Biofrontera, Inc. (NASDAQ:BFRI) Q3 2022 Earnings Conference Call November 14, 2022 11:00 AM ET
Company Participants
Tirth Patel – LHA Investor Relations
Fred Leffler – CFO
Erica Monaco – CEO, COO, Treasurer & Secretary
Conference Call Participants
Jonathan Aschoff – ROTH Capital Partners
Bruce Jackson – The Benchmark Company
Operator
Good day, and welcome to the Biofrontera Inc. Third Quarter Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Tirth Patel of Investor Relations. Please go ahead.
Tirth Patel
Good morning, and welcome to Biofrontera Inc.’s Third Quarter 2022 Financial Results and Business Update Conference Call. Please note that certain information discussed during today’s call by management is covered under the safe harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that Biofrontera’s management will be making forward-looking statements and that actual results may 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 qualified by the cautionary statements contained in Biofrontera’s press releases and SEC filings.
Also, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, November 14, 2022. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law.
During today’s call, there will be references to certain non-GAAP financial measures. Biofrontera believes these measures provide useful information for investors, yet should not be considered as a substitute for GAAP nor should they be viewed as a substitute for operating results determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in this morning’s press release. More specifically, management will be referencing adjusted EBITDA, a non-GAAP financial measure defined as net income or loss excluding interest income and expense, income taxes, depreciation, amortization and certain other nonrecurring or noncash items.
With that, I would like to turn the call over to Erica Monaco, Chief Executive Officer of Biofrontera Inc. Erica?
Erica Monaco
Thank you, Tirth, and welcome, everyone, to our third quarter conference call. Joining me today is Fred Leffler, our newly appointed Chief Financial Officer. In a moment, Fred will review our recent financial results, and then I’ll discuss the business and strategy. But first, I’d like to say a few words.
I’m proud of our growing and hard-working Biofrontera team. Our third quarter results reflect the investments we’ve made over the past couple of quarters in strengthening medical affairs advocacy, developing our sales team and sales infrastructure and securing our financial outlook on our path toward profitability. The feelings of momentum and Team Market Biofrontera are palpable. During the third quarter and recent weeks, we strengthened our medical affairs initiatives with sponsorship, participation and presentation of our innovative dermatology solutions. Through peer-to-peer interactions and other activities, dermatologists are increasingly choosing our brands for their patients. The variety of our activities and our visibility in the dermatology sector are sharpening our corporate profile as an innovative dermatology company, and emphasizing our strong commitment to improving patient care in collaboration with dermatologists.
Our success in strengthening patent protection for our products justifies continued investments in marketing and further clinical development. With that, I’ll turn the call over to Fred to discuss our Q3 and year-to-date financial results. Fred?
Fred Leffler
Thank you, Erica, and good morning, everyone. I’m thrilled to be part of the Biofrontera team, and I’m pleased to be speaking with everyone today. Before I review our financial performance, I’d like to share a little bit about my background.
I spent the first half of my career in finance and accounting roles, and the second half of my career in management consulting, whereas my job to evaluate business strategy and execution and make recommendations to optimize shareholder value. When presented with the opportunity at Biofrontera, I applied that same analytical approach, and I very much liked what I saw in the business and team.
Biofrontera’s business opportunity is tremendous. And with the basic building blocks in place, now is an ideal time to apply my expertise and help guide the company’s future direction and secure success. I look forward to interacting with our shareholders and analysts while working to build further awareness and support within the investment community as we focus on evaluating all our potential options and build upon our current successes.
So in terms of our recent performance, I’ll start with a review of our third quarter financial results. Following the achievement of record high first half revenues, our third quarter 2022 revenues were $4.3 million, which was in line with the third quarter of 2021. Cost of revenues decreased by 3%, primarily due to slightly lower annual sales during that quarter. Total operating expenses were $8 million for the third quarter of 2022 compared with $20.4 million for the third quarter of 2021. This decline was driven by lower selling, general and administrative expenses, which decreased by $9.3 million or 54% compared to the prior year. The primary driver of the decrease in SG&A was last year’s one-time legal settlement expense, which was partially offset by higher business insurance and headcount costs because of resumed hiring in 2022.
