FINANCIAL PERFORMANCE IN 2004
The Group's net sales reached SEK 40.4 million, an increase of SEK 4.8 million over 2003. This sales growth was mainly attributable to dairy and infant formula customers. Tablet sales were largely on par with the previous year despite the fact that Erina, BioGaia's tablet customer in Japan, purchased large volumes ahead of its launch in 2003.
Gross profit amounted to SEK 24.8 million, a year-on-year increase of SEK 0.2 million. In 2004 the gross margin fell from 69% to 61% mainly due to a shift in the Company's sales towards a larger share of product revenues and a lower share of royalties than previously.
The operating result was SEK
–28.8 million, down SEK 1.7 million from the previous year owing mainly to higher selling and R&D expenses.
Selling expenses rose by SEK 1.3 million, partly in connection with the oral health initiative and a stronger focus on the Asian market. Since August 2004, the Company has a representative in Hong Kong.
R&D expenses were up SEK 2.0 million, mainly due to a decrease in capitalisation of development expenses from SEK 4.7 million to SEK 2.9 million. Above all, this is explained by the fact that a large share of R&D expenses refer to non-capitalised costs for further development of existing products. Total R&D expenditure was SEK 16.4 (16.7) million.
The net result for the year was SEK –23.2 million, down SEK 10.2 million from the year-earlier figure which included a reversal of warranty provisions amounting to SEK 11 million, compared with SEK 4 million in 2004. Excluding this item, the net result declined by SEK 3.2 million compared with the previous year due to a drop in operating profit and interest income.
The Group's liquid assets at 31 December 2004 totalled SEK 62.2 million (92.9). In 2004 the Company paid out a loan of SEK 4.4 million to the associated company TwoPac AB to be used primarily towards development of equipment for manufacturing LifeTopÔ products.
Consolidated shareholders' equity amounted to SEK 91.5 million. The Group's equity/assets ratio was 84%.
Investments in tangible assets amounted to SEK 0.3 (0.6) million.
The Parent Company's net sales totalled SEK 40.1 (35.4) million and the result after net financial items was SEK
–23.0 (-11.8) million.
Fourth quarter sales reached SEK 7.8 million, up SEK 2.1 million over the year-earlier period but down SEK 4.0 million from the preceding quarter. This is mainly explained by higher tablet sales in the third quarter than in the fourth. Since BioGaia still has a limited number of customers, the timing of deliveries can create significant variations between periods and make comparisons between quarters misleading.
Operating expenses rose by SEK 3.5 million over the previous quarter. This is partly due to lower activity in the third quarter during the summer holidays, but also to the fact that the Company's oral health initiative and focus on the Asian market took place in the fourth quarter.
The number of employees on 31 December 2004 was 33 (33).
APPROPRIATION OF RETAINED LOSSES
The Board of Directors and the Managing Director propose that the retained loss be carried forward. No dividend is proposed.
BioGaia's primary short-term objective is to attain profitability. In view of the Company's strong portfolio of innovative products, successful clinical trials and distribution network covering a large share of the key markets, BioGaia's future outlook is bright.
BioGaia's sales have risen by an average 36% annually since 2001 and this growth is expected to accelerate further as the company's existing partners widen their offering of BioGaia products or enlarge their sales staff. Furthermore, a number of new contracts will become active in 2005. With a largely stable cost level and strong sales growth, BioGaia will approach profitability.
BioGaia complies with the recommendations of the Swedish Financial Accounting Standards Council. The Company has applied the same accounting principles as in the annual report for 2003.
DIFFERENCES BETWEEN CURRENT ACCOUNTING PRINCIPLES AND REPORTING ACCORDING TO IFRS (INTERNATIONAL FINANCIAL REPORTING STANDARDS)
BioGaia has reviewed the differences between the Company's current accounting principles and the IFRS standards to be applied with effect from 2005. The review showed no significant differences other than increased disclosure requirements. This means that the result and financial position for 2004 would not have been affected by the application of IFRS instead of the current accounting principles.
