1. society
2. welfare
3. healthcare

Pharmaceuticals
Raghuram Selvaraju, Ph.D.
(646) 502-2464
rselvaraju@aegiscap.com
Yi Chen, Ph.D.
(646) 502-2463
ychen@aegiscap.com
Initiating Coverage
October 30, 2013
Key Metrics
$2.05
DSKX - NASDAQ
Oct 29 2013
Pricing Date
$5.50
Price Target
$4.00 - $0.35
52-Week Range
12.3
Shares Outstanding (mm)
Market Capitalization ($mm)
$25.2
3-Mo Average Daily Volume
13,845
Institutional Ownership
NA
Debt/Total Capital
NM
DS Healthcare Group, Inc.
Rating: Buy
Healing Hair Loss...And Beyond
Investment Highlights:
■
Initiating Coverage. We are initiating coverage on DS Healthcare Group,
Inc. (formerly Divine Skin, Inc.) with a Buy rating and a 15-month price
target of $5.50 per share. In our view, this company represents an attractive,
risk-mitigated opportunity in the consumer healthcare domain, targeting a
high-growth segment. DS Healthcare is a leader in the development and
commercialization of innovative hair care products aimed at combating hair
loss, typically referred to clinically as androgenic alopecia (male or female
pattern baldness).
■
Capital-Efficient Business Model. The firm began operations in 2007 and
since that time has accumulated a deficit of only $6.3mm. In our view, a
substantial number of milestones have been reached since the firm started
working in the consumer healthcare area. DS Healthcare has successfully
developed a suite of proprietary topical products - and is now working on an
oral pill for hair loss therapy. The firm recently filed a patent for this product
candidate, which it could pursue in prescription form to target the drug market
for hair loss by conducting clinical studies and submitting the candidate for
approval from the FDA. We do not project sales in the prescription drug
market in our current model. In addition, DS Healthcare has established a
network of third-party manufacturers to make its products on an order-byorder basis, so as to ensure that it maintains a low expense structure and does
not need to carry excess inventory. Finally, the firm has forward-integrated
in an outsourced manner by inking relationships with distributors across
North America, as well as accessing distribution and retail channels in Latin
America, Asia and the Middle East.
■
Profitability Could Be Attained Near-Term. In our view, if the firm
can match our rapid revenue growth projections, it could transition to cash
flow-positive status in early 2014. We note that our assumptions are very
conservative, as we project peak sales in 2024 of only $230mm, while the
overall market that DS Healthcare is targeting could represent a $100bn
opportunity globally.
NM
ROE
$0.26
Book Value/Share
Price/Book
7.9x
Dividend Yield
NM
LTM EBITDA Margin
NM
EPS ($) FY: December
2012A
Prior
2013E
Curr.
2013E
Prior
2014E
Curr.
2014E
1Q-Mar
(0.04)
--
(0.04)A
--
(0.02)E
2Q-Jun
(0.03)
--
(0.06)A
--
0.01E
3Q-Sep
0.00
--
(0.02)E
--
0.01E
4Q-Dec
(0.23)
--
0.00E
--
0.03E
FY
(0.32)
--
(0.12)E
--
P/E
NM
NM
0.03E
68.33x
Revenue ($M)
2012A
Prior
2013E
Curr.
2013E
Prior
2014E
Curr.
2014E
1Q-Mar
2.0
--
4.0A
--
3.6E
2Q-Jun
3.5
--
3.4A
--
4.7E
3Q-Sep
3.2
--
3.8E
--
5.3E
4Q-Dec
2.6
--
4.4E
--
6.5E
11.2
--
15.6E
--
20.0E
FY
Source: BigCharts.com
Company Description:
DS Healthcare Group, Inc. is a Florida-based consumer healthcare firm
commercializing products for hair loss, skin care and hygiene.
The Disclosure section may be found on pages 26 - 27 of this report.
DS Healthcare Group, Inc.
October 30, 2013
Investment Thesis
DS Healthcare Group, Inc. is a specialty consumer healthcare firm developing a
range of personal care products, primarily aimed at treating hair loss. The company
has established several product lines, consisting of oral tablets, lotions, shampoos and
conditioners, which contain both known stimulators of hair growth and regrowth as well
as novel phytochemicals and organic compounds that the company has identified in its
laboratories. DS Healthcare aims to penetrate markets worldwide through the pursuit of
relationships with local distributors as well as advertising campaigns that emphasize the
company’s premium brand message along with the data that have thus far been obtained
from several human studies showing the hair regrowth-stimulating capabilities of the
firm’s products. While the company does not claim to be able to regrow hair for those
who have already lost functional hair follicles, it believes that it can enable those
individuals who retain functional follicles to regrow their hair over all areas of the head,
not just the crown. DS Healthcare also produces skin care and feminine hygiene
products. We believe that the firm’s positive revenue trajectory, proven product efficacy,
segmented product line and multilayered commercial strategy targeting high-growth
markets globally should unlock shareholder value. In particular, we are encouraged by
recent evidence of significant interest in the cosmetics and cosmeceuticals arenas, which
should bolster the valuation of the company going forward. The firm could reach cash
flow-positive status in early to mid-2014.
We are initiating coverage with a Buy rating and a 15-month price target of $5.50
per share, which assumes a total firm value of $95 million and roughly 17 million
fully-diluted shares outstanding as of end-2014. We note that DS Healthcare Group
shares as an investment may entail above-average risk and volatility.
Investment Positives
Substantial Market Opportunity. In our view, DS Healthcare Group, Inc. represents an
attractive investment case because of the massive discrepancy between the company’s
current market cap and revenue base vs. the size of the current market for hair loss
products. In the U.S. alone, this is estimated to constitute a $7 billion-a-year market.
Since there are very few effective hair loss prevention products currently available, we
believe that DS Healthcare Group could rapidly penetrate this market in both the U.S. and
international territories, which would permit significant revenue growth at a rapid pace.
Favorable Product Placement. The company exploits a relatively unexplored niche
within the cosmeceuticals and consumer products domain – to whit, the use of
prescription-grade hair loss prevention compounds within a product lineup aimed at hair
salons and drug stores (i.e. on an over-the-counter basis). The firm brands its proprietary
shampoos, conditioners and hair care lotions as premium products that command topshelf positioning, aligning the DS Healthcare brands with the names of the most
respected hair stylists and salons in both the U.S. and internationally. The company has
also achieved placement in various pharmacy chains, including CSB Drogaria and
Farmalife, which own or operate 85 retail locations in Brazil. Drogaria’s overall product
lineup covers >90% of all pharmaceutical consumer products sold to Brazilian customers.
Capital-Efficient Business Model. In our view, this firm benefits from a flat
organizational structure and a low expense base. Therefore, even relatively incremental
increases in revenue are likely to have a significant impact on the firm’s bottom line.
Although gross margins on DS Healthcare Group’s products are only in the 40% – 45%
range, given the high costs associated with the premium packaging for these products, we
believe that the relatively low expenditures on R&D and G&A demonstrate how
efficiently this company is run and how rapidly it could become sustainably profitable.
2
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Investment Risks
Financial outlook and history of unprofitable operations. DS Healthcare Group, Inc.
has incurred losses since inception and is not expected to attain cash flow-positive status
soon. Given these factors, DS Healthcare Group shares may constitute above-average
risk and volatility, in our opinion.
FDA unpredictability. While the company has thus far succeeded in incorporating
prescription-grade compounds such as minoxidil and finasteride into its products, it may
in future be required to submit additional product content and quality control data to the
FDA. Agency requirements are unpredictable and subject to significant change. If the
firm were to be required to furnish significant additional quality assurance information
and / or submit to further regulatory monitoring, its ability to generate profits could be
impaired and its products could be subject to marketing restrictions.
Potential dependency on partners to provide enhanced market penetration. DS
Healthcare Group is currently dependent upon its partners and distributors in order to
achieve market penetration for its products. The firm partners with hair salons, consumer
products stores and drug store chains in order to place its products inside the appropriate
consumer healthcare product retail channel. If its partners do not appropriately position
DS Healthcare Group’s products or if they elect not to continue ordering the products, the
company could face substantial headwinds in generating revenue as it cannot sell its
products in bulk independently.
Competitive landscape. Unlike several of the more well-known firms operating in the
cosmetics and cosmeceuticals arenas, DS Healthcare Group is extremely small. Its
competitors in the hair loss reduction and prevention space include such established
pharmaceutical firms as Merck & Co. with Propecia (finasteride), Johnson & Johnson
with Rogaine (minoxidil), and Procter & Gamble with Nioxin (a proprietary blend of
ingredients designed to stimulate hair regrowth, such as ensulizole and sulisobenzone).
Both Propecia and Rogaine are currently available generically in the U.S. If DS
Healthcare Group cannot effectively position its proprietary products against these kinds
of hair loss reduction and prevention remedies, it may fail to reach profitability.
Intellectual property risk. The company relies on patents and trade secrets to protect its
products from competition. A court might not uphold DS Healthcare Group’s intellectual
property rights, or it could find that DS Healthcare Group infringed upon another party’s
property rights. In addition, generics firms could potentially find loopholes in DS
Healthcare Group’s intellectual property estate, which might enable them to launch
generic versions of the firm’s proprietary branded products prior to the expiry of patent
protection on these products.
Additional risks. As of June 30th, 2013, DS Healthcare Group, Inc. had about $0.5
million in cash and equivalents. While the firm is not projected to burn a significant
amount of cash near-term, these estimates could change if the company needed to spend
substantially more capital on product development, packaging and marketing. Other
sources of cash could include: distributorship fees from partnerships, warrant and option
exercises or issuance of more shares. If the firm fails to validate the commercial appeal
of its products and drive revenue growth, it may not be able to raise cash at all.
