Biofrontera AG Sponsored ADR (BFRA) 2021 Q3 法說會逐字稿

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. (Operator Instructions)

May I now hand you over to Pamela Keck, Head of IR, who will lead you through this conference. Please go ahead.

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 9 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 fines.

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 Lubbert, our CEO.

Well, 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 9 months of 2021. For that, I would like to hand over to Ludwig.

Thank you, Hermann, and thank you all for joining us today. I would like to start by providing you with an overview of the financial results for the 9 months ended September 30, 2021.

Following the challenges resulting from COVID-19 pandemic, the company's sales 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 9-month 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 EUR 18.5 million, an 11% decrease compared to EUR 20.8 million in sales in the same period last year. Please note that total revenue in the 2020 reporting period included a onetime payment of EUR 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 9 months of 2021 were EUR 14.3 million, up 29% compared to the first 9 months of 2020. The year-on-year sales recovery already perceived in mid-March 2021, especially in our largest sales market, the U.S., continued, resulting from the recovery of the general pandemic situation in the U.S. as well as in Germany. Due to the pandemic, for better comparability, we not only compare the revenue developments in the reporting period of 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 U.S., the company generated revenues from product sales in the amount of EUR 12.3 million, in the first 9 months of the year compared to EUR 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 in 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 sales in 2019, the company reported a slight decrease of about 9% in the month January to September 2021. As already mentioned, this was mainly due to the weak sales month of January and February this year due to the pandemic as well as the lack of or lower sales of Aktipak and the Xepi, respectively.

Moving on to the German market. In Germany, the company generated product sales of EUR 3.9 million, which is comparable with our product at the previous year's level. For added transparency, and 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 9 months of 2019, that is pre-pandemic again, the company recorded an increase of roughly 20% in Germany for the current reporting period. In the rest of Europe, sales improved by 64% to EUR 2.2 million compared to EUR 1.4 million in the 9 months period in 2020.

Following Galenica AB's distribution start of Ameluz and BF-RhodoLED in the Scandinavian countries by mid-year, another distribution license has been granted to Poland to Medac, the German term, Gesellschaft fur klinische Spezialpraparate GmbH, the name of the company. The onetime license fee payment of EUR 50,000 paid to the company upon conclusion of this contract is included in the European sales. Compared to the first 9 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 was our unusual short-term disclosure practice, which was intended to show the capital markets that the sales recovery out of the pandemic. Our aim was to give our shareholders a better opportunity to compare with normal non-pandemic related business development. As we are now thankfully back to pre-pandemic sales level, that is 2019 sales levels, we have decided to discontinue this mode of practice as of the month of September. Furthermore, we would not want to impose this disclosure practice on our subsidiary Biofrontera Inc., which recently completed its own IPO on NASDAQ.

Now back to the reporting period. The first 9 months of 2021, gross profit decreased by EUR 2.5 million in the reporting period to EUR 15.8 million compared to EUR 18.3 million in the prior year period. The gross margin decreased to 85% compared to 88% in the prior year period. Again, this was mainly due to the onetime license payment received as part of the license agreement in the amount of EUR 6 million included in the prior year's number.

Research and development costs increased to EUR 4.5 million in the first 9 months of 2021 compared to EUR 3.4 million in the previous year period, which is mainly due to the recommencement of clinical studies, which have 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 EUR 7.6 million in the 9-month period 2021 from EUR 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 EUR 16.3 million in the reporting period comparable with the previous year's level, which was, however, due to an impairment loss of EUR 2 million on the Xepi license included in the prior year's figure. Selling expenses mainly includes the cost 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 and taxes, depreciation and amortization and decreased by EUR 4.3 million to negative EUR 9.7 million in the reporting period compared with negative EUR 5.4 million in the prior year period, which again, is also due to the previously mentioned onetime 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 EUR 2.1 million to negative EUR 12.1 million compared with negative EUR 10 million in the first 9 months of 2020. Cash and equivalents amounted to EUR 29.5 million as of September 30, 2021, compared to EUR 16.5 million on December 31 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 have 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 Hermann, who will update you on the operational progress.