About Biogaia AB
BioGaia is a biotechnology company that develops, markets and sells probiotic products with documented health effects. The products are primarily based on the lactic acid bacterium Lactobacillus reuteri (ReuteriÒ), which has probiotic or health-enhancing effects. BioGaia has also developed unique delivery systems that make it possible to create probiotic products with a longer shelf life.
BioGaia sells license rights for the use of ReuteriÒ cultures in customers' own products, for example yoghurt and infant formula, as well as finished products such as ReuteriÒ tablets, ReuteriÒ drops, probiotic containing LifeTopÔ Straw and LifeTopÔ Cap, dental chewing gum and lozenges.
BioGaia's products are sold to nutrition, food, health food, pharmaceutical and animal feed companies in 16 countries worldwide.
BioGaia holds patents for the use of ReuteriÒ in all major markets.
BioGaia has 33 employees in Stockholm and Lund, Sweden, Hong Kong, China, and Raleigh, USA.
The class B share of the Parent Company BioGaia AB is quoted on the O list of the Stockholm Stock Exchange.
EVENTS DURING THE FOURTH QUARTER OF 2004
BioGaia's health bacteria reduce short-term sickness absence
A study conducted at two workplaces in Sweden showed that the number of sick days caused by gastrointestinal illness and colds is reduced by more than 50% if the employees are given daily supplements of L. r. Protectis. This double-blind, placebo-controlled study was performed on 181 subjects for a duration of 12 weeks, and showed that daily intake of L. r. Protectis halves the number of subjects that report sickness absence due to gastrointestinal illness or colds. In the placebo group, sickness absence due to these illnesses corresponded to 0.9% of working days, but was decreased to 0.4% in the ReuteriÒ group. These differences were highly statistically significant.
In the study, LifeTopÔ Straw was used together with a portion-packed beverage. Regular use of this product by the Swedish workforce could increase the number of working days in Sweden by 4 million annually.
Launch of BioGaia products delayed
In mid-October it became clear that BioGaia would not meet its goal to reach profitability by the end of 2004 due to delays in product launches by two of the Company's customers. These delays concern the French company that plans to launch a beverage with LifeTopÔ Cap in France and the Chinese dairy scheduled to launch a milk beverage with LifeTopÔ Straw in China. In both cases, the delays are due to delays in the customers' concept development and other launch preparations. Both companies expect to launch the products in the first half of 2005.
Agreement with Laboratorios Casen
In December 2003 BioGaia signed an agreement with Laboratorios Casen giving that company exclusive rights to sell LifeTopÔ Straw together with oral rehydration products to hospitals and pharmacies in Spain. Following a successful launch in Spain during April, Casen is planning launches in several other European countries. In preparation for this, BioGaia and Casen signed a new agreement in October giving Casen exclusive rights to sell the product in Europe.
New loan from Industrifonden
In August 2000 BioGaia was granted a loan from Industrifonden (the National Industrial Development Fund) for up to SEK 12 million to be used in the Company's allergy research programme. SEK 7.9 million of the granted amount was paid out in August 2000. The loan was secured by promissory notes carrying a total of 150,000 subscription warrants. The paid-out portion of the loan was secured by a promissory note carrying 100,000 warrants, each of which granted the right to subscribe for one class B share at an exercise price of SEK 1. In March 2004, Industrifonden exercised its option to subscribe for 100,000 B shares. Following the transaction, the number of shares in BioGaia AB amounts to 740,668 A shares and 16,466,894 B shares.
The loan from Industrifonden was renegotiated in December 2004, at which time the original loan of SEK 7.9 million was divided into two parts, a loan of SEK 3.0 million and a commitment to pay royalties on futures sales of allergy products. If no allergy products are sold, no royalties will be paid. The portion of the original loan to be repaid in royalties, SEK 4.9 million, is reported as a provision in the balance sheet.
The remaining 50,000 warrants expired in connection with renegotiation of the loan, after which the Company has no outstanding warrants.
