Biogaia AB

STO:BIOG B

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen. Welcome to the BioGaia Q1 report 2019. Today, I'm pleased to present Isabelle Ducellier, CEO; and Margareta Hagman, CFO. [Operator Instructions] Speakers, please begin.

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes, good morning and thank you. Isabelle here. Welcome to my second telephone conference, but this time regarding the quarter 1 2019.I would like to underline 4 dimensions regarding this quarter. Next slide, please. The first one is that we have actually strong sales growth of our products in both Pediatrics and Adult segment. And especially in Adult segment, we have an increase by 54%.Secondly, I would like as well to emphasize strong sales growth for BioGaia Protectis drops; BioGaia Protectis tablets, which is quite unusual, so it's worth mentioning it; and BioGaia Prodentis lozenges mainly driven by Japan.Thirdly, I think it is very worth noticing that we have extremely strong growth in the Asia Pacific region, with Quarter 1 at plus 80%. And finally, as you have probably all noticed, an increase of our costs mainly driven by sales and marketing activity, by -- with hiring new staff, by the implementation of the new ERP system, by increased patent costs with this year a very active period for Q1 in terms of asking for new patents linked with our preclinical research. And finally, the opening of our Center of Excellence in Eslöv, so therefore adding extra investment in term of equipment and lab.Next page, please. Two key events to be underlined. First one is the launch of a very interesting new product, BioGaia Protectis capsule, and the capsules are, on top of that, vegan. So why did we launch that product? First of all, because 52% of the dietary supplements today in the world are sold in capsules and we didn't have any. So I think it was the right time to adapt our portfolio with this new format. And secondly, vegan because we have a lot of requests from our vegan consumers to have a vegan probiotic, and therefore comes this product BioGaia Protectis vegan that we launched in March, in Finland. And we have received a lot of interest for all our other markets, especially in the Nordics where vegan population is growing and growing.Secondly, I would like to thank Abbott, our distributor in South America, because they have been very active launching new product. Like in Colombia, they launched Prodentis; in Salvador, they launched Gastrus; in Honduras as well, Gastrus; and in Turkey, despite a bit of a complicated economical situation as we speak, they anyway decided to launch Protectis minipacks and Protectis drops with vitamin D.Then it's not Q1, but it happened just now in May. We are extremely happy to announce at least the launch of BioGaia Osfortis. I've been mentioning several times that we published -- we had a study published in June last year. And we decided to accelerate the development of that new product that we are, as we speak, launching in the U.S. This is again bone losses, so both osteopenia and osteoporosis. And here as well a lot of requests from our other markets, so we will launch this product, I mean, in different markets this year and coming year.Then very, very late -- I mean, lately, on Monday, we had a clinical study published on diverticulitis. And here as well, for us, it opens a new indication for our strain. So we are extremely happy about this result from this study run by Veronica Ojetti in Rome. So more to come in terms of product development, probably.Next page, please. Other facilities on Slide 2 regarding the sales. We can notice, if we take our own product, so if exclude the impact from the Nestlé royalties contract, a good increase on the Pediatrics product by 12% for the quarter, so plus 24% rolling 12. And for the adults, a significant increase by 55% for the first quarter, which is aligned with our strategy to continue to defend our position within Pediatrics and to accelerate our focus on Adult segment.Next page, please. If we look at the gross margin now, on the rolling 12, it's stable. For this specific quarter, Q1, we can notice the slight decrease by 1%, which is mainly due to dissemination of the contract with Nestlé. But happy to see that the margin for the Adult Health segment is increasing by 3%, which is mainly due to access of Prodentis lozenges in Japan.Next page, please. In line with our strategy to minimize the regional rates here, as well, we are very happy to see very strong growth in the Asia Pacific segment. EMEA is growing still very strongly if you exclude the Nestlé royalty impact. I mean, actually, on Q1, we are at plus 15% increase so we have a plus 20% increase in the EMEA on rolling 12. Regarding Americas, it's a bit misleading, this minus 8%. It's mainly due to -- I mean, basically, order phasing in 2 of our main countries. First of all, Brazil, and, secondly, U.S. for Gerber. But here, I really want to underline the fact that if we look at Q1 plus Q2, this variation will not be visible. On the contrary, we -- I mean we do expect a very strong Q2 to absorb this variation, so it's just a phasing issue.Next page, please. In term of income statement, I guess that we'll have a lot of question about that later. The operating expenses has increased quite heavily by 28%, and that's basically due to a lot of events. First of all, we have a lot of extra focus in term of sales in some markets, one, in Brazil; two, in Sweden. So I don't know if we have a lot of Swedish people here joining us, but I hope you've seen our TV campaign, that you hear our radio campaign, that you've seen us on social media. So we have really decided to invest more on Sweden.We have a very, very active Q1 and we are located in the 5 main pharmacy chains in Sweden and on apotea.se.Then in the U.S., we are accelerating our campaign with Amazon. And here, as well, we had a big intensive U.S. campaign program. So that explains, I mean, partly, the marketing and sales activities costs.In terms of finance, which is not exactly finance, but we have decided last year to implement a new ERP. So we started to work on it Q1. We have a go-live plan, end of the year, and therefore we have a lot of invoices that came and affect it directly. It's -- yes, I mean, we have it in the budget, a big phasing on Q1 affecting by SEK 1.5 million, almost, the expenses.In terms of laboratory, as I mentioned in my introduction, we have decided to own a lot of our expertise in terms of our bacteria indoor and therefore invest in a top-notch lab in Eslöv, and that is affecting as well the operating expenses.Regarding the EBIT margin, it has obviously a short-term impact for Q1. But we maintain a 34% on the rolling 12 and we do confirm the target for the year at 34%.Next page, please. Not really a lot of things to comment regarding the balance sheet, just the new items due to IFRS 16, leases, and as well an increase in cash.Next page, please. In conclusion, I would like to summarize this presentation by saying that, I mean, Q1 is on line with our expectation regarding the sales of our own products, plus 19%. Indeed, is the termination of the Nestlé contract affecting us short term, but we do remain confident for the long term, thanks to intensive new launches in the pipeline, both of our own product, but as well new products for Nestlé, especially for Gerber in the U.S., and I will come back to that for Q2. And I'm very positive regarding the launches pipeline because I've seen our worldwide distribution network and how strong it is. And so there is a lot of new launches to come.I have, anyway, to admit that the costs are higher as usual, but I do believe it's necessary to scale up BioGaia. We need to build the brand. We have to move from a B2B model to a B2B2C marketing model, and that requires some investment for building the brand. We need to structure our internal platform, like having a very efficient ERP.And something that I forgot to mention before is the patent, we have, I mean, a very intensive patent spending in Q1, but you know patent is the key success factor for future. We have extremely interesting results from the preclinical side that we wanted to protect, to protect the value of the company, and that happened in Q1 as well.And finally, I just want to say that I'm super enthusiastic regarding the launch of Osfortis. It's a new indication for us. It's in line with our strategy to focus on healthy aging segment. And we do have a great hope for the new line expansion.Thank you, and I'm ready to take your answer. Thank you -- question.

