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Edited Transcript of BIOG B.ST earnings conference call or presentation 8-Aug-19 7:30am GMT

Q2 2019 Biogaia AB Earnings Call

Stockholm Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Biogaia AB earnings conference call or presentation Thursday, August 8, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Isabelle Valerie Ghislaine Ducellier

BioGaia AB (publ) - CEO

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Conference Call Participants

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* Daniel Albin

Danske Bank Markets Equity Research - Research Analyst

* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to BioGaia Q2 report 2019. Today, I'm pleased to present CEO, Isabelle Ducellier. (Operator Instructions)

Speakers, please begin.

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [2]

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Yes, thank you. Good morning, everybody. I hope you had or you are having nice holiday. And today, we are going to speak about the quarter 2 2019 for BioGaia.

So basically, we are very happy to start by saying that the sales of our own product have been increasing by 20%, which are a strong increase, and the total sales of the company for Q2 has increased by 11%. This is driven by both Pediatrics plus 19% and Adult product plus 27%. I will come back to that later. It's driven as well by the good sales on our main product, Protectis drop, but the extremely strong increase of the Protectis tablet by 52%. As for the BioGaia Prodentis lozenges, plus 56%.

In term of regional split, we have a very strong growth in Asia Pacific by 58% followed by Americas plus 25%, and good growth of our own products in EMEA, plus 8%. And to sustain the scale-up of the company, we have continued investment in marketing activities, and we have been continuing recruiting staff and investing in research and development with -- by a 6% increase on cost.

Next page, please. In term of key events, there was obviously the launch of Osfortis, our new probiotic against bone losses in America. So in the U.S., that you can find both on our partner website, Everidis or on Amazon. Then we published a very interesting study regarding a new indication called diverticulitis, that we will come back to you as well.

In term of key event after quarter 2, we have signed a new agreement with Abbott, regarding the sales of our products in Uruguay. So if you put all the country we are working together with Abbott in LatAm, we are now -- Abbott representing in 11 countries in Latin America from Panama to Costa Rica, Mexico, Colombia, Peru, Bolivia. So we are very happy with the reinforcement of the relationship with Abbott.

Next page, please. So to come back to the sales per segment. If you look at the Pediatric products, a very strong increase by 19%, and it's both for the drops and for the tablets. Regarding the Adult portfolio, even stronger increase for Q2 by 27%. Last Q1, we had an increase of about 54% for the Adult portfolio. So if you look at the accumulated first semester, I mean, 6-month period 2019, on the Adult portfolio, we have a 30% increase, which is on line with the medium strategy we've been mentioning regularly. So a strong rolling 12 at plus 15%.

Next page, please. In term of gross margin, we are able to maintain a very high level of gross margin for the company at 74%. A slight decrease on the Pediatrics due to the fact that as we don't have the royalty as before from Nestlé, which was 100% margin, it impacted slightly the gross margin, but that segment at very strong 74%.

Next page, please. In term of regional split per market, we are extremely satisfied with the result in Asia Pacific. After first quarter at plus 88% (sic) [80%] if I do remember properly. We do have another very strong Q2 at plus 58%. And that is mainly driven by China for the drops, but as well by Korea, by Japan for Prodentis, by Hong Kong for the Protectis tablets. So we are extremely satisfied with the dynamic of the whole Asia Pacific region.

Regarding Americas, here as well if you do remember my previous conference, we had some question because Americas' figures at Q1 were not as good as expected, but I explained there was a timing issue for delivery for Aché that happened in Q2 instead of Q1. And therefore, now we are back to deliver, we want to have the Americas which is normal by 25% and on an accumulated 25% as well. So we have Aché doing very well in Brazil, but we have as well Gerber in U.S. that launched a new product that we've been developing for them together with them.

Regarding EMEA, here, at the total sales level, obviously, it's minus 7% due to the fact that we've lost the royalty income. But if you exclude the royalty income from that minus 7% that -- we are showing a strong plus 8% growth on our own product. And so there are different explanations for that. One of this is false, I cannot resist to the say that. I don't know if it's still the effect, but I do believe it's more Pediatric work, but really working well both on Protectis drops and tablets.

In Finland, that has been -- I mean, they had a pretty low Q1, but we launched Protectis capsule vegan and that really relaunched the whole market. So now they have been reordering the product. So the consumer really stood very well this new proposition, new format in capsule and the vegan proposal, which is very popular in Scandinavia and Europe.

We have as well strong results in Greece from the smaller base. And well, they launched Gastrus, which is very positive for us. And Italy is definitively back on track, both for drops and tablets, and Italy is one of our biggest market, and our -- it's a record market. So overall, doing well, very happy Q2 for us.

