Oculus Innovative Sciences (OCLS)

Yet Another Consecutive Record Sales Quarter
Margins Improve to 80% Due to Increased Royalty Rate
Seasonality to Affect Sales Next Quarter 

Download Full 16-Page Report with Important Disclosures: OCLS Update 11-09-11

1.) Record Sales in FYQ2 following Record Q1 and Record FY 2011: Oculus reported record top line revenues of $3.7M for FYQ2’12. This follows Q1 record revenues of $2.9M and total FY2011 record revenues of $9.8M. The 49% increase Q/Q in product revenue (3.4M vs. 2.3M) was primarily due to the royalty rate increase from partner Innovacyn from 20% to approximately 30% on July 1st for the Vetericyn® animal health and Puracyn® OTC human product lines.

2.) Significant Margin Improvement: Oculus reported record gross margins of 80% for FYQ2 (versus 66% in Q1), mostly attributable to the increase in royalty rates from partner Innovacyn. The company has guided gross margins going forward in the 75% range due to seasonality.

3.) Seasonality and Guidance: Investors should note that top line sales and gross margins will experience seasonal fluctuations as the equine animal health business decreases during the winter months. To mitigate this, the company is working on expanding its companion animal (cats and dogs) presence as well as the development of new products for animal livestock that are less correlated to seasonal changes. For the upcoming FYQ3 (Dec. 31) Oculus management guided revenue in the $2.6M range, EBITDA in the $1.4M range and cash operating expenses in the $3M range. For the Innovacyn group the company reduced the original 70%-90% growth to 50%-70% while increasing guidance for the international market from 10-25% growth to 15%-30%. Oculus is maintaining their guidance for the US prescription group of 50%-100% and the total product revenue of 40%-80%.

4.) Partnerships Launching New Products: In the United States alone, Oculus has six product launches that are either underway or scheduled to begin by the end of the year. These product launches include Microcyn®-based products for dermatology, veterinary, podiatry, and wound care markets.

5.) New R&D and Growth Initiatives: Management has expressed interest in expanding into new markets with Microcyn®-based products including surgical and urinary tract infection indications. Management has also indicated that they are pursuing the development of new healthcare technologies other than Microcyn, either externally or through internal development. During FYQ2’11 Oculus licensed global rights for an endotracheal tube from the National Institutes of Health (NIH) designed to reduce ventilator-associated pneumonia. Investors should note that while this product is not included in our model, it could represent additional value in the future. Oculus is continuing to work with the FDA on both scar and allergen indications, and Oculus’s partner, OroSciences is continuing to work with the FDA on multiple oral applications of Microcyn®-based products.

6.) Undervalued Stock: We believe shares of Oculus Innovative Sciences are undervalued and are maintaining Oculus with a Strong Buy rating and a 12-18 month Price Target of $4.75. Our valuation is based on a 35x multiple on projected fiscal year 2014 EPS and discounted 15% for cumulative risk.

Download Full 16-Page Report with Important Disclosures: OCLS Update 11-09-11

Trend of Consecutive Sales Records Continues
Innovacyn Animal Health Royalties Increased July 1st
More New Partnerships and Growth Initiatives 

Download Full 16-Page Update with Important Disclosures: OCLS Update 08-12-11

1.) Record Sales Q1 FY2012 following Record Q4 and Record FY 2011 Revenues: Oculus reported record top line revenues of $2.9M for Q1 FY 2012. This follows 2011 FYQ4 record revenues of $2.7M and total FY2011 record revenues of $9.8M. The Company has also guided to over $3.0M in revenues for Q2 and between 40%-80% revenue growth for FY2012.

2.) Animal Health Royalties Rate Increased: Oculus’ royalty rate from partner Innovacyn increased from 20% to approximately 30% on July 1st for the Vetericyn® animal health and Puracyn® OTC human product lines. This represents approximately a 50% increase in royalty payments to Oculus. Revenues paid to Oculus by Innovacyn in Q1 FY2012 were $563K while material benefits from the rate increase are expected to begin in Q2.

3.) More New Partnerships: Oculus has signed an agreement with Eloquest Healthcare (subsidiary of Ferndale Pharma Group) for the use of Microcyn® based products for negative pressure wound therapy. Products will be marketed under the Eloquest name and product launch is anticipated to begin in early 2012. Additionaly, Oculus signed partnerships with Amneal for podiatry, Amneal affiliate Quinnova for atopic dermatitis hydrogel and Amneal affiliate AmDerma for acne. (see Distribution Agreements)

4.) Partnerships to Bring New Products to Market: In the United States alone, Oculus has six product launches that are either underway or schedule to begin by the end of the year. These launches include Microcyn®-based products for dermatology, veterinary, podiatry, and wound care markets.

