PART
I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM
3. KEY INFORMATION
A.
[Reserved]
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
We
believe the following to be the principal risks and uncertainties facing our company. If any of these risks occur, our business,
financial condition and performance could suffer and the trading price and liquidity of our securities could decline. Because
any global pharmaceutical business of the kind in which we are engaged is inherently exposed to risks that become apparent only
with the benefit of hindsight, risks of which we are not currently aware or which we do not currently consider to be material
could also adversely impact our business, financial condition and performance, including our ability to execute our strategy.
The order of presentation of the risk factors below does not necessarily indicate the likelihood of their occurrence or the potential
magnitude of their consequences. This annual report also contains forward-looking information that involves risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors,
including the risks described below and elsewhere in this annual report.
Risk
Factors Summary
Our
business is subject to a number of risks and uncertainties. The following is a summary of the principal risk factors described
in this section:
Risks
Related to Our Financial Position and Capital Requirements
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The
COVID-19 global pandemic has continued to negatively affect our sales and operations and may continue to do so.
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We
have a history of operating losses and anticipate that we will continue to incur operating losses in the future and that we
may never sustain profitability.
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Risks
Related to Our Business and Strategy
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Certain
of our important patents expired in 2019. Although the process of developing generic topical dermatological products presents
specific challenges that may deter potential generic competitors, generic versions of Ameluz® may enter the market following
the recent expiration of these patents. If this happens, we may need to reduce the price of Ameluz® significantly and
may lose significant market share.
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Insurance
coverage and medical expense reimbursement may be limited or unavailable in certain market segments for our products or product
candidates, which could make it difficult for us to sell our products.
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Healthcare
legislative changes may have a material adverse effect on our business and results of operations.
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To
date, we have a relatively short history of sales of our products, primarily in Germany, and Spain and, in the United. States.
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We
face significant competition from other pharmaceutical and medical device companies and our operating results will suffer
if we fail to compete effectively. We also must compete with existing treatments, such as simple curettage and cryotherapy,
which do not involve the use of a drug but have gained significant market acceptance.
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We
depend on a single unaffiliated contract manufacturer to manufacture Ameluz®. If we fail to maintain our relationship
with this manufacturer or if this manufacturer is unable to continue to produce product for us, our business could be materially
harmed.
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If
we fail to manufacture Ameluz®, BF-RhodoLED®, Xepi® or other marketed products and product candidates in sufficient
quantities and at acceptable quality and cost levels, or to fully comply with current good manufacturing practice, or cGMP,
or other applicable manufacturing regulations, we may face a bar to, or delays in, the commercialization of our products,
breach obligations to our licensing partners or be unable to meet market demand, and lose potential revenues.
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The
U.S. market size for Ameluz® for the treatment of actinic keratosis may be smaller than we have estimated.
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Even
if we obtain regulatory approvals for our products and product candidates, or approvals extending their indications, they
may not gain market acceptance among hospitals, physicians, health care payors, patients and others in the medical community.
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If
product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization
of our products.
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Risks
Related to the Clinical Development and Regulatory Approval of Our Products
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Our
business depends substantially on the success of our principal product Ameluz®. If we are unable to successfully commercialize
Ameluz®, to obtain and maintain regulatory approvals or reimbursement for Ameluz® for existing and additional indications
and/or in additional countries, or if we experience significant delays in realizing any of those commercialization or product
development objectives, our business may be materially harmed.
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Clinical
drug development is expensive and involves uncertain outcomes, and results of earlier studies and trials may not be predictive
of future trial results. If one or more future Phase III clinical trials for Ameluz® were unsuccessful, or significantly
delayed, we could be required to abandon development, we may suffer reputational harm and our business will be materially
harmed.
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Risks
Related to Our Dependence on Third Parties
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We
may rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates
and our business could be substantially harmed.
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We
currently license the commercialization rights for some of our products outside of the U.S., Germany, Spain and the UK, which
exposes us to additional risks of conducting business in international markets.
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Risks
Related to Our Intellectual Property
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If
our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we
may not be able to compete effectively in our market.
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Third-party
claims of intellectual property infringement may affect our ability to sell our products and may also prevent or delay our
product discovery and development efforts.
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We
are currently involved in lawsuits to defend or enforce our patents and may become involved in similar suits in the future,
which could be expensive, time-consuming and unsuccessful.
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Risks
Related to the Ownership of Our ADSs
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There
has been varying trading volume for our ordinary shares and the market price of our ADSs could be subject to wide fluctuations.
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We
are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our
ADSs less attractive to investors.
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Actions
of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek
changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.
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As
a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less
information with the SEC than U.S. companies.
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As
we are a “foreign private issuer” that follows, and intends to continue to follow, certain home country corporate
governance practices, holders of our ADSs may not have the same protections afforded to shareholders of companies that are
subject to all The NASDAQ Capital Market corporate governance requirements.
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Your
rights as a shareholder in a German corporation may differ from your rights as a shareholder in a U.S. corporation.
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We
may qualify as a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes which could
result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs.
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U.S.
investors may have difficulty enforcing civil liabilities against our company or members of our supervisory and management
boards and the experts named in this annual report.
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ADS
holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result
in less favorable outcomes to the plaintiffs in an action of that kind.
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Risks
Related to Our Financial Position and Capital Requirements
The
COVID-19 global pandemic has continued to negatively affect our sales and operations and may continue to do so.
Since
the beginning of 2020, COVID-19 has become a global pandemic. As a result of the measures implemented by governments around the
world, Biofrontera’s business operations have been directly affected. In particular, there has been a significant decline
in demand for Biofrontera’s products worldwide as a result of different priorities for medical treatments that emerged during
the COVID-19 pandemic, thereby causing a delay of many dermatological treatments and diagnosis. Revenue from product sales for
the fiscal year ended December 31, 2020 has declined by about 22% when compared to the same period in 2019. As long as the impact
of the COVID-19 pandemic continues, we may experience disruptions that could severely impact our business, operations, sales and
marketing, as well as preclinical studies and clinical trials, including:
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delays, difficulties or postponement in enrolling and retaining patients in our clinical trials;
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decreases in demand for our products as a result of dermatological care becoming less of a priority for patients and medical professionals
during the pendency of the COVID-19 pandemic;
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delays, difficulties or postponement in clinical site initiation, including difficulties in recruiting clinical site investigators
and clinical site staff;
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diversion of healthcare resources away from the conduct of clinical trials unrelated to infectious diseases;
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of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended
by national, state, provincial or local governments, employers and others; and
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limitations in employee resources that would otherwise be focused on the conduct of our sales and marketing activities, research
and development efforts, and preclinical studies and clinical trials, including because of sickness of employees or their families
or the desire of employees to avoid contact with other individuals.
Although
our company has implemented comprehensive cost reductions, emergency plans to maintain central processes and activities to protect
employees, there can be no guarantee that these measures will be able to offset the impact of COVID-19 on business and operations
of Biofrontera in the long term. The future performance of our business as well as the ability to provide forecasts depends on
the timing and speed of recovery from the pandemic. The direct and indirect effects of the pandemic have had a negative impact
on our company’s liquidity position as the pandemic develops as a result of declines or delays in the treatments for which
our products are used, especially in the United States, resulting in a steep decrease in revenue for us. The extent to which the
COVID-19 pandemic will continue to impact our business, research and development efforts, clinical trials, prospects for regulatory
approval for new indications for our products, sales, marketing and other operations will depend on future developments, which
are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration
of the outbreak, the extent and duration of travel restrictions and social distancing in Europe, the United States and other countries,
business closures or business disruptions and the effectiveness of vaccines and other actions taken to contain and treat the disease.
In addition, a recession or market correction resulting from the spread of the COVID-19 pandemic could materially affect our business
prospects and the value of our ordinary shares and ADSs.
We
have a history of operating losses and anticipate that we will continue to incur operating losses in the future and that we may
never sustain profitability.
We
have incurred losses in each year since inception. Our net loss for the fiscal years ended December 31, 2020, December 31, 2019
and December 31, 2018 was €13.0 million, €7.4 million, and €8.9 million, respectively. As of December 31, 2020,
we had an accumulated deficit of €165.7 million.
Our
ability to become profitable depends on our ability to further commercialize our principal product Ameluz®. Even if we are
successful in increasing our product sales, we may never achieve or sustain profitability. In the long term, we anticipate substantially
increasing our sales and marketing expense as we attempt to exploit the regulatory approvals we have received to market Ameluz®
in the United States for the photodynamic therapy treatment of actinic keratoses of mild-to-moderate severity on the face and
scalp and in the EU for the treatment of field cancerization and basal cell carcinoma. There can be no assurance that our sales
and marketing efforts will generate sufficient sales to allow us to become profitable. Moreover, because of the numerous risks
and uncertainties associated with developing and commercializing pharmaceutical products, we are unable to predict the extent
of any future losses or when we will become profitable, if ever. We cannot rule out the possibility that we or our subsidiaries
may engage in additional equity or debt financing in the future, which could dilute the voting rights of shareholders and the
value of their shares. If we or our subsidiaries are unable to achieve profitability over time or to obtain additional equity
or debt financing in such a scenario, this would have a material adverse effect on our or their financial condition.
If
we fail to obtain additional financing, we may be unable to complete the development and commercialization of our products and
product candidates.
Our
operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to pursue
additional indications for which our products and product candidates may be commercialized, to continue the clinical development
of our product candidates, including further Phase III clinical trials, and to defend and/or prosecute lawsuits, including our
patent litigation with DUSA. Going forward, we expect that we will also require significant funds in order to commercialize the
drug Xepi®, the rights to which we acquired in March 2019 through our purchase of Cutanea.
We
believe that existing cash and cash equivalents will be sufficient to fund operations for the next 12 months at least. However,
changing circumstances may cause us and/or our subsidiaries to consume capital significantly faster than currently anticipated,
and we and/or our subsidiaries may need to spend more money than currently expected because of circumstances beyond our control.
Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to:
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the
timing, costs and results of clinical trials for our product Ameluz® or other products or potential products;
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the
outcome, timing and cost of regulatory approvals by the U.S. Food and Drug Administration, or FDA, the European Medicines
Agency, or EMA, and comparable foreign regulatory authorities, including the potential for the FDA, EMA or comparable foreign
regulatory authorities to require that we perform more studies than those that we currently expect;
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the
cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or other litigation;
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the
effects of competing technological and market developments;
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the
cost and timing of completion of commercial-scale manufacturing activities;
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the
cost of establishing sales, marketing and distribution capabilities for Ameluz® photodynamic therapy or other
products or potential products in the U.S. and in such other regions in which we are approved to market them and in which
we choose to commercialize them; and
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the
impact of COVID-19 on our clinical trials, the timing of regulatory approvals, demand for our products, our ability to market
and sell our products and other matters.
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We
cannot be certain that additional funding will be available on acceptable terms, or at all. In addition, the recent outbreak of
the COVID-19 pandemic has significantly disrupted world financial markets, negatively impacted global market conditions and may
reduce opportunities for us to obtain additional funding. If we are unable to raise additional capital in sufficient amounts and
on terms acceptable to us, we may have to significantly delay, scale back or discontinue the commercialization of our products
or development of product candidates. We also could be required to license our rights to our products and product candidates to
third parties on unfavorable terms. In addition, any equity financing would likely result in dilution to our existing holders
of our ordinary shares and ADSs, and any debt financing would likely involve significant cash payment obligations and include
restrictive covenants that may restrict our ability to operate our business.
Any
of the above events could significantly harm our business, prospects, financial condition and/or results of operations and could
cause the price of our ordinary shares or ADSs to decline.
Our
existing and any future indebtedness could adversely affect our ability to operate our business.
In
May 2017, we entered into a finance contract with the European Investment Bank (“EIB”), under which EIB agreed to
provide us with loans of up to €20.0 million in the aggregate. Our finance contract with EIB, which we refer to as the EIB
credit facility, is unsecured, and is guaranteed by certain of our subsidiaries. The drawdown of each tranche required the achievement
of certain milestones, and each tranche must be repaid five years after drawdown. The EIB credit facility contains undertakings
by our company regarding the use of proceeds and limitations on debt, liens, mergers, acquisitions, asset sales, dividends and
other restrictive covenants. As of the date of this annual report, we have borrowed €15.0 million under the EIB credit facility.
On July 7, 2022, we will be required to repay a principal amount of €10.0 million, plus €3.0 million in deferred interest
and an additional amount of performance participation interest determined by reference to the change in our market capitalization
between disbursement and maturity of the loan. On February 4, 2024, we will be required to repay another principal amount of €5.0
million, plus €1.5 million in deferred interest and an additional amount of performance participation interest determined
by reference to the change in our market capitalization between disbursement and maturity of the loan. Under the EIB credit facility,
we are not permitted to incur additional third-party debt in excess of €1.0 million without the prior consent of the EIB
(subject to certain exceptions, such as for ordinary course deferred purchase arrangements and, subject to maximum amounts, various
types of leases).
In
addition to our required payments under the EIB credit facility, the Share Purchase and Transfer Agreement dated March 25, 2019
(as amended, the “Share Purchase and Transfer Agreement”), by and among Biofrontera Newderm LLC, Biofrontera AG, Maruho
Co., Ltd. and Cutanea, pursuant to which we acquired Cutanea from Maruho Co., Ltd., requires us to repay to Maruho Co., Ltd.,
up to $3.6 million on December 31, 2022 and up to $3.7 million on December 31, 2023 in start-up costs that Maruho Co., Ltd. agreed
to pay to us in connection with such acquisition (not to exceed $7.3 million in the aggregate).
In
January 2017, we issued convertible bonds maturing on January 1, 2022 in the aggregate initial principal amount of €5.0 million,
of which €3.0 million has already been converted into our shares. The convertible bonds we issued in January 2017 provide
the holders of those bonds with the right to convert them, at any time, in whole but not in part, into our ordinary shares, at
a conversion price per share equal to €5.00 per share from January 1, 2018 until maturity. In March 2018, the conversion
rate was changed from €5.00 to €4.75 in accordance with section 11 of the bond terms and conditions. In August 2020,
the conversion rate was changed from €4.75 to €4.737 in accordance with section 11 of the bond terms and conditions.
In March 2021 the conversion rate was changed from €4.737 to €4.716 in accordance with section 11 of the bond terms
and conditions. If all of the remaining bonds were converted, we would be required to issue up to 430,619 additional ordinary
shares, which would result in additional dilution to shareholders.
Our
indebtedness could have significant adverse consequences, including:
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requiring
us to dedicate a portion of our cash to the payment of interest and principal, reducing money available for working capital,
capital expenditure, product development and other general corporate purposes;
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increasing
our vulnerability to adverse changes in general economic, industry and market conditions;
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increasing
the risk of dilution to the holders of our ordinary shares or ADSs in the event any of these bonds are exercised for or converted
into our ordinary shares;
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limiting
our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, including changes
arising as a result of the COVID-19 pandemic; and
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placing
us at a competitive disadvantage to competitors that are better capitalized than we are.
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We
may not have sufficient funds and may be unable to arrange for additional financing to pay the amounts due under our existing
debt obligations, in particular the minimum €13 million payment due under the EIB credit facility on July 7, 2022 and the
minimum €6.5 million payment due under the EIB credit facility on February 4, 2024 as well as the repayments of start-up
costs to Maruho Co., Ltd. of up to $3.6 million on December 31, 2022 and up to $3.7 million on December 31, 2023, which start-up
costs (not to exceed $7.3 million in the aggregate) Maruho Co., Ltd. agreed to provide to us under the terms of the Share Purchase
and Transfer Agreement pursuant to which we acquired Cutanea, and which must be repaid if certain profits from the sale of Cutanea
products we agreed to share with Maruho are less than the amount of such start-up costs. Failure to make payments or comply with
other covenants under our existing debt could result in an event of default and acceleration of amounts due. If an event of default
occurs and the lender or lenders accelerate the amounts due, we may not be able to make accelerated payments, and such lenders
could file suit against us to collect the amounts due under such obligations or pursue other remedies. In addition, the covenants
under our existing debt obligations could limit our ability to obtain additional debt financing. If we are unable to satisfy our
existing debt obligations it could have material adverse effect on our business, prospects, financial condition and/or results
of operations.
Risks
Related to Our Business and Strategy
Certain
of our important patents expired in 2019. Although the process of developing generic topical dermatological products presents
specific challenges that may deter potential generic competitors, generic versions of Ameluz® may enter the market following
the recent expiration of these patents. If this happens, we may need to reduce the price of Ameluz® significantly and may
lose significant market share.
One
patent family that protected our technology relating to nanoemulsion of 5-aminolevulinic acid, the active ingredient in Ameluz®,
against copying by competitors expired on November 12, 2019. This patent family included U.S. Patent No. 6,559,183, which, prior
to its expiration, served as a material, significant and possibly the only barrier to entry into the U.S. market by generic versions
of Ameluz®. Although the process of developing generic topical dermatological products presents specific challenges that may
deter potential generic competitors, Patent No. 6,559,183 no longer prevents generic versions of Ameluz® from entering the
U.S. market and competing with Ameluz®. If generic competitors do enter the market, this may cause a significant drop in the
price of Ameluz® and, therefore, a significant drop in our profits. We may also lose significant U.S. market share for Ameluz®.
We
hold another patent family protecting our technology relating to nanoemulsions for which we have been issued patents in various
jurisdictions and which expires in December 2027. A corresponding U.S. patent application has been filed but is still pending.
We cannot guarantee that this U.S. patent will be issued or, if issued, will adequately protect us against copying by competitors.
The
UK’s withdrawal from the EU could result in increased regulatory and legal complexity, which may make it more difficult
for us to do business in the EU and the rest of Europe and impose additional challenges in securing regulatory approval of our
product candidates in the EU and the rest of Europe.
On
June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the EU, commonly referred to as Brexit. On January
30, 2020, the UK formally withdrew from the EU. Following the UK’s formal withdrawal from the EU, the UK is expected to
continue to follow all of the EU’s rules and its trading relationship with the EU will remain the same during a transition
period which expired on December 31, 2020. Several aspects of the UK and EU relationship will need to be determined during the
transition period, including free trade agreements and rules and regulations affecting the biotechnology or pharmaceutical industries.
Brexit
may lead to legal uncertainty and potentially divergent laws and regulations between the UK and the EU, as the UK determines which
EU laws to replicate or replace and this uncertainty may persist for years. We cannot predict whether or not the UK will significantly
alter its current laws and regulations in respect of the pharmaceutical industry and, if so, what impact any such alteration would
have on us or our business. Moreover, we cannot predict the impact that Brexit will have on (i) the marketing of pharmaceutical
products, (ii) the process to obtain regulatory approval in the UK for product candidates or (iii) the award of exclusivities
that are normally part of the EU legal framework.
Brexit
may also result in a reduction of funding to the EMA if the UK no longer makes financial contributions to European institutions,
such as the EMA. If UK funding is so reduced, it could create delays in the EMA issuing regulatory approvals for our products
and product candidates and, accordingly, have a material adverse effect on our business, financial position, results of operations
and future growth prospects.
Uncertainty
about the final outcome of the negotiations between the UK and the EU could have an adverse effect on our business and financial
results. The long-term effects of Brexit will depend on the terms negotiated between the UK and the EU, which may take years to
complete and may include, among other things, greater restrictions on imports and exports between the UK and EU countries, a fluctuation
in currency exchange rates and additional regulatory complexity. Our operations in the UK and Europe, as well as our North American
operations, could be impacted by the global economic uncertainty caused by Brexit and the actual withdrawal by the UK from the
EU. If we are unable to manage any of these risks effectively, our business could be adversely affected.
Insurance
coverage and medical expense reimbursement may be limited or unavailable in certain market segments for our products or product
candidates, which could make it difficult for us to sell our products.
Government
authorities and third-party payors, such as private health insurers and health maintenance organizations or, in some jurisdictions
such as Germany, statutory health insurance, decide which products they will cover and the amount of reimbursement. Reimbursement
by a third-party payor may depend upon a number of factors, including the government or third-party payor’s determination
that use of a product is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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reasonable and appropriate for the specific patient;
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cost-effective; and
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neither experimental nor investigational.
Obtaining
coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly
process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use
of our products. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement or
a particular reimbursement amount. If reimbursement of our future products or extended indications for existing products is unavailable
or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
The
pricing of prescription pharmaceuticals is subject to governmental control in some of the countries in which we have received
and/or seek to receive approval to commercialize certain of our products. We are approved to market certain of our products in
the EU and the U.S., and we intend to seek approval to market our product candidates in selected other jurisdictions. If we obtain
approval in one or more foreign jurisdictions for our product candidates, we will be subject to rules and regulations in those
jurisdictions. In some countries, particularly those in the EU, the pricing of prescription pharmaceuticals is subject to governmental
control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing
approval for a product candidate. In addition, market acceptance and sales of our product candidates will depend significantly
on the availability of adequate coverage and reimbursement from government or other third-party payors for our product candidates
and may be affected by existing and future health care reform measures. Without adequate levels of reimbursement by government
health care programs and private health insurers, the market for our products will be limited. While we continue to support efforts
to improve reimbursement levels to physicians and plan to work to improve coverage for our products, if our efforts are not successful,
a broader adoption of our products and sales of our products could be negatively impacted.
Healthcare
legislative changes may have a material adverse effect on our business and results of operations.
In
the U.S. and certain other countries, there have been a number of legislative and regulatory changes to the health care system
that could impact our ability to sell our products profitably. In particular, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 revised the payment methodology for many products under Medicare in the U.S., which has resulted in
lower rates of reimbursement. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, or collectively, the Affordable Care Act, or ACA, was enacted. On January 20, 2017, President Donald
Trump signed an executive order stating that the administration intended to seek prompt repeal of the ACA, and, pending repeal,
directed by the U.S. Department of Health and Human Services and other executive departments and agencies to take all steps necessary
to limit any fiscal or regulatory burdens of the ACA. On January 28th, 2021 President Joseph R. Biden, Jr. signed the Executive
Order on Strengthening Medicaid and the Affordable Care Act stating his administration’s intentions to reverse the actions
of his predecessor and strengthen the ACA. As part of this Executive Order, the Department of Health and Human Services, United
States Treasury, and the Department of Labor are to review all existing regulations, orders, guidance documents, policies, and
agency actions to consider if they are consistent with ensuring both coverage under the ACA and if they make high-quality healthcare
affordable and accessible to Americans. At this time we are unsure what effect the new administration’s policies or this
executive order will have. There is significant uncertainty about the future of the Affordable Care Act in particular and healthcare
laws generally in the United States. The continued expansion of the government’s role in the U.S. healthcare industry may
further lower rates of reimbursement for pharmaceutical products. We are unable to predict the likelihood of changes to the Affordable
Care Act or other healthcare laws which may negatively impact our profitability.
President
Biden intends, as his predecessor did, to take action against drug prices which are considered “high.” The most likely
time to address this would be in the reauthorization of the Prescription Drug User Fee Act (PDUFA) 2022 as part of a package bill.
Drug pricing continues to be a subject of debate at the executive and legislative levels of U.S. government and we expect to see
legislation focusing on this in the coming year. The American Rescue Plan Act of 2021 signed into law by President Biden on March
14, 2021 includes a provision that will eliminate the statutory cap on rebates drug manufacturers pay to Medicaid beginning in
January 2024. With the elimination of the cap, manufacturers may be required to compensate states in an amount greater than what
the state Medicaid programs pay for the drug.
The
Affordable Care Act is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare
spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and the health insurance
industry, impose new taxes and fees on the healthcare industry and impose additional health policy reforms. This law revises the
definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug
rebates to states once the provision is effective. Further, the law imposes a significant annual fee on companies that manufacture
or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may
require us to modify our business practices with healthcare practitioners.
Some
of the provisions of the Affordable Care Act have yet to be fully implemented, while certain provisions have been subject to judicial
and Congressional challenges. Thus, the full impact of the Affordable Care Act, any law replacing elements of it, or the political
uncertainty surrounding its repeal or replacement on our business remains unclear. Such developments may materially adversely
affect the prices we are able to receive for our products or otherwise materially adversely affect our ability to profitably commercialize
our products in the United States.
Other
legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. On August 2,
2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select
Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years
2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several
government programs. This includes aggregate reductions of Medicare payments to providers up to 2 % per fiscal year. The American
Taxpayer Relief Act of 2012, or the ATRA, among other things, reduced Medicare payments to several providers, including hospitals,
imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments
to providers from 3 to 5 years. The current U.S. administration continues to focus heavily on drug pricing issues and Congress
has introduced a multitude of legislative proposals aimed at drug pricing. For example, the Prescription Drug Pricing Reduction
Act of 2019 proposes to, among other things, penalize pharmaceutical manufacturers for raising prices on drugs covered by Medicare
Parts B and D faster than the rate of inflation, cap out-of-pocket expenses for Medicare Part D beneficiaries, and proposes a
number of changes to how drugs are reimbursed in Medicare Part B. A similar drug pricing bill, the Elijah E. Cummings Lower Drug
Costs Now Act proposes to enable direct price negotiations by the federal government on certain drugs (with the maximum price
paid by Medicare capped based on an international index), requires manufacturers to offer these negotiated prices to other payers,
and restricts manufacturers from raising prices on drugs covered by Medicare Parts B and D. In May 2019, CMS issued a final rule
requiring drug manufacturers to include certain drug price information in television advertisements for products that are covered
by Medicare and Medicaid. The final rule was struck down by a federal district court in July 2019. The ruling is being appealed
and there is no assurance as to whether we will be required to comply with the price transparency requirements. We cannot predict
whether any proposed legislation will become law and the effect of these possible changes on our business cannot be predicted
at this time.
In
addition to legislative proposals, Congressional Committees have requested certain manufacturers provide specific documents and
detailed information regarding drug pricing practices. If we become the subject of any government investigation with respect to
our drug pricing, marketing, or other business practices, we could incur significant expense and could be distracted from operation
of our business and execution of our strategy. Any such investigation could also result in reduced market acceptance and demand
for our products, could harm our reputation and our ability to market our products in the future, and could have a material adverse
effect on our business, financial condition, results of operations and growth prospects. At the state level, there are similar
new laws and ongoing ballot initiatives that create additional pressure on our drug pricing and may also affect how our products
are covered and reimbursed. A number of states have adopted or are considering various pricing actions, such as those requiring
pharmaceutical manufacturers to publicly report proprietary pricing information, limit price increases or to place a maximum price
ceiling or cap on certain products. Existing and proposed state pricing laws have added complexity to the pricing of drugs and
may already be impacting industry pricing decisions.
We
expect continued significant focus on health care and drug pricing legislation. There have been, and likely will continue to be,
legislative and regulatory proposals at the U.S. federal and state levels directed at broadening the availability of healthcare
and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. Additionally,
third party payors, including governmental payors, managed care organizations and private health insurers, are increasingly challenging
the prices charged for medical products and services and examining their cost effectiveness. The continuing efforts of governments,
insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare
and/or impose price controls may adversely affect:
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the
demand for products, or for our product candidates, if we obtain regulatory approvals for them;
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our
ability to set a price or obtain reimbursement that we believe is fair for our products;
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our
ability to generate revenues and achieve or maintain profitability; and
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the
level of taxes that we are required to pay.
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Any
denial or reduction in reimbursement from Medicare or other programs or governments may result in a similar denial or reduction
in payments from private payors, which may adversely affect our future profitability.
We
are subject to governmental regulation and other legal obligations in the EU and European Economic Area, or EEA, related to privacy,
data protection and data security. Our actual or perceived failure to comply with such obligations could harm our business.
We
are subject to diverse laws and regulations relating to data privacy and security in the EU and eventually in the EEA, including
Regulation 2016/679, known as the GDPR. The GDPR applies extraterritorially and implements stringent operational requirements
for controllers and processors of personal data. New global privacy rules are being enacted and existing ones are being updated
and strengthened. We are likely to be required to expend capital and other resources to ensure ongoing compliance with these laws
and regulations.
Complying
with these numerous, complex and often changing regulations is expensive and difficult. Failure by us, any partners, our service
providers, or our employees or contractors to comply with the GDPR could result in regulatory investigations, enforcement notices
and/or fines of up to the higher of €20 million or up to 4% of our total worldwide annual revenue. In addition to the foregoing,
a breach of privacy laws or data security laws, particularly those resulting in a significant security incident or breach involving
the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information,
could have a material adverse effect on our business, reputation and financial condition.
As
a data controller, we are accountable for any third-party service providers we engage to process personal data on our behalf,
including our clinical research organizations, or CROs. We attempt to mitigate the associated risks by performing security
assessments and due diligence of our vendors and requiring all such third-party providers with data access to sign agreements
and obligating them to only process data according to our instructions and to take sufficient security measures to protect
such data. There is no assurance that these contractual measures and our own privacy and security-related safeguards will
protect us from the risks associated with the third-party processing, storage and transmission of such information. Any
violation of data or security laws by our third-party processors could have a material adverse effect on our business and
result in the fines and penalties outlined above.
Where
we transfer personal data out of the EU and EEA, we do so in compliance with the relevant data export requirements from time to
time. There is currently ongoing litigation challenging the commonly used transfer mechanism, the EU Commission approved model
clauses. On July 16, 2020, the Court of Justice of the European Union, or CJEU, issued a judgment which annulled, without granting
a grace or transition period, the European Commission’s Decision (EU) 2016/1250 of July 12, 2016 on the adequacy of the
protection provided by the U.S. Privacy Shield (a mechanism for complying with data protection requirements when transferring
personal data from the EU to the United States). Accordingly, such framework is not a valid mechanism to comply with EU data protection
requirements when transferring personal data from the European Union to the United States. To the extent that we were to rely
on the EU-U.S. Privacy Shield Framework, we will not be able to do so in the future, which could increase our costs and limit
our ability to process personal data from the EU. The same decision also cast doubt on the viability of one of the primary alternatives
to the U.S. Privacy Shield, namely, the European Commission’s Standard Contractual Clauses, as a vehicle for such transfers
in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account
the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and
additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures
is currently uncertain. The CJEU went on to state that if a competent supervisory authority believes that the Standard Contractual
Clauses cannot be complied with in the destination country and the required level of protection cannot be secured by other means,
such supervisory authority is under an obligation to suspend or prohibit that transfer. At present, there are few, if any, viable
alternatives to the Standard Contractual Clauses, and the law in this area remains dynamic. These recent developments may require
us to find alternative bases for the compliant transfer of personal data outside the EEA and we are monitoring developments in
this area.
We
are also subject to evolving European privacy laws on cookies and on e-marketing. The EU is in the process of replacing the e-Privacy
Directive (2002/58/EC) with a new set of rules taking the form of a regulation, which will be directly implemented in the laws
of each European member state. The draft e-Privacy Regulation imposes strict opt-in marketing rules with limited exceptions for
business-to-business communications, alters rules on third-party cookies, web beacons and similar technology and significantly
increases fining powers to the greater of €20 million or 4% of total worldwide annual revenue. While the e-Privacy Regulation
was originally intended to be adopted on May 25, 2018 (alongside the GDPR), it is still going through the European legislative
process.
We
process personal data in relation to participants in our clinical trials in the EEA, including the health and medical information
of these participants. The GDPR is directly applicable in each EU Member State, however, it provides that EU Member States may
introduce further conditions, including limitations which could limit our ability to collect, use and share personal data (including
health and medical information), or could cause our compliance costs to increase, ultimately having an adverse impact on our business.
The GDPR imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data
processing and implement policies as part of its mandated privacy governance framework. It also requires data controllers to be
transparent and disclose to data subjects (in a concise, intelligible and easily accessible form) how their personal information
is to be used, imposes limitations on retention of personal data; defines for the first time pseudonymized (i.e., key-coded)
data; introduces mandatory data breach notification requirements; and sets higher standards for data controllers to demonstrate
that they have obtained valid consent for certain data processing activities. In addition to the foregoing, a breach of the GDPR
could result in regulatory investigations, reputational damage, orders to cease/change our use of data, enforcement notices, as
well potential civil claims including class action type litigation where individuals suffer harm.
California
recently enacted the California Consumer Privacy Act, or CCPA, which will, among other things, require new disclosures to California
consumers and afford such consumers new abilities to opt out of certain sales of personal information, which went into effect
on January 1, 2020. This Act also applies to any information of certain patients that a drug company may possess. It remains unclear
what, if any, modifications will be made to this legislation or how it will be interpreted in the years to come. The effects of
the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to
incur substantial costs and expenses in an effort to comply. As a general matter, compliance with laws, regulations, and any applicable
rules or guidance from self-regulatory organizations relating to privacy, data protection, information security and consumer protection,
may result in substantial costs and may necessitate changes to our business practices, which may compromise our growth strategy,
adversely affect our ability to acquire customers, and otherwise adversely affect our business, financial condition and operating
results. Noncompliance with the CCPA could result in regulatory investigations, reputational damage, orders to cease/change our
use of data, enforcement notices, as well potential civil claims including class action type litigation where individuals suffer
harm.
To
date, we have a relatively short history of sales of our products, primarily in Germany, Spain and the United States.
We
have a relatively short history of sales of our products to date. Since 2012, our sales in Germany have been generated in dermatology
offices through our own sales force. Historically, our sales partners in European countries outside of Germany have experienced
difficulty in selling Ameluz® because that process involves selling a drug combined with a procedure, an area in which our
sales partners generally have little experience. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic
keratosis in the United States in October 2016 and have a limited history of marketing our products there. In addition, we began
marketing the drug Xepi® in the United States following our acquisition of Cutanea in March 2019 and have a limited history
of marketing Xepi® there. While our products have gained increasing acceptance in the markets we serve, our products may never
generate substantial revenue or profits for us. We must establish a larger market for our products and build that market through
marketing campaigns to increase awareness of, and confidence by doctors in, our products. We expect this may be even more challenging
in the near term as a result of current measures and regulations implemented by governments worldwide in an attempt to control
the COVID-19 pandemic, which we predict may in the foreseeable future continue to lead to declining demand in some of the markets
for our products as different priorities for medical treatments emerge, thereby causing a delay of actinic keratosis treatment
for patients in those markets. If we are unable to expand our current customer base and obtain market acceptance of our products,
our operations could be disrupted and our business may be materially adversely affected. Even if we achieve profitability, we
may not be able to sustain or increase profitability.
Competing
products and technologies based on traditional treatment methods may make our products or potential products noncompetitive or
obsolete.
Well-known
pharmaceutical, biotechnology and medical device companies are marketing well-established therapies for the treatment of actinic
keratosis and basal cell carcinoma. Doctors may prefer to use other therapies, rather than trying our products.
Additionally,
reimbursement issues affect the economic competitiveness of our products as compared to other therapies. See “—Insurance
coverage and medical expense reimbursement may be limited or unavailable in certain market segments for our products or product
candidates, which could make it difficult for us to sell our products.”
Our
industry is subject to rapid, unpredictable and significant technological change and intense competition. Our competitors may
succeed in developing, acquiring, or licensing on an exclusive basis products that are safer, more effective or more desirable
than ours. Many of our competitors have substantially greater financial, technical and marketing resources than we have. In addition,
several of these companies have significantly greater experience than we do in developing products, conducting preclinical and
clinical testing, obtaining regulatory approvals to market products for health care, and marketing healthcare products.
Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our
competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater
availability of capital for investment in these industries.
We
cannot guarantee that new drugs or future developments in drug technologies will not have a material adverse effect on our business.
