Biofrontera AG
Q3 2021 Earnings Call Transcript

Published: 18 Nov 2021

[Operator:]

Dear ladies and gentlemen, welcome to the conference call to discuss the Q3 2021 Earnings Results. At our customers request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Pamela Keck, Head of IR, who will lead you through this conference. Please go ahead.

[Pamela Keck:]

Thank you. Good morning. Good afternoon. And welcome to Biofrontera's earnings conference call for the third quarter, 2021. Yesterday, we issued a press release announcing financial results for the nine months ended September 30, 2021. We encourage everyone to read the press release, as well as the Q3 earnings report both of which are available on our website. Please note that certain information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that during this call, Biofrontera's management will be making forward-looking statements. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. All risks and uncertainties are detailed in and are qualified by the cautionary statements contained in Biofrontera's press releases and all SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, November 18, 2021. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. And with that, I would now like to turn the call over to Hermann Lübbert, our CEO.

[Hermann Lübbert:]

Thank you, Pamela. And thank you very much, ladies and gentlemen, for taking the time to participate in today's call. With me today is Ludwig Lutter, our CFO. He will present the financial results in a second. Following that I would like to share with you updates regarding our current regulatory and clinical development, as well as the current business performance and activities. But first now to the financial results of the first nine months of 2021. For that, I would like to hand over to Ludwig.

[Ludwig Lutter:]

Thank you, Hermann, and thank you all for joining us today. I'd like to start by providing you with an overview of the financial results for the nine months ended September 30, 2021. Following the challenges resulting from COVID 19 pandemic, the company's experienced a slow start at the beginning of 2021. However, from mid-March onwards, a clear recovery in sales development became apparent. This includes our key market the U.S., where we have been generating sales comparable to pre-pandemic levels again since mid-March. As a result, we can look back on an encouraging nine months period. But first let me talk about the general revenue development. For the period January 1 to September 30, 2021 Biofrontera Group generated total sales of €18.5 million, a 11% decrease compared to €20.8 million in sales in the same period last year. Please note, the total revenue in 2020 - in the 2020 reporting period included a one-time payment of €6 million received by the company under a license agreement in April 2020. Therefore, we believe it is important to compare revenue generated from actual product sales. Revenues from product sales in the first nine months of 2021 were €14.3 million up 29% compared to the first nine months 2020. The year-on-your sales recovery already perceived in mid-March 2021, especially in our largest market -- face market in the U.S. continued, resulting from the recovery of the general epidemic situation in the U.S. as well as in Germany. Due to the pandemic for better comparability, we not only compare the revenue development in the reporting period with the prior year -- with the prior year period, but also the revenue in 2019, the most recent pre-pandemic year. The comparison with product sales in 2019 shows that since the beginning of 2021, product sales in all markets have been back to pre-pandemic levels despite the fact that the first few months were still heavily impacted by the pandemic, particularly in the U.S. Let's take a closer look at the U.S. our key market. In the U.S. the company generated revenues from product sales in the amount of €12.3 million in the first nine months of the year, compared to €9.1 million in the same period last year, an increase of 36%. While sales in the U.S. 2020 as well in January and February of 2021 were significantly lower than the previous year due to the pandemic, the Biofrontera Group was able to show a considerable year-on-year sales recovery which started as mentioned about mid-March 2021. Compared to U.S. product face in 2019, the company had more than a slight decrease or decrease of about 9% in the month of January to September 2021. As already mentioned, this was mainly due to the weak sales months of January and February this year due to the pandemic as well as the lack of or lower sales of Ameluz and Xepi respectively. Moving on to the German market. In Germany, the company generated product sales of €3.9 million, which is comparable with our prior -- with the previous year's level. For added transparency, it is worth mentioning that revenues from product sales in Germany increased in 2020 despite pandemic related restrictions, and the initial Corona shock freeze in April 2020. This was aided by the possibility of daylight PDT, which can