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Q4 2023 Biofrontera Inc Earnings Call

Participants

Andrew Barwicki; IR; Barwicki Investor Relations Inc.

Hermann Luebbert; Chief Executive Officer; Biofrontera Inc

Eugene Frederick Leffler; Chief Financial Officer; Biofrontera Inc

Jonathan Aschoff; Managing Director, Senior Research Analyst; Roth Capital Partners LLC

Bruce Jackson; Analyst; The Benchmark Company, LLC

Presentation

Operator

Welcome to the Biofrontera Incorporated Fourth Quarter 2023 Financial Results and Business Update Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Andrew Barwicki with Barwicki Investor Relations. Please go ahead.

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Andrew Barwicki

Thank you. Good morning, and welcome to Biofrontera Incorporated's Fourth Quarter and Fiscal 2023 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 are qualified by the cautionary statements contained in Biofrontera's press release and SEC filings. Also, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 18, 2024. 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 reference 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 reviewed as a substitute for operating rules determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in this Friday's press release. More specifically, management will be referencing adjusted EBITDA and non-GAAP financial measures, defined as net income or loss, excluding interest income and expense, income, taxes, depreciation, and amortization, and certain other nonrecurring or noncash items.
With that said, I would like now to turn the call over to Hermann Luebbert, CEO, Chairman, and Founder of Biofrontera. Hermann?

