By Brian Marckx, CFA
READ THE FULL MYOS RESEARCH REPORT
Q4 2018 Update: Yolked, MYOS Canine Formula Sales Accelerating. Going Into 2019 w/ New Clinical Evidence and Marketing Initiatives…
MYOS RENS Technology (MYOS) reported Q4’18 financial results and provided a business update. Relative to the financials, revenue remains relatively insignificant, although there are signs of some traction on the topline. Revenue from both Yolked and MYOS Canine Muscle Formula, their two lead products which launched in April and June (2018), respectively, reached new quarterly highs in the period. But with the recent shift in focus of efforts and resources towards these two higher-potential products and away from (more) the legacy brands, sales of Qurr and Physician Muscle Health Formula have begun to decelerate.
We expect this trend to continue as MYOS leverages clinical trial evidence in both humans and dogs and expands their presence in Division I and professional sports to drive awareness and uptake of their two lead products. Meanwhile, we think Qurr and Physician Muscle Health Formula will be deemphasized, at least for the near-term, as MYOS remains very diligent towards efficient use of capital and personnel.
In just the last few quarters the company has made what we think is substantial progress towards putting distribution in place and in building brand awareness of MYOS Canine and Yolked. This includes recent distribution agreements with Miller Veterinary Supply East and The Vitamin Shoppe, an endorsement partnership with Aaron Gordon of the Orlando Magic (Feb 2019), securing courtside advertising during nationally televised college basketball games and a presence in college athletic departments.
But perhaps what we find most encouraging is that management continues to stress that the foundation of their growth strategy for their Fortetropin-based products is built around clinical evidence. The most recent data supporting the clinical utility of their products was announced in January and subsequently presented at the North American Veterinary Community (NAVC) / VMX Conference in Orlando. Results (which we discuss below) showed that Fortetropin is associated with a reduction in muscle loss and improvement in overall recovery of dogs that underwent TPLO surgery, which is similar to ACL surgery in humans. This is just the latest data in a growing body of clinical evidence that supports the effectiveness of Fortetropin in reducing muscle loss, increasing lean muscle mass, increasing strength and speeding recovery following surgery.
And MYOS appears determined to further build out their clinical data database. In fact, management noted on the Q4 call that, given the positive results of this Kansas State dog study, that they hope to conduct a (somewhat) similar study in humans – specifically, in patients undergoing total knee replacement surgery. In addition, MYOS indicated that they hope to initiate additional new studies over the coming months.
Q4 2018 revenue was $149k, down 5% yoy (from $157k) but up 126% from Q3’18 (from $66k) and about 24% better than our $120k estimate. Sales of Yolked and MYOS Canine Formula were $89k and $36k, accounting for 60% and 24% of the total, respectively. Both marked new quarterly revenue highs in the period. As the Miller East and The Vitamin Shoppe distribution agreements were penned in November and December, respectively, we think revenue of MYOS’s two lead products may have benefitted (at least to some degree) from initial stocking orders.
Meanwhile, revenue from Qurr, MYOS' consumer-focused Fortetropin-based products (puddings, powders and shakes) which launched in April 2017, was $19k in Q4, the lowest quarterly revenue from that product since its introduction. While Qurr has accounted for a substantial portion of the company’s revenue over the last two years, including 31% in 2017 and 49% in 2018, it appears MYOS is deemphasizing this brand as the company shifts their focus and resources to their Canine Formula and Yolked.
In the 10-K the company notes that they have accelerated the remaining amortization (which was previously set to amortize through 3/2022) associated with the capitalized costs related to building of the Qurr website to 12/31/19, which matches the expiration date of the remaining Qurr inventory. As such, Qurr sales will likely fall off and conclude during the year. However, as Yolked was launched into the consumer market (including via Amazon and The Vitamin Shoppe) in late-2018, we expect this sales channel to remain well represented by MYOS’s Fortetropin products.
Physician Muscle Health Formula, a Fortetropin-based product sold to physicians for their patients which launched in May 2016, generated $5k worth of revenue in Q4. The product had yet to gain much traction, generating just $24k (5% of total) of revenue in 2017 and another $24k (7% of total) in 2018. We expect insignificant revenue from this product going forward and anticipate that it will be discontinued. We think that the physician channel could eventually be reinvigorated with additional human clinical study results – potentially including a planned trial in patients undergoing total knee replacement surgery (discussed below).