Next page, please. In term of income statement, here as well, last Q1, we have had a lot of discussion about operating expenses. And the plan is still for the year to try through other operating expenses growing at parity with the sales. For Q2 at least, we are growing slower, but at the 6-month period accumulated, we have plus 15%. So we are very satisfied with the way we manage our operating expenses.

Regarding the EBIT margin, we have a strong Q2, and we keep 34% EBIT margin for the rolling 12, which is in line with our Board guidelines regarding BioGaia core.

Next page, please. Balance sheet. So basically, something to notice here is that we've decided to capitalize our ERP system, which has an impact on the balance sheet for the Q2 and that has been approved, of course, with auditor, Deloitte.

Regarding MetaboGen, we announced in April 2018 that they will reach all the milestone. We will acquire the remaining shares, and that's what we are going to do. So we have put a liability for the remaining acquisition of the shares for a level of SEK 11.4 million, and this acquisition will be performed in 2021.

Next page, please. In term of cash flow, here, we have a decreased cash flow for the period. That is driven by a slightly lower accumulated operating profit, higher taxes and higher dividend.

Next page, please. As a conclusion, I would like to underline the fact that we have a very strong Q2 during -- driven by sales of our own products. And quarter-after-quarter, we are able to improve our global reach. So I'm not counting one by one, which we are saying -- we have said more than 100 country. I think we have to count again because it's more than 100 now. So as I mentioned in the introduction, latest one being Uruguay with Abbott, so -- which is very satisfactory for us.

And then in term of portfolio, the medium-term strategy is to balance this backdrop between Pediatrics and Adults, and that's as well what we are demonstrating -- have been demonstrating in Q1 and have demonstrated in Q2. And in term of regional split, here as well, the medium strategy will be to reach EMEA 60%, Americas 40%, APAC 40%, and quarter-after-quarter, we demonstrate that this medium strategy is reachable.

So as a reconclusion, I would like to say that I think we thought today would demonstrate that we are able to compensate the loss of Nestlé royalties, which is not an easy task with sound organic growth of our own products. And that means that here as well it's confirmed the necessity for us to continue building BioGaia's brand. And I think we should always keep in mind not to look at Q1, Q2, but more on the long-term perspective and on a [GAAP] perspective, where BioGaia demonstrates strong figures.

Thank you for your attention. And I'm ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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I have 3 questions. The first one is the phasing effects in Americas between the second and the first quarter. Is it possible to quantify that? And also, I wonder if there were any other extraordinary large orders that helped growth in the quarter?

The second quarter also related to sales. If I heard you correctly, you said the APAC growth was mainly driven by China. So is it possible in any way to maybe not an absolute number but in relation -- relative to Japan, et cetera, how big China has become for you? And what type of potential you see there?

And then my third and final question relates to operating cost. When you refer to that growing in line with sales, is that for total group sales growth or is it product sales, i.e., adjusted for the lower royalties?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [3]

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Thank you. So to answer to your first question regarding phasing, I mean, basically, we had one delivery for Aché that should have been sent in March, and then probably in April. Nothing extraordinary, it's just business as usual. They have been focused.

I mean, we have been obliged to slightly change the name of the brand for a regulatory issue in Brazil [regarding drop]. So as we have been investing a lot in marketing campaigns to explain to the consumer of the slightly change of name, brand name, and therefore, I think that is pushing the drops. But that's, I mean, business as usual.

What is new as I mentioned is the new product that we launched under Gerber brand, which is a minipack, so it's a new format. But otherwise, we knew this already, I could not just disclose it before announcing. So it's a new line and a new product. So therefore, I mean, new sense, and we are very happy because Nestlé is asking us to develop new product constantly with them, and there are more to come, that I will disclose next quarter.

Regarding your question for the sales in APAC, I mean, we normally don't disclose every sales per country. What I can tell you is that the sales for China is a 3-figure increase and the third figure is a big figure as well. So I mean, China is increasing very, very quickly. It's driven by the drops. As I mentioned, I think, last time, even if the fertility rate is decreasing in China as everybody -- everywhere else, the fact is that the population is so big that they had 18 million newborns in 2018, and our drops are really popular around the Chinese mother. In Japan...

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [4]

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Could I ask you on China, how soon do you think China could become larger than Japan for you?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [5]

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I mean, in Japan, we are as well strong because today in Japan, we mainly sell the Prodentis, but we are -- and now we want to expand as well. We want to roll out even our Pediatrics product in Japan, and we want as well to look at both markets in Japan. So it's difficult for me to answer to your question.