Industry risks. Emerging consumer healthcare stocks are inherently volatile and
increasingly subject to development and regulatory risk.
Meeting or missing
commercialization milestones may result in a significant change in the perception of the
company and the stock price. We do not anticipate volatility subsiding in the near term.
For additional risk considerations, please refer to the company's SEC filings.
3
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Valuation
Comparables Analysis: Given that DS Healthcare Group is currently unprofitable and
considering our belief that sustainable profitability is roughly a year away, we use a
discounted cash flow-based approach to value the shares. Based on a comparables
analysis, it appears the stock is worth $5.50 per share, utilizing our estimate of an $85
million risk-adjusted net present value (rNPV) for the firm’s portfolio of marketed
proprietary hair loss reduction and prevention products. This assumes that the shares
trade in-line with the comp group’s present average enterprise value of roughly $85
million and that the firm has ~17 million shares outstanding (fully-diluted) in late 2014.
Table 1: Comparable Company Analysis
(Millions, Except Per-Share Data)
Development stage
Marketed
Marketed
Marketed
Marketed
Marketed
Marketed
Marketed
Marketed
Phase 2 / 3
Marketed
Market Sector
Tissue Repair
Hair Care
Hair Care / Skin Care
Health / Beauty Products
Personal Care Products
Herbal Supplements
Cosmeceuticals
DTC Products
Pain / CNS
Muscle Health
Company Name
Anika Therapeutics
Biologix Hair
Bonamour Inc.
CCA Industries
China Nepstar Chain Drugstore
Empowered Products
Fibrocell Science
Liberator Medical Holdings
Imprimis Pharmaceuticals
Muscle Pharm Corp.
Ticker
ANIK
BLGX
BONI
CAW
NPD
EMPO
FCSC
LBMH
IMMY
MSLP
Rating
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Closing Price
(10/29/13)
$28.04
$.21
$.28
$3.10
$1.84
$.38
$4.02
$2.32
$4.15
$9.85
Shares
(MM)
14
28
200
7
98
63
28
52
9
9
Average
Market Cap
($MM)
379
6
56
22
180
24
111
122
37
87
Cash
($MM)
54
0
0
7
100
0
21
11
18
9
Debt
($MM)
9
15
0
0
0
0
0
3
0
0
102
Enterprise
Value ($MM)
334
21
56
15
79
24
90
114
19
78
86
Discrepancy
Current valuation
Personal Care
DS Healthcare Group, Inc.
DSKX
Buy
$1.92
12.3
24
0.5
1.5
25
95
9
0
Projected
86
Derived 12-month comparable value
Target valuation
(15-month)
Personal Care
DS Healthcare Group, Inc.
DSKX
Buy
$5.50
16.9
Source: First Call and Aegis Capital Corp. estimates
Free Cash Flow: We estimate that DS Healthcare Group could be free cash flow
negative for the foreseeable future. We define free cash flow as operating cash flow
minus capital expenditures and dividend payments. We utilize a discounted cash flow
analysis supporting a risk-adjusted Net Present Value (rNPV) framework to derive our
$5.50 price target. This approach is described further in the next section of the report.
Our detailed analysis is split into three principal components – our discounted cash flow
model including the rNPV assessment of the firm’s marketed products; our assessment of
the target markets and the associated sales model for the company’s current product
lineup; and the near-term financial outlook for the company. Our historical income
statement and financial projections are presented at the back of this report.
Risk-Adjusted Net Present Value Analysis
Detailed analysis of our risk-adjusted NPV calculation is presented below. We have
utilized a discount rate of 20%, an effective tax rate of 40%, and a sales and marketing
offset of 55%, which factors in gross margins of 45% – 50% that improve over time. Our
market model can be found in Table 4.
Table 2: Market Metrics
Discount rate
Sales and marketing offset
Tax rate
NPV ($ MM)
20%
55%
40%
90
Source: Company reports; Aegis Capital Corp. estimates
We have modeled sales in only the U.S., Latin America and China, since this appeared to
be a reasonably conservative approach. Investors should note that DS Healthcare’s
products are in fact currently being commercialized in territories beyond these countries.
4
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Company Overview
Formerly known as Divine Skin, Inc., also known as DS Laboratories, DS Healthcare
Group, Inc. is a Florida corporation that was incorporated on January 26, 2007. Since
inception, the firm has worked to develop its products through a rigorous development
process involving the testing of proprietary blends of phytochemicals and antioxidants
combined with compounds that have been pharmaceutically proven to stimulate hair
regrowth. As shown below, the firm has also developed a distinctive and differentiated
product packaging approach, designed to capture the attention of the consumer.
Figure 1: Flagship Product Portfolio – Premium Packaging
Source: DS Healthcare Group, Inc.
The firm develops proprietary topical formulations, which utilize the emerging science
behind nanosomes. These enhance the penetration of various organic compounds without
causing inflammation – a known issue with alcohol / propylene glycol formulations.
Inflammation has been linked to perifollicular fibrosis, which is a known accelerant of
hair loss. DS Healthcare has developed milder formulations that are less likely to cause
these localized inflammatory reactions. The firm’s proprietary solid lipid nanosomes
have the added advantage of facilitating the penetration of the compounds in the firm’s
hair care products into the hair follicles – the primary site of therapeutic action.
DS Healthcare uses a network of specialty retailers across North America and distributors
throughout Europe, Asia and South America. Globally, the company utilizes a mix of
specialty retailers, spas, salons and other distributors. The firm’s branded products are
manufactured by third-party suppliers on an order-by-order basis, mainly sold under its
flagship “DS Laboratories” brand. It also offers certain products via its “Polaris Labs”,
“Sigma Skin” and “Pure Guild” brands. The current product portfolio is shown below:
Table 3: DS Healthcare Product Lineup
Hair Re-Growth
Hair Care
Skin Care
Personal Care
Anti-Aging
Revita
Dandrene
Hydroviton.CR
Hydroviton.CR
Viterol.A
Revita.LT
Nia
Keramene
Keramene
Revita. COR
Radia
Oligo.DX
Nirena
Revita.EPS
Trioxil
Revita.EPS
Spectral.DNC
Vexum.SL
Spectral.DNC-L
Spectral DNC-N
Spectral.RS
Source: DS Healthcare Group, Inc.
We believe that the company’s diversified product portfolio should enable it to drive
growth sustainably in a relatively risk-mitigated manner. Furthermore, if any of its
branded product lineups becomes successful, we believe that DS Healthcare could attract
the attention of one of the more established firms in the cosmetics and cosmeceuticals
sector. Such companies have demonstrated a consistent willingness to pay high
premiums for successful consumer products within the personal care domain.
5
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Principal Product Portfolio Overview
Hair Re-Growth and General Hair Care
Revita® Shampoo and Revita.Cor Conditioner
Revita is a hair growth stimulating shampoo. The Revita suite uses a combination of
materials specially designed to maintain scalp vitality and act on follicle dysfunctions.
This formulation is developed completely without the use of sodium lauryl sulfate or
sodium laureth sulfate, commonly-used low-cost detergents in shampoos and cleansers
that are linked to skin irritation, drying, and hair loss due to follicle attack. In a recent
clinical study of Revita's effectiveness, 90% of volunteers reported less hair loss, 85%
reported better appearance, 75% reported feeling cleaner, and 70% reported faster hair
growth. DS Healthcare also recently launched the Revita.LT brand, which is specifically
formulated for blond and other light hair colors. Revita.Cor is the firm’s hair growthstimulating conditioner. It contains a relatively high (4%) concentration of caffeine,
among other ingredients. According to independent studies at the University of Jena in
Germany in 2000 using hair samples from the scalps of young men entering into the first
stages of hormone-related hair loss, topical caffeine solution treatment increased average
hair growth by 46% and the hair life cycle was extended by 37% vs. the control group.
Spectral®
The company’s Spectral® line of products are topical lotions and sprays designed for men
with advanced androgenic alopecia, colloquially referred to as male pattern baldness.
Spectral.DNC, a spray formula, Spectral.DNC-L, a lotion, and Spectral DNC-N are
designed to re-grow hair through multiple pathways. One of the active ingredients in the
DNC and DNC-L products is Procyanidin B-2 complex. The company believes that this
formula helps retain and re-grow hair. In an independent study published in the British
Journal of Dermatology in 2002, Procyanidin B-2 was shown to shorten the hair resting
phase and prolong the hair growth phase, thereby improving hair growth results. This
treatment uses over 10 active compounds that trigger different processes in the scalp to
generate healthy hair and contains nanosome microspheres to enhance skin absorption.
Spectral.RS is a topical treatment for advanced androgenic alopecia. It is designed to
address multiple causes that lead to thinning hair such as perifollicular fibrosis and
internal factors such as stress, hormonal disturbances, lack of vitamins and mineral salts,
and the use of certain medications. Perifollicular fibrosis accompanies all hair loss; in
this condition, the collagen around the hair root becomes rigid and tightens, pushing the
root to the surface and thus causing the premature loss of hair. One of the active
ingredients in Spectral.RS is adenosine, which was shown to be effective at inducing hair
growth in an independent clinical study conducted by Shiseido Laboratories in 2005.
Adenosine is a purine nucleoside consisting of a molecule of adenine attached to a ribose
sugar moiety via a β-N9-glycosidic bond. It plays an important role in biochemical
processes (e.g. energy transfer) – as adenosine triphosphate (ATP) and adenosine
diphosphate (ADP) – and in signal transduction as cyclic adenosine monophosphate
(cAMP). It is known to regulate a number of important physiological functions, and also
acts as an anti-inflammatory mediator at the adenosine A2A receptor.
