BioGaia AB (publ) (BIOGB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to BioGaia Q4 report 2019. Today, I'm pleased to present Isabelle Ducellier, CEO. [Operator Instructions] Isabelle, please begin.

Yes. Good morning, and thank you who follow BioGaia. So I'm going to present the last quarter of 2019, starting by saying that in terms of sales of our products, we had a good quarter with an increase of 6% of our product sales. Having said that, as everybody is well informed about, due to the loss of the GUM contract, royalty contract with Nestlé and the delays and problem with delivery with [indiscernible] in Q4, the total sales have decreased by minus 1%. If we look at the product sales more specifically, we are very happy about the last quarter for our Pediatrics portfolio that presented a very nice increase of 10%. In terms of specific SKUs, the Protectis drops against colic for kids has been showing a very good growth. And 2019 has been a very good year for Gastrus. So we have been waiting for this increase of sales of Gastrus for a long time, and it seems like now it's happening. If we look per region, Asia has been strong every quarter. And Q4 is as well a very strong quarter for APAC with an increase by 20%. Regarding Americas, the quarter is only at 2%. But on the year basis, we see later, the year was very good. And EMEA, we had a good sales of our products. But if we put together the problem with royalty, then unfortunately it decreased by 10%. Next page, please. Key events, as communicated by press release. We have had a problem with our supplier of blister in Belgium that are affecting our delivery, both in Q3 and Q4. We had a very nice study published regarding H. pylori for Gastrus that helped our partner to be able to capitalize and to present Gastrus together with the treatment with antibiotic of H. pylori. And you can notice as well a lot of launches, 2 minipack Protectis launches, 1 in Chile and 1 in Mexico. We opened a very interesting new market for us in Qatar. We have Ferring -- together with Ferring with our drops. In Singapore, we completed the portfolio balancing the Protectis tablets and the drops. And Indonesia, we had already our Protectis tablets and drops, but now we launch Prodentis lozenges for oral health. Next page, please. If we look at our sales per segment, so as I mentioned, a good quarter for the Pediatrics product. The adult portfolio has been suffering for our problem of delivery with Sanico. But on the year basis, we have very strong growth of the Pediatrics products and even stronger growth for the adult, which is in line with the strategy to target the adult population with our probiotics and therefore showing an increase by 16% on -- so of course, a smaller basis than the Pediatrics portfolio. Next page, please. Gross margin per segment, I mean, exactly at par with last year for the quarter 4 for Pediatrics product, slightly decreased for the Adult Health product, mainly due to mix effect. So first of all, we have smaller volume on our adult portfolio. And therefore, the gross margin is slightly lower than the Pediatrics. And then we have new innovation product, where at the launching phase, the gross margin is slightly lower. But if you look on the year basis, we basically maintained a very high level at 73% gross margin, almost stable versus last year. Next page, please. As I mentioned in my executive summary, if we look at the sales per geographic market, the winner of the year is still APAC. So it's both 20% for quarter 4 and plus 36% for year-to-date. And it's driven by, I mean, a lot of markets, starting with Japan, China, which is something new for us, Vietnam has been very strong this year. Philippines is still going strong as well as Australia. If we look at America, so I mean, average quarter, but that's nothing to do with sellout, that remains very strong. But if we look at the total year, it's a plus 10%. And there was -- we are very happy to see that U.S. as a market has been our biggest market in 2019, which has never happened before. It has been driven both by Gerber, so we launched 2 new products under the Gerber brand with Nestlé in the quarter 3. That worked very well. And on top of that, Everidis, we had a very extensive proof plan on Amazon during all 2019 that worked very well. And they said that -- I had just come back from U.S. on Sunday. And Everidis told me that normally December is their weakest month. And this year, December has been their strongest month. So we are very happy about the results in the American -- North American market. Regarding EMEA, every time we look at EMEA, we have to keep in mind that, that's where we have put the royalty income. And therefore, it's difficult to read the line, minus 10% in EMEA. It doesn't reflect the reality. We have a good and healthy growth on our products in EMEA. But obviously, if you impact all royalty losses for EMEA, you have [ minus 9%] on the year basis, which is not reflecting, as I mentioned, the organic sales of our products. Next page, please, income statement. So the plan was to absorb the loss of royalties on the year basis. And with a turnover of SEK 768 million compared to SEK 742 million last year, we managed to indeed increase by 4%, taking -- I mean, with the royalty losses into consideration. So in terms of OpEx, we try to monitor our costs at parity with ourselves. And that's basically what we've been managing to do on the quarter 4. On the year-to-date basis, we have increased the OpEx by 9%. If you compare with the total sales of 4%, you can argue that, well, it's more than that. But if you compare with the sales of our products, here it says, well, OpEx are online with the sales of our products. And that's what we want. And we need to continue to invest because we do foresee a very bright picture for the probiotic market worldwide. And we want to be there to take market share as of today. So that will be a bit sad and not really strategic to decrease the OpEx more just because we lost a contract of royalty in 2019. In terms of EBIT margin, quarter 4, we managed to keep a 33% EBIT margin for BioGaia core, which is indeed lower than last year at 36%. And on the year basis, we maintained a strong EBIT margin at 32%, a slight decrease because of the royalty here again. Next page, please. In terms of cash flow, so we finished the quarter, I mean, the quarter by SEK 2.8 million. The decrease is mainly due to a higher paid tax and we had an increased investment in production. We are very happy about the level of quality at Eslöv, our plant, and we want to continue to be really on top of technology to deliver for a very high quality. And we do rely very much on Eslöv for our drug, so it's very important that we continue to invest. We have here as well a new line for jars to be able to secure here as well the manufacturing of our tablet in jars in the future. And this line will be running and ready to run in June 2020. Next page, please. As a conclusion, I would like to say that despite good product sales, especially in Pediatrics, we have indeed suffered from decreased royalties and supply issue during the last quarter. Having said that, 2019 remained a good year with consumer demands there, our brand is healthy. We have a very good distribution network, very committed behind the brand BioGaia and the support of physician and key opinion leaders running around the world. So with that and the fact that we've launched 2 new -- 3 new products in 2019, namely Osfortis in U.S., the Protectis capsule in Finland and Prodentis Mum in Japan, the fact that we've opened 7 new markets in 2019, I remain very confident for 2020. We have a mitigation plan in place to address the problem we had with Sanico in Belgium for the blister packaging. We have, as I mentioned before, a very professional and dedicated distribution network that are ready to roll out our portfolio and eventually new products coming. We'll come back to that in 2020. And we have our organization in place to really succeed in what we want to achieve, namely to switch from the B2B business model to B2B2C business model. And we've been able to demonstrate already in 2019 that further, I mean, focus on B2C is delivering with the success we have in the U.S. with Amazon and in China with Tmall. Thank you so much for listening. And I'm ready to take your questions.