Hermann Luebbert

Thank you, Andrew, and my thanks to everyone joining us this morning. On today's call, I'll provide an overview of our accomplishments and pipeline strategy that occurred during the second part of 2023 and how these changes helped lay the groundwork for many initiatives in 2024 and beyond. Additionally, we have had some significant successes already in the first quarter of 2024 that I will touch upon. Fred Leffler, our CFO, will follow with a discussion on financial results, and then both of us will be available to answer questions after our prepared remarks.
Starting with the business update, we have made tremendous progress across critical areas including, first, optimizing our customer-facing teams to provide broad support and services to our customers. Second, controlling our cost structure and improving our balance sheet. And third, advancing R&D and assuming all clinical initiatives on Ameluz starting June 2024. This tremendous progress has been realized by investors.
Following the renegotiation of our license and supply agreement for Ameluz, with dramatic reductions in the transfer price we pay to Biofrontera Group in Germany, we very recently secured financing of $8 million and expect another tranche of $8 million in Q2. These proceeds will be used to finance our ongoing commercial organization and support the clinical activities for further Ameluz development, which, as mentioned, we will take over from the German Biofrontera Group in June 2024. I would like to comment, all our employees, as we announced net revenue of $34.1 million, a record for Biofrontera and a 19% increase for the year.
While Ameluz makes up for most of our revenue, we are also proud to share that 123 BF-RhodoLED lamps were placed at physician offices during the year compared to 66 placed in 2022, an increase of 86% and the highest number we have ever installed in a single year. The growing number of lamps in the field reflects both first-time installations and additional lamps among dermatology practices are already familiar with Ameluz PDT, facilitating growth for existing and new customers.
More specifically, of the 123 installations, 61 sites already had at least one of our lamps in place and bought a further lamp to provide more on Ameluz PDT to their patients. The remaining 62 offices are now set up to start Ameluz BF-RhodoLED PDT. Lamp placements are a leading indicator for future growth, and we are delighted with the increasing recognition of Ameluz PDT as an effective and patient-friendly treatment for actinic keratosis, and in the future, also other diseases.
During 2023, we have reduced our cost structure and invested a proportion of the cost savings in our commercial and support teams. We are continuing to optimize our customer-facing strategy by shifting resources from a sales force-focused organization to invest in marketing, strategic accounts, medical and reimbursement support.
Increasing efforts in sales force training will further help our territory managers to be more efficient. By doing so, we are continuing to develop a team that supports all stakeholders within our customer organizations. We believe this approach will be better suited to supporting our goals and the buy-and-bill PDT market and bringing new customers into PDT. To explain, buy and bill relates to Ameluz purchases by the doctors' offices, which then need unproblematic patient treatment and reimbursements to make this process financially viable to the office.
In December, we settled arbitration regarding a dispute around our acquisition of the Xepi asset. This allowed us to remove significant liabilities from our balance sheet, which Fred will discuss in a moment.
Now turning to new developments, research and development, and patents. We expect two significant commercial developments for 2024 that will favorably impact our business. We are planning to launch the larger RhodoLED XL lamp for the treatment of extended photodamaged skin areas with AK in Q2 of this year.
While this allows the illumination of a larger skin area, a three-tube safety study was completed, and the data was submitted to and accepted by the FDA for review. We expect to include the use of up to three tubes per treatment into the Ameluz label during Q4 of 2024. In combination with the launch of the XL lamp, this will allow PDT of larger skin areas, constituting a crucial requirement for our further growth.
The US Food and Drug Administration, the FDA, has approved a new formulation of Ameluz lacking propylene glycol for the treatment of actinic keratosis. We expect that production of this formulation will begin in 2024 and help improve tolerability for some of our patients while also reducing the generation of impurities over time, which may result in an extended shelf life.
The US Patent and Trademark Office, the USPTO, granted a new patent related to a photodynamic therapy or PDT protocol that is expected to be less painful but similarly effective to conventional PDT. Between all of our patents currently granted by the US Patent Office, PDT with Ameluz and RhodoLED is currently protected until 2040. Further patents are still pending and may extend the protection of our products until 2043 or even further.
In 2024, we purchased -- no, in 2023, sorry, we purchased two additional patents for low-cost portable photodynamic therapy lamps for use with Ameluz, and we started development of these lamps. The planning process for building a prototype is nearing completion, and we expect to begin looking at next steps in the near future.
We are also pleased to announce that the first patient has been dosed in the Phase 3 randomized double-blind vehicle-controlled multi-center clinical study to evaluate the safety and efficacy of Ameluz and RhodoLED XL in the field-directed treatment of actinic keratosis on the extremities, the neck, and the trunk. This is significant opportunity for our company, as many patients suffer from AK, not only on their face and scalp, but also on various exposed areas of the body.
The last two months have seen transformational developments for our company, with the successful renegotiation of our LSA or license and supply agreement for Ameluz and RhodoLED lamps with Biofrontera Group in Germany, and the subsequent securing of up to $16 million in financing. According to the amended LSA, we have reduced our Ameluz transfer price, it is the price we pay to our licensor, from 50% of our revenues, up to $30 million, and 40%, from $30 million to $50 million, to a flat 25% for '24 and '25. This amount will then step up to 30% in 2026, and step-wise, up to 35% in subsequent years. This structure, however, applies only to actinic keratosis and non-melanoma skin cancers, while we have secured a flat 25% indefinitely for any acne-related indications.
As part of this amendment, Biofrontera Inc. is taking over all clinical trials as of June 1, 2024. The additional cost is expected to be only a portion of the savings from the reduced transfer cost. This arrangement allows us to more effectively round these trials and control their costs.
Finally, we have secured sufficient funding for the company for two separate deals. In November 2023, we closed on additional financing of $4.5 million. And in February of this year, we closed on a private placement of up to $16 million that is expected to be paid in two tranches. We have received $8 million, and expect to meet the requirements to secure the additional $8 million tranche in either May or June 2024. We look forward to providing updates on all these programs and more on our first quarter 2024 call.
With that, I'll turn the call over to Fred to walk through the financial details of the first fourth quarter and full year. Fred?