be performed without direct contact with a physician. Compared to the first nine months of 2019, that is pre-pandemic again, the company recorded an increase of roughly 20% in Germany for the current reporting period, and the rest of Europe, sales improved by 64% to €2.2 million compared to €1.4 million in the nine months period in 2020. Following Galenica AB distributions start of Ameluz and the BF-RhodoLED, in the Scandinavian countries by mid-year another distribution license has been granted to Poland to meet the German term Gesellschaft für klinische Spezialpräparate mbH is the name of the company. The one-time license fee payment of €50,000 paid to the company upon conclusion of this contract is included in the European sales. Compared to the first nine months of 2019, we generated about 22% higher sales during the same period in 2021 in the European markets other than Germany. Given the volatile sales development in our markets due to the constantly changing governmental restrictions, we have been publishing preliminary sales numbers on a monthly basis from April through September this year. This rather unusual short term disclosure practice, which was intended to show the capital markets that safe recovery out of the pandemic. Our aim was to give our shareholders a better opportunity to compare the normal/non-pandemic-related business development. As we are now thankfully, back to pre-pandemic sales levels, that is 2019 sales levels, we have decided to discontinue this monthly practice so as of the month of September, as of the month of September. Furthermore, we would not want to impose this disclosure practice in our subsidiary Biofrontera Inc. which recently completed its own IPO on NASDAQ. Now back to the reporting period, the first nine months of 2021, gross profit decreased by €2.5 million in the reporting period to €15.8 million compared to €18.3 million in the prior year period. The gross margin decreased to 85% compared to 88% in the prior year period. Again, this is mainly due to the one time license payment received as part of a license agreement in the amount of €6 million included in the prior year's number. Research and development costs increased to €4.5 million in the first nine months of 2021 compared to €3.4 million in the previous year period, which is mainly due to the recommencement of clinical studies, which had been put on hold as a result of the COVID-19 pandemic. Research and development expenses include the cost for clinical trials, but also the expenses for regulatory affairs that is for the granting, maintenance and expansion of our approvals. General and administrative expenses increased to €7.6 million in the nine month period of 2021 from €6.9 million in 2020, mainly due to cost saving measures implemented in the previous year, again, as a result of the COVID-19 pandemic, as well as the increase in the provision or accrual for anticipated litigation costs for the DUSA litigation in the U.S. Sales and marketing expenses amounted to €16.3 million in the reporting period, comparable with the previous year's level, which was however due to an impairment loss of €2 million on the Xepi license included in the prior year's figure. Selling expenses mainly include the costs for our own sales force in Germany, Spain the U.K. and the United States, as well as marketing expenses. In the 2021 financial year, EBITDA and EBIT were introduced as key performance indicators for the management reporting. Both have become established international as key performance indicators and are replacing the previously reported KPI of profit or loss from operating activities. Group EBITDA included earnings before interest, taxes, depreciation and amortization and decreased by €4.3 million to negative €9.7 million in the reporting period, compared with negative €5.4 million in the prior period, which again, is also due to the previously mentioned one time license payment in April 2020 as well as the impairment loss on the Xepi license in March 2020. Group EBIT includes earnings before interest and taxes and decreased by €2.1 million to negative €12.1 million compared with negative €10 million in the first nine months 2020. Cash and equivalents amounted to €29.5 million as of September 30, 2021 compared to €16.5 million on December 31 of last year. Now the IPO of Biofrontera Inc. in October generated a gross emission proceeds of USD18 million, as announced on November 2, 2021. From today's perspective, Biofrontera Group has sufficient funds to implement the group's strategy in the coming 12 months. The 8 million shares in Biofrontera Inc. held by Biofrontera AG have also become tradable as a result of the IPO and could be available as an additional financial reserve. In addition, I'd like to mention that the company has terminated the loan from the European Investment Bank prematurely. The company announced on November 3 this year to repay the loan in full including interest and other fees, still this year in 2021. And with this summary, I'd like to hand over back to Herman, who will update you on the operational front.