Dandrene®
Dandrene is an anti-fungal shampoo designed to treat itchy scalp and dandruff. The
product includes anti-mycotic properties, which inhibit the infectious fungi that generate
dandruff scales.
6
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Skin Care
Hydroviton®
A skin cleanser for oily and acne prone skin, this product contains liposome-encapsulated
azelaic acid (trade name: Azelosome). In a 2006 independent study by Engelhard,
Azelosome achieved 46% suppression of 5α-reductase, a hormone that causes oily skin.
Keramene®
A hair removal agent, this product is formulated to suppress hair growth and softens
remaining hair strands, and combines plant hormones, natural palmatine and
nondihydroguaiaretic acid. It uses two complementary pathways: a) inducing follicles
into the catagen state so they stop growing hairs, and b) suppressing kerafinocyte
proliferation so remaining hairs grow slower. It contains telocapil, among other
ingredients, shown in a 2003 independent study by Provital Group to reduce hair growth.
Oligo®
Oligo.DX is a cream designed to improve the appearance of cellulite from women’s
thighs, hips and buttocks. It contains a liposomal complex of caffeine and escin among
other ingredients, which were tested in a study by an independent group in Spain in 2002.
The action of this complex was evaluated through an in vivo study performed on 20
females with cellulite imperfections, aged between 18 and 70. The product was applied
daily for 60 days on specific body areas and the following parameters were identified:
1) Buttock circumference: 15% of patients showed a decrease of 2.0 – 3.0 cm while
60% showed a decrease of 0.5 – 1.0 cm
2) Thigh circumference: 85% of patients presented a decrease of 0.5 – 1.0 cm
3) Body fat mass: 50% of patients showed a significant decrease of 0.6 – 1.4 kg.
Trioxil®
Trioxil (bisazulene gel) is an acne cream. It contains Ichthyol Pale, among other
ingredients, which has been shown to reduce skin blemishes under an independent study
conducted on 101 test persons who were treated with a 1% formulation. The study was
conducted by ICHTHYOL-Gesellschaft in Germany in 2004.
Personal Care
Nirena®
Nirena is an intimate feminine care cleanser developed without cheap detergents, harsh
chemicals, and low pH tolerances, which DS Healthcare believes are commonly found in
other commercially available products. The principle active ingredient in Nirena is
Brazilian peppertree extract. In clinical studies, extract of the Brazilian peppertree
displayed antimicrobial properties. A 1974 independent study used the herb effectively
to treat 100 patients with chronic cervicitis and vaginitis.
Revita.EPS
Revita.EPS is a product based on advanced bio-peptides that are designed to grow and
increase the length and girth of eyelash hair. The bio-peptides include SymPeptide
226EL, which under independent studies conducted by Symrise Corp. in 2007 have
shown a 25% increase in eyelash length after 2 weeks of use.
7
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Nanosome Encapsulation
Nanosomes are very small microparticle-based capsules, which were studied in various
contexts beginning roughly a decade ago but which have started to be used in different
cosmetic and cosmeceutical applications because of their broad utility in enhancing the
penetration of organic compounds through the skin. In addition, because they can be
prepared using a wide range of components – lipids, phospholipids, colloids – nanosomes
can be engineered to specifically create a defined penetrative profile for a product. Thus,
they can be used to target active compounds within a particular product formulation to a
particular target under the epidermal surface. This is especially important in treatment of
hair loss, where the primary target of therapy must be the base of the hair follicle.
Figure 2: Nanosome Technology
Source: DS Healthcare Group, Inc.
In our view, the fact that DS Healthcare currently possesses the only topical hair loss
therapy that uses nanosome technology is a significant competitive advantage. Although
we note that other companies can also use nanosomes, thus far DS Healthcare remains
the only firm in the hair loss reduction and prevention domain that is employing them.
8
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Hair Loss Overview
It is important to understand the molecular mechanisms underlying hair loss, since these
constitute the basis of DS Healthcare’s hair care products. The main disorder being
targeted here is clinically known as androgenic alopecia, or pattern baldness. It is known
to affect roughly 70% of men and 40% of women over the course of their lifespan. Men
typically present with hairline recession at the temples and vertex balding, while women
normally exhibit hair thinning in a diffuse pattern over the top of their scalps.
Both genetic and environmental factors play a role, and many etiologies remain
unknown. The only confirmed external factor is stress, while the principal hormonal
mechanism driving androgenic alopecia involves dihydrotestosterone (DHT). The
synthesis of DHT from testosterone via the enzyme 5-alpha-reductase (5-α-reductase)
causes several processes implicated in hair loss – the induction of pro-inflammatory
cascades within the hair follicle; increased production of reactive oxygen species,
creating an environment of oxidative stress; and suppression of growth factors that are
essential for follicle health and normal proliferation of cells at the level of the
mesenchymal dermal papillae. Papillar cells are required for normal replacement and
regeneration of hair follicles, along with regrowth of hair lost due to normal turnover.
The structure of a hair follicle lying within the skin is shown in the figure below.
Figure 3: Hair Follicle Cellular Structure
Source: Molecular Biology Of The Cell (2005)
9
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
The nature and extent of hair loss in men is typically evaluated using the HamiltonNorwood Scale (a different rating instrument – the Ludwig scale – is used for women).
The pictorial illustration of the Norwood rating scheme is shown in the figure below.
Figure 4: Norwood Scale For Rating Male Pattern Baldness
Source: American Hair Loss Association (2010)
Data obtained from double-blinded, controlled studies conducted by independent groups
using DS Healthcare’s Revita® and Spectral® products has shown that hair regrowth can
be stimulated by using these products. However, it is important to note that thus far DS
Healthcare has not managed to develop anything that would regenerate hair from dead
follicles. Accordingly, someone who – on the above Norwood scale – would rate a 4A or
greater, meaning that their follicles have completely degenerated, would likely have a
poor response to therapy. Early treatment seems paramount in order for efficacy to be
achieved. The figure below depicts independent clinical data from one of these studies.
Figure 5: DS Healthcare Controlled Trial Results
Source: DS Healthcare Group, Inc.
The targeting of multiple pathways in DS Healthcare’s products ensures that the efficacy
of these topical formulations is optimized. Although new techniques to prevent hair loss
and regrow hair – even in areas where the follicles have been lost – are being developed
(e.g. follicle transplantation, bimatoprost, prostaglandin D2 synthase inhibitors), in our
view DS Healthcare now represents the state of the art in hair loss therapy.
10
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Consumer Healthcare Market Opportunity
In this section, we provide some perspectives on the market potential for the company’s
proprietary personal care products, with specific emphasis on the firm’s hair loss
reduction and prevention portfolio. In our view, the hair loss products are likely to be the
main drivers of revenue growth in the near- and long-term. The firm’s portfolio is
classified within the domain of consumer products, which is a roughly $300 billion-ayear sector. Within this area, hair care represents approximately 20%, as shown below.
Figure 6: Consumer Products Market Segmentation
Source: Market research
The chart below shows how the cosmetics market is broken down among the various
firms operating in this area. While several firms have substantial market share, the sector
remains fragmented. Leaders include L’Oréal, Estée Lauder, Procter & Gamble, Revlon,
Avon, Shiseido and Coty (which recently went public, raising ~$1 billion in an IPO).
Figure 7: Cosmetics Industry Company Breakdown
Source: ScienceDirect
11
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Competitive Landscape
The market for hair-growth products is dominated by Ortho-McNeil (Rogaine®, topical),
Merck & Co. (Propecia®, internal), and GlaxoSmithKline (Avodart®, internal), primarily
in the prescription-drug segment. Nioxin® scalp care products have generated sales
internationally as well (currently marketed by Procter & Gamble).
Rogaine® (oral minoxidil)
Minoxidil is an antihypertensive vasodilator medication, which was also shown to slow
down or stop hair loss and, under certain circumstances, promote hair regrowth. It is
available over-the-counter for the treatment of androgenic alopecia. Widely used for the
treatment of hair loss, it has been proven clinically effective in both the prevention of loss
and in establishing varying degrees of hair re-growth in males and females suffering
pattern baldness. Minoxidil must be used indefinitely for continued support of existing
hair follicles and the maintenance of any experienced hair regrowth.
Figure 8: Rogaine (Minoxidil) Chemical Structure
Source: EvaluatePharma
The initial formulations of minoxidil were orally bioavailable, branded under the name
Loniten®, and aimed at treating high blood pressure. However, the drug was discovered
to have the intriguing side effect of stimulating hair growth. Minoxidil may cause
increased growth or darkening of fine body hairs, or, in some cases, significant hair
growth. When the medication is discontinued, hair loss typically returns to its original
rate within 30 to 60 days. Upjohn Corp. (subsequently Pharmacia & Upjohn; now part of
Pfizer) produced a topical minoxidil solution to be used to treat baldness and hair loss,
under the brand name Rogaine® in the U.S. and Canada, and Regaine® in Europe and the
Asia-Pacific. Treatments usually include a 5% solution designed for men, and a 2%
solution for women. Patent protection on minoxidil solution expired in February 1996.
Propecia® (oral finasteride)
Finasteride is a type II 5α-reductase inhibitor; by blocking this enzyme, it directly inhibits
the conversion of testosterone – the canonical male sex hormone – to dihydrotestosterone
(DHT). Considered a “supercharged” version of testosterone, DHT has 2 – 3 greater
androgen receptor affinity than testosterone and has 15-30 times greater affinity than
adrenal androgens. Men with androgenic alopecia have higher 5-α-reductase, lower total
testosterone, higher unbound/free testosterone and higher free androgens, including DHT.
