Biofrontera Inc. (BFRI) Q4 2018 Earnings Report, Transcript and Summary

Dear ladies and gentlemen, welcome to the conference call to discuss 2018 Full Year Financial 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. [Operator Instructions] May I now hand you over to Pamela Keck who will lead you through this conference. Please go ahead.

Thank you, and good morning and welcome, everyone. Before we begin the call, I have to go through some household items first. The news release issued this morning has been filed according to the applicable securities regulations and available on the Biofrontera website. Earlier this morning, Biofrontera issued a press release announcing financial results for the 12 months ended December 31, 2018. We encourage everyone to read today's press release, as well as Biofrontera's Annual Report on Form 20-F, which has been filed with the SEC. The Company's press release is also available on the Biofrontera's website at www.biofrontera.com. We encourage you to review the documents in their entirety. Please note that certain of the 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. These forward-looking statements are subject to a number of risks and are qualified by the cautionary statements contained in the press release and SEC filings, including our Annual Report. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, April 29, 2019. We undertake no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. With that, I would now like to turn the call over to Hermann Lübbert. Hermann, please go ahead. Hermann Lübbert: Yes. Thank you, Pamela. And thank you everyone for joining us this morning for Biofrontera's full-year 2018 earnings conference call. Today, I'm joined by our Chief Financial Officer, Thomas Schaffer, who will review our financials; and Christoph Dünwald, our Chief Commercial Officer, who’ll provide an update on our commercial products. Throughout 2018, Biofrontera successfully improved the clinical positioning and market potential of Ameluz in both the EU and the U.S., which helped to drive another record year of revenue. We are pleased with a 76% revenue growth rate and anticipate another robust year of growth. We have made great strides in the EU to return to strong growth with the approval and marketing of Ameluz to include daylight PDT for the treatment of actinic keratosis. In the U.S., we continue to significantly strengthen our presence, bolstering our sales team that has been able to increase their penetration into dermatology practices under an improved reimbursement environment. Furthermore, our initial public offering on the NASDAQ Capital Markets in February 2018 enhanced and validated our growing global presence. More recently, we have taken steps to transform Biofrontera from a highly specialized expert in PDT to a fully fledged specialty pharmaceutical company with a border focus in dermatology. Through our recent acquisition of Cutanea Life Sciences from Maruho, we have expanded our commercial portfolio to include two additional FDA approved prescription drugs, AKTIPAK and Xepi, which we will begin to leverage through our established sales and marketing infrastructure in the U.S. Our sales force shares our enthusiasm for the opportunity to expand our growth -- our product offering, which will in turn expand our reach and growth potential. As we look ahead, we also believe that the expanded branded generics development agreement with Maruho will help advance our future growth profile. More on that and our relationships with Maruho later on. Let me first highlight our clinical accomplishments in the U.S. and EU over the past year. We were very excited to recently announce positive results from our Phase 3 clinical trial, evaluating the safety and efficacy of conventional PDT with Ameluz for the treatment of AKs on the extremities, trunk and neck. The study was multicenter, randomized, double-blind, intra-individual and enrolled 50 patients at six study sites in Germany. Each patient had between 4 to 10 clinically confirmed AK lesions in comparable areas on the left -- right and left side of the extremities, trunk or neck, and mild, moderate and severe lesions were treated with one or two PDT treatments. The study met its primary endpoint, demonstrating that Ameluz was superior to placebo with a mean total lesion clearance rate of 86%, compared to 33% for placebo. In addition, the study met all secondary end points. When