IPO Update: Biofrontera Pursues $36 Million IPO

Summary

• Biofrontera has filed to raise $36 million in a U.S. IPO.
• The firm sells licensed treatments for skin that has been overexposed to the sun.
• BFRI is being sued for patent infringement, its revenue has only partially rebounded from the pandemic and I can't determine if the IPO is reasonably valued.
• I'll watch the IPO from the sidelines.
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guvendemir/E+ via Getty Images

Quick Take

Biofrontera (NASDAQ:BFRI) has filed to raise $18 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company sells licensed treatments for skin conditions due to overexposure to the sun.

Given the uncertainty from BFRI’s pending litigation, its growth trajectory going forward and difficulty in ascertaining whether the proposed valuation is reasonable, I'll pass on the IPO.

Company & Technology

Woburn, Massachusetts-based Biofrontera was founded to license and sell prescription drugs and related products for dermatological conditions caused by excess exposure to the sun.

The company is wholly-owned by the parent firm Biofrontera AG (BFRA), which went public in the U.S. in 2018.

Management is headed by Chief Executive Officer Erica Monaco, CPA, who has been with the firm since 2016 and was previously a financial executive at SUN Pharma.

Below is a brief overview video of sun damaged skin treatment options:

(Source)

The company’s primary offerings include:

• Ameluz

• BF-RhodoLED lamp

• Xepi

Biofrontera has received at least $47 million in equity investment from parent firm Biofrontera AG.

Customer Acquisition

The company sells its drugs and related devices to medical practitioners and facilities within the United States through its direct sales team.

Management seeks to expand its product offerings through licensing or acquisition and says it may seek to acquire a controlling interest in its parent firm.

Selling, G&A expenses as a percentage of total revenue have varied as revenues have fluctuated, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2021	100.7%
2020	96.1%
2019	109.6%

Click to enlarge

(Source)

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rebounded from negative territory to 0.3x in the most recent reporting period, as shown in the table below:

Selling, G&A	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2021	0.3
2020	-0.4

Click to enlarge

(Source)

Market & Competition

According to a 2021 market research report by Verified Market Research, the global market for photodynamic therapy was an estimated $1.23 billion in 2020 and is forecast to exceed $2.3 billion by 2028.

This represents a forecast CAGR of 8.74% from 2021 to 2028.

The main drivers for this expected growth are an increase in the incidence of skin conditions and diseases, especially as the U.S. population ages in the years ahead.

Also, in developed countries, the healthcare infrastructure will continue to show robust growth, broadening access to its use.

Major competitive or other industry participants include:

• Sun Pharma

• Galderma

• Others

Financial Performance

Biofrontera’s recent financial results can be summarized as follows:

• Variable topline revenue

• Positive gross profit and gross margin in 1H 2021

• Uneven operating loss and negative operating margin

• Reduced cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2021	$ 10,599,000	50.9%
2020	$ 18,849,000	-28.0%
2019	$ 26,181,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2021	$ 4,920,000	44.9%
2020	$ (9,066,000)	-26.9%
2019	$ (12,408,000)
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2021	46.42%
2020	-48.10%
2019	-47.39%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2021	$ (7,215,000)	-68.1%
2020	$ (9,606,000)	-51.0%
2019	$ (19,415,000)	-74.2%
Net Income (Loss)
Period	Net Income (Loss)
Six Mos. Ended June 30, 2021	$ (7,195,000)
2020	$ (10,987,000)
2019	$ (10,892,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2021	$ (4,508,000)
2020	$ (12,369,000)
2019	$ (37,677,000)
(Glossary Of Terms)

Click to enlarge

(Source)

As of June 30, 2021, Biofrontera had $3 million in cash and $19 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2021, was negative ($6 million).

IPO Details

BFRI intends to sell 3 million shares of common stock at a proposed midpoint price of $6.00 per share for gross proceeds of approximately $18.0 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (ex- underwriter options) would approximate $46.4 million.

Excluding the effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 27.27%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

to fund expansion of our commercial infrastructure and general working capital which will include hiring of additional personnel, capital expenditures and the costs of operating as a public company.

the remainder to fund other general corporate purposes, including to pursue our strategy to in-license further products or product opportunities, procure products through asset acquisition from other healthcare companies, as well as acquiring some or all of the shares of other healthcare companies, potentially also including shares of our current parent company, Biofrontera AG, although we have no agreements or commitments for any specific acquisitions or in-licenses as of the date of this prospectus.

(Source)

Management’s presentation of the company roadshow is not available.

The firm is currently in litigation and is accused of patent infringement by DUSA, with a jury trial set for November 29, 2021. Management did not offer an estimate of the type or amount of potential adverse impact, if any, but said that it:

will enter into an agreement with Biofrontera AG to allocate the costs of the above mentioned litigation involving DUSA such that we and Biofrontera AG will each be responsible for a percentage (to be determined following the consummation of this offering based on several factors including, among others, the extent of Biofrontera AG’s ownership of Biofrontera) of the legal costs incurred in connection with the proceedings after the initial public offering. The allocation of liability for any adverse judgment will depend on the outcome of the proceedings with DUSA and will be negotiated with Biofrontera AG once that is known. Other than described above, no binding agreement with Biofrontera AG currently exists or will be entered into following the date of this prospectus.

Listed underwriters of the IPO are Roth Capital Partners and The Benchmark Company.

Valuation Metrics

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$66,000,000
Enterprise Value	$46,391,000
Price / Sales	2.94
EV / Revenue	2.07
EV / EBITDA	-4.76
Earnings Per Share	-$0.91
Float To Outstanding Shares Ratio	27.27%
Proposed IPO Midpoint Price per Share	$6.00
Net Free Cash Flow	-$6,024,000
Free Cash Flow Yield Per Share	-9.13%
Revenue Growth Rate	50.88%
(Glossary Of Terms)

Click to enlarge

(Source)

Commentary

BFRI is seeking U.S. public market growth capital to fund its various unspecified corporate expansion activities as it seeks to begin the separation process from its parent firm.

The company’s financials show the negative impact of the pandemic on its 2020 results, but revenue appears to be rebounding based on 1H 2021’s results.

Free cash flow for the twelve months ended June 30, 2021, was negative ($6 million).

Selling, G&A expenses as a percentage of total revenue have fluctuated as revenues have been affected by the pandemic; its selling, G&A efficiency rate improved to 0.3x in the most recent reporting period.

The market opportunity for photodynamic therapies for skin damage is large and expected to grow at a reasonably strong rate in the near term, so the firm has positive industry dynamics in its favor.

Roth Capital Partners is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (3.9%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is sluggish growth as a result of the lingering coronavirus pandemic, as the firm still is not expected to reach its 2019 results in 2021.

As for valuation, it is difficult to determine a direct comparable for the firm.

Given the uncertainty from its litigation, its growth trajectory going forward and difficulty in ascertaining whether the proposed valuation is reasonable, I'll pass on the IPO.

Expected IPO Pricing Date: Month of October, 2021.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Investing in IPOs is an inherently volatile and opaque endeavor. My research is focused on identifying quality IPO companies at a reasonable price, but I’m wrong sometimes. I analyze fundamental company performance and my conclusions may not be relevant for first-day or early IPO trading activity, which can be highly volatile and unrelated to company fundamentals. This report is intended for educational purposes only and is not financial, legal or investment advice.