Increased competition could result in price reductions, lower levels of government or other third-party reimbursements, failure
to achieve market acceptance and loss of market share, any of which could adversely affect our business, results of operations
and financial condition. Further, we cannot give any assurance that developments by our competitors or future competitors will
not render our technologies obsolete or less advantageous.
We
face significant competition from other pharmaceutical and medical device companies and our operating results will suffer if we
fail to compete effectively. We also must compete with existing treatments, such as simple curettage and cryotherapy, which do
not involve the use of a drug but have gained significant market acceptance.
The
pharmaceutical and medical device industry is characterized by intense competition and rapid innovation. Our competitors may be
able to develop other products that are able to achieve similar or better results for the treatment of actinic keratosis. We expect
that our future competitors will include mostly established pharmaceutical companies, such as Sun Pharma (DUSA) and Galderma.
Most of our competitors have substantially greater financial, technical and other resources, such as larger research and development
staffs and experienced marketing and manufacturing organizations and well-established sales forces. Competition may increase further
as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in
these industries.
Our
competitors may succeed in developing, acquiring or licensing products that are more effective or less costly than our products
and product candidates. In addition, our products compete with other therapies, such as simple curettage and, particularly in
the United States, cryotherapy, which do not involve the use of a drug but have gained significant market acceptance.
If
we are not able to compete effectively with the competitors and competing therapies, we may lose significant market share in the
relevant markets, which could have a material adverse effect on our revenue, results of operations and financial condition.
If
we are unable to establish effective marketing and sales capabilities or enter into agreements with third parties to market and
sell our products, we may be unable to generate revenues.
In
order to commercialize our products, we must further build our marketing, sales and distribution capabilities, in particular in
the U.S. The establishment, development and training of our sales force and related compliance plans to market our products are
expensive and time consuming and can potentially delay the commercial success of our products. In the event we are not successful
in developing our marketing and sales infrastructure, we may not be able to successfully commercialize our products, which would
limit our ability to generate product revenues.
We
depend on a single unaffiliated contract manufacturer to manufacture Ameluz®. If we fail to maintain our relationship with
this manufacturer or if this manufacturer is unable to continue to produce product for us, our business could be materially harmed.
We
depend on a single unaffiliated contract manufacturer located in Switzerland to manufacture Ameluz®. If we fail to maintain
the relationship with this manufacturer, we may be unable to obtain an alternative manufacturer of Ameluz® that could deliver
the quantity of the product at the quality and cost levels that we require. Even if an acceptable alternative manufacturer could
be found, we would expect long delays in transitioning the manufacturing from the existing manufacturer to a new manufacturer.
Problems of this kind could cause us to experience order cancellations and loss of market share. The failure of the manufacturer
to supply Ameluz® that satisfies quality, quantity and cost requirements in a timely manner could impair our ability to deliver
Ameluz® and could increase costs, particularly if we are unable to obtain Ameluz® from alternative sources on a timely
basis or on commercially reasonable terms. In addition, the manufacturer is regulated by the country of Switzerland and by the
FDA and must comply with applicable laws and regulations. Finding a suitable replacement of this particular partner would therefore
be extremely difficult. If we lost our relationship with this manufacturer, this could have a material adverse effect on our business,
prospects, financial condition and/or results of operations. If the suppliers fail to comply, this could harm our business.
If
we fail to manufacture Ameluz®, BF-RhodoLED®, Xepi® or other marketed products and
product candidates in sufficient quantities and at acceptable quality and cost levels, or to fully comply with current good manufacturing
practice, or cGMP, or other applicable manufacturing regulations, we may face a bar to, or delays in, the commercialization of
our products, breach obligations to our licensing partners or be unable to meet market demand, and lose potential revenues.
The
manufacture of our products requires significant expertise and capital investment. Currently, all commercial supply for Ameluz®
is manufactured by a single unaffiliated contract manufacturer. We would need to spend substantial time and expense to replace
that manufacturer if it failed to deliver products in the quality and quantities we demand or failed to meet any regulatory or
cGMP requirements. We take precautions to help safeguard the manufacturing facilities, including acquiring insurance and performing
on site audits. However, vandalism, terrorism or a natural or other disaster, such as a fire or flood, could damage or destroy
manufacturing equipment or our inventory of raw material or finished goods, cause substantial delays in our operations, result
in the loss of key information, and cause us to incur additional expenses. Our insurance may not cover our losses in any particular
case. In addition, regardless of the level of insurance coverage, damage to our facilities may have a material adverse effect
on our business, financial condition and operating results.
We
must comply with federal, state and foreign regulations, including FDA regulations governing cGMP enforced by the FDA through
its facilities inspection program and by similar regulatory authorities in other jurisdictions where we do business. These requirements
include, among other things, quality control, quality assurance and the maintenance of records and documentation. For our medical
device products, we are required to comply with the FDA’s Quality System Regulation, or QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and
shipping of our medical device products.
Our
contract facilities have been inspected by the FDA for cGMP compliance. If we do not successfully maintain cGMP compliance for
these facilities, commercialization of our products could be prohibited or significantly delayed. Even after cGMP compliance has
been achieved, the FDA or similar foreign regulatory authorities at any time may implement new standards or change their interpretation
and enforcement of existing standards for manufacture, packaging, testing of or other activities related to our products. For
our commercialized medical device product, the FDA audits compliance with the QSR through periodic announced and unannounced inspections
of manufacturing and other facilities. The FDA may conduct inspections or audits at any time. Similar audit rights exist in Europe
and other foreign jurisdictions. Any failure to comply with applicable cGMP, QSR and other regulations may result in fines and
civil penalties, suspension of production, product seizure or recall, imposition of a consent decree, or withdrawal of product
approval, and would limit the availability of our product. Any manufacturing defect or error discovered after products have been
produced and distributed also could result in significant consequences, including adverse health consequences, injury or death
to patients, costly recall procedures, re-stocking costs, warning letters, Form 483 reports, civil monetary penalties, product
liability, damage to our reputation and potential for product liability claims. If we are required to find a new manufacturer
or supplier, the process would likely require prior FDA and/or equivalent foreign regulatory authority approval and would be very
time consuming. An inability to continue manufacturing adequate supplies of our products at any contract facilities could result
in a disruption in the supply of our products. Delay or disruption in our ability to meet demand may result in the loss of potential
revenue. We have licensed the commercial rights in specified foreign territories to market and sell our products. Under those
licenses, we have obligations to manufacture commercial product for our commercial partners. If we are unable to fill the orders
placed with us by our commercial partners in a timely manner, we may potentially lose revenue and be in breach of our licensing
obligations under agreements with them.
In
addition, we are subject to regulations in various jurisdictions, including the Federal Drug Supply Chain Security Act in the
U.S., the Falsified Medicines Directive in the EU and many other such regulations in other countries that require us to develop
electronic systems to serialize, track, trace and authenticate units of our products through the supply chain and distribution
system. Compliance with these regulations may result in increased expenses for us or impose greater administrative burdens on
our organization, and failure to meet these requirements could result in fines or other penalties.
Failure
to comply with all applicable regulatory requirements may subject us to operating restrictions and criminal prosecution, monetary
penalties and other disciplinary actions, including, sanctions, warning letters, product seizures, recalls, fines, injunctions,
suspension, shutdown of production, revocation of approvals or the inability to obtain future approvals, or exclusion from future
participation in government healthcare programs. Any of these events could disrupt our business and have a material adverse effect
on our revenue, profitability and financial condition.
The
U.S. market size for Ameluz® for the treatment of actinic keratosis may be smaller than we have estimated.
The
public data regarding the market for actinic keratosis treatments in the United States may be incomplete. Therefore some of our
estimates and judgments are based on various sources which we have not independently verified and which potentially include outdated
information, or information that may not be precise or correct, potentially rendering the U.S. market size for treatment of actinic
keratosis with Ameluz® smaller than we have estimated, which may reduce our potential and ability to increase sales of Ameluz®
and revenue in the United States. Although we have not independently verified the data obtained from these sources, we believe
that such data provide the best available information relating to the present market for actinic keratosis treatments in the United
States, and we often use such data for our business and planning purposes.
If
we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues and liquidity may suffer,
and our products could be subject to restrictions or withdrawal from the market.
Any
government investigation of alleged violations of the law could require us to expend significant time and resources in response
and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely
affect our ability to commercialize and generate revenues from our products. If regulatory sanctions are applied or if regulatory
approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are
unable to generate revenues from our product sales, our potential for achieving profitability will be diminished and the capital
necessary to fund our operations will be increased.
Even
if we obtain regulatory approvals for our products and product candidates, or approvals extending their indications, they may
not gain market acceptance among hospitals, physicians, health care payors, patients and others in the medical community.
In
May 2016, we received approval from the FDA to market in the United States Ameluz® in combination with photodynamic
therapy using our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate
severity on the face and scalp. We launched the commercialization of Ameluz® and BF-RhodoLED® for
actinic keratosis in the United States in October 2016. In addition, our in-licensed Xepi® received approval from the FDA
in 2017 and was first launched in the U.S. market in late 2018 and may not gain market acceptance over time. Even after obtaining
regulatory approval for our products or product candidates, or extending their indications, our products may not gain market acceptance
among hospitals, physicians, health care payors, patients and others in the medical community. Market acceptance of any of our
products and product candidates for which we receive approval depends on a number of factors, including:
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the
clinical indications for which they are approved, including any restrictions placed upon the product in connection with its
approval, such as patient registry or labeling restriction;
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the
product labeling, including warnings, precautions, side effects, and contraindications that the FDA or other regulatory authorities
approve;
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the
potential and perceived advantages of our product candidates over alternative products or therapies;
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relative
convenience and ease of administration;
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the
effectiveness and compliance of our sales and marketing efforts;
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acceptance
by major operators of hospitals, physicians and patients of our products or candidates as a safe and effective treatment;
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the
prevalence and severity of any side effects;
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product
labeling or product insert requirements of the FDA or other regulatory authorities;
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any
Risk Evaluation and Mitigation Strategy that the FDA might require for our drug product candidates;
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the
timing of market introduction of our products and product candidates as well as competitive products;
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perceived advantages of our products over alternative treatments;
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the
cost of treatment in relation to alternative products; and
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the
availability of adequate reimbursement and pricing by third party payors and government authorities, including any conditions
for reimbursement required by such third-party payors and government authorities.
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If
our products and product candidates are approved and/or receive label extensions, but fail to achieve market acceptance among
physicians, patients, payors, or others in the medical community, we will not be able to generate significant revenues, which
would have a material adverse effect on our business, prospects, financial condition and results of operations.
With
respect to our already approved products, we may be subject to healthcare laws, regulation and enforcement. Our failure to comply
with those laws could have a material adverse effect on our results of operations and financial condition.
We
may be subject to additional healthcare regulation and enforcement by the U.S. federal government and by authorities in the U.S.,
the EU and other jurisdictions in which we conduct our business. In certain jurisdictions outside of the U.S. where we currently
commercialize certain of our products, we are already subject to such regulation and enforcement. Such U.S. laws include, without
limitation, state and federal anti-kickback, federal false claims, privacy, security, financial disclosure laws, anti-trust, Physician
Payment Sunshine Act reporting and fair trade regulation and advertising laws and regulations. Many states and other jurisdictions
have similar laws and regulations, some of which are broader in scope. If our operations are found to be in violation of any of
such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, but not limited to,
civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation
in federal, state or other healthcare programs and imprisonment, any of which could adversely affect our ability to operate our
business and our financial results.
Increased
Health and Human Services, Office of Inspector General, or OIG, scrutiny on the sale of products through specialty pharmacies
or through physician practices by means of direct investigation or by issuance of unfavorable Opinion Letters may curtail or hinder
the sales of our licensed products based on risk of enforcement upon ourselves or our buyers. The OIG continues to make modifications
to existing Anti-Kickback Statute, or AKS, safe harbors which may increase liability and risk for our company as well as adversely
impact sales relationships. On November 20, 2020 OIG issued the final rule for Safe Harbors under the Federal AKS. This new final
rule creates additional safe harbors including ones pertaining to patient incentives. OIG is able to modify safe harbors as well
as regulatory compliance requirements which could impact our business adversely.
The
majority of states also have statutes or regulations similar to these federal laws, which apply to items and services reimbursed
under Medicaid and other state programs, or, in several states, apply regardless of the payer. In addition, some states have laws
that require pharmaceutical companies to adopt comprehensive compliance programs. Certain states also mandate the tracking and
require reporting of gifts, compensation, and other remuneration paid by us to physicians and other health care providers.
In
September 2010, OIG issued a Special Advisory Bulletin to notify drug manufacturers that OIG intended to pursue enforcement actions
against drug manufacturers that failed to submit timely AMP and ASP information. The Medicaid Drug Rebate Program requires manufacturers
to enter into and have in effect a national rebate agreement with the Secretary of Health and Human Services in order for Medicaid
payments to be available for the manufacturer’s covered outpatient drugs. Companies with such rebate agreements are required
to submit certain drug pricing information to CMS, including quarterly and monthly pricing data. There has been an increased level
of federal enforcement against drug manufacturers that have failed to provide timely and accurate pricing information to the government.
Since September 2010, OIG has settled 13 cases against drug manufacturers relating to drug price reporting issues, totaling approximately
$18.5 million. We expect continued enforcement directed at companies that fail to make accurate and timely price reports. If we
were found to not make the required pricing disclosures, we could incur significant expense and delay.
A
recall of our drug or medical device products, or the discovery of serious safety issues with our drug or medical device products,
could have a significant negative impact on us.
The
FDA, the EMA and other relevant regulatory agencies have the authority to require or request the recall of commercialized products
in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable
risk to health. Manufacturers may, under their own initiative, recall a product. A government-mandated or voluntary recall by
us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors,
design or labeling defects or other deficiencies and issues. Recalls of our products would divert managerial and financial resources
and have an adverse effect on our reputation, financial condition and operating results, which could impair our ability to produce
our products in a cost-effective and timely manner.
Further,
under the FDA’s medical device reporting, or MDR, regulations, we are required to report to the FDA any event which reasonably
suggests that our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and,
if the malfunction of the same or similar device marketed by us were to recur, would likely cause or contribute to death or serious
injury. The FDA also requires reporting of serious, life-threatening, unexpected and other adverse drug experiences and the submission
of periodic safety reports and other information. Product malfunctions or other adverse event reports may result in a voluntary
or involuntary product recall and other adverse actions, which could divert managerial and financial resources, impair our ability
to manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition
and operating results. Similar reporting requirements exist in Europe and other jurisdictions.
Any
adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications,
or regulatory agency action, which could include inspection, mandatory recall or other enforcement action. Any corrective action,
whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our
business and may harm our reputation and financial results as well as threaten our marketing authority for such products.
Our
medical device product, the BF-RhodoLED® lamp, is subject to extensive governmental regulation, and failure to
comply with applicable requirements could cause our business to suffer.
The
medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state and
European and other foreign governmental agencies. The regulations are very complex and are subject to rapid change and varying
interpretations. Regulatory restrictions or changes could limit our ability to carry on or expand our operations or result in
higher than anticipated costs or lower than anticipated sales. The FDA and other U.S. or European or other foreign governmental
agencies regulate numerous elements of our business, including:
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product
design and development;
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pre-clinical
and clinical testing and trials;
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product
safety;
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establishment
registration and product listing;
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distribution;
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labeling,
manufacturing and storage;
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pre-market
clearance or approval;
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advertising
and promotion;
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marketing,
manufacturing, sales and distribution;
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relationships
and communications with health care providers;
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adverse
event reporting;
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market
exclusivity;
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servicing
and post-market surveillance; and
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recalls
and field safety corrective actions.
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Before
we can offer our device products to any of the nations within the EU and the European Free Trade Association, we must first satisfy
the requirements for CE Mark clearance, a conformity mark that signifies a product has met all criteria of the relevant EU directives,
especially in the areas of safety and performance. The process of obtaining regulatory clearances or approvals to market a medical
device can be costly and time-consuming, and we may not be able to obtain these clearances or approvals on a timely basis, or
at all for our products or proposed products. We obtained CE Mark clearance for our BF-RhodoLED® lamp in November
2012 and FDA approval for it, to be used in connection with Ameluz® gel, in May 2016.
Biofrontera
is also working to develop a new lamp, the “RhodoLED® XL,” which would allow use of Ameluz® on
larger surfaces. Management believes that this new lamp, if it is developed and approved, could provide new business growth opportunities
for our company. In the United States, according to FDA guidance, products for PDT, such as Ameluz® gel and its
corresponding lamp(s), must be approved as combination products that cover both the drug and the lamp. In May 2016, we received
approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using our BF-RhodoLED®
lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and
scalp. The applicable office of the FDA has determined that if we develop a new lamp to be used with Ameluz®, we
must seek a new approval utilizing the “New Drug Application” procedure. As part of a drug/device combination, the
lamp is by definition classified as a class III medical device and as such requires a premarket approval (PMA) by the FDA. A new
lamp will also require changes in the “Prescribing Information” of the drug. Our PMA application for the RhodoLED®
XL lamp, in combination with Ameluz® for the treatment of mild and moderate actinic keratosis on the face scalp, was submitted
to the FDA in March 2021 as part of this approval process. The approval process may take more than six months, plus, if needed,
time required to answer questions or provide additional data. During the process, there is a risk that the FDA might ask for additional
tests or even clinical trials, and there is no assurance that we will be able to satisfy the FDA’s requests for additional
tests or trials in a timely manner, or at all, and there is no assurance that we will be able to develop this new lamp, or obtain
approval to use it in the United States for PDT treatment of actinic keratosis.
The
FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
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our
inability to demonstrate that our products are safe and effective for their intended uses or substantially equivalent to a
predicate device;
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the
data from our clinical trials may not be sufficient to support clearance or approval; and
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the
manufacturing process or facilities we use may not meet applicable requirements.
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In
addition, the FDA and other regulatory authorities may change their respective clearance and approval policies, adopt additional
regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products
under development or impact our ability to modify our currently cleared or approved products on a timely basis.
Any
delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating
revenue from these products or achieving profitability. Additionally, the FDA and comparable foreign regulatory authorities have
broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny of us, could dissuade some customers
from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
Failure
to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such
as fines, civil penalties, injunctions, warning letters, Form 483 reports, recalls of products, delays in the introduction of
products into the market, refusal of the FDA or other regulators to grant future clearances or approvals, and the suspension or
withdrawal of existing approvals by the FDA or other regulators. Any of these sanctions could result in higher than anticipated
costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and
operating results.
Furthermore,
we may evaluate international expansion opportunities in the future for our medical device products. As we expand our operations
outside of the U.S. and Europe, we are, and will become, subject to various additional regulatory and legal requirements under
the applicable laws and regulations of the international markets we enter. These additional regulatory requirements may involve
significant costs and expenditures and, if we are not able comply with any such requirements, our international expansion and
business could be significantly harmed.
Modifications
to our medical device products, such as our BF-RhodoLED® lamp in Europe, may require reclassifications, new CE
marking processes or may require us to cease marketing or recall the modified products until new CE marking is obtained.
A
modification to our medical devices such as our BF-RhodoLED® lamp, which is approved for sale in Europe, could
lead to a reclassification of the medical device and could result in further requirements (including additional clinical trials)
to maintain the product’s CE marking. If we fail to comply with such further requirements, we may be required to cease marketing
or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines
or penalties. Additionally, because we received approval from the FDA to market in the U.S. Ameluz® in combination
with photodynamic therapy using our BF-RhodoLED® lamp, any new lamp we may develop, such as the BF-RhodoLED® XL lamp,
would require new approval from the FDA. We cannot assure you that we will obtain any such new approval. See “Item 4.B.
Information of the Company—Business Overview—Research and development projects— Development of the BF-RhodoLED®
XL lamp” for more information about our application for approval of our BF-RhodoLED® XL lamp.
We
are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel,
we may be unable to successfully implement our business strategy.
Our
ability to compete in the highly competitive pharmaceutical industry depends upon our ability to attract and retain highly qualified
managerial, scientific and medical personnel with specialized scientific and technical skills. We are highly dependent on our
management, scientific, medical and operations personnel, including Professor Hermann Lübbert, Ph.D., chairman of our management
board and chief executive officer. The loss of the services of any of our chief executive officer or other key employees and our
inability to find suitable replacements could potentially harm our business, prospects, financial condition or results of operations.
Despite
our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment
with us on short notice. Although we have employment agreements with our key employees, these employees could leave our employment
at any time, with certain notice periods. We do not maintain “key man” insurance policies on the lives of these individuals
or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate
highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel
and sales representatives.
Many
of the other biotechnology and pharmaceutical companies that we compete against for qualified personnel have greater financial
and other resources, different risk profiles and a longer history in the industry than we do. They may also provide more diverse
opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates
than what we can offer. If we are unable to continue to attract and retain high quality personnel, our ability to advance the
development of our product candidates, obtain regulatory approval and commercialize our products and product candidates will be
limited.
Our
employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We
are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply
with FDA or EMA regulations, provide accurate information to the FDA or EMA, comply with manufacturing standards we have established,
comply with healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized
activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive
laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices in the U.S. and Europe as
well as in other jurisdictions where we conduct our business. These laws and regulations may restrict or prohibit a wide range
of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.
Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could
result in regulatory sanctions, inability to obtain product approval and serious harm to our reputation. It is not always possible
to identify and deter employee misconduct, and any precautions we take to detect and prevent this activity may not be effective
in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits
stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and
we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business,
including the imposition of significant fines or other sanctions.
We
will need to grow the size of our organization and we may experience difficulties in managing this growth.
As
of December 31, 2020, we had 149 employees. In the longer term, as our development and commercialization plans and strategies
develop, and as we continue operating as a public company, we expect to need additional managerial, operational, sales, marketing,
financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:
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identifying,
recruiting, integrating, maintaining and motivating existing or additional employees;
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managing
our internal development efforts effectively, including the clinical and FDA and EMA review process for our product candidates,
while complying with our contractual obligations to contractors and other third parties; and
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improving
our operational, financial and management controls, reporting systems and procedures.
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Our
future financial performance and our ability to commercialize our products will depend, in part, on our ability to effectively
manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day
activities in order to devote a substantial amount of time to managing these growth activities. In the past, we have used the
services of outside vendors to perform tasks including clinical trial management, statistics and analysis and regulatory affairs.
Our growth strategy may also entail expanding our group of contractors or consultants to implement these tasks going forward.
Because we rely on numerous consultants, effectively outsourcing many key functions of our business, we will need to be able to
effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected
deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services
provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may
not be able to obtain regulatory approval for our product candidates or otherwise advance our business. There can be no assurance
that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically
reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our
groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and
commercialize our products and product candidates that we develop and, accordingly, may not achieve our research, development
and commercialization goals.
We
may encounter difficulties growing our sales force.
Due
to our ongoing assessment of the size of our required sales force, we may be required to hire substantially more sales representatives
to adequately support the commercialization of our products and product candidates or we may incur excess costs as a result of
hiring more sales representatives than necessary. With respect to certain geographical markets, we may need to enter into collaborations
with other entities to utilize their local marketing and distribution capabilities, but we may be unable to enter into such agreements
on favorable terms, if at all. We may be competing with companies that currently have extensive and well-funded marketing and
sales operations.
Certain
of our employees and patents are subject to foreign laws.
A
majority of our employees work in Germany and are subject to German employment law. Ideas, developments, discoveries and inventions
made by such employees and consultants are subject to the provisions of the German Act on Employees’ Inventions, which regulates
the ownership of, and compensation for, inventions made by employees. We face the risk that disputes can occur between us and
our employees or former employees pertaining to alleged non-adherence to the provisions of this act that may be costly to defend
and take up our management’s time and efforts whether we prevail or fail in any such dispute. There is a risk that the compensation
we provided to employees who assign patents to us may be deemed to be insufficient and we may be required under German law to
increase the compensation due to such employees for the use of the patents. In those cases where employees have not assigned their
interests to us, we may need to pay compensation for the use of those patents. If we are required to pay additional compensation
or face other disputes under the German Act on Employees’ Inventions, our results of operations could be adversely affected.
We
believe that our success depends, in part, upon our ability to protect our intellectual property throughout the world. However,
the laws of some foreign countries, including Germany, may not be as comprehensive as those of the U.S. and may not be sufficient
to protect our proprietary rights. In addition, we generally do not pursue patent protection in all jurisdictions because of cost
and confidentiality concerns. Accordingly, our international competitors could obtain foreign patent protection for, and market
overseas, products and technologies for which we are seeking patent protection in the U.S.
A
variety of risks associated with commercializing our products and product candidates internationally could materially adversely
affect our business.
We,
or our licensing partners, may seek regulatory approval for our products or product candidates outside of the U.S. and EU and,
accordingly, we expect that we will be subject to additional risks for our products and product candidates related to operating
in foreign countries if we obtain the necessary approvals, including:
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differing
regulatory requirements in foreign countries;
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the
potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices,
opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;
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unexpected
changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
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economic
weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance
with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign
taxes, including withholding of payroll taxes;
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foreign
currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident
to doing business in another country;
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difficulties
staffing and managing foreign operations;
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workforce
uncertainty in countries where labor unrest is more common than in Germany or the U.S.;
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potential
liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;
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challenges
enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and
protect intellectual property rights to the same extent as in the EU or the U.S.;
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production
shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business
interruptions resulting from geo-political actions, including war and terrorism.
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These
and other risks associated with our or our licensing partners’ international operations may materially adversely affect
our ability to attain or maintain profitable operations.
Our
business and operations would suffer in the event of system failures, cyber-attacks or a deficiency in our cyber-security.
Despite
the implementation of security measures, our internal computer systems and those of our current and future CROs, and other contractors
and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication
and electrical failures. The risk of a security breach or disruption, particularly through cyber-attacks or cyber-intrusion, including
by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication
of attempted attacks and intrusions from around the world have increased. While we have not experienced any such material system
failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could
result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial
data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase
our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of,
or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur
liability and the further development and commercialization of our products and product candidates could be delayed.
If
product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization
of our products.
We
face an inherent risk of product liability as a result of the clinical testing of our products and face an even greater risk if
we commercialize our products on a larger scale. For example, we may be sued if our products allegedly cause injury or are found
to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include
allegations of defects in manufacturing; defects in design; a failure to warn of dangers inherent in the product, negligence,
strict liability; and a breach of warranties. Claims could also be asserted under state consumer protection acts. In Europe, medical
products and medical devices may, under certain circumstances, be subject to no-fault liability. If we cannot successfully defend
ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of
our products and product candidates. Even a successful defense would require significant financial and management resources. Regardless
of the merits or eventual outcome, liability claims may result in:
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costs
to defend litigation and other proceedings;
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a
diversion of management’s time and our resources;
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decreased
demand for our products;
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injury
to our reputation;
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withdrawal
of clinical trial participants;
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initiation
of investigations by regulators;
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product
recalls, withdrawals or labeling, marketing or promotional restrictions;
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loss
of revenue;
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substantial
monetary awards to trial participants or patients;
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exhaustion
of any available insurance and our capital resources;
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the
inability to commercialize our products; and
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a
decline in our share or ADS price.
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We
currently maintain product liability insurance. If such insurance is not sufficient, or if we are not able to obtain such insurance
at an acceptable cost in the future, potential product liability claims could prevent or inhibit the commercialization of our
products and the products we develop. A successful claim could materially harm our business, financial condition or results of
operations. Additionally, we cannot guarantee that continued product liability insurance coverage will be available in the future
at acceptable costs.
Our
international operations may pose currency risks, which may adversely affect our operating results and net income.
Our
operating results may be affected by volatility in currency exchange rates and our ability to effectively manage our currency
transaction risks. In general, we conduct our business, earn revenues and incur costs in the local currency of the countries in
which we operate. In 2020, 44% of our revenue was generated and approximately 42% of our costs were incurred in euros (27% and
39%, 29% and 45%, for 2019 and 2018, respectively). As we execute our strategy to expand in the U.S. and internationally, our
exposure to currency risks will increase. We do not manage our foreign currency exposure in a manner that would eliminate the
effects of changes in foreign exchange rates. Therefore, changes in exchange rates between these foreign currencies, the dollar
and the euro will affect our revenues, cost of goods sold, and operating margins, and could result in exchange losses in any given
reporting period. Based on certain assumptions relating to our operations (which assumptions may prove incorrect) and our internal
models, we believe that, with respect to the fiscal year ended December 31, 2020, an average 10% appreciation of the U.S. dollar
against the euro would have resulted in a decrease of approximately €0.5 million in our net income for such period, whereas
we believe that an average 10% depreciation of the U.S. dollar against the euro would have resulted in an increase of approximately
€0.4 million in our net income during such period
We
incur currency transaction risks whenever we enter into either a purchase or a sale transaction using a different currency from
the currency in which we report revenues. In such cases we may suffer an exchange loss because we do not currently engage in currency
swaps or other currency hedging strategies to address this risk.
Given
the volatility of exchange rates, we can give no assurance that we will be able to effectively manage our currency transaction
risks or that any volatility in currency exchange rates will not have an adverse effect on our results of operations.
Failure
to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal
penalties and an adverse effect on our business.
We
operate in a number of countries throughout the world. We are committed to doing business in accordance with applicable anti-corruption
laws. We are subject, however, to the risk that our officers, directors, employees, agents and collaborators may take action determined
to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act
2010 and the European Union Anti-Corruption Act, as well as trade sanctions administered by the U.S. Office of Foreign Assets
Control and the U.S. Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal
penalties or curtailment of operations in certain jurisdictions and might adversely affect our results of operations. In addition,
actual or alleged violations could damage our reputation and ability to do business.
Global
economic, political and social conditions and global pandemics have adversely impacted our sales and operations and may continue
to do so.
The
uncertain direction and relative strength of the global economy, difficulties in the financial services sector and credit markets,
continuing geopolitical uncertainties and other macroeconomic factors all affect spending behavior of potential end-users of our
products. The prospects for economic growth in Europe, the United States and other countries remain uncertain and may cause end-users
to further delay or reduce purchases of drugs or therapies that are not fully reimbursed by governmental or other third-party
payors. In particular, a substantial portion of our sales are made to customers in countries in Europe, which has recently experienced
significant economic disruptions. If global economic conditions remain volatile for a prolonged period or if European economies
experience further disruptions, our results of operations could be adversely affected.
For
a more detailed discussion of the adverse impact of the COVID-19 pandemic, see “—Risks Related to Our Financial
Position and Capital Requirements—The COVID-19 global pandemic has continued to negatively affect our sales and operations
and may continue to do so.”
Our
products may become obsolete prior to the end of their anticipated useful lives, and we may be required to dispose of existing
inventory or write off the value or accelerate the depreciation of those assets, each which would materially and adversely impact
our results of operations.
We
focus on continual product innovation and product improvement. While we believe this provides a competitive edge, it also results
in the risk that our products will become obsolete prior to the end of their anticipated useful lives. If we introduce new products
or next generation products prior to the end of the useful life of a prior generation, we may be required to dispose of existing
inventory, or write off the value of these assets, each of which would materially and adversely impact our results of operations.
Our
business involves environmental risks and we may incur significant costs complying with environmental laws and regulations.
We
are subject to federal, state, local and foreign laws and regulations which govern the use, manufacture, storage handling and
disposal of hazardous materials and specific waste products. We believe that we are in compliance in all material respects with
currently applicable environmental laws and regulations. However, we cannot guarantee that we will not incur significant costs
to comply with environmental laws and regulations in the future. We also cannot guarantee that current or future environmental
laws or regulations will not materially adversely affect our operations, business or financial condition. In addition, although
we believe our safety procedures for handling and disposing of these materials comply with federal, state, local and foreign laws
and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event
of such an accident, we could be held liable for any resulting damages, and this liability could exceed our resources.
Risks
Related to the Clinical Development and Regulatory Approval of Our Products
Our
business depends substantially on the success of our principal product Ameluz®. If we are unable to successfully
commercialize Ameluz®, to obtain and maintain regulatory approvals or reimbursement for Ameluz®
for existing and additional indications and/or in additional countries, or if we experience significant delays in realizing any
of those commercialization or product development objectives, our business may be materially harmed.
We
have invested a significant portion of our efforts and financial resources in the development of Ameluz®, which
has received marketing approval in the United States for lesion- and field-directed treatment of actinic keratosis and in the
EU for lesion- and field-directed treatment of actinic keratosis, photodynamic therapy treatment of field cancerization and certain
superficial and/or nodular basal cell carcinoma, and treatment of actinic keratosis with Ameluz® in combination
with daylight photodynamic therapy. Although we have received these approvals as well as additional approvals extending their
indications, there remains a significant risk that we will fail to generate sufficient revenue or otherwise successfully commercialize
these products in the EU or the U.S. The success of our products will depend on several factors, including:
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successful
completion of further clinical trials;
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receipt
of further regulatory approvals, including for the marketing of Ameluz® for additional indications and/or in
additional countries;
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obtaining
adequate reimbursement from governments and other third-party payors for Ameluz®;
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maintaining
regulatory compliance for our contract manufacturing facility and sales force;
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manufacturing
sufficient quantities in acceptable quality;
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achieving
meaningful commercial sales of our products;
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sourcing
sufficient quantities of raw materials used to manufacture our products;
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successfully
competing with other products;
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continued
acceptable safety and effectiveness profiles for our products following regulatory approval and marketing;
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obtaining
and maintaining patent and trade secret protection and regulatory exclusivity; and
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protecting
our intellectual property rights.
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If
we do not achieve one or more of these factors in a timely manner, or at all, we could experience significant delays or an inability
to successfully commercialize our products, which would materially harm our business and we may not be able to earn sufficient
revenue and cash flows to continue our operations.
Our
ability to generate future revenues depends heavily on our success in:
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maintaining
and extending U.S., EU and/or other foreign regulatory approvals for our products;
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manufacturing
commercial quantities of our products at acceptable costs;
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successfully
commercializing our products, and
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achieving
broad market acceptance of our products and product candidates in the medical community and with the government and other
third-party payors and patients.
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Clinical
drug development is expensive and involves uncertain outcomes, and results of earlier studies and trials may not be predictive
of future trial results. If one or more future Phase III clinical trials for Ameluz® were unsuccessful, or significantly
delayed, we could be required to abandon development, we may suffer reputational harm and our business will be materially harmed.
If
the results of our clinical trials for our current products or product candidates or clinical trials for any future product candidates
do not achieve their primary efficacy endpoints or raise unexpected safety issues, the prospects for approval of our product candidates
or the extension of indications for our products will be materially adversely affected. Moreover, preclinical and clinical data
are often susceptible to varying interpretations and analyses and many companies that believed their product candidates performed
satisfactorily in preclinical studies and clinical trials have failed to achieve similar results in later clinical trials, or
have ultimately failed to obtain regulatory approval of their product candidates. Many products that initially showed promise
in clinical trials or earlier stage testing have later been found to cause undesirable or unexpected adverse effects that have
prevented their further development and regulatory approval. Our ongoing trial for basal cell carcinoma may not produce the results
that we expect or that are required to achieve FDA approval.