looking at complete clearance, 67% of the patients that are treated with Ameluz were completely cleared 12 weeks after the last PDT compared to 12% of the placebo treated sites. These secondary results helped to further support the primary endpoint, and we expect to file for label extension with the European Medicines Agency, EMA, and the U.S. FDA in the third quarter of this year. If approved, Ameluz would be the only PDT drug in Europe and the U.S. for treatment of actinic keratosis of all severities on the extremities, trunk and neck which would increase our competitive advantage over other PDT drugs on the market. In addition to the recent success in actinic keratosis, we initiated our U.S.-based Phase 3 trial evaluating Ameluz PDT for the treatment of superficial basal cell carcinoma. While we already have approval for BCC and the EU, after discussions with the FDA, the agency requested an additional placebo-controlled trial in the U.S. This trial is randomized, double-blind and placebo-controlled and we anticipate enrolling approximately 186 patients. We expect to complete patient recruitment for the study in the first half of 2020, and believe that if approved, this would make Ameluz the only PDT drug in the U.S. indicated for the treatment of superficial basal cell carcinoma, providing patients and physicians a highly efficacious and cosmetically acceptable alternative to surgery. Finally, to further support our anticipated growth of Ameluz, we were granted EMA and FDA approval to upscale the batch sizes for the production of Ameluz, which will increase production capacity fivefold, ensuring a secure supply of Ameluz as demand in the U.S. grows. Scaling the manufacturing process will also allow for a substantial improvement to our gross margins. With that, let me hand the call over to Christoph to discuss our commercial organization and its focus. Christoph Dünwald: Thank you, Hermann. 2018 was also a very successful year for Biofrontera from a commercial perspective. We were pleased with another doubling of sales figures and were even able to increase our original sales forecast last fall. With over €21 million total sales and over 100,000 units sold, we have set new milestones in the Company's history. We saw two main drivers for the sales success in 2018, the European launch of Ameluz for daylight therapy; and the advancement of the U.S. market penetration. Let me take you through the development in Europe first. Once again, the sales trend was very positive in those European markets in which we operate with our own sales teams. In Germany, the largest European market for Ameluz, business developed very positively and Biofrontera was able to expand its market leadership in the segment of PDT drugs to a recent market share of approximately 66%. The main reason for this was the introduction of daylight PDT with Ameluz. The estimate that daylight PDT will conquer further market shares in the future and that were previously reserved for self-applied topical crèmes. What is particularly interesting is that Ameluz now finally reimbursed in Germany by the public health insurance funds when prescribed for daylight PDT. The number of patients who have access to treatment with Ameluz have therefore multiplied in 2018. We have used this to reposition ourselves in the German dermatology market. We have invested in marketing and sales and were able to observe that prescription for Ameluz in Germany increased by approximately 50% last year, a very promising trend. In Spain, the approval of daylight PDT has led to exceptional growth as well. After approval and reimbursement process lasting almost 18 months, the Spanish authorities granted us approval in July 2018 to market Ameluz for basal cell carcinoma. As a reminder, in Germany, we have been able to do so since the beginning of 2017. However, in Spain, we had to expect a 27% reduction in our sales price from July 1, 2018. We now have to compensate for this loss in margin by increasing volumes. With the approval of basal cell carcinoma, we also laid the foundation for taking our sales activities in England into our own hands. In England, it is more common to treat basal cell carcinoma than actinic keratosis and patients are referred by general practitioners to dermatologists who in the English health care system are mainly located in hospitals. We were able to win the core of the PDT sales team from our direct competitor Galderma