The net loss for the third quarter of 2022 was $2.6 million or $0.11 per share, and this compares with a net loss of $16 million or $2 per share for the third quarter of 2021. Adjusted EBITDA was negative $5 million for the third quarter of 2022 compared with negative $3.8 million for the third quarter of 2021.
Now turning to our year-to-date financial results. Total revenues for the first 9 months of 2022 were $18.5 million versus $14.9 million last year, representing an increase of $3.6 million or 24%. This year-to-date growth rate provides a better view of our performance versus the quarterly results as there is some seasonality in our business and the timing of price increases can shift a material amount of revenues between quarters. The 9-month increase in revenues was primarily driven by a higher volume of Ameluz orders, which resulted in an increase of Ameluz revenue by $3.2 million and by an Ameluz price increase, which increased Ameluz revenue by about $0.2 million. Cost of revenues increased by 25% with the prior year period primarily due to higher sales of Ameluz.
Total operating expenses were $31.5 million for the first 9 months of 2022 compared with $38.3 million for the same period in 2021. SG&A expenses decreased by $2.3 million or 8%, again reflecting a one-time legal settlement expense incurred in 2021, partially offset by higher business insurance and headcount costs as a result of resumed hiring in 2022.
Net income for the first 9 months of 2022 was $2.1 million or $0.11 per diluted share, and this compares with a net loss of $23.2 million or $2.90 per share for the first 9 months of 2021. Adjusted EBITDA was negative $14.1 million for the first 9 months of 2022 compared with negative $9.5 million for the same period in 2021. I refer you to the table in the news release we issued earlier this morning for a reconciliation of GAAP to non-GAAP financial measures.
2022 adjusted EBITDA of negative $14.1 million does include public company costs of increased insurance, audit SOX and Investor Relations, which totaled $2.1 million. As of September 30, 2022, Biofrontera had cash and cash equivalents of $27.5 million, and we believe our cash position is sufficient to fund operations for at least the next 12 months. But as a growth company, we intend to be opportunistic regarding potential financing activities and this includes routinely positioning ourselves to strengthen our strategic position, scale our business more quickly, mitigate business risk and pursue new growth opportunities.
With that, I’ll turn it back over to Erica.
Erica Monaco
Thank you, Fred, and welcome again. We’re thrilled to have you on the Biofrontera team. So with that, I will provide some additional color on those results.
Despite Q3 revenues being flat year-over-year, I’d like to point out that improved sales momentum, tactical execution and strengthened brand recognition all contributed to higher year-to-date revenue. As Fred mentioned, record 9-month revenues are up 24% over 2021 and are up more than 80% compared with 2020 and up more than 26% versus the pre-COVID year 2019. These results put us on track to achieve full year 2022 growth in total revenues of between 24% and 31%, inclusive of the typical seasonal strength in the first and fourth quarters. We revised our guidance because the predictability of our yearly results is weighted quite heavily on the last few weeks of the year, where even a handful of orders or weather-related shipping delays can impact revenue recognition.
That said, our commercial focus throughout 2022 has been on achieving deeper sales penetration among current customer accounts and increasing market share. We’ve been successful with both with current customer growth and market share both increasing compared with 2021. Underlying this growth is our commercial strategy, which is supported by strengthening medical affairs and establishing Biofrontera as a trusted partner to our customers. Educating dermatologists on the importance of field therapy and raising awareness of our products’ high efficacy supports our efforts to expand utilization of PDT, especially among patients with more than 15 AK lesions when reimbursement for cryotherapy is capped.
