Biofrontera AG

Welcome to the conference call to discuss the Q3 2021 earnings results. At our customer's 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. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. 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 nine months ended September 30th, 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, BioFronteros 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 Luegert, our CEO.

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 Luther, 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.

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 September 30, 2021. Following the challenges resulting from COVID-19 pandemic, the company's sales experience is slow start at the beginning of 2021. However, from about mid-March onwards, a clear recovery in sales development became apparent. This includes our key market, the US, 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-month period. But first, let me talk about the general revenue development. For the period January 1 to September 30, 2021, BioFrontier Group generated total sales of 18.5 million euros, a 11% decrease compared to 20.8 million in sales in the same period last year. Please note, The total revenue 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 of 2020. The year-on-year sales recovery already perceived in mid-March 2021, especially in our largest market, sales market, the US, continued, resulting from the recovery of the general pandemic situation in the US 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 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 US. Let's take a closer look at the US, our key market. In the US, the company generated revenues from product sales in the amount of 12.3 million euros, 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 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 recorded a slight decrease of about 9% in the months 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 Actifact and Giuseppe, respectively. Moving on to the German market. In Germany, the company generated product sales of 3.9 million euros, which is comparable 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. In the rest of Europe, sales improved by 64% to 2.2 million compared to 1.4 million euros in the nine-month period in 2020. Following Galenica's distribution start of Amalus and BF Rotoled in the Scandinavian countries, By mid-year, another distribution license has been granted to Poland, to MEDAC, the German term, Gesellschaft für klinische Spezialpräparate, GmbH, 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 the sales recovery out of the pandemic Our aim was to give our shareholders a better opportunity to compare the normal slash 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 on our subsidiary buyer for Interra 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 euros 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 cost 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 2021 from 6.9 million euros 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 euros on the CSEPI license included in the prior year's figure. Selling expenses mainly include the cost for our own Salesforce in Germany, Spain, the UK, 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 in taxes, depreciation and amortization and decreased by 4.3 million to negative 9.7 million euros in the reporting period compared with negative 5.4 million euro in the prior year 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 CEPI license in March 2020. Group EBIT includes earnings before interest and taxes and decreased by 2.1 million euros to negative 12.1 million euros compared with negative 10 million euros in the first nine months 2020. Cash and equivalents amounted to 29.5 million euros as of September 30, 2021 compared to 16.5 million euros on December 31st of last year. Now the IPO of Biofrontera Inc. in October generated a gross emission proceeds of 18 million US dollars 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 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 US 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 US 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 US 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. 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 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 a further three years. I would like to devote these three 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 we 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 Rodolat XL, In June 2021, we have finally received approval for the Rodolet 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 U.S.A., for which clinical sites are currently being initiated. Specifically, seven sites are being initiated for the Phase IIb 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 amylose will be investigated. Study number one includes 126 adult patients suffering from moderate to severe acne, which will be treated with amylose PDT or placebo. The efficacy of amylose 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 unloose in the treatment of AK located on the face and scalp with PDT together with the new Rodolet XL lamp. The study includes 100 patients with mild to severe actinic keratosis. Each patient will receive the content of three anterior tubes of amylose for a field-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 pharmacokinetics 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 drug 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 Biofontera Group can look back on an encouraging nine-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. With our sales in Germany having increased even in 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 US, 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 regard 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 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 with concern and hope that there will be no further significant downward trend. Briefly about Xeppy, our second product in the US portfolio. Xeppy 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 or a licensor was delayed. This time was used to work on product positioning and to prepare the new campaign. Following the restocking of many US 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 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 and 32 million euros as well as EBITDA loss of between 11 and 14 million and EBIT loss of between 13 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 like to open the line for questions.

Thank you. Then we will now begin the question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 0 and 2 to answer your question. If you're using speaker equipment today, please lift the handset before making your selection. In the interest of time, we'd like you to focus on your two most important questions. One moment, please, for the first question. The first question we've received is from Bruce Jackson, Benchmark Company. Please go ahead. Your line is now open.

Hi. 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 US subsidiary, does the revenue guidance include sales for the subsidiary because when the guidance was originally put out, it was for the total AG entity. 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., by Fonterra Inc. is still fully consolidated, and such the guidance contains, is unchanged, contains both companies.

Okay, good. And then the other question I've got right now is around the mechanics of the licensing agreement for AMALUs to the U.S. subsidiaries. So it's, I understand it's on a sliding scale. How is that... 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 does the licensing fee shift when you hit a certain run rate or does it change when you cross certain calendar points is my question.

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

Okay, got it. All right, thank you very much. I'll hop back in queue. All right, thanks, Bruce.

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

Thanks, and 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 revenues. 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 of the other ends of the guidance?

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 certainly remember from previous years, we always have this upswing towards the end of the year when The doctor's offices actually fill their stocks. 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 upswing 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'll 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 Salesforce 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?

All of this is determined in the license and supply agreement between the two companies. So it's BioFrontera Inc's task 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 LSA. And for those trials, and the two that are just starting are just two out of that list, for those trials, all the cost will be on the books of Biofrontera-AG.

Got it. Appreciate you taking the question. Thank you.

Sure. Thank you.

Thank you. There are no further questions, so I would like to come back to you.

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

Same here. Till next time. Thank you.

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