Biofrontera AG Sponsored ADR (BFRA) 2020 Q3 法說會逐字稿

Dear, ladies and gentlemen, welcome to the conference call of Biofrontera AG. At our customers' request, this conference will be recorded.

(Operator Instructions)

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

Thank you, and good morning, and welcome to Biofrontera's Earnings Conference Call for the Third Quarter and 9 Months Ended September 30, 2020. Yesterday, we issued a press release announcing financial results for the 9 months ended September 30, 2020. We encourage everyone to read the press release as well as the interim report, both of which are available on Biofrontera's website as usual.

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 captured only as of the date of this live broadcast today, November 12, 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.

And with that, I would now like to turn the call over to 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 Thomas Schaffer, our CFO. He will present the financial results in a second. I will then summarize the general performance of our commercial efforts, provide clinical updates and will briefly comment on some strategic topics.

But first, let's have a look at the financial results for the first 9 months of 2020. For that, I would like to hand over to Thomas Schaffer.

Thank you, Herman. Thank you all for joining us today. Good morning, good afternoon to everyone. I would like to start by giving you an overview of the financial results for the 9 months ended September 30, 2020. The coronavirus crisis has also dominated the third quarter of 2020. In the first 9 months, we achieved total revenues of EUR 20.8 million, an increase of approximately 9% compared to the EUR 19.1 million in the same period last year. This includes, however, the onetime payment from Maruho under the license agreement that we signed in April this year.

Revenues of EUR 14.3 million were generated from product sales, a decrease of 23% compared to EUR 18.7 million in the first 9 months of 2019. The decline in revenues from product sales is mainly due to the ongoing crisis development in the United States, where Biofrontera has experienced the greatest impact of that crisis. U.S. product sales, therefore, amounted to EUR 9.1 million, about 33% less compared to the EUR 13.6 million in the same period last year. This amount included approximately EUR 0.2 million from product sales subsidy. The decline in sales there was, however, compensated by the positive sales development in Germany and the one-off payment from Maruho.

Revenues for the first 9 months in Germany increased by 19% to EUR 3.9 million compared to EUR 3.3 million in the same period last year. Here, our sales team was able to successfully take advantage of the label extension to include the treatment of actinic keratosis on the body and extremities as well as daylight PDT. Product sales in the remaining European countries amounted to EUR 1.4 million compared to EUR 1.8 million in the prior year period.

Gross profit increased by EUR 3.4 million in the first 9 months of 2020 to EUR 18.3 million compared to the EUR 14.9 million in the previous year. Gross margin increased to 88% compared to 78% in the same period of last year, mainly due to the income from the onetime payment from Maruho under the license agreement, without any directly related cost of sales. Research and development costs of EUR 3.4 million for the first 9 months of 2020 were similar to last year's amount of approximately EUR 3.2 million that include cost of clinical trials as well as regulatory affairs such as costs for obtaining, maintaining and expanding our market authorizations.

General and administrative expenses amounted to EUR 6.9 million in the reporting period compared to $12.1 million in the same period last year. This significant decrease was driven by the cost-saving measures introduced due to the COVID-19 pandemic and significantly lower legal costs. Furthermore, the previous year's number includes costs from the first-time consolidation of Cutanea Life Sciences in the amount of approximately EUR 2 million.

Sales and marketing costs amounted to EUR 16.3 million compared to EUR 20.6 million in the same period last year, which represents a significant reduction. Our pandemic-related cost-saving measures showed a particular strong impact here. We were able to reduce our sales and marketing costs by a total of EUR 6.3 million. However, this was partially offset by a special write-down of the Xepi license in the amount of about EUR 2 million in the first quarter of 2020. The continued uncertain business outlook due to the COVID-19 crisis has had an impact on the valuation of certain assets and liabilities of the company.

Reduced sales of Xepi have resulted in a different assessment of the medium-term business and profit outlook for Xepi, and consequently, in the reevaluation of both the balance sheet value of the Xepi license and the purchase price liability to Maruho both recorded in the first quarter of 2020. It's somewhat difficult still at this time to compare our financial figures of this reporting period with those of the same period last year. We consolidated Cutanea in the first time last year and accounted for the purchase price allocation, therefore a few further explanations.

Other expenses and income totaled to minus EUR 1.6 million in the reporting period compared to other expenses and income of plus EUR 20.8 million in the previous year. The prior year figure included onetime effects from the acquisition of Cutanea Life Sciences in the amount of EUR 19.3 million. Without these longtime effects, other income and expenses of the prior year amounted to plus EUR 1.6 million and thus decreased by about EUR 3.2 million in the current year. This is mainly due to accelerated fluctuations in the valuation of foreign currency receivables and liabilities. Here, an income of EUR 1.3 million was recorded in the same period last year. There is -- an expense of EUR 1.8 million had to be considered in the reporting period. However, this item has no effect on our liquidity.