Thank you, Ludwig. I would like to take the opportunity to briefly outline the events of the last few months for you. In 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 companions 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 and 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 growth 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 growth. 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 will benefit directly from this growth through the 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 have become marketable through the IPO and can be used flexibly to finance Biofrontera AG, should it be required. A capital increase of Biofrontera AG has therefore become unnecessary for a long time.

Since the USA represents by far the largest sales market for the entire Biofrontera Group, the role of the growth engine within the Group is assigned to Biofrontera Inc. The course 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 a further 3 years. I would like to devote these 3 years where I see the greatest possible benefit 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 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 trust you have placed in me and the entire company over the years. I hope that the seeds you have planted over many years will finally come to fruition in the near future. The 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 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 called 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 2 clinical studies for Ameluz are commencing in the USA, for which clinical sites are currently being initiated. Specifically, 7 sites are being initiated for the Phase IIb study for the treatment of moderate to severe acne in adults and 8 sites for the Phase I safety study in which the safety of photodynamic therapy with the simultaneous application of 3 tubes of Ameluz will be investigated. Study #1 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 duration of 1 and 3 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 skull 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 3 entire tubes of Ameluz for a field-directed treatment. This study comes on the back of a maximum 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, we changed to 3 cubes per treatment. Currently, the product information limits the use to 1 tube of Ameluz per treatment. Both studies are focused on optimizing market positioning and expanding market share for our FDA-approved prescription of 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 9-month 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, and our sales in Germany have increased even this year, the pandemic set us back significantly last year in 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 2 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 has by no means completely disappeared in 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 is concerned 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 Ferrer, 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. pharmacies' 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 9 months of 2021 was in line with our expectations and the encouraging development in the past 2 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 EUR 25 million and EUR 32 million as well as EBITDA loss of between EUR 11 million and EUR 14 million, and EBIT loss of between EUR 13 million and EUR 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 like to open the line for questions.

(Operator Instructions) The first question we've received is from Bruce Jackson, Benchmark Company.

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 total AG, anyway, so maybe you could just help us interpret the revenue guidance for the rest of the year?

Yes. Since Biofrontera AG is still the controlling shareholder of Biofrontera Inc., Biofrontera Inc. is still fully consolidated. And so such the guidance contents is unchanged concerns both companies.

And then the other question I've got right now is around the mechanics of the licensing agreement for Ameluz to of the U.S. subsidiaries. So 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 annual basis? Or is it calculated on a quarterly basis? So when if the -- does the licensing fee shifts when you hit a certain run rate? Or does the hit change when you cross certain calendar points is my question.

It's calculated on an annual basis. So the first EUR 30 million in revenues, the transfer price is 50% of the net price. Then for the next EUR 20 million, it's 40%, and everything above is 30%. And this is calculated on an annual basis. So every 1st of January it starts in new.

The next question is from Thomas Flaten, Lake Street Capital Markets.

I appreciate you taking the questions. Back to the guidance, could you perhaps -- it's a pretty wide range, about a quarter's worth of revenue that you could put between the higher and 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?

Well, when we look at the assumptions for the lower end to end up at the lower end, we would have to see a 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 said this upswing towards the end of the year in the doctor's offices actually kill their previous stocks. And in previous years, we have had a price increase on January 1st. This year, we have decided not to have a price increase. And because of that, we are not certain what to expect from the out-swing towards the end of the year, whether 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 happening to the same extent as in previous years, and then we will probably be comfortably in the range.

Got it. 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?

Yes. All of this is determined in the license and supply agreement between the 2 companies. So it's Biofrontera Inc.'s task to take care of marketing and sales expenses. So expanding the sales force would be on the works 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 LSA. And for those trials and the one -- the 2 that are just starting or just 2 out of that list, for those trials, all the cost will be on the books of Biofrontera AG.

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

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

Maybe till next time. Thank you.

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