[Operator Instructions] Our first question is from Kristofer Liljeberg from Carnegie.

I have the same question as before, you'll probably not answer it. But you haven't thought about quantifying the impact on sales from the manufacturing issues. I think the reason I'm asking is that it will be interesting to see what growth would have been if we adjust both for the lower royalties and the issue that had here, that maybe also would give some more credibility to your statement about growth in 2020 being back at historical levels. So any color on that would be very helpful.

Good morning, Kristofer. Indeed, we have not communicated on the quantification of this issue. One, because we can definitively quantify how many delivery has been delayed and we know when we are going to deliver. That is a very easy thing to do. The problem is more that it's difficult to estimate how much sales we have lost due to the fact we've been out of stock in some markets. And this invisible part of the iceberg is probably bigger than the real delivery issue as such. So that's why we have not been willing to communicate. Having said that, we have a very clear understanding of the backlogs. We know exactly when the different orders are going to be delivered. So that's why -- I mean, I feel pretty confident for Q1 and Q2 coming.

Okay. So terrific. So the manufacturing issues around the IT or software issues with the supplier, that was solved already before, I understand. But do you still have the -- does the supplier still have the problems with the backlog when we go into first quarter or...

Yes. No, I mean they had a long backlog, not only with us, but all with their pharma clients. And so with -- I mean, our new CFO, Alex, and our purchase manager went to Sanico last week. And the fact is that now what we've done is that they are going to produce all our products on their line, which is a speed line and with the outside of their requirement of sterilization. At [indiscernible], we are not obliged to follow this EU regulation. But Sanico, as such as a company, has to follow this rule. So now they put us outside of the zone, so they can produce nonstop without any problems. And therefore, we can recap on the backlog. But there are still a small backlog coming from Q3 and Q4. But it's -- I mean, it's minor.

Okay. So you think you could maybe have a positive impact instead that as customers need to restock now in the first half of 2020?

It's not going to be like a 50% increase. But it might have a good impact for some delivery. I mean I have one specific case, if you look at Brazil, where we had a very big order in the Q4 and we've been able to deliver 50% of it. So when you look at the sales of Russia in the quarter 4, you wonder, "Okay. What's going on?" But it's just because the big order has been split into 2 and therefore are going to land in Q1, which is going to be a good Q1 for Russia. So there will be a slight positive impact on my opinion on Q1, yes.

[Operator Instructions] And our next question is from Daniel Albin from Danske Bank.

So I have three questions. The first one being on R&D expenses. Going into 2020, could you maybe elaborate a bit on what level you think you will -- or targeting in 2020? And my second question is regarding your investments in this quarter and also going into 2020. You are mentioning a certain production line in Eslöv. In terms of CapEx, could you quantify that number for us in 2020? And third question regarding your product, BioGaia Osfortis, when will we see this product in more countries than just U.S.?

Thank you, Daniel. First question, R&D, so you have probably noticed a slight decrease in percentage of turnover in Q4. But if you compare Q -- I mean, 2019 with 2018, we maintained investment level of about 13% of our turnover. And that's basically what you can expect for 2020. So we do believe that science for us is a key point of differentiation versus some competitor in probiotics not running clinical study. And therefore, we want to maintain our level of investment. Having said that, 13% is a very decent level. And we don't want to pass that 13% level, either. That's for your first question. Your second question regard the production line. The cost has been already passed in 2019. We took the decision to invest in this jar line because we have an increased demand for that type of packaging. So it's jar with a bigger number of tablets inside. So that's why we took the decision to do that. And we are as well considering to -- at some markets to as well switch one blister packaging to move into jars, so which will as well help us in consideration with the program we had with [indiscernible] last year. So no impact on CapEx for that specific line in 2020. And as regard to the Osfortis, we are considering launching Osfortis in 2 new markets. But I ask you to wait Q1 for me to be able to disclose which market.

[Operator Instructions] Our next question is from Kristofer Liljeberg from Carnegie.

So some follow-up questions. First, on what you said about R&D cost, I didn't hear you clearly. So was your message that 13% as a percent of sales is a good level going forward?

Yes.