5-α-reductase expression is highest in the scalp and prostate.
DHT is known to over-stimulate the androgen receptor, causing inhibition of growth
factors such as insulin-like growth factor 1 (IGF-1) and increased production of inducible
nitric oxide synthase (iNOS), which causes enhanced levels of oxidative stress. Within
the scalp, these processes contribute to a deleterious environment around the hair follicle,
12
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
creating higher propensity for follicular degeneration and regression and thus stimulating
hair loss.
Accordingly, finasteride was developed and commercialized in order to
specifically block the excess production of DHT. The drug was developed under the
brand name Propecia® to treat male pattern baldness, and as Proscar® to treat benign
prostatic hyperplasia (BPH), generally considered a precursor of prostate cancer.
Figure 9: Propecia® (Finasteride) Chemical Structure
Source: EvaluatePharma
Finasteride is generally viewed as a highly effective hair loss prevention agent, although
its efficacy is not dramatic in most cases and certain men fail to respond. As measured
by hair counts, in a five-year study of men with mild to moderate hair loss, over 60% of
the men who took 1mg of finasteride daily regrew some hair. In contrast, all of the men
in the study who were not taking finasteride lost hair. In the same study, based on
photographs that were reviewed by an independent panel of dermatologists, 48% of those
treated with finasteride experienced visible regrowth of hair, and a further 42% had no
further loss. Average hair count in the treatment group remained above baseline, and
showed an increasing difference from hair count in the placebo group, for all five years of
the study. Finasteride is effective only for as long as it is taken; the hair gained or
maintained is lost within 6 – 12 months of ceasing therapy. In clinical studies,
finasteride, like minoxidil, was shown to work on both the crown area and the hairline,
but is most successful in the crown area.
A recent 10-year study of 118 men treated with 1mg/day finasteride for androgenic
alopecia found that 86% of men continued to benefit from treatment over the entire
course of 10 years – showing increased or stable rates of hair growth – and only 14%
experienced any further hair loss. Interestingly, it was found that subjects who showed
the most hair growth in their first year of treatment were more likely to have better hair
growth after five years, with nearly 69% of these patients experiencing continued growth;
however, many of those who experienced no growth in their first year of treatment were
found to improve later on. Furthermore, subjects over 30 years of age tended to have
better hair growth in the long run, presumably due to having experienced more hair loss
by that point in their lives in comparison.
Side effects were seen in only 5.9% of patients, and no patients reported depression or
gynecomastia (enlarged breast tissue). The effectiveness of finasteride in treating
androgenic alopecia does not seem to decline over time, even in older patients (including
those over 40 years of age), and it is well-tolerated overall. This study specifically
looked at users who continued using the medication. A recent case control evaluated
male pattern baldness patients with psychiatric sequellae after discontinuation of
13
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
finasteride, and reported depressive symptomatology and suicidal ideation for those who
also experienced sexual side effects during use of the drug. In recent years, in fact, it has
become apparent that Propecia® may cause more sexual side effects than first believed,
and the FDA has issued stringent new label warnings. Since 2011, Merck has faced a
steadily growing stream of lawsuits due to the side effects purportedly caused by
Propecia®. The usage of this oral product has dropped significantly as a result.
Nioxin®
Originally developed by Nioxin Research Laboratories, the Nioxin® family of products
comprises eight scalp and hair care systems that treat thinning hair. Nioxin ® does not
stimulate hair growth, but rather enhances the health of the scalp and enhances the
condition of hair already present. Nioxin® Scalp Treatment System 2 contains two main
active ingredients as well as vitamins, enzymes and other biologically important
chemicals. The main active ingredient in Nioxin® is phenylbenzimidazole sulfonic acid,
or ensulizole, which is 4% of the total product, according to Nioxin Research
Laboratories. This chemical is normally used in sunscreen and absorbs ultraviolet light in
the 280 – 320 nm range. Ensulizole is a white to pale beige powder. Through including
a sunscreen in Nioxin®, the scalp is protected from sunburn and is in healthier condition
to produce full, healthy hair. The second active ingredient in Nioxin® is sulisobenzone,
which constitutes 1.6% of the total product. Sulisobenzone is also used in sunscreen.
Furthermore, Nioxin® includes several vitamins in its formula to nourish the scalp and
hair follicles, as B vitamins are sometimes deficient in people with thinning or unhealthy
hair. B vitamins in Nioxin® include pantothenic acid, or vitamin B5, folic acid or vitamin
B9, niacin or vitamin B3, biotin, or vitamin B7, pyridoxine or vitamin B6, cyanocobalamin, a synthetic form of vitamin B12, and thiamine or vitamin B1. In addition,
Nioxin® also includes the chemicals ubiquinone, co-enzyme A, glycoproteins,
clorphenesin, and melanin, according to Nioxin Research Laboratories. Ubiquinone,
commonly known as co-enzyme Q10, is an antioxidant and may boost the immune
system, creating a healthier scalp environment. Co-enzyme A is in a complex with
pantothenic acid or vitamin B5, and is required for many biochemical reactions including
synthesis of fats and acetylation of proteins important for cell division. Glycoproteins are
proteins that are important for cell signaling, growth and division. Clorphenesin is an
antifungal with antibacterial properties and melanin produces hair color.
From our perspective, Nioxin® represents possibly the closest comparable to DS
Healthcare Group’s hair loss reduction and prevention product suite. We believe that
investors should be encouraged by the fact that Nioxin Research Laboratories showed
sufficient commercial traction with its product lineup to warrant being acquired by
Procter & Gamble in September 2008 for over $300 million, or roughly 10 times sales.
Prior to its acquisition, Nioxin Research Laboratories had achieved market entry with the
Nioxin lineup in 42 countries, with particularly strong growth being achieved in Asia and
Latin America. In our view, the success that this firm managed to achieve internationally
bodes well for DS Healthcare and demonstrates that complex products involving blends
of agents with proven anti-hair loss activity resonate with consumers.
We feel DS Healthcare possesses certain advantages vs. Nioxin Research Laboratories –
its insistence upon the utilization of only clinically-validated ingredients as well as upon
the conduction of double-blinded, controlled clinical trials in human volunteers to test the
efficacy of its products is unparalleled in the hair care industry. Accordingly, therefore,
we believe that DS Healthcare could over time establish an even more solid reputation
than Nioxin Research Laboratories. In addition, we note that the DS Healthcare product
lineup is broader than the Nioxin® franchise, which could make DS Healthcare more
attractive as a target. The DS Healthcare products actively stimulate hair regrowth, while
the Nioxin® product suite was primarily designed to promote scalp health.
14
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Global Consumer Healthcare Market Model
We have modeled sales of DS Healthcare Group products in three major geographies –
the U.S., Latin America (principally Brazil and Mexico, as these are the countries where
the firm currently has the strongest sales and distribution arrangements), and China
(which the company recently entered and where sales are expected to begin being
generated in late 2013). The modeling approach used assumes that these are the most
important territories for DS Healthcare because of the size of the populations involved.
We note that this is a conservative methodology for several reasons – first, DS Healthcare
products are already being sold in areas outside the ones that we have modeled, since the
company has successfully established distribution arrangements in 15 countries to date;
second, the firm is likely to develop additional personal care brands beyond the hair care,
skin care and feminine hygiene domains, but we are not projecting any sales potential for
such future product launches; and third, we have assumed extremely low penetration
rates in the countries where we have modeled out sales. As an example, peak global sales
in our model are estimated at only $230 million, whereas the estimated market for hair
care products in Brazil alone is worth ~$9 billion annually. The figure below depicts the
various geographies in which DS Healthcare has established a foothold for its products.
Figure 10: DS Healthcare International Presence
Source: DS Healthcare Group, Inc.
After Japan, Brazil is the largest cosmetics market. Sales topped $43 billion in 2011,
representing rapid growth of 142% in a five-year period. By comparison, the cosmetics
markets in Japan and the U.S. rose 40% and 7.3%, respectively in the same time frame.
Brazil also happens to be a nation fixated on hair. Shampoos and conditioners rank as the
largest personal care consumer products category with growth of 40% in 2012. These
types of products are expected to account for over 20% of total personal products sales in
2016. Brazilians put a high premium on hair care, more so than other countries, because
wide racial diversity there includes all eight hair types, making hair care a national
pastime. Long, straight and smooth hair is the ultimate cultural approval in Brazil, where
racial discrimination is based on appearance and not on ethnic origin.
According to Euromonitor International, total sales of beauty and personal care products
in China tripled in size from 2000 to reach an estimated $24 billion in 2010.
Euromonitor projects the market will grow to $34 billion by 2015. Analysts believe this
rapid pace is driven by the increasing affluence of China's fast-growing middle class.
Based on these statistics, we believe there is room for substantial upside to our
projections. We have also assumed 45% – 50% margins with a 20% discount rate.