In
addition, we may experience numerous unforeseen events that could cause our clinical trials to be delayed, suspended or terminated,
or which could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including
that:
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clinical
trials of our products and product candidates may produce negative, inconclusive or inconsistent results, and we may decide,
or regulators may require us, to conduct additional clinical trials or implement a clinical hold;
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we
may elect or be required to suspend or terminate clinical trials of our products and product candidates, including based on
a finding that the participants are being exposed to unacceptable health risks;
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regulators
or institutional review boards may not authorize us or our investigators to commence or continue a clinical trial, or may
require additional data before allowing clinical trials to commence, continue or proceed from one phase to another, or conduct,
or continue a clinical trial at a prospective trial site;
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our
third-party contractors may fail to comply with regulatory requirements, such as good clinical practice requirements, fail
to follow approved study protocols, or fail to meet their contractual obligations to us in a timely manner, or at all;
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the
cost of clinical trials for our products and product candidates may be greater than we anticipate;
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changes
in government regulation or administrative actions may occur;
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the
supply of materials necessary to conduct clinical trials of our products and product candidates may be insufficient or inadequate;
and
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our
products and product candidates may have undesirable adverse effects or other unexpected characteristics.
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If
we experience delays in the completion of, or termination of, any clinical trial of our products and product candidates, the commercial
prospects of our products and product candidates will be materially harmed, and our ability to generate product revenues from
any of these products and product candidates, if any, will cease or be delayed. We may have to repeat or redesign clinical trials,
which could delay the regulatory approval process. In addition, any termination of, or delays (including as a result of the COVID-19
pandemic) in completing, our clinical trials will increase our costs, slow down our product development and approval process and
jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may significantly harm our business,
financial condition and prospects. In addition, many of the factors that cause, or lead to a delay in the commencement or completion
of or early termination of, clinical trials may also ultimately lead to the denial of regulatory approval of our products and
product candidates.
We
will be subject to ongoing regulatory requirements in every market where we engage in business and we may face future development,
manufacturing and regulatory difficulties.
Our
drug products Ameluz® and Xepi® and any other drug products we develop, license or acquire will
be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping,
submission of safety and other post-market approval information, importation and exportation. In addition, approved products,
manufacturers and manufacturers’ facilities are required to comply with extensive FDA and EMA requirements and the requirements
of other similar regulatory authorities, including ensuring that quality control and manufacturing procedures conform to cGMP
requirements.
Accordingly,
we will be required to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production
and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA
and EMA and other similar regulatory authorities and to comply with certain requirements concerning advertising and promotion
for our products and potential products.
If
a regulatory authority discovers previously unknown problems with a product, such as adverse events of unanticipated or unacceptable
severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing
or labeling of a product, it may impose restrictions on that product or us, including requiring withdrawal of the product from
the market. If our products or potential products fail to comply with applicable regulatory requirements, a regulatory authority
may, among other actions:
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issue
warning letters or Form 483 (or similar) notices requiring us to modify certain activities or correct certain deficiencies;
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require
product recalls or impose civil monetary fines;
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mandate
modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
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require
us or our potential future collaborators to enter into a consent decree or permanent injunction;
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impose
other administrative or judicial civil or criminal actions, including monetary or other penalties, or pursue criminal prosecution;
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withdraw
regulatory approval;
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refuse
to approve pending applications or supplements to approved applications filed by us or by our potential future collaborators;
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impose
restrictions on operations, including costly new manufacturing requirements; or
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seize
or detain products.
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Risks
Related to Our Dependence on Third Parties
We
may rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates
and our business could be substantially harmed.
In
the past, we have engaged third party CROs in connection with our Phase III clinical trials for our products and product candidates
and will continue to engage such CROs in the future. We may rely on these parties for proper execution of our clinical trials,
and we will control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies
is conducted in accordance with applicable protocol, legal and regulatory requirements, and scientific standards, and our reliance
on our CROs does not relieve us of our regulatory responsibilities. We and our CROs will be required to comply with current Good
Clinical Practices, or cGCP requirements, which are a collection of regulations enforced by the FDA or comparable foreign regulatory
authorities for products and product candidates in clinical development in order to protect the health, safety and welfare of
patients and assume the integrity of clinical data. These requirements are also intended to protect the health, safety and welfare
of study subjects through requirements such as informed consent. The FDA enforces good clinical practices through periodic inspections
of trial sponsors, principal investigators and trial sites. In Phase I, the initial introduction of the drug into human subjects,
the drug is typically tested to assess the pharmacological actions and side effects associated with increasing doses. Phase II
usually involves clinical trials in a limited patient population to determine the effectiveness of the drug for a particular indication
or indications, dosage tolerance and optimum dosage and to identify common adverse effects and safety risks. If a drug demonstrates
evidence of effectiveness and an acceptable safety profile in Phase II, Phase III clinical trials are undertaken to obtain additional
information about clinical efficacy and safety in a larger number of patients. Throughout this process, regulatory authorities
enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these
CROs fail to comply with applicable cGCP regulations or record-keeping requirements at any point during the clinical trial process,
the clinical data generated in our clinical trials may be deemed unreliable and the FDA or EMA or comparable foreign regulatory
authorities may require us to perform additional clinical trials before approving our marketing applications or, in some instances,
require us to suspend operations. We cannot assure you that, upon inspection, such regulatory authorities will determine that
any of our clinical trials comply with the cGCP regulations. In addition, for drugs, our clinical trials must be conducted with
products produced under cGMP regulations and will require a large number of test subjects. For our devices, clinical trials must
use product manufactured in compliance with design controls under the QSR. Our failure or any failure by our CROs to comply with
these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the
regulatory approval process. Moreover, we may be implicated if any of our CROs violate federal, state, local or foreign fraud
and abuse or false claims laws and regulations, or healthcare privacy and security laws.
The
CROs will not be employed directly by us and, except for remedies available to us under our agreements with such CROs, we cannot
control whether they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These
CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting
clinical studies or other product development activities, which could affect their performance on our behalf. If the CROs do not
successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the
quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or
regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able
to complete development of, obtain regulatory approval for or successfully commercialize our product or product candidates. As
a result, our financial results and the commercial prospects for our products and product candidates would be harmed, our costs
could increase and our ability to generate revenues could be delayed.
Switching
or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition
period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired
clinical development timelines. Although we plan to carefully manage our relationships with our CROs, there can be no assurance
that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse
impact on our business, prospects, financial condition and results of operations.
We
rely on third parties for the supply of raw materials and manufacture of our principal product.
We
rely on third parties for the timely supply of raw materials and for the manufacture of Ameluz®. Although we actively
manage these third-party relationships to provide continuity and quality, some events which are beyond our control could result
in the complete or partial failure of these goods and services. Any such failure could have a material adverse effect on our financial
condition and operations.
We
currently license the commercialization rights for some of our products outside of the United States, Germany, Spain and the UK,
which exposes us to additional risks of conducting business in international markets.
Markets
outside the U.S., Germany, Spain and the UK are an important component of existing commercialization strategy for our existing
marketed products as well as part of our growth strategy for Ameluz®. We have entered into commercial supply agreements
for Ameluz® and BF-RhodoLED® lamps pursuant to which we exclusively supply and our partners exclusively
purchase the products from us in their respective territories where we do not directly market our products, as described in greater
detail under “Business — Commercial Partners and Agreements.” Our agreements require us to timely supply products
that meet the agreed quality standards and require our customers to purchase products from us, in some cases in specified minimum
quantities. If we fail to maintain these agreements and agreements with other partners or to enter into new distribution arrangements
with selling parties, or if these parties are not successful, our revenue-generating growth potential will be adversely affected.
Moreover, international business relationships subject us to additional risks that may materially adversely affect our ability
to attain or sustain profitable operations, including:
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efforts
to enter into distribution or licensing arrangements with third parties in connection with our international sales, marketing
and distribution efforts may increase our expenses or divert our management’s attention from the development of product
candidates;
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changes
in a specific country’s or region’s political and cultural climate or economic condition;
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differing
requirements for regulatory approvals and marketing internationally;
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difficulty
of effective enforcement of contractual provisions in local jurisdictions;
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potentially
reduced protection for intellectual property rights;
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potential
third-party patent rights in countries outside of the U.S. or the EU;
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unexpected
changes in tariffs, trade barriers and regulatory requirements;
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economic
weakness, including inflation, or political instability;
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compliance
with tax, employment, immigration and labor laws for employees traveling abroad;
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the
effects of applicable foreign tax structures and potentially adverse tax consequences;
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foreign
currency fluctuations, which could result in increased operating expenses and reduced revenue and other obligations incidental
to doing business in another country;
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workforce
uncertainty in countries where labor unrest is more common than in the U.S. or Germany;
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the
potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices,
opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;
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failure
of our employees and contracted third parties to comply with U.S. Office of Foreign Asset Control rules and regulations and
the U.S. Foreign Corrupt Practices Act or comparable foreign regulations;
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production
shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business
interruptions resulting from geo-political actions, including war and terrorism, epidemics and pandemics (such as the COVID-19
pandemic) or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.
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These
and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.
We
may form or seek strategic alliances in the future and we may not realize the benefits of such alliances.
We
may form or seek strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third
parties that we believe will complement or augment our development and commercialization efforts with respect to our products
and any future products that we may develop. For example, we have entered into a license agreement with Maruho, a significant
shareholder, pursuant to which Maruho received an exclusive license for the development and commercialization of Ameluz® for
all indications in East Asia and Oceania Any of these relationships may require us to incur non-recurring and other charges, increase
our near- and long-term expenditures, issue securities that dilute our existing holders of our ordinary shares or ADSs or disrupt
our management and business.
In
addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming
and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements
for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and
third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we
license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully
integrate them with our existing operations and company culture and vice versa. We cannot be certain that, following a strategic
transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering
into new strategic partnership agreements related to our products or product candidates could delay the development and commercialization
of our products or product candidates in certain geographies or for certain indications, which would harm our business prospects,
financial condition and results of operations.
Risks
Related to Our Intellectual Property
If
our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may
not be able to compete effectively in our market.
We
rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property
related to our technologies and products. Any disclosure to or misappropriation by third parties of our confidential proprietary
information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive
position in our market.
In
addition, the patent applications that we own or that we may license may fail to result in issued patents in the U.S., the EU
or in other countries or jurisdictions. Even if the patents do successfully issue, third parties may challenge the validity, enforceability
or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they
are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from
designing around our claims. If the breadth or strength of protection provided by the issued patents and patent applications we
hold with respect to our products is threatened, it could dissuade companies from collaborating with us to develop, and threaten
our ability to commercialize, our products. Further, if we encounter delays in our clinical trials, the period of time during
which we could market our products under patent protection would be reduced. Since patent applications in the U.S. and most other
countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application
related to our product candidates. Furthermore, for applications in which all claims are entitled to a priority date before March
16, 2013, an interference proceeding can be provoked by a third party or instituted by the U.S. Patent and Trademark Office, or
USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. For
applications containing a claim not entitled to priority before March 16, 2013, there is greater level of uncertainty in the patent
law with the passage of the America Invents Act (2012) which brings into effect significant changes to the U.S. patent laws some
of which are yet untried and untested, and which introduces new procedures for challenging pending patent applications and issued
patents. A primary change under this reform is creating a “first to file” system in the U.S. This will require us
to be cognizant going forward of the time from invention to filing of a patent application.
In
addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect
proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our
product discovery and development processes that involve proprietary know-how, information or technology that is not covered by
patents. Although we require our employees to assign their inventions to us to the extent permitted by law, and require our employees,
consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into
confidentiality agreements, we cannot be certain that our trade secrets and other confidential proprietary information will not
be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent
information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent
or in the same manner as the laws of the U.S. or the EU. As a result, we may encounter significant problems in protecting and
defending our intellectual property both in the U.S., in the EU and in other countries. If we are unable to prevent unauthorized
material disclosure of our intellectual property to third parties, we may not be able to establish or maintain a competitive advantage
in our market, which could materially adversely affect our business, operating results and financial condition.
Third
party claims of intellectual property infringement may affect our ability to sell our products and may also prevent or delay our
product discovery and development efforts.
Our
commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There
is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical
industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings
before the USPTO, or oppositions and other comparable proceedings in foreign jurisdictions. Recently, following U.S. patent reform,
new procedures including inter partes review and post grant review have been implemented. This reform includes changes
in law and procedures some of which are still untried and untested and will bring uncertainty to the possibility of challenge
to our patents in the future. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third
parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries
expand and more patents are issued, the risk increases that our products may give rise to claims of infringement of the patent
rights of others.
Third
parties may assert that we are employing their proprietary technology without authorization. There may be third party patents
of which we are currently unaware with claims to materials, formulations, devices, methods of manufacture or methods for treatment
related to the use or manufacture of our products. Because patent applications can take many years to issue, there may be currently
pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third
parties may obtain patents in the future and claim that use of our technologies infringes upon such patents. If any third-party
patents were held by a court of competent jurisdiction to cover the manufacturing process of our products or product candidates,
any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able
to block our ability to commercialize the product unless we obtained a license under the applicable patents, or until such patents
expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a
court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination
therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize
the product unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable.
In either case, such a license may not be available on commercially reasonable terms or at all. If we are unable to obtain a necessary
license to a third-party patent on commercially reasonable terms, or at all, our ability to commercialize our products or product
candidates may be impaired or delayed, which could in turn significantly harm our business.
Parties
making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to
sell our products and to further develop and commercialize our products and product candidates. Defense of these claims, regardless
of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our
business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble
damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign
our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether
any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even
in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization
of our products or product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms,
if at all. In that event, we would be unable to further develop and commercialize our products or product candidates, which could
harm our business significantly.
In
March 2018, DUSA brought a lawsuit against us and our subsidiaries before the District Court of Massachusetts due to alleged infringement
of its patents No. 9,723,991 and No. 8,216,289 by sales of BF-RhodoLED® in the United States. In July 2018, DUSA amended its
complaint to add claims of trade secret misappropriation, tortious interference with contractual relations, and deceptive and
unfair trade practices. See “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal
Proceedings” for more information about this and other litigation our company is involved in. Although we believe that
these claims lack merit and intend to defend against them vigorously, we cannot guarantee that the outcome will be successful.
We have incurred in the past, and expect to incur in the future, significant expenses in defending these claims, and we expect
to have to divert significant employee resources, including management resources, to defend the claims. Any of the foregoing may
have a material adverse effect on our business, prospects, financial condition and/or results of operations.
We
are currently involved in lawsuits to defend or enforce our patents and may become involved in similar suits in the future, which
could be expensive, time-consuming and unsuccessful.
Competitors
may infringe upon our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which
can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that one or more of our patents
is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that
our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings, including our
litigation against DUSA as described above, could put one or more of our patents at risk of being invalidated, held unenforceable,
or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their
merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business.
In the event of a successful claim or counterclaim of infringement against us, we may have to pay substantial damages, including
treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties
or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.
Interference
or derivation proceedings provoked by third parties or brought by the USPTO may be necessary to determine the priority of inventions
with respect to our patents or patent applications. Third parties may also seek to challenge our patents via inter partes
review and post grant review proceedings before the USPTO. An unfavorable outcome in our litigation against DUSA or other patent
related litigation could require us to cease using the related technology or to attempt to license rights to it from the prevailing
party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation
or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and
other employees. We may not be able to prevent misappropriation of our trade secrets or confidential information, particularly
in countries where the laws may not protect those rights as fully as in the U.S. or the EU.
Furthermore,
because of the substantial amount of discovery that could be required in connection with intellectual property litigation, there
is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition,
there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ordinary
shares and ADSs.
Obtaining
and maintaining our patent protection depends on compliance with various procedures, document submission requests, fee payments
and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance
with these requirements.
Periodic
maintenance fees on any issued patent are due to be paid to the USPTO and patent agencies in other jurisdictions in several stages
over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of
procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent
lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are
situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial
or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse
of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time
limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might
be able to enter the market, which would have a material adverse effect on our business.
We
may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential
information of third parties.
We
have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously
employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants
or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or
our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in
defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.
As
part of its suit against us, DUSA has asserted claims of trade secret misappropriation, tortious interference with contractual
relations, and deceptive and unfair trade practices. See “—Third party claims of intellectual property infringement
may affect our ability to sell our products and may also prevent or delay our product discovery and development efforts”
for more information.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting and defending patents on all of our products and product candidates throughout the world would be prohibitively expensive.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products
and, further, may export otherwise infringing products to territories where we have patent protection, but where enforcement is
not as strong as that in the U.S. and the EU. These products may compete with our products in jurisdictions where we do not have
any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them
from so competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions.
The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and
other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us
to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings
to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from
other aspects of our business.
Our
trade secrets are difficult to protect.
Confidentiality
agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information
and may not adequately protect our intellectual property.
Our
success depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors
as well as our partners, licensors and contractors. Because we operate in a highly competitive technical field of drug development,
we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to
protect. We enter into confidentiality agreements with our corporate partners, employees, consultants, sponsored researchers and
other advisors. These agreements typically require that the receiving party keep confidential and not disclose to third parties
all confidential information developed by the receiving party or made known to the receiving party by us during the course of
the receiving party’s relationship with us. Our agreements also provide that any inventions made based solely upon our technology
are our exclusive property, and we enter into assignment agreements that are recorded in patent, trademark and copyright offices
around the world to perfect our rights.
These
confidentiality and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our
trade secrets also could be independently discovered by competitors, in which case, we would not be able to prevent use of such
trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade
secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the
U.S. or the EU may be less willing to protect trade secrets. There exists a risk that we may not be able to detect when misappropriation
of our trade secrets has occurred or where a third party is using our trade secrets without our knowledge. The failure to obtain
or maintain meaningful trade secret protection could adversely affect our competitive position.
Generic
manufacturers may launch products at risk of patent infringement.
If
other manufacturers launch products to compete with our products or product candidates in spite of our patent position, these
manufacturers would likely erode our market and negatively impact our sales revenues, liquidity and results of operations.
Risks
Related to the Ownership of our ADSs
There
has been varying trading volume for our ordinary shares and the market price of our ADSs could be subject to wide fluctuations.
Each
ADS represents two ordinary shares of our company. Even though our ordinary shares have been listed on the Stock Exchange in Düsseldorf
since 2006 and the Frankfurt Stock Exchange since 2012, there has been limited liquidity in such markets for our ordinary shares
from time to time, which could make it more difficult for holders to sell our ordinary shares. We do not intend to directly list
our ordinary shares on a U.S. trading market and, therefore, do not expect that a trading market will develop for our ordinary
shares.
The
market price of the ADSs could be subject to wide fluctuations in response to many risk factors listed in this section, and others
beyond our control. In addition, the stock market generally has experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of listed companies, including as a result of the COVID-19 pandemic.
Broad market and industry factors may negatively affect the market price of our ordinary shares or ADSs, regardless of our actual
operating performance. The market price and liquidity of the market for our ordinary shares or ADSs that will prevail in the market
may be higher or lower than the price you pay and may be significantly affected by numerous factors, some of which are beyond
our control.
We
are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our ADSs
less attractive to investors.
We
are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or JOBS Act. For as long as we continue
to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation
requirements of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure
obligations regarding executive compensation in this annual report and exemptions from the requirements of holding nonbinding
advisory votes on executive compensation and shareholder approval of any golden parachute payments not previously approved. We
could be an emerging growth company until the earliest of the end of the 2023 fiscal year (i.e., the fiscal year corresponding
with the fifth anniversary of our initial public offering), the date on which we qualify as a “large accelerated filer”
under U.S. securities laws, the end of the fiscal year in which our annual revenue is $1,070,000,000 or more, or the date on which
we issue more than $1,000,000,000 in non-convertible debt during any prior three-year period. Our investors may find our ADSs
less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may
be a less active trading market for our ADSs and our ADS price may be more volatile.
Under
the JOBS Act, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We currently prepare our financial statements in accordance with IFRS as issued by the IASB, which
do not have separate provisions for publicly traded and private companies. However, in the event we convert to generally accepted
accounting principles in the U.S., or U.S. GAAP, while we are still an emerging growth company, we may be able to take advantage
of the benefits of this extended transition period.
Actions
of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek changes
that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.
A
group of shareholders (the “reporting persons”) associated with Wilhelm Konrad Thomas Zours, one of our major shareholders,
and certain of his affiliates has filed with the U.S. Securities and Exchange Commission, or the SEC, a beneficial ownership statement
on Schedule 13D relating to our company. According to the Schedule 13D, as amended, as of November 27, 2020, Mr. Zours, through
and with the other reporting persons, holds voting power over approximately 14.2 million of our ordinary shares, representing
approximately 29.7% of the total voting power of our ordinary shares outstanding. Because Mr. Zours, through and with the other
reporting persons, controls over 25% of the total voting power of our ordinary shares, he holds a blocking minority that enables
him to prevent the passage of certain resolutions of fundamental importance relating to our company, including, in particular,
capital increases with exclusion of subscription rights, capital decreases, the creation of authorized or conditional share capital,
the dissolution of a company, a merger into or with another company, split-offs and split-ups, the conclusion of inter-company
agreements (Unternehmensverträge) as defined in the German Stock Corporation Act (Aktiengesetz) (in particular domination
agreements (Beherrschungsverträge) and profit and loss transfer agreements (Ergebnisabführungsverträge)), and a
change of the legal form of a company relating to the company. In addition, in the Schedule 13D, as amended, the reporting persons
state that they desire to change the composition of the management board and supervisory board of our company. In addition, certain
of the reporting persons have previously proposed a number of tender offers for our shares, as well as resolutions at our shareholder
meetings and have filed legal actions against us relating to actions taken at our shareholder meetings.
The
reporting persons or other activist investors may attempt to effect changes in our company’s strategic direction and how
our company is governed, or to acquire control over our company. Some investors seek to increase short-term shareholder value
by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, share repurchases, or
even sales of assets or the entire company. While our company welcomes varying opinions from all shareholders, activist campaigns
that contest or conflict with our strategic direction could have an adverse effect on our company’s results of operations
and financial condition as responding to proxy contests and other actions by activist shareholders can disrupt our operations,
be costly and time-consuming, and divert the attention of our company’s management board and supervisory board from the
pursuit of business strategies. Also, we may be required to incur significant legal fees and other expenses related to any securities
litigation or activist shareholder matters. In addition, perceived uncertainties as to our future direction as a result of changes
to the composition of our management board or supervisory board may lead to the perception of a change in the direction of the
business, instability or lack of continuity which may be exploited by our competitors, may cause concern to our current or potential
customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified
personnel and business partners. These types of actions could cause significant fluctuations in our share and ADS price based
on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and
prospects of our business.
We
could be subject to securities class action litigation.
In
the past, securities class action litigation has often been brought against a company following a decline in the market price
of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant share
price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s
attention and resources, which could harm our business.
If
securities or industry analysts cease publishing research, or publish inaccurate or unfavorable research about our business, our
ordinary share and ADS price and trading volume could decline.
The
trading market for our ordinary shares and ADSs will depend in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts who covers us downgrades our ordinary shares or ADSs or publishes
inaccurate or unfavorable research about our business, our share and ADS price may decline. If one or more of these analysts ceases
coverage of our company or fails to publish reports on us regularly, demand for our ordinary shares and ADSs could decrease, which
might cause our share and ADS price and trading volume to decline.
As
a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information
with the SEC than U.S. companies.
This
may limit the information available to holders of ADSs. We are a “foreign private issuer,” as defined in the rules
and regulations of the SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies
organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934
(the “Exchange Act”) that regulate disclosure obligations and procedural requirements related to the solicitation
of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, members of our
supervisory board and management board and our principal shareholders are exempt from the reporting and “short-swing”
profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our
securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly
as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for
U.S. public companies. As a foreign private issuer, we will file an annual report on Form 20-F within four months of the close
of each year ended December 31 and furnish reports on Form 6-K relating to certain material events promptly after we publicly
announce these events. However, we are not required to issue quarterly financial information because of the above exemptions for
foreign private issuers, and holders of our ADSs will not be afforded the same protections or information generally available
to investors holding shares in public companies organized in the United States.
As
we are a “foreign private issuer” that follows, and intends to continue to follow, certain home country corporate
governance practices, holders of our ADSs may not have the same protections afforded to shareholders of companies that are subject
to all The NASDAQ Capital Market corporate governance requirements.
As
a foreign private issuer, we have the option to follow certain German corporate governance practices rather than those of The
NASDAQ Capital Market, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose
the requirements we are not following and describe the home country practices we follow instead. We intend to rely on this “foreign
private issuer exemption” with respect to The NASDAQ Capital Market’s shareholder approval requirements in respect
of equity issuances and equity-based compensation plans, the requirement to have independent oversight on our director nominations
process and the quorum requirement for meetings of our shareholders. In addition, we intend to rely on the “foreign private
issuer exemption” in the future with respect to The NASDAQ Capital Market requirement to have a formal charter for the compensation
committee. We may in the future elect to follow home country practices in Germany with regard to other matters. As a result, holders
of our ADSs may not have the same protections afforded to shareholders of companies that are subject to all The NASDAQ Capital
Market corporate governance requirements. See Item 16G “Corporate Governance — Differences between Our Corporate
Governance Practices and the Rules of The NASDAQ Capital Market”.
We
may lose our foreign private issuer status in the future, which would then require us to comply with the Exchange Act’s
domestic reporting regime and cause us to incur significant legal, accounting and other expenses.
We
are currently a foreign private issuer and, therefore, we are not required to comply with all of the periodic disclosure and current
reporting requirements of the Exchange Act applicable to U.S. domestic issuers. We would lose our foreign private issuer status
if, for example, more than 50% of our assets are located in the U.S. and we continue to fail to meet additional requirements necessary
to maintain our foreign private issuer status. As of December 31, 2020, only a portion of our assets were located in the United
States, although this may change as we expand our operations in the U.S.
A
foreign private issuer must determine its status on the last business day of its most recently completed second fiscal quarter.
If a foreign private issuer no longer satisfies these requirements, it will become subject to U.S. domestic reporting requirements
on the first day of its fiscal year immediately succeeding such determination. If we lost this status, we would be required to
comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and
extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance
practices in accordance with various SEC and The NASDAQ Capital Market rules. The regulatory and compliance costs to us under
U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be
significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private
issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and
costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers,
it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make
it more difficult for us to attract and retain qualified members to our management board and supervisory board.
Your
rights as a shareholder in a German corporation may differ from your rights as a shareholder in a U.S. corporation.
We
are organized as a stock corporation (Aktiengesellschaft or AG) under the laws of Germany, and our U.S. investors
are holders of ADSs of a German stock corporation. The rights of shareholders of a German stock corporation under German law differ
in important respects from those of shareholders of a U.S. corporation. These differences include, in particular:
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Under
German law, certain important resolutions, including, for example, capital decreases, measures under the German Transformation
Act, such as mergers, conversions and spin-offs, the issuance of convertible bonds or bonds with warrants attached and the
dissolution of the German stock corporation apart from insolvency and certain other proceedings, require the vote of a 75%
majority of the capital present or represented at the relevant shareholders’ meeting (Hauptversammlung). Therefore,
the holder or holders of a blocking minority of 25% or, depending on the attendance level at the shareholders’ meeting,
the holder or holders of a smaller percentage of the shares in a German stock corporation may be able to block any such votes,
possibly to our detriment or the detriment of our other shareholders.
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As
a general rule under German law, a shareholder has no direct recourse against the members of the management board (Vorstand)
or supervisory board (Aufsichtsrat) of a German stock corporation in the event that it is alleged that they have breached
their duty of loyalty or duty of care to the German stock corporation. Apart from insolvency or other special circumstances,
only the German stock corporation itself has the right to claim damages from members of either board. A German stock corporation
may waive or settle these damages claims only if at least three years have passed and the shareholders approve the waiver
or settlement at the shareholders’ meeting with a simple majority of the votes cast, provided that a minority holding,
in the aggregate, 10% or more of the German stock corporation’s share capital does not have its opposition formally
noted in the minutes maintained by a German civil law notary.
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By
subscribing or purchasing ADSs an investor will not become a shareholder of the Company.
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For
more information, we have provided summaries of relevant German corporation law and of our articles of association in Exhibit
2.5 to this Form 20-F.
We
may qualify as a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes which could result
in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs.
In
general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through
certain corporate subsidiaries) is passive income (this is known as the “income test”) or (2) at least 50% of the
average value of our assets (looking through certain corporate subsidiaries) is attributable to assets that produce, or are held
for the production of, passive income (this is known as the “asset test”). We expect to be treated as a publicly traded
corporation for purposes of the PFIC rules with respect to the current taxable year. In such case, the value of our assets for
purposes of the asset test will generally be determined by reference to the market price of our ordinary shares.
In
the event we are treated as a PFIC, U.S. Holders of our ADSs could be subject to adverse U.S. federal income tax consequences.
These consequences include the following: (i) if our ADSs are “marketable stock” for purposes of the PFIC rules and
a U.S. Holder makes a mark-to-market election with respect to its ADSs, the U.S. Holder will be required to include annually in
its U.S. federal taxable income an amount reflecting any year-end increase in the value of its ADSs; (ii) if a U.S. Holder does
not make a mark-to-market election, it may incur significant additional U.S. federal income taxes on income resulting from distributions
on, or any gain from the disposition of, our ADSs, as such income generally would be allocated over the U.S. Holder’s holding
period for its ADSs and subject to tax at the highest U.S. federal income taxation rate in effect for such years, with an interest
charge then imposed on the resulting taxes in respect of such income; and (iii) dividends paid by us would not be eligible for
reduced individual rates of U.S. federal income tax. In addition, U.S. Holders that own an interest in a PFIC are required to
file additional U.S. federal tax information returns. A U.S. Holder may in certain circumstances mitigate adverse tax consequences
of the PFIC rules by filing an election to treat the PFIC as a qualified electing fund, or a “QEF”. However, in the
event that we are or become a PFIC, we do not intend to comply with the reporting requirements necessary to permit U.S. Holders
to elect to treat us as a QEF.
Based
on our current estimates of expected gross assets and income for the year ended December 31, 2020, we do not believe we were a
PFIC for the year ended December 31, 2020. However, the application of the PFIC rules is subject to uncertainty in several respects,
and therefore, no assurances can be provided with respect to our PFIC status for the year ended December 31, 2020 or with regard
to our PFIC status in the past, the current year or in the future. Fluctuations in the market price of our ordinary shares may
cause us to become a PFIC for the current taxable year or later taxable years. If we were unable to deploy significant amounts
of cash for active purposes, our risk of being classified as a PFIC would substantially increase. Because there are uncertainties
in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable
year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. We urge U.S.
Holders to consult their own tax advisors regarding the possible application of the PFIC rules.
As
a holder of ADSs, you may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials
in time to be able to exercise your right to vote.
Holders
of our ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced by our ADSs on an individual
basis. Under the terms of the deposit agreement, holders of the ADSs may instruct the depositary for the ADSs (the “depositary”)
or its nominee to exercise the voting rights attaching to the ordinary shares represented by the ADSs. Pursuant to the deposit
agreement and in light of the fact that pursuant to German law and our articles of association, one whole ordinary share represents
one vote, voting instructions can be given only in respect of a number of ADSs representing a whole number of ordinary shares.
You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold
their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
The
value of the ADSs may not track the price of our ordinary shares.
Our
ordinary shares currently trade on the Frankfurt Stock Exchange under the Symbol B8F; International Securities Identification
Number (ISIN) DE0006046113; German securities code (WKN) 604611. Active trading volume and pricing for our ordinary shares on
the Frankfurt Stock Exchange will usually, but not necessarily, act as predictors of similar characteristics in respect of the
ADSs. In addition, the terms and conditions of our agreement with our depositary may result in less liquidity or lower market
value of the ADS than for our ordinary shares. Since the holders of the ADSs may surrender the ADSs to take delivery of and trade
our ordinary shares (a characteristic that allows investors in ADSs to take advantage of price differentials between different
markets), an illiquid market for our ordinary shares may result in an illiquid market for the ADSs. Therefore, the trading price
of our ordinary shares may not be correlated with the price of the ADSs.
Your
right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We
may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot
make any such rights available to the ADS holders in the U.S. unless we register such rights and the securities to which such
rights relate under the U.S. Securities Act of 1933, as amended, or the Securities Act, or an exemption from the registration
requirements is available. In addition, the deposit agreement provides that the depositary will not make rights available to you
unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities
Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect
to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we
may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate
in our rights offerings and may experience dilution in your holdings.
As
a holder of ADSs, you may not receive distributions on our ordinary shares represented by the ADSs or any value for them if it
is illegal or impractical to make them available to holders of ADSs.
Under
the terms of the deposit agreement, the depositary has agreed to pay to you the cash dividends or other distributions it or the
custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive
these distributions in proportion to the number of our ordinary shares your ADSs represent. However, in accordance with the limitations
set forth in the deposit agreement, it may be unlawful or impractical to make a distribution available to holders of ADSs. We
have no obligation to take any other action to permit the distribution of the ADSs, ordinary shares, rights or anything else to
holders of the ADSs. This means that, as a holder of ADSs, you may not receive the distributions we make on our ordinary shares
or any value from them if it is unlawful or impractical to make them available to you. These restrictions may have a material
adverse effect on the value of your ADSs.
Exchange
rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may
pay in the future in connection with your ADSs.
Under
German law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our unconsolidated
annual financial statements prepared under the German Commercial Code in accordance with accounting principles generally accepted
in Germany. Exchange rate fluctuations may affect the amount in U.S. dollars that our shareholders receive upon the payment of
cash dividends or other distributions we declare and pay in euros, if any. Such fluctuations could adversely affect the value
of our ADSs and, in turn, the U.S. dollar proceeds that holders receive from the sale of our ADSs.
You
may be subject to limitations on the transfer of your ADSs.
Your
ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to
time when it deems doing so expedient in connection with the performance of its duties. The depositary may close its books from
time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time
the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close
its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers
of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary
thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or under any
provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result,
you may be unable to transfer your ADSs when you wish.
U.S.
investors may have difficulty enforcing civil liabilities against our company or members of our supervisory and management boards
and the experts named in this annual report.
Certain
members of our supervisory and management boards are non-residents of the U.S., and all or a substantial portion of the assets
of such persons are located outside the U.S. As a result, it may not be possible, or may be very difficult, to serve process on
such persons or us in the U.S. or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions
of the securities laws of the U.S. In addition, awards of punitive damages in actions brought in the U.S. or elsewhere may be
unenforceable in Germany. An award for monetary damages under the U.S. securities laws would be considered punitive if it does
not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of
any judgment in Germany will depend on the particular facts of the case as well as the laws and treaties in effect at the time.
Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking
and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to
be conducted in the German language, and all documents submitted to the court would, in principle, have to be translated into
German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon
the civil liability provisions of the U.S. federal securities laws against us, certain members of our supervisory and management
boards and the experts named in this annual report. The U.S. and Germany do not currently have a treaty providing for recognition
and enforcement of judgments (other than arbitration awards) in civil and commercial matters, though recognition and enforcement
of foreign judgments in Germany is possible in accordance with applicable German laws.
As
a result of being a public company in the U.S., we are subject to additional regulatory compliance requirements, including Section
404 of the Sarbanes-Oxley Act, and if we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud.
As
a public company listed on The NASDAQ Capital Market, the Sarbanes-Oxley Act requires, among other things that we assess the effectiveness
of our internal control over financial reporting at the end of each fiscal year.
The
process of process of designing, implementing and testing our internal control over financial reporting required to comply with
Section 404(a) of the Sarbanes-Oxley Act is time-consuming, costly and complicated. If we fail to maintain internal control over
financial reporting adequate to meet the demands that will be placed upon us as a public company listed in the U.S., our business
and reputation may be harmed, the accuracy and timeliness of our financial reporting may be adversely affected, and the price
of our ADSs may decline.
