Biofrontera AG
Q1 2020 Earnings Call Transcript

Published: 20 May 2020

[Operator:]

Dear, ladies and gentlemen, welcome to the conference call of Biofrontera AG. At our customers’ request, this conference will be recorded. As a reminder, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions].Now, may I hand you over to Pamela Keck, Head of Investor Relations, who will lead you through this conference. Please go ahead.

[Pamela Keck:]

Thank you. Good morning and welcome to Biofrontera’s earnings conference call for the first quarter 2020. Yesterday, we issued a press release announcing financial results for the three months ended March 31, 2020. We encourage everyone to read the press release as well as the quarterly report, both of which are available on our website at www.biofrontera.com.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 SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today on May 20, 2020. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.With that, I would now like to turn the call over to Hermann Lübbert, our CEO.

[Hermann Lübbert:]

Well, thank you, Pamela. And thank you today very much, ladies and gentlemen, for taking the time to participate in today’s call. With me today is Thomas Schaffer, our CFO. He will present the final -- financial results in a second. I will then summarize the general business development and clinical updates and will provide an update on the current status of our commercial efforts. I will then also briefly comment on the upcoming Annual General Meeting and the proposed capital measures.But first, let's have a look at the financial results of the first quarter. For that, I would like to hand over to Thomas Schaffer.

[Thomas Schaffer:]

Thank you, Hermann. Good morning, good afternoon, everyone on the call. Welcome to Biofrontera. And thanks for joining us today. I would like to start by giving you an overview of the financial results for the first quarter of 2020. For the period from January 1st to March 31, 2020, consolidated sales of EUR 6.5 million reflect a decrease of 5% compared to the same period of last year, following the fourth quarter of 2019, which was the best quarter in the company's history to-date. We experienced a mixed business performance in the first quarter.In early 2020, sales in our largest market, the United States, were slightly lower than expected due to stockpiling of Ameluz by doctors at the end of 2019 prior to the price increase effective as of January 1st. Between mid-February and mid-March 2020, we were then able to generate sales revenues in line with our original budget. However, due to the coronavirus crisis in the second half of March, revenue dropped close to zero.While we were able to achieve product sales of EUR 4.2 million in our largest market in the first quarter, this represents a decline in sales of 19% compared to EUR 5.2 million in the same period last year. Sales in Germany kicked off the New [Year] very strongly, clearly exceeding our expectations. Despite falling sales figures in March, product sales in the first quarter of 2020 rose by 22% to EUR 1.3 million. Contributing to this positive development were our marketing and sales activities in connection with the label extension for Ameluz approved by the European Commission in March.We also succeeded in increasing our sales in the other European countries during the reporting period from EUR 0.6 million in Q1 2019 to EUR 0.8 million this year. Apart from larger shipments to license partners, the extremely positive business development in Spain prior to the start of the strict lockdown regulations, there was particularly noteworthy.Gross profit on sales declined to EUR 5.7 million compared to EUR 5.9 million in the same period last year. The gross margin remained almost unchanged at 88% compared to 86% in the first quarter '19. Research and development costs amounted to EUR 1.3 million compared to EUR 1.4 million in the first quarter 2019. R&D costs primarily include costs for clinical studies, as well as regulatory expenses, fees for maintaining and extending our regulatory approvals.General and administrative expenses amounted to EUR 2.2 million compared to about EUR 2 million in the previous year period. The increase of about 13% is mainly due to the further development of our organizational structure during the course of the previous year.Sales and marketing costs totaled EUR 8.7 million, a steep increase of EUR 3.1 million or 57% compared to the same period in 2019. This increase is primarily due to the periodic amortization of Xepi license in the amount of EUR 500,000 as well as the extraordinary impairment in the amount of EUR 2 million resulting from the revaluation of the Xepi license in light of the current market situation. Both impairments are non-cash items.Just a brief explanation, the COVID-19 pandemic was a so called non-adjusting event within the meaning of the applicable accounting guidelines. This means that we have prepared our financial statements for 2019 with the information available as of December 31, 2019. The corona crisis was not reflected therefore in these figures. At the end of the first quarter, we have now reassessed the business plan for Xepi and performed an impairment test on the license. Based on the lower business expectations for Xepi from today's point of view, this resulted in a write-down of the Xepi license in the amount of approximately EUR 2 million.In this context, this also reduces the purchase price liability for the profit share to be paid to Maruho at a later date. For this purpose, we have recorded an income of EUR 0.4 million under other income. We have also adjusted the interest accrued from the performance component of the EIB loan. This interest component is dependent on the market capitalization of Biofrontera. Since the market cap on March 31 was significantly lower than on December 31, 2019, an adjustment of EUR 200,000 was made as an effect on other income. In the first three months of 2020, the loss before tax amounted to EUR 5.5 million, a decline of EUR 2.9 million compared to a loss of EUR 2.6 million in the prior year period. This change is mainly due to the negative sales development described earlier, the impairment of the Xepi license, as well as further expanding our operating activities.Cash and cash equivalents amounted to EUR 7.8 million as of March 31, compared to EUR 11.1 million as of December 31. This means that we currently still have sufficient liquidity available. However, in order to be able to maintain business operations reliably over a period of at least 12 months, and to adequately finance our growth opportunities, we will require additional funding in the course of this year. To this end, we have proposed an authorized capital increase to the Annual General Meeting to be held on May 28th. More on this later. It is currently impossible to foresee how long and how strongly the pandemic will affect the economy. Still no reliable estimate or more precise quantification of the specific implications for sales and earnings can be made for the 2020 financial year. For this reason, Biofrontera's ability to forecast is significantly impaired at this time.In its initial budget for 2020 financial year, the Group had assumed a 25% increase in revenue compared to the previous year, and operating costs at approximately the same level as the previous year. However, the effects of the coronavirus pandemic may lead to a significant deviation from previous projections and to a noticeable decline in sales compared to previous plans. The anticipated reduced revenue will also have a negative impact on the profitability and the liquidity of the Group in the 2020 financial year, as lack of revenue may not be fully offset by cost reduction measures.I would now like to hand over to Hermann Lübbert again, so that he can provide you with an update on current operational and strategic developments.