15
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Table 4: Estimated U.S. and International Sales – Market Size Model
U.S. Population
Androgenic alopecia patients seeking treatment
Prevalence
Skin and hygiene product customers
Prevalence
Hair care product penetration rate
Skin and hygiene product penetration rate
Hair care product annual cost ($)
Skin and hygiene product annual cost ($)
Total hair care customers
Total skin and feminine hygiene customers
U.S. product sales ($ MM)
Brazil & Mexico Population
Population growth rate
Androgenic alopecia patients seeking treatment
Prevalence
Skin and hygiene product customers
Prevalence
Hair care product penetration rate
Skin and hygiene product penetration rate
Hair care product annual cost ($)
Skin and hygiene product annual cost ($)
Total hair care customers
Total skin and feminine hygiene customers
Latin America product sales ($ MM)
China Population
Population growth rate
Androgenic alopecia patients seeking treatment
Prevalence
Skin and hygiene product customers
Prevalence
Hair care product penetration rate
Skin and hygiene product penetration rate
Hair care product annual cost ($)
Skin and hygiene product annual cost ($)
Total hair care customers
Total skin and feminine hygiene customers
China product sales ($ MM)
Total worldwide product sales ($ MM)
2013
315,000,000
2014
318,937,500
2015
322,924,219
2016
326,960,771
2017
331,047,781
2018
335,185,878
2019
339,375,702
2020
343,617,898
2021
347,913,122
2022
352,262,036
2023
356,665,311
2024
361,123,628
2025
365,637,673
2026
370,208,144
2027
374,835,746
2028
379,521,193
2029
384,265,208
2030
389,068,523
37,800,000
12%
25,200,000
8%
38,272,500
12%
26,152,875
8%
40,365,527
13%
27,448,559
9%
41,850,979
13%
29,099,509
9%
42,705,164
13%
29,794,300
9%
43,909,350
13%
30,166,729
9%
45,136,968
13%
30,543,813
9%
46,388,416
14%
30,925,611
9%
46,968,271
14%
31,312,181
9%
47,555,375
14%
31,703,583
9%
48,149,817
14%
32,099,878
9%
48,751,690
14%
32,501,126
9%
49,361,086
14%
32,907,391
9%
49,978,099
14%
33,318,733
9%
50,602,826
14%
33,735,217
9%
51,235,361
14%
34,156,907
9%
51,875,803
14%
34,583,869
9%
52,524,251
14%
35,016,167
9%
0.03%
0.06%
0.04%
0.07%
0.06%
0.07%
0.08%
0.09%
0.15%
0.10%
0.18%
0.12%
0.21%
0.15%
0.25%
0.18%
0.32%
0.22%
0.38%
0.25%
0.44%
0.30%
0.50%
0.22%
0.41%
0.18%
0.32%
0.12%
0.24%
0.07%
0.17%
0.04%
0.14%
0.03%
0.09%
0.01%
300
200
308
205
323
211
339
217
356
224
374
231
392
238
404
245
416
252
429
260
442
267
455
276
469
284
483
292
497
301
512
310
527
319
543
329
11,340
15,120
13,395
18,307
24,219
19,214
33,481
26,190
64,058
29,794
79,037
36,200
94,788
45,816
115,971
55,666
150,298
68,887
180,710
79,259
211,859
96,300
243,758
71,502
202,380
59,233
159,930
39,982
121,447
23,615
87,100
13,663
72,626
10,375
47,272
3,502
6
8
12
17
29
38
48
61
80
98
119
131
112
89
67
49
42
27
318,000,000
1.50%
322,770,000
1.50%
327,611,550
1.50%
332,525,723
1.50%
337,513,609
1.50%
342,576,313
1.50%
347,543,670
1.45%
352,339,772
1.38%
357,096,359
1.35%
361,738,612
1.30%
366,441,214
1.30%
371,204,950
1.30%
376,030,614
1.30%
380,919,012
1.30%
385,870,959
1.30%
390,887,282
1.30%
395,968,816
1.30%
401,116,411
1.30%
47,700,000
15%
31,800,000
10%
49,061,040
15%
32,277,000
10%
50,452,179
15%
32,761,155
10%
51,541,487
16%
33,252,572
10%
52,652,123
16%
33,751,361
10%
53,784,481
16%
34,257,631
10%
54,911,900
16%
34,754,367
10%
56,374,364
16%
35,233,977
10%
57,135,417
16%
35,709,636
10%
57,878,178
16%
36,173,861
10%
58,630,594
16%
36,644,121
10%
59,392,792
16%
37,120,495
10%
60,164,898
16%
37,603,061
10%
60,947,042
16%
38,091,901
10%
61,739,353
16%
38,587,096
10%
62,541,965
16%
39,088,728
10%
63,355,011
16%
39,596,882
10%
64,178,626
16%
40,111,641
10%
0.08%
0.09%
0.10%
0.11%
0.12%
0.13%
0.14%
0.15%
0.15%
0.16%
0.18%
0.18%
0.22%
0.19%
0.25%
0.21%
0.26%
0.22%
0.28%
0.21%
0.31%
0.19%
0.35%
0.17%
0.32%
0.16%
0.24%
0.12%
0.19%
0.07%
0.14%
0.04%
0.09%
0.03%
0.06%
0.01%
140
100
37,206
28,620
8
144
103
151
106
158
109
166
112
174
115
183
119
189
122
194
126
200
130
206
134
212
138
219
142
225
146
232
151
239
155
246
160
254
164
49,061
35,505
59,534
42,590
72,158
49,879
78,978
54,002
96,812
61,664
120,806
66,033
140,936
73,991
148,552
78,561
162,059
75,965
181,755
69,624
207,875
63,105
192,528
60,165
146,273
45,710
117,305
27,011
87,559
15,635
57,020
11,879
38,507
4,011
11
13
17
19
24
30
36
39
42
47
53
51
40
31
23
16
10
1,354,000,000 1,370,248,000 1,386,690,976 1,402,637,922 1,418,066,939 1,433,382,062 1,448,719,250 1,463,930,803 1,479,302,076 1,494,834,748 1,510,530,513 1,526,391,083 1,542,418,189 1,558,613,580 1,574,979,023 1,591,516,303 1,608,227,224 1,625,113,610
1.25%
1.20%
1.20%
1.15%
1.10%
1.08%
1.07%
1.05%
1.05%
1.05%
1.05%
1.05%
1.05%
1.05%
1.05%
1.05%
1.05%
1.05%
176,020,000
13%
81,240,000
6%
184,983,480
14%
89,066,120
7%
194,136,737
14%
95,681,677
7%
197,771,947
14%
98,184,655
7%
201,365,505
14%
102,100,820
7%
207,840,399
15%
107,503,655
8%
210,064,291
15%
113,000,102
8%
212,269,966
15%
131,753,772
9%
214,498,801
15%
147,930,208
10%
216,751,038
15%
156,957,649
11%
219,026,924
15%
166,158,356
11%
221,326,707
15%
170,955,801
11%
223,650,637
15%
178,920,510
12%
225,998,969
15%
187,033,630
12%
228,371,958
15%
188,997,483
12%
230,769,864
15%
190,981,956
12%
233,192,947
15%
192,987,267
12%
243,767,041
15%
195,013,633
12%
0.00%
0.01%
0.00%
0.01%
0.01%
0.01%
0.02%
0.02%
0.03%
0.03%
0.03%
0.04%
0.04%
0.05%
0.04%
0.06%
0.04%
0.06%
0.05%
0.07%
0.05%
0.07%
0.05%
0.06%
0.04%
0.05%
0.03%
0.04%
0.03%
0.03%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
180
120
185
123
194
127
203
130
214
134
224
138
235
143
243
147
250
151
257
156
265
160
273
165
281
170
290
175
298
181
307
186
316
192
326
197
3,520
4,062
4,902
4,453
11,648
9,568
39,554
14,728
50,341
30,630
62,352
43,001
73,523
56,500
84,908
72,465
90,089
88,758
97,538
102,022
100,752
116,311
106,237
105,993
82,751
89,460
67,800
74,813
57,093
60,479
46,154
36,287
34,979
23,158
24,377
9,751
1
16
1
20
3
29
10
44
15
64
20
82
25
103
31
127
36
155
41
181
45
211
47
230
38
201
33
161
28
127
21
93
16
73
10
47
Source: Company Reports and Aegis Capital Corp. estimates
16
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Cosmetics Industry Valuation Overview
Since there have been a number of high-profile acquisition transactions and public
listings in the past several years within the cosmetics and cosmeceuticals sectors, we
believe it is important to highlight the valuation metrics underlying some of these
transactions in this report. In our view, these transactions could provide an important
framework for the manner in which DS Healthcare Group’s core business may be valued
in the future if the firm can demonstrate the ability to rapidly grow sales and improve
profit margins. We believe that the company’s diversified product lineup, global reach,
differentiated branding strategy and insistence on quality could attract attention from
larger companies, including firms such as Valeant (VRX/NYSE, Buy), which are also
active in overlapping territories such as Brazil and other emerging markets.
Table 5: Cosmetics / Cosmeceuticals Precedent Transactions
Transaction Date
Target / Issuer
Transaction
Value ($ MM)
Transaction Type
Buyers / Investors
4/22/2013
Obagi Medical Products, Inc.
$439
Merger / Acquisition
Valeant Pharmaceuticals International
12/19/2012
SkinMedica
$350
Merger / Acquisition
Allergan, Inc.
9/27/2010
St. Tropez Ltd.
$99
Merger / Acquisition
PZ Cussons plc
12/24/2009
Randall International, LP
NA
Merger / Acquisition
LUJC International
12/20/2009
Chattem Inc.
$2,239
Merger / Acquisition
Sanofi S.A.
12/13/2009
Simple Health & Beauty
$390
Merger / Acquisition
Alberto-Culver Co.
6/16/2009
ZIRH Holdings, LLC
NA
Merger / Acquisition
Procter & Gamble Co.
6/1/2009
The Art of Shaving, LLC
$60
Merger / Acquisition
Procter & Gamble Co.