In
addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls
over financial reporting beginning with our annual report following the date on which we are no longer an “emerging growth
company,” which may be as late as the end of the 2023 fiscal year.
ADS
holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in
less favorable outcomes to the plaintiffs in an action of that kind.
The
deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS
holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to
our ordinary shares, the ADSs or the deposit agreement, including any claim under U.S. federal securities laws.
If
we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable
based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the
enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws
has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial
waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement,
by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit
agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider
whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with
respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision
before entering into the deposit agreement.
If
you or any other ADS holders bring a claim against us or the depositary in connection with matters arising under the deposit agreement
or relating to the ADSs, including claims under federal securities laws, you may not be entitled to a jury trial with respect
to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is
brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable
trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial
by jury would have had, including results that could be less favorable to the plaintiffs in that action.
Nevertheless,
if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit
agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by
any ADS holder or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and
the rules and regulations promulgated thereunder.
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our
company was formed in 1997 by Professor Hermann Lübbert, Ph.D., who currently serves as chairman of our management board
and our chief executive officer, as a limited liability company (Gesellschaft mit beschränkter Haftung or GmbH)
under German law and under the name “BioFrontera Laboratories GmbH” to provide services to the pharmaceutical industry.
In
September 1997, the company was renamed “BioFrontera Pharmaceuticals GmbH” and commenced its current operations, which
include the development, marketing, sales, manufacturing and distribution of drugs and medical devices, cosmetics, and other dermatology-related
products. On August 24, 2000, our company was converted into a German stock corporation (Aktiengesellschaft or AG), and
on November 27, 2003, our company was renamed “Biofrontera AG”.
Our
company’s principal executive offices are located at Hemmelrather Weg 201, D-51377 Leverkusen, Germany and our telephone
number is +49 214 876 00. Our website address is www.biofrontera.com. Information contained on our website is not incorporated
by reference into this annual report, and you should not consider information contained on our website to be part of this annual
report or in deciding whether to purchase or sell our ADSs. Our agent for service of process in the U.S. is Biofrontera Inc.,
120 Presidential Way, Suite 330, Woburn, Massachusetts 01801, United States. Our ordinary shares have been listed on the Stock
Exchange in Düsseldorf since 2006 and on the Frankfurt Stock Exchange under the ticker symbol “B8F” since 2012.
Since
February 2018 our ADS have been listed on The NASDAQ Capital Market under the ticker symbol “BFRA”. Each ADS represents
two ordinary shares of Biofrontera AG.
On
March 25, 2019, we announced that we, through a U.S. subsidiary, acquired Cutanea from Maruho Co., Ltd., the parent of our significant
shareholder, Maruho Deutschland GmbH, that holds, as of January 28, 2020, approximately 29.9% of our outstanding ordinary shares.
In November 2018, Cutanea launched Xepi®, a prescription cream for the treatment of impetigo, a frequent bacterial
skin infection (Staphylococcus aureus or Streptococcus pyogenes). We have added Xepi® to our U.S. product portfolio
and promote this new product alongside our principal product, Ameluz®.
The
SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC, which can be located at http://www.sec.gov.
B.
Business Overview
We
are an international biopharmaceutical company specializing in the development and commercialization of pharmaceutical products
for the treatment of dermatological conditions, in particular, diseases caused primarily by exposure to sunlight that results
in sun damage to the skin. In the U.S. and Europe, our principal approved products focus on the treatment of actinic keratoses,
which are skin lesions that can sometimes lead to skin cancer, as well as the treatment of basal cell carcinoma in the EU. In
the U.S. we also market a topical antibiotic for the treatment of impetigo, a bacterial skin infection. We conduct our own research
and development and, in several regions, including the U.S., market and sell our own products.
Our
principal product is Ameluz®, which is a prescription drug approved for use in combination with our FDA approved
medical device, the BF-RhodoLED® lamp, for photodynamic therapy (“PDT”)(when used together, “Ameluz®
PDT”) in all of the countries of the EU, in the UK, in Switzerland, and in the U.S. for the lesion-directed and field-directed
treatment of actinic keratosis of mild-to-moderate severity on the face and scalp. We are currently selling Ameluz®
for this indication in the U.S. and in Europe.
In
addition, in the EU, Ameluz® is currently approved by the European Commission for the photodynamic therapy treatment
of field cancerization (entire skin areas infiltrated by tumor cells and entailing several actinic keratoses), as well as superficial
and/or nodular basal cell carcinoma unsuitable for surgical treatment due to possible treatment-related morbidity and/or poor
cosmetic outcome as well as for treatment of actinic keratosis with Ameluz® in combination with daylight photodynamic
therapy (i.e., using natural daylight to activate the drug, also referred to as “daylight PDT”). We have also
received the approval in the EU for label extension for Ameluz® to include the treatment of mild and moderate actinic keratosis
on the extremities and trunk/neck with photodynamic therapy.
It
is further approved in Switzerland for treatment of actinic keratosis and field cancerization with Ameluz® in combination
with daylight photodynamic therapy and for superficial and/or nodular basal cell carcinoma unsuitable for surgical treatment due
to possible treatment-related morbidity and/or poor cosmetic outcome.
As
further described below, we plan to seek further extensions of the approved indications for Ameluz® photodynamic
therapy primarily in the U.S.
Our
second prescription drug product in our portfolio is Xepi® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone. Currently,
no antibiotic resistance against Xepi® is known and it has been specifically approved by the FDA for the treatment of impetigo
due to Staphylococcus aureus or streptococcus pyogenes. The approved indication is impetigo, a common skin infection. It is approved
for use in adults and children 2 months and older. We are currently selling Xepi® for this indication in the U.S. under an
exclusive license and supply agreement with Ferrer Internacional (Ferrer) that was acquired by Biofrontera on March 25, 2019 through
its acquisition of Cutanea.
The
following table summarizes a) the indications for which our products are currently approved, b) the indications we are in the
process of seeking approval to market Ameluz®, and c) products currently in development, organized by territory:
*
Through our acquisition of Cutanea in March 2019, we acquired the right to market Xepi® in the United States. We
are unaware of any immediate or near-term plans of Ferrer for a US-market focused development pipeline.
For
a breakdown of total revenues by category of activity and geographic market, please see “Item 5—Operating and Financial
Review and Prospects—Components of Our Results of Operations—Revenue”.
Our
Strategy
Our
principal objectives are to increase the sales of our approved products and to obtain further regulatory approvals for the marketing
of Ameluz® PDT for additional indications and in additional countries, and. The key elements of our strategy include
the following:
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geographic
expansion of Ameluz® sales worldwide, including by:
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expanding
our sales in the United States of Ameluz® in combination with our BF-RhodoLED® lamp for the
treatment of minimally to moderately thick actinic keratosis of the face and scalp and positioning Ameluz®
to be a leading photodynamic therapy product in the United States, by growing our dedicated sales and marketing infrastructure
in the United States;
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expanding
our sales of Ameluz® in other countries where it is an approved product by entering into arrangements with
distribution partners;
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extension
of the approved indications for Ameluz® photodynamic therapy, including by:
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seeking
to extend the approved label in the United States for actinic keratosis to include actinic keratosis lesions located other
than on the head or scalp and increase the maximal size of the treatment field;
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seeking
to extend the approved indications in the United States for Ameluz® in combination with our BF-RhodoLED®
lamp for the treatment of basal cell carcinoma;
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seeking
to extend the approved indications in the United States for Ameluz® in combination with our BF-RhodoLED®
lamp for the treatment of acne, which would require further clinical trials and other research and development activities;
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seeking
to extend the approved indications in the EU and United States for Ameluz® to additional indications, such as squamous
cell carcinoma in situ, actinic cheilitis, warts, wound healing, and/or cutaneous leichmania; all of which would require further
clinical trials, and other research and development activities; and
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expanding
our sales of Xepi® in the United States for treatment of impetigo by improving the market positioning of the product.
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Our
Products
Ameluz®
and BF-RhodoLED®
Our
principal marketed product is Ameluz®. Ameluz® is used in photodynamic therapy to selectively remove
tumor cells.
We
outsource the production of Ameluz® to a third-party contract manufacturer in Switzerland. In general, photodynamic
therapy is a two-step process:
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the
first step is the application of a drug known as a “photosensitizer,” or a pre-cursor of this type of drug, which
tends to collect in cancerous cells; and
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the
second step is activation of the photosensitizer by controlled exposure to a selective light source in the presence of oxygen.
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During
this process, energy from the light activates the photosensitizer. In photodynamic therapy, the activated photosensitizer transfers
energy to oxygen molecules found in cells, converting the oxygen into a highly energized form known as “singlet oxygen,”
which destroys or alters the sensitized cells.
The
longer the wavelength of visible light, the deeper into tissue it penetrates. Different wavelengths, or colors of light, including
red and blue light, may be used to activate photosensitizers. The selection of the appropriate color of light for a given indication
is primarily based on two criteria:
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the
desired depth of penetration of the light into the target tissue; and
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the
efficiency of the light in activating the photosensitizer.
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Photodynamic
therapy can be a highly selective treatment that targets specific tissues while minimizing damage to normal surrounding tissues.
It also can allow for multiple courses of therapy. The most common side effect of photosensitizers that are applied topically
or taken systemically is temporary skin sensitivity to bright light. As noted in the Ameluz® patient insert, treatment
is generally well tolerated but tingling discomfort or pain is common during PDT. In our Phase III trials, the resulting redness
and/or inflammation resolved within 1 to 4 days in most cases; in some cases, however, it persisted for 1 to 2 weeks or even longer.
Patients undergoing traditional photodynamic therapy treatments with an artificial light (as opposed to daylight PDT) are usually
advised to avoid direct sunlight and/or to wear protective clothing and sunscreen for some days after the treatment. Patients’
indoor activities are generally unrestricted except that they are told to avoid bright lights. The degree of selectivity and period
of skin photosensitivity varies among different photosensitizers and is also related to the drug dose given. Unless activated
by light, photosensitizers have no direct photodynamic therapy effects.
History
of Approved Indications and Active Applications
In
December 2011, Ameluz® 78 mg/g gel (Spanish for “love the light”, development name BF-200 ALA) received its first
centralized European approval for the treatment of mild and moderate actinic keratoses (AK) on the face and scalp. In the EU,
its significant superior effect in combination with an LED lamp compared to the direct European competitor product Metvix®
for AK was demonstrated during phase III development for EU approval. Actinic keratoses are superficial forms of skin cancer with
a risk of spreading to deeper skin layers and thus developing into potentially fatal squamous cell carcinoma. The combination
of Ameluz® with light treatment is an innovative form of treatment that is classified as photodynamic therapy (PDT). The product
information authorized by the EMA expressly states the significant superiority of Ameluz® in the removal of keratosis compared
to the direct competitor product, both in conventional light treatment with a special lamp and in application with ordinary daylight.
Since January 2017, Ameluz® is also approved in the EU for the treatment of superficial and nodular basal cell carcinomas.
We
believe the overall characteristics of Ameluz® in terms of treatment, handling, user-friendliness as well as relatively low
recurrence rates of PDT in the treatment of actinic keratoses will lead to the expectation that this treatment option will attract
even more attention from dermatologists in the years to come.
In
2017, Biofrontera submitted an application for approval for daylight-PDT with Ameluz® and was granted approval by the European
Commission in March 2018. The label extension now includes the treatment of actinic keratoses and field cancerization with daylight-PDT.
We believe that daylight-PDT can be a cost-effective and painless alternative to traditional PDT treatment with a special lamp.
The topically applied drug is activated by natural or artificial daylight. As daylight-PDT does not require the treatment to be
carried out in a doctor’s office, it competes directly with self-applied topical drugs, which are used much more widely
in Europe. As a result, Ameluz® is also reimbursed by the statutory health insurers in Germany for use with daylight-PDT,
whereas use of the drug with conventional PDT is generally not reimbursed. The results of the follow-up phase of the clinical
comparison study on daylight-PDT with Ameluz® and Metvix® were included in the product information (SmPC) in March 2020.
The company expects that the significantly superior efficacy in the EU label compared to Metvix® one year after treatment
will further enhance the market positioning of Ameluz® in Europe.
In
March 2020, the European Commission granted a label extension for Ameluz® to cover the treatment of mild and moderate actinic
keratoses by photodynamic therapy with Ameluz® not only on the head, but also on the extremities and trunk/neck. The extension
of the approval by the European Commission followed a positive vote by the EMA and is based on the results of a Phase III study
involving 50 patients. The patients were treated with Ameluz® on one randomized side of the body and placebo on the other
side. If lesions remained on both sides of the body, PDT was repeated three months later. The results for the primary regulatory
endpoint show that Ameluz® was significantly superior (p<0.0001) to placebo based on a mean total lesion clearance rate
of 86% versus 33%. In this study, the average lesion recurrence rate 12 months after Ameluz® treatment was 14.1% compared
to 27.4% after placebo. The company expects that this label extension will also further strengthen the market position of Ameluz®
in Europe.
In
May 2016, Biofrontera received the marketing approval for Ameluz® in the United States. The approved indication is for “AMELUZ®
gel, in combination with photodynamic therapy (PDT) using BF-RhodoLED® lamp, a narrowband, red light illumination source,
is indicated for lesion-directed and field-directed treatment of actinic keratoses (AKs) of mild-to-moderate severity on the face
and scalp.” As the approval in the United States includes a combination of drug and lamp according to FDA guidelines, Biofrontera
has developed its own PDT lamp, the BF-RhodoLED®. In order to meet the strict requirements of the FDA for the production of
a Class III medical device, production of the lamp was transferred to Biofrontera Pharma GmbH in 2016 as part of the FDA approval
process and is now carried out at our company’s headquarters in Leverkusen. This makes Biofrontera the responsible manufacturer
from the perspective of the regulatory authorities. In the EU, this lamp was CE-certified in 2012, which also required ISO 9001
and ISO 13485 certifications for the entire company. The ISO certification was renewed in 2019 at regular intervals.
Our
BF-RhodoLED® is a red-light lamp specifically designed for photodynamic therapy, and uses LEDs emitting red light at a wavelength
of approximately 635 nm to activate the photosensitizer.
We
believe our BF-RhodoLED® lamp combines a controlled and consistent emission of light at the required wavelength with simplicity
of design, user-friendliness and energy efficiency. Our BF-RhodoLED® lamp contains a fan used to blow air over the treated
skin surface and power settings for the fan. In the model used in the EU, our lamp also allows adjustment of the light intensity
during photodynamic therapy in order to reduce discomfort experienced during the treatment. Our BF-RhodoLED® lamp is currently
distributed throughout the EU. Our lamp is approved in the U.S. by the FDA as a combination product for use in treatment with
Ameluz® for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and
scalp.
Actinic
keratosis
Non-melanoma
skin cancer and its precursor actinic keratosis (AK) is the principal market for our flagship prescription drug Ameluz®. Actinic
keratoses are superficial potentially pre-cancerous skin lesions caused by chronic sun exposure that may, if left untreated, develop
into a form of potentially life-threatening skin cancer called squamous cell carcinoma. Actinic keratoses typically appear on
sun-exposed areas, such as the face, bald scalp, arms or the back of the hands, and are often elevated, flaky, and rough in texture,
and appear on the skin as hyperpigmented spots.
These
skin lesions occur not only isolated, but in many cases also over a large area. Such an area of the skin is called field cancerization.
In this case, visible and not yet visible skin damage can be in direct proximity to each other on the affected skin areas. In
about one in ten patients with AK, a malignant form of non-melanoma skin cancer (squamous cell carcinoma) can develop from a skin
lesion or in its vicinity. Even AK that are not yet visible already carry a high risk of transitioning into squamous cell carcinoma.
It
is believed that lifetime doses of ultraviolet (UV) radiation play an important role in the development of AK. Over many years,
UV radiation damages the skin cells, which then mutate and proliferate, which can lead to abnormal keratinization (hyperkeratosis).
This is why AK occurs most frequently in older people: in Germany, for example, more than 11 out of every 100 people between the
ages of 60 and 70 are affected. Men are more frequently affected than women, since it is not uncommon for men to work outdoors
and thus be exposed to the sun, usually without protection. Particularly at risk are, for example, farmers and forestry workers,
roofers, carpenters, gardeners and lifeguards. In addition to age and gender, other factors can promote the development of AK.
These include a fair skin type, severe sunburns, or treatment with medications that weaken the immune system.
Therapy
options for the treatment of actinic keratosis
Because
actinic keratosis can develop into squamous cell carcinomas, actinic keratosis is classified by The European Academy of Dermatology
and Venereology and the American Academy of Dermatology as a tumor that requires treatment. In order to minimize the risk of developing
cancer, AK must be detected and treated early.
Actinic
keratoses are treated using a wide range of methods. The traditional methods of treating actinic keratoses are cryotherapy (or
the deep freezing of skin with liquid nitrogen); simple curettage; self-administered prescription topical medications (usually
creams, gels, or solutions containing active ingredients that must be applied to the damaged areas of the skin, usually regularly
over an extended period of time); and combining a drug with photodynamic therapy (PDT). When deciding on the treatment option,
the physician takes into account the disease progression to date, the extent of the existing skin damage, and the patient’s
condition (age, possible existing concomitant diseases, medications to be taken).
Although
any of these methods can be effective, each has limitations and can result in significant side effects.
Cryotherapy
is non-selective (meaning it cannot target specific tissues but affects all tissues in the area of application), can be painful
at the site of freezing, and can cause blistering and loss of skin pigmentation, leaving temporary or permanent white spots. In
addition, because there is no standardized treatment protocol, results are not uniform and can depend on the skill or technique
of the doctor treating the patient.
Topical
prescription products such as 5-fluorouracil cream, or 5-FU, can be irritating and require twice-a-day application by the patient
for approximately 2 to 4 weeks, which may result in inflammation, redness and erosion or rawness of the skin. Following the treatment,
up to several weeks of healing may be required. Imiquimod or diclofenac, other topical prescription products, require extended
applications of cream, lasting up to 3 or 4 months, during which the skin may become very red and inflamed. Tirbanibulin is a
newly approved topical, approved by the FDA in December 2020.
International
treatment guidelines list photodynamic therapy as the “gold standard” for the field-directed treatment of actinic
keratoses. In this process, a gel containing the active ingredient, such as Biofrontera’s Ameluz®, is first applied
to the affected areas of skin. The active ingredient is preferentially absorbed by cells with high metabolic activity, such as
cancer cells and their precursors, and converted into its light-activatable form. As a result, they become more light-sensitive
and are destroyed within a few hours by targeted illumination, while healthy skin cells remain unharmed. The dead cells are broken
down and the skin renews itself. Usually, no scarring remains and the appearance of the skin visibly improves over the next weeks
and months.
Market
overview and competitive landscape in Germany
Germany
is Biofrontera’s single largest European sales market. In Germany, around 1.7 million people annually are treated by dermatologists
for AK, which represents around 2 to 3% of the total population. However, the number of people suffering from the disease is probably
higher. In 2020, a total of 814,410 prescriptions were issued for the treatment of AK (previous year: 831,073). Self-applied topicals
such as prescription creams and gels containing active ingredients were used most widely, taking a market share of 92.9%, followed
by PDT (the combination of a topically applied drug with light therapy) at 7.1% (previous year: 93.4% and 6.6%, respectively).
Due to the impact of the COVID-19 pandemic and the market exit of a widely used topical drug at the beginning of 2020, the overall
AK market declined by 2% in 2020. However, PDT treatments were able to slightly increase market share in the process, we believe
mainly due to the growth in sales of Ameluz®.
The
chart below displays the relative percentages of these actinic keratosis treatments in Germany in 2020 based on data accessible
from RPI, NVI, ODV and Insight Health:
Although
the total number of cryotherapy or simple curettage treatments for actinic keratosis in Europe is not publicly accessible, we
believe that in Europe only a small number of patients with actinic keratosis are treated with cryotherapy or simple curettage
treatments.
Based
on our estimates and analysis of market data accessible from RPI and Insight Health, in Germany, the largest European market for
Ameluz®, our market share in the PDT drug segment was approximately 62.3% in 2020, compared to approximately 57.0% in the
previous year. The continued uptake of daylight PDT has allowed Ameluz® to prove itself as a strong leader in the PDT market
against competing products. We estimate that daylight PDT will continue to capture additional market share previously reserved
for self-applied topical creams. The fact that Ameluz® is reimbursed in Germany by statutory health insurers when prescribed
for daylight PDT is particularly important. Thus, the number of patients who have access to treatment with Ameluz® has multiplied,
which is also reflected in an increase in prescriptions for Ameluz® in Germany of around 17% in 2020.
The
chart below shows the relative percentages of the PDT market share in 2020:
Actinic
keratosis has been recognized as an occupational disease by the Federal Ministry of Labor and Social Affairs in Germany since
2013. As a result of such recognition, occupational insurance associations in Germany must cover, for the duration of the patients’
lives, the treatment costs of patients who have worked predominantly outdoors for extended periods of time and who meet certain
other criteria. In Germany since March 2016, photodynamic therapy has been included as an approved treatment option for occupational
actinic keratosis, which means it can be reimbursed by the government.
There
are a few other companies that are selling photodynamic therapy agents other than Ameluz® for the treatment of
actinic keratoses and certain other skin conditions. Our major competitor in the EU is methyl aminolaevulinate (160mg/g) (MAL)
Metvix®/Metvixia®, a drug owned and distributed by Galderma S.A., which is used in photodynamic
therapy with red light. Its approved indications include: the treatment of thin or non-hyperkeratotic and non-pigmented actinic
keratoses on the face and scalp when other therapies are considered less appropriate; the treatment of superficial and/or nodular
basal cell carcinoma unsuitable for other available therapies due to possible treatment related morbidity and poor cosmetic outcome,
such as lesions on the mid-face or ears, lesions on severely sun damaged skin, large lesions, or recurrent lesions; and the treatment
of squamous cell carcinoma in situ (Bowen´s disease) when surgical excision is considered less appropriate. Metvix®
is indicated in adults above 18 years of age. As described above, we believe that the extensions of our indications in the
EU for Ameluz® to include daylight photodynamic therapy (2018) and treatment of AK on areas other than the face
and scalp (2020) has allowed Ameluz® to better compete with Metvix® and Luxerm® and
with other topical prescription drugs, which are widely used in Europe, and have been leading to improved revenue in Germany and
other EU countries.
Metvix®
has also been approved in the EU for use in daylight photodynamic therapy which is sold by Galderma under the brand name
Luxerm® in Germany and Luxera® in other European countries. This gave that drug a competitive advantage
compared to Ameluz®, as Ameluz® was not, until March 2018, approved to be used in daylight photodynamic
therapy to treat actinic keratosis. Since we have recently obtained approval for the treatment of actinic keratosis using Ameluz®
with daylight photodynamic therapy, we believe we should better compete with Metvix® and Luxerm®,
but there can be no assurance that we will continue doing so.
A
patch containing 5-ALA (Alacare®), which is owned and sold by Galderma, is approved for the treatment of mild actinic
keratosis in a single treatment session in combination with red light without pretreatment of the lesion.
In
addition, we also compete with a number of non-photodynamic therapy products for the treatment of actinic keratoses and certain
other skin conditions, including: Efudex® (5-fluorouracil), sold by Valeant; Solaraze® (diclofenac
sodium), sold by Almirall; ALDARA® and Zyclara® (imiquimod), sold by Meda Pharma; and Actikerall®
(5-fluorouracil and salicylic acid) sold by Almirall.
The
relative benefits of different treatment options for mild-to-moderate actinic keratosis have been analyzed in a European meta-analysis
(Vegter & Tolley 2014). The objective of this study was to compare different treatments for mild-to-moderate actinic keratosis
on the face and scalp available in clinical practice in Europe. A network meta-analysis was performed to compare different treatment
modalities by combining a network of both head to head and indirect comparative evidence. Study selection was based on the Cochrane
systematic search and review for actinic keratosis treatments available in Europe. In total, 25 randomized, controlled studies
(5,562 patients) with the primary outcome measure “complete patient clearance” were considered and included. For PDT,
only studies with LED lamps were included. Although this study was a meta-analysis of placebo-controlled trials, rather than a
head-to-head comparison of treatments, we believe this data shows significant support for Ameluz PDT as the best available treatment
option for mild-to-moderate actinic keratosis of the face and scalp.
We
believe that only a small proportion of patients in the EU who could be treated with medication in combination with photodynamic
therapy are currently being so treated because dermatologists in the EU favor topical prescriptions, which require the least amount
of work from medical practitioners (since no office procedure is required). In the EU, cryotherapy is not a common practice due
to its limited efficacy, high recurrence rates and the lack of reimbursement. Photodynamic therapy for actinic keratosis is not
reimbursed in all markets in the EU. Particularly in those countries where dermatology is mostly a hospital-based discipline,
dermatologists typically treat basal cell carcinoma (and not actinic keratosis). We expect sales of Ameluz® to
increase in the EU because of the greater benefits demonstrated in clinical trials, better cosmetic results compared to other
treatment options, and the extension of indications to field cancerization, daylight-PDT and basal cell carcinoma in addition
to actinic keratosis on the face and scalp as well as on the neck/trunk and extremities.
Market
overview and competitive landscape in the United States
The
United States represents the most important pharmaceutical market in the world and is also Biofrontera’s major sales market.
According to the Skin Cancer Foundation, actinic keratosis currently affects approximately 58 million people in the United States.
In 2020, a total of 12.7 million treatments for actinic keratosis were performed. The U.S. market for actinic keratosis treatment
differs significantly from the European market. In the United States, the most common treatment for actinic keratosis remains
cryotherapy, with approximately 11.0 million procedures performed per year in 2020 and an 86.3% market share. Topical drugs for
the treatment of AK took a market share of about 11.9% with about 1.5 million prescriptions in 2020, followed by PDT drugs with
about 227,000 prescriptions at 1.8%.
The
chart below displays the relative percentages of these actinic keratosis treatments in the United States in 2020:
Simple
curettage is generally not used to treat actinic keratosis in the United States. As in Germany, the overall market, i.e. the number
of total AK treatments, declined in 2020 due to the COVID-19 pandemic. In the United States, we saw a decline of 15.6% in AK treatments
compared to the previous year (15.1 million AK treatments). Rising infection rates and the resulting official recommendation by
the American Academy of Dermatology to provide patients with remote diagnosis and treatment (telehealth) led to significantly
declining patient numbers and widespread, albeit temporary, closures of physicians’ offices.
Based
on our estimates and analysis of market data accessible from CMS and IQVIA, we believe that Ameluz® achieved an
estimated market share for PDT drugs of 24.5%, compared with approximately 22.6% in 2019. We were thus able to improve our market
positioning vis-à-vis the competing PDT product notwithstanding the COVID-19 pandemic.
The
chart below shows the relative percentages of the PDT market share in the United States in 2020:
Our
goal is to continue to improve the market positioning of Ameluz® to become the leading PDT drug for the treatment of AK in
the United States. In addition, we see the opportunity to expand the PDT market as a therapy for the treatment of actinic keratosis
as the first option compared to cryotherapy, especially in patients with more than 15 lesions. We believe dermatologists have
favored cryotherapy to treat actinic keratosis; however, we believe that there is treatment guideline pressure towards field-directed
therapy (as opposed to single lesion therapy), which may also help support use of photodynamic therapy treatments.
The
primary competing PDT drug Levulan® has been approved for the treatment of minimally to moderately thick actinic keratosis
of the face or scalp in combination with PDT with a blue light source since 1999. Levulan® was the only FDA-approved product
on the U.S. market for the PDT treatment of actinic keratosis (in accordance with the applicable prescribing information) until
our company launched Ameluz® in the United States in October 2016 (Galderma sold Metvix® in the U.S. market only for a
short period and withdrew the product in 2013).
In
addition, in August 2017, we agreed with the FDA on recommended revisions for our clinical trial to support extending Ameluz®
PDT for the treatment of superficial basal cell carcinoma in the United States. We commenced patient recruitment in 2018. Due
to the nature of the study protocol mandated by the FDA, we expect the recruitment process will likely take a considerable amount
of time. Only if we obtain FDA approval for such label extension can we market the product for treatment of basal cell carcinoma.
If we obtain FDA approval for such label extension, we anticipate that Ameluz® would be at that time the only drug in the
United States for the treatment of superficial basal cell carcinoma with PDT.
We
anticipate that our ability to compete in the PDT-market will be based upon such factors as:
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the
efficacy from treatment with Ameluz® photodynamic therapy;
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the
recurrence rates from treatment with Ameluz® photodynamic therapy;
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the
ease of administration of our formulation for photodynamic therapy;
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the
ability of our drug to provide both lesion- and field-directed treatment;
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the
cost of our drug and the type and cost of our photodynamic therapy light device;
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the
number of required doses;
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the
cosmetic outcome and improvement of skin impairment; and
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our
continued efforts to develop further indications.
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Based
on the above market and competitive analysis, we believe there is substantial market potential and room for growth in the U.S.
and we believe that this data provides the best information available to us relating to the present market for actinic keratosis
treatments in the United States. We also base our business planning activities on these data.
Market
Overview for Treatment of Basal Cell Carcinoma
Basal
cell carcinomas are abnormal, uncontrolled growths or lesions that arise in the skin’s basal cells, which line the deepest
layer of the epidermis (the outermost layer of the skin). Basal cell carcinomas often appear as open sores, red patches, pink
growths, shiny bumps or scars and are typically caused by accumulated sun exposure.
Basal
cell carcinomas are the most common invasive tumors affecting humans, accounting for approximately 80% of all non-melanoma skin
cancers worldwide. Studies of populations in the U.S. and Switzerland have shown that approximately 20% to 30% of Caucasians will
develop at least one basal cell carcinoma in their lifetime, and cases are increasing worldwide, which is believed to be caused
by increased exposure to ultraviolet light. More than 4 million cases of basal cell carcinoma are diagnosed in the U.S. each year.
Although basal cell carcinoma rarely spreads to other parts of the body and becomes life-threatening, it can be disfiguring if
not treated promptly
The
most common treatment for basal cell carcinoma in the EU and U.S. is surgical removal. In many European countries, dermatology
specialists are hospital-based and, as a result, basal cell carcinoma is most commonly treated by hospital surgery in such European
countries, which is rarely the case for actinic keratosis. The treatment of basal cell carcinoma by a surgical procedure can result
in high costs and clearly visible scarring. But thin, non-aggressive basal cell carcinomas can also be treated with photodynamic
therapy. The advantage of treating basal cell carcinoma with photodynamic therapy is that it is a non-invasive alternative that
can have better cosmetic results, i.e., removal of tumors without leaving clearly visible scarring.
Xepi®
The
acquisition of Cutanea in March 2019 enabled Biofrontera to market another FDA-approved drug that has been introduced in the U.S.
market. Xepi® (ozenoxacin cream, 1%) is a topical prescription medicine approved for the treatment of impetigo due to Staphylococcus
aureus or Streptococcus pyogenes. Xepi®’s mechanism of action involves the inhibition of bacterial DNA replication enzymes,
DNA gyrase A and topoisomerase IV. Ozenoxacin has been shown to be bactericidal against S. aureus and S. pyogenes organisms. Because
of this dual mechanism of action, Xepi® is believed to show a low overall the frequency of resistance. Studies have shown
thatoverall, the frequency of resistant mutants selected by ozenoxacin is ≤10-10. In clinical studies ozenoxacin has been shown
to be active against most isolates of the following microorganisms, both in vitro and in clinical infections of impetigo caused
by Staphylococcus aureus (including methicillin-resistant isolates) and Streptococcus pyogenes. The approved indication is the
topical treatment of impetigo due to Staphylococcus aureus or Streptococcus pyogenes in adult and pediatric patients 2 months
of age and older.
Impetigo
is a common and highly contagious bacterial skin infection caused by bacteria. The bacteria that can cause impetigo include Group
A beta-hemolytic streptococcus and Staphylococcus aureus. It occurs most frequently in children 2 to 5 years old, but people of
any age can be affected. Impetigo causes red sores that most often appear on the face, neck, arms, and legs. These sores can turn
into blisters that open and form a yellowish crust. Transmission of the disease is by direct contact and poor hygiene can increase
the spread. Anyone can get impetigo, and a person can get it more than once. Although impetigo is a year-round disease, it occurs
most often during the warm weather months.1 There are more than 3 million cases of impetigo in the United States every
year.
1
How to Treat Impetigo and Control This Common Skin Infection | FDA
Possible
complications of impetigo2 can include:
|
●
|
Worsening
or spreading of the infection
|
|
●
|
Scarring,
which is more common with ecthyma
|
Impetigo
caused by beta-hemolytic strep bacteria can cause:
|
●
|
Kidney
damage (poststreptococcal glomerulonephritis)
|
|
●
|
Fever,
joint, and other problems (rheumatic fever)
|
Although
impetigo rarely leads to serious complications, effective treatment with drugs like Xepi® can shorten how long impetigo lasts.
Treatment
decisions should consider resistance pattern of S. aureus as antibiotic ineffectiveness resulting from bacterial resistance makes
infections more difficult to control, worsens prognosis, and increases healthcare costs. Increasing resistance to known antibiotics
is a serious concern for doctors. The World Health Organization has declared antimicrobial resistance as one of the top 10 global
public health threats facing humanity. The cost of resistance to our economy and health system is significant. In a 2009 study
titled “Hospital and Societal Costs of Antimicrobial Resistant Infections in a Chicago Teaching Hospital: Implications for
Antibiotic Stewardship,” 13.5% of patients had antimicrobial resistance resulting in a 6.5% attributable mortality rate
and a per patient incremental cost of $100,000 per resistant infection. If impetigo spreads to a community it may also trigger
the spread of resistant strains, such as methicillin-resistant staphylococcus aureus (MRSA), with poor prognoses for patients
over time. According to the FDA, 90% of MRSA community acquired infections present as skin and soft tissues infections, whereby
patients infected with MRSA are 64% more likely to have complications than those infected with the non-resistant forms. In the
United States, it is believed that 78% of bacterial skin and soft tissue infections are due to MRSA.3
The
market for topical antibiotics for the treatment of impetigo is driven by generics with mupirocin being the top choice of topical
antibiotics across all specialties. Before the COVID-19 pandemic, the mupirocin market was growing with a CAGR of 7.1% and is
down 8.3% compared to 2019.
In
2020, over 13 million prescriptions were written for mupirocin for a range of conditions. According to prescription data from
IQVIA, dermatologist account for approximately 12% of the annual topical antibiotic prescriptions written or about 1-1.3 million
prescriptions. As our focus is on the dermatology market, we believe we can capture a significant portion of the dermatologists
antibiotic prescriptions relating to the applicable indication and generate significant revenues.
The
chart below displays the utilization of mupirocin by specialty in 2020:
Considering
the above market analysis, we believe there is a considerable growth potential for Xepi®.
2
From CLS link to Johns hopkins Impetigo | Johns Hopkins Medicine
3
Antimicrobial resistance (who.int); Hospital and Societal Costs of Antimicrobial-Resistant Infections in a Chicago Teaching
Hospital: Implications for Antibiotic Stewardship | Clinical Infectious Diseases | Oxford Academic (oup.com);
Belixos®
Belixos®
is not sold in the United States. It is a modern active cosmetic product specially developed for sensitive and irritated skin.
Biofrontera’s patented biocolloid technology, which optimizes epidermal penetration, makes the products unique: pure herbal
biocolloids combine with medicinal plant extracts to form an extraordinary combination of active ingredients with a proven depth
effect. The Belixos® series includes the following products: Belixos® Liquid and Belixos® Protect.
