Biofrontera Inc. (NASDAQ:BFRI) Q4 2022 Earnings Call Transcript March 8, 2023
Operator: Greetings and welcome to the Biofrontera, Inc. Fourth quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the form of presentation. I will now turn the conference over to your host, Mr. Toni . You may begin.
Unidentified Company Representative: Thank you. Good afternoon and welcome to Biofrontera, Inc.’s conference call to discuss our fourth quarter and full year 2022 financial results. I’m joined today by Biofrontera Chief Executive Officer Erica Monaco and Chief Financial Officer, Fred Leffler. Before turning the call over to Erica, I would like to remind everyone that on the call today we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are based on bio Biofrontera’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see today’s earnings release and our filings with the US Securities and Exchange Commission.
Biofrontera undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law. I would also note that during this call, management will refer to certain non-GAAP financial measures such as adjusted EBITDA. Management believes that these measures provide meaningful information for investors and reflect the way they view the operating performance of the company. You can find a reconciliation of our GAAP to non-GAAP measures at the end of the earnings release. With that, I’d like to turn the call over to Erica Monaco. Erica?
Erica Monaco: Thank you, Tony, and thank you to everyone tuning into our call today. We appreciate your interest in Biofrontera. 2022 was Biofrontera’s first full year as a public company. It was an eventful year and I am proud of our team’s many accomplishments. We achieved record annual revenues in 2022, up 19% over 2021 and 12% higher than our previous record, which was the pre-COVID year 2019. Coming off of this landmark here, I want to pause for a moment and recognize today, March 08 as International Women’s Day. This year’s theme is to embrace equity. As a female business leader, I am proud to support an organization that values and embraces inclusion of all. Biofrontera is 58% female and proud to be contributing to a more inclusive world.
Today, I would like to celebrate the amazing employees and industry partners we have, the challenge of the status quo, make an impact and drive for change. On the business front, we are making a measurable impact in the AK marketplace in terms of both awareness and market share, and we completed much of the necessary investment to build out our commercial infrastructure. Revenues for Q4 2022 were slightly lower than planned, yet this does not reflect lower customer demand or any loss of market share. While the pace of Ameluz’s PDT treatments was pretty much as we expected, shipments and revenue were impacted by a combination of weather-related delays as well as specific territory vacancies that prevented order processing. Now, before I move into the deeper business discussion, I will hand it over to Fred to share our Q4 and full year results.
Fred Leffler: Thank you, Erica. It’s great to be holding this call and discussing a strong year for Biofrontera. I’ll start with a review of our financial highlights for the fourth quarter of 2022. Revenues in the quarter were $10.1 million, up 11% over fourth quarter 2021. This increase was driven by continued growth in sales of Ameluz, partially offset by some shipping delays and challenges in a few of our sales territory at the end of the quarter. Erica will elaborate on this in her remarks. We incorporate our cost of revenue as an operating expense and not as cost of goods sold. So within total operating expenses in the fourth quarter, the cost of revenue was $5.3 million, up about 10% year-over-year, which is in line with our revenue growth for the quarter.
Selling, general and administrative expenses were $10.2 million in the fourth quarter of 2022, up 10% versus the fourth quarter 2021 roughly in line with the growth in revenues. We made investments in our G&A functions, particularly those that underpin revenue to support our growth plans and the ramp up here is mostly complete. We do not expect significant increases between now and the point we become cash flow positive. While we continue to invest in our commercial team, we expect that the selling expense growth should be generally in line with revenue growth in the short term. Longer term, we expect SG&A leverage as these expenses will grow slower than revenues as we reach our target commercial structure. Adjusted EBITDA was negative $4.4 million for the quarter compared with negative $3.2 last year.
Now turning to our full year financial results, total revenues were $28.7 million versus $24.1 million in 2021, representing an increase of $4.6 million or 19%. These were record annual revenues for Biofrontera and notably, we are now above pre-COVID revenue levels. Cost of revenue was $15.2 million in 2022, up 19% versus 2021. Due to our purchasing agreement with our supplier, this growth tends to be fairly linear with revenues growth at these levels. As our revenues grow in the future, our cost of revenue will come down at predetermined volume levels. Selling, general and administrative expenses were $35.1 million and $36.5 million for 2022 and 2021 respectively, a decrease of $1.4 million or 3.8%. This decrease was driven by the one-time legal settlement expense of $11.3 million recognized in 2021.