We believe dermatologists have favored cryotherapy to date because of reimbursement, but recent shifts in cryotherapy reimbursement and treatment guideline pressure towards field-directed therapy should support sales of PDT treatments. This commercial strategy we launched earlier this year, includes a new model for inside sales that enhances productivity by allowing our field sales force to deepen customer relationships while inside support expand reach and frequency to some of our newer and smaller accounts.
We’ve made good progress in building our key account management team reacting to the evolution of our industry to large corporate practices and buying groups. The team has developed a robust database and analytic tools to effectively evaluate the key account opportunities and potential. These data support 2 new key account initiatives to expand Ameluz’s PDT adoption.
The first initiative positions our territory managers to support the expansion of PDT adoption and the optimization of PDT implementation within key account clinics. The second program is the flagship initiative to identify a model PDT clinic within targeted accounts. The flagship clinics will then serve as the model for PDT implementation and will be replicated within other key account clinics. Our key account team deployed this strategy in the field during Q4 of this year, and we are beginning to measure the impact of their initiative as we move into 2023.
The enhanced sales training program we rolled out last quarter has increased sales force effectiveness and enables more impactful performance evaluations and development process. I view these results as validation of the data-driven approach we initiated about a year ago that equips our sales force with valuable information to enhance their success. We expect the ROI on this training program to have immediate impact on growth beginning next year.
As with many companies post COVID, we have faced staff turnover and the need for retraining. Almost 2/3 of our sales force joined our organization within the last 18 months. In our sales model, it can take at least 6 months to fully develop a sales rep. While we are still attracting top talent and creating rewarding and incentivizing compensation programs, we are working to further strengthen and stabilize our foundation. We will be looking for increased ROI from our existing sales force in addition to any future expansion plans we roll out in 2023.
Throughout the third quarter, we furthered our commitment to educating health care providers through various initiatives, including seminars, medical conferences, prescriber networking events and engagement with key opinion leaders. As an example, Biofrontera served as a corporate sponsor for the Fall Clinical Dermatology Conference in Las Vegas, and we hosted a booth showcasing our current and upcoming products and engaged in dermatologist-focused marketing activities. We also presented 4 posters on the label expansion clinical work being performed on our products as well as investigator-initiated studies, which lends further credence to the interest and support we’re getting from the community. Investigator-initiated studies that align with our areas of clinical interest and real-world use of PDT to treat skin conditions are a critical component of our medical education initiatives.
Through the support of independent research, like the posters that were presented, we reinforced our commitment to innovation to improve patient outcomes, address medical and scientific questions to advance our therapy and further strengthen Biofrontera’s brand and profile within the industry. We initiated patient advocacy and awareness events to get ahead of solar damage and non-melanoma skin cancer, thereby helping to spotlight Biofrontera’s patient-focused mission.
At the Fall Clinical, we sponsored an advisory board meeting that consisted of 2 sessions, providing advanced education on the advantages and current landscape of photodynamic therapy, and sharing of real-world PDT utilization experiences among leading dermatologists. At the conference, we also showcased the BF-RhodoLED as well as Biofrontera’s new larger PDT lamp named RhodoLED XL. Both are approved for use in combination with Ameluz for the treatment of mild-to-moderate AK on the patient’s scalp. The RhodoLED XL allows for the illumination of a larger surface area, thereby enabling simultaneous treatment of AK lesions that are distant from one another.
This lamp was previously set to launch by the beginning of next year. But due to some supply chain disruptions as well as inflationary pricing, we have pushed back that launch. Delaying the launch was not a decision we made lightly. We know we have a great product, but we need to get the timing and the pricing correct right from the outset. Manufacturing costs were increased by suppliers and we don’t feel that it is right to push those costs on to customers and potentially affect initial sales and updates.