Belixos®
products are manufactured according to stringent quality and environmental regulations. They are free of paraffins, parabens,
ethyl alcohol, animal products, dyes and fragrances that may have negative dermatological effects. Its skin compatibility was
certified as “very good” by the independent “Dermatest” Institute. Belixos® is obtainable
in Europe in selected pharmacies, dermatological institutes and from the online retailer Amazon on Amazon’s non-U.S. platforms
(but is not available in the United States).
Revenues
from the sale of Belixos® contribute a negligible amount to our company’s total revenue.
Sales
and marketing
At
the start of 2020, our company completed organizational restructuring measures. Following the reorganization of the operational
management of our subsidiary Biofrontera Inc., we also announced an organizational restructuring of our sales organization in
Europe. As a result of the 2020 changes, Biofrontera’s global sales organization now has two divisions: sales and marketing
in the U.S., Biofrontera’s largest market, and unified management of all sales organizations in Europe.
USA
We
commercially launched Ameluz® in the United States in October 2016. Our distribution of Ameluz® in the United States is
handled by our subsidiary Biofrontera Inc. In the reporting period, we filled all key positions in the United States locally and
further developed distribution structures. Our U.S. sales and marketing team currently consists of approximately forty employees.
The sales force is supported by our Scientific Advisory team, our Market Access and our Customer Service Team. Since its launch
in the United States, we have sold €50 million of Ameluz® there, establishing the product in the market. In March 2019,
Biofrontera acquired all shares of Cutanea and was thus able to expand its sales in the United States with another FDA-approved
drug, Xepi®.
Germany
and Europe
With
its central European approval, Ameluz® can be sold and distributed in all EU countries as well as in Norway, Iceland and Liechtenstein.
In many European countries, however, the price and reimbursement status have to be determined before market launch, which can
be a lengthy process. This process involves reference pricing and re-imports, that might result in low prices in individual EU
countries, which in return can have a negative impact on the entire EU market. This is one of the reasons why the drug is only
available in certain EU countries. In these countries the drug is available at pharmacy retail prices ranging from €150 to
approximately €220 per 2g tube. In Spain, the price was reduced to €75 by decree of the Ministry, against which our
company filed an administrative complaint.
In
Europe, Ameluz® and BF-RhodoLED® are marketed in Germany (since 2012), Spain (since 2015) and the UK (since May 2018)
by our own sales force. Germany is by far the largest European market for Ameluz®. In other EU countries and in Switzerland,
the products are distributed through distribution partners. In Switzerland, independent approval procedures were required, which
were carried out by our local marketing partner in collaboration with Biofrontera. The contracts with distribution partners were
concluded in such a way that Biofrontera received no or only a moderate down payment and the regional partners buy Ameluz®
from Biofrontera at a price that is linked to their own sales price. Depending on the market conditions of a country, Biofrontera’s
share of the sales price varies somewhat, but averages 50% of net sales. Overall, however, marketing through Biofrontera’s
own sales force has proven to be much more successful in recent years, so that sales to distribution partners now only account
for a small percentage of total sales. In this context, during the reporting period, our license and supply agreement agreements
with Perrigo Israel for the commercialization of Ameluz® and BF-RhodoLED® in Israel and our license and supply agreement
with Desitin Arzneimittel GmbH for the commercialization of Ameluz® and BF-RhodoLED® in Scandinavia were each terminated
by mutual agreement.
In
December 2020, Biofrontera entered into an exclusive license and supply agreement with Galenica AB, Malmö for the marketing
of Ameluz® and BF-RhodoLED® in the Nordic countries. Sales of the products in the Nordic countries are expected to commence
in the second half of 2021.
In
March 2020, Biofrontera announced that it had signed a non-binding term sheet for an exclusive license and supply agreement with
medac GmbH Sp. z o.o., Warsaw, the Polish branch of medac Gesellschaft für klinische Spezialpräparate mbH, for the commercialization
of Ameluz® and BF-RhodoLED® in Poland. We expect the definitive license and supply agreement with medac GmbH Sp. z o.o.
to be concluded in 2021.
Other
regions
In
April 2020, Biofrontera AG signed an exclusive license and supply agreement with Maruho Co, Ltd, Osaka, Japan (Maruho) for the
development and commercialization of Ameluz® for all indications in East Asia and Oceania. The agreement has a term of 15
years from the start of distribution in the countries covered by the agreement.
Under
the agreement, Maruho will receive exclusive development and marketing rights, including permission to sublicense Ameluz®
in Japan, China, Korea, India, Pakistan, Vietnam, the Philippines, Australia, New Zealand and surrounding countries and islands
(Territory). Maruho is entitled, with the consent of Biofrontera, to conduct its own research and development under the terms
and conditions of the licensing agreement. Maruho will grant our company a free and unlimited license for all results of such
research and development activities performed by Maruho for commercialization outside the Territory. Under the terms of the license
agreement, Biofrontera will supply Ameluz® to Maruho at cost plus 25%, while Maruho has the obligation to make commercially
reasonable efforts to develop, register and market Ameluz® in all countries within the Territory.
Under
the agreement, Maruho has made a one-time payment of €6 million to Biofrontera AG. Further future payments will be due upon
achievement of certain regulatory and commercial milestones. Maruho will also pay royalties of initially 6% of net sales in the
countries of the Territory, which may increase to 12% depending on sales volume and will decrease in case of the introduction
of generic products in these countries.
Research
and development projects
All
research and development activities of Biofrontera regarding the nanoemulsion and Ameluz® are carried out by Biofrontera
Bioscience GmbH, which is responsible for clinical studies as well as for the granting, maintenance and expansion of our approvals.
Responsibility for the project management of all development activities is assumed internally; individual tasks such as data management
and statistics are partially or completely outsourced. The development of the new red-light lamp BF-RhodoLED® XL is the responsibility
of Biofrontera Pharma GmbH. Research and development costs for both Ameluz®, the approved drug, and the other research and
development projects, with the exception of the further development of the new BF-RhodoLED® XL red light lamp, are recognized
as expenses in the period in which they are incurred. In the reporting period, 21 people were employed in research and development
as well as regulatory affairs (previous year: 22).
Research
cooperation with Maruho Co., Ltd.
On
March 19, 2019, the Company signed an agreement to continue its research collaboration with Maruho Co., Ltd. of Osaka, Japan (Maruho)
for the development of branded generics. As part of the new project phase, Biofrontera has prepared the formulation of one of
four active ingredients investigated in an earlier project phase (phase 1) using Biofrontera’s nanoemulsion for entry into
the clinical phase. During the reporting period, the agreement on this phase of the research collaboration expired as planned
and is currently not being continued. Biofrontera has a right to use all research results.
Phase
II trial for the treatment of mild to severe acne
With
regard to seeking possible label extension in the United States for Ameluz® to treat acne, Biofrontera has prepared a corresponding
development plan for the indication extension and received feedback from the FDA on the design of the necessary clinical trials.
The study program is expected to start with a Phase IIb trial in the second half of 2021.
Phase
III trial for the treatment of actinic keratoses on the extremities or trunk/neck
Based
on the positive assessment of the Committee for Medicinal Products for Human Use (CHMP) of the EMA in February 2020, the European
Commission granted the formal extension of approval in March 2020. The extended approval of Ameluz® now also includes the
treatment of mild and moderate actinic keratoses on the extremities and trunk/neck with photodynamic therapy.
Based
on the data for the European label extension, Biofrontera has also held discussions with the FDA about expanding the label for
Ameluz® in the United States to include the treatment of AK in the extremities and trunk/neck. The FDA proposed an additional
clinical trial before it would consider any label extension of Ameluz® to include additional body regions. The study protocol
will be coordinated with the FDA prior to the start of the clinical trial. Patient recruitment is expected to start prior to the
end of 2021.
Phase
I trial / pharmacokinetics study with Ameluz®-PDT
In
October 2020, our company was able to complete the phase I pharmacokinetics study (PK study), which tested the safety of photodynamic
therapy with simultaneous use of three tubes of Ameluz® on larger or multiple areas. Subsequently, the study data were analyzed,
the study report was written and incorporated into the registration dossier (NDA). In February 2021, our company announced that
it had submitted an application to the FDA to amend the product information, which currently limits use to one tube of Ameluz®
per treatment.
The
maximum use PK study included 32 patients with actinic keratoses on larger or multiple areas who received PDT treatment with a
total of three tubes of Ameluz® on either the face/scalp or extremities/torso/neck. Ameluz® was applied in accordance
with the currently approved treatment protocol, except that 60 cm2 of skin area was treated with three tubes of the
drug. Illumination was performed after 3 hours of occlusion time, using either one or two BF-RhodoLED® lamps simultaneously,
depending on the number and location of the treatment area(s). The study was conducted at a specialized Phase I dermatology facility
in Texas/USA.
The
objective of the study was to investigate the amount of the active ingredient that enters the blood after three complete tubes
of Ameluz® have been applied to the skin, in order to evaluate safety in this regard. In addition, other parameters relating
to the safety of patients undergoing this treatment were investigated. These results will enable Biofrontera as well as the regulatory
authority to assess whether simultaneous treatment with three tubes could result in risks for patients.
Development
of the BF-RhodoLED® XL lamp
Biofrontera
is developing the BF-RhodoLED® XL to allow the application of Ameluz® on larger areas as well as the simultaneous illumination
of several interspersed lesions. Furthermore, if developed and approved, the BF-RhodoLED® XL could offer a significantly improved
user experience with highly customizable settings. Combined with what we believe is a modern and high-quality design, if the lamp
is approved by the FDA we would expect favorable customer reaction in the United States, and thus an increase in Ameluz® sales.
Following delays in our first production batch of the lamp due to supply delays of parts caused by the COVID-19 pandemic, we submitted
application for approval to the FDA in March 2021.
Phase
III trial for the treatment of superficial basal cell carcinoma (BCC) with Ameluz® in combination with our red-light lamp
BF-RhodoLED® in the United States.
To
further increase our growth potential in the U.S. market in the medium term, we are currently conducting a clinical trial in the
United States for the treatment of superficial basal cell carcinoma (BCC) with Ameluz® in combination with our BF-RhodoLED®
lamp. We have been working intensively on patient recruitment since September 2018. However, due to the demanding study protocol
mandated by the FDA, the recruitment process will likely take a considerable amount of time. Patient recruitment is expected to
be completed in the beginning of 2022. If in the future, after such clinical trial, the FDA approves such indication, we expect
that Ameluz® would be the only drug in the United States for the treatment of superficial BCC with PDT.
Group
structure
As
of December 31, 2020, the Biofrontera Group (hereinafter also called “Biofrontera”, “Biofrontera Group”,
“Group” or the “Company”) consists of a parent company, Biofrontera AG and 5 (December 31, 2019: 5) wholly
owned subsidiaries. The parent company’s headquarters is located in Leverkusen, Germany.
Effective
March 25, 2019, Biofrontera acquired all shares of Cutanea and its subsidiaries Dermarc LLC and Dermapex LLC through a newly founded
U.S.-company Biofrontera Newderm LLC. Cutanea and its subsidiaries as well as Biofrontera Newderm LLC, were merged with and into
Biofrontera Inc. at the end of 2019. While Biofrontera Inc. has assumed all commercial activities relating to our product sales
in the United States, Biofrontera Bioscience GmbH oversees and administers all regulatory tasks relating to our business.
Biofrontera
Bioscience GmbH, Biofrontera Pharma GmbH, Biofrontera Development GmbH and Biofrontera Neuroscience GmbH are located at our parent
company’s headquarters in Leverkusen, Germany. Biofrontera Inc.’s headquarters are in Woburn, Massachusetts, USA.
Intellectual
Property
In
the ordinary course of our business, we seek to protect commercially important products, product candidates and technology through
a combination of patents, trademarks, processes, proprietary know-how and information, regulatory exclusivity and contractual
restrictions on disclosure in the U.S., EU and/or other foreign markets, including filing of applications for German utility models.
In addition, we rely upon trade secrets and contractual arrangements to protect proprietary information that may be important
to the development and operation of our business and intend to file for, prosecute, maintain or license the intellectual property
that we believe is relevant to the strategic needs of our business.
Trademarks
We
have filed for and received trademark protection for Biofrontera® (as word marks), several Biofrontera®
figurative marks, the figurative mark Natural heritage with herbal biocolloids® in two embodiments as well
as for the Ameluz®, Belixos®, BF-RhodoLED® and Rhodoled® word marks
in the EU, the U.S. and/or certain other jurisdictions. The word marks BF-200 ALA® and Nanoxosan®
are registered in Austria, Germany and Switzerland. The word marks Lumixeen® and Dynala® are registered
in Germany and the word mark Gefühlt mir® is registered in the EU and in Switzerland.
Patents
The
Company maintains five different company-owned patent families worldwide. Our patents are held by Biofrontera Bioscience GmbH.
The
patent families refer to our technologies related to our nanoemulsion, photodynamic therapy (PDT) and migraine prophylaxis.
Nanoemulsion
We
have been issued patents for our nanoemulsion technology in Europe (for France, Germany, Italy, Spain, Switzerland/Liechtenstein,
and the UK), Australia, Belarus, Canada, Chile, China, Hong Kong, Israel, Japan, Mexico, New Zealand, Russian Federation, South
Africa, Singapore, and the Ukraine. Patent protection in these jurisdictions will expire on December 21, 2027. Patent applications
have been filed and are pending in the United States. Patent applications in the United Arab Emirates were discontinued in 2020.
On
November 12, 2019 protection for the patent family describing the combination of nanoemulsions with aminolevulinic acid hydrochloride,
the active ingredient in Ameluz®, expired. However, Ameluz® continues to be protected by the nanoemulsion technology patent
family, which continues until December 2027, although the corresponding patent application in the United States is still pending.
This patent has not yet been and possibly may never be granted in the US and thus will not provide patent protection for Ameluz®
in this market. However, we believe that the risk presented by future generic competition is mitigated by specific challenges
in developing generic topical dermatological products, including regulatory hurdles. As part of Biofrontera’s patent strategy
to further protect Ameluz®, additional patent applications have been submitted (see below).
Photodynamic
therapy
A
new international patent application “Photodynamic therapy comprising two light exposures at different wave lengths”
was filed with the European Patent Office (EPO) on August 23, 2018. All countries that were members of the PCT (Patent Cooperation
Treaty) on the filing date (including the United States) were designated in the application. The international publication of
the application was published on February 27, 2020. Entry into the regional/national phase is initiated for the EU, United States,
Japan, Australia, China, Hong Kong, New Zealand and Singapore.
Another
international patent application titled “Illumination for photodynamic therapy” was filed with the EPO on June 5,
2019. Again, all states which were contracting states of the PCT at the date of filing of the PCT application were designated
in the application.
On
November 17, 2020, the national phase was initiated in the United States. On December 10, 2020, the international application
was published.
Additionally,
another new patent application “Illumination device for photodynamic therapy, method for treating a skin disease and method
for operating an illumination device” was filed in the US on October 15, 2020.
Migraine
prophylaxis BF-1
An
international patent application regarding anti-migraine compounds and their use was submitted to the EPO, the European Patent
Office. Patents were granted to the Group in Europe (nationalized for Germany, Spain, France, United Kingdom, Italy) and the United
States. Patent protection expires on January 31, 2034.
Xepi®
The
drug product Xepi®, in-licensed by Biofrontera, is protected by two patent families in the United States as well as other
countries. As far as the United States is concerned, patent protection exists for the drug substance until November 9, 2023, for
the composition of Xepi® until January 29, 2032 and for the treatment of impetigo, for which it is approved, until December
15, 2029.
The
patent rights include an issued U.S. composition of matter patent and three issued U.S. formulation and method of use patents,
as well as issued counterpart formulation and method of use patents in Canada and Mexico, and a pending counterpart formulation
and method of use application in Mexico. Such patents are directed to Quinolonecarboxylic acid derivatives
or salts thereof and pharmaceutical topical compositions related thereto. Rights to generic applications of such patents were
retained by Medimetriks Pharmaceuticals, Inc. under that company’s original license agreement with Ferrer Internacional,
S.A.
Trade
Secrets and Proprietary Information
Trade
secrets play an important role in protecting our products, product candidates and technology and provide protection beyond patents,
trademarks, processes, proprietary know-how and information, regulatory exclusivity and contractual restrictions on disclosure
in the U.S., EU and/or other foreign markets. The scale-up and commercial manufacture of our products involve processes and in-process
and release analytical techniques that we believe are unique to us. Accordingly, we seek to protect our proprietary information
by requiring our employees, consultants and other advisors to execute proprietary information and confidentiality agreements upon
the commencement of their employment or engagement. These agreements generally provide that all confidential information developed
or made known during the course of the relationship with us be kept confidential and not be disclosed to third parties except
in specific circumstances. In the case of our employees, the agreements also typically provide that all inventions resulting from
work performed for us, utilizing our property or relating to our business and conceived or completed during employment shall be
our exclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants also typically
contain similar assignment of invention obligations. Further, we require confidentiality agreements from entities that receive
our confidential data or materials.
Commercial
Partners and Agreements
In
July 2016, we entered into a collaboration and partnership agreement with Maruho, a pharmaceutical company based in Japan specializing
in dermatology that is also an affiliate of Maruho Deutschland, a significant shareholder of our company. The term of our agreement
with Maruho initially expired on December 31, 2017 and was extended to March 31, 2018 and has since expired. On March 19, 2019,
our company signed an agreement to continue its research collaboration with Maruho for the development of branded generics. As
part of the new project phase, Biofrontera has prepared the formulation of one of four active ingredients investigated in an earlier
project phase (phase 1) using Biofrontera’s nanoemulsion for entry into the clinical phase. In 2020, the agreement on this
phase of the research collaboration expired as planned and is currently not being continued. Biofrontera has a right to use all
research results. In April 2020, Biofrontera signed an exclusive license and supply agreement with Maruho for the development
and commercialization of Ameluz® for all indications in East Asia and Oceania. The agreement has a term of 15 years from the
start of distribution in the countries covered by the agreement. For more information, see “Business — Our Research
and Development Plans — Our Development Collaboration with Maruho.”
In
2020, we ended the license and supply agreement with Desitin Arzneimittel GmbH to market and sell Ameluz® and the
BF-RhodoLED® lamp in Denmark, Sweden, and Norway.
In
December 2020, we entered into an exclusive license and supply agreement with Galenica AB, Malmö, Sweden for the marketing
of Ameluz® and BF-RhodoLED® in the Nordic countries. Sales of the products in the Nordic countries are expected to commence
in the second half of 2021.
We
have a license and supply agreement with Pelpharma Handels GmbH to market and sell Ameluz® and the BF-RhodoLED®
lamp in Austria.
In
March 2020, Biofrontera announced that it had signed a non-binding term sheet for an exclusive license and supply agreement with
medac GmbH Sp. z o.o., Warsaw, the Polish branch of medac Gesellschaft für klinische Spezialpräparate mbH, for the commercialization
of Ameluz® and BF-RhodoLED® in Poland. We expect the definitive license and supply agreement with medac GmbH Sp. z o.o.
to be concluded in 2021.
We
have a license and supply agreement with Louis Widmer SA in which we have granted a distribution license for Ameluz®
and the BF-RhodoLED® lamp in Switzerland and Liechtenstein. The license and supply agreement with Perrigo
Israel Agencies Ltd. in which we have granted a distribution license for Ameluz® and the BF-RhodoLED®
lamp in Israel, the West Bank and the Gaza Strip was terminated in 2020.
In
these agreements with our sales partners, we often (but not always) receive an initial up-front payment. The sales partners purchase
Ameluz® from us at a price that is linked to their own anticipated sales price. Our share of the sales price varies,
depending on any up-front payment as well as market conditions within each country or region, ranging from 35% to 50% of the net
revenue our sales partners received for our products.
We
depend on a single unaffiliated contract manufacturer, Frike Group, located in Switzerland to manufacture Ameluz®
for us. Pursuant to this contract, Frike Group produces, upon request by us, the volumes of Ameluz® that we require
according to pre-agreed specifications. Our contract with Frike Group has an initial term through October 2022 and thereafter
may be terminated by either party at any time upon 12 months’ prior notice.
Biofrontera
Pharma GmbH has an agreement with Midas Pharma GmbH (“Midas”) to obtain 5-aminolevulinic acid hydrochloride (5-ALA),
the active pharmaceutical ingredient contained in Ameluz®. Midas, located in Germany, relies on a sub-contractor, located
in Italy, to manufacture the 5-ALA that it supplies to Biofrontera Group. 5-ALA provided by Midas is approved for use in the U.S.
and the EU. Pursuant to Biofrontera Pharma GmbH’s contract with Midas, Midas supplies, upon request by Biofrontera Pharma
GmbH, the volumes of 5-ALA that Biofrontera Pharma GmbH requires according to pre-agreed specifications. Under the agreement,
Biofrontera Pharma GmbH is obligated, during the initial contractual period ending December 31, 2021, to purchase a fixed high
percentage of its annual requirements of 5-ALA from Midas. After this period, Biofrontera is obligated to purchase no less than
certain minimum quantities from Midas per calendar year. The agreement with Midas has an initial term until December 31, 2021,
and automatically renews for further two-year periods, unless terminated upon six months’ notice. The agreement may be terminated
for good cause without a notice period. The agreement is subject to German law.
Xepi®
is produced for Biofrontera solely by Ferrer Internacional S.A., the licensor of Xepi®, which supplied Cutanea, and now supplies
Biofrontera, with the finished product under that certain License and Supply Agreement. Under this agreement, Ferrer has granted
to Biofrontera the exclusive right to market and otherwise commercialize the products related to the compound Ozenoxacin. The
agreement allows us to develop, make, have made, use, register, market, promote, sell, have sold, offer for sale and import Ozenoxacin
and pharmaceutical products containing Ozenoxacin for treatment of topical bacterial infections in patients caused by impetigo.
We have agreed to pay royalties to Ferrer, with royalty percentages in the mid-to-high single digits based on certain levels of
net sales of licensed products sold by us. Under the agreement, we will purchase all our requirements of trade units and samples
of products containing Ozenoxacin exclusively from Ferrer or Ferrer’s appointee, and Ferrer has agreed that it will manufacture
and supply to us, or cause to be manufactures and supplied to us, all such trade units and samples.
Facilities
Our
global corporate headquarters is located in Leverkusen, Germany. We lease approximately 37,000 square feet at this facility, in
which we house our corporate offices and the manufacturing facility for BF-RhodoLED® lamp under an operating lease
the initial term of which expired on June 15, 2019. This lease extended automatically to December 31, 2020 and automatically extends
on December 31 of each year thereafter for one additional year unless terminated by either party upon twelve months’ prior
notice. Our U.S. headquarters is located in Woburn, Massachusetts, where we lease approximately 10,372 square feet under a lease
agreement that has an initial term expiring in September 2025.
Government
Regulation
Regulation
by governmental authorities in the U.S. and other countries is a significant factor in the development, manufacture and marketing
of pharmaceutical products and in ongoing research and development activities. All of our products will require regulatory approval
by governmental agencies prior to commercialization. In particular, pharmaceuticals are subject to rigorous preclinical testing
and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries.
Government
authorities in the U.S. (at the federal, state and local level) and in other countries extensively regulate, among other things,
the research, development, testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion,
advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug and medical device
products such as those we are developing. Ameluz® and our medical device products are only marketed in certain
countries and our products and product candidates must be approved or cleared by the FDA before they may be legally marketed in
the U.S. and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries.
U.S.
Drug Development and Review
Drug
Development Process
Post-Approval
Requirements for Approved Drugs
Any
drug products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things,
record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy
information, product sampling and distribution requirements, and complying with FDA promotion and advertising requirements, which
include, among other requirements, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in
patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations
on industry sponsored scientific and educational activities, and requirements for promotional activities involving the internet.
Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label
uses.
In
addition, quality control and manufacturing procedures must continue to conform to applicable manufacturing requirements after
approval. We are relying exclusively on our manufacturing partner’s facilities for the production of clinical and commercial
quantities of our products in accordance with cGMP regulations. cGMP regulations require among other things, quality control and
quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and
correct any deviations from cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved
drugs are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced
inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue
to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems
with a product after approval may result in restrictions on a product, manufacturer or holder of an approved NDA, including, among
other things, recall or withdrawal of the product from the market. In addition, changes to the manufacturing process are strictly
regulated, and depending on the significance of the change, may require prior FDA approval before being implemented and development
of and submission of data to support the change. Other types of changes to the approved product, such as adding new indications
and additional labeling claims, are also subject to further FDA review and approval, as well as, possibly, the development and
submission of data to support the change.
The
FDA also may require post-approval, sometimes referred to as Phase 4, trials and surveillance to monitor the effects of an approved
product or place conditions on an approval that could restrict the distribution or use of the product. Discovery of previously
unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including
adverse publicity, judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications
with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require
changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require
the implementation of other risk management measures, such as a risk evaluation and mitigation strategy. Also, new government
requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which
could delay or prevent regulatory approval of our product label extensions or products under development.
Pervasive
and Continuing FDA Regulation for Medical Devices
After
a device is placed on the market, regardless of its classification or premarket pathway, numerous regulatory requirements apply.
These include, but are not limited to:
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establishing
establishment registration and device listings with the FDA;
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Quality
System Regulation, or QSR, which requires manufacturers, including third party manufacturers and certain other parties, to
follow stringent design, testing, process control, documentation, corrective action/preventive action, complaint handling
and other quality assurance procedures, as applicable;
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labeling
statutes and regulations, which prohibit the promotion of products for uncleared or unapproved, or off-label, uses and impose
other restrictions on labeling;
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clearance
or approval of product modifications that could affect (or for 510(k) devices, significantly affect) safety or effectiveness
or that would constitute a change (or for 510(k) devices, a major change) in intended use;
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medical
device reporting regulations, which require that manufacturers report to the FDA if an event reasonably suggests that their
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if the malfunction of the same or a similar device of the manufacturer were to recur;
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corrections
and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product removals
if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA, that may present a risk
to health. In addition, the FDA may order a mandatory recall if there is a reasonable probability that the device would cause
serious adverse health consequences or death; and
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post-approval
restrictions or conditions, including requirements to conduct post-market surveillance studies to establish additional safety
or efficacy data.
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The
FDA has broad post-market and regulatory enforcement powers. The agency may conduct announced and unannounced inspections to determine
compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of subcontractors.
Failure by us or our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or
other regulatory authorities, which may result in sanctions and related consequences including, but not limited to:
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untitled
letters or warning letters;
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fines,
injunctions, consent decrees and civil penalties;
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recall,
detention or seizure of our products;
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operating
restrictions, partial suspension or total shutdown of production;
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refusal
of or delay in granting our requests for 510(k) clearance or premarket approval of new products or modified products;
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withdrawing
510(k) clearance or premarket approvals that are already granted;
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refusal
to grant export approval for our products;
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criminal
prosecution; and
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unanticipated
expenditures to address or defend such actions.
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We
are subject to announced and unannounced device inspections by FDA and other regulatory agencies overseeing the implementation
and adherence of applicable local, state and federal statutes and regulations.
Affordable
Care Act
In
March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of
2010, or collectively, the Affordable Care Act, was enacted, which includes measures that have or will significantly change the
way health care is financed by both governmental and private insurers. Among the provisions of the Affordable Care Act of greatest
importance to the pharmaceutical industry are the following:
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The
Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement
with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds
for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, the Affordable Care Act made
several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability
by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic agents from 15.1% of average
manufacturer price (AMP) to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new
formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially
impacting their rebate liability by modifying the statutory definition of AMP. The Affordable Care Act also expanded the universe
of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed
care utilization as of 2010. Per a ruling by the U.S. Supreme Court in 2012, states have the option to expand their Medicaid
programs which in turn expands the population eligible for Medicaid drug benefits. CMS has proposed to expand Medicaid rebate
liability to the territories of the U.S. as well. In addition, the Affordable Care Act provides for the public availability
of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement
by the CMS may also provide for the public availability of pharmacy acquisition of cost data, which could negatively impact
our sales.
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In
order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to
be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in
the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate
amounts reported by the manufacturer. Effective in 2010, the Affordable Care Act expanded the types of entities eligible to
receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals,
these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan
indication. In July 2013, the Health Resources and Services Administration (HRSA) issued a final rule allowing the newly eligible
entities to access discounted orphan drugs if used for non-orphan indications. While the final rule was vacated by a federal
court ruling, HRSA has stated it will continue to allow discounts for orphan drugs when used for any indication other than
for orphan indications. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions
to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.
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Effective
in 2011, the Affordable Care Act imposed a requirement on manufacturers of branded drugs and biologic agents to provide a
50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., “donut
hole”).
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Effective
in 2011, the Affordable Care Act imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded
prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government
healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.
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The
Affordable Care Act required pharmaceutical manufacturers to track certain financial arrangements with physicians and teaching
hospitals, including any “transfer of value” made or distributed to such entities, as well as any ownership or
investment interests held by physicians and their immediate family members. Manufacturers were required to begin tracking
this information in 2013 and to report this information to CMS by March 2014.
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As
of 2010, a new Patient-Centered Outcomes Research Institute was established pursuant to the Affordable Care Act to oversee,
identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The
research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.
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The
Affordable Care Act created the Independent Payment Advisory Board, IPAB, which, beginning in 2014, has authority to recommend
certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription
drugs. Under certain circumstances, these recommendations will become law unless Congress enacts legislation that will achieve
the same or greater Medicare cost savings. IPAB recommendations are only required when Medicare spending exceeds a target
growth rate established by the Affordable Care Act. Members of the IPAB have still not been appointed and Medicare cost growth
is below the threshold that would require IPAB recommendations.
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The
Affordable Care Act established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and
service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending. Funding
has been allocated to support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019.
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Non-U.S.
Government Regulation
In
addition to regulations in the U.S., we will be subject to a variety of regulations in other jurisdictions governing, among other
things, clinical trials and any commercial sales, promotion and distribution of our products. Whether or not we obtain FDA approval
for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement
of clinical trials or marketing of the product in those countries. We, or our local partners, have filed marketing authorization
applications for Ameluz® and BF-RhodoLED® in Israel and Switzerland and have obtained centralized
European approval from the EMA in the EU.
Non-U.S.
Government Regulation Applicable to Drugs
Certain
countries outside of the U.S. have a similar process that requires the submission of a clinical trial application much like an
Investigational New Drug, or IND, application prior to the commencement of human clinical trials. If we fail to comply with applicable
foreign regulatory requirements, we may be subject in those countries to, among other things, fines, suspension or withdrawal
of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
In
the European Economic Area, or EEA (which is comprised of the 27 Member States of the European Union plus Iceland, Liechtenstein
and Norway), for example, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There
are two types of marketing authorizations:
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The
Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the EMA
Committee for Medicinal Products for Human Use (CHMP), and which is valid throughout the entire territory of the EEA. The
Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal
products, and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative
disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active
substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical
innovation or which are in the interest of public health in the European Union. We received Community MA for Ameluz®
in November 2011.
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National
MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory,
are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already
been authorized for marketing in a Member State of the EEA (the Reference Member State), this National MA can be recognized
in other Member States (the Concerned Member States) through the Mutual Recognition Procedure. If the product has not received
a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through
the Decentralized Procedure. Under the Decentralized Procedure, an identical dossier is submitted to the competent authorities
of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member
State. The competent authority of the Reference Member State prepares a draft assessment report, a draft summary of the product
characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the Concerned Member States for
their approval. If the Concerned Member States raise no objections, based on a potential serious risk to public health, to
the assessment, SPC, labeling, or packaging proposed by the Reference Member State, the product is subsequently granted a
national MA in all the Member States (i.e., in the Reference Member State and the Concerned Member States). If one or more
Concerned Member State raises objections based on a potential serious risk to public health, the application is referred to
the Coordination group for mutual recognition and decentralized procedure for human medicinal products (the CMDh), which is
composed of representatives of the EEA Member States. If a consensus cannot be reached within the CMDh the matter is referred
for arbitration to the CHMP, which can reach a final decision binding on all EEA Member States. A similar process applies
to disputes between the Reference Member State and the Concerned Member States in the Mutual Recognition Procedure.
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As
with FDA approval, we may not be able to secure regulatory approvals in Europe in a timely manner, if at all. Additionally, as
in the U.S., post-approval regulatory requirements, such as those regarding product manufacture, marketing, or distribution, would
apply to any product that is approved in Europe, and failure to comply with such obligations could have a material adverse effect
on our ability to successfully commercialize any product.
With
respect to the conduct of clinical trials in the European Union a clinical trial application, or CTA, must be submitted to each
country’s national health authority and an independent ethics committee, much like the FDA and Institutional Review Board
requirements in the U.S., respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trials
may proceed.
In
October 2015, the European Commission adopted regulations providing detailed rules for the safety features appearing on the packaging
of medicinal products for human use. This legislation, part of the Falsified Medicines Directive, or FMD, is intended to prevent
counterfeit medicines entering into the supply chain and will allow wholesale distributors and others who supply medicines to
the public to verify the authenticity of the medicine at the level of the individual pack. The safety features comprise a unique
identifier and a tamper-evident seal on the outer packaging, which are to be applied to certain categories of medicines. FMD became
effective as of February 2019. We have implemented all necessary safety measures defined in the FMD.
In
addition to regulations in Europe and the U.S., we will be subject to a variety of foreign regulations governing clinical trials
and commercial distribution of any existing or future products. For other countries outside of the European Union, such as countries
in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing
and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with cGCP
and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
Non-U.S.
Government Regulation Applicable to Medical Devices
The
advertising and promotion of our products in the EEA is subject to the provisions of the Medical Devices Directive, Directive 2006/114/EC
concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other national
legislation in the EEA countries governing the advertising and promotion of medical devices. The European Commission has submitted a
Proposal for a Regulation of the European Parliament and the Council on medical devices, amending Directive 2001/83/EC, Regulation (EC)
No 178/2002 and Regulation (EC) No 1223/2009, to replace, inter alia, Directive 93/42/EEC and to amend regulations regarding medical
devices in the European Union, which could result in changes in the regulatory requirements for medical devices in Europe. In Germany,
the advertising and promotion of our products can also be subject to restrictions provided by the German Act Against Unfair Competition
(Gesetz gegen den unlauteren Wettbewerb) and the law on the advertising of medicines (Heilmittelwerbegesetz), criminal
law, and some codices of conduct with regard to medical products and medical devices among others. These laws may limit or restrict the
advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare
professionals.
Sales
of medical devices are subject to foreign government regulations, which vary substantially from country to country. In order to market
our products outside the U.S., we must obtain regulatory approvals or CE Certificates of Conformity and comply with extensive safety
and quality regulations. The time required to obtain approval by a foreign country or to obtain a CE Certificate of Conformity may be
longer or shorter than that required for FDA clearance or approval, and the requirements may differ. In the EEA, we are required to obtain
Certificates of Conformity before drawing up an EC Declaration of Conformity and affixing the CE Mark of conformity to our medical devices.
Many other countries, such as Australia, India, New Zealand, Pakistan and Sri Lanka, accept CE Certificates of Conformity or FDA clearance
or approval although others, such as Brazil, Canada and Japan require separate regulatory filings.