Cash and cash equivalents as of September 30, 2020 amounted to EUR 16.6 million compared to EUR 11.1 million as of December 31, 2019. This amount includes the proceeds from the issuance of the mandatory convertible bond with gross proceeds of EUR 7.9 million.

Just a quick reminder. Secure liquidity in the short term, the company resolved to issue 1% qualified subordinated mandatory convertible bond 2020, '21, with a total nominal value of up to EUR 7.914 million. In August 2020, we announced that the mandatory convertible bond was fully placed. As mentioned before, the gross proceed from this issuance amounted to EUR 7.9 million. This has given us considerable financial leeway, and above all, has enabled us to [confirm our going concerned] assumption. Financial requirement of at least EUR 5 million, stated in our annual financial report 2019, to maintain business operations until the end of April '21 of net and over exceed it by the successful completion of the capital measure. Thus, Biofrontera currently has sufficient liquidity at its disposal.

And this morning, we announced that we will now exercise our right to mandatory conversion of the bond. Investors do not need to do anything. This will be handled automatically by the custodian banks. Trading of the bond is, therefore, expected to cease on November 18.

Finally, Biofrontera continues to feel the economic and social impact of the corona pandemic. As a result, it is still very difficult to forecast the business performance. However, as in previous years, the company expects a significant increase in sales in the fourth quarter.

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 development. Over to you, Hermann.

Well, thank you, Thomas. The coronavirus pandemic continues to be a tremendous challenge for all of us. The situation is disrupting economic activity and continues to dictate the behavior of people and businesses. As you have already heard, in the first 9 months of 2020, we have recorded a 23% decline in revenue from product sales compared to the same period last year, largely due to the crisis development in the U.S. This decrease is already much smaller than after the first 6 months in 2020, when the decline in sales was 30% compared to the first 6 months in 2019. In Q3, the decline was only 9% compared to Q3 last year. We are also optimistic for the fourth quarter, which always shows the highest sales by far, due to seasonality.

Overall, the decline in sales in the U.S.A. was compensated by the strong sales performance in Germany and the one-off payment from Maruho. Compared to the second quarter, our largest market, the U.S.A., has been showing the first signs of stabilization in line with the typical seasonality. In many parts of the U.S., medical practices have reopened, and patients are willing to undergo PDT treatment for actinic keratosis.

In Germany, we are well on our way with our new campaign (foreign language), which is a German word play for the obligation to prevent skin cancer, has generated a lot of attention among dermatologists despite the pandemic. The extension of the approval in March to include the treatment of actinic keratosis on the body and extremities as well as the benefits of daylight therapy have led to a very significant increase in sales of 36% compared to the third quarter of 2020 and 2019.

In the remaining EU markets, we were initially able to record a very positive sales trend. Particularly in Spain, the revenue growth was exceptionally strong prior to the very strict lockdown measures introduced in Spain due to the pandemic. However, in spite of the continuing situation there, we do see recovery in sales. And also similarly in the U.K., so that on the European, except Germany, sales surge in Q3 2020, we were only 15% below the third quarter revenue of 2019. This leaves us with confidence that we will soon be able to build on our sales successes prior to the pandemic. Overall, in all European markets, including Germany, we did exceed the previous year sales in both the third quarter and the 9-month period of 2020 compared to the same period last year.

Operating expenses were significantly lower in Q3 2020 compared to the same period last year. In particular, sales and marketing expenses were reduced year-over-year. Additionally, the decreased administrative expenses took profit from lower legal costs. As a result, our operating results improved considerably compared to the third quarter of 2019. On the clinical and regulatory side, we continue to be successful beyond the European label extension in the first quarter of 2020.

In October, the clinical phase of the pharmacokinetics study to evaluate the safety of PDT using 3 tubes of Ameluz was completed. This study is necessary for the approval of the treatment of larger body areas with several tubes of Ameluz and the adjustment of reimbursement modalities with those of the competitive products. We expect the study, including the completion of the study report, to be finished by the end of the year.

At the same time, we are working diligently on the new BF-RhodoLED-XL launch to be completed, which enables the application of Ameluz on larger skin areas. Due to the delays in the supply of parts for the first manufacturing batch caused by the coronavirus crisis, the dossier for marketing approval will now be submitted to the FDA in the first quarter of 2021.

Biofrontera continues to work intensively to continue patient recruitment for the Phase III study for the treatment of superficial basal cell carcinoma with Ameluz in the U.S.A. during the crisis. However, the complex study protocol, in combination with the limitations imposed by the pandemic, still hamper the recruitment of patients for this study. An additional market for PDT in the U.S.A. is moderate to severe acne. After the FDA has already responded to our proposed clinical development plan, the necessary clinical trials are expected to begin any time, assuming the company can commit the necessary financial resources. The studies required by the FDA to extend the label of Ameluz to the treatment of actinic keratosis on extremities and tongue and neck also depend on the funding for the continued future growth of Biofrontera over and above the recently successfully completed capital measure.

