not every turnaround stock is successful as Circuit City can attest, but others like Rite Aid (NYSE: RAD) and Sirius (NASDAQ: SIRI) show how a company can recover from the brink to deliver big returns for investors. To that point, investors pay close attention to quarterly reports from value plays with turnaround potential, such as Accuride Corp. (NYSE: ACW) and Oculus Innovative Science (NASDAQ: OCLS), for recent results and future expectations.
Oculus Innovative Sciences, a specialty pharma that develops and markets solutions for the treatment of dermatological conditions and advanced tissue care, made a move in 2014 to spin out its infection drug candidate RUT58-60 into a new public company called Ruthigen. Simultaneously, Oculus revamped its board and executive team while making the decision to focus its strategy on the global dermatology market. Incidentally, Ruthigen didn't spend a long time as a public entity, reverse merging with drug delivery company Pulmatrix (NASDAQ: PULM) in June with Pulmatrix being the surviving entity.
The spinout worked out for Oculus, which banked millions of dollars selling its stake in Ruthigen as part of the terms of the merger with Pulmatrix. The cash has been put to good use, keeping Oculus essentially debt free as it executes on the early stages of its new plan. The changes have included Oculus ending the partnership with Innovacyn, taking its animal healthcare business back under its own umbrella and hiring its own sales force to market Oculus' portfolio of Microcyn-based products. By ending the relationship with Innovacyn, Oculus made the conscious decision to allow its animal healthcare business sales to end in order to restructure its sales channels with greater corporate control to maximize future revenue. Another change that was outside the power of Oculus, but certainly will benefit the company was the acquisition of More Pharma, Oculus' distributor in Mexico, by Laboratorios Sanfer. Sanfer is much larger and commands a presence throughout all of Latin America.
The effect of the new strategy began to show in the final quarter of fiscal 2015 ended March 31, 2015, when total revenue climbed to $4.0 million from $2.9 million in the year prior quarter. The sweeping changes in partners had different impacts inside the headline number, as Sanfer stocked up on product, bolstering revenue in Mexico, but royalty revenue on animal healthcare products sunk because of the termination of the agreement with Innovacyn.
Last week Oculus released its results from the first quarter of fiscal 2016 ended June 30, again demonstrating that its new model should provide durable growth. Total revenue was $3.7 million, a gain of 8 percent from $3.4 million in the comparable quarter of fiscal 2015. Product revenue increased to $2.92 million from $2.12 million. Importantly, sales in Oculus' primary markets of the U.S. and Mexico led the gains. Sales in the U.S. improved to $787,000 in the latest quarter versus $355,000 in the year earlier quarter, signaling that the company's sales force is penetrating the market. In Mexico, Sanfer's expanded reach helped product revenue climb 43 percent to $1.6 million, despite an 18 percent decline in the value of a peso. On a constant currency basis, product revenue growth was up 68 percent.
Product sales in Europe and the rest of the world slid 15 percent to $571,000, impacted by the 23 percent plunge in the euro. Revenue from product licensing and royalties were cut to $447,000 from $1.05 million, owing to relationship with Innovacyn ending.
Net loss expanded to $2.3 million, or 15 cents per share, from $70,000 a year earlier, which benefited from a $1.5 million gain related to derivative liabilities. With more corporate boots on the ground selling product and increased marketing efforts, the widening loss should be expected until a leveling effect comes into play from the growing top line sales.
Oculus ended the quarter with $8.8 million in cash and cash equivalents, giving it plenty of cash to move forward for several quarters without any need for dilution.
The first quarter performance equates to a revenue run rate for fiscal 2016 of $14.8 million, which will top the $13.9 million in fiscal 2015. A look at the growth in the U.S. and Mexico and the number or prescriptions being written for its two newest dermatology products, Alevicyn and Celacyn, provide metrics that would suggest total sales could actually eclipse that run rate. Prescription growth has been strong, as discussed in the quarterly conference call, rising from about 1,300 units in Q3 fiscal 2015 to 4,400 in Q4 to 7,000 units in Q1 fiscal 2016. Moreover, Oculus CFO and COO Bob Miller said that June prescriptions were about 2,700, which implies a quarterly pace of 8,100. Further, Oculus said that it has been able to increase the price for three of its U.S. dermatology products with "zero impact" on unit growth.
There was a confounding snap reaction downward upon the release of the results from the quarter, even though revenue was essentially in line with consensus expectations. The drop pulled down the OCLS market capitalization to $19.48 million, or a little over 2x cash, arguably a low valuation for a company expanding the top line. It is notably low considering that dermatology companies that have been acquired in the past seven years command valuations of 5 to 6 times revenue.
Oculus is certainly not over its skis at this point and as a turnaround story is producing meaningful improvements in short order. Many of the comparative figures are actually better than they appear because they are veiled by the previous agreement with Innovacyn. The market also doesn't seem to be accounting for at least two new product launches in dermatology expected by the end of 2015 that will drive new sales. With a number of catalysts ahead and a driven management team reinvigorating sales, it looks like a course is set for a productive second half of the year.
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SOURCE: Emerging Growth LLC