Reimbursement
Sales
of our products will depend, in part, on the extent to which our products will be covered by third party payors, such as government health
care programs, statutory health insurances, and commercial insurance and managed healthcare organizations. These third-party payors are
increasingly reducing reimbursements for medical products and services and there is no guarantee that we will be able to obtain reimbursement
at all for any future products. In addition, the U.S. government, state legislatures and foreign governments have continued implementing
cost-containment programs, including price controls, competitive bidding program, restrictions on reimbursement and requirements for
substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies
in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third party reimbursement
for our product or product candidates or a decision by a third-party payor to not cover our product or product candidates could reduce
physician usage of our products once approved and have a material adverse effect on our sales, results of operations and financial condition.
In
the U.S., treatment of actinic keratosis with Ameluz® in combination with our BF-RhodoLED® photodynamic
therapy lamp is eligible to be reimbursed by the U.S. federal government’s Medicare Program through Part B, which means that dermatologists
purchase the drug to treat a patient in their office in combination with our BF-RhodoLED® photodynamic therapy lamp and
the doctors can be reimbursed for the cost of the drug after its use to treat a patient. This differentiates Ameluz® from
drugs that are reimbursed through the U.S. federal government’s Medicare Program through Part D, which are and distributed through
pharmacies. Medicare Part B drugs are reimbursed under the Average Sales Price (ASP) payment methodology. ASP data is calculated based
on a formula defined by federal statute and regulation and is submitted to the Centers for Medicare & Medicaid Services (“CMS”)
on a quarterly basis. CMS uses the ASP data to determine applicable reimbursement rates for Ameluz under Part B. The Medicare Part B
ASP reimbursement for Ameluz® may fall below the cost that some medical providers pay for Ameluz, which could materially and adversely
affect the sales of Ameluz.
Fraud
and Abuse Laws
We
are also be subject to healthcare anti-fraud and abuse regulations and enforcement of such laws by the federal government and the states
and foreign governments in which we conduct our business. The laws that may affect our ability to operate include:
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the
federal healthcare programs’ Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting,
receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual
for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid programs;
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federal
false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented,
claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
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federal
criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare
matters;
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federal
Civil Monetary Penalties Law that prohibits various forms of fraud and abuse involving the Medicare and Medicaid programs;
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state
law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services
reimbursed by any third-party payor, including commercial insurers;
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for
Europe, directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices,
as well as other national legislation in the European Union governing the advertising and promotion of medical devices; and
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in
Germany the advertising and promotion of our products can be subject to restrictions provided by the German Act Against Unfair Competition
protecting against commercial practices which unacceptably harass a market participant.
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Healthcare
Privacy and Security Laws
We
may be subject to, or our marketing activities may be limited by, the federal Health Insurance Portability and Accountability Act of
1996, or HIPAA, and its implementing regulations, which established uniform standards for certain “covered entities” (healthcare
providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare transactions and protecting
the security and privacy of protected health information. The American Recovery and Reinvestment Act of 2009, commonly referred to as
the economic stimulus package, included sweeping expansion of HIPAA’s privacy and security standards called the Health Information
Technology for Economic and Clinical Health Act, or HITECH, which became effective on February 17, 2010. Among other things, the new
law makes HIPAA’s privacy and security standards directly applicable to “business associates,” independent contractors
or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of
a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates
and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal
courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.
In
Europe and Germany, we may be subject to strict data protection regulations, in particular with regard to health data of individuals,
which are categorized as “special categories of personal data” pursuant to Section 22 subsection 1c German Federal Data Protection
Act (Bundesdatenschutzgesetz). “Personal data” refers to any information relating to an identified or identifiable
natural person (data subject); an identifiable person is one who can be identified, directly or indirectly, in particular by reference
to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity.
The special categories of data such as health data may only be processed if (i) it is necessary in order to exercise the rights conferred
by the law on social security and social protection and to comply with the obligations thereunder, or (ii) necessary for preventive health
care purposes, for the assessment of the employee’s ability to work, for medical diagnosis, for health or social care or for the
management of health and social care systems and services, or pursuant to a contract concluded by the data subject with a health-care
professional, and processed by, or under the responsibility of, medical staff or other persons subject to an equivalent obligation of
confidentiality, or (iii) it is necessary for reasons of public interest in the field of public health, such as protection against serious
cross-border health threats or to ensure high standards of quality and safety in health care and in medicinal products and medical devices;
the professional and criminal law requirements for maintaining professional secrecy must be complied with. Therefore, we may be subject
to and our marketing activities may be limited by the regulations regarding the data protection of individuals (e.g., according to the
Regulation (EU) 2016/679 (General Data Protection Regulation), the Directive 95/46/EC of the European Parliament and of the Council of
24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data
as well as to the German Federal Data Protection Act 2018). These regulations could also restrict the transfer of data from Germany/Europe
to the U.S. The general transfer of personal data outside of Europe is prohibited according to Section 3 subsection 5 article 78 German
Federal Data Protection Act (implementing Art. 44 GDPR) if the data importer cannot guarantee an appropriate standard of data protection.
A transfer of personal data to a non-EU member state (third country) is allowed only if the third country guarantees a reasonable standard
of protection. Currently the U.S. is not generally considered to be a country with an appropriate level of data protection, only if the
data recipient is privacy shield certified data may be transferred from the EU to the United States without concluding further contractual
arrangements. This means that, if the data recipient in the United States is not privacy shield certified, further contractual arrangements
have to be adopted to permit the international transfer of personal data to the U.S.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You
should read the following discussion of our financial condition and results of operations in conjunction with the audited consolidated
financial statements and the notes to our financial statements included elsewhere in this annual report. This discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under the section
entitled “Risk Factors” and elsewhere in this annual report, our actual results may differ materially from those anticipated
in the forward-looking statements contained in the following discussion and analysis.
Overview
We
are an international biopharmaceutical company specializing in the development and commercialization of a platform of pharmaceutical
products for the treatment of dermatological conditions, in particular, diseases caused primarily by exposure to sunlight that results
in sun damage to the skin.
We
were founded in 1997 by Professor Hermann Lübbert, Ph.D., who currently serves as chairman of our management board and our chief
executive officer. Our ordinary shares have been listed on the Stock Exchange in Düsseldorf since 2006 and on the Frankfurt Stock
Exchange since 2012 under the ticker symbol “B8F” since 2012. American Depositary Shares (ADS) each representing two ordinary
shares of Biofrontera have been listed on The NASDAQ Capital Market since February 2018.
Our
principal product is Ameluz®, which is a prescription drug approved for use in combination with photodynamic therapy,
or PDT, which we sometimes refer to as Ameluz® PDT. We are currently selling Ameluz® in the United States
and in Europe. In Germany, Spain, the UK, and the U.S., we distribute and sell our products through our own sales force. We have agreements
with partners to sell Ameluz® and the BF-RhodoLED® lamp in other European countries. We manufacture Ameluz®
for worldwide sales using a third-party contract manufacturer in Switzerland. We assemble our BF-RhodoLED® lamp
at our corporate headquarters in Leverkusen, Germany.
Ameluz®
PDT received centralized European approval in 2011 from the European Commission for the treatment of actinic keratosis of mild-to-moderate
severity on the face and scalp. Since the initial centralized European approval of Ameluz® PDT, the European Commission
granted label extensions for the use of Ameluz® PDT for (i) the treatment of field cancerization, or larger areas of skin
on the face and scalp with multiple actinic keratosis, (ii) the treatment of superficial and/or nodular basal cell carcinoma unsuitable
for surgical treatment due to possible treatment-related morbidity and/or poor cosmetic outcome, (iii) the treatment of mild-to-moderate
actinic keratosis on the face and scalp using Ameluz® in combination with daylight photodynamic therapy and (iv) treatment
of actinic keratosis of mild-to-moderate severity on the extremities and neck/trunk.
In
May 2016, we received approval from the FDA to market in the U.S. Ameluz® in combination with photodynamic therapy using
our BF-RhodoLED® lamp for lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity
on the face and scalp. We launched the commercialization of Ameluz® and BF-RhodoLED® for actinic keratosis
in the U.S. in October 2016.
On
March 25, 2019, we entered into an agreement with Maruho to acquire 100% of the shares of Cutanea including its subsidiaries Dermark
LLC and Dermapex LLC through our wholly owned subsidiary, Newderm. Cutanea had been marketing Xepi®, a prescription cream for the
treatment of impetigo, since November 2018.
We
have incurred losses in each year since inception. Our net loss for the fiscal years ended December 31, 2020, December 31, 2019 and December
31, 2018 was € 13.0 million, €7.4 million and €8.9 million, respectively. As of December 31, 2020, we had an accumulated
deficit of € 165.7 million. Our ability to become profitable depends on our ability to further commercialize our main product Ameluz®
and control costs. Even if we are successful in increasing our product sales, we may never achieve or sustain profitability. In
the long term, we anticipate increasing our sales and marketing expense as we attempt to exploit the recent regulatory approvals we have
received to market Ameluz® in the U.S. and the EU.
Over
the past five years, we have funded our operations primarily through the issuance and sale of equity securities, warrant bonds and convertible
bonds. We expect to continue to fund our operations over the next several years primarily through our existing cash resources, additional
private or public sales of the securities of our company or its subsidiaries, and revenues generated from our operating business. Any
equity financing, if needed, would likely result in dilution to our existing shareholders and any debt financing, if available, would
likely involve significant cash payment obligations and include restrictive covenants that may restrict our ability to operate our business.
Business
performance – year under review
2020
was characterized by the impact of the COVID-19 pandemic. In the reporting period from January 1 to December 31, 2020, Biofrontera was
directly affected by the global COVID-19 pandemic starting in mid-March and as a result suffered from reduced sales especially in the
United States. However, in 2020 our company has been able to help mitigate the negative impact on our revenue through the down payment
we received from Maruho Co., Ltd. (the parent company of a significant shareholder) under the license agreement we entered into with
Maruho in April 2020, the fully placed convertible bond 2020/2021 we issued in August 2020, as well as cost reduction measures we introduced
at an early stage of the pandemic.
Commercialization
of Ameluz® in the United States
Revenue
generated from our sales in the United States were €16.6 million in 2020, compared to €23.3 million in 2019, representing a
decrease of 29% year-on-year. Revenue includes €0.3 million from product sales of Xepi® (previous year: €0.6 million).
As
reported above, Biofrontera was directly affected by the global COVID-19 pandemic from mid-March 2020. From that point on, rising infection
rates and the official recommendation of the American Academy of Dermatology to provide patients with remote diagnosis and treatment
whenever possible led to significantly declining patient numbers and extensive, albeit temporary, practice closures. In the wake of this,
our U.S. sales in particular declined sharply. As a result, Biofrontera Inc., our wholly owned subsidiary in the United States, initiated
extensive cost-cutting measures, including headcount reductions. After negligible sales of our products in the United States in April
2020, we observed a slow recovery of our U.S. business again in the summer and later the first signs of stabilization in line with the
usual seasonality. In many parts of the U.S., doctors’ offices reopened during the second half of 2020, at least in part, and patients
showed increasing willingness to undergo treatment for actinic keratosis. In the fourth quarter of 2020, we again saw a seasonally strong
increase in sales, but overall sales in this quarter also remained below the level of the previous year, in part due to the so-called
second wave of coronavirus infections.
Commercialization
of Ameluz® in Europe
Revenue
from product sales in Germany increased by approximately 11% to €5.1 million in 2020 compared to €4.6 million in 2019, despite
COVID-19-related restrictions. In the rest of Europe, the pandemic led to a decline in sales, with product sales of €2.1 million
in 2020 compared to €2.6 million in 2019.
In
Germany, our sales team successfully leveraged an approval extension granted in March 2020 to include the treatment of actinic keratoses
on the body and extremities, as well as recent study results, even during the COVID-19 pandemic, promoting the benefits of Ameluz®
to dermatologists. In this context, the advantages of daylight PDT, which could be performed in sunny weather without immediate contact
with doctors, became particularly evident during the summer months. In Spain, we saw positive sales development at the beginning of 2020
prior to the outbreak of the pandemic, after which business declined sharply due to the strict lockdown regulations imposed in Spain.
In the United Kingdom, sales remained at a low level for almost the entirety of 2020 due to the COVID-19 pandemic.
Sales
generated by distribution partners in other European countries contributed only a small share to our total sales.
Regional
expansion of the commercialization of Ameluz®
On
March 13, 2020, we announced that we had signed a non-binding term sheet for an exclusive license agreement with medac GmbH Sp. z o.o.,
Warsaw, the Polish subsidiary of medac Gesellschaft für klinische Spezialpräparate mbH, for the commercialization of Ameluz®
and BF-RhodoLED® in Poland. The term sheet contains terms and conditions regarding the amount of the one-time license fee of about
€200,000, the expected term of 5 years, the transfer price for Ameluz® and BF-RhodoLED® as well as the local regulatory
responsibilities in Poland.
On
April 20, 2020, Biofrontera concluded an exclusive license and supply agreement with Maruho Co, Ltd, Osaka, Japan (the parent of a significant
shareholder) for the development and commercialization of Ameluz® for all indications in East Asia and Oceania. The agreement has
a term of 15 years from the start of sales in the countries covered by the agreement. This partnership gives us the opportunity to generate
long-term revenues at low cost and low business risk in markets that we are unlikely to be able to serve with our own resources. As part
of the licensing agreement, Maruho made a one-time payment of €6.0 million to Biofrontera AG. In addition, further future payments
are dependent on the achievement of certain regulatory and sales milestones as well as royalties on sales.
On
December 7, 2020, we announced that our wholly owned subsidiary Biofrontera Pharma GmbH and Galenica AB, Malmö, Sweden, signed an
exclusive license and supply agreement for the marketing of both Ameluz® and BF-RhodoLED® in the Nordic countries of Sweden,
Norway, Denmark, Finland and Iceland. According to the agreement, Galenica AB of Malmö, Sweden, receives exclusive distribution
rights for the Nordic regions, whereby Biofrontera will supply Ameluz® to Galenica at a transfer price of 50% of the expected net
revenues. Furthermore, Biofrontera will be responsible for the marketing authorization as well as manufacturing and quality control,
while Galenica will handle all aspects of commercialization, local registration and reimbursement in the Nordic countries. Both companies
will collaborate on regulatory compliance regarding drug safety (pharmacovigilance). After the amicable termination of the agreement
between Biofrontera and the former distribution partner for some of these regions, Galenica is now working towards the reintroduction
of the products in Denmark, Sweden and Norway and their initial launch in Finland and Iceland by the middle of next year. In addition,
Galenica has a right of first refusal for commercialization in the Baltic States.
Consequences
of the COVID-19 pandemic
In
2020, as a result of the COVID-19 pandemic, the number of AK treatments declined, leading to a sharp drop in sales, particularly in our
most important sales market, the United States. On March 20, 2020, i.e., shortly after the pandemic spread of the virus became known,
our company therefore announced that it would take comprehensive cost-cutting and cost-control measures on a precautionary basis.
As
such, short-time work was introduced for all employees in Germany until the end of July 2020. Similar measures were implemented for our
subsidiaries in Spain and the UK. Our U.S. subsidiary Biofrontera Inc. also introduced significant cost-cutting measures. We significantly
reduced our headcount there and introduced a furlough program, under which all employees were required to take temporary unpaid leave.
In addition, the members of the Supervisory Board as well as the Management Board of Biofrontera AG and the management of Biofrontera
Inc. voluntarily waived part of their salaries. In addition, in 2020 we reduced costs for training and continuing education, among other
things.
While
these cost reduction measures were in effect, we were able to continue to ensure compliance with legal requirements from a medical and
capital markets perspective as well as disclosure obligations.
Due
to the COVID-19 pandemic, the continued challenging business environment has impacted the valuation of some of the Company’s assets
and liabilities. During the COVID-19 pandemic, we have focused our sales strategy in the U.S. market on our flagship product Ameluz®
and delayed the targeted re-launch to improve the positioning of our in-licensed product Xepi®. The reduced sales of Xepi® led
to a reassessment of the medium-term business and earnings prospects for Xepi® and thus to an impairment of the Xepi® license
in the first quarter of 2020. To a minor extent, inventories were written down as of December 31, 2020 due to an anticipated expiration
of shelf life. Beyond this, no significant risks have arisen in relation to financial instruments, particularly regarding unusual receivables.
Restructuring
of the sales structure and the U.S. business
In
January, following the reorganization of our U.S. subsidiary Biofrontera Inc., we also restructured the sales and marketing structure
in Europe. In the course of this restructuring, Christoph Dünwald resigned from his position as Chief Commercial Officer (CCO) in
order to devote himself to new tasks. Biofrontera’s worldwide sales organization now is organized in two divisions: sales and marketing
in the United States, Biofrontera’s largest market, and the joint management of all sales organizations in Europe.
Regulatory
and clinical progress
Based
on a positive assessment by the CHMP of the EMA on February 3, 2020, the European Commission on March 10, 2020 granted the formal label
extension for Ameluz® on March 10, 2020, which now also covers the treatment of mild and moderate actinic keratoses (AK) on the extremities
and trunk/neck with photodynamic therapy (PDT).
In
addition, the results of the follow-up phase of the clinical comparative study on daylight PDT with Ameluz® and Metvix® were
included in the product information (SmPC). Ameluz® showed significantly lower recurrence rates after 12 months at 19.5% compared
to Metvix® at 31.2%.
In
October 2020, the clinical phase of the pharmacokinetics study (PK study) in the United States, which had been underway since the beginning
of the reporting year, was concluded with the so-called “last subject last visit”. The PK study tested the safety of photodynamic
therapy (PDT) for the treatment of actinic keratoses on larger or multiple areas with the simultaneous use of up to three tubes of Ameluz®.
This represents a prerequisite for the treatment of larger body surfaces with multiple tubes of Ameluz®, as well as for the alignment
of reimbursement modalities vis-à-vis competing products, and thus could provide an increase in the competitiveness of Ameluz®
in all our markets, particularly in the United States. The study report was submitted to the FDA in February 2021 with the objective
of removing a restriction in the product information to the use of only one tube per treatment.
Additionally,
we were able to bring the development of the new BF-RhodoLED® XL lamp, which enables Ameluz® to be used on larger surfaces, to
near completion. However, due to pandemic-related delays in the supply of parts for the production of the first production batch, it
was not possible to submit the approval application to the FDA until March 2021.
In
2020, we also continued to pursue patient recruitment for the Phase III trial for the treatment of basal cell carcinoma (BCC) with Ameluz®
in the United States.
Although
there were fewer (internal and external) employee training activities, we met the standards for ensuring drug quality with a higher number
of audits and inspections in our quality management system compared with 2019.
Subscription
offers for convertible bonds
On
February 26, 2020, our management board, with the approval of our supervisory board, resolved for our company to issue up to 1,600,000
units of the 0.5% qualified subordinated mandatory convertible bond 2020/2024 and up to 1,600,000 units of the 1.00% qualified subordinated
mandatory convertible bond 2020/2026. In March 2020, the subscription offer was withdrawn and not implemented due to the disruptions
on the capital markets caused by the COVID-19 pandemic.
To
ensure short-term liquidity, in August 2020, we issued a 1.0% qualified subordinated mandatory convertible bond 2020/21. The bond issue
was fully placed with gross proceeds of €7.9 million. On November 12, 2020, we announced that we would exercise our right of mandatory
conversion pursuant to Section 8 (2) of the bond terms and conditions, which was then implemented in 2020.
Components
of Our Results of Operations
Revenue
We
generate revenue through the sale of our products Ameluz®, Xepi®, BF-RhodoLED® and Belixos®
(our cosmetic skin care product).
In
Germany, Spain, the UK and the U.S., we distribute and sell Ameluz® through our own sales force and recognize revenue
upon shipment to our customers, such as wholesalers or hospitals or physicians. We have entered into license and distribution agreements
with a variety of partners in other European countries. According to these agreements, we produce our products and sell them to our distribution
or commercial partners at a transfer price, which is a defined percentage of the estimated final sales price in the respective country
or territory. Such percentages range from 35% to 50% of the net revenue our sales partners received for our products. Since production
of Ameluz® is specific for most countries, we typically produce larger lots for our distribution or commercial partners
and ship and invoice them. Our distribution or commercial partners hold inventory and subsequently sell stock over time in their applicable
country or territory. We recognize revenue upon shipment to such partners. Upon signing of our license and supply agreements, we also
typically receive one-time payments from our distribution partners.
In
addition, in March 2019, Biofrontera expanded its product portfolio in the United States with the acquisition of rights to market in
the United States the FDA-approved drug Xepi®. We believe Xepi® is the first topical antibiotic in the
U.S. that has been approved by the FDA in about 10 years. The approval also includes the treatment of Impetigo. While we believe that
Xepi® has market potential, we believe that Ameluz® will remain our most important product in the near future.
Accordingly,
the primary factors that determine our revenue derived from our products are:
|
●
|
the
level of orders generated by our sales force in the United States, Germany, Spain and the UK;
|
|
|
|
|
●
|
the
level of orders from our commercial partners;
|
|
|
|
|
●
|
the
level of prescriptions and institutional demand for our products; and
|
|
|
|
|
●
|
unit
sales prices.
|
Revenue
from the sales of our BF-RhodoLED® photodynamic therapy lamp, which support sales of Ameluz®, and from
Belixos®, our over-the-counter line of skin care cosmetics products, is relatively insignificant compared with the revenues
we generate through our sales of Ameluz®.
Because
traditional photodynamic therapy treatments using a lamp are performed more frequently during the winter, our revenue is subject to some
seasonality and has historically been higher during the first and fourth quarters than during the second and third quarters. However,
daylight photodynamic therapy is more frequently performed during the summer (and often cannot be performed during the winter). Our recent
approval from the European Commission for daylight photodynamic therapy has had the effect of smoothing our revenue from product sales
in Europe throughout the year.
In
the past, we have also generated revenue from development projects entered into with Maruho. Under a collaboration and partnership agreement
we entered into with Maruho, Maruho bore all costs in connection with development work for product candidates, which work was carried
out either by our personnel or by subcontractors that we selected. We generated revenue of €0.5 million from this agreement in the
fiscal year ended December 31, 2020, €0.7 million from this agreement in the fiscal year ended December 31, 2019 and €0.1 million
from this agreement in the fiscal year ended December 31, 2018. This agreement with Maruho was renewed to enter into phase II of the
project in March 2019.
From
time to time, we also generate revenue from licensing and supply agreements in form of one-time upfront payments (down payment) or milestone
payments. In the year ended December 31, 2020, we generated revenue of €6.0 million paid from a down payment by Maruho under a licensing
and supply agreement we entered into with it for the development and commercialization of Ameluz® for all indications in East Asia
and Oceania.
The
following table provides a breakdown of revenue by geographic region for the past three fiscal years:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
€
thousands
|
|
Product
sales
|
|
|
Revenue
from development projects
|
|
|
Revenue
from license agreements
|
|
|
Product
sales
|
|
|
Revenue
from development projects
|
|
|
Revenue
from license agreements
|
|
|
Product
sales
|
|
|
Revenue
from development projects
|
|
|
Revenue
from license agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
5,159
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,633
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,307
|
|
|
|
-
|
|
|
|
-
|
|
Europe (ex-Germany)
|
|
|
2,104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.737
|
|
|
|
-
|
|
|
|
-
|
|
USA
|
|
|
16,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,894
|
|
|
|
-
|
|
|
|
-
|
|
Other regions
|
|
|
-
|
|
|
|
493
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
686
|
|
|
|
-
|
|
|
|
|
|
|
|
129
|
|
|
|
40
|
|
Total
|
|
|
23,853
|
|
|
|
493
|
|
|
|
6,000
|
|
|
|
30,579
|
|
|
|
686
|
|
|
|
-
|
|
|
|
20,938
|
|
|
|
129
|
|
|
|
40
|
|
Cost
of Goods Sold
Our
cost of goods sold is comprised of all direct manufacturing expenses for our products, including any expenses associated with manufacturing
and logistics, such as packaging, freight or transportation costs. We further include any costs associated with changes or upgrades in
the manufacturing processes at our third-party manufacturers which had to be paid by us to fulfill certain obligations requested by the
EMA or FDA. All overhead costs associated with manufacturing are also included in our costs of goods sold.
Research
and Development Expenses
We
incur research and development expenses related to our clinical and drug and medical device development programs. Our research and development
expenses consist of expenses incurred in developing, testing and manufacturing drugs and devices for clinical trials, as well as seeking
and maintaining regulatory approval of our product candidates, including:
|
●
|
expenses
associated with regulatory submissions, clinical trials and manufacturing;
|
|
|
|
|
●
|
payments
to third party CROs, contract laboratories and independent contractors;
|
|
|
|
|
●
|
payments
made to regulatory consultants;
|
|
|
|
|
●
|
payments
made to third party investigators who perform clinical research on our behalf and clinical sites where such testing is conducted;
|
|
|
|
|
●
|
Personnel-related
expenses, such as salaries, benefits, travel and other related expenses;
|
|
|
|
|
●
|
expenses
incurred to obtain and maintain regulatory approvals and licenses, patents, trademarks and other intellectual property; and
|
|
|
|
|
●
|
facility,
maintenance, and allocated rent, utilities, and depreciation and amortization, and other related expenses.
|
Research
and development costs totaled €4.8 million, €4.6 million and €4.4 million for the fiscal years ended December 31, 2020,
December 31, 2019, and December 31, 2018, respectively.
The
following table summarizes the costs of significant projects and reconciling items to arrive at total research and development expenses
for the periods shown (in thousands of euros):
|
|
Fiscal
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
€
|
|
|
€
|
|
|
€
|
|
Clinical studies (external expenses)
|
|
|
1,828
|
|
|
|
2,030
|
|
|
|
1,278
|
|
FDA and EMA fees
|
|
|
715
|
|
|
|
657
|
|
|
|
448
|
|
Other expenses
|
|
|
2,246
|
|
|
|
1,949
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Research and development expenses
|
|
|
4,789
|
|
|
|
4,636
|
|
|
|
4,428
|
|
As
we continue our clinical trial program for Ameluz®, both to show effectiveness in comparison to other drugs or therapies
and to try to extend the current indications of Ameluz®, we expect to continue to incur similar levels of research and
development expenses. In addition, any termination of, or delays in completing, our clinical trials will slow down our product development
and approval process, leading to increased costs.
Sales
and Marketing Costs
Sales
costs consist primarily of salaries, benefits and other related costs for personnel serving in our sales, marketing and business development
functions in Germany, Spain, the UK and the U.S. Our sales costs also include costs related to marketing materials as well as sales congresses,
industry conferences and similar events conducted to promote our products.
In
the fiscal year ended December 31, 2020, sales and marketing expenses saw a significant reduction compared to the previous year. This
was mainly due to the cost-saving measures implemented due to the COVID-19 pandemic. In this context, the effects of the cost-saving
measures were offset by the non-cash impairment of the Xepi® license in the amount of €2,001 thousand. Sales and marketing costs
include the expenses for our sales forces in Germany, Spain, the United Kingdom, and the United States, as well as marketing expenses.
We
incurred sales costs of €20.5 million €28.9 million and €17.7 million for the fiscal years ended December 31, 2020, December
31, 2019, and, December 31, 2018, respectively.
General
and Administrative Expenses
General
and administrative expenses consist primarily of compensation for employees in executive and operational functions, including finance,
investor relations, information technology and human resources. Other significant costs in this category include facilities costs and
professional fees for accounting and legal services, investor relations, travel, insurance premiums and depreciation. During the fiscal
year ended December 31, 2020, we decreased our general and administrative expenses compared to the previous year. This was mainly due
to the cost-saving measures introduced in response to the COVID-19 pandemic and lower legal and consulting expenses.
We
incurred general and administrative expenses of €9.1 million, €16.3 million and €12.9 million for the fiscal years ended
and December 31, 2020, December 31, 2019, December 31, 2018, respectively.
Stock
Compensation
We
grant stock options to members of our management board, senior management, and employees. We recognize compensation expense as a charge
to operations over the relevant vesting period of the options, which generally is four years.
The
aggregate estimated fair value for options issued during the fiscal year ended December 31, 2020 was approximately € 1.8 million
as compared to €2.8 million in the fiscal year ended December 31, 2019, and €2.1 million in the fiscal year ended December
31, 2018, which is being recognized over the vesting periods. Total compensation expense recorded related to options during the fiscal
year ended December 31, 2020, was approximately €0.3 million. From inception through the fiscal year ended December 31, 2020, we
have incurred cumulative compensation expense related to stock options of approximately €1.6 million.
Finance
Expense
Finance
expense consists of interest income and interest (expense), and foreign exchange gains (losses). Interest income consists of interest
earned on our cash and cash equivalents. The interest expenses were the result of interest payments on our warrant bonds outstanding
during 2017, and of the compounding of interest on the warrant bonds, using the effective interest method. Interest expenses in the fiscal
years ended December 31, 2018, December 31, 2019 and December 31, 2020, further included interest for the loan under the EIB credit facility
(including the second tranche drawn down in February 2019) and convertible bonds, calculated by using the effective interest method.
We incurred finance expense of €3.1 million, €2.7 million and €1.8 million in the fiscal years ended December 31, 2020,
December 31, 2019 and December 31, 2018, respectively
Other
Income and Expenses
Other
income and (expenses) in 2020 mainly include the loss from currency translation amounting due to consolidating an intercompany U.S. dollar
loan by Biofrontera AG to its wholly owned U.S. subsidiary Biofrontera Inc. for 2020, 2019 and 2018.
Income
Taxes
As
a result of the net losses we have incurred in each fiscal year since inception, we have recorded no provision for income taxes during
such periods. At December 31, 2020, we had net operating loss carry-forwards for German corporation purposes of €134.6 million.
Deferred tax assets are generally determined on the basis of the existing income tax rates in Germany. As a result of the German Company
Tax Reform Act 2008, the corporation tax rate is set at 15%. When a solidarity surcharge of 5.5% is included, this results in a combined
tax rate of 15.8%.
In
addition to the corporate tax rate, our company is also subject to a local business tax rate of 8.8% (2019 and 2018: 16.6%). As the business
taxes are not deductible as an operating expense, the resulting tax rate is 24.6% (2019 and 2018: 32.5%).
Loss
carry forwards have an unlimited carry forward period under current German law.
We
are also subject to corporate taxation in the United States.
We
are entitled under U.S. federal income tax laws to carry forward any net operating losses incurred from tax years ending on or before
December 31, 2018 for a period of twenty years and can offset our net operating losses carried forward against future taxable income.
As of December 31, 2020, we had tax loss carryforwards in the U.S. totaling €32.2 million.
The
effective income tax rate in the United States was 26% in 2020 (2019: 26%; 2018: 25%).
At
present, there is a new corporate income tax rate in the United States of 21% effective for the tax years ending in 2018 and thereafter.
Also effective for tax years ending in 2018 and forward, the carry forward of losses is indefinite but limited to up 80% of computed
taxable income. The United States does from time to time, amend the level of taxation levied on corporations and there is no certainty
that the tax rate currently in effect will not change in the future. The recently enacted Coronavirus Aid, Relief, and Economic Security
Act, or the “CARES Act,” temporarily repeals the 80% taxable income limitation on the use of net operating losses for taxable
years beginning before January 1, 2021.
Due
to the lack of predictability regarding future taxable profits, the existing deferred tax assets deriving, as a matter of principle,
from loss carryforwards and tax-deductible differences were generally not recognized on the balance sheet, in accordance with IAS 12.34.
On our balance sheet as of December 31, 2020, however, we capitalized deferred tax assets of €7.5 million as our wholly-owned subsidiary
Biofrontera Pharma GmbH had become profitable and is expected to remain profitable such that we will be able to set off respective loss
carry-forwards against future profits in accordance with German tax acts.
Effect
of Foreign Currency Fluctuations
We
publish our consolidated financial statements in euros. Historically, most of our revenue and expenses have also been denominated in
euros. Therefore, historically, we had not been subject to any major influences on our net income due to currency exchange effects. Since
we have obtained FDA approval and begun to commercialize our products in the U.S., however, we generate a significant part of our revenue
and expenses in U.S. dollars. The revenue and expenses incurred in U.S. dollars will be translated into euros when they are reported
in our consolidated financial statements. As a result, any substantial future appreciation or decline of the U.S. dollar against the
euro could have a material effect on our revenue and profitability.
Based
on certain assumptions relating to our operations (which assumptions may prove incorrect) and our internal models, we believe that, with
respect to the fiscal year ended December 31, 2020, an average 10% appreciation of the U.S. dollar against the euro would have resulted
in a decrease of approximately €0.5 million in our net income for such period, whereas we believe that an average 10% depreciation
of the U.S. dollar against the euro would have resulted in an increase of approximately €0.4 million in our net income during such
period.
Our
holding company Biofrontera AG has provided to our wholly-owned U.S. subsidiary Biofrontera Inc. an inter-company loan to provide financial
funds for our U.S. operations. The loan is denominated in U.S. dollars and interest bearing. Any fluctuation of the exchange rate between
the euro and the US dollar will have an impact on our consolidated profit and loss statement.
Our
product Ameluz® is manufactured by a third-party contract manufacturer in Switzerland. Any invoices by such manufacturer
are denominated in Swiss Francs. As our sales and revenue increase, we expect to increase the manufacturing purchases from our Swiss
manufacturer and could, therefore, be increasingly subject to currency exchange effects from these Swiss Franc denominated transactions
with our Swiss manufacturer.
Comparison
of Fiscal Years Ended December 31, 2020 and December 31, 2019
Total
revenue
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Germany
|
|
|
5,159
|
|
|
|
4,633
|
|
|
|
526
|
|
|
|
11
|
%
|
Europe (ex Germany)
|
|
|
2,104
|
|
|
|
2,603
|
|
|
|
(499
|
)
|
|
|
(19
|
)%
|
US
|
|
|
16,589
|
|
|
|
23,343
|
|
|
|
(6,754
|
)
|
|
|
(29
|
)%
|
Other regions
|
|
|
6,493
|
|
|
|
686
|
|
|
|
5,807
|
|
|
|
847
|
%
|
Total Revenue
|
|
|
30,345
|
|
|
|
31,265
|
|
|
|
(920
|
)
|
|
|
(3
|
)%
|
Biofrontera
generated total revenue of €30.3 million in the fiscal year ended December 31, 2020, a decrease of 3% compared to the amount €31.3
million generated in the fiscal year ended December 31, 2019. Revenue from product sales decreased by almost 22% year-on-year to €23.9
million (previous year: €30.6 million).
Our
business felt the greatest impact from the COVID-19 pandemic in the United States, where sales fell by 29% to a total of €16.6 million
(previous year: €23.3 million). This includes €0.3 million in sales of the new product Xepi® (previous year: €0.6
million).
In
the fiscal year ended December 31, 2020, sales in Germany improved by 11% year-on-year to €5.2 million (previous year: €4.6
million). In Germany, our sales team successfully leveraged an approval extension granted in March 2020 to include the treatment of actinic
keratoses on the body and extremities, as well as recent study results, even during the COVID-19 pandemic, promoting the benefits of
Ameluz® to dermatologists. In this context, the advantages of daylight PDT, which could be performed in sunny weather without immediate
contact with doctors, became particularly evident during the summer months. In other European countries, in the fiscal year ended December
31, 2020, total sales decreased by 19% to €2.1 million (previous year: €2.6 million).
in
the fiscal year ended December 31, 2020, revenue from other regions amounted to €6.5 million (previous year: €0.7 million)
and include €6.0 million in revenue from a down payment from Maruho under the license agreement we entered into with it in April
2020.