12/3/2008
Nioxin Research Laboratories, Inc.
$300
Merger / Acquisition
Procter & Gamble Co.
9/30/2008
Noxell Corporation (Noxzema)
$81
Merger / Acquisition
Alberto-Culver Co.
3/25/2008
Frederic Fekkai & Co., LLC
$330
Merger / Acquisition
Procter & Gamble Co.
10/30/2007
Burt's Bees, Inc.
$1,205
Merger / Acquisition
Clorox Corp.
7/16/2007
Jemella Limited
$326
Merger / Acquisition
Montagu Private Equity Ltd.
12/18/2006
Avalon Natural Products , Inc.
$120
Merger / Acquisition
The Hain Celestial Group, Inc.
Source: DS Healthcare Group, Inc.
In June 2013, Coty, Inc. (COTY/NYSE, Not Rated), a retailer of fragrances and
cosmetics such as Calvin Klein and NYC New York Color, raised $1 billion in an IPO,
making it the biggest of any consumer products company to be listed in the U.S. In our
view, long-term investors may be drawn to this pure-play beauty company’s prospects for
growth, and management promises renewed efforts in skincare. There are plans for
expansion in developing areas of Asia and Latin America, which represent rapidly
growing markets that are being targeted by other beauty product makers. However, the
firm’s operational performance has not been convincing. It posted $320 million in losses
from write-downs on acquisitions in 2012, and despite being in business since 1904, sales
growth has been comparatively lackluster. Revenues thus far in 2013 have been
effectively flat vs. the prior-year period, but Coty currently has a $6 billion market cap.
Substantial valuations in the beauty industry are relatively common.
Nestlé
(NSRGY.PK, Not Rated) – the nutrition, health, and wellness giant – may be selling its
30% share in L'Oréal SA (LRLCY.PK, Not Rated), owner of Lancôme's well-established
line of skincare, makeup, and fragrance products along with brands such as Garnier hair
care products and Maybelline mascara. Although top-line growth is about 6% yearly,
L'Oréal has a market capitalization of $103 billion, meaning the sale could raise over $30
billion. While L'Oréal is a recognized brand, the majority of its offerings are simply
reiterations of older-generation items like RevitaLift and Age Perfect. In mid-2013,
Estée Lauder (EL) reported only a 7% rise in sales for its most recent quarter, predicting
a potentially smaller increase for the next sequential period. The gain was led by its
skincare line, mainly Advanced Night Repair, which touts a pseudo-scientific theory that
skin restores itself during sleep. Yet, Estée Lauder’s market cap is $26 billion. In our
view, the cosmetics and cosmeceuticals sectors are as much about marketing and
branding as they are about safe and effective products. We believe that DS Healthcare
represents an attractively-positioned opportunity that could receive attention from several
more established cosmetics and cosmeceuticals purveyors in the future.
17
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Capital Structure and Financing History
DS Healthcare performed a 10-for-1 reverse stock split in late 2012, in conjunction with
its up-listing to the NASDAQ Capital Market. The company had ~12.3 million shares
outstanding, along with approximately 250,000 million warrants and only 32,633 options,
as of mid-2013. We thus derive a fully-diluted share count of about 12.5 million shares.
Table 6: DS Healthcare Group Capital Structure (06/30/2013)
Number of Shares
Exercise Price
Expiration Date
Cash, cash equivalents and
marketable securities
Total Cash
$461,384
Common Stock
12,259,279
Options
32,633
$0.10
2015
$3,263
Warrants
253,893
$4.67
2016
$1,185,680
Fully Diluted Shares
12,545,805
$1,650,328
Source: Company reports
The table below depicts the financing history to date in terms of the private sales of
common stock that have taken place. In our view, the fact that DS Healthcare has had to
raise relatively little capital to support its operations shows how efficient the firm’s
business model is and how well-positioned the firm could be to achieve profitability.
Table 7: DS Healthcare Group Financing History
Private Sale of Common Stock
Common
Period
Shares
2010
Q1 2010
Q2 2010
Q3 2010
Q4 2010
2011
Q1 2011
Q2 2011
Q3 2011
Q4 2011
2012
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Gross
Proceeds
Price
Issuance
Costs
Net
Proceeds
111,200
173,400
66,000
100,000
450,600
$
$
$
$
1.80
1.50
2.04
2.50
200,000
260,000
134,500
250,000
844,500
(60,000)
(78,000)
(36,600)
(75,000)
(249,600)
140,000
182,000
97,900
175,000
594,900
325,721
353,083
125,124
803,928
$
$
$
$
2.52
2.59
2.66
-
821,000
916,250
332,250
2,069,500
(223,651)
(179,974)
(56,144)
(459,769)
597,349
736,276
276,106
1,609,731
292,000
292,000
1,546,528
$
$
$
$
2.51
-
732,000
732,000
3,646,000
(146,400)
(146,400)
(855,769) $
585,600
585,600
2,790,231
$
$
Source: Company reports
We consider DS Healthcare Group to be a relatively lean and efficiently-run firm.
Investors should note that after less than a decade in operation, the firm has developed a
broad portfolio of proprietary products; established a network of third-party
manufacturers that can execute production runs on an order-by-order basis (thus ensuring
that the company does not need to maintain excess inventory); and set up an array of
distributors via which its products can be effectively commercialized without requiring
significant in-house sales and marketing infrastructure. The accumulated deficit to date
is approximately $6 million, which corresponds to a relatively modest burn rate.
18
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Financial Review and Outlook
Revenue: We forecast $15.6 million and $20 million in revenue for 2013 and 2014,
respectively. Management does not provide guidance.

Additional Markets: We expect DS Healthcare to start commercializing its
products in the People’s Republic of China over the course of the coming
quarters. Further expansion into India and the Pacific Rim is anticipated.

Profitability in 2014: We estimate that DS Healthcare should be able to
achieve profitability on a sustainable basis starting in 2014, as sales continue
to ramp and the company maintains an efficient approach to conducting R&D.
Gross Margins: We project that the gross margins on the firm’s overall product lineup
are likely to approximate 40% – 45%, which should gradually improve over time as
economies of scale are realized.
Operating Expenses: For 2013, we estimate operating expense levels that are slightly
higher than those seen in 2012 and 2011. We estimate R&D of $0.2 million in 2013, as
the company continues to improve its proprietary formulations; however, we do not
anticipate that this firm is ever likely to spend a substantial amount on R&D as its
activities in this area tend to be less capital-intensive and do not involve the typical costs
associated with pharmaceutical development (e.g. human clinical trials).
Taxes: We assume a ~40% corporate tax rate. As of end-2012, the company had net
operating loss carry-forwards of $4.3 million. Unused net operating loss carry-forwards
will expire at various dates beginning in 2029 and ending in 2031. In our estimation, the
existing carry-forwards are unlikely to substantially offset future taxable income.
Share Count: The outstanding fully-diluted share count stands at 13 million shares. The
fully-diluted shares account for the conversion of 0.3 million shares in the form of
options and warrants, with a total of 0.3 million shares being potentially dilutive. Given
the company’s cash position, strategic goals, and capital structure, a share repurchase
program is unlikely, in our view.
EPS: We forecast EPS of ($0.12) and $0.03 for 2013 and 2014, respectively. We
estimate that the company could achieve breakeven in early to mid-2014 and turn
sustainably profitable within that time frame on a trailing twelve-month basis.
Balance Sheet: The firm held roughly $0.5 million in cash as of June 30th, 2013. We
estimate $9.3 million in cash by late 2014, reflecting further net cash spend and a single
equity financing in early 2014.
Cash Flow: We estimate that the firm will consume roughly $0.9 million in operating
cash flows during 2013. Additional funding may be required to support operational
activities beyond 2013, particularly if the company’s revenue trajectory is not as solid as
we project or if the firm elects to pursue additional expansion via acquisition.
Guidance: The firm does not provide financial guidance.
19
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Management Team
Daniel Khesin
President & Chief Executive Officer
Mr. Khesin founded DS Healthcare Group under its original name, Divine Skin,
following his discovery of several innovative product formulations for the personal care
space. He has served as President and CEO since the firm was founded in 2007. Prior to
that time, Mr. Khesin was CEO of DK Design Group, Inc., a professional audio
company, where he managed investments, engaged in the incubation of new technology
and developed a distribution network from January 2004 to 2005. Previously, he was
Vice President of Operations of Free Razor, LLC, a continuity program for personal care
products from 2003 to 2004. Mr. Khesin attended Hunter College in New York City.
Gary Rodney, CPA, M.B.A.
Chief Financial Officer
Mr. Rodney currently serves as the firm’s acting CFO, and possesses over 20 years of
experience with preparing SEC filings, providing CFO / controller services, and raising
capital for private and public companies. He holds a B.S. degree in business
administration from Florida International University and an M.B.A. from Barry
University, Miami Shores, FL. Mr. Rodney is also a Certified Public Accountant.
Michael Paul Strong
Director of Operations
Michael Paul Strong has served as the firm’s Vice President of Sales since its inception.
Prior to joining DS Healthcare, he was a language instructor in Rio de Janeiro, Brazil.
Mr. Strong is responsible for all sales and product distribution activities and oversees our
sales, education and marketing personnel. He is fluent in English and Portuguese.
Board of Directors
Daniel Khesin, M.D.
Chairman, President & CEO
See management bios in previous section.
Keith Markey, Ph.D., M.B.A.
