Time to Take Another Look at Oculus Innovative Sciences

Five years ago, several analysts were covering Oculus Innovative Sciences OCLS with favorable ratings (i.e. "buy," "market outperform," etc.), but things have changed as the stock price slid from the area of $20 per share to now under $1.00 per share. With that, analyst coverage of OCLS is now very thin. In short, the company needed a change in business strategy to right the ship, revitalize sales and margins and more efficiently control spending in a bid to win back positive attention on Wall Street. In the past two years, Oculus Innovative Sciences has taken those steps and it is time to take a look at where the company is today and where it is heading.

In March 2014, Oculus spun-out its biotechnology business, with the newly formed surgical drug company Ruthigen, Inc. RTGN handling research and development of RUT58-60 as a biopharmaceutical agent while Oculus maintained its flagship Microcyn® (a pH neutral solution of hypochlorous acid) technology for drug and device indications. The Microcyn® franchise of topical dermatology and advanced tissue care products for human and animal applications has been Oculus' backbone since inception, with products now sold in 37 countries under 10 different FDA approvals and 10 CE Marks (European regulatory approval) with 45 issued patents and more than 90 patents pending. Utilized for its anti-inflammatory, anti-itch, anti-pain, anti-scarring, antimicrobial and healing properties, more than five million patients have been treated with Microcyn® products with an impeccable safety profile of zero serious adverse events.

As part of the spin-off, former Oculus chief executive officer Hoji Alimi took the top executive position at Ruthigen and Oculus Chief Operating Officer Jim Schutz assumed the roles of CEO and president at Oculus and kept his seat on a newly compiled board of directors. Oculus is still the largest individual shareholder in Ruthigen with a 42 percent stake.

The appointment of Schutz, a lawyer by training with a successful background in business development and commercialization in the life sciences industry, to CEO at Oculus represented a turning point for a company that needed a sustainable plan for growth. To add some color to Schutz's experience, he was previously the general counsel of Jomed, where in 2003 he orchestrated the sale of Jomed's coronary and peripheral interventional business to Abbott Laboratories ABT for about $88 million and Jomed's global IVUS and Functional Measurement businesses to Volcano Therapeutics VOLC for an undisclosed amount. Incidentally, Royal Philips PHG recently acquired Volcano in a deal with a transaction value of approximately $1.2 billion.

SECFilings TV Interview with Mr. James Schutz / CEO of Oculus Innovative Sciences (OCLS) from TDM Financial

In this video interview with SECFilings TV, Schutz explains that he and Oculus CFO Bob Miller deliberated extensively about a more effective use of funds and a direction for the company to move forward. The conclusion was the therapeutic area of dermatology as the best pathway to grow shareholder value. As described by Schutz, before he took over as CEO, the company was "a mile wide and an inch deep" and had a partner for every product and indication. The business model needed consolidation conducive to vertical expansion, not just horizontal; a task management has undertaken with a new board of seasoned vets in sales, marketing, execution and dermatology.

Of course, partnerships do have proven benefits and are necessary in many applications, but they also have limitations as well, namely control. As discussed in the most recent quarter's conference call, Oculus is scrapping some of its domestic sales partnerships as contracts expire and has built a team of 20 direct, field sales people and nine inside sales people initially focused on specific high-volume regions as delineated by culling sales and prescription data. Internationally, Oculus still plans to use the sales talents of partners on a country-by-country basis, with oversight from full-time Oculus employees. Looking at the company's animal healthcare market, two new partnerships have been forged for legacy offerings and the recent launch of MicrocynAH® products. Oculus is aiming for diversified sales channels on this front, not disclosing partners names, but saying that one is more focused on mass distribution to retailers like Wal-Mart WMT and the other focused on the pet specialty markets, such as Petco and PetSmart PETM.

Even with the more succinct scope, the market opportunity is tremendous and generally comes with wide margins and quick ramp-up time. Research specialist GlobalData estimated in November 2013 that atopic dermatitis therapeutic sales in the nine major global markets will increase from $3.9 billion in 2012 to $5.6 billion by 2022. Scars are big business as well with more than 40 million surgical skin procedures occurring annually in the United States alone. The American Society of Plastic Surgeons said that 15.1 million cosmetic surgery procedures and 5.7 million reconstructive surgery procedures were performed in 2013. These figures go without mentioning the animal care business opportunity, but for brevity's sake, the markets are quite large, to say the least.

For its dermatology initiatives, Oculus launched its IntraDerm Pharmaceuticals division early this year, led by a veteran dermatology sales and marketing team. IntraDerm's first U.S. products are Alevicyn™ Antipruritic Gel, for treatment of atopic dermatitis to reduce itch, and Alevicyn™ Dermal Spray, for treatment of such procedures as skin cancer removal to heal and protect against infection . January sales of Alevicyn™, which was launched in Q4, have already exceeded projections. IntraDerm is also bringing to market Celacyn™ Prescription Scar Management Gel, with plans for a commercial launch next month. Celacyn™ is the first and only prescription therapeutic for scar management in the U.S., giving it a unique position to capture market share, especially given the fact that it is a non-steroid-based product. Four products for treatment of acne, atopic dermatitis and skin procedures were commercialized late in the fourth quarter under the IntraDerm Pharmaceuticals EU banner and the Celacyn™ launch in Europe is expected this spring.

With a market valuation less than $12 million, Schutz is not afraid to label Oculus as undervalued, citing several factors in his math. In fact, he purchased shares in November at $1.78 each. For starters, Oculus has no debt and ended 2014 with $2.2 million in cash before raising $5.3 million via a public offering early this year. Oculus also expects a $1.5 million milestone payment from Ruthigen in the next few months and has the conditional opportunity to sell two million shares of RTGN to current Ruthigen shareholders for $5.5 million dependent upon Ruthigen executing a potential merger transaction. If that all came to fruition tomorrow, that would total $14.5 million versus the current $11.8 million market cap. In fairness, $7.0 million is still speculative (although it seems just a matter of months before Ruthigen enrolls the last patient in the Phase 1/2 study, which started enrollment in November 2014, to trigger the $1.5 million payment) and burn rate isn't calculated into that total. But neither is revenue, which is running about $3.2 million per quarter on average and expected to experience double-digit growth for the coming fiscal year.

Schutz makes a point that is hard to argue with; now it's a matter of the expectations falling into line and seeing if Wall Street analysts start re-visiting the new version of Oculus Innovative Sciences.

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