Biogaia AB

STO:BIOG B

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the BioGaia Q4 results 2018.Today, I am pleased to present Isabelle Ducellier, CEO; and Margareta Hagman, CFO. [Operator Instructions]Speakers, please begin.

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Thank you. Good morning. So my name is Isabelle Ducellier, and I am the new CEO of BioGaia since November, but not totally new to BioGaia as I was sitting in the board before. So welcome to my first telephone conference regarding Q4 2018 and year-end report 2018.Next slide, please. So regarding the quarter 4 2018, we are very happy with the good sales growth in both pediatric and adult segments. The good sales growth for BioGaia are mainly in our Protectis drops, the Protectis tablets and Prodentis lozenges. We can show as well a very good growth in all 3 regions, Asia Pacific, EMEA and Americas.For the Q4, rather than for the whole year, we have observed as well a significant positive currency effect, was driven by euro, dollar and yen. And we are continuing our investment in marketing activities, recruiting staff and research and development.Next slide, please, key events that has happened regards -- in quarter 4. First, I'll do our sister company, MetaboGen. In October, we announced that the first version of this next-generation probiotic products is now ready to get into a safety study. So both the ethical application for the first safety study on humans have been approved, and the clinical study is underway.Then major events. I started. I am not certain if we can say that. And regarding new launches, we did launches in 3 different markets, Canada, China and U.S., our oral health product Prodentis lozenges. And in China, we've been launching Protectis plus vitamin D as lozenges as well.Next slide, please, regarding the sales per segment, starting with Q4. So basically, it's our best quarter ever in BioGaia's history, ending at SEK 210 million. The -- both segments increased. Having said that, the Adult Health increase is faster than the Pediatrics from a smaller base.If we look at the year 2018, here as well, SEK 742 million, a new record best year ever. I think, all my predecessors has been saying that every year, so that -- I'm happy to continue the trend. So we ended by plus 21% but, if you exclude the currency effect, plus 16%. And if we compare with the total probiotic market, that's increasing by 10%, we are definitively overperforming towards the market.Our main product, the drop Protectis, continued double-digit growth. And our Adult increase is mainly driven by Prodentis and Prodentis mainly from Japan but as well as from Protectis and Gastrus that we launched in a couple of countries.Next slide, please, gross margin per segment. In Q4, you can notice a slight decrease by 2 points which is mainly due to the lack of the royalty from the GUM Nestlé contract that we've been informing the market about before. And on the year basis, it's stable compared to last year at a very high 2 -- I mean, 75% gross margin level.Next slide, please, looking at the sales per geographical market. Here as well the 3 regions increased. Europe and EMEA is our biggest market, increasing by 11%. And we are extremely happy about the trends in -- both in Asia Pacific and Americas, growing very significantly. Americas is mainly driven by Brazil and the U.S., whereas in Asia that will -- the growth is driven by Japan, China and Hong Kong from a smaller base. So these result in a higher share of our turnover in Asia and Americas, which we are very, very happy about.Next slide, please, regarding the income statement. We have adjusted EBIT at 37% in 2008 (sic) [ 2018 ] so -- compared to 38% last year, which is more than that we have promised the market, which is 34%. So here as well, very happy to overperform on adjusted EBIT. We have, anyway, to emphasize the fact that we have an increased operating expenses both for Q4 and for the year, which is mainly driven by marketing activity in focused market, so namely Italy, Brazil, Sweden, that we want to continue because we have a very nice trend there that we want to support. And the second expenses will be the new recruitment. We have recruited 23 new BioGaiers into the family, and that's mainly driven by Japan, with the recruitment of 10 new sales guys visiting the dental clinics in all Japan and 3 for MetaboGen. And I have too as well -- have the pleasure to announce that, that's for 2019, we have now a new Human Resources Director, who started actually on Monday, [ Angelica Sheldof ].Next page, please, balance sheet. So here we -- I mean, we basically have a proposed dividend of SEK 10 per share. And if you look at the capitalized development expenses and the goodwill, I just wanted to mention that it's mainly related to the acquisition of MetaboGen. Regarding current assets, this is mainly driven by the trade account receivables and a slight increase of the inventory, which is naturally related to the increase of sales. And our customer didn't want to be out of stock, so that increased the level of inventory in order to address the increase of sales.Next page, please, and to end this presentation. The present focus, basically we are working on new product developments, such as osteoporosis, as we have already been communicating. I can as well inform that I've been traveling extensively since I started. I'm a strong believer that you get a lot of information from the market, visiting the market, and I need, as I'm new in the industry, to understand the consumer mind and the distributor mind for probiotics.My first comment will be that I'm totally amazed by the level of interest regarding the probiotics in general. It's not only a European phenomenon. It's a global phenomenon in Asia, Americas, everywhere, so it's very encouraging. I've been as well impressed by the level of commitment of our distributor and the level of understanding for BioGaia products in general. So I've been to Hong Kong, Singapore, Philippines, Japan, Brazil, Mexico, Italy, France, you name it. And the same level of encouragement for the future.And the last information I wanted to present was the fact that we are now investing in reinforcing our sales team because -- I mean, with this increase everywhere in the world, we need as well to increase the level of support to our distributor, so we have decided to reinforce, in 2019, our export team by adding key account manager for the Nordic countries, 1 for the Middle East, 2 people in the U.S., so that we can have the right level of support both in term of sales, marketing and research to our distributor worldwide.Thank you. And now I'm open for Q&A.

