Dr. Zein Obagi made his name developing and marketing rejuvenation products that do a better job penetrating skin than typical department store potions.
Now, after developing a big following among cosmetic surgeons, the Beverly Hills dermatologist is hoping that his pharmaceutical-grade skin lightening, peeling and other products will draw an even wider customer base.
And that goal may not be out of reach, as the private company he founded in the 1980s Obagi Medical Products Inc. enters its first year as a publicly traded corporation.
Obagi has new products appealing to dermatologists and other doctors, additional offerings in its core lines and recent clinical data supporting claims of efficacy. As such, it has set its sights on a public profile similar to that of Allergan Inc., the Irvine maker of the hugely successful wrinkle relaxer Botox.
"It's truly turned out as I envisioned when I set out to create science-based products that would improve the cellular function of the skin," said Dr. Obagi, who no longer serves on the company's board but is a paid advisor and is the second largest shareholder with 18.6 percent of outstanding shares.
The celebrity dermatologist now operates three skin care clinics independent of the corporation, including the recently expanded Obagi Skin Care Institute in Beverly Hills, where the corporation leases space for its marketing and physician training center.
Obagi targets the physician-dispensed cosmeceuticals segment of the $20 billion facial skin care market. Products are marketed to doctors as high-margin additional income for their practices. The products are priced to be competitive with department store lines.
Obagi's flagship Nu-Derm system of over-the-counter and prescription skin lightening products is considered the market leader, generating $53.2 million in product revenue last year.
However, the line is 19 years old and still accounted for 70 percent of the company's $73.9 million in product revenue last year, with sales growing 23 percent in the fourth quarter alone. And though the company had diversified into Vitamin C, Retin-A and chemical skin peel products over the years it has been seen as badly in need of diversification.
Now, Obagi is expanding at a time when aging baby boomers are increasingly sophisticated about the options for preserving the appearance of youth and willing to spend a premium to achieve it.
It's entered the fiercely competitive $2.2 billion topical acne treatment market, dominated by mass market brands such as Neutrogena and premium lines such as Perricone and Murad. Obagi hopes to make its best inroads with dermatologists seeking a study-backed product they can sell in their offices.
The Clenziderm MD line, which launched in February, features the standard three-step system made popular by infomercial-marketed Proactiv, but utilizes patent-pending technology that enables benzoyl peroxide to penetrate deeper into the pores rather than just sitting on the surface of the skin.
Likewise, Elastiderm eye cream and gel, which started rolling out in the fourth quarter, boasts a patent-pending penetrating mineral complex that purports to do more than just plump the skin to reduce wrinkles.
Both launches included features that Chief Executive Steve Carlson considered essential to the company's growth prospects: intellectual property protection and clinical trial data, even though the products do not require Food and Drug Administration approval.
"Obagi had this great Nu Derm technology, but not a significant amount of intellectual property and had not done a lot of clinical studies," Carlson said. "Plastics surgeons are OK with before and after pictures. Dermatologists want to see the data."
The company also is expanding the markets for its core lines. The Obagi Condition and Enhance System launched last July. It repackages its Nu-Derm skin care, Vitamin C, lightening and exfoliation products for use before and after cosmetic procedures, such as a Botox or Restylane derma filler injection. The system contributed $1.5 million to fourth quarter sales and retails for more than $400.
The company in February announced a physician use study with Israel medical device maker Syneron Inc. to determine whether Condition and Enhance system would improve the results of a laser to treat photodamaged and discolored skin, and acne. Carlson sees the potential for the line to be used to reduce scarring after noncosmetic surgeries too.
Carlson, who as an Allergan senior vice president was responsible for building Botox's global market in the late 80s and early 90s, compares the market potential for Obagi technologies to the multitude of aesthetic and therapeutic uses developed over the years for Botox.
"If we can leverage this (Obagi) penetration technology, there's this endless number of active agents that could be used with it, enabling lower doses of the agent and greater safety," said Carlson, who joined the company in July 2005.
So far Wall Street investors and analysts alike seem to be buying the Botox analogy. The stock closed at $14.69 on March 28, up 33 percent since its $11.05 opening on its first day of trading on Dec. 14.
Moreover, three of the four analysts covering the company all four of whom work at investment banks that helped underwrite Obagi's IPO have the equivalent of an "outperform" rating on shares, with Donald Ellis at Thomas Weisel Partners setting a $16 a share price target. Elliot Wilbur, an analyst for CIBC World Markets, is among the most bullish.
"We project accelerating top-line growth as the company increasingly piggybacks on momentum of high-end aesthetic treatments (Botox, Restylane) and expands into other market segments, i.e., acne," Wilbur wrote when he initiated coverage in January.
But even Wilbur had words of caution, noting "Obagi will likely face more heated competition going forward as the aesthetics market expands."
The company reported record net sales of $23 million in the fourth quarter, up 19 percent from a year ago. Net income was flat at $2.5 million as the company saw increased costs from launching new products, adding sales staff and costs associated with the public offering.
Carlson said the $59 million IPO was more a way to provide liquidity for its major investors and give its 178 employees a stake in the company than as a means to raise capital. He noted Obagi has maintained a positive operating cash flow for several years and traditionally has grown organically rather than through acquisition.
Indeed, one potential overhang on the stock is concern about how the company's largest shareholder, New York private investment firm Stonington Partners Inc. will handle its remaining 45 percent stake. (It sold close to 1 million shares during the IPO.)
The Stonington fund that provided key financing to Obagi in its early years was set to terminate March 29. Managing partner Alexis Michas said he was not allowed disclose the partnership's plans, but did give indications the partners might not be in a hurry to unload their entire stake.
"This is a very exciting company and one of the most successful investments we have ever made," Michas said.
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