[Hermann Lübbert:]

Thank you, Ludwig. I'd like to take the opportunity to briefly outline the events of the last few months to full year. In the recent weeks, there has been some upheaval at Biofrontera, which also affects me personally, and which I would like to explain to you as some of you have been longstanding company owners of Biofrontera. For this reason, I would like to take this opportunity to provide you with a more detailed explanation of the decision-making process resulting actions. It has become increasingly impossible for Biofrontera AG to actively and flexibly structure the financial basis of the company due to the blocking that has existed for years in the implementation of the authorized capital, which was resolved by you, the shareholders at various annual general meetings. Especially, after the exceptional situation of the Corona pandemic, which we have managed to cope with successfully on the expense side as well as on the sales side, we must make the best possible use of the resulting goal momentum. Biofrontera's future clearly lies in the U.S. market, as this is where we have the greatest growth potential with our product, significantly increasing marketing and sales efforts here is therefore the cornerstone for successful corporate goals. However due to the situation described above, the investments required for rapid growth in the U.S. market can no longer be provided by Biofrontera AG. The financial independence of Biofrontera Inc. was therefore the only sensible way to consistently pursue our expansion strategy, which we have been successfully pursuing for years. With the independent IPO of our U.S. subsidiary Biofrontera Inc. at the end of October, we have created the prerequisites for it to now be able to grow and develop flexibly and independently of the financing options of Biofrontera AG so that it can effectively exploit the great potential of the U.S. market. The German Biofrontera companies with benefits directly from this goal Ameluz license and supply agreement. Therefore, it is irrelevant whether Biofrontera Inc. is still a controlled subsidiary or not, to the contrary, the shares in Biofrontera Inc. held by Biofrontera AG has become marketable through the IPO, and can be used flexibly to finance by Biofrontera AG should it be required. A capital increase of Biofrontera AG has therefore become unnecessarily for a long time. Since the USA, represents by far the largest sales market for the entire Biofrontera Group the whole of the growth engine within the Group and to Biofrontera Inc. The cause for future growth of the entire Biofrontera Group will be determined in Biofrontera Inc. After originally agreeing to extend my personal term of office on the management Board of Biofrontera AG only, until December 31, 2022 I have now decided to remain at the disposal of the Biofrontera Group for further three years. I would like to devote these three years where I see the greatest possible benefits for the company. Thus on November 10, 2021, I submitted my request for early retirement as CEO and Member of the Management Board to the Supervisory Board of Biofrontera AG. In the best interest of all Biofrontera AG companies I will fully devote myself to my duties as Executive Chairman of Biofrontera Inc. in the future. While I will continue to be a part of the company, I would like to take this opportunity to thank you very much for the tasks you have placed in me and the entire company over the years. I hope that the seeds we have planted over many years will finally come to fruition in the near future. For succession plan for my position was initiated by the Supervisory Board when my contract was extended about a year ago. And we are confident that the appointment will be made in such a way that they reflect the strategic approach of Biofrontera AG. Along with these strategic steps Biofrontera AG has also continued to make progress on the regulatory side. Following the FDA's green-light for the approval process of the new larger PDT lamp RhodoLED XL in June 2021. We have finally received approval for the RhodoLED XL lamp, for the U.S. market in October. This sets the stage for the production of the lamp so that we can start sales in the U.S. in the course of next year. The lamp will already be used in our clinical trials which are about to start. Earlier this week, we announced that two clinical studies for Ameluz are commencing in the USA, for which clinical sites are currently being initiated. Specifically, seven sites are being initiated for the Phase 2b study for the treatment of moderate-to-severe acne in adults and eight sites for the Phase I safety study in which the safety of photodynamic therapy with the simultaneous application of three tubes of Ameluz will be investigated. Study number one includes 126 adult patients suffering from moderate-to-severe acne, which will be treated with Ameluz PDT or placebo. The efficacy of Ameluz PDT will be tested with incubation durations of one and three hours compared to placebo. The primary endpoint of the study is the absolute change in the number of inflammatory lesions and an improvement in symptoms as assessed by the physician conducting the study. The other study evaluates the safety and tolerability of Ameluz in the treatment of AK located on the face and scalp with PDT together with the new RhodoLED XL lamp. The study includes 100 patients with mild-to-severe actinic keratoses, each patient will receive the content of three entire tubes of Ameluz for tubes directed treatment. This study comes on the back of a maximal use pharmacokinetics clinical study completed in early 2021. As announced in June, the study results from that pharmacokinetic study were presented to the FDA. In that meeting, the FDA requested another safety study focusing on transient application side effects, before allowing the amendment of the product information be changed to three tubes per treatment. Currently, the product information limits the use to one tube of Ameluz per treatment. Both studies are focused on optimizing market positioning and expanding market share for our FDA approved prescription like Ameluz for photodynamic therapy in our largest market the United States. Studies have commenced with site initiations for both studies being underway. We expect patient recruitment to start before the end of the year. Now a few words on the current sales performance, as we have already heard from Ludwig the Biofrontera Group can look back on an encouraging nine months period due to a significant recovery in sales in the second and third quarters' of 2021. The company has benefited in terms of revenue from photodynamic therapy with daylight or daylight PDT for short, in the German market last year, even in the midst of the pandemic. With our sales in Germany having increased even in this year, the pandemics that set us back significantly last year and our, key market the United States as a result of the Corona measures. In the reporting period, however, Biofrontera was able to create new sales momentum, particularly in the U.S., such that sales gradually picked up over the last two quarters, and we were even able to grow by comparison to the pre-pandemic years. However, we are not out of the woods yet with regards to the Corona-related restrictions on visits to doctors' offices, both for patients and our sales team. The pandemic-related restrictions have by no means completely disappeared and the doctors' offices and continue to make the work of our sales teams more difficult. However, the recovery in our sales shows that everyone involved is learning to cope with the situation. We firmly believe that the continued recovery will also translate into further sales growth. Of course, we also view the current development of the pandemic with concern and hope that there will be no further significant downwards trend. Briefly about Xepi, our second product in the U.S. portfolio, Xepi could hardly be promoted during the pandemic, and the scheduled relaunch could only start in the past few days. As a product shipment from our licensor was delayed. This time was used to work on product positioning and to prepare the new campaign. Following the restocking of many U.S. pharmacy inventories, our sales force is now able to start promoting the product again at full strength. All in all, the business performance in the first nine months of 2021 was in line with our expectations, and the encouraging development in the past two quarters leaves us optimistic. The company fully maintains the guidance for the 2021 financial year published on April 12. Accordingly, we expect annual sales between €25 million and €32 million as well as EBITDA loss of between €11 million and €14 million and EBIT loss of between €13 million and €16 million. Details on the forecast can be found in our annual report 2020. Finally, I would like to express my sincere gratitude to our employees who have brought the companies through these difficult times without any major damage. Thank you also dear shareholders, for your patience and for taking the time to participate in our conference call today. I would now I'd like to open the line for questions.