To help managers with this launch as well as our plans to strengthen our sales force and execution on our commercial plan, during the third quarter of this year, we appointed Gerard DiGirolamo as our National Sales Director. Gerard joined us in September and brings to Biofrontera more than 25 years of experience in building pharmaceutical sales and commercial teams with a particular expertise in dermatology. In a recent prior role at Verrica Pharmaceuticals, he built their U.S. sales infrastructure in preparation for the commercial launch of a successful dermatology drug device combination product. This tactical approach aligns with our mission by involving and collaborating with medical affairs, marketing, key opinion leaders and national influencers.
Targeted medical conferences such as the Fall Clinical allow us opportunities not only to share our research with the academic community but also to explore potential partnering and business development opportunities. We are laying the groundwork for commercial success by interacting directly with dermatology leaders, strengthening our brand and supporting both company-sponsored and investigator-initiated clinical research that advances product potential.
Clinical development complements our commercial strategy by expanding the market positioning for Ameluz, providing more confidence to patients and offering more favorable treatment options. Expanding the Ameluz label to include new indications will help open new market opportunities and accelerate sales growth. To provide an update on our ongoing study, I’ll share with you, that the enrollment in the superficial BCC Phase III trial now stands at 83%. The Phase I study for AK that focuses on increasing single treatments to 3 tubes is now approximately 74% enrolled. Additionally, a new site has been added to this study, which should accelerate the pace of the trial moving forward.
The Phase II acne trial has been recruiting slowly this year. We’ve learned a lot during this time on patient selection and the determination of acne severity and have been in discussions with our investigators and the FDA throughout as we fine-tune the protocol. We believe we now have an optimal protocol that will be ready in Q1 of 2023. Moving forward with this knowledge and improvement will help to accelerate the enrollment in 2023.
We expect even more positive news on these 3 ongoing studies that offer tremendous potential to our future commercial strategy and on our patent protection in the first half of 2023, and we’ll provide those updates as soon as they become available. I’m proud not only of the hard work all the teams within Biofrontera have put in this year, but also the impact and recognition they’re continuing to receive.
For example, the new analyst marketing campaign earned a Relaunch/Revitalization of the Year Award and Professional Website/Online Initiative of the Year Award, as well as our Associate Director of Marketing, Leslie Hopkins, was named the 2022 brand champion for dermatology. These recognitions came from PM360, a publication for marketing decision makers in the pharmaceutical biotech diagnostics and medical device industries.
As a final topic, in addition to the business operations I’ve just discussed, I’d like to point out some recent strategic transactions we participated in. In Q4, we acquired a 7.45% equity ownership position in Biofrontera AG with a current market value of about $6.9 million, mostly through tendering shares of Biofrontera Inc., partly also with cash. We have an exclusive long-term perpetual license on all technology relating to PDT with Ameluz and ALA that is developed at Biofrontera AG. For this agreement, AG gets between 30% and 50% of our revenues in order to support improvements of our label and the quality of our product, optimizing the market opportunity in the U.S.
AG is at the forefront of further development of PDT by improving drug formulations and illumination technology, adding indications and improving clinical protocols. By holding a significant ownership stake in AG, we will be in a position to influence further development and investment in AG to render the most beneficial for the U.S. market. A significant stake in AG will facilitate aligning our goals and future collaborations that are beneficial for both companies.
So in conclusion, we are continuing to roll out our corporate development initiatives, planning for future development opportunities, and exploring multiple avenues to accelerate our path to profitability. The year-to-date sales growth certainly demonstrates the positive impact of strengthening medical affairs and establishing Biofrontera as a trusted partner to dermatologists.
We look forward to closing out 2022 strong, advancing our therapies through label expansion and setting up our financial footing put by Biofrontera in an even stronger position in 2023.
That concludes our business update for Q3. Thank you again for taking the time to participate in this conference call. Operator, we are now ready to take questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And the first question will come from Jonathan Aschoff with ROTH Capital Partners.
Jonathan Aschoff
I was curious, is the push to reap what you can from existing customers with existing salespeople, and I guess some of the customers in their region, that’s overwhelmingly a function of the capital markets at present, right, which do not exactly facilitate raising capital to expand the sales force. Would that be accurate?