[Hermann Lübbert:]

Thank you, Thomas. Sales developed very positively at the beginning of the year before the COVID-19 pandemic, and the associated restrictions had a strong impact on our business. With the restructuring of our U.S. sales organization, we were able to further improve the positioning of our products and further accelerate market penetration. In particular, our already well established product Ameluz will benefit from the experience gained and methodically generated market data, which will allow us to market it more efficiently and in a more targeted manner, once business activities have fully resumed.Since March, official recommendations by the American Academy of Dermatology, the largest dermatology organization in the United States, to provide patients with remote diagnosis and treatment where possible during the crisis resulted in a significant decline in the number of patients treated in dermatology practices, as well as temporary practice closures. After sales of our products have dropped to almost zero, we currently expect the situation to improve soon due to the increasing relaxation of measures to combat the coronavirus in some U.S. states.Medical offices are already reopening and patients are increasingly willing to visit their doctors for treatment of actinic keratosis. At present, we are already observing a slow recovery of our U.S. business, but cannot yet assess its dynamics conclusively. In some U.S. states, sales representatives are beginning to visit doctors’ offices again.Apart from that, our focus in the USA is currently on preparatory work in order to take full advantage of the business opportunities arising from the expected pent up demand for photodynamic therapy, and thus Ameluz, as quickly and effectively as possible after the crisis. In addition, we expect further growth in the USA from an equally more efficient exploitation of the market potential of Xepi.In Germany, marketing and sales were able to successfully use their label extension as well as the current study data to communicate the advantages of Ameluz to dermatologists, even during the crisis, whereby it’s all in written or electronic format. It was precisely during this period, the advantages of daylight PDT, which can be performed without direct contact with a doctor, and then consistently good weather became apparent. In fact, we are told that some patients actually preferred to undergo PDT at enrollment because the current contact restrictions meant that they had fewer concerns about the potentially visible side effects of the treatment. Although our sales to wholesalers had declined significantly, pharmacy sales suffered considerably less as a result.In Spain, revenue growth was exceptionally strong prior to the strict lockdown restrictions introduced due to the COVID-19 pandemic, which makes us confident that revenue will recover quickly once the restrictions are lifted. In January, following the reorganization of the U.S. subsidiary Biofrontera Inc., we also restructured the sales organization in Europe. Biofrontera’s worldwide sales organization now stands on two pillars

[Operator:]

[Operator Instructions]. Our first question is from Bruce Jackson from The Benchmark Company.

[Bruce Jackson:]

A couple of questions for Thomas. On the cash flow, for the first quarter, do happen to have the operating cash flow number and the CapEx number?

[Thomas Schaffer:]

The CapEx is pretty much zero since we are typically a company that doesn't need capital expenditures for its business. We don't need any production equipment and so on. And other than this, we do not prepare cash flow statements on a quarterly basis. We would do this on the semiannual report.

[Bruce Jackson:]

And then, with the income statement going forward, and in particular the operating expense line, I know that you've instituted a number of cost management programs. You've also -- you've had some change in your litigation expense. Do you have like a general target for operating expenses going forward? Is it going to be down to first quarter, about the same or at some point will keep moving back up?