For the full year 2018, revenue was $360k, down 32% from $526k in 2017. The contraction relates to sales to Cenegenics Product and Lab Services, which were $200k in 2017 and $0 in 2018. As a reminder, Cenegenics resold the product through their age management centers and related clinicians. While that distribution agreement ended in December 2016, subsequent purchase orders meant this channel remained a significant contributor to revenue in 2017. We do not model any future sales through Cenegenics.
Combined, Yolked and MYOS Canine Formula generated $219k of sales in 2018, accounting for 45% of the total. During the second half of the year, these two products (which, again, launched in April and June 2018, respectively) generated sales of $146k, or 68% of total revenue.
Yolked appears to continue to be well-received with management indicating that the product is receiving positive feedback from both IMG and the universities themselves. Since its launch in April 2018 it has been detailed to collegiate athletic programs through their strategic partnership with IMG College. As a reminder, initially the IMG agreement covers nine Division I colleges (in the NE). Many of the initial schools that they have worked with began a four-month program in July 2018 – while others started in the Fall. In furthering their collegiate sports related awareness-building efforts, MYOS recently announced that Yolked has had a presence at nationally-televised college basketball games with courtside LED signage. Going into the Fall of 2019, Yolked related advertisements will be visible during college football games.
MYOS has also made a move with Yolked into professional sports. In early February the company announced an endorsement deal with Aaron Gordon, a power forward and prolific scorer of the NBA’s Orlando Magic. Gordon will act as a celebrity athlete endorser for Yolked and, per the press release announcing the relationship, “will represent Yolked through a variety of media channels, including social media and traditional formats, and serve as a face of the brand.” Noteworthy is that the announcement, which also mentions that this “is the first major endorsement…but will not be the last”, indicates that additional similar endorsement deals for Yolked could follow.
MYOS is also now tapping the consumer market with Yolked. In late-2018 the company launched Yolked to the consumer market with distribution established through The Vitamin Shoppe. Yolked was in all of their 775 stores by the close of 2018 and can also be purchased on their website. Yolked can also now be purchased on Amazon.com. In furthering their consumer-facing initiatives, MYOS recently updated the yolked.com website and began implementing formal sales and marketing programs aimed at building awareness and increasing sales.
MYOS Canine Muscle Formula, their first Fortetropin-based supplement for dogs launched in June 2018. MYOS has wasted no time in generating early awareness of the product and in expanding their sales reach. MYOS Canine was featured at the Atlantic Coast Veterinary Conference in Atlantic City, NJ in October. In terms of distribution-reach, upon launch the product had its own website and became available on Amazon.com. Then, in November Miller Veterinary Supply East, which (per their website) provides “licensed veterinarians the equipment, instruments, pet food, pharmaceuticals and supplies needed to run their practices”, began carrying MYOS Canine. Miller East affords access to more than 6,000 veterinary hospitals in the eastern U.S.
MYOS Canine is believed to be the first and only evidence-based supplement for supporting muscle health in dogs. MYOS has noted that initial observational studies (including two done at veterinarian hospitals) indicated that their Fortetropin-based supplement may improve mobility. While anecdotal, coupled with positive results of prior studies and highly compelling results of the KSU study (detailed below), the database of evidence continues to grow and fortify.
There is no denying the attractiveness of the domestic pet market. The U.S. pet supplements market is worth approximately $600M and growing rapidly. MYOS has indicated that they expect to leverage the massive growth of the pet-health market. While MYOS Canine Muscle Formula is their first commercial foray into the market, it is not expected to be their last as their intention is to bring additional Fortetropin-based pet products to market. Current customer call-points include veterinarian hospitals, vet practices and direct-to-consumer. Revenue could gain additional traction from the new distribution via Miller East, which came online in Q4’18, as well as from increased awareness as a result of exhibiting and presenting at major veterinarian conferences including the Atlantic Coast Vet conference (October 2018) and the North American Veterinary Community (NAVC) / VMX Conference (January 2019).
