BioGaia Releases Their AB Interim Report (1 January – 30 June 2008 )

BioGaia AB Interim report 1 January – 30 June 2008
(Figures in brackets refer to the same period of the previous year)

- Net sales amounted to SEK 72.4 million (51.2), an increase of SEK 21.2 million (41%) compared to the same period of last year.

- Operating profit was SEK 12.6 million (2.6), an improvement of SEK 10 million over same period of last year.

- Profit before tax was 13.6 million (3.3), an increase of SEK 10.3 million compared to the same period of last year.

- Profit after tax was SEK 22.1 million (3.3), an improvement of SEK 18.8 million over the same period of last year. The profit includes a tax benefit of SEK 8.5 million pertaining to a change in the deferred tax asset.

- Earnings per share were SEK 1.29 (0.19).

- The period's cash flow from operating activities before change in working capital was SEK 16.2 (6.2) million. Total cash flow for the period was SEK 5.0 (1.3) million. Cash and cash equivalents at 30 June 2008 totalled SEK 47.9 (41,1) million.


Key events in the second quarter of 2008

- Agreement with NeoCare for the sale of BioGaia's Probiotic drops and tablets in Belgium and Luxembourg.

- Agreement with BERICAP for the sale of LifeTop Cap.

- Agreement with Verman for the sale of drops and tablets in Russia.

Key events after the end of the second quarter

- Extended agreement with Ferring for the sale of BioGaia's Probiotic drops and tablets in 10 countries in Latin America.

- Agreement with AllergyCare AG for the sale of BioGaia's Probiotic drops and tablets in Switzerland.

"What we are now seeing in the form sales and earnings growth is the fruit of a long-term focus on R&D and product development, and that we have a well functioning business model. Our market is growing fast and our own brand is gaining increasingly widespread recognition. We anticipate continued strong sales development," says Managing Director Peter Rothschild.

Latest press releases from BioGaia:
2008-07-24 BioGaia completes its Latin American market coverage and signs agreement for Switzerland
2008-06-24 BioGaia extends partnership with Verman
2008-04-29 BioGaia in strategic alliance with BERICAP

For additional information contact: Peter Rothschild, Managing Director, telephone: +46 8 -555 293 00,
Jan Annwall, Deputy Managing Director, telephone: +46 8 - 555 293 00
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BioGaia is a biotechnology company that develops, markets and sells probiotic products with documented health benefits. The products are primarily based on the lactic acid bacterium Lactobacillus reuteri (Reuteri), which has probiotic, health-enhancing effects. The class B share of the Parent Company BioGaia AB is quoted on the Small Cap list of the OMX Nordic Exchange Stockholm.
www.biogaia.com


BioGaia AB (publ.)

Interim report
1 January – 30 June 2008
Figures in brackets refer to the same period of last year.

The Board of Directors and the Managing Director of BioGaia AB (publ) hereby present the interim report for the period 1 January – 30 June 2008.

BioGaia AB

The company

BioGaia is a biotechnology company that develops, markets and sells probiotic products with documented health benefits. The products are primarily based on the lactic acid bacterium Lactobacillus reuteri (Reuteri) which has health-enhancing effects. BioGaia has also developed unique delivery systems, such as probiotic-containing straws and caps, that make it possible to create probiotic products with a long shelf life.

BioGaia has 38 employees, of whom 15 are based in Stockholm, 16 in Lund, 3 in Raleigh, USA, and 4 in Hiroshima, Japan.

The class B share of the Parent Company BioGaia AB is quoted on the Small Cap list of the OMX Nordic Exchange Stockholm.

Business model

BioGaia's revenue is derived mainly from the sale of finished products, but also from license rights for the use of Reuteri cultures in customers' own products (such as baby formula and dairy products).The finished probiotic products consist of tablets, drops and oral health products (chewing gum and lozenges), as well as probiotic-containing straws and caps. BioGaia's products are sold through nutrition, food, natural health, pharmaceutical and animal feed companies in 36 countries worldwide. In Sweden, BioGaia's products are sold under the brands Semper Magdroppar and Gum PerioBalance chewing gum in pharmacies, as well as Semper baby and infant formula with active culture and Probiomax gut health tablets in grocery stores. BioGaia holds patents for the use of Reuteri in all major markets.