This decrease was offset by higher headcount costs as a result of resumed hiring in 2022 and a broad increase in the cost to comply with corporate governance, regulatory reporting, risk management, auditing, and other requirements applicable to us as a public company. 2022 adjusted EBITDA was negative $18.1 million compared with negative $12.6 million for 2021. The decrease was primarily driven by our net losses, which in turn reflect higher selling, general and administrative expenses, excluding legal settlement expenses due to increased headcount and compliance costs. I’ll refer you to the table in the news release we issued earlier this afternoon for reconciliation of GAAP to non-GAAP financial measures. As we look ahead, we believe we can be cash flow positive within approximately two years.
There are several factors that support this view. Our current market opportunity in PDT for AK is sufficiently large that we are projected to reach those revenue levels to be breakeven with just our Ameluz PDT therapy as currently indicated. Given the timing of potential future label expansions or new indications, those would be additive, but not necessary for us to reach p cash flow positive position I just mentioned. Our cost of revenues will improve as it is known and contractually set. Cost of revenues are fixed at 50% up to $30 million in revenues, but then we’ll step down in 10% increments as revenue scale to predefined levels and we have made the necessary commercial infrastructure investments, especially in revenue supporting functions to support this plan growth to profitability.
We would expect to see increased operating leverage as we grow our revenues. As a result, we have the business and financial model in place, so moving forward, the most impactful lever to accelerate revenue growth over this timeframe is the size of our sales force. While Erica will discuss our plans for sales force growth and productivity improvements in her remarks, I will just point out that our growth over the next couple years will primarily be determined by how efficiently we can scale our sales force. In terms of capital at year-end 2022, we have cash and cash equivalents of $17.2 million and investments of $10.5 million. As we think about growing revenues, we are continuing to evaluate the potential for a faster sales force hiring ramp as well as additional licensing opportunities.
Our focus will be on maintaining a balance between growth and the potential costs of financing with the goal of protecting shareholder value. Lastly, we won’t be providing preliminary quarterly revenue results moving forward. While we felt that it was helpful data during our first year as a public company, we believe that the revenue results will have more meeting when accompanied by the rest of the P&L and additional context from management discussion. As a result, we plan to release our complete financial results and hold conference calls such as this one at the normal quarterly cadence. With that, I’ll turn the call over to Erica.
Erica Monaco: Thank you, Fred. Moving into 2023, we have seen strong order and shipping volumes in January and February, which is a good indicator of ongoing customer demand. We’ve also been addressing the sales territory challenges, which I will discuss in a moment. Looking forward, Biofrontera is well positioned for success and we are optimistic as we kick off 2023 for five primary reasons. One, much of our commercial infrastructure is now in place forming a strong foundation upon which we will grow our business. This includes the rollout of our advisory council, comprised of five KOLs across various industry platforms, the addition of an inside sales function, stronger data and analytic tools and resources, and a strategic plan for developing larger corporate accounts.
Two, cryotherapy has been historically broadly utilized by dermatologists due to convenience and past reimbursement levels. However, recent shifts in reimbursement and treatment guidelines favor field directed therapy as opposed to single legion therapy, and this should further support sales of PDT treatment. Three; following a year of accomplishments and recognition of our strengthened medical affairs and marketing efforts, our customers are becoming increasingly better educated about the use and benefits of our PDT therapy, which should help drive demand. Four, as we continue our education initiatives in 2023, our focus on the patient continuum of care will encourage physicians to incorporate field treatment with Ameluz’s PDT into their AK treatment plans.
This will support real world treatment paths while also providing a more comprehensive approach to disease management. And five, as Fred mentioned, we are investing in our key growth lever, our sales force. In fact, this year we plan to expand the sales force by adding another regional team comprised of eight new sales reps and a regional manager. Taking all of these factors into account, we believe we are poised for solid growth in 2023 and beyond. There were many highlights in 2022 in addition to our sales growth. On the marketing front, our analyst campaign and product website won several industry awards. Through increased scientific and medical engagement with key opinion leaders and disease awareness foundations, our medical affairs department elevated Biofrontera as a trusted partner at medical conferences, as well as through medical education webinars and live product demonstrations.