5.) New R&D and Growth Initiatives: Management has expressed interest in expanding into new markets with Microcyn® based products including surgical and urinary tract infection indications. Management has also indicated that they are pursuing the development of new healthcare technologies other than Microcyn® either externally or through internal development. Oculus is continuing to work with the FDA on both scar and allergen indications, and Oculus’s partner, OroSciences is continuing to work with the FDA on multiple oral applications of Microcyn® based products.

6.) Undervalued Stock: We believe shares of Oculus Innovative Sciences are undervalued and are maintaining Oculus with a Strong Buy rating and a 12-18 month Price Target of $4.75. Our valuation is based on a 35x multiple on projected fiscal year 2014 EPS and discounted 15% for cumulative risk.

Download Full 16-Page Update with Important Disclosures: OCLS Update 08-12-11

Union Springs MyClyns Receives FDA Warning for Drug Claims
Not a Major Growth Driver for Oculus Financial Performance

Download Full Report with Important Disclosures: Morning Note 07-07-11 OCLS

Oculus partner Union Springs was recently issued an FDA warning letter for their “MyClyns Personal Protection Spray”, sold over-the-counter to consumers, for making drug-like claims such as preventing Methicillin Resistant Staphylococcus Aureus (MRSA), Human Immunodeficiency Virus (HIV) and Hepatitis C which have not been approved by the FDA. Investors should note that Oculus’ royalties from Union Springs are not a major growth driver. The FDA letter can be found at: http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm256752.htm

Oculus Innovative Sciences has a number of Microcyn® products that have received U.S. FDA 510(k) medical device clearance for use by healthcare professionals. We also believe this demonstrates the capabilities of the Oculus management team in successfully navigating the regulatory pathway. 

The U.S. FDA has cleared the various Microcyn® products for a number of different indications for use by healthcare professionals as shown below:

AmDerma Exercises License Option for Oculus Microcyn-Based Acne Candidate

Download Full Report with Important Disclosures:  Morning Note 06-28-11 OCLS

Oculus announced that AmDerma Pharmaceuticals, the parent company of Quinnova Pharmaceuticals, an alliance member of Amneal Enterprises, has exercised its option to license rights to Oculus’ Microcyn-based acne drug candidate, which they had previously paid $500,000 for option rights that expired on June 30th. AmDerma and Oculus expect to finalize the terms of the license agreement within 45-60 days.

This was part of the broad agreement with Amneal and its affiliates on February 15, 2011 which also included:

1.) Quinnova Pharmaceuticals, licensing, with a $500,000 prepayment and ongoing double-digit royalties, the U.S. and Canadian rights to their FDA cleared, Microcyn™-based dermatology atopic dermatitis hydrogel. Future prescription formulation dermatology products will also be licensed for undisclosed upfront payments.

2.) An agreement that Amneal will co-promote the current prescription formulations of Microcyn™-based wound care products to podiatry professionals in the United States and Canada.

About Amneal Enterprises:
Amneal Enterprises is an alliance of independent businesses, each strategically aligned based on its ability to bring significant value and tremendous growth potential to the group as well as each of its members. In this way, Amneal Enterprises continues to grow aggressively yet intelligently and in keeping with the group’s strategic plan. Though each company operates independently, working together Amneal Enterprises can leverage the value across the alliance for exponential advancement of the venture as a whole while enabling more dynamic growth for each individual business. More information can be found at http://www.amnealenterprises.com

Investment Summary

1.) Record Q4 and Record FYE 2011 Revenues: Oculus finished FYQ4 with a record $2.7M in revenues, up 24% from FYQ4’10. FY2011 revenues also set a record for the company at $7.8M, up 32% over FY2010.

2.) Animal Health Royalties to Increase: Oculus’ royalty rate from partner Innovacyn will increase from 20% to 30% commencing on July 1st for the Vetericyn® animal health and Puracyn® OTC human product lines. This will represent a 50% increase royalty payments to Oculus.

3.) New Partnerships: Oculus signed new partnerships with Amneal for podiatry, Amneal affiliate Quinnova for atopic dermatitis hydrogel and Amneal affiliate AmDerma for acne. (see Distribution Agreements)

4.) Strong FDA Pipeline: On February 8th, Oculus received FDA 510(k) clearance for Atopic Dermatitis HydroGel. Other indications awaiting FDA clearance are Scar Treatment HydroGel, Oral Rinse/Oral Mucositis Formulations and Allergen Shield. If approved, we would expect these indications to yield strong gross margins when launched in the U.S. (see Milestones & Events)

5.) Strong Management Guidance: Oculus management re-affirmed guidance for sales revenues of $45-$60 million by calendar year 2013 with 20% operating profitability. (see Financial Model & Valuation)

6.) Undervalued Stock: We believe shares of Oculus Innovative Sciences are undervalued and are maintaining Oculus with a Strong Buy rating and a 12-18 month Price Target of $4.75. Our valuation is based on a 35x multiple on projected fiscal year 2014 EPS and discounted 15% for cumulative risk.

Download Full Report with Important Disclosures:  Morning Note 06-28-11 OCLS