The BioGaia brand

Many of BioGaia's products are sold under the customer's own brands. At the end of 2005 BioGaia launched its own brand and today has many distributors in a large number of countries that sell products partly or entirely under the BioGaia brand. Even in cases where customers use their own brands, the BioGaia brand is featured on the package. BioGaia's strategy is to increase the share of sales consisting of BioGaia-branded products.

Research

BioGaia's research is focused on selection of different probiotics for gut health, the immune system and oral health. Extensive clinical studies have shown that BioGaia's various probiotic products:
- stimulate the human immune system,
- protect against GI tract and respiratory tract infections,
- alleviate the side effects of antibiotic treatment,
- reduce the level of H. pylori infection,
- relieve infantile colic,
- reduce gum inflammation and the risk for dental caries,
- reduce the risk of infection in premature infants.


KEY EVENTS IN THE SECOND QUARTER

Launches during the second quarter

- Ferring, BioGaia's Probiotic drops in Mexico
- Sunstar – Lozenges in the UK
- Semper – infant formula with Reuteri in Sweden

The length of time between contract and launch varies between countries due to differing amounts of time needed for the registration process. The products are normally registered as dietary supplements and in certain cases as pharmaceuticals.

Agreement with NeoCare

In April BioGaia signed an agreement with the Belgium pharmaceutical company NeoCare, giving NeoCare the right to sell BioGaia's Probiotic drops and tablets in Belgium and Luxembourg. The products will be sold under BioGaia's trademark.

Agreement with BERICAP

In April BioGaia entered into a global collaborative agreement with Bericap Sarl, a subsidiary of Bericap, one of the world's largest manufacturers of plastic caps and other packaging closures.
Under the agreement, the two companies will collaborate in development, manufacturing and marketing of BioGaia's patented beverage cap, LifeTop Cap, which has been developed to protect sensitive ingredients such as probiotics from the effects of moisture, heat and light in PET bottles.
The Bericap Group will market LifeTop Cap to its customers worldwide, manufacture the plastic details and develop new varieties for different bottle types. BioGaia will sell and market the product and, through its 50%-owned company Two Pac, handle the ingredients and manufacture the aluminium blister that protects the ingredients and is placed in the LifeTop Cap.

Agreement with Verman for Russia

In June BioGaia signed an additional collaborative agreement with BioGaia's Finnish partner, Verman OY, for the Russian market.
Under the agreement, Verman has been granted a non-exclusive right to distribute and sell BioGaia's Probiotic tablets and drops under Verman's own Rela brand on the Russian market. Today Rela is the top-selling probiotic brand in the Finnish pharmacy market. In autumn 2008 Verman will open its own office in Moscow from which it manage the Russian business activities.

Annual meeting of BioGaia

The Annual General Meeting of BioGaia AB on 22 April 2008 resolved unanimously in favour of the following:
- that no dividend will be paid to the shareholders
- re-election of sitting Board members Jan Annwall, Stefan Elving, Thomas Flinck, David Dangoor, Inger Holmström and Paula Zeilon
-election of Jörgen Thorball as a new Board member
- re-election of David Dangoor as Board Chairman
- principles for remuneration and other terms of employment of senior executives in accordance with the Board's proposal
- principles for nominating committee in accordance with the proposal in the notice of the Annual General Meeting.


KEY EVENTS AFTER THE END OF
THE QUARTER

Extended agreement with Ferring

In July BioGaia extended its agreement with Ferring Pharmaceuticals to cover essentially all of Latin America. The agreement gives Ferring exclusive rights to sell BioGaia's Probiotic tablets and drops in 10 additional countries: Colombia, Costa Rica, Nicaragua, Panama, the Dominican Republic, Guatemala, Honduras, Cuba, El Salvador and Trinidad-Tobago. The products will be sold under the BioGaia brand.