Erica Monaco
So I think I missed the first few words. Do you think the current reach — the current focus is on existing accounts due to the capital margin?
Jonathan Aschoff
Right.
Erica Monaco
I would say yes and no. I think our goal going into this year was always to strengthen our existing base and push forward on that side. And we’ve seen demonstrated success there. The placements that we put in this year in terms of inside sales, key accounts, and enhanced training, were all intentional strategic steps to strengthen the position before we expand.
As we look in connector and we evaluate — we need to continually analyze the market to determine our best overall strategy, and yes, financing does have a play in how and when we expand, but it is not the only driver, Jonathan. So hopefully, that answers your question.
Jonathan Aschoff
Yes. And the next and last one is just so the biggest factor in your lower 2022 guidance is just the inability to guarantee, which is reasonable. The last couple of weeks of our revenue, and there’s nothing else in that. It’s just that inability to guarantee timing so late in the year?
Erica Monaco
I think we’re still — I mean the previous guidance was at least 30% growth, and I think with the range of 24% to 31%, we’re hovering right around what we did say. That is a key factor in determining how the end of the year will play out. But I also did want to highlight the fact that 2/3 of the sales force is relatively new to the organization. And making sure they’re developed and ready to go for next year can play a factor into those results as well.
Operator
The next question will come from Bruce Jackson with The Benchmark Company.
Bruce Jackson
Congratulations on all of the new hires and building out a team. So my first question is on the operating expense profile. Now you’ve got a few ex members on the payroll, what’s the operating expense profile going to look like going forward for the next 3 quarters?
Erica Monaco
Going forward for the next few quarters, I think you’re looking at a pretty stable run rate for us. We have positioned the business almost to scale besides any commercial expansion that would take place in 2023. So what you’re seeing in terms of a run rate is consistent. What we saw in Q2 and Q3 isn’t all that different from what you’ll see moving forward.
Bruce Jackson
Okay. Okay, great. And then in terms of the revenue guide, the range that $24 million to $30 million, that kind of puts us in a roughly 20% top line growth rate kind of range. That’s also what you did last year. Should we be assuming going forward that that’s kind of what the long-term growth rate is headed?
Erica Monaco
No. I would say, no, we should not be assuming that. I think given the fact that we’re developing 2/3 of our sales force this year and we’ve implemented some new strategies, we haven’t seen the true ROI from all of those efforts yet. And what you can expect in 2023 on is at least that type of performance plus enhancements will further develop and strengthen our growth opportunity.
Bruce Jackson
So we’re looking for acceleration next year?
Erica Monaco
Yes.
Bruce Jackson
Okay. And then just generally, a couple of questions about the market. There’s been some staffing shortages in dermatology offices. How are you finding physician office access to be — and are there any changes in just the general market conditions for dermatology?
Erica Monaco
Sure. I think that’s — I mean, that’s a good question, Bruce. We ask the teams that all the time to get a pulse on what’s going on out there. And the staffing seems to have recovered as of recently in the derm space, but now they’re dealing with that same concept of retraining. And certainly, with PDT, it’s important to have advocacy within the organization of the dermatologists. And so regaining those sort of pioneers that want to take the charge and lead it internally is a bit of a rebuild.
But in terms of access, logistically, there’s — you schedule yourself now instead of showing up or you do some things virtually. And — we’ve been very good about our medical team doing quite a bit virtually, which has actually increased our efficiency and able to reach a broader audience more regularly. So in terms of access, I’d say it’s back and just maybe just different than how it used to be.
Bruce Jackson
Okay. And then last question for me. You were talking about the focus on your established base. You’ve also been leading with the idea that it’s greater-than-15 lesion patients that you’re really [indiscernible] these offices. With the accounts that have been using your product for a while, are they still focused on that 15-plus lesion patient or they started to extend the use of Ameluz into like the less-than-15 lesion patient market?
