Obagi Medical Products Inc. Reports Operating Results (10-Q)

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Aug 09, 2010
Obagi Medical Products Inc. (OMPI, Financial) filed Quarterly Report for the period ended 2010-06-30.

Obagi Medical Products Inc. has a market cap of $234.67 million; its shares were traded at around $10.69 with a P/E ratio of 16.45 and P/S ratio of 2.25. OMPI is in the portfolios of Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

Economy. Many treatments in which our products are used are considered cosmetic in nature, are typically paid for by the patient out of disposable income and are generally not subject to reimbursement by third-party payors such as health insurance organizations. As a result, we believe that our current and future sales growth may be influenced by the economic conditions within the geographic markets in which we sell our products. During the first three quarters of the year ended December 31, 2009, the economic conditions within the U.S. had a negative impact on our revenue growth performance. Although we experienced improvement in revenue growth in the fourth quarter of 2009 and the first and second quarters of 2010, with net sales of $30.7 million, $25.7 million and $28.9 million, respectively, as compared to net sales of $25.4 million, $22.6 million and $25.9 million for the fourth quarter of 2008 and

Physician-dispensed sales increased $3.2 million to $27.8 million during the three months ended June 30, 2010, as compared to $24.6 million during the three months ended June 30, 2009. Over 50% of the growth experienced during the three months ended June 30, 2010 was due to an increase in volume of our core product offerings. We experienced an increase in the majority of our product categories as follows: (i) an increase in Nu-Derm sales of $1.4 million; (ii) an increase in Vitamin C sales of $1.3 million, of which $0.4 million is attributable to our normal to oily line extension of Obagi C-Rx launched in January 2010; (iii) an increase in Elasticity sales of $0.3 million; and (iv) an increase in the Other category of $0.3 million. The growth in the Other category was primarily attributable to the launch of Refissa in September 2009, which contributed $0.4 million. These increases were partially offset by a decrease in the Therapeutic category of $0.1 million. The decline in the Therapeutic category was primarily due to the increased promotional activity surrounding the launch of our Rosaclear product in January 2009 and our exit of the pharmacy channel in April 2009. Licensing fees decreased by $0.2 million due to decline in unit sales by our Japanese partner Rohto during the three months ended June 30, 2010.

Our aggregate sales growth was primarily composed of a $3.4 million increase in U.S. sales, offset in part by a decline of $0.4 million from our International markets and licensing fees. The decline in International sales was primarily in the Elasticity, Other and Nu-Derm product categories and was principally a result of decreases in the Far East and the Middle East regions of $0.3 million and a $0.2 million, respectively; these declines were partially offset by increases in Europe and Other and the Americas regions of $0.2 million and $0.1 million, respectively. As noted above, our licensing fees decreased $0.2 million.

Selling, general and administrative. Selling, general and administrative expenses consist primarily of salaries and other personnel-related costs, professional fees, insurance costs, stock-based compensation, depreciation and amortization not attributable to products sold, warehousing costs, advertising, travel expense and other selling expenses. Selling, general and administrative expenses increased $1.7 million to $16.5 million during the three months ended June 30, 2010, as compared to $14.8 million for the three months ended June 30, 2009. This increase was primarily due to the following: (i) a $1.2 million increase in professional fees, consisting primarily of legal fees; (ii) a $0.5 million increase in bad debt expense primarily related to a non-performing international distributor; (iii) a $0.5 million increase in other marketing expenses; (iv) a $0.2 million increase in other expenses; (v) a $0.1 million increase in advertising expenses; and (vi) a $0.1 million increase in expenses related to our third party logistics provider. These increases were partially offset by: (i) a $0.7 million decrease in SoluCLENZ-related expenses as a result of our exit from the pharmacy channel, which includes $0.4 million in contract termination costs and $0.3 million due to the wind-down of distribution and support of the product in the pharmacy channel; (ii) a $0.1 million decrease in noncash compensation; and (iii) a $0.1 million decrease in depreciation and amortization. As a percentage of net sales, selling, general and administrative expense was 57% for each of the three-month periods ended June 30, 2010 and 2009.

Interest income and Interest expense. Interest income declined to $29,000 for the three months ended June 30, 2010 from $53,000 for the three months ended June 30, 2009. We earn interest income from the investment of our cash balance into higher interest-yielding certificates of deposit. Although our average cash and cash equivalents, including short-term investments, increased from $22.8 million for the three months ended June 30, 2009 to $40.6 million for the three months ended June 30, 2010, our weighted average interest rate decreased from 0.86% during the three months ended June 30, 2009 to 0.28% during the three months ended June 30, 2010. Interest expense was $2,000 during the three months ended June 30, 2010, as compared to $18,000 for the three months ended June 30, 2009.

Physician-dispensed sales increased $6.1 million, to $52.6 million during the six months ended June 30, 2010, as compared to $46.5 million during the six months ended June 30, 2009. Over 30% of the growth experienced during the six months ended June 30, 2010 was due to an increase in volume of our core product offerings. We experienced an increase in the majority of our product categories as follows: (i) an increase in Vitamin C sales of $2.6 million, of which $1.0 million is attributable to our normal to oily line extension of Obagi C-Rx launched in January 2010; (ii) an increase in Nu-Derm sales of $2.4 million; (iii) an increase in the Other category of $1.3 million; and (iv) an increase in Elasticity sales of $1.0 million. The growth in the Other category was primarily attributable to the launch of Refissa in September 2009, which contributed $1.0 million. These increases were partially offset by a decrease in the Therapeutic category of $1.2 million. The decline in the Therapeutic category was primarily due to the increased promotional activity surrounding the launch of our Rosaclear product in January 2009 and our exit of the pharmacy channel in April 2009. Licensing fees remained fairly flat at $2.0 million during the six months ended June 30, 2010, as compared to the six months ended June 30, 2009.

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