[Operator]

[Operator Instructions] And our first question comes from the line of Carl Mellerby from SEB.

[Carl Mellerby, Equity Research Analyst]

My first one relates to the gross margin and if you could potentially provide some more details in regards to what kind of impact you expect on the gross margin in 2019 due to the loss of royalty revenue from Nestlé? And also, secondly, on R&D expenses. R&D spend was up quite significantly this year, some 30%. Should we expect the same rate of increase also in 2019? And then finally, you mentioned that you will increase your focus on China and the U.S. in 2019. Could you elaborate a bit more on this?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes. Thank you for the questions. So first of all, regarding the gross margins, indeed, now we have terminated, as it was planned, the contract with Nestlé regarding GUM. Having said that, when I look at the trends both regarding the level of probiotic market and ourself, our own brand BioGaia worldwide, I mean, I have to admit that perhaps Q1, Q2 is going to be a bit more difficult to absorb that losses upfront, but on the long term -- middle-term and long-term perspective, I don't see any problem at all to absorb backlog, we are as well open to new opportunities for new private label type of contract. We have a lot of requests coming from different players. So -- okay, indeed short term, it's going to be a bit difficult to absorb, but long term, I don't have any concern about it. Regarding the R&D expenses, basically that represent SEK 100 million. It is our key point of differentiation. So every time I travel, I can see, especially in Asia, a lot of probiotics with absolutely no clinical-proven data. And I think the fact that we do have a lot of clinical data give us a strong point of differentiation mainly for the professionals, so doctor, pediatrician, gastroenterology (sic) [ gastroenterologist ]. They dare to recommend our products to their patients because they know that there are clinical research, and even the consumer feel more safe to buy BioGaia's brand because of these data. So I don't think the level of R&D we are having is too high or too little. We are going to maintain that, and we are as well looking into the new indications. There are a lot of discussion worldwide about diabetes, obesity, autism, oncology, I mean, you name it. We have as well to look into the new indications, so obviously research and development is key for our activities. And the last part of your question, regarding U.S. So here, we -- I mean, today, already 55% of the U.S. probiotic market go via Internet. And we have an excellent partner to address that, which the name is Everidis. And they do build the sales every month. They work mainly via Amazon. They have as well a part of medical market team, but it's mainly via Amazon, and here, we see extremely high potential. Same potential regarding e-commerce in China, where here as well we have a partner totally dedicated to Alibaba. We further sell a lot via Alibaba today, especially the Protectis drops.

[Operator]

Our next question comes from the line of Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Yes. I have quite a few number of questions, I hope that's okay. Maybe I'll take them one by one. First, is it possible to give some form of indication how much of America sales is now from North America, say, U.S., Canada?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Now I'm looking at Margareta because I'm new, I'll just take this. We have been communicating that or not. I mean, basically, what I can say is that, in the Americas, Brazil is our leading market and will even, I think, be the biggest market in the world in 2019. So Brazil, we have a very strong partner here called Aché. And I think that will remain bigger than U.S. and Canada. In U.S., as I mentioned, so we have Everidis for the e-commerce base, and then we have a very strong business with Gerber. Here we are working on new product launches for next year. So I do believe and -- that the U.S. market will increase as well significantly. Regarding Canada, we are working with Ferring. Ferring has been sending all its management team last year and have a new management extremely committed behind probiotics. So we do hope to have a good year of 2019, but the level -- I mean, the -- it's a smaller market for us.