[Operator:]

Thank you. The first question we've received is from Bruce Jackson, Benchmark Company. Please go ahead. Your line is now open.

[Bruce Jackson:]

Thank you for taking my questions, and congratulations on all of the progress. My first question is about the revenue guidance and the interpretation. So now that you have successfully spun out the U.S. subsidiary, does the revenue guidance includes sales for the subsidiary? Because when - the guidance was originally put out, it was for the for the total AG entity, so maybe you could just help us interpret the revenue guidance for the rest of the year?

[Hermann Lübbert:]

Yes, since Biofrontera AG is still the controlling shareholder of Biofrontera Inc., Biofrontera Inc. is still fully consolidated and such the guidance contains, is unchanged contains both companies.

[Bruce Jackson:]

Okay, good. And then the other question I've got right now is around the mechanics of the licensing agreement for Ameluz two of the U.S. subsidiaries. So it's on - I understand it's on a sliding scale. How is, that managed so - in terms of the revenue thresholds for the licensing fee percentage, is it calculated on an annual basis or is it calculated on a quarterly basis? So when does the licensing fee shift when you hit a certain run rate or does it hit change when you cross certain calendar points is my question?

[Hermann Lübbert:]

It's calculated on an annual basis so, the first €30 million -- for the first €30 million in revenue the transfer price is 50% of the net price than for the next €20 million it's 40%. And everything above is 30% and this is calculated on a - on an annual basis. So every first of January, it starts new.

[Operator:]

The next question is from Thomas Flaten, Lake Street Capital Markets. Please go ahead. Your line is open.

[Thomas Flaten:]

Thanks, and I appreciate you taking the questions. Back to the guidance, could you perhaps it's a pretty wide range about a quarters worth of revenue that's - that you could put between the higher end the lower bound? Can you explain to us a little bit the assumptions that go into either the low end or the high end and what would need to happen to be at one or the other ends of the guidance?

[Hermann Lübbert:]

When we look at the assumptions for the lower end - to end up at the lower end, we would have to see significant worsening of the Corona situation to the point that making revenues would be extremely difficult. For the high end as you probably or certainly remember from previous years, we always have this upswing towards the end of the year when the doctors' offices actually filled our stocks. In previous years, we have had a price increase on January 1, this year we have decided not to have a price increase. And because of that we are not certain what to expect from the upswing of - towards the end of the year whether that this will anyway be in the same range. And that could bring us to the upper end of the range or more likely, whether that won't be to the same -- happening to the same extent as in previous years and then we'll probably be comfortably in the range.

[Thomas Flaten:]

And then another question on BFRI. How are you going to manage the cash that's BFRI allocated versus AG allocated? So for example, with respect to sales force expansion in the U.S., would that be BFRI cash. Do they have to contribute to R&D projects that are managed by AG? Could you just give us some insight into how you guys plan on managing that?

[Hermann Lübbert:]

Yes, all of this is determined in the license and supply agreement between the two companies. So it's Biofrontera Inc's tasked to take care of marketing and sales expenses. So extending the sales force would be on the books of Biofrontera Inc. It's Biofrontera AG's task to do all the regulatory work to do pharmacovigilance. And to perform the clinical trials these clinical trials that Biofrontera AG has to perform are clearly defined in the other setting. And for those tiles and the one - the two that are just starting, are just two out of that list. For those tiles all the cost will be on the books of Biofrontera AG.

[Operator:]

Thank you. There are no further questions. So I would like to turn back to you.

[Hermann Lübbert:]

Yes. So if there are no further questions, then thank you very much for taking the time and listening and have a nice day.

[Ludwig Lutter:]

Thank you until next time, thank you.

[Operator:]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.