for Biofrontera, and took very detailed and time consuming administrative steps in 2018 to position Ameluz once again in the English markets. Radically improved reimbursement situation for UK hospitals for PDT treatments has now come into force in April 2019, and Biofrontera should benefit from the new market opportunities. Let me come now to the U.S., our strongest growth market. As in previous financial year, our activities in the U.S. are the main component of our commercial success. By now, the U.S. sales team has grown to almost 40 employees. Our sales force is supported by seven scientific consultants, MSLs, our market access and manage market team, and the customer service team that has recently received a highly recognized award for its work. Over the past two years, we have sold more than $20 million worth of Ameluz in the United States, establishing the product in the marketplace. A key focus of our work in 2018 was to ensure the successful and correct reimbursement of Ameluz. Since the drug is purchased directly by the dermatologists as a so-called by and build drug, the reimbursement risk and the additional work involved in the reimbursement process remains with the physician. This initially reduced their willingness to stock up on larger quantities of Ameluz. The individual reimbursement codes, the so-called J-code for Ameluz was requested by Biofrontera in January 2017 and was issued in January 2018 according to the normal application deadline. With that, we have cleared another hurdle for the normalized reimbursement of Ameluz. Unfortunately, we encountered a brief erroneous restriction of reimbursement for Ameluz in the third quarter. However, this restriction was corrected retroactively to July 1, 2018, due to our intervention at CMS, the Center for Medicare and Medicaid Services. The final hurdle to a smooth reimbursement of our drug was the publication of the average selling price. Although Biofrontera has communicated this average price to the responsible authority every quarter since the launch in October 2016, the publication finally happened for the first time in January 2019. We therefore assume that the major problems with the reimbursement have finally been solved. Our customers have benefited from the increase in reimbursement for the work performed by physicians in connection with the PDT treatment. This reimbursement, the so-called CPT-codes, have been significantly increased and the physician-related -- excuse me, the physician relevant codes are now above reimbursement for cryotherapy, the previously preferred treatment for actinic keratosis in the U.S. This improved reimbursement will help us to better position PDT in the markets. After two years on the U.S. markets, we raised the price of Ameluz, in line with inflation for the very first time in October 2018. The price increase was accepted by our customers overall, but led to increase sales in September 2018. We estimate that Ameluz market share in the U.S. PDT drug segment is now around 18%, up from say 8% in 2017, and expect further market penetration this year. The U.S. revenue growth was exceptionally high at 136% in 2018. It is now important to introduce new to dermatologists to photodynamic therapy so that they can offer Ameluz to their patients. Last year, about 800 customers ordered Ameluz from us and the trend is rising. Many of our customers walk out of a clinic together with several other dermatologists. The top 30% of our customers spent on average about $60,000 on Ameluz last year. The visible success of our commercial strategy has contributed to the fact that Biofrontera has been given the opportunity to acquire Cutanea Life Sciences in the U.S. This has 2 advantages for us. First, with immediate effect we can sell two approved products, safety and Xepi and AKTIPAK in addition to Ameluz in the dermatology space; and second, by nurturing the sales teams, we can grow sales with the best employees of both organizations to a team of about 45 employees, sales reps, plus five regional managers. The goal is to successfully promote all three products to American dermatologists from July onwards with one integrated sales team. The targets for 2019 are ambitious, but we will again do our best to achieve them and thus lead by Biofrontera to break even. The success of 2018 is our inspiration for new records this year. And with that, I will hand over to Thomas for our financial review. Thomas?

