New Cash, Increasing Margins… Big Turn-Around Potential At This $4 M Enterprise Value Company

Priced for bankruptcy just two months ago, this last biotech name—of 3 that I promised you—has a new lease on life with a $16 million cash infusion, increased profit margins and a recent growth spurt that could soon show positive cash flow

And yet, it still only has a $4 million Enterprise Value (EV=market cap – cash)

Meet Biofrontera (BFRI-NASD) —with a stock chart only a mother could love.

Source: Stockcharts.com

Just a few weeks ago Biofrontera (BFRI – NASDAQ) was, believe it or not, a $1M market cap company.

That’s right – one-million-dollars.

Today the stock is worth more, but not much more. Biofrontera just finished up a $16M placement that adds 20M shares for a grand total of ~22M.

Still – this is a VERY low-priced name. $20M market cap, but only a $4M enterprise value.

This isn’t an early-stage biotech with an animal study and an IND (new drug application),  Biofrontera is generating revenue right now.

Of course, if a company is trading at $1M there’s gotta be a catch. Biofrontera has been locked into a VERY unfavorable deal that has virtually guaranteed they would lose money. But just this week, that all changed.

Biofrontera swung a deal that will increase their gross margins from 50% to 75% overnight. This completely changes the business model and puts them on a fast-track to positive cash flow.

How did they do it? Here’s the short of it.

Biofrontera is a dermatology company. They are the US-based arm of a German company of the same name – Biofrontera AG.

The German parent spun off Biofrontera to sell their dermatology products in the US. The main one being a photodynamic therapy (PDT).

PDT is a light treatment. The patient applies a topical formulation, called Ameluz, which reacts with the proprietary red-light lamp, called the BF-RhodoLED. Together this activates a reaction within targeted cells, killing cells like actinic keratoses (AK), which are precancerous rough patches on sun-exposed skin.

Biofrontera’s Ameluz treatment is the only FDA approved drug for treating AK with PDT.

This is a classic razor-razor blade model. Biofrontera sells their BF-RhodoLED lamps to dermatology clinics. Every time the lamp is used a tube of Ameluz is applied to the patient.

Biofrontera has been building out their lamp network. They added 101 lamps in the field year-to-date. There are 655 lamps in the field as of Q3.

Right now, the therapy is limited to the treatment of AK. But there are lots of avenues for label expansion.

• In August Biofrontera announced positive Ph1 results for a 3-tube treatment of Ameluz (versus 1 tube right now). 3 tubes allows treatment to a larger surface area while potentially requiring fewer office visits.

• Enrollment of 186 patients in a Ph3 study evaluating Ameluz for the treatment of superficial basal cell carcinoma or SBCC. This study will read-out in mid-2024.

• A Ph3 study evaluating the use of Ameluz PDT on the extremities, neck and tongue. A little under half the total patients have been dosed to date.

• Finally, the big kahuna – acne – a Ph2 trial with 65 of 126 patients enrolled so far – for the treatment of moderate to severe acne.

Each of these trials are funded by the parent.

The keys to this story are A. the cash raise and B. the margin expansion, which was announced on February 20:

Source: Biospace

The new supply agreement will increase gross margins from 50% to 75% beginning this year. Margins stay there for 2024 and 2025.

In 2026 margins begin to step back down, eventually to 65% in 2032. The exception is acne – if the indication is approved all acne purchases will remain at 75% margin.

This is a sweetheart deal and one that Biofrontera had to do if they wanted to bring in new cash.

Even before this deal Biofrontera was on offence. They had increased the size of their salesforce by 30%. They had expanded their coverage to 40 territories. They grew revenue in Q3 by over 100% YoY to $8M.

Before the deal, Biofrontera was expecting to be cash flow positive in 12-18 months. With the new margins that should come much quicker. If you retroactively applied the margin change to the Q3 cash flow they would have been cash flow neutral for the quarter.

Full year revenue growth for 2023 is guided to 25% YoY, about $36M. I think they will do at least $40 million 2024, maybe more.

The second key is the financing. Yes, this was a $1M stock a few weeks ago and the reason why is—it had bankruptcy written all over it. It was burning cash and didn’t have any more to burn.

Now they have cash, and with the new margins will be burning it much more slowly.

This is no longer a distressed situation. But its still trading like a distressed situation.

I don’t think the market has fully digested the changes. A few months ago, Biofrontera was adding a “going concern” clause to their 10-Q. Today they have $16 million of cash, expanded gross margins and 3 expansion trials on deck. The market hasn’t flipped that switch.

Nothing is sure thing. The business is still burning cash. The German parent is under stress of their own. But Biofrontera is growing, and the cash burn will step down.

Assuming $40M revenue this year, you are paying 0.5x P/S and that isn’t even considering the cash-on-hand.

Biotechs are ALWAYS about risk/reward. This one appears in our favor.

EDITORS NOTE–my first biotech profile–SKYE BIOSCIENCES–jumped from $7 – $19 in the week after we profiled it, and just announced a $40 million raise at $10/share. The second, OPTINOSE–has jumpedd from $1.20 – $1.80 this last 4 weeks as its PDUFA date on its TAM expansion happens…this Saturday! (yes, FDA does issue news on Saturdays).