Positive Results of Canine Muscle Recovery Study Following Surgery…
In mid-January MYOS announced positive results of a study conducted at Kansas St. University evaluating the ability of their canine Fortetropin formula to reduce muscle loss in dogs following tibial-plateau leveling osteotomy, or TPLO (i.e. surgery after ligament tear), a common procedure for dogs with cranial cruciate ligament rupture (CCLR). According to the Journal of the American Veterinary Medical Association, over one million surgeries involving the knee are performed on dogs each year. CCLR is the most common cause of lameness in dogs and one that pet owners are estimated to spend over $1.5B per year to treat (the majority of which relates to surgery).
As the leg must be immobilized for weeks following TPLO, muscle loss is a common complication of the procedure. Muscle atrophy is typically evident within two weeks following surgery. And while studies have shown that muscle mass generally begins to return by the fourth week into recovery, significant atrophy remains by week eight. Other studies have shown that affected limbs (i.e. those surgically repaired) maintained just 60% of their muscle mass (as compared to the unaffected limbs) 10 weeks into recovery (chart below) and many dogs show residual muscle atrophy even one year following surgery.
View Exhibit I
As results of this Kansas St study show, MYOS’s Canine Formula appears to significantly reduce this muscle loss common among dogs that undergo TPLO. The double-blinded study included 100 dogs, 50 of which received daily Fortetropin, with the other 50 receiving a macronutrient-matched placebo (i.e. daily cheese powder). The dogs were evaluated on change in muscle mass of the affected and unaffected limbs, as measured by thigh circumference, and change in weight-bearing capacity – both of which are well-established endpoints in TPLO studies. Serum myostatin levels were also evaluated.
The dogs underwent forced exercise restriction during the first eight weeks following surgery. This was followed by a gradual return to activity during weeks 9 through 12. Measurements were taken at baseline, week 8 and week 12. Significance was set at p<0.1.
Topline results were announced in a press release on January 15th and, later that same month, the full results were presented by Ken Harkin, Professor & Section Head, Kansas State University College of Veterinary Medicine, at the North American Veterinary Community (NAVC) / VMX Conference in Orlando.
Results showed that;
- Fortetropin prevented loss of muscle mass of the affected limb as measured by the thigh circumference in their affected and unaffected limbs. While there was no statistically different change in thigh circumference (of both the affected and unaffected limbs) of dogs that received Fortetropin, there was a statistically significant decrease in thigh circumference (of both the affected and unaffected limbs) among dogs that received placebo
- Fortetropin-supplemented dogs had a statistically significant greater improvement in the percentage of weight supported by the affected limb as determined by force plate stance analysis (i.e. a more rapid return to normal stance force distribution) as compared to the placebo group from week 0 to week 8 (i.e. during period of exercise restriction)
- Fortetropin prevented a rise in levels of serum myostatin, which is a protein that prevents muscle growth. While there was no statistically significant change in serum myostatin levels among dogs that received Fortetropin, there was a statistically significant increase (from week 0 to week 8 and from week 0 to week 12) in serum myostatin levels among dogs in the placebo group
MYOS also noted that there was significant interest in the results from attendees of VMX, which is one of the largest veterinary conferences in the world and attracted over 700 exhibitors last weekend. We think that these results significantly bolster the effectiveness claims of MYOS Canine Formula, which is believed to be the first and only evidence-based supplement for supporting muscle health in dogs. As such, we expect that this most recent study data will likely account for a significant portion of MYOS’ marketing message.
Readying for human study in total knee replacement surgery…
As we noted in our update following announcement of the Kansas St study results, given that TPLO recovery in dogs has significant crossover to muscle atrophy experienced by humans following certain orthopedic surgeries, such as ACL repair, we opined that these results could also play a role in helping to guide a similar clinical development program in humans. For example, studies have shown that some muscle fibers of the affected limb may never fully recover following ACL surgery in humans, resulting in chronic loss of quadriceps strength. At the time we noted that we expected to hear more about MYOS’ plans for leveraging these Kansas State results for potentially guiding additional human clinical programs.