Cost
of sales
Cost
of Sales
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Cost of sales
|
|
|
(3,536
|
)
|
|
|
(4,875
|
)
|
|
|
(1,339
|
)
|
|
|
(27
|
)%
|
Cost
of sales was €3.5 million for the fiscal year ended December 31, 2020, compared to €4.9 million for the fiscal year ended December
31, 2019, a decrease in costs of €1.3 million. This decrease resulted primarily from a lower volume of products sold during the
period.
Research
and development expenses
Research
and Development Expenses
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Clinical studies (external expenses)
|
|
|
(1,828
|
)
|
|
|
(2,030
|
)
|
|
|
(202
|
)
|
|
|
(10
|
)%
|
FDA and EMA Fees
|
|
|
(715
|
)
|
|
|
(657
|
)
|
|
|
58
|
|
|
|
9
|
%
|
Other research and development expenses
|
|
|
(2,246
|
)
|
|
|
(1,949
|
)
|
|
|
297
|
|
|
|
15
|
%
|
Total research &
development expenses
|
|
|
(4,789
|
)
|
|
|
(4,636
|
)
|
|
|
153
|
|
|
|
3
|
%
|
Research
and development expenses were €4.8 million for the fiscal year ended December 31, 2020, compared to €4.6 million for the fiscal
year ended December 31, 2019, a slight increase of expenses of €0.2 million, or 3%. The increase in the costs for the clinical studies
follows the progress of studies in the U.S. Expenses for regulatory items, including costs related to the granting, maintenance and expansion
of our approvals, increased principally as a result of the inclusion of approval fees for Xepi® in the fiscal year ended
December 31, 2019.
Research
and development costs include the costs of clinical studies, but also the costs of regulatory affairs, i.e. the granting, maintenance
and expansion of our label indications and other regulatory approvals.
Sales
costs
Sales
Costs
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Personnel expenses
|
|
|
(10,520
|
)
|
|
|
(14,048
|
)
|
|
|
(3,528
|
)
|
|
|
(25
|
)%
|
Trade shows and marketing material
|
|
|
(1,995
|
)
|
|
|
(3,476
|
)
|
|
|
(1,482
|
)
|
|
|
(43
|
)%
|
Logistics and other
|
|
|
(7,967
|
)
|
|
|
(11,331
|
)
|
|
|
(3,365
|
)
|
|
|
(30
|
)%
|
Total sales costs
|
|
|
(20,482
|
)
|
|
|
(28,856
|
)
|
|
|
(8,374
|
)
|
|
|
(29
|
)%
|
Sales
costs were €20.5 million for the fiscal year ended December 31, 2020, compared with €28.9 million for the fiscal year ended
December 31, 2019, a significant decrease in costs of €8.4 million, or 29%. The decrease in sales and marketing costs was a result
of the cost-saving measures that were implemented due to the COVID-19 pandemic.
Sales
and marketing costs include the expenses for our sales forces in Germany, Spain, the United Kingdom, and the United States, as well as
cost for marketing material such as flyers and promotional materials distributed to physicians, and costs for marketing events such as
symposia and scientific meetings.
General
and administrative expenses
General
and Administrative Expenses
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
General and
administrative expenses
|
|
|
(9,150
|
)
|
|
|
(16,275
|
)
|
|
|
(7,125
|
)
|
|
|
(44
|
)%
|
General
and administrative expenses decreased by 44%, to €9.2 million for the fiscal year ended December 31, 2020, compared to €16.3
million for the fiscal year ended December 31, 2019. This decrease in expenses was due to the cost-saving measures introduced as a result
of the COVID-19 pandemic during the fiscal year ended December 31, 2020 and lower legal and consulting expenses.
Specifically,
shortly after the spread of the COVID-19 virus became known, our company announced that it would take comprehensive cost-saving and cost-control
measures on a precautionary basis. As such, short-time work was introduced for all employees in Germany until the end of July 2020. Similar
measures were implemented for the subsidiaries in Spain and the UK. Our U.S. subsidiary Biofrontera Inc. also introduced significant
cost-cutting measures, such as a significant reduction in headcount and the introduction of a furlough program, under which all employees
were required to take temporary unpaid leave. In addition, the members of the supervisory board as well as the management board of Biofrontera
AG and the management of Biofrontera Inc. voluntarily waived part of their salaries. In addition, costs for training and continuing education,
among other things, were reduced in 2020.
Interest
Interest
income and expense
Interest
Income and Expense
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Interest Expense
|
|
|
(3,079
|
)
|
|
|
(2,712
|
)
|
|
|
367
|
|
|
|
14
|
%
|
Interest Income
|
|
|
411
|
|
|
|
127
|
|
|
|
284
|
|
|
|
224
|
%
|
Interest
expense primarily includes interest for the loan under the EIB credit facility. The interest expense in the fiscal years ended December
31, 2020 and December 31, 2019 was €3.1 million and €2.7 million, respectively, consisting of the following:
in € thousands
|
|
2020
Effective interest
expenses
|
|
|
2020
Interest
expenses
|
|
|
2019
Effective interest
expenses
|
|
|
2019
Interest
expenses
|
|
Convertible
bond 2017/2022
|
|
|
26
|
|
|
|
122
|
|
|
|
32
|
|
|
|
136
|
|
EIB
loan 2017
|
|
|
269
|
|
|
|
975
|
|
|
|
202
|
|
|
|
1.046
|
|
EIB
loan 2019
|
|
|
33
|
|
|
|
488
|
|
|
|
11
|
|
|
|
457
|
|
Purchase
price liability (earn-out and start-up costs)
|
|
|
-
|
|
|
|
750
|
|
|
|
-
|
|
|
|
650
|
|
Leasing
|
|
|
-
|
|
|
|
179
|
|
|
|
-
|
|
|
|
124
|
|
Other
|
|
|
218
|
|
|
|
20
|
|
|
|
-
|
|
|
|
53
|
|
Total
|
|
|
546
|
|
|
|
2.534
|
|
|
|
245
|
|
|
|
2.466
|
|
Interest
income was €411 thousand during the fiscal year ended December 31, 2020, compared with €127 thousand during the fiscal year
ended December 31, 2019 and resulted mainly from the fair value valuation of the performance component of the EIB credit facility in
the amount of €288 thousand and from the recognition in the income statement of the debt component upon early conversion of the
mandatory convertible bond 2020/2021 in the amount of €98 thousand.
Other
income and (expense), net
Other
Income and (Expense), Net
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Other income
and (expense), net
|
|
|
(2,418
|
)
|
|
|
21,184
|
|
|
|
(23,602
|
)
|
|
|
(111
|
)%
|
Other
income and (expense) totaled €(2.4) million in the fiscal year ended December 31, 2020 compared with €21.2 million in the fiscal
year ended December 31, 2019, with the previous year’s amount including non-recurring effects from the acquisition of Cutanea amounting
to €21.0 million. In addition, income and (expenses) from currency translation amounting to €(3.6) million (previous year:
€0.3 million) are reflected.
Comparison
of Fiscal Years Ended December 31, 2019 and December 31, 2018
Total
revenue
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Germany
|
|
|
4,633
|
|
|
|
3,307
|
|
|
|
1,346
|
|
|
|
40
|
%
|
Europe (ex Germany)
|
|
|
2,603
|
|
|
|
2,737
|
|
|
|
(134
|
)
|
|
|
(5
|
)%
|
US
|
|
|
23,343
|
|
|
|
14,894
|
|
|
|
8,449
|
|
|
|
57
|
%
|
Other regions
|
|
|
686
|
|
|
|
169
|
|
|
|
517
|
|
|
|
306
|
%
|
Total Revenue
|
|
|
31,265
|
|
|
|
21,107
|
|
|
|
10,178
|
|
|
|
48
|
%
|
Revenue
for the fiscal year ended December 31, 2019 increased by approximately 48%, to €31.3 million, from €21.1 million for the fiscal
year ended December 31, 2018.
During
the fiscal year ended December 31, 2019, we recorded €4.6 million of revenue in Germany, which represents an increase of €1.3
million or 40%, compared to the fiscal year ended December 31, 2018. This increase was mainly due to increased adoption of Ameluz®—in
particular in combination with daylight PDT—by dermatologists in Germany. We expect our revenue to grow in Germany because in Germany
Ameluz®, when used in combination with daylight PDT, is eligible for reimbursement for all patients with public health
insurance, which was not previously the case. We expect further sales growth in Europe as a result of the EU-label expansion received
in March 2020 to include the treatment of actinic keratoses on the extremities as well as the trunk and neck. In addition, the results
of the follow-up phase of the clinical study comparing daylight PDT with Ameluz® and Metvix® were included
in the product information (SmPC), which we expect to lead to higher sales in the future.
During
the fiscal year ended December 31, 2019, we recorded €23.3 million of revenue in the U.S. This includes sales of €0.8 million
from Xepi® and Aktipak®. Revenue in the U.S. in the fiscal year ended December 31, 2019 increased significantly
by €8.5 million, or 57%, as compared to the fiscal year ended December 31, 2018 and, as a result, in 2019, the U.S. represented
the largest regional market for us. This revenue growth resulted primarily from further expansion of our sales and distribution infrastructure
and improved reimbursement for the work performed by dermatologists using PDT. In 2019, the reimbursement in the U.S. for the treatment
with Ameluz®, which is based on so-called CPT codes, was increased again, improving the positioning of PDT as a treatment option.
During
the fiscal year ended December 31, 2019, we recorded revenue of €2.6 million from the sale of products in other European countries,
either to our distribution partners or from our own sales in countries other than Germany. This represents a decrease of €0.1 million
or 5%. In Spain, a 27% reduction in our sales price in Spain as of July 1, 2018 was offset in whole by higher sales. However, the decrease
in revenue generated by declining deliveries to license partners led to the overall decrease in sales.
Other
revenue includes revenue from the development projects with Maruho as well as license agreements and amounted to €686 thousand during
the fiscal year ended December 31, 2019, which represents an increase of €517 thousand or 306% compared to the fiscal year ended
December 31, 2018. We did not record any license income during the fiscal year ended December 31, 2019. We had €40,000 in license
income in the fiscal year ended December 31, 2018.
Cost
of sales
Cost
of Sales
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Cost of sales
|
|
|
(4,875
|
)
|
|
|
(4,451
|
)
|
|
|
424
|
|
|
|
10
|
%
|
Cost
of sales was €4.9 million for the fiscal year ended December 31, 2019, compared to €4.5 million for the fiscal year ended December
31, 2018, an increase in costs of €0.4 million. This increase resulted primarily from a higher volume of products sold during the
period.
Research
and development expenses
Research
and Development Expenses
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Clinical studies (external expenses)
|
|
|
(2,030
|
)
|
|
|
(1,278
|
)
|
|
|
752
|
|
|
|
59
|
%
|
FDA and EMA Fees
|
|
|
(657
|
)
|
|
|
(448
|
)
|
|
|
209
|
|
|
|
47
|
%
|
Other research and development expenses
|
|
|
(1,949
|
)
|
|
|
(2,702
|
)
|
|
|
(753
|
)
|
|
|
(28
|
)%
|
Total research &
development expenses
|
|
|
(4,636
|
)
|
|
|
(4,428
|
)
|
|
|
208
|
|
|
|
5
|
%
|
Research
and development expenses were €4.6 million for the fiscal year ended December 31, 2019, compared to €4.4 million for the fiscal
year ended December 31, 2018, an increase in expenses of €0.21 million, or 5%. The increase in the costs for the clinical studies
follows the progress of the studies, in particular the BCC study in the U.S. Expenses for regulatory items, including costs related to
the granting, maintenance and expansion of our approvals, increased principally as a result of the inclusion of approval fees for Xepi
TM in the fiscal year 2019.
Research
and development costs include the costs of clinical studies, but also the costs of regulatory affairs, i.e. the granting, maintenance
and expansion of our label indications and other regulatory approvals.
Sales
costs
Sales
Costs
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Personnel expenses
|
|
|
(14,048
|
)
|
|
|
(11,493
|
)
|
|
|
2,555
|
|
|
|
22
|
%
|
Trade shows and marketing material
|
|
|
(3,476
|
)
|
|
|
(1,870
|
)
|
|
|
1,606
|
|
|
|
86
|
%
|
Logistics and other
|
|
|
(11,331
|
)
|
|
|
(4,381
|
)
|
|
|
6,951
|
|
|
|
159
|
%
|
Total sales costs
|
|
|
(28,856
|
)
|
|
|
(17,744
|
)
|
|
|
11,112
|
|
|
|
63
|
%
|
Sales
costs were €28.9 million for the fiscal year ended December 31, 2019, compared with €17.7 million for the fiscal year ended
December 31, 2018, an increase in costs of €11.1 million, or 63%.
Sales
costs include salaries and other benefits for our sales and marketing teams in the United States, in Germany, in Spain and in the UK,
costs for marketing material such as flyers and promotional materials distributed to physicians, and costs for marketing events such
as symposia and scientific meetings. The increase for the fiscal year ended December 31, 2019, in sales costs is due to the further expansion
of our sales organization in the U.S. as well as sales-related costs incurred at Cutanea in connection with Cutanea’s acquisition
and integration into our business.
General
and administrative expenses
General
and Administrative Expenses
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
General and
administrative expenses
|
|
|
(16,275
|
)
|
|
|
(12,963
|
)
|
|
|
3,312
|
|
|
|
26
|
%
|
General
and administrative expenses increased by 26%, to €16.3 million for the fiscal year ended December 31, 2019, compared to €13.0
million for the fiscal year ended December 31, 2018. This increase in expenses was mainly due to the Cutanea acquisition as well as legal
fees in the amount of €6.9 million in the fiscal year ended December 31, 2019 (€6.2 million in the fiscal year ended December
31, 2018), relating to lawsuits brought against us by, and by us against, a competitor and against us by, and by us against a shareholder
(See “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings”
for more information). These legal costs include an accrual of €1.035 million for legal fees which we expect to be incurred in connection
with these lawsuits until the cases are resolved.
Interest
Interest
income and expense
Interest
Income and Expense
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Interest Expense
|
|
|
(2,712
|
)
|
|
|
(1,784
|
)
|
|
|
927
|
|
|
|
68
|
%
|
Interest Income
|
|
|
127
|
|
|
|
25
|
|
|
|
103
|
|
|
|
416
|
%
|
Interest
income was €127 thousand during the fiscal year ended December 31, 2019, compared with €25 thousand during the fiscal year
ended December 31, 2018. Interest income consists of interest earned on our cash and cash equivalents. The increase in interest income
in the fiscal year ending December 31, 2019 is primarily due to larger cash investments from increased cash and cash equivalents.
The
interest expense in the fiscal years ended December 31, 2019 and December 31, 2018 was €2.7 million and €1.8 million, respectively,
consisting of the following:
in €
thousands
|
|
2019
Interest expense
from compounding
|
|
|
2019
Interest expense
and the like
|
|
|
2018
Interest expense
from compounding
|
|
|
2018
Interest expense
and the like
|
|
Convertible
bond 2017/22
|
|
|
32
|
|
|
|
136
|
|
|
|
30
|
|
|
|
156
|
|
EIB loan 2017
|
|
|
202
|
|
|
|
1,046
|
|
|
|
140
|
|
|
|
1,458
|
|
EIB loan 2019
|
|
|
11
|
|
|
|
457
|
|
|
|
-
|
|
|
|
-
|
|
Cutanea purchase
price liability
|
|
|
-
|
|
|
|
650
|
|
|
|
-
|
|
|
|
-
|
|
Leasing
|
|
|
-
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
245
|
|
|
|
2,466
|
|
|
|
170
|
|
|
|
1,614
|
|
Interest
expense includes interest for the loan under the EIB credit facility. The increase in interest income in the fiscal year ending December
31, 2019 is primarily due to the drawdown of the additional tranche in February 2019.
Other
income and (expense), net
Other
Income and (Expense), Net
|
|
|
Fiscal
Year ended
December 31,
|
|
|
Increase
(decrease)
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
€ thousands (except percentages)
|
|
Other income
and (expense), net
|
|
|
21,184
|
|
|
|
969
|
|
|
|
20,215
|
|
|
|
2,086
|
%
|
Other
income (expense), net was €21.2 million for the fiscal year ended December 31, 2019, compared with €1.0 million for the fiscal
year ended December 31, 2018. Other income mainly includes the negative difference (bad will) of €14.8 million arising from the
purchase price allocation and other income from the assumption of costs agreed to be paid by Maruho under the Share Purchase and Transfer
Agreement. In addition, the items include expenses and income from currency translations in the amount of €0.3 million (fiscal year
ended December 31, 2018: € 0.7 million).
Liquidity
and Capital Resources
We
devote a substantial portion of our cash resources to research and development and sales, general and administrative activities primarily
related to the commercialization of our products, Ameluz® and BF-RhodoLED® lamp. We have financed our operations
primarily with the proceeds of the issuance and sale of equity securities, warrant bonds and convertible bonds and, since May 2017, with
proceeds from the EIB credit facility, and supply revenue and licensing income from some of our distribution partners. To date, we have
generated supply revenue from direct sales in the U.S., Germany, Spain and the UK as well as from sales to distribution partners in some
European countries and , until 2019, Israel.
Our
management board regularly reviews the equity ratio of Biofrontera as a standalone entity as well as on a consolidated basis with its
subsidiaries. Management seeks to ensure an appropriate equity base, within the framework of expectations of the capital markets, and
creditworthiness with respect to national and international business partners. Our management board seeks to ensure that all companies
within our group have sufficient equity and debt funding at their disposal.
We
have incurred losses in each year since inception. Our net loss for the fiscal years ended December 31, 2020, December 31, 2019 and December
31, 2018 was € 13.0 million, €7.4 million and €8.9 million, respectively. As of December 31, 2020, we had an accumulated
deficit of € 165.7 million.
Cash
and cash equivalents amounted to €16.5 million as of December 31, 2020, compared to €11.1 million as of December 31, 2019 and
€19.5 million as of December 31, 2018.
The
following table summarizes our cash flows from operating, investing and financing activities for the periods presented:
|
|
|
|
|
Fiscal
Year ended
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
€ thousands
|
|
Consolidated Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(2,849
|
)
|
|
|
(32,894
|
)
|
|
|
(13,434
|
)
|
Investing activities
|
|
|
2,873
|
|
|
|
21,053
|
|
|
|
(511
|
)
|
Financing activities
|
|
|
5,948
|
|
|
|
3,455
|
|
|
|
22,274
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
5,972
|
|
|
|
(8,386
|
)
|
|
|
8,329
|
|
Operating
Activities
For
the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018, our net cash used in operating activities was €2.9
million, €32.9 million and €13.4 million, respectively. The decrease in net cash used in operating activities in the fiscal
year ended December 31, 2020 compared to the fiscal year ended December 31, 2019 was due to the effects from the acquisition and restructuring
of Cutanea included in the previous year’s figure.
Investing
Activities
For
the fiscal year ended December 31, 2020, our net cash from investing activities was €2.9 million, compared to cash from (used in)
investing activities of €21.1 million for the fiscal year ended December 31, 2019 and cash used in investing activities of €(0.5)
million in the fiscal year ended December 31, 2018. The previous year’s figure includes €22.8 million in liquidity taken over
as part of the Cutanea acquisition as well as start-up costs from Maruho. Investments in property, plant and equipment and intangible
assets amounted to €0.8 million (previous year: €1.9 million). The net cash used in investing activities in the fiscal years
ended December 31, 2018 was primarily for the purchases of tangible and intangible assets.
Financing
Activities
Our
net cash provided by financing activities was €5.9 million for the fiscal year ended December 31, 2020 compared to €3.5 million
for the fiscal year ended December 31, 2019 and €22.3 million for the fiscal year ended December 31, 2018. The cash provided by
financing activities in the fiscal year ended December 31, 2020, mainly includes the proceeds from the mandatory convertible bond 2020/2021.
The cash provided by financing activities in the fiscal year ended December 31, 2019 was primarily due to the drawdown of a further loan
tranche of the EIB loan under the EIB credit facility in the amount of €5.0 million, offset, in part by, lease payments in the amount
of €1.2 million. The cash provided by financing activities in the fiscal year ended December 31, 2018 was primarily due to the net
proceeds generated from our rights offering of common shares in Germany and our initial public offering of ADSs in the U.S. in February
2018.
Future
Capital Requirements
We
expect to continue to incur substantial additional operating losses from significant general and administrative (including relating to
litigation), sales, marketing and manufacturing expenses in the U.S. as we seek to expand the commercialization of Ameluz® in
the U.S. and undertake further clinical trials and other activities related to extending the approved indications for Ameluz®.
In addition, we expect to incur additional expenses to add and improve operational, financial and information systems and personnel,
including personnel to support our product commercialization efforts. We also expect to incur significant costs to continue to comply
with corporate governance, internal controls and similar requirements applicable to us as a public company in the U.S. and in Germany.
We also anticipate to incur significant expenses in connection with lawsuits brought by and against our competitor in the U.S and by
and against a shareholder.
To
date, our company has at all times been able to timely meet its payment obligations. However, we may not have sufficient funds and may
be unable to arrange for additional financing to pay the amounts due under our existing debt obligations, in particular the minimum €13.0
million payment that we must make on July 7, 2022 and a minimum payment of €6.5 million which we must make on February 4, 2024 under
the EIB credit facility. We have no committed external sources of funds, other than the EIB credit facility, under which future borrowings
were subject to draw conditions, including, the achievement of specified milestones. However, the period during which we could have made
additional draws expired on May 19, 2020 and, as a result, we are not able to draw down another loan tranche under the EIB credit facility.
In addition, the covenants under our existing debt obligations could limit our ability to obtain additional debt financing. For example,
under the EIB credit facility, we are not permitted to incur additional third-party debt in excess of €1.0 million without the prior
consent of EIB (subject to certain exceptions). In addition, while we believe the claims in the DUSA litigation, which is currently scheduled
for trial in November and December 2021, lack merit, in the event of an adverse decision, we may not have sufficient funds to pay any
significant awards.
If
we raise additional funds by issuing equity securities, convertible notes or bonds, or other convertible securities, our shareholders
will experience dilution. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to
us or our shareholders. In addition, the recent outbreak of the COVID-19 pandemic has significantly disrupted world financial markets,
negatively impacted global market conditions and may therefore reduce opportunities for us to obtain additional funding. If we raise
additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights
to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.
Our
future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
|
●
|
the
costs of our commercialization activities for Ameluz®, most importantly in the U.S.;
|
|
|
|
|
●
|
the
scope, progress, results and costs of development for extending indications for Ameluz®;
|
|
|
|
|
●
|
the
costs of maintaining and extending our regulatory approvals;
|
|
|
|
|
●
|
the
extent to which we acquire or invest in products, businesses and technologies;
|
|
|
|
|
●
|
the
extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our products; and
|
|
|
|
|
●
|
the
costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property
claims.
|
Description
of Principal Financing Documents
European
Investment Bank Loan Commitment and Security Agreements
On
May 19, 2017, we entered into a Finance Contract with EIB, which we sometimes refer to as the EIB credit facility, whereby EIB has committed
to lend us up to €20.0 million. The loan terms specify that the amounts drawn will be used to finance up to approximately 50% of
specified research and development expenses forecast to be made by us between 2017 and 2020. The key terms of the EIB credit facility
are as follows:
|
●
|
Term
and Availability. The EIB credit facility can be drawn in up to four tranches each in a minimum amount of €5.0 million,
each of which matures 5 years from the scheduled date of disbursement for the relevant tranche. The final availability date for the
EIB credit facility was May 19, 2020. After that date, we were not able to draw down another loan tranche under the EIB credit facility.
|
|
|
|
|
●
|
Conditions
to disbursement. We had drawn the first €10.0 million of the loan commitment in the form of two €5 million tranches
in 2017. In February 2019 we drew another tranche of €5.0 million. We did not draw the final tranche of up to an additional
€5.0 million as we could not fulfill the requirements for drawing this tranche (such as provide evidence satisfactory to EIB
that we have reached consolidated revenues of €35.0 million on a 12-month rolling basis and that we have raised at least an
additional €5.0 million in equity financing).
|
|
|
|
|
●
|
Use
of Proceeds and Co-Funding Requirement. We are required to use proceeds from the EIB credit facility in order to fund post-marketing
level clinical trials to produce data for obtaining regulatory clearance in the EU and U.S. for Ameluz® in different
indications and treatment modalities, referred to as the “Project”. In addition, we are required to ensure that we have
available, and to expend, our own funds to finance approximately 50% of the Project budget (which is approximately €40.0 million
in total). This means that, for any given year we may use the EIB credit facility to finance only approximately 50% of costs related
to the Project.
|
|
|
|
|
●
|
Interest.
There are three components to the interest we pay under the EIB credit facility: quarterly floating interest payments, a deferred
interest payment, and a performance participation interest payment. We make floating interest payments each quarter based on a rate
per annum equal to EURIBOR plus 4.00%. The deferred interest and the performance participation interest payments are payable
in full when the relevant tranche matures (or on any earlier prepayment date). Deferred interest accrues daily on each €5.0
million tranche at a rate of 6.0% per annum. For each €5.0 million tranche, the performance participation interest amount is
equal to the product of EIB’s disbursement date notional equity proportion in respect of such tranche multiplied
by our market capitalization on the maturity date of such tranche. The disbursement date notional equity proportion in relation
to the outstanding €10.0 million tranche of the loan is 0.64% and the disbursement date notional equity proportion in relation
to the outstanding €5.0 million tranche of the loan is 0.20%.
|
|
|
|
|
●
|
Restriction
on Debt. We are not permitted to incur additional third-party debt in excess of €1.0 million without the prior consent of
EIB. This restriction is subject to certain exceptions, such as for ordinary course deferred purchase arrangements and, subject to
maximum amounts, various types of leases.
|
|
●
|
Events
of Default. The EIB credit facility contains a number of provisions allowing EIB to accelerate the payment of all or part of
amounts outstanding under the EIB credit facility, including customary acceleration provisions for failure to make payments, inaccuracy
of representations and warranties, default on other loan obligations (cross-default), illegality or change of law, and events relating
to bankruptcy, insolvency and administration. In addition, EIB may accelerate upon any event or change in condition which in the
opinion of EIB has a material adverse effect on our business, operations, property, condition (financial or otherwise) or prospects,
or on the business, operations, property, condition (financial or otherwise) or prospects of Biofrontera Bioscience GmbH, Biofrontera
Pharma GmbH or Biofrontera Inc.
|
|
|
|
|
●
|
Other
Covenants. Subject in each case to certain exceptions, the EIB credit facility contains negative covenants and restrictions,
including among others: restrictions on the granting of security, on the provision of loans and guarantees, on the disposal of assets
and on a change of business. Furthermore, we must retain 100% ownership of Biofrontera Bioscience GmbH, Biofrontera Pharma GmbH and
Biofrontera Inc. and 51% ownership of any other subsidiary whose gross revenues, total assets or EBITDA represent 5% or more of our
consolidated gross revenues, total assets or EBITDA. The EIB credit facility also contains affirmative covenants, such as the execution
of the Project as described in the EIB credit facility agreement, mandatory periodic reporting of financial and other information
and the notification upon the occurrence of any event of default.
|
|
|
|
|
●
|
Cancellation
Upon Project Cost Reduction. If it is determined that the total principal amount of the loan drawn by us exceeds 50% of the total
cost of the Project, EIB may cancel the undisbursed portion of the loan and demand prepayment of the loan up to the amount by which
the loan, excluding accrued interest, exceeds 50% of the total cost of the Project.
|
Convertible
Bond II
In
January 2017, we issued a convertible bond with an aggregate principal amount of €4.999 million, which is divided into 49,990 non-registered
pari passu ranking bonds, each with a principal amount of €100. These bonds bear interest at a rate of 6% per annum on their principal
amount from and including February 1, 2017. We must pay interest on these bonds semi-annually in arrears on January 1 and July 1 of each
year. We must redeem these bonds in full on January 1, 2022, by paying the outstanding principal amount, together with accrued interest
on the principal amount until (but excluding) the maturity date, unless they have previously been redeemed or converted or purchased
and cancelled. The bonds were offered on a preemptive basis to all existing shareholders and were fully subscribed.
The
terms and conditions of these bonds provide that each bondholder is entitled to declare due and payable the entire principal amount and
any other claims arising from the bonds if we fail to pay within 30 days after the relevant payment date any amounts due and payable
on the bonds or we exceed the “permissible indebtedness” under the terms and conditions by incurring additional debt. We
will be deemed to exceed the “permissible indebtedness” if, as a result of our incurrence of any debt, both (1) our “net
financial indebtedness” exceeds €25 million, and (2) our “net indebtedness quota” exceeds 4.0. “Net financial
indebtedness” is defined as (i) the sum of long-term financial liabilities and short-term financial debt, less (ii) cash and cash
equivalents, and “net indebtedness quota” is defined as the quotient of (i) our “net financial indebtedness”
divided by (ii) our EBITDA (as defined in the terms and conditions of the bonds). For purposes of these calculations, all relevant figures
are determined based on our most recent published annual or interim quarterly financial reports at the time we incur additional debt.
We will not be deemed to exceed the “permissible indebtedness” if the “net indebtedness quota” exceeds 4.0 due
to a reduction of our EBITDA.
We
granted each bondholder the right to convert its bonds, at any time, in whole but not in part, into our ordinary shares, at a conversion
price per share equal to: €3.50 per share from the date of issuance until March 31, 2017; €4.00 per share from April 1, 2017
until December 31, 2018; and €5.00 per share from January 1, 2018 until maturity. In March 2018 the conversion price was reduced
to €4.75, in August 2020, the conversion price was adjusted to €4.737, and in March 2021 the conversion price was adjusted
to €4.716, in accordance with section 11 of the bond terms and conditions. As of December 31, 2020, bonds in a nominal amount of
€2,030,800 were converted into the company’s shares. In 2020 no bonds were converted into shares. In the previous year, bonds
with a nominal amount of €564,500 €0 were converted into 118,841 shares.
For
more information on Convertible Bond II, see Note 10 (Financial Liabilities) to our audited consolidated financial statements for the
fiscal years ended December 31, 2020.
Convertible
bond 2020/2021
In
August 2020, Biofrontera issued a qualified subordinated mandatory convertible bond 2020/2021 from Conditional Capital I. The bond was
divided into 2,638,150 bearer bonds with a nominal value of €3.00 each (“bonds”). The term of the bonds began on August
20, 2020 and ends on December 20, 2021. However, in accordance with section 8 (2) of the terms and conditions of the bonds, the Company
is entitled to make a mandatory conversion at any time for an unlimited period after the price of the Company’s shares has exceeded
€4.50 per share (“mandatory conversion trigger price”).
On
November 12, 2020, Biofrontera decided to exercise the right to mandatory conversion in accordance with §8 (2) of the bond terms
and conditions.
Accordingly,
shares with a nominal value of €2,638,150 Biofrontera AG were converted from the mandatory convertible bond 2020/2021. In this context,
€5,179 thousand was allocated to the capital reserve. With the early exercise of the conversion option by Biofrontera, the debt
portion outstanding at the conversion date in the amount of €98 thousand was recognized in profit or loss. The capital procurement
costs incurred in the amount of €378 thousand were deducted from the capital reserve.
Off-Balance
Sheet Transactions
We
did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES
The
consolidated financial statements of Biofrontera for the fiscal year ending December 31, 2020 have been prepared in accordance with the
International Financial Reporting Standards, or IFRS, of the International Accounting Standards Board, or IASB, and the interpretations
of the International Financial Reporting Standards Interpretations Committee, or IFRS IC, and applicable on the balance sheet date.
The
assets and liabilities are recognized and measured in accordance with the IFRS that were required on December 31, 2020.
The
preparation of the consolidated financial statements for the fiscal year ended December 31, 2020 in accordance with IFRS required the
use of estimates and assumptions by the management that affect the value of assets and liabilities – as well as contingent assets
and liabilities – as reported on the balance sheet date, and revenues and expenses arising during the fiscal year. The main areas
in which assumptions, estimates and the exercising of a degree of discretion are appropriate relate to the determination of the useful
lives of non-current assets and the formation of provisions, as well as income taxes. Estimates are based on historical experience and
other assumptions that are considered appropriate in the circumstances. They are continuously reviewed but may vary from the actual values.
While
our significant accounting policies are more fully discussed in our consolidated financial statements included in this annual report,
we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation
of our consolidated financial statements. We have reviewed these critical accounting policies and estimates with the audit committee
of our supervisory board.
Revenue
Recognition
The
company recognizes as revenue all income from product sales and the granting of licenses. The completed customer contracts contain only
one performance obligation each. The company is entitled to a fixed consideration for the products sold and licenses granted. To the
extent that obligations to take back expired goods have been agreed with customers, Biofrontera only recognizes revenue to the extent
that it is highly probable that it will be possible to realize this amount, taking into account the proportion of products to be taken
back as based on historical experience. The timing and amount of the revenues to be reported in the consolidated income statement are
determined by the extent to which Biofrontera transfers control of the products to be supplied or the rights to be granted to the customers.
Most
of the revenues are generated by product sales. In accordance with respective local legislation concerning the marketing of pharmaceuticals
and medical products, Ameluz® is sold exclusively through pharmaceutical wholesalers or directly to hospitals in Germany,
as well as directly to pharmacies and hospitals in other European countries. In the U.S., Ameluz® is reimbursed as a so-called
“buy-and-bill drug” and consequently marketed directly to physicians.
Xepi®
is sold directly to specialty pharmacies in the U.S. Sales are recognized net of sales deductions when ownership and control are transferred
to the customer. Sales deductions include expected returns, discounts and incentives such as payments made under patient assistance programs.
These rebates are estimated at the time of sale based on the amounts incurred or expected to be received for the related sales.
Revenue
is recognized when the products are delivered to the respective customers.
In
addition, Biofrontera generates sales revenues within the framework of the research and development cooperation with Maruho Co., Ltd.
Revenue is recognized over a specific period of time.
Down
payments received by Biofrontera for the conclusion of license agreements granting customers a right of use are realized on a point-in-time
basis.
In
the case of direct sales of BF-RhodoLED®, the delivered products and services on which amounts are owed are settled only
after complete installation has taken place. The installation service represents a pure ancillary service, as for legal reasons the lamp
may only be used by the customer once it has been installed. In the U.S., some lamps are made available to physicians in return for a
fee for an up to six-month evaluation period. A final decision to purchase does not need to be made until the end of this period. The
company generated revenues from the monthly fees during the evaluation period, and from the sale of lamps.
Belixos®
is predominantly distributed in Europe through Amazon’s non-U.S. platforms and pharmaceutical wholesalers. Revenue from Amazon
sales is recognized after transfer of control and payment by the customer. For sales to pharmaceutical wholesalers, revenue is recognized
upon transfer of control. Based on experience, return rights granted with the sale through Amazon are exercised by customers only in
very few cases.
Revenue
is recognized net of sales-related taxes and sales deductions. For expected sales deductions, such as rebates and discounts, estimated
amounts are taken into account accordingly at the time of revenue recognition. The payment terms for Ameluz® include short-term
payment terms with the possibility of cash discounts.
The
preparation of the consolidated financial statements for December 31, 2020 in accordance with IFRS required the use of estimates and
assumptions by the management that affect the value of assets and liabilities as reported on the balance sheet date, and revenues and
expenses arising during the fiscal year.