Thank you, Christoph. And good morning, good afternoon, everyone on this conference call today. I would like to review our financials for the full-year 2018 and then provide guidance for the 2019 financial year. For the full-year ended December 31, 2018, we reported total revenue of €21.1 million, compared to €12 million for the same period in 2017, representing a 76% increase year-over-year. Revenue in the United States grew significantly to €14.9 million for the full-year 2018, compared to €6.3 million in the same period last year, representing a 136% increase. This growth was, as already mentioned as Christoph and Hermann, primarily driven by the expansion of our sales organization, as well as improvements in the reimbursement for PDT for dermatologists in the U.S. Revenue in Germany amounted to €3.3 million for the full-year 2018, compared to €2.7 million for the same period in 2017, representing a 24% increase from the full-year 2017. Our revenue in the remainder of Europe amounted to €2.7 million for the full year 2018, compared to €1.6 million in 2017, an increase of 69%, compared to the same period last year. Growth in Europe is mainly due to the introduction of daylight PDT with Ameluz which was approved in March 2018. Revenues from other regions, which represent revenues from our development project with Maruho were only €130,000 in the full year 2018, compared to the previous year of €1.4 million as we had ended the phase of the collaboration already in March 2018. Our gross profit increased by €6.3 million to reach €16.7 million in the full-year 2018, compared to €10.3 million in the full-year 2017. Gross margin decreased to 79% in 2018, compared to 86% in the previous year. This decrease in our gross margin was primarily due to the one-off costs included in cost of sales for the introduction of larger production batches, as well as the reduction in sales revenue from other regions which had a gross margin of 100%. Research and development expenses increased 5% to €4.4 million in the full-year 2018, compared to €4.2 million in the same period last year. These costs are similar to the previous year and include the cost of clinical trials, as well as regulatory activities, such as the granting, maintenance and expansion of our approvals. Sales and marketing expenses increased 5% to €17.7 million for the full-year 2018, up from €16.9 million in the previous year. Sales and marketing include the costs of our own sales teams in Germany, Spain, the UK and the U.S., as well as our marketing activities. General and administrative expenses were approximately €13 million for the full-year 2018 compared to €3.1 million in 2017. This increase is due to the higher legal and consulting costs in association with the ongoing lawsuits, primarily with DUSA Pharmaceuticals and also an increase of administrative expenses in the U.S. some of which had previously been recorded in sales and marketing costs. For the full-year 2018, we reported a net loss of €9.6 million or €0.20 per share compared to net loss of €15.2 or €0.42 per share for the same period in 2017. Cash and cash equivalents was €19.5 million as of December 31, 2018 compared to €11.1 million as of December 2017. Biofrontera therefore continues to be in a very solid financial position. With the full-year 2018 financials complete, I would now like to provide the Company's guidance for the full year 2019. For the 2019 financial year, we expect revenue to be in the range of €35 million to €40 million. These numbers do not include any revenues from Cutanea. Research and development are expected to be between €5 million and €7 million. General and administrative expenses are expected to be in the same range as 2018, between €10 million to €12 million. Sales and marketing costs are expected to increase to between €20 million and €22 million. Loss from operations is expected to be between €7 million and €9 million. And loss before income taxes is expected to be between €9 million and €11 million. Of course, the achievement of these forecasts depends largely on revenue development. During the course of the 2019 financial year, we expect to become operationally break even in the fourth quarter. Regarding our acquisition of Cutanea, we anticipate that it will not lead to any negative changes in operating activities nor will it have any negative effects on our cash position for the full-year 2019. We expect sales service revenue from AKTIPAK and Xepi to new products to be in the mid single digit million range, which as I mentioned earlier, are not included in our full-year guidance. Additionally, any incremental marketing costs that incurred in 2019 for the commercialization of the acquired products will be pre-financed by Maruho and will consequently not affect our total sales costs in 2019. With that I would also now like to summarize the commercial terms of the Cutanea acquisition. We acquired Cutanea Life Sciences for the initial purchase price of $1, the purchase price equaling the startup costs effectively shall be payable to Maruho 2023. Thereafter, profits from the sale of Cutanea products will be equally shared between Maruho and Biofrontera until 2030. Maruho will provide those mentioned startup costs up to $7.3 million as a startup funding for the business activities of Cutanea, as operated by Biofrontera. Any rights in Cutanea’s existing