So we are establishing Japan for long term. We have our own distribution company there with 25 people. So the dynamic is very strong. But the figures regarding demography are stronger in China, and we have a very strong partner, very well equipped in term of digital sales. So we sell a lot via (inaudible). So -- I mean those markets are going to work very well for the future for different reasons.

And your third question regarding operating cost, basically, yes, in parity with the total group. I mean, today, the strength is strongly BioGaia core. So BioGaia core, BioGaia Group is the same in term of sales. The differences will be for operating costs where I was mentioning our operating cost towards the digital sales.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [6]

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Okay. And if you -- okay. And how much additional cost will you have from the 2 subsidiaries where you're not going 100%?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [7]

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It really depends. I mean they are at different level of maturities. So I think we are closer with MetaboGen to get some income, whereas it's more long term for BioGaia Pharma. And the figures are so small still that the percentage of increase doesn't mean that much.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [8]

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Okay. That's fair. Just a final follow-up on -- also regarding Americas. And were there stocking effects for the new products that we should think about helping the quarter or will suggest the phasing effects between the 2 quarters?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [9]

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No. It's really the phasing effect. So there is no stock and -- I mean, we've learned from our mistake in 2016. I think there is a certain information I got. They look at where they will go on stocks. So no, I don't think that's the case anymore.

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Operator [10]

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(Operator Instructions) Our next question is from Daniel Albin from Danske Bank.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [11]

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So I have a question on EMEA. I wonder if you could elaborate a bit more regarding the product revenue sales growth of 8% in the quarter. Because excluding FX, I believe, you're basically around flat growth year-on-year? And going forward, what you believe a reasonable organic growth level to be for us to assume?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [12]

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For EMEA, there is different dynamics. Our first client is Ewopharma, but they are dealing with 15 countries. So -- and today, Eastern Europe has a bit of, I mean, economical difficulties. So even if they are our biggest market, I think, for them, that will be difficult to have a very strong increase.

But that is balanced by Italy, France, even Spain, and -- I mean, I think, Spain and Portugal, but from a very small basis. Greece is doing well. And then we had one issue in South Africa due to regulatory question regarding the Protectis category. So that was a bit slow, and so they're being cautious, but I'm going there soon in November.

All in all, I think there will be different effects, some will increase, some will decrease. And we will have average increase in EMEA, but from a very strong base. So it's a big part of our business still.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [13]

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Okay. But in terms of levels, is a flat growth reasonable to expect? Or can you grow organically 5%, 10%?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [14]

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I think -- yes, we will grow organically, and I think you will see the increase in Italy coming and I cannot explain everything. I will explain more about Italy under Q3. So there will be an organic growth, that will not be flat, that will be better than that.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [15]

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Okay. My second question is related to BioGaia Osfortis. Firstly, have you signed any new distributors during this quarter?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [16]

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I mean, basically, we have a list of distributor that scream to launch the product. So -- but we -- it's a very high incompetency in term of factory products. So effect for us, a bit more time to cultivate a process than to cultivate growth of the portfolio.

So we ask to monitor, we don't want to roll out everywhere and to be out of stock everywhere. So we are more managing expectation depending on the marketing -- I mean, the market possibilities rather than pushing the product out everywhere because then we will be out of stock tomorrow. Even for the U.S., we don't push too hard because we are going to -- we have already sold 50% of what we've been shipping without doing almost anything. And the day we're going to be extremely pushy, then we will be out of stock. So we wanted to have the second batch coming to the U.S. before pushing harder.

So it's more like managing the -- our possibility to cultivate. And now we are not giving up on that matter as well. We know we have a long list of clients. So we're just like scaling up the launching of this process.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [17]

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Okay. And I guess, thirdly, if I heard you correctly, you said that the remaining shares of MetaboGen will be acquired in 2021. Is that correct?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [18]

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It is correct.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [19]

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And I wonder is that also the date where we are going to see some top line data from the ongoing clinical studies in connection to that?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [20]

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You mean that we will have some income coming from MetaboGen? Or what do you mean? I'm sorry, I didn't get your question.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [21]

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Like the clinical studies, the study results from those studies, are they going to be published at that date?

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [22]

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There is strong, strong reasons to believe that, yes, it's going to happen before that.

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Operator [23]

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(Operator Instructions) And there seem to be no further questions at this point. So I will hand the word back to Isabelle for final comments.

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Isabelle Valerie Ghislaine Ducellier, BioGaia AB (publ) - CEO [24]

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Yes. My final comment will be for the one on holiday, please enjoy. And thank you for your attention. Have a very nice day. Bye-bye.