Eugene Frederick Leffler

Thank you, Hermann, and it is great to be talking with everyone again. I will start with our fourth quarter 2023 results.
Total revenue for the fourth quarter of 2023 were $10.6 million, an increase of $0.5 million or about 4% compared with $10.1 million for the fourth quarter of 2022. This reflects the continued adoption of Ameluz, but was impacted more than anticipated by a buy-in prior to the price increase at the beginning of the quarter.
Total operating expenses were $14.5 million for the fourth quarter of 2023 compared with $15.8 million for the fourth quarter of 2022. Cost of revenues were $5.4 million for the fourth quarter of 2023 compared with $5.3 million for the prior year quarter, driven by higher Ameluz product revenue.
Selling, general and administrative expenses were $9.1 million for the fourth quarter of 2023 compared with $10.2 million for the fourth quarter of 2022, with the decrease primarily driven by lower personnel costs. Net income for the fourth quarter of 2023 was $3.5 million or $1.65 per share compared with a net loss of $2.8 million or a loss of $2.16 per share for the prior year quarter, with all per-share figures on a split-adjusted basis.
Adjusted EBITDA for the fourth quarter of 2023 was negative $3.2 million compared with negative $4.4 million for the fourth quarter of 2022, reflecting higher revenues partially offset by increased SG&A costs. Adjusted EBITDA, a non-GAAP financial measure, is defined as net income or loss excluding interest income and expense, income, taxes, depreciation and amortization, and certain other nonrecurring or noncash items. I'll refer you to the table on the news release we issued on Friday, March 15, for a reconciliation of GAAP to this non-GAAP financial measure.
Now turning to our full year 2023 results. Total revenues for 2023 were $34.4 million compared to $28.7 million for 2022, a growth of approximately 19%. The increase was primarily driven by higher volume of Ameluz sales due to a restructured discount program, higher adoption of the Ameluz by dermatologists, and a higher average Ameluz selling price.
Total operating expenses were $56.7 million for 2023 compared with $47.3 million for 2022. Cost of revenues increased from the prior year to $17.4 million for 2023 from $15.2 million in 2022, primarily driven by increased Ameluz volume.
Selling, general and administrative expenses for 2023 were $39.1 million compared with $35.9 million for 2022, an increase of about 9% compared with the prior year, driven by personnel related expenses and higher legal expenses. The net loss for 2023 was $20.1 million or $13.2 per share compared with a net loss of $0.6 million or $0.61 per share for the fiscal year 2022.
Adjusted EBITDA was negative $19.5 million for 2023 compared with negative $18.1 million for 2022. The decrease was primarily driven by the commercial team expansion that took place in the second quarter of 2023. Again, please refer to the table in our news release on Friday, March 15, for a reconciliation of GAAP to non-GAAP financial measures.
Now turning to our balance sheet. As of December 31, 2023, we had cash and cash equivalents of $1.3 million compared with $17.2 million as of December 31, 2022. Our investment in related parties is $0.1 million compared with $10.5 million as of December 31, 2022. This is due to the increase -- or the decrease in share price of the investment and the fact that we used a large portion of the shares to settle in the arbitration dispute. As a result, we eliminated liabilities of approximately $9.8 million and recorded a gain of approximately $7.4 million.
I have talked about our increasing inventory in 2023 quite a bit. And as of today, we have received and paid for all orders. Our inventory balance as of December 31, 2023, is $10.9 million compared to $7.2 million on hand as of December 31, 2022.
I would like to clarify this amount a bit. We also have a net asset for replacement inventory of $5.2 million as well. This is due to a voluntary recall of three batches of Ameluz from our supplier, of which we were notified of the issue in February 2024. The batches will we be replaced at no cost to us, and we expect to receive those batches over the summer months. This will not impact our ability to fulfill orders in the meantime.
So we are now in a position to sell off our inventory over 2024 and achieve a reasonable safety stock, which improves our working capital position. We are still not anticipating on making any inventory purchases for until at least the second half of 2024. And as a result, we will continue to manage our working capital (technical difficulty)
(technical difficulty) bridge loan for $4 million at the end of December of 2023 in order to finance the company through the most recent capital raise that Hermann mentioned earlier. We will pay down this loan through early July 2024, and do not expect to need such a facility in the near future.
Based on multiple positive indicators for the year, we expect two-digit growth in revenue compared to 2023 and expect to be cash-flow positive within approximately 12 to 18 months, depending on our spend associated with -- or with our additional spend associated with the US clinical studies.
So with that overview of our business and recent financial performance, Hermann and I are now ready to take questions from our covering analysts. Operator?

Question and Answer Session

Operator

(Operator Instructions) Jonathan Aschoff, Roth.

Jonathan Aschoff

I wanted to ask about just your trial. Acne, what is the patient enrollment number and the timing to data?

Hermann Luebbert

Hi, Jonathan. In the acne Phase 2 trial, about half of the patients are currently enrolled. A little more than between 50% and 60% are currently enrolled. And we expect to complete enrollment until the end of the year, and then have data available in the middle of next year.

Jonathan Aschoff

Okay. And then how about the same two questions for peripheral AK?

Hermann Luebbert

The peripheral AK study has similar enrollment, actually. The data will probably come slightly after the acne trial data because the patients are longer in the trial, but --

Jonathan Aschoff

Okay, so 2H '25, maybe? Like 2H '25 for data, you would think? Second half of '25?

Hermann Luebbert

Yes.

Jonathan Aschoff

And then how about enrollment for BCC data? Is that still tracking for mid '24? Or like a few months from now, something like that?

Hermann Luebbert

Enrollment was completed already --

Jonathan Aschoff

No, no. Data tracking. The data timing. Is that still the middle of this year?