[Operator]

[Operator Instructions] The first question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

I have a few questions. First one, is it possible to quantify the impact on growth from the phasing effects you have in Americas this quarter since they might have been quite significant?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

I mean, I have the answer. I don't think I can disclose all the details. But I would recommend you to look at Aché Brazil next year -- I mean next quarter at Gerber. Gerber, we are going to launch 2 new products that we have developed together with them, which is a very interesting approach because we developed a new product with them so we have a lot of innovation coming from 2 department. And if you look at the rolling 12, I don't think you will see any impact on U.S. On the contrary, I think we can expect very good news from the U.S. side because here, as well, thanks to Osfortis, the new launch, Everidis has shown us very interesting figures for the rest of the year.

[Kristofer Liljeberg-Svensson]

Okay. So I think excluding the royalty effects, sales improved 11% organically in the quarter. Compared with beginning of the last year, it has been around 15% to 16%. You think those 15% to 16%, excluding the royalty effect, is a good level to assume that you can contain?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes. I mean as I said last time, I knew Q1 will not be fantastic. I guess Q2 will be okay. And the plan is to recap from the termination of that contract by strong organic growth. And to be honest, even with Nestlé, now with our new product in the pipeline with Nestle Lat Am, mainly Mexico, but as well other countries in South America. So we have a lot of countries from Nestlé planet that are interesting to continue to work with us on them to develop new product, new drugs. And on top of that, we have still the infant formula business going on. So yes, we -- the plan is to recap on the termination of the contract, yes.

[Kristofer Liljeberg-Svensson]

Okay. When it comes to the gross margin, is this the new reasonable level without the royalties?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

I think on the rolling 12 aspect, we will maintain this level, yes.