research and development activities, so this is not related to the products but to former research activities ongoing at Cutanea originated from Maruho will remain with Maruho. Any other rights in Cutanea’s other research and development activities will be transferred to Maruho during a transition time. Maruho has further agreed to cover any ongoing expenses, which may be incurred in the first three months following the closing of the transaction. Maruho will furthermore indemnify Biofrontera and Cutanea from any liabilities relating to or arising from the period prior to the closing. We will fully consolidate Cutanea for the first time in our 2019 semiannual financial statements, and we will provide business combination reporting under IFRS 3. With that, I would now like to hand over to Hermann for some closing remarks. Hermann? Hermann Lübbert: Yes. Thank you, Thomas. With the financials complete, I would now like to conclude by pointing out that we are going through a transformation period with major and growth, perhaps the most exciting time in the history of the company. As we continue to accelerate our growth in the U.S. and establish Biofrontera as an industry leader with dermatologists, we were very excited to announce the acquisition of Cutanea Life Sciences from our strategic part Maruho. This is a significant piece of the pattern in Biofrontera's future. As briefly mentioned earlier, Cutanea has two FDA approved prescription products, AKTIPAK and Xepi. AKTIPAK is a prescription gel for the treatment of acne and Xepi was recently approved as a prescription drug for the topical treatment of impetigo, a frequent bacterial skin infection. Xepi is the only drug in its class that is approved by the FDA with demonstrated activity against antibiotic resistant bacteria such as MRSA. A little bit of background on our history with Maruho. As you might know, Maruho has been a strategic investor for the past few years now. About three years ago, we entered into the first phase of a research collaboration, which has yielded exciting results. We recently initiated the next project stage in the branded generics development partnership. As part of the newly agreed upon project phase, we will combine one of the four active ingredients tested during Phase 1 with our nanoemulsion and put out this product for clinical trials. We would like to point out that previously existing intellectual property, in particular that related to Biofrontera's nanoemulsion technology, shall remain the property of the respective owner. New IP and results of the new project phase, including project documentation shall be shared equally by Biofrontera and Maruho. The new project phase will require up to €1.1 million in research costs. These costs will be exclusively paid by Maruho. Another important piece of our strategic partnership is a joint research program for the label extension of Ameluz for the more severe forms of acne, which will enter render Ameluz more interesting for the Japanese market where sun-induced skin cancers are fairly rare. Maruho and Biofrontera recently signed a nonbinding term sheet in this regard. Acne is an indication Biofrontera has been investigating for the U.S. market and identified as a major growth opportunity for Ameluz. Currently, a proof-of-concept trial and maximal use pharmacokinetic trial are planned, the cost of which will be borne by Maruho in an amount yet to be specified. These trials would be followed by Phase 3 trials as required for the U.S. market approval of acne. According to the term sheet, Maruho will also cover the costs for the Phase 3 trials. Under the term sheet, we would further grant Maruho a license for marketing Ameluz in parts of East Asia and Oceania. However, please keep in mind that the terms and conditions still have to be negotiated. If both parties cannot agree on terms for this license, Biofrontera will have to remunerate Maruho for the cost of the Phase 3 trials provided however that those trials achieve positive results. Again, please remember that this is based on a nonbinding term sheet thus far. We will keep you updated on any developments on this front. The acquisition of Cutanea is a bold step into the future for us. With the continued expansion of Ameluz in both the EU and the U.S., as well as our acquisition of Cutanea, Biofrontera is now a multi-product specialty dermatology company. Looking ahead, we are very excited to leverage our expanded product portfolio through our robust sales and marketing infrastructure in the U.S. and plan to continue to work with our strategic partner Maruho to help realize Biofrontera's full potential. On this note, I would like to mention Maruho's tender offer to our shareholders. Maruho intends to up their shareholding of Biofrontera to just under 30%. This morning, we, Biofrontera's management and its supervisory board, have published our joint opinion on this offer. According to our joint opinion, we recommend accepting the tender offer for strategic reasons. However, on the basis of an expert opinion of the audit firm, IVC, Independent Valuation & Consulting AG, the offered cash price per share is considered too low. At this point, I would like to thank our employees, our shareholders and to supervisory board for all their contributions. Thank you very much. And now, I would like to open the call for questions.