We furthered our medical initiatives by providing educational grants for a variety of CME and non-CME videos, podcasts and emails. These were a great success in gaining significant web traffic and CME participation from dermatologists. With content focusing on disease progression, individualizing treatment, and dispelling myths, these programs help support our strategy as we move into 2023. We saw a significant increase in conference sessions discussing AK treatment concepts and the advancement of photodynamic therapy as a treatment alternative, especially after we showcased four new data posters and two peer reviewed publications from investigator initiated research, highlighting real world approaches to PDT therapy, as well as an analysis on the pharmacoeconomics of PDT for the field directed treatment of actinic keratosis.
This momentum coupled with our medical initiatives in 2023 should help us to support the dermatology community as we position our company for expansion and growth. Biofrontera is focused on commercializing and growing a portfolio of dermatological products and therapies. We are a commercial business marketing a best-in-class therapy to a $4 billion market. Our success will be driven by our ability to sell more products to current customers and gain new customers. To that end, a key goal of 2022 was investing in the commercial infrastructure to enable and support this business direction. This was a multi-pronged approach and we have described many of these activities over the last year, including broadening the commercial strategy by adding inside sales to cover wide space, key account management to work with larger groups and corporate accounts, and expanding customer support capabilities, adding medical affairs expertise, and ramping our marketing and customer education efforts and engaging and cultivating key opinion leaders across the industry in pivotal and influential markets and the development of a KOL advisory council.
While investing in the business is never done, we completed much of the heavy lifting in these areas in 2022. One area of ongoing investment and optimization is our sales force. During COVID, we had to significantly reduce our sales force headcount and this impacted sales and relationships with dermatologists. We finished 2022 with 80% of the number of territories we had pre-COVID. Given the necessary investments in other parts of the commercial infrastructure, we did not materially grow the sales force in 2022 and still achieved solid growth and market share gains. However, a challenge we have experienced with this relatively lean team is that the variability in performance by a few reps can have an outsized impact on the total, basically, the law of small numbers.
We’ve saw this in Q4 where unexpected variances had a meaningful impact on the quarterly results. While we currently have fewer reps, their quality and productivity are much higher now, as evidenced by our record revenues in 2022. We’re proud that our sales training has resulted in the average revenue per sales rep in 2022 being approximately 30% higher than in 2019 and roughly 20% higher than in 2021. In 2022, we generated about $900,000 in sales per rep. We project that with a full scale sales force. We can reach cash-flow positive with around $1.1 million to $1.2 million in sales per rep, depending on the timing and scope of our sales footprint expansion. With our two step planned sales expansion, further maturation of our existing sales force and increased utilization of our newly implemented supportive tools and departments, this revenue milestone is well within our grasp.
It is important to understand that this is an anticipated to occur before any significant label expansion. The major lever for growth moving forward is not only optimizing the current team, but adding to the sales force, which we have already been growing this year. We are pleased to announce an expansion of our sales team by adding a new region that will include eight additional reps and a regional sales manager in 2023. Not only will more feet on the street help to drive growth, but each rep will have better reach and frequency within their territories, and this will make them more productive and provide better coverage overall. Our plan has been to grow to between 50 sales reps to 55 sales reps over the next two years, but given the revenue leverage we could achieve with a larger sales force, we are evaluating the potential to grow the sales force more quickly.
We will have the new members of the sales team coming to headquarters in Woburn in a few weeks, and I’m looking forward to meeting with all of them as they begin to ramp up. We are very excited about the team that we are putting together for 2023. Our commercial infrastructure is the key to driving and supporting the current and expected future portfolio of therapies and treatments. The treatment of actinic keratosis is a $4 billion market with few competitive treatments. With our current strategy, our target market is a $440 million segment comprised of PDT for AKs and cryo treatments for single office treatments of excessive lesions across the field, specifically under the therapeutic billing code for greater than 14 AK lesions. These two focus areas of the market represent an underserved patient population where we provide a strong advantage over competitive therapies by providing clinical value with a high efficacy and field-based treatment as well as economic value due to favorable reimbursement.