[Thomas Schaffer:]

So won't be able to [spot an extra audit]. New item in the operating expenses, which is the EUR 2 million in terms of Xepi license, which is provided under sales cost this year. If you take that out of the equation, we would still expect that our operating expenses go down, would become lower in Q2. Simply because the measures we've taken, the cost reduction measures we've taken were effective beginning of mid-March. So at least in January and February, before the crisis, we were still operating kind of at full expenses. So in general G&A and sales costs will be reduced in Q2 and going forward.With regard to legal expenses, these are already significantly lower than the quarterly level we experienced in 2018 and in 2019. However, it's difficult to predict how these are going to turn out in the future, simply because the most important -- the most expensive trial is the DUSA litigation in Massachusetts. For that one we're waiting for the judge in Massachusetts to rule on further proceedings and on the timeline. Currently, there is hardly or no activity on that trial, and therefore, almost zero expenses these days.

[Bruce Jackson:]

And then Hermann, you mentioned that -- you talked a little bit about Xepi. Can you just remind us where you are on the marketing plans for that product? I know there are some things that need to be put in place in terms of the marketing framework and distribution. And is that something that you're ramping up right now?

[Hermann Lübbert:]

Yes. It's clearly something that we intend to ramp up in the course of the year. After we took it over -- or when we took it over last year, Xepi wasn't covered by a single insurance company in the United States and because of that created a loss with every tube sold. And we are far away from this, now more than 150 million U.S. citizens are actually covered for Xepi without any pre-condition. And that, of course, changes the situation with Xepi drastically. So we do expect that now once the corona crisis is over and our reps can go out and start talking about it, in really the first time that really intensively that we see sales for Xepi also coming up rapidly.

[Operator:]

[Operator Instructions]. Moving on to the next question from Thomas Flaten of Lake Street Capital Markets.

[Thomas Flaten:]

Hermann, one for you. You mentioned the FDA feedback on the acne study design. Could you provide a little bit of detail on what that study might look like? And I know timing is dependent on capital. But just some more information on -- any color that you could provide would be great?

[Hermann Lübbert:]

Well, that's really straightforward. So the FDA gave us indications for some details that they like to see, which didn't really change our plan. So, basically what we tried to do is, we tried to stick with the same concentration of the active ingredient that we also use in the current Ameluz and -- but we play with the incubation time. So we do the clinical trials, the different incubation times -- the phase II trial, there’s different incubation times, and then placebo, select the best incubation time for phase III trials.

[Thomas Flaten:]

And if we assume that starts -- let me ask it differently. What -- over what time period do you think that could be completed the phase II studies assuming the capital was in place?

[Hermann Lübbert:]

I think the study can be performed relatively quickly because there's so many patients out there who would be willing to go into the study. The phase II study also doesn't have an extensive follow-up, which of course, would be an interesting question to ask, but we reserved that question to the phase III trial. So this could actually be done probably in about a year's time.

[Thomas Flaten:]

Great. And then with respect to the to the U.S. salesforce, could you comment on how many reps are currently employed? And the second question to that is, during the crisis, have they been engaging with the customers virtually or have they been largely at a standstill given office closures et cetera?

[Hermann Lübbert:]

In the U.S., we currently have 30 reps over there. So we reduced the number of reps slightly when we went into cost cutting measures. It also gave us an opportunity, of course, to optimize the sales territories at the same time. And during the crisis, basically they did three things. They did stay in contact with the doctors virtually where that was possible, a number of -- a large number of the dermatology offices were just closed, but others stayed open and the reps did have a chance to actually be in touch. But they also prepared -- and that was the major task for them, they prepared for the time after. So basically, categorize and prioritize the customer base in the territories and plan for the time when they can actually go out physically again. And in parallel, they were trained by our new marketing staff about the sales efforts and where we want to put our core efforts afterwards.So that kept them busy during those times. And now, as I said before, in some states perhaps can already start to go out. In Germany, we -- just on the side, in Germany, we have the reps starting to go out this week. So it's all sort of loosening up a little bit. Obviously, not everywhere in the United States, the Northeast is still pretty much closed, we’re somewhere in the centre, and also in the Southeast or in the West. First visits are already possible again.

[Thomas Flaten:]

Thanks for all that detail. Just one final one from me. Following up on Bruce's question about Xepi. Over the -- well pick a time period, that I'm just trying to understand what the magnitude of that sales opportunities for you whether that's this year, next year, whatever time period you think is appropriate, what kind of sales goals are you looking at for that product?

[Thomas Flaten:]

Well, I'd say EUR 1.5 million to EUR 2 million revenue this year provided that we we come back to normal fairly soon in the United States. But that certainly is not going to be peak sales. That's something we're going to experience in a couple of years only. But I would say that certainly there’s more than double-digit, millions in revenue numbers on an annual basis.

[Operator:]

Thank you. [Operator Instructions]. As there are no further questions at this moment, I'll hand the session back to you Pamela. Please go ahead.

[Pamela Keck:]

Thank you, everyone, for joining us today. And enjoy the rest of your day.

[Hermann Lübbert:]

Yes, thank you very much.

[Thomas Schaffer:]

Thank you.

[Operator:]

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