Independent Director
Dr. Markey has served as the science director for Griffin Securities Inc., an investment
banking firm based in New York City, since November 2007. From 1985 through
October 2007, he served as junior analyst and associate research director for Value Line
Publishing Co. Dr. Markey is currently a member of the New York Academy of Science,
Licensing Executive Society and the National Association of Science Writers. He
received his undergraduate degree from Syracuse University, a Ph.D. from the University
of Connecticut and an M.B.A. degree from New York University.
Matthew Pfeffer, CPA
Independent Director
Mr. Pfeffer has been Corporate Vice President and CFO of Mannkind Corp.
(MNKD/NASDAQ, Not Rated) since April 2008. Previously, Mr. Pfeffer served as
Chief Financial Officer and Senior Vice President of Finance and Administration of
VaxGen, Inc. from March 2006 until April 2008, with responsibility for finance, tax,
treasury, human resources, IT, purchasing and facilities functions. Prior to VaxGen, Mr.
Pfeffer served as CFO of Cell Genesys, Inc. Prior to that, he served in a variety of
financial management positions at other companies. He began his career at Price
Waterhouse, has a bachelor’s degree in accounting from the University of California,
Berkeley and is a Certified Public Accountant.
20
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Bernhard Opitz
Independent Director
Mr. Opitz has served as Executive Vice President of Cody Laboratories Inc., a
manufacturer of APIs and pharmaceutical solutions, since August 2011. He holds an
MS/BS degree in Engineering from the Technical University Graz, Austria. Mr. Opitz
previously held various positions in Engineering, Manufacturing, and Product
Development at Bayer AG (XETRA: BAYN.DE, Not Rated) in Germany, Italy and the
U.S. from 1980 to 2000, including Vice President of Operations, and Senior Vice
President of Engineering for Bayer Corp. Before joining Cody Laboratories, Mr. Opitz
also served as Senior Vice President for Ikonisys, a medical device start-up, as Vice
President Engineering for Wells’ Dairy, a privately held company, as Vice President
Manufacturing for Nanosphere Inc., a diagnostic company, and as Senior Vice President
for Unilife Corp., a medical device company.
21
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Table 8: DS Healthcare Group, Inc. (DSKX) – Historical Income Statements, Financial Projections
FY end December 31
$, except per share data
4QE
2013E
1QE
3,431,154
-
3,828,460
-
4,390,250
-
15,615,229
-
3,550,000
-
3,965,365
3,431,154
3,828,460
4,390,250
15,615,229
6,749,657
196,107
3,640,433
4,249,470
2,190,681
28,998
728,000
1,508,675
1,830,068
47,702
846,664
1,369,558
1,914,230
41,000
900,000
1,200,000
2,085,369
50,000
1,050,000
1,150,000
Total expenses
14,835,668
4,456,354
4,093,992
4,055,230
4,335,369
Gain (loss) from operations
(3,611,244)
(490,989)
(662,838)
(226,770)
54,881
(48,133)
(19,745)
(41,817)
(35,000)
(38,000)
36,266
56,615
(55,954)
-
-
Total revenue
Expenses
Cost of product and service revenue
Research & development
Selling and marketing
General and administrative
Other income/expense
Interest income/expense
Realized loss on marketable securities
Other income/expense
Total investment income and other
Loss before provision for income taxes
Deferred income tax benefit
Provision for income taxes
Net loss/income
Noncontrolling Interest
Net loss Attributable to Shareholders
Net loss per share (basic)
Net loss per share (diluted)
Weighted average number of shares outstanding (basic)
Weighted average number of shares outstanding (diluted)
1QA
11,224,424
-
3,965,365
-
11,224,424
2013E
2QA
3QE
Revenue
Product revenue
Service revenue
Research and other
2012A
(11,867)
3QE
4QE
2014E
2015E
4,650,000
-
5,300,000
-
6,500,000
-
20,000,000
-
28,800,000
-
3,550,000
4,650,000
5,300,000
6,500,000
20,000,000
28,800,000
8,020,348
167,700
3,524,664
5,228,233
1,597,500
53,000
1,100,000
1,100,000
1,976,250
55,000
1,200,000
1,200,000
2,120,000
70,000
1,350,000
1,300,000
2,600,000
80,000
1,500,000
1,500,000
8,293,750
258,000
5,150,000
5,100,000
12,779,000
475,000
7,200,000
6,650,000
16,940,945
3,850,500
4,431,250
4,840,000
5,680,000
18,801,750
27,104,000
(1,325,716)
(300,500)
218,750
460,000
820,000
1,198,250
1,696,000
(134,562)
(40,000)
(50,000)
(70,000)
(80,000)
-
-
-
-
661
36,870
(97,771)
(35,000)
(38,000)
(454,119)
(760,609)
(261,770)
16,881
(7,996)
-
(2,893)
-
(3,623,111)
(16,366)
(3,606,745)
(462,115)
(4,122)
(457,993)
(763,502)
(6,439)
(757,063)
(261,770)
(4,000)
(257,770)
16,881
1,000
15,881
(1,470,506)
(13,561)
(1,456,945)
(0.32)
(0.32)
(0.04)
(0.04)
(0.06)
(0.06)
(0.02)
(0.02)
0.00
0.00
(0.12)
(0.12)
(3,623,111)
-
11,106,145
11,106,145
12,137,997
12,137,997
12,209,433
12,209,433
-
12,409,279
12,409,279
-
12,814,279
12,814,279
(240,000)
-
(200,000)
-
(133,901)
(40,000)
(50,000)
(70,000)
(80,000)
(240,000)
(1,459,617)
(340,500)
168,750
390,000
740,000
958,250
(64,125)
(148,200)
(281,200)
(493,525)
(598,400)
(340,500)
2,000
(342,500)
104,625
4,000
100,625
241,800
6,000
235,800
458,800
8,000
450,800
464,725
20,000
444,725
897,600
40,000
857,600
(0.02)
(0.02)
0.01
0.01
0.01
0.01
0.03
0.03
0.03
0.03
0.05
0.05
16,569,354
16,569,354
16,569,404
16,569,404
16,569,454
16,569,454
16,131,879
16,131,879
16,569,679
16,569,679
(10,889)
-
12,392,747
12,392,747
Source: Company Reports and Aegis Capital Corp. estimates
22
2014E
2QE
AEGIS CAPITAL CORP.
-
14,819,304
14,819,304
(200,000)
1,496,000
DS Healthcare Group, Inc.
October 30, 2013
Table 9: DS Healthcare Group, Inc. (DSKX) – Historical Balance Sheet, Financial Projections
FY end December 31
$ in thousands, except per share data
12/31/12A
3/31A
2013E
6/30A
9/30
12/31
12/31/13E
3/31
2014E
6/30
9/30
12/31
12/31/14E
12/31/15E
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Restricted cash
Accounts receivable
Inventories
Other assets and prepaid expenses
412,488
2,125,641
3,453,950
159,164
196,513
2,368,864
3,482,883
117,041
461,384
2,190,115
3,139,267
329,032
289,873
2,871,345
2,768,155
329,032
307,034
3,292,688
2,673,449
329,032
307,034
3,292,688
2,673,449
329,032
9,590,786
2,662,500
2,475,722
329,032
9,411,686
3,487,500
2,524,450
329,032
9,413,971
3,975,000
2,593,040
329,032
9,333,428
4,875,000
2,764,583
329,032
9,333,428
4,875,000
2,764,583
329,032
8,817,244
6,375,000
4,259,667
329,032
Total current assets
6,151,243
6,165,301
6,119,798
6,258,405
6,602,202
6,602,202
15,058,040
15,752,668
16,311,043
17,302,043
17,302,043
19,780,943
Property and equipment
Intangible assets
Restricted cash
Marketable securities
Other assets
293,720
1,674,852
-
277,699
1,647,694
-
258,029
1,555,199
-
238,329
1,462,699
-
218,629
1,370,199
-
218,629
1,370,199
-
198,929
1,277,699
-
179,229
1,185,199
-
159,529
1,092,699
-
139,829
1,000,199
-
139,829
1,000,199
-
61,029
630,199
-
104,861
129,635
116,050
116,050
116,050
116,050
116,050
116,050
116,050
116,050
116,050
116,050
Total Assets
8,224,676
8,220,329
8,049,076
8,075,483
8,307,080
8,307,080
16,650,718
17,233,146
17,679,321
18,558,121
18,558,121
20,588,221
Current liabilities
Accounts payable
Accrued expenses
Accrued acquisition and integration costs
Deferred revenue
Current portion of long-term debt
Other current liabilities
3,032,422
448,658
580,407
2,324,417
449,836
1,197,384
376,150
2,590,349
374,879
1,437,442
429,534
2,027,615
374,879
2,012,353
429,534
2,167,684
374,879
1,500,000
429,534
2,167,684
374,879
1,500,000
429,534
1,925,250
374,879
1,312,572
429,534
2,215,625
374,879
1,500,000
429,534
2,420,000
374,879
1,500,000
429,534
2,840,000
374,879
1,500,000
429,534
2,840,000
374,879
1,500,000
429,534
3,972,500
374,879
1,500,000
429,534
Total current liabilities
4,061,487
4,347,787
4,832,204
4,844,381
4,472,097
4,472,097
4,042,235
4,520,038
4,724,413
5,144,413
5,144,413
6,276,913
45,177
-
42,845
-
39,468
-
39,468
-
39,468
-
39,468
-
39,468
-
39,468
-
39,468
-
39,468
-
39,468
-
39,468
-
4,106,664
4,390,632
4,871,672
4,883,849
4,511,565
4,511,565
4,081,703
4,559,506
4,763,881
5,183,881
5,183,881
6,316,381
5,500
12,120
9,244,748
(30,000)
(5,097,990)
5,500
12,160
9,342,958
(30,000)
75,551
(5,555,984)
5,500
12,259
9,524,032
(30,000)
5,587
(6,313,046)
5,500
12,559
9,799,732
(30,000)
5,587
(6,570,816)
5,500
13,069
10,386,222
(30,000)
5,587
(6,554,935)
5,500