A basic premise of our business strategy has been that we would grow PDT as a proportion of AK treatments and that we would gain further share within PDT. We are pleased to see that these market dynamics played out as expected in 2022. According to reason data, we represent about 30% of the PDT market. In our target market, which includes PDT and cryo treatments of more than 14 lesions, we grew by about 12% to 3.8% of the market, evidencing we are not only growing within the PDT space, but expanding utilization more broadly across the market. We believe we have a strong revenue runway with the current label for Ameluz’s PDT. It simply requires continued market education and better sales coverage in order to grow. Any future label expansions or new indications are not required to hit our growth targets for the next couple of years and represent sources of upside potential.
On additional sources of upside potential, I’d like to cover some updates on label expansion opportunities and products, starting with the RhodoLED XL. Our R&D and manufacturing business partners have been working diligently to bring the RhodoLED XL lamp to market, which is an FDA approved and indicated in combination with Ameluz for lesion directed and field directed treatments of AKs of mild to moderate severity on the face and scalp. Unfortunately, the complexities of manufacturing and lingering supply chain challenges related to our next generation lamp that contains more than 1100 components have temporarily impeded our efforts. While I can’t speak specifically about the timing at this juncture, I can reiterate our commitment to bring the RhodoLED XL to dermatologists and patients as soon as possible.
In the meantime, our current red light source BF-RhodoLED remains available for treating surface areas of various sizes through accessible financing, leasing and sales options, and we encourage dermatologists to utilize PD with Ameluz for the treatment of AK. As we’ve stated on past calls, we are looking to expand our portfolio of therapies and treatments. This will enable us to leverage the commercial infrastructure and industry relationships we have built while better serving our expanding base of Durham customers We are progressing in the further development of our existing label expansion opportunities. Biofrontera AG, our licenseor is conducting clinical trials that would expand our label to include the extremities, trunk and neck and multiple tube use per treatment.
The open label multi-center Phase I safety trial investigating three tubes of Ameluz per treatment along with the BF-RhodoLED lamp is over 95% enrolled with an anticipated completion of treatment phase in the next few months. This will provide a significant advantage in our competitive positioning once we are able to market this label change. The recently launched Phase 3 study in the extremities, neck and chunk has now enrolled seven patients at two centers. Upon the completion of the Phase 1 safety study using three tubes, we expect that the addition of clinical study sites here will accelerate enrolment. Beyond the expansion of Ameluz’s PDT for AK treatment, there are additional studies contractually committed and in progress that could expand our portfolio to include superficial basal cell carcinoma, squamous cell carcinoma in C2 and moderate to severe acne.
The Phase III superficial basal cell carcinoma trial is over 90% enrolled and the multicenter randomized double-blind Phase II trial and moderate to severe acne is about 25% enrolled. All of these longer term development projects will further strengthen our clinical profile and open access to the dermatology market well beyond the existing $4 billion market we serve today. As we evaluate opportunities for additional portfolio expansion areas of priority interests are along the continuum of diagnosis, treatment and post therapy for AK with PDT, as well as additional conditions that our dermatologists treat. Another minor source of revenue is Depi, a topical prescription medicine approved for the treatment of impetigo, a bacterial skin infection.
We are working with our licenser on the process of setting up a new contract manufacturer at this time and are on pace for commercial impact by 2024. We are also exploring additional options to maximize shareholder value, including licensing and other commercial opportunities, which we hope to update you on this year. Overall, 2022 was a pivotal year for Biofrontera. We successfully completed our first full year as a publicly traded company. We invested in and established the infrastructure to support the rigor of public company life. We raised cash to fund our growth strategy, we were recognized by our industry and peers for our clinical and marketing accomplishments, we recorded record revenues that eclipsed our pre-COVID high, we increased our share by 12% in our large and attractive target market, and we succeeded in this without any increase to our sales force footprint.
We are off to a great start so far in 2023 and are looking forward to an exciting year with accelerating growth. Specifically, we expect to grow revenues by at least 25% over 2022, driven by factors such as sales force expansion, improving sales rep productivity, and continued share gains versus both our competitive PDT therapies and adverse cryotherapy. We are already underway in our sales expansion, reinvigorating our pricing strategy and evaluating cost control opportunities that do not sacrifice the growth momentum we anticipate. To reiterate what Fred said earlier, we are committed to bringing value to our shareholders and will continue to be opportunistic in finding ways to do so. Thank you for your time. I will now turn the call over to Tony to moderate the Q&A.