Hermann Luebbert

Data should be -- of the clinical part of the study should be after the middle of this year. And follow up in the first half of next year. (inaudible)

Jonathan Aschoff

Okay. Thank you, Hermann. If I may go to the portable lamp. Can you make any estimates as to when derms might have access to the portable lamp?

Hermann Luebbert

The portable lamp will still need some time, of course, before it hits the market. But that's something that we see on the market in the next two years, just to be clear.
However, we believe that this will be a significantly easier entry into PDT for offices that so far haven't been able to do PDT because they don't have sufficient space. And it will also help our reps to actually take a lamp around and do live demonstrations in doctors' offices on label. And furthermore, the doctors will have the chance to take the lamp and do -- offer PDTs in retirement homes. So it will provide much more flexibility to the way in which PDT can actually be done.

Jonathan Aschoff

Okay, I think I missed what you had said. The XL lamp, was that going to come on to the market in force by the end of the year, is that what you said?

Hermann Luebbert

No. Q2.

Jonathan Aschoff

Q2 of this year?

Hermann Luebbert

Of this year. Yes.

Jonathan Aschoff

Excellent. So guys, can you definitely sell all of the annual minimum purchases of Ameluz you must make with the new transaction terms? Is that a layup to sell the minimum you have to buy?

Eugene Frederick Leffler

Jonathan, yeah, this is Fred. Yeah, we believe that is, as you put it, a layup. And yeah, the minimums associated with the LSA, the structuring should be easily achieved going forward.

Jonathan Aschoff

Okay. Lastly, you've moved to see using the term two-digit growth. I mean, that starts with can. I would hope that your growth this year over last year would be double that, and that that would not be a stretch. Is that a fair way to look at it, that 20% would not be a stretch?

Eugene Frederick Leffler

Yeah, it will. It then goes 99, Jonathan, but -- (laughter). You're right. I think that we expect similar to growth that we've seen over the past couple of years. And if we maintain that trajectory going forward and as I mentioned, depending on how we deploy the spend associated with the clinical trial that we're taking over in June, we should be breakeven in approximately 12 to 18 months.

Jonathan Aschoff

Okay. Thank you very much, guys.

Eugene Frederick Leffler

Thank you, John.

Operator

(Operator Instructions) Bruce Jackson, The Benchmark Company.

Bruce Jackson

A question about the sales and marketing effort. So have there been any changes to the sales force in terms of numbers? And is turnover stable?

Hermann Luebbert

We did in fact decide to reduce the sales force slightly in favor of growing the other service functions that are required to actually make the head of the sales force to be successful. So currently, we have 32 reps, all of them, and seven managers of these 32 reps. What was the second part of the question?

Bruce Jackson

Yeah, so the question, any change in the turnover? So the reps that you got right now, is it stable?

Hermann Luebbert

Yeah, the turnover is, of course, something that is a problem to every company. When we compare our turnover in the sales force with other companies, so this is the industry average, then we are still below that, which is good. On the other hand, we still try to do everything we can to reduce the turnover even further.

Bruce Jackson

Okay, great. And then getting back to Fred's comments on the sales growth for the coming year, the double-digit. You've done in roughly 19% year over year for the past couple of years, so if we like homed in on that number, would that be a reasonable target to begin with?

Eugene Frederick Leffler

I think that's a reasonable target. Our CAGR since 2020 has been 22%. So yeah, I think those are the two numbers that you take a look at, and I think around that would be a reasonable estimate.

Bruce Jackson

Okay. And then last question from me. Sometimes the timing of the price increases can have an impact on the calendarization of the quarter. So what would be looking for this year? Would it be similar to 2023? Or might there be any differences?

Eugene Frederick Leffler

Bruce, we're still evaluating our pricing strategy and things like that. And we haven't made a concrete decision on any price increases yet for 2024.

Bruce Jackson

So in terms of like the seasonality of the revenue by quarter then, should we assume that looks similar to 2023?

Eugene Frederick Leffler

Yes, I think that's a good working assumption. And if any changes come to that, we will certainly update everyone.

Bruce Jackson

Okay. Great. Thank you very much.

Hermann Luebbert

Thank you, Bruce.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Hermann Luebbert

So we believe that we had a very successful year in 2023, that we had some transformational changes to the company that makes the status of the company and the future of the company look much brighter than what we were looking at a year ago. And with that, I would like to thank all our employees again to taking the company to where we are now. And thank you for taking the time to listen in. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.