Agreement with AllergyCare AG

In July BioGaia signed a distribution agreement with the Swiss-based pharmaceutical company AllergyCare AG. The agreement gives AllergyCare exclusive rights to sell BioGaia's Probiotic drops and tablets in Switzerland and Liechtenstein. The products will be sold under the BioGaia brand.

EARLIER EVENTS IN 2008

Launches during the first quarter

- Ferring, BioGaia's Probiotic drops in Jordan
- Delta Medical, BioGaia's Probiotic drops in Ukraine
- Ewopharma, BioGaia's Probiotic drops and tablets in Hungary and Bulgaria
- Ewopharma, BioGaia's Probiotic tablets in the Czech Republic


Global agreement with Sunstar

Sunstar Suisse SA already had an option for a distribution agreement covering a large number of countries. At the beginning of January 2008, Sunstar exercised this option and signed an additional agreement with BioGaia that gives Sunstar exclusive rights to distribute BioGaia's probiotic oral health products in more than 100 countries.

The products will be sold under Sunstar's GUM PerioBalance brand. The agreement also includes possibilities for joint development of new oral products. The launch will be carried out within a 2-year period. One of the first launches will take place in the USA during 2008.

Sunstar already distributes BioGaia's oral health products in Germany, France, Italy, Spain, Sweden and Norway.

BioGaia continues its Japanese venture

The sales of BioGaia's Probiotic drops and soy drinks with BioGaia's Probiotic straw that were started in 2007 are continuing in 2008. Efforts to adapt the products and marketing to the Japanese market are in progress. This venture is part of BioGaia's long-term focus on its own brand. The cost of the Japanese venture during the six-month period amounted to SEK 3.5 million (3.2), which is higher than anticipated. The net cost on a full-year basis is expected to be lower than in the prior year.

New agreement with Ferring

In February BioGaia signed a new agreement with Ferring Pharmaceuticals in Switzerland, giving Ferring exclusive rights to sell BioGaia's Probiotic drops in Australia, New Zealand and Israel, and BioGaia's Probiotic tablets in Brazil, Egypt, Greece, Iran, Jordan, Canada, Lebanon, Mexico, Saudi Arabia and Syria.

The partnership began in the spring of 2006 and has been so successful that Ferring decided, in connection with the extension of its earlier agreement, to begin marketing BioGaia's Probiotic drops in new markets and to add BioGaia's Probiotic tablets to its product portfolio.

The drops have been launched in Spain, Portugal, the Czech Republic, Canada, Jordan, and Mexico. Ferring also has exclusive rights to sell BioGaia's Probiotic drops in Brazil, Egypt, Greece, Iran, Lebanon, Saudi Arabia and Syria.

FINANCIAL PERFORMANCE IN THE FIRST HALF OF 2008

The Group's net sales amounted to SEK 72.4 million (51.2), an increase of 41% compared to the same period of last year. BioGaia's Probiotic drops in Europe accounted for most of the period's sales growth.

Gross profit reached SEK 47.8 million, an improvement of SEK 13.6 million over the same period of last year.

Selling expenses rose by SEK 1.7 million compared to the same period of last year, which is mainly explained by higher personnel costs and increased costs for the registration of new products.

The period's R&D expenses amounted to SEK 10.7 million (9.0), which is equal to 18% (19%) of total operating expenses. The higher R&D expenses are due to an increased level of activity in clinical studies that began during the half-year period. The amortisation component of R&D expenses amounted to SEK 2.0 million (2.1). Investments in capitalised development expenses totalled SEK 0 million (0).

Operating profit was SEK 12.6 million (2.6), an improvement of SEK 10.0 million compared to the same period of last year.

Profit after tax was SEK 22.1 million (3.3), an increase of SEK 18.8 million compared to the same period of last year.