Erica Monaco
The reps, did you say [indiscernible]?
Bruce Jackson
[Indiscernible] extending the use into the less-than-15 lesion patient population?
Erica Monaco
I think — so I would like to go forward into 2023 with some more updated percentages there to be able to get some precise numbers. It’s very difficult to measure some shifts in cryo performance because it’s at least 86% of this $4 billion market. So we have a hard time when numbers move slightly in our favor, really quantifying it in a percentage of cryo. But we will certainly try to roll out some metrics that we can develop KPIs for as we look into 2023 with that number.
Operator
As there are no further audio questions, I would like to turn the call over to Mr. Patel for any questions online. Please go ahead, sir.
Tirth Patel
Thank you. We have received some additional questions that were e-mailed to our Investor Relations team. Thank you to all shareholders who submitted them. We’ve compiled the most commonly asked themes into three questions.
Our first question is, is your investment in Biofrontera AG, the first step in a broader strategy?
Erica Monaco
Sure. Thank you, Tirth. As I mentioned on the call earlier, our investment in Biofrontera AG is a strategic step to strengthen the position of Ameluz and red light PDT in the United States. AG is at the forefront of further developing PDT by improving drug formulations and illumination technology and adding further indications and improving the protocols. So by holding a significant ownership stake in Biofrontera AG, we believe we will be in a position to further influence the development and investment of AG in ways that will help render them most beneficial for the U.S. market.
Tirth Patel
Our second question, can you provide more color on the strategies involved in increasing sales per rep?
Erica Monaco
Yes, sure. And I think I might have touched on this on the call and even in some of the previous questions. But in 2022, we enhanced our sales training department. We added a key account management department, and we added inside sales to support our sales functions. These value-added functions will offer additional tools to our existing sales reps. They’ll provide added bandwidth for lower volume, harder to access accounts and they’ll provide a specialized resource to our evolving industry.
We expect these tools to provide deeper insight and strategic planning and allowing our reps to be even more efficient and more intentional and more impactful in their sales efforts.
Tirth Patel
And our final question is, how many reps do you plan to hire in 2023? And what’s the pace of that hiring? With those hires, will your field sales force be fully staffed? Or is it more to come in 2024?
Erica Monaco
Good question. Thank you, Tirth. So with planning for expansion like this every step of the way, we need to continually analyze the market and best determine our overall strategy. This includes the size of the sales force. As we’ve seen strong growth in our market share of PDT already this year, largely by strengthening our existing customer base, we need to still determine the optimal size and placement of our sales force before we commit to a specific number.
We are working on our expansion plans, which we expect to see materialize in 2023. And as soon as we have more details with numbers and locations, of course, we will roll those out as we enter the new year. And actually, let me just expand a little bit on that. I think — sorry, Tirth, just thinking. I think if we were to expand, there’s numbers that have floated around publicly before like getting into the 40s range and then getting into the 50s range is probably the most optimal size for us. Although I don’t want to commit to a long-term finite number, I do think somewhere in the 50s is where we will land in — over a couple of years, that will probably 1 to 2 years to do this in a strategic way.
Tirth Patel
Thank you. That concludes our submitted questions.
Operator
For this concluding our question-and-answer session, I would like to turn the conference back over to management for any closing remarks.
Erica Monaco
Thank you for those additional questions, everybody. So in closing, I just wanted to say that we are laser-focused on our business, our commercial and our financial goals. Hermann, Fred and I all look forward to meeting with our investors and analysts during the JPMorgan conference in San Francisco in early January. We will be on site there and available for one-on-one meetings from January 9 to 11. Please contact our Investor Relations agency, LHA, to arrange a meeting if you like.
Beyond JPMorgan, we look forward to speaking with you again when we report our 2022 fourth quarter and full year financial results in early April. In the meantime, thank you again for joining us today.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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