Thank you very much. And we will now begin our question-and-answer session. [Operator Instructions] The first question is from Bruce Jackson of The Benchmark Company. Please go ahead. Your line is open.

Hi, everybody. Just a couple of questions about the Maruho agreement. First with the letter of understanding for acne. Does this permit you to begin the clinical trial work? And then, the second part is if thing here [ph] goes well, can you give us just a rough timeline on when you think you might have a final agreement? Are we talking about something that could take a couple of months or something that could take a couple of years? So, just if you could give us a rough idea of when you think this thing might be nailed down? Hermann Lübbert: Well, we are currently in the process of planning the exact clinical trial, a proof-of-concept trial, which then has to be brought forward to the FDA to discuss the study design with respect to FDA approval. Why we do this? By knowing the details of the study design, we will be able to calculate the cost of the study. And that is what's currently determining the timing of reaching a final agreement with Maruho. So, I would expect this final agreement should be signed within very few months.

And then, my other Maruho question is about the development project with one of their compounds. So, can you just talk a little bit about what indication is it for? I suspect this for some sort of inflammatory condition, like maybe atopic dermatitis. But, I just wanted to get an indication from you if that might be the indication that you're working on. Hermann Lübbert: Yes. And principally as it's full of inflammatory conditions, can be applied to a variety of different inflammatory conditions. It's a known active ingredient, which is combined with our nanoemulsion technology to improve its penetration and its safety profile. So, it's really about making something that does already exist better.

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

I wanted to confirm, during Christoph's comments, I believe he said that the combined sales force would be 45 individuals plus 5 managers. Was that correct or did I mishear that? Christoph Dünwald: No. That is correct. We are striving for 40-45 reps, and we keep the management structure that we at the moment.

Okay. And you expected that the integrated sales force to be active starting July 1 or are some of those new sales people already integrated? Christoph Dünwald: So, we’ll strive for having everybody on-board in all the territories at the moment in first of July. We still have a couple of open positions that we have to fill by then but we have two months now time to get the people on board and train them. But there's some great addition that we have to our existing sales force that is coming from Cutanea, and they accepted our offers.

And then, switching gears a little bit. For the BCC study, I believe you mentioned in the release that you would have enrollment completed in the first half of 2020. Do you have an expectation or provide some guidance around timing for submission and what you guys are thinking about relative to timing for commercial launch, assuming everything goes well? Hermann Lübbert: Well, if we can finalize enrollment -- enrollment is the part where we have the least control because this is really done by the physicians. So, that’s going to be completed early in 2020, then the last patient out would be six months after that patient’s in. So, it would then be in the second half of 2020. Once the last patient is out, we believe that within three to six months, we will be able to file the application with the FDA.

Thank you. The next question is from Gary Waanders of Bryan, Garnier & Co. Your line is now open. Please go ahead.

Firstly, on the Q3 submission of Ameluz for the trunk and extremities indication, that extension, roughly what time for the review do you expect in the EU and U.S.? Is it -- do you think about 12 months or so? Hermann Lübbert: Well, in the U.S supplement to an ongoing NDA, an active NDA is usually six months. We expect actually the same in Europe, but the EMA can actually extend the time if they have a lot of questions, which we don't expect them to do. So, we would think that both in the U.S. and the EU, we’re looking at pretty much six months.

And on the manufacturing scale up, the batch scale up, roughly what sort of improvement do you expect in gross margin resulting from that?

Currently, we have, as you say, around 80% gross margin. I would expect that to be in the maybe 5-percentage point range.

And the last one for me is regarding the operational breakeven, you saw it for expecting in Q4. Is that -- without giving guidance for 2020, is that something you expect to then sustain from that point on? Hermann Lübbert: So, without giving any guidance for 2020, I would expect certainly expect that we continue to grow and sustain the business then.

Thank you. At the moment, there are no questions [Operator instructions] We have received a follow-up question of Gary Waanders of Bryan, Garnier & Co. Your line is now open. Please go ahead.

Sorry. Just final one is on the comment about the Maruho tender price being too low. Is there any change then to the price that you would expect as a result of that review? Hermann Lübbert: I think -- and I can only speculate. I mean, this is something that Maruho and Biofrontera don't communicate, also for full legal reasons. So, I would think that for Maruho it is an important goal to achieve 30%. And whether or not the price will be increased, may dependent on the kind of response they get from the market.

There are no further questions. I would hand back to you. Hermann Lübbert: Yes. If there are no questions and we hopefully could answer all the ones that we are asked, I would like to thank you again. Thanks for taking the time to think about Biofrontera and listen to us this morning. Thank you. Bye, bye.

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