The Group pays no tax due to the existence of a cumulative loss carryforward. The total loss carryforward in the Group at 31 December 2007 was SEK 123.1 million, of which SEK 113.1 million was attributable to the Swedish companies.
At 30 June 2008 BioGaia recognised a deferred tax asset of SEK 17.5 million, resulting in a tax benefit of SEK 8.5 million in the income statement. In connection with future reports, the company will take a position on whether or not to recognise additional deferred tax assets.

The Group's cash and cash equivalents at 30 June 2008 totalled SEK 47.9 million (41.1).
Cash flow for the period was SEK 5.0 million (1.3), an improvement of SEK 3.7 million compared to the same period of last year.

In the first half of 2008, the company paid a conditional shareholder contribution of SEK 2.0 million to the associated company TwoPac AB.

Cash flow from operating activities before change in working capital was SEK 16.2 million (6.2), an improvement of SEK 10 million compared to the same period of last year. The increase in working capital was SEK 7.6 million and is mainly attributable to inventories and accounts receivable.

Consolidated equity amounted to SEK 117.0 million (78.7). The Group's equity/assets ratio was 86% (84%).

Capital expenditure on property, plant and equipment totalled SEK 1.6 million (1.3).

The Parent Company reported net sales of SEK 72.6 million (52.0) and a profit after net financial items of SEK 14.3 million (7.5).

Financial performance in the second quarter of 2008

Second quarter sales amounted to SEK 36.4 million, up by SEK 11.7 million over the same period of last year. Compared to the first quarter, sales increased by SEK 0.3 million.

Operating profit for the second quarter was SEK 5 million, an increase of SEK 4.7 million over the same period of last year. Compared to the first quarter, operating profit fell by SEK 2.6 million due to a somewhat changed product mix during the period that resulted in lower gross margins and higher selling expenses.

Profit after tax for the second quarter was SEK 14.1 million, an improvement of SEK 13.4 million compared to the same period of last year. Profit for the period includes a tax benefit of SEK 8.5 million.

Second quarter cash flow was SEK 1.5 million. Cash flow from operating activities before change in working capital was SEK 6.8 million.

EMPLOYEES

The total number of employees in the Group at 30 June 2008 was 38 (37).

SIGNIFICANT RISKS AND UNCERTAINTIES; GROUP AND PARENT COMPANY

No major changes in significant risks and uncertainties have taken place during the period.

The Japanese venture is associated with increased market risk. Although the market has shown a strong interest in these products, relatively large volumes are needed to achieve adequate profitability.

The shares in the associated company (TwoPac AB) and the receivable from the associated company amounted to a total of SEK 11.6 million (10.6). TwoPac AB's primary operations are development of equipment and manufacturing of BioGaia's Probiotic drops and straws and LifeTop Cap on behalf of BioGaia. BioGaia's assessment is that the cash flow from TwoPac will generate good prof¬itability, for which reason no impairment loss was recognised on the balance sheet date. Should BioGaia's investment fail in full or in part, the Company may be forced to recognise an impairment loss on all or parts of the holding in and receivables from the associated company.

BioGaia's capitalised development expenditure amounts to SEK 6.6 million, of which SEK 2.1 million refers to the LifeTop Cap project. BioGaia has a sales agreement for LifeTop Cap and has received inquiries from a number of potential custom¬ers. BioGaia has also signed a collaborative agreement with BERICAP (see above), one of the world's largest manufacturers of plastic caps. BioGaia's assessment is that the cash flow from LifeTop Cap will generate good profitability, for which reason no impairment loss has been recognised. Should this investment fail in full or in part, BioGaia may be forced to recognise an impairment loss on all or parts of the project cost.

FUTURE OUTLOOK

BioGaia's goal is to create strong value growth and a good return for the shareholders. This will be achieved through a greater emphasis on the BioGaia brand, increased sales to both existing and new customers and a controlled cost level.

In 2008 and 2009 BioGaia expects the tablets, drops and oral health products to be launched in a large number of countries.

In view of the Company's strong portfolio of innovative products partly under the company's own brand, successful clinical trials and growing distribution network covering a large share of the key markets, BioGaia's future outlook is bright.

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