EARLIER EVENTS DURING 2004
Study shows that chewing gum from BioGaia significantly reduces bleeding gums (gingivitis)
In the spring of 2004 a study was conducted in Malmö, Sweden, under the supervision of dentist Per Krasse. The results showed that patients suffering from gingivitis who used BioGaia's dental chewing gum containing L. r. Prodentis had significantly reduced bleeding of the gums already after two weeks of consumption. The occurrence of gingivitis was reduced by 60% after four weeks of use. BioGaia is first in the world to offer a probiotic chewing gum. Trial sales of the chewing gum and lozenges to dentists in the Skåne region have been started on a small scale. The next step will be to expand sales to the entire country before moving to prioritised foreign markets. The venture has generated a limited increase in expenses for the current year, but is expected to make a positive contribution to the Company's future earnings. BioGaia has filed a patent application for use of the bacterial strain L. r. Prodentis for treatment of gingivitis and other oral health problems.
New findings in BioGaia allergy study
In 2001 BioGaia launched a clinical study in collaboration with the Karolinska Institute Centre for Allergy Research. The final results of the study are expected in 2005.
An interim report presented after 6 months of treatment showed that administration of ReuteriÒ to mothers leads to increased levels of the anti-inflammatory cytokine (cell signal substance) IL-10 while reducing the level of TGF-beta-2. These findings are consistent with diminished risk for mastitis in the mothers and could suggest a direct positive effect on the infants' immune defence. The implications of this for infant health are being investigated in the ongoing study.
BioGaia LifeTopÔ Cap sold to France and Belgium
BioGaia has previously signed a distribution agreement with a French beverage company granting them the right to use BioGaia's patented screw cap LifeTopÔ Cap in France and Belgium. The customer's plan was to launch the product in October 2004. However, the launch has been pushed back due to delays in the customer's concept development and other launch preparations, and is now scheduled for the first half of 2005. BioGaia is unable to reveal the name of the company prior to launch.
New study in Israel
In January a study by Professor Weizman in Israel was presented. The results of the study show that the intake of ReuteriÒ protects daycare children from infections and thereby results in lower sickness absence, fewer doctors' visits and reduced use of antibiotics. The independent investigators also noted that ReuteriÒ was superior in all respects to the competing probiotic used in the study. All of the findings were statistically significant.
The study has been published in Pediatrics, the official journal of the American Academy of Pediatrics.
Tablets launched in Finland
In April 2004 BioGaia signed an agreement with Oy Verman Ab granting the right to sell the tablets on the Finnish market. At the beginning of October, the tablets were launched.
Agreement with Lotte
In January 2004 BioGaia signed a 10-year agreement with Lotte Ham & Milk giving Lotte the right to use ReuteriÒ in yoghurt products for the South Korean market. Sales of ReuteriÒ products were started in the first quarter.
Agreement with Hipp
In February an agreement was signed with the German baby food manufacturer Hipp GmbH & Co Vertrieb KG giving them the right to use ReuteriÒ in certain baby food products in Europe. Hipp is the leading producer of baby food on the German market. Baby formula containing ReuteriÒ were launched in Germany and Austria at the beginning of 2004. Additional products with ReuteriÒ were launched in late autumn.
Activities in the Animal Health area are proceeding according to the previously communicated plan. This means that the Company is working to licence out the use of ReuteriÒ for animal health purposes in Europe and the USA and to obtain EU approval.
Sales development in 2004
Human Health accounted for 99% of sales in 2004. Old contracts generated around 85% of revenue. New contracts, i.e. contracts under which sales started during 2004, accounted for around 15% of revenue. Of the signed contracts where the product has not yet been launched, sales for four are expected to begin in 2005.
KEY EVENTS AFTER YEAR-END
In November 2001 BioGaia signed a license agreement with Milko for the sale of dairy products in Sweden. As announced earlier, BioGaia prematurely terminated the agreement with Milko in November 2003 due to breach of contract on Milko's part. In January 2005, oral proceedings were carried out as part of the arbitration. The final ruling is awaited in March. In a worst case scenario, BioGaia will be liable for the fees and costs of arbitration as well as its own and Milko's costs arising from the proceedings.
A patent dispute is underway in Italy and BioGaia has initiated court proceedings against the perpetrating company.