[Kristofer Liljeberg-Svensson]

Okay. And also, operating costs, because I noticed you said that the ambition is to reach that 34% margin for the full year, if I heard you correctly. But what type of operating costs are you then assuming?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes, I mean my wish is that we are able to maintain operating costs at parity with ourself. Q1, we had a lot of short term and changing for a lot of invoices end up in Q1. So I will really make sure that we don't continue to have plus 28%. To tell you exactly what we did, the figure of operating costs at the end of the year, I don't know, but I will really do my best to take you the 30% EBIT margin.

[Kristofer Liljeberg-Svensson]

34% EBIT margin?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes.

[Operator]

[Operator Instructions] We have a follow-up question from Kristofer Liljeberg.

[Kristofer Liljeberg-Svensson]

This Osfortis product and the launch, how quickly do you plan to roll that out? And maybe you could talk a little bit about how you view the sales potential versus the other Adult Health product?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes, I mean Osfortis is a new indication for us. We did this because the market, globally, worldwide, is huge. I mean if you look at the population of women when starting to menopause, almost all, yes -- I mean most of them will be facing either osteopenia or osteoporosis. And if you look at, as an example of our position in Japan, where we are very strong where we have our own subsidiary there, I mean the healthy aging issue and the problem on osteoporosis for all women is huge. I have to say that the price point of Osfortis is pretty premium. So, obviously, we are going to focus on markets where the purchase power is high, Japan is one of these. We will probably look at the Scandinavian market as well. So major market where -- with population a bit older.And the U.S. is obviously a very good market for us. But we've noticed a lot of requests, even from Lat Am, where I'm not sure the price point -- I mean that might be an issue, but it seems like not. So great expectation, big -- I mean a big untouched market. And you know Kristofer, I'm coming from a marketing background, I know that to have success, you have to come with a product that is answering to a consumer need non-met, and it's exactly the case with Osfortis. Today, for women in the menopause who have problem with osteoporosis, they're obliged to take drugs, and these drugs works very well. The problem, they have a lot of side effects, so some women can't really handle the side effects. And we come with a product which is totally safe, with no side effects and a very strong evidence that it works. So I'm very -- I mean very positive to that launch of new product. Hello?

[Operator]

[Operator Instructions] There are currently no further questions -- we have a question from Daniel Albin from Danske Bank.

[Daniel Albin, Research Analyst]

So I have a follow-up question on the Osfortis product and more towards how you're seeing the price point compared to products, pharmaceuticals sold in this field. How will you -- how...

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

The price will be the obviously cheaper than drugs. But to be transparent, drugs are reimbursed in a lot of markets whereas probiotics are not, so it's more out-of-pocket. So -- but I think there are more and more women that are willing to buy good product for their health and they know that they will face osteoporosis. I mean the price point in the U.S. will be about $39, which is the recommended price by our distributor, Everidis. If you look on Amazon and -- we are premium, but not out of the market, so it's a reasonable price. We did as well some consumer research and they did accept the $40 price level. So I think we are well-positioned. It's an expensive product, but I think it's safe and women would prefer to have a product with no side effect that works than having drugs that they are partly reimbursed from their insurance company, but with a lot of side effects.

[Daniel Albin, Research Analyst]

Yes. And in terms of bringing more clinical studies in this area in order to commercialize the product, how should we view that?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes. So we have already published a very strong study that's done here by [ Lorenzen ]. And we want to continue because we keep doing research to -- I mean to improve our products and to see if it works. This time we have a target group of women, a bit older, and now we are going to launch a new study on a bit younger women at really the beginning of the menopausal period. And then we are going as well to check different dose. Today, we have extremely high dose that works very well, but it works so well that we do believe that perhaps we should check if we will lower dose it could work as good as. So we are constantly testing and testing again to come up with a perfect product, but today we are super happy with the one we have.

[Daniel Albin, Research Analyst]

Okay. And just another question on MetaboGen and more specifically towards that project within ICP, founded by Ferring. I wonder if, in terms of the time line, when can we expect clinical results from the current study. Any idea?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

I mean, [ Sarah ] will be better positioned to answer to that question. But as far as I understood, we do expect the result of the study by the end of the year.

[Operator]

There are no further questions. I'll hand the conference back over to you.

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Okay. No further questions, so thank you so much for your attention. I might see some of you this afternoon at the general assembly. And if not, you will hear my voice again and my French/English on August 4, the publication of the Q2.Thank you.

[Operator]

Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.