[Margareta Hagman]

Yes. And we haven't disclosed the North America part of the Americas, but it's around 35%, 40%. And maybe we will build it in the future. Maybe we will divide Americas into -- in the future to be more transparent.

[Kristofer Liljeberg-Svensson]

Okay. No, that's very helpful. And then also on sales, could you maybe comment a little bit? I noticed that Pediatrics sales is down in EMEA. Is that only related to the development royalties going down from Nestlé or something else? While on the other hand, Adult Health surprisingly strong both in Asia and EMEA, if you could just say something about that as well.

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

So regarding Pediatrics in Europe, basically it's mainly, as you said, driven by the loss of GUM, but the drops sales are extremely strong. So we did -- we have not noticed anything on the contrary, so I am not worried. And I didn't get the second part of your question, regarding Asia.

[Kristofer Liljeberg-Svensson]

Yes. I noticed both in EMEA and Asia that the Adult Health products were very strong, better than I expected at least. Something special there?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes. It's very clearly driven by Prodentis. Especially in Asia, the level of -- one is from the consumer that they have to have a good oral health is extremely high. And then you have the cultural impact in Japan where they have problem. They want to have a good breath, so they take a lot of probiotics products. So it's mainly driven by that. In Japan, we have had a key opinion leader on TV in August, clearly saying that reuteri is very good for your health, both oral health, gut health. And from that day, from that program, we could see a double-digit increase everywhere in Japan, not only coming from our own subsidiary BioGaia Japan, but as well from our 3 main clients in the country. So it's really a Prodentis impact. Having said that, from a much smaller basis, you could as well notice that Gastrus is starting to sell, mainly in the U.S., so here we are looking at it very closely.

[Kristofer Liljeberg-Svensson]

Great. And then operating cost. Listening to the call, it seems definitely you want to continue to invest, were up 20% in Q4. So what type of expansion of operating cost should we expect now in 2019?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

So basically, I look at operating costs. I mean, I'm a type of CEO that like to have operating cost including at the same level as sales, which for 2019, if you look at BioGaia's group level, is not the case because we increased by 25% compared 20% for the sales. Having said that, if you look at BioGaia's core, we increased exactly at par with our sales. So we have a bit of extra operating costs coming from MetaboGen and BioGaia Pharma. And for next year, I think we might be able to see new incomes coming from these subsidiaries, and therefore, the operating costs will be absorbed by the new incomes coming from them. So we continue business as usual for our investment. I think the trend is so positive that it will be very short-sight thinking to stop the investment just because we stopped one contract with Nestlé. So we will continue the same level of investment as before.

[Kristofer Liljeberg-Svensson]

Sorry. Is it a fair assumption to expect the operating costs in total, with MetaboGen and BioGaia Pharma, expanding maybe 20%?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Well, you like to ask very specific figures, I don't have already. Well, we don't disclose the exact figures, but I can say we are trying to maintain at parity operating costs and turnover.

[Kristofer Liljeberg-Svensson]

Okay, good. And on that topic, do you think you could deliver on this 34% margin target then in 2019 despite the lost royalties?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

I mean that in the long term that's obviously the figures we want to keep in mind. '19 -- 2019, will be a transition year. So we keep that in mind. We cannot guarantee. I think there will be all sorts to be transparent. 2019 is going -- the first 2 quarter are going to be a bit more difficult than before. But we keep that in -- for the long term absolutely as an objective.

[Operator]

Our next question comes from the line of Christopher Uhde from ABG.

[Christopher Winston Uhde, Biotechnology Analyst]

I just wondered, how do you see the Chinese economic cycle affecting your Asia Pacific growth rate?

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Thank you for the question. Basically, when I went there, I just asked a silly question about the trend, the law regarding how many babies they can get. And no -- I mean, the one single child law is gone, and I was wondering if it has an impact on newborns as our main product there is the drops. And they foresee, I mean -- no. 2018, there had 17 million, 1-7 million, newborn in China. 60% from these 17 million are first child, the rest is second child. So I mean, you can do the math by yourself. We are the leading product for probiotics for pediatrics in China. 17 million newborns. I think we are very pleased about China next year. And we have the right partner to address that opportunity.

[Operator]

[Operator Instructions] And it looks like there are no more questions registered, so I'll hand the call back to you, speakers. Please go ahead.

[Isabelle Valerie Ghislaine Ducellier, Chief Executive Officer]

Yes. Thank you so much for these very interesting question. I hope I addressed them the best I could. And I wish you a very good day. Thank you from Margareta and myself.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.