It was not a long wait as management noted on the Q4 call in late-March 2019 that these Kansas State TPLO results have facilitated their interest in conducting a (somewhat) similar study in humans – specifically, in patients undergoing total knee replacement surgery. The goal will be to demonstrate that Fortetropin supplementation can reduce total recovery time and facilitate rehabilitation. While still in the early stages, management noted that they hope to announce initial details of the planned study in the coming weeks.
In addition to the recently completed Kansas State study and the anticipated human knee replacement study, MYOS’s recent product development efforts have included collaborations with the University of Berkeley, Weill Cornell Medical College and Rutgers University. In addition to these (detailed below), MYOS is looking to add additional preclinical and clinical studies in their ongoing quest to continue to build their Fortetropin evidence database.
- The study at the University of Berkeley aims to understand the impact of Fortetropin on the rate at which new muscle is synthesized in men and women between 60 and 75 years of age. Positive results from the study could help bolster sales of MYOS’ product in the future. MYOS anticipates the study completing in Q2 of this year.
- In May 2018 MYOS contracted with Weill Cornell Medical College for a preclinical study to evaluate Fortetropin in preventing weight and muscle loss associated with lung cancer. Unfortunately, per an update in the 2018 10-K, results did not show that Fortetropin had a significant impact on cancer-related weight and muscle loss and as such, MYOS has decided to not pursue future cachexia-related studies. As outcomes of this study had no consequences on our model, it does not affect our outlook or price target.
- In March 2018 MYOS entered into a research agreement with Rutgers University to develop product candidates for preventing muscle loss (resulting from sarcopenia and cachexia) and improving muscle health. The program is led by Joseph W. Freeman, Ph.D., an Associate Professor in the Department of Biomedical Engineering at Rutgers. Dr. Freeman is also part of the University's Musculoskeletal Tissue Regeneration (MoTR) laboratory which focuses on developing engineering techniques to repair and regenerate musculoskeletal tissue. As of the Q2 call (August 2018) management’s guidance was for patient screening to begin shortly and, assuming all went well, for initial data to be available sometime in 2019. Since then the company has not provided updated guidance.
MYOS continues successfully raise operating funds. Recently this included the sale of ~1.5M common shares at an average price of ~$1.49 for $2.3M in gross proceeds. Joe Mannello (MYOS’ CEO) also recently agreed to lend up to $1M in exchange for a 5%, one-year (matures 8/31/19) unsecured promissory note ($1M funded as of year-end 2018. Subsequently, $250k of this was converted to common stock). An in January 2019 MYOS received $1.1M from the sale of its net operating losses through the State of NJ Economic Development Authority.
Maintaining $3.50/Share Price Target…
We have made adjustments to our model following Q4 results. We continue to look for gradual revenue growth over the near term but for that to accelerate as awareness builds of the clinical and real-life benefits of Fortetropin on muscle health (in both humans and pets). The Kansas State TPLO results have the potential to facilitate MYOS’s overall marketing message as it relates to the proven benefits of Fortetropin as well as bolster the revenue curve of MYOS Canine Muscle Formula. Positive outcomes of a total knee replacement study (currently in the planning phase) could be a significant catalyst to helping to drive adoption among medical nutrition channels. As such we will be eager to hear updates on the progress of this endeavor.
Meanwhile, beefed-up distribution and new marketing initiatives should benefit sales of Yolked. Celebrity athlete endorsements, The Vitamin Shoppe distribution channel and additional presence in collegiate and professional sports should help to define Yolked’s brand. This, along with clinical evidence should aid in separating Yolked from plethora of protein powders and other supplements that largely lack the efficacy-related evidence that Fortetropin does. While these awareness and brand-building initiatives can take time to resonate with consumers, we think these efforts have the potential to carve out Yolked in a niche by itself and to drive revenue for the long term.
We continue to be highly encouraged by management’s evidence-based approach towards messaging and product development and, assuming positive results from ongoing (and future) studies, would expect this strategy to result in long-term growth in both revenue and shareholder value.
We incorporate a discount rate of 15% and 2% terminal growth rate. We value MYOS at approximately $3.50/share. This valuation provides more than 100% upside to the current trading price of $1.57/share.
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