Delays in the company store financing due to legal disputes, bring me to the next topic and the ongoing legal proceedings. In its ruling of September 22, 2020, the German Federal Supreme Court overturned a ruling of the Cologne Higher Regional Court of November 15, 2018, which had been directed against the company. The reverse judgment of the Cologne Higher Regional Court concerned an action for revision and nullity by the shareholder, Deutsche Balaton AG, which is directed against resolutions of the Annual General Meeting on May 24, 2017.

The matter has now been referred back to the Cologne High Regional Court for retrial and decision. In its reason for the decision, the Cologne Higher Regional Court had assumed that the management board had severely and unequivocally violated the requirement of equal treatment of shareholders in connection with the capital increase carried out in October and November 2016. Now the German Federal Supreme Court has determined that the violation of law assumed by the Cologne Higher Regional Court has not at all occurred.

The company has now filed another application with the Cologne High Regional Court for the release of the urgently needed capital increase that was approved at the 2020 Annual General Meeting. We hope to be able to access the capital, already approved by the general meeting as soon as possible, so that we can resume our strategically important growth part as quickly as possible with much needed investments in marketing and sales, specifically in the U.S. as well as some clinical studies.

As you are already aware, the company has been engaged in a process of mediation with the Deutsche Balaton Group by order of the U.S. District Court of the Southern District of New York since September this year. Within the framework of the ongoing process of mediation, an experienced and renowned mediator has been engaged to resolve ongoing legal disputes. In order to have sufficient time for the complex negotiations, the parties mutually agreed to extend the original deadline of November 11, 2020, until the end of February 2021.

This leads me to my final litigation update. The trial of DUSA Pharmaceuticals Inc. or DUSA in short, filed in March 2018 with the District Court of Massachusetts against the Biofrontera Group. In October, the further proceedings were referred to a decision by the jury. A trial date has not yet been set. The lawsuit includes the alleged infringement of DUSA patents through the sale of the BF-RhodoLED in the U.S.A., claims based on unauthorized use of alleged trade secrets as well as Deutsche's interference with contractual relations and deceptive and unfair trade practices. DUSA has asserted considerable claims for damages in these proceedings. However, the company considers this to be unfounded and unsubstantiated. We remain confident that the allegations in (inaudible) DUSA are unturnable, which is why we are rigorously defending ourselves against them.

The economic and social effects of the pandemics are evident for Biofrontera. As a result, it is still very difficult to forecast the business performance for the traditionally very strong year-end sales. However, the stabilization of sales in the U.S.A. renders us optimistic about the sales performance in the fourth quarter.

I would now like to open the line for questions.

(Operator Instructions) Our first question is from Bruce Jackson, The Benchmark Company.

So if we could talk a little bit more about the fourth quarter dynamics. So a 3-part question here. First, can you comment on just generally the procedure volume at the dermatology offices with some of the other specialties? They've been running at approximately 70% to 90% of the previous patient flow. So could you comment on just generally the market conditions and the dermatology offices? Secondly, the timing of annual price increases can have some impact on the seasonality trends. So do you plan on taking a price increase this year during the fourth quarter? And then finally, can you just sort of directionally tell us do you expect the fourth quarter sales to be up quarter-to-quarter and then also year-to-year?

Yes. You asked quite a number of questions. Let me start with the development of the fourth quarter, the comparison to other quarters. So we do, in fact, see increased sales in the fourth quarter. Obviously, we cannot really predict what's going to happen for the rest of the year. It very much depends on the development of the crisis. Compared to other products, Ameluz is actually doing okay. So it's -- the decline that we see with Ameluz is reflecting the entire market as far as we can say. So all other products have also gone down in a similar fashion.

What was the other question?

Sure. Sorry. So -- and then with the -- usually, you've taken price increases in either the third quarter or the fourth quarter. Do you anticipate taking any price increases this year during the fourth quarter?

We anticipate to take a price increase starting January 1.

Okay. And then...

Finally, Bruce, I think your last question was probably regarding quarter-on-quarter and year-over-year performance. We will certainly be -- in particular, the United States, we will certainly increase quarter-on-quarter, Q3 versus Q4. We may not reach the level of Q4 last year in the United States.

We haven't received further questions. I will hand back to the speakers.

So Hermann, do you want to conclude?

Yes. No, I was waiting whether somebody else wants to ask a question. Since that's not the case, thank you very much for listening, taking the time this morning or this afternoon. Thank you very much.

Thank you very much from my side as well. Enjoy the rest of today and until next quarter.

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