Unidentified Company Representative: Thanks, Erica. Ali, can we open up the lines for questions please?
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Operator: Thank you. At this time, we will be conducting a question-and-answer session. Our first question is coming from Jonathan Aschoff with ROTH MKM. Please go ahead.
Jonathan Aschoff: Thank you. Good afternoon, and congrats on the progress. I was wondering how many docs of all the docs that are using Ameluz are using three tubes with the Excel lamp or are they still spreading one tube more thinly to cover a vastly greater area than the label says to use it for? And I guess what percentage of the docs that use Ameluz even have the Excel lamp?
Erica Monaco: Oh, hi Jonathan. Thank you for the questions. Let me try to break that one down in terms of, first, let me address the Excel. So we’ve not launched the Excel lamp yet in the United States. There are some supply chain challenges that we are working through, and I will update everybody when we’re able to better predict when we will be launching that. So everybody that’s in the US using our lamp is using our current traditional BF-RhodoLED model, in terms of multiple tubes in a treatment, it is not in line with the label, and so typically you would expect insurance companies to not reimburse for that, and in some situations they may be still using the competitive product if they want to treat multiple areas in one therapy. So, it’s not something you can tell necessarily from the market data, but based on reimbursement, it is unlikely that they are using multiple tubes right now.
Jonathan Aschoff: Okay. And everybody who wants the smaller land can get one. There’s no supply issue there, is that correct?
Erica Monaco: Correct.
Jonathan Aschoff: So what would you say are some of the biggest the biggest headwind or some of the biggest headwinds to either, hiring or maintaining salespeople? What’s the hiring headwind, attrition rate influences?
Erica Monaco: Sure. I think that we probably echo the same sentiment that a lot of people in the industry are feeling in terms of turnover. What we’ve been seeing is somewhere between 25% to 30% turnover, which is actually fair is better than the industry average right now pre or post-COVID. So I think we’re comfortable with that attrition rate. However, we are trying to make this an attractive place to work and setting reasonable goals and targets and focusing on low cost, no cost initiatives that help boost morale and really focus on our people. It is our greatest line item. It’s our largest operating expense, and so of course, asset it’s our greatest asset, greatest expense, and we need to be mindful of all of those factors.
And so we take that into consideration when planning the expansion and planning how to continue to motivate and retain. So going forward in terms of expansion headwinds, I don’t necessarily foresee any. I think we’ve — as you can see from some of the posts online, we’ve already been posting positions as part of this expansion, and we’ve had really great success in terms of interviewing and meeting and getting to know these people, and we’re looking forward to bringing them all on board formally and being able to announce that to the public soon.
Jonathan Aschoff: Okay. Thank you Erica. Just two more short ones. What was the magnitude of that late shipping amount in the fourth quarter that, presumably will be first quarter revenue instead?
Erica Monaco: I don’t know that you can precisely quantify, specific orders. I think what we saw in early January was certainly an uptick from what we anticipated which is clearly tied to orders that weren’t able to ship in those last few days and during some of the unfortunate weather events that took place across the country. But, I think it will be more evident as we result on Q1, how that performance looked.
Jonathan Aschoff: Okay. And then lastly would you care to share a share account? There’s no share account in the press release.
Fred Leffler: Oh, got it. There are approximately 26.7 million shares outstanding right now.
Jonathan Aschoff: Thanks a lot. Thank you, guys.
Operator: Thank you. Our next question is coming from Bruce Jackson with The Benchmark Company. Please go ahead.
Bruce Jackson: Hi, good afternoon, and thank you for taking my questions. So Fred, not to belabor the share count question, but what was the share count at the end of fourth quarter, and then what was the average for the year?
Fred Leffler: Hi, Bruce. I do not have those numbers at my fingertips right now, but I’m happy to get back to you on that.
Bruce Jackson: Okay, no problem. So good news. The hiring of the additional reps and the targeting of 50 people to 55 people, where did you exit 2022.
Erica Monaco: With salesforce?
Bruce Jackson: With the salesforce? Right.
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