13,069
10,386,222
(30,000)
5,587
(6,554,935)
5,500
13,073
19,500,218
(30,000)
5,587
(6,897,435)
5,500
13,073
19,500,218
(30,000)
5,587
(6,796,810)
5,500
13,073
19,500,218
(30,000)
5,587
(6,561,010)
5,500
13,073
19,500,218
(30,000)
5,587
(6,110,210)
5,500
13,073
19,500,218
(30,000)
5,587
(6,110,210)
5,500
13,073
19,500,218
(30,000)
5,587
(5,252,610)
Total shareholder's equity
Noncontrolling Interest
Total Equity
4,134,378
(16,366)
4,118,012
3,850,185
(20,488)
3,829,697
3,204,332
(26,928)
3,177,404
3,222,562
(30,928)
3,191,634
3,825,443
(29,928)
3,795,515
3,825,443
(29,928)
3,795,515
12,596,943
(27,928)
12,569,015
12,697,568
(23,928)
12,673,640
12,933,368
(17,928)
12,915,440
13,384,168
(9,928)
13,374,240
13,384,168
(9,928)
13,374,240
14,241,768
30,072
14,271,840
Total liability and shareholder's equity
8,224,676
8,220,329
8,049,076
8,075,483
8,307,080
8,307,080
16,650,718
17,233,146
17,679,321
18,558,121
18,558,121
20,588,221
Liabilities and shareholder equity
Deferred revenue
Other long-term liabilities
Long-term accrued acquisition costs
Long-term deferred tax liability
Total Liabilities
Shareholder's equity
Preferred stock
Common stock
Additional paid-in capital
Stock subscription
Accumulated other comprehensive income
Deficit accumulated
Source: Company Reports and Aegis Capital Corp. estimates
23
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Table 10: DS Healthcare Group, Inc. (DSKX) – Historical Statement of Cash Flows, Financial Projections
FY end December 31
$ in thousands, except per share data
Cash flows from operating activities
Net loss
Adjustments for:
Stock-based compensation
Depreciation & amortization
Realized loss on marketable securities
Allowances
Other non-cash expense
Change in operating assets & liabilities
Accounts receivable
Inventories
Other current assets
Accounts payable
Accrued expenses
Deferred revenue
Other liabilities
Total change in operating assets & liabilities
Cash flows from operating activities
Cash flows from investing activities
Investment in PPE
Purchases of injection molds
Purchases of brand rights
Advances
Purchases of Mexican Sudsidiary
Sales of Assets
Security deposits
Cash flows from investing activities
2013E
2QA
2012A
1QA
(3,623,110)
(462,115)
(763,503)
(317,724)
165,456
832,448
293,023
98,250
143,284
181,174
42,283
112,200
112,200
279,424
409,967
594,534
4,070
154,591
-
(50,894)
-
(100,000)
-
(100,000)
-
(96,303)
-
(444,845)
18,098
5,175
(3,123)
(255,045)
148,743
(530,997)
(596,987)
237,803
335,456
(164,151)
265,932
(74,958)
(18,317)
581,765
(9,175)
(681,230)
471,112
(562,734)
(772,852)
(1,078,376)
(570,669)
163,182
137,356
(270,131)
(92,475)
(1,458,941)
987,847
(158,976)
(162,569)
(330,003)
130,426
(992,216)
(1,777,014)
(160,753)
(38,426)
(143,847)
297,452
4,678
(36,144)
(77,040)
(12,037)
(35,139)
(21,941)
-
502,558
48,800
(1,619,788)
(130,961)
1,347,237
443,574
88,862
(1,810,173)
3QE
4QE
-
-
-
-
2013E
(1,377,886)
(33,978)
(35,139)
(8,027)
(8,027)
-
(55,203)
20,039
4,801
2,899
399,626
311,758
574,911
74,647
1,360,942
20,039
4,801
(52,304)
1QE
2014E
2015E
634,046
984,046
1,484,434
1,484,434
112,200
112,200
112,200
112,200
448,800
448,800
779,514
197,727
(264,721)
712,520
478,266
(825,000)
(48,727)
265,375
(608,352)
(283,356)
(862,500)
(135,257)
354,375
(643,382)
102,864
(900,000)
(206,686)
420,000
(686,686)
409,560
(1,807,986)
(192,943)
775,029
(1,225,900)
707,334
(1,807,986)
(192,943)
775,029
(1,225,900)
707,334
-
-
-
-
-
-
-
-
-
-
-
-
184,276
-
-
184,276
-
-
(6,232)
393,394
(3,377)
308,381
276,000
850,911
587,000
661,647
(9,609)
863,000
2,214,333
9,114,000
8,929,724
Net increase/ decrease in cash and cash equivalents
Effect of exchange rate
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
(871,855)
1,284,343
412,488
(258,796)
42,821
412,488
196,513
302,105
(37,234)
196,513
461,384
(227,466)
461,384
233,919
569,171
233,919
803,090
385,015
5,587
412,488
803,090
9,407,990
803,090
10,211,080
AEGIS CAPITAL CORP.
4QE
212,796
512,800
1,015,358
24
3QE
(346,454)
Cash flows from financing activities
Proceeds from debt
Repayments on asset-backed loan
Repayment of debt
Proceeds from issuance of common stock and warrants
Cash flows from financing activities
Source: Company Reports and Aegis Capital Corp. estimates
2014E
2QE
(184,276)
(99,080)
10,211,080
10,111,999
102,864
10,111,999
10,214,864
409,560
10,214,864
10,624,424
9,114,000
9,114,000
9,821,334
803,090
10,624,424
707,334
10,624,424
11,331,758
DS Healthcare Group, Inc.
October 30, 2013
Public Companies Mentioned in this Report:
Allergan, Inc. (AGN/NYSE)
Anika Therapeutics (ANIK/NASDAQ)
Bayer AG (BAYN.DE/XETRA)
Biologix Hair (BLGX/OTCBB)
Bonamour Inc. (BONI/OTCBB)
CCA Industries (CAW/AMEX)
China Nepstar Chain Drugstore (NPD/NYSE)
Clorox Corp. (CLX/NYSE)
Coty (COTY/NYSE)
Empowered Products (EMPO/OTCBB)
Estée Lauder (ELAA.DU/DSE)
Fibrocell Science (FCSC/AMEX)
GlaxoSmithKline (GSK/NYSE)
The Hain Celestial Group (HAIN/NASDAQ)
Imprimis Pharmaceuticals (IMMY/NASDAQ)
Liberator Medical Holdings (LBMH/OTCBB)
MannKind Corp. (MNKD/NASDAQ)
Muscle Pharm Corp. (MSLP/OTCBB)
Procter & Gamble (PG/NYSE)
PZ Cussons plc (PZC.L/LSE)
Sanofi S.A. (SNY/NYSE)
Valeant Pharmaceuticals International (VRX/NYSE, Buy)
25
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Required Disclosures
Price Target
Our 15-month price target is $5.50 per share.
Valuation Methodology
We utilize a risk-adjusted Net Present Value calculation to derive our price objective. Our analysis of the future potential for the firm's
marketed consumer healthcare products yields an rNPV of $90 million, to which we add the projected cash of $9 million as of end-2014.
This translates into a price per share of $5.50, assuming roughly 17 million fully-diluted shares outstanding as of the end of 2014.
Risk Factors
Issues that could prevent the achievement of our price objective include, but are not limited to, clinical, regulatory, competitive,
reimbursement and financial risks. Products in development may not advance due to inadequate safety, efficacy, or tolerability. Regulatory
agencies may decline to allow new products onto the market in specific territories, or force the company to withdraw its existing marketed
products if the agencies determine that there could be safety concerns. The firm may require substantial funding to execute on its business
model, which could be dilutive to current shareholders. We expect competition for the company's products from several public and private
companies developing both over-the-counter as well as prescription-grade therapeutic solutions for hair and skin care. Distribution and
manufacturing of the firm's proprietary products could depend upon third-party organizations.
For important disclosures go to www.aegiscap.com.
Research analyst compensation is dependent, in part, upon investment banking revenues received by Aegis Capital Corp.
Aegis Capital Corp. intends to seek or expects to receive compensation for investment banking services from the subject company within
the next three months.
26
AEGIS CAPITAL CORP.
DS Healthcare Group, Inc.
October 30, 2013
Investment Banking
Services/Past 12 Mos.
Rating
BUY [BUY]
HOLD [HOLD]
SELL [SELL]
Percent
86.11
13.89
0.00
Percent
29.03
0.00
0.00
Meaning of Ratings
A) A Buy rating is assigned when we do not believe the stock price adequately reflects a company's prospects over 12-18 months.
B) A Hold rating is assigned when we believe the stock price adequately reflects a company's prospects over 12-18 months.
C) A Sell rating is assigned when we believe the stock price more than adequately reflects a company's prospects over 12-18 months.
Other Disclosures
The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all
inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Aegis Capital
Corp., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein,
and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts
of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and
are subject to change without notice. Aegis Capital is under no obligation to provide updates to the opinions or information provided
herein. Additional information is available upon request.
© Copyright 2012 by Aegis Capital
Aegis Capital Corp.
(212) 813-1010
810 Seventh Avenue, 18th Floor
New York, New York 10019
27
AEGIS CAPITAL CORP.