Main
areas of application for significant assumptions, estimates and the exercise of discretion arise for the following matters:
|
●
|
Fair
value measurement under IFRS 13 in relation to the determination of the fair value of the purchase price liability for Cutanea.
|
|
|
According
to the earn-out provisions in the Share Purchase and Transfer Agreement for the acquisition of Cutanea, the profits from the sale
of the Cutanea products will be split equally between Maruho and Biofrontera until 2030. The expected annual purchase price payments
will be due depending on future profits generated from the sale of Xepi®. In determining the future purchase price payments,
management has to make assumptions and estimates about the future expected profits from the sale of Xepi® as well as a determination
of the cost of capital.
|
|
|
|
|
●
|
Assessment
of the recoverability of non-current assets
|
|
|
Biofrontera
is required to assess external and internal sources of information for non-current assets that are subject to amortization, based
on which possible indications of impairment or reversal of impairment can be identified. When assessing whether there are indications
of impairment or a reversal of impairment losses and - if such indications exist - when determining the fair values required in this
case as part of an impairment test, management must make assumptions and estimates about the expected future cash flows from the
use of the non-current assets and a determination of the cost of capital.
|
|
●
|
Income
taxes
|
|
|
Biofrontera
is required to calculate the expected current income tax for each group company, as well as to assess temporary differences arising
from the different treatment of certain balance sheet items between the IFRS consolidated financial statements and the financial
statements prepared for tax purposes. Where temporary differences exist, these generally result in the recognition of deferred tax
assets and liabilities in the consolidated financial statements. Management must make assumptions and estimates when calculating
actual and deferred taxes. The recognition of deferred tax assets of Biofrontera AG is subject to higher requirements due to the
loss history. Deferred tax assets are only recognized if it can be substantiated that taxable profits will be generated in the future
and that it is then probable that the deferred tax item to be capitalized can be offset against future taxable profits. In order
to assess the probability of the future utilization of deferred tax assets, various factors have to be taken into account, such as
the earnings situation in the past and operational planning. If actual results differ from these estimates, or if these estimates
have to be adjusted in future periods, this could have an adverse effect on the Group’s net assets, financial position and
results of operations. If there is a change in the assessment of the recoverability of deferred tax assets, the recognized deferred
tax assets - in accordance with the original recognition - are to be written down through profit or loss or recognized directly in
equity, or impaired deferred tax assets are to be recognized through profit or loss or directly in equity.
|
|
|
|
|
●
|
Provisions
for litigation risks
|
|
|
Provisions
are recognized for pending legal proceedings on the basis of current estimates. The outcome of the legal proceedings cannot be determined
or is subject to uncertainties. In assessing the risks arising from litigation, management must make assumptions and estimates as
to whether and to what extent provisions for litigation risks should be recognized. Actual claims arising from legal proceedings
may therefore differ from the amounts accrued.
|
|
|
|
|
●
|
Estimates
in connection with financial instruments
|
|
|
Estimates
are made to determine fair values in connection with the measurement of the performance component of the EIB loans and the liabilities
from the stock appreciation program. The determination requires management to make assumptions regarding the valuation models used
as well as a determination of the cost of capital.
|
|
|
|
|
●
|
Development
costs
|
|
|
At
Biofrontera, research and development costs include expenses for clinical trials as well as for the granting, maintenance and extension
of approvals. For the approved drug Ameluz® as well as for the other research and development projects, with the exception of
the further development of the new BF-RhodoLED® XL red light lamp, research and development costs are recognized as expenses
in the period in which they are incurred. In the opinion of management, the criteria prescribed by IAS 38.57 for the recognition
of development costs as assets are not met due to the uncertainties associated with the development of new products by the Biofrontera
Group until approval in the target markets has been obtained and it is probable that future economic benefits will flow to the Company.
|
|
|
The
BF-RhodoLED® XL red light lamp is a further development of the existing lamp, from which Biofrontera expects a future economic
benefit.
|
Estimates
are based on experience and other assumptions that are believed to be reasonable under the circumstances. They are reviewed on an ongoing
basis, but may differ from actual values.
Changes
in previous estimates due to the impact of the COVID-19 pandemic have occurred with regard to the valuation of the Xepi® license,
the purchase price payment from the earn-out provisions of the Share Purchase and Transfer Agreement with Maruho and the EIB loan.
The
expected income from the sale of Xepi® and, consequently, the expected annual purchase price payments were reestimated as of March
30, 2020, due to the current market situation influenced by the COVID-19 pandemic and resulting time shifts in the market penetration
of Xepi®. This resulted in an impairment of the Xepi® license and a reduction of the nominal amount of the expected purchase
price payment. As a result of the significant decrease in market capitalization in 2020, there was a reduction in the performance component
of the EIB loan recognized in income.
The
carrying amounts of the items affected by estimates can be found in the respective explanations of the items in the notes to the consolidated
financial statements.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Overview
We
are a German stock corporation (Aktiengesellschaft or AG) and, in accordance with the German Stock Corporation Act (Aktiengesetz),
we have two separate boards of directors, the supervisory board (Aufsichtsrat) and the management board (Vorstand). The
two boards are separate, and no individual may simultaneously be a member of both boards.
The
management board is responsible for the management of our business in accordance with applicable law, our articles of association (Satzung)
and the internal rules of procedure (Geschäftsordnung) adopted by our supervisory board. The management board represents
us in our transactions with third parties and in other proceedings with third parties.
The
principal responsibility of the supervisory board is to supervise the management board. The supervisory board is also responsible for
appointing and removing members of the management board and representing our company in connection with transactions between a member
of the management board and our company. The supervisory board is not itself permitted to make management decisions, but in addition
to its statutory responsibilities, our supervisory board has determined in the rules of procedure for the management board, that certain
transactions and decisions require its prior consent. The supervisory board has organized its internal affairs and structure by adopting
rules of procedure.
The
members of both the supervisory board and the management board are solely responsible for and manage the duties of the relevant board
(as described above); therefore, neither board may make decisions that are the responsibility of the other board under applicable law,
our articles of association or the internal rules of procedure. Members of both boards owe a duty of loyalty and care to the company.
In exercising their duties, the applicable standard of care is that of a diligent and prudent businessperson. Members of both boards
must take into account a broad range of considerations when making decisions, including the interests of our company and its shareholders.
As
a general rule under German law, a shareholder has no direct recourse against the members of the supervisory board or the management
board in the event that they are believed to have breached their duty of loyalty and care. Apart from insolvency or other special circumstances,
only the company has the right to claim damages from members of either board. We may waive such damages or settle these claims only if
at least three years have passed and the shareholders approve the waiver or settlement at the shareholders’ meeting with a simple
majority of the votes cast, provided that a minority holding, in the aggregate, 10% or more of our share capital does not have their
opposition formally noted in the minutes maintained by a German notary.
Our
supervisory board has comprehensive monitoring functions. To ensure that these functions are carried out properly, our management board
must, among other things, regularly report to the supervisory board with regard to current business operations and future business planning
(including financial, investment and personnel planning). Our supervisory board may, at any time, request special reports regarding our
affairs, legal or business relations and our subsidiaries and the affairs of any of our subsidiaries, to the extent that the affairs
of such subsidiary may have a significant impact on us.
The
following description, as far as it relates to our articles of association, is based on the most recent version of our articles of association,
which were registered in the commercial register on February 24, 2021.
Supervisory
Board
Our
articles of association establish that our supervisory board shall have six members.
All
of the members of our supervisory board are elected at the shareholders’ meeting in accordance with the provisions of the German
Stock Corporation Act. Under German law, the members of a supervisory board may be elected for a term until the adjournment of the shareholders’
meeting resolving on ratification of the acts of the supervisory board for the fourth fiscal year following the commencement of their
respective term of office, where the fiscal year in which such term of office commences shall not be taken into account (i.e., approximately
five years, depending on the dates of the annual general meeting at which the members of the supervisory board are elected), which is
a standard term of office. Pursuant to our supervisory board’s rules of procedure, only persons who have not yet reached the statutory
retirement age (currently: the age of 67) should be proposed as members of our supervisory board. Members of our supervisory board do
not have service contracts that provide for benefits upon termination of employment. Their remuneration is stipulated in the articles
of association.
Any
member so elected by our shareholders may be removed by the shareholders in a general meeting. In addition, any member of our supervisory
board may, at any time, resign by giving one month’s prior written notice to the end of a month to the management board, or for
important cause without notice. According to our articles of association and the internal rules of procedure of our supervisory board,
our supervisory board has a quorum when all members were invited or requested to participate in a decision and no less than three of
the members of our supervisory board participated. Unless otherwise provided by our articles of association, resolutions of our supervisory
board are passed by simple majority of the votes cast. In the case of a deadlock, the chairman of our supervisory board has the deciding
vote. The supervisory board meets at least twice each half-year.
The
shareholders’ meeting may, at the same time as it elects the members of our supervisory board, elect one or more substitute members.
The substitute members replace members who cease to be members of our supervisory board and take their place for the remainder of their
respective terms of office. We have not elected any substitute members.
If
a member of the supervisory board resigns, it is also possible to have a successor appointed by the competent court. The successor remains
in office until a successor is elected by our shareholders in a shareholder’s general assembly.
Our
supervisory board elects a chairman and a vice chairman from its members. The vice chairman exercises the chairman’s rights and
obligations whenever the chairman is unable to do so. The members of our supervisory board have elected Ulrich Granzer as chairman and
Jürgen Baumann as vice chairman, each for the term of their respective membership on our supervisory board, but may at any time
remove them as chairman and vice chairman, respectively, by supervisory board resolution.
The
business address of the members of our supervisory board is our principal executive office at Hemmelrather Weg 201, D-51377 Leverkusen
Germany.
The
following table sets forth the names and functions of the current members of our supervisory board, as well as their ages, positions,
dates of first appointments and their terms
Name
|
|
Nationality
|
|
Age
|
|
Position
|
|
Date
of first appointment
|
|
Term
|
Dr.
Ulrich Granzer13
|
|
German
|
|
60
|
|
Chair
|
|
May
12, 2006
|
|
2021
|
Jürgen
Baumann12
|
|
German
|
|
66
|
|
Vice
Chair
|
|
May
24, 2007
|
|
2021
|
John
Borer123
|
|
USA
|
|
63
|
|
Member
|
|
May
31, 2016
|
|
2021
|
Reinhard
Eyring3
|
|
German
|
|
62
|
|
Member
|
|
February
7, 2018
|
|
2021
|
Prof.
Dr. Franca Ruhrwedel2
|
|
German
|
|
48
|
|
Member
|
|
July
10, 2019
|
|
2021
|
Kevin
Weber
|
|
USA
|
|
63
|
|
Member
|
|
May
31, 2016
|
|
2021
|
(1)
Member of the personnel committee.
(2)
Member of the audit committee.
(3)
Member of the nominating committee.
The
following is a brief summary of the business experience of the members of our supervisory board:
Ulrich
Granzer, Ph.D. Dr. Granzer has been a member of our supervisory board since 2006 and has been the chairman of our supervisory board
since 2016. He is a pharmacist and is Managing Director of Granzer Regulatory Consulting & Services and was formerly director of
regulatory affairs at GlaxoSmithKline plc, Knoll AG and Bayer AG.
Jürgen
Baumann. Mr. Baumann has been a member of our supervisory board since 2007 and has been the vice chairman of our supervisory board
since 2016. Mr. Baumann was chairman of our supervisory board from 2007 through 2016. As an economics graduate, Mr. Baumann was formerly
a member of the Management Board of Schwarz Pharma AG responsible for European operations with eight national subsidiaries and four production
sites. Up until October 2012, Mr. Jürgen Baumann was a member of the Supervisory Board of Riemser AG, Greifswald.
John
Borer III, J.D. Mr. Borer has been a member of our supervisory board since 2016. He is the Senior Managing Director and Head of Investment
Banking at The Benchmark Company, LLC. He was formerly the Chief Executive Officer and Head of Investment Banking at Rodman & Renshaw,
and has held senior positions at Pacific Business Credit and Barclays American Business Credit. He holds a Doctor of Law degree (J.D.)
from Loyola Law School in Los Angeles, California.
Reinhard
Eyring. Mr. Eyring has been a member of our supervisory board since February 2018. He is an attorney who is head of Ashurst Germany,
a part of Ashurst LLP, and a partner in the corporate department at that firm in Frankfurt. Prior to joining Ashurst Germany, Mr. Eyring
was partner and managing partner with another major law firm. Mr. Eyring graduated from the University of Freiburg/Breisgau in 1988.
Mr. Eyring has also served as Chairman of the Advisory Committee of Stiftung Leben mit Krebs, Wiesbaden since September 2009.
Prof.
Dr. Franca Ruhwedel has been a member of the supervisory board since July 2019. She is currently Professor of Finance and Accounting
at the Rhine-Waal University of Applied Sciences in Kamp-Lintfort. Previously, she held the position of Professor of Accounting and Controlling
at the FOM University in Essen. During her professional career she has held positions as project manager in the areas of M&A and
corporate development at thyssenkrupp AG and thyssenkrupp Steel AG. After her training as a banker at Commerzbank AG and her studies
of business administration, Ms. Ruhwedel obtained her doctorate at the Ruhr University of Bochum.
Kevin
Weber. Mr. Weber has been a member of our supervisory board since 2016. He is a Principal at Skysis, LLC, a firm that provides commercial
strategy consulting services to pharmaceutical, biotech and medical device companies. Prior to Skysis, LLC, Mr. Weber was Chief Executive
Officer of Paraffin International Inc. Before Paraffin International, Mr. Weber was the Vice President of Marketing for Depomed, a specialty
pharmaceutical company focused on pain medicine and neurology products. Mr. Weber is also a board member of the American Chronic Pain
Association and holds a B.S. in Management and Marketing from Western Michigan University.
Supervisory
Board Committees and Independence
Decisions
are generally made by our supervisory board as a whole; however, decisions on certain matters may be delegated to committees of our supervisory
board to the extent permitted by law. The chairman, or if he or she is prevented from doing so, the vice chairman, chairs the meetings
of the supervisory board and determines the order in which the agenda items are discussed, the method and order of the voting, any adjournment
of the discussion and passing of resolutions on individual agenda items after a due assessment of the circumstances.
Pursuant
to Section 107(3) of the German Stock Corporation Act, the supervisory board may form committees from among its members and charge them
with the performance of specific tasks. The committees’ tasks, authorizations and processes are determined by our supervisory board.
Where permissible by law, important powers of the supervisory board may also be transferred to committees. The internal rules of procedure
of the supervisory board explicitly provide for a personnel committee, an audit committee, and a nomination committee. In April 2018,
the supervisory board determined that a research & development and market access committee was no longer necessary and subsequently
dissolved this committee.
German
law does not require the majority of our supervisory board members to be independent. However, the rules of procedure for our supervisory
board require that the supervisory board be composed of a sufficient number of independent members, as determined by our supervisory
board. The supervisory board passed a resolution, as recommended by the German Corporate Governance Code, regarding targets for the composition
of the supervisory board, and determined that at least half of the supervisory board members should be independent within the meaning
of the German Corporate Governance Code. Within the meaning or recommendation C.6 of the German Corporate Governance Code, a supervisory
board member is considered independent if he/she is independent from the company and its management board, and independent from any controlling
shareholder. At present, in the opinion of our supervisory board, all its members are to be regarded as independent of the company and
the management board within the meaning of the German Corporate Governance Code. To the knowledge of our supervisory board, the company
currently has no controlling shareholder. Thus, the members of the supervisory board are also to be regarded as independent in this respect
within the meaning of the German Corporate Governance Code.
Our
supervisory board has determined that a majority of our supervisory board members are independent directors in accordance with the listing
requirements of The NASDAQ Capital Market. The NASDAQ independence definition includes a series of objective tests, including that the
board member is not, and has not been for at least three years, one of our employees and that neither the board member nor any of his
family members has engaged in various types of business dealings with us. In addition, as required by NASDAQ rules, our supervisory board
has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our supervisory
board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a board member. In making these
determinations, our supervisory board reviewed and discussed information provided by the members of the supervisory board and us with
regard to each board member’s business and personal activities and relationships as they may relate to us and our management. The
wife of our chief executive officer, Prof. Hermann Lübbert, serves as a senior employee of our company responsible for regulatory
affairs and manufacturing (“Prokurist”); however, there are no family relationships among any of the members of our
supervisory board, the members of our management board or our executive officers.
Personnel
Committee
The
Personnel Committee prepares Supervisory Board decisions on the appointment and dismissal of Management Board members. Unlike in the
past, the full Supervisory Board is now responsible for compensation decisions as a result of the changes introduced by the German Act
on the Appropriateness of Management Board Compensation (VorstAG) which means the Personnel Committee is now only involved in preparatory
work.
The
Personnel Committee currently comprises the following members: Mr. Jürgen Baumann, Mr. John Borer and Dr. Ulrich Granzer. Mr. Baumann
is currently Chairman.
The
committee met on April 20, 2020, and dealt with the target achievement of the members of the Management Board in 2019 as well as the
issuance of options to members of the Management Board. In addition, in several conference calls in June 2020 the Personnel Committee
discussed the extension or restructuring of service contracts for members of the Management Board. In November and December 2020, the
committee also addressed succession planning for the Management Board and in particular the search for a Chief Financial Officer to succeed
Mr. Schaffer.
Audit
Committee
The
Audit Committee is concerned in particular with monitoring the financial reporting process, the effectiveness of the internal control
system, the risk management system and the internal auditing system, as well as the audit of the financial statements, here in particular
the selection and independence of the auditor and the additional services provided by the auditor. The Audit Committee may make recommendations
or proposals to ensure the integrity of the financial reporting process. In the case of companies within the meaning of Section 264d
of the German Commercial Code, i.e., also in the case of Biofrontera AG, the proposal of the Supervisory Board for the election of the
auditor shall be based on the recommendation of the Audit Committee. In the case of companies within the meaning of Section 264d of the
German Commercial Code, at least one member of the Supervisory Board must also have expertise in the fields of accounting or auditing
and be a member of the Audit Committee.
The
Audit Committee comprised the following members in the reporting year: Mr. Jürgen Baumann, Mr. John Borer and Prof. Dr. Franca Ruhwedel.
Prof. Dr. Ruhwedel is Chairwoman of the Audit Committee.
The
committee met twice in the reporting year, namely with the auditor in preparation for the Supervisory Board’s discussion of the
financial statements on April 20, 2020 and November 19, 2020.
In
addition to the regular meetings, the Chairwoman of the Audit Committee was in regular contact with the chief financial officer of Biofrontera
and with the auditors. She coordinated the audit planning and the focus of the audit with the auditor and was informed about the progress
of the audit in regular virtual meetings
Nominating
Committee
In
addition to the Chairman, the Nominating Committee comprises two other members of the Supervisory Board who are to be elected. The task
of the Nominating Committee is to propose suitable candidates to the Supervisory Board for recommendation to the Annual General Meeting.
In doing so, the Nominating Committee takes into account the balance and diversity of expertise, skills and experience of all members
of the Supervisory Board and prepares candidate profiles. In addition, the Nominating Committee shall make proposals to the Supervisory
Board and communicate the results of a regular assessment of the expertise, skills and experience of both the individual members as well
as the Supervisory Board as a whole. The Nominating Committee consulted by telephone during the reporting period.
The
current members of the Nominating Committee are as follows: Mr. John Borer, Dr. Ulrich Granzer and Mr. Reinhard Eyring. Dr. Ulrich Granzer
is currently Chairman of the Nominating Committee.
Management
Board
Currently,
our management board consists of Prof. Dr. Hermann Lübbert (chairman of the management board and chief executive officer) and Mr.
Ludwig Lutter (chief financial officer).
Name
|
|
Nationality
|
|
Age
|
|
Position
|
|
Date
of first appointment
|
|
Term
|
Prof. Dr. Hermann Lübbert
|
|
German
|
|
65
|
|
Chairman and CEO
|
|
2000
|
|
December 31, 2022
|
Ludwig Lutter
|
|
German
|
|
54
|
|
CFO
|
|
2021
|
|
February 29, 2024
|
Mr.
Thomas Schaffer resigned from his position as chief financial officer effective February 28, 2021. Effective March 1, 2021, Mr. Ludwig
Lutter was appointed as the new chief financial officer of Biofrontera AG. Mr. Dünwald resigned from his position as chief commercial
officer at the end of January 2020.
Under
German law and our articles of association, our management board must consist of one or more persons, and the supervisory board determines
the exact number of members of the management board. Our supervisory board also appoints the chairman and the vice chairman of the management
board, if any.
Members
of our management board conduct the daily business of our company in accordance with applicable laws, our articles of association and
the rules of procedure for the management board. The management board is generally responsible for the management of our company and
for handling our daily business relations with third parties, the internal organization of our business and communications with our shareholders.
In addition, the management board has the responsibility for:
|
●
|
the
preparation of our annual financial statements;
|
|
●
|
the
making of a proposal to our shareholders’ meeting on how our profits (if any) should be allocated (such proposal to be submitted
simultaneously by our supervisory board); and
|
|
|
|
|
●
|
regular
reporting to the supervisory board on our current operating and financial performance, our budgeting and planning processes and our
performance under them and on future business planning (including strategic, financial, investment and personnel planning).
|
Our
supervisory board appoints the members of the management board for a maximum term of five years. Reappointment or extension of the term
for up to five years is permissible. Our supervisory board may revoke the appointment of a management board member prior to the expiration
of his or her term for good cause only, such as for gross breach of fiduciary duties or if the shareholders’ meeting passes a vote
of no-confidence with respect to such member, unless the supervisory board deems the no-confidence vote to be clearly unreasonable. Our
supervisory board is also responsible for entering into, amending and terminating service agreements with the management board members
and, in general, for representing us in disputes with the management board, both in and out of court. Our supervisory board may assign
these duties to a committee of our supervisory board, except in certain cases in which the approval of the entire supervisory board is
required, such as the approval of the compensation of members of our management board and the reduction of the compensation of members
of our management board upon a deterioration of our financial condition, which includes, among other things, a bankruptcy or the layoff
of a significant number of employees.
According
to our articles of association, either (i) two management board members or (ii) one management board member acting jointly with an authorized
representative have the authority to act on our behalf. The supervisory board may grant any management board member the right to represent
us alone and may release any member of the management board from the restrictions on multiple representations under Section 181, 2nd
Case of the German Civil Code.
Prof.
Dr. Hermann Lübbert has been granted authority to represent us alone. He and Ludwig Lutter have been furthermore released from the
restrictions imposed by Section 181, 2nd Case of the German Civil Code with respect to transactions conducted with some of our subsidiaries.
Our
management board has the authority to determine our business areas and operating segments and resolve upon the internal allocation of
responsibility for certain business areas and operating segments among the various members of the management board by setting up a business
responsibility plan. Since we currently have only two members of our management board, we do not have a formal business responsibility
plan in place at this time.
The
business address of the members of our management board is our principal executive office at Hemmelrather Weg 201, D-51377 Leverkusen
Germany.
The
following is a brief summary of the business experience of the members of our management board:
Prof.
Hermann Lübbert, Ph.D. Prof. Dr. Lübbert has served as our chief executive officer since 1997. He is chairman of the management
board of Biofrontera AG and a managing director of all subsidiaries of Biofrontera AG. He studied biology in his home town of Cologne
and received his doctorate there in 1984. Following 3.5 years in academic research at the University of Cologne and the California Institute
of Technology, he gained experience in managing a global research organization during 10 years at Sandoz, where he served as Head of
Genome Research, and Novartis Pharma AG, where he served as a member of the global Neuroscience Research Management Team. Prof. Lübbert
founded Biofrontera in 1997 and has been managing the company ever since. He qualified as a university lecturer at the Swiss Federal
Institute of Technology (ETH) Zurich and in addition to his engagement as Executive Director, holds a professorship for animal physiology
at the Ruhr-University Bochum.
Ludwig
Lutter. Mr. Lutter has served as our chief financial officer since March 2021. Before joining Biofrontera, he served as chief financial
officer for several public and private company including Intershop Communications AG (5 years), SOPHOS (former Astaro AG, 5 years), and
Poet Holdings, Inc. (8 years), which under his responsibility was brought public on both The Nasdaq Stock Market and the Frankfurt Stock
Market, among other start-ups and IT-companies. Prior to that, he served in public accounting and tax consulting for KPMG (1 year) and
other public accounting firms (2 years). Ludwig Lutter holds a degree in business administration from the University of Texas, USA, and
is qualified as a certified tax advisor in Germany.
German
Corporate Governance Code
The
German Corporate Governance Code, or Corporate Governance Code, was originally published by the German Ministry of Justice in 2002 and
was most recently amended on December 16, 2019 and published in the German Federal Gazette on March 20, 2020. The Corporate Governance
Code contains recommendations and suggestions relating to the management and supervision of German companies that are listed on a stock
exchange. It follows internationally and nationally recognized standards for good and responsible corporate governance. The purpose of
the Corporate Governance Code is to make the German system of corporate governance transparent for investors. The Corporate Governance
Code includes corporate governance recommendations and suggestions with respect to shareholders and shareholders’ meetings, the
supervisory and management boards, transparency, accounting policies, and auditing.
There
is no obligation to comply with the recommendations or suggestions of the Corporate Governance Code. The German Stock Corporation Act
requires only that the supervisory board and management board of a German listed company issue an annual declaration of compliance (Entsprechenserklärung)
that either (i) states that the company has complied with the recommendations of the Corporate Governance Code, (ii) lists the recommendations
that the company has not complied with and explains its reasons for deviating from the recommendations of the Corporate Governance Code
(“Comply or Explain”). In addition, a listed company is also required to state in this annual declaration of compliance whether
it intends to comply with the recommendations or list the recommendations it does not plan to comply with in the future and why not.
These declarations must be published permanently on our website. If we change our policy on certain recommendations between such annual
declarations, we must disclose this fact and explain our reasons for deviating from the recommendations. As opposed to such noncompliance
with recommendations, noncompliance with mere suggestions contained in the Corporate Governance Code need not be disclosed.
As
a result of the listing of our ordinary shares on the regulated market of the Frankfurt Stock Exchange, the Corporate Governance Code
applies to us and we are required to issue the annual declarations described above. According to their respective rules of procedure,
our supervisory board and management board are obliged to comply with the Corporate Governance Code except for such provisions which
they have explicitly listed in their annual declaration and for which they have stated that they do not comply with.
In
particular, we adhere to the following significant recommendations of the Corporate Governance Code: (i) the supervisory board will establish
audit and nominating committees; (ii) the management board must keep the supervisory board closely informed, in particular with respect
to measures which can fundamentally affect our condition; and (iii) significant management measures are subject to supervisory board
approval.
Compensation
of Management Board and Supervisory Board Members
Compensation
of Supervisory Board Members
2020
Supervisory Board Member Compensation Table
The
following table sets forth information for the fiscal year ended December 31, 2020 regarding the compensation earned by or paid to our
supervisory board members who served on our supervisory board during 2020.
Name
|
|
Fees
Earned or Paid in Cash (€)
|
|
Jürgen Baumann
|
|
|
23,000
|
|
Ulrich Granzer, Ph.D.
|
|
|
35,000
|
|
John Borer
|
|
|
15,000
|
|
Reinhard Eyring
|
|
|
19,000
|
|
Prof. Franca Ruhwedel, PhD
|
|
|
21,000
|
|
Kevin Weber
|
|
|
15,000
|
|
The
German Corporate Governance Code, as amended on December 16, 2019, stipulates that the members of the supervisory board shall receive
compensation that is in reasonable relation to their duties and the position of the company. The compensation of supervisory board members
shall take appropriate account of the higher time commitment of the chairman and deputy Chairman of the supervisory board as well as
the members of committees.
Under
German law, the compensation of the supervisory board of a German stock corporation can only be determined by the shareholders’
meeting. As per the annual general meeting held on May 28, 2020, the supervisory board compensation was amended, whereby the variable
compensation component of the members of the supervisory board was eliminated and a purely fixed compensation was set. The following
remuneration system for our supervisory board has been approved by our shareholders.
Each
member of our supervisory board receives a fixed annual fee of €20,000 (fixed fee). Our chairman receives twice and our vice chairman
receives one-and-a-half times the fee.
Members
of the supervisory board receive the following additional compensation for their work on supervisory board committees:
Each
member of the audit committee receives €3,000, and the chairman of the audit committee receives twice this amount. Each member of
another committee receives €2,000, and the chairman of another committee receives double this amount. Membership of the nominating
committee is not taken into account. Committee activities are taken into account for a maximum of two committees. If this number is exceeded,
the two most highly remunerated committee memberships shall be decisive.
Members
of the supervisory board who are members of the supervisory board or a committee for only part of the fiscal year or who chair or vice-chair
the supervisory board or chair a committee receive pro rata compensation.
In
addition, the members of the supervisory board receive an attendance fee of €1,000 for each participation in a meeting of the supervisory
board or its committees. Participation in telephone and video conferences or participation in a meeting by means of connection by telephone
and video conference is remunerated accordingly with an attendance fee. For several meetings - whether of the supervisory board or of
committees - held on one calendar day, an attendance fee shall be paid only once in total.
Furthermore,
the members of the supervisory board, with the exception of the chairman and the vice chairman, receive remuneration of €4,000 for
chairing an annual meeting.
The
remuneration shall be paid after the end of each fiscal quarter.
Our
company reimburses the members of the supervisory board for expenses incurred in the course of their duties, including any taxes incurred
on the remuneration and the reimbursement of expenses.
Our
company has obtained an indemnity insurance policy, for the benefit of the members of our supervisory board, which covers statutory liability
arising from the activities of our supervisory board.
Compensation
of Management Board Members
2020
Management Board Member Compensation Table
The
remuneration of the members of our management board consists of fixed compensation paid in twelve equal monthly installments. In addition,
an annual performance-related bonus payment is provided for our management board members, which must be linked to the long-term performance
of our company in accordance with the German Act on the Appropriateness of Management Board Compensation. Furthermore, a long-term compensation
component is in place through participation in our company’s stock option program and stock appreciation rights (SAR) program.
The
total management board compensation in the fiscal year ended December 31, 2020 as well as the total number of stock options issued to
the members of our management board as of December 31, 2020 are as follows:
in € thousands (unless
otherwise indicated)
|
|
Prof.
Dr. Hermann Lübbert
|
|
|
Thomas
Schaffer
|
|
|
Christoph
Dünwald
|
|
|
|
CEO
2020
|
|
|
CFO
2020
|
|
|
CCO
2020
|
|
Fixed component of compensation
|
|
|
322
|
|
|
|
244
|
|
|
|
23
|
|
Compensation in kind
|
|
|
9
|
|
|
|
13
|
|
|
|
1
|
|
Total fixed compensation
|
|
|
331
|
|
|
|
257
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term incentive (variable, STI)
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
Long-term incentive (variable, LTI), thereof
from
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options (maturity May 13, 2025)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income from exercising stock options
|
|
|
86
|
|
|
|
54
|
|
|
|
72
|
|
Stock Appreciation Rights (SARs) (maturity
May 3, 2030)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of SARs
|
|
|
290
|
|
|
|
218
|
|
|
|
-
|
|
Income from exercising SARs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total LTI
|
|
|
376
|
|
|
|
271,5
|
|
|
|
72
|
|
Total performance-based compensation
|
|
|
376
|
|
|
|
271,5
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation
|
|
|
707
|
|
|
|
529
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stock options (Dec 31)
|
|
|
164,495
|
|
|
|
100
|
|
|
|
-
|
|
Number of stock options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair value when granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of SARs (Dec 31)
|
|
|
200
|
|
|
|
150
|
|
|
|
-
|
|
Number of SARs granted
|
|
|
200
|
|
|
|
150
|
|
|
|
-
|
|
Fair value when granted
|
|
|
290
|
|
|
|
218
|
|
|
|
-
|
|
After
his departure from our management board, Mr. Christoph Dünwald received remuneration as a former executive member in the amount
of €137 thousand for the period from February to November 2020.
The
fixed component of Prof. Dr. Lübbert’s compensation amounts to 47% (previous year: 51%) and that of Mr. Schaffer to around
49% (previous year: 60%) of total compensation. The fixed compensation of Mr. Dünwald amounts to approximately 16% (previous year:
64%).
Our
management board members are also provided with company cars for private use. In addition, our company contributes to the costs of private
health, pension and long-term care insurance up to the maximum amount of the respective employer’s contribution limit, insofar
as corresponding insurance policies actually exist and corresponding costs are incurred. The existing service agreements provide that
- depending on the achievement of defined targets - an annual bonus is to be granted. If targets are exceeded, the maximum amount of
the annual bonus is limited (cap). If targets are missed by up to 70%, the bonus payment is reduced on a straight-line basis; if targets
are missed by more, the bonus payment is not paid at all. The assessment factors (2019: revenue (30%), earnings after tax (20%), achievement
of break-even in Q4-2019 (20%), completion of patient recruitment in the BCC study (20%), completion of the clinical phase of the periphery
study (10%)) are mutually agreed at the end of each fiscal year for the following fiscal year in a performance target agreement. The
aforementioned performance criteria set for 2019 were not achieved and thus no bonus payment was granted in fiscal year 2020.
Severance
payments in the event of premature termination of a management board member’s contract without serious cause are limited to a total
of two annual salaries, but not more than the total compensation entitlement for the remaining term of the contract at the time of departure
(“severance payment cap”).
The
maximum compensation of the management board members from the fixed and one-year performance-related compensation (bonus) amounts to
€520 thousand for Prof. Dr. Lübbert and €390 thousand for Thomas Schaffer. Maximum compensation under Ludwig Lutter’s
employment agreement amounts to €405,000. With regard to the maximum compensation under the multi-year variable compensation, we
refer to the following explanations on the stock option program and SAR program.
In
order to further increase the long-term incentive effect of the variable compensation and consequently its focus on sustainable corporate
development, the members of our management board have committed themselves to holding our ordinary shares as private assets for stock
options granted under the 2015 stock option program. This commitment is for a period of three years beginning one month after the issue
date of the options (“blocked shares”). The amount of the personal commitment varies for the individual management board
members. If restricted shares are sold prematurely, which must be reported to the chairman of our supervisory board without delay, our
company may demand the retransfer of a corresponding number of stock options free of charge within one month of notification of the sale,
whereby the options granted last are always to be retransferred (last in first out). A retransfer is not possible if the management board
member can demonstrate that the sale of the restricted shares was necessary to meet urgent financial obligations. The range of exercise
prices for outstanding options that have been awarded to our management board members is between €2.25 and €6.708, the range
of fair value of outstanding options that have been awarded to our management board members is between €1.00 and €2.55. After
expiry of the respective vesting period, the option rights may be exercised up to the end of six years after the respective issue date
(exclusive).
As
a long-term performance component, members of our management board are granted stock appreciation rights (“SARs”) under their
service agreements, starting in the 2020 fiscal year (long-term incentive, “LTI”). An annual target amount of 150% of the
STI (“short-term incentive”) target amount (“LTI target amount”) has been agreed. The number of SARs granted
each year is equal to the LTI target amount divided by the economic value of the SARs at the time they are granted. SARs subject to vesting
requirements may not be exercised if and to the extent that the gross proceeds from all exercised SARs granted to our management board’s
chairman would exceed the gross fixed compensation actually received by the management board member since the first grant of SARs by
more than 300% without this limit.
To
the extent that terms and conditions of the SAR program provide for a personal investment, it is agreed, in deviation from any SAR terms
and conditions, that the personal investment must be made within six months of the exercise date in the amount of 25% of the payout amount
(gross) and that the acquired shares in our company may not be sold for at least four years after the granting of the SARs.
For
the purpose of further increasing the long-term incentive effect of the variable compensation and thus its focus on sustainable corporate
development, members of our management board undertake to acquire up to 100,000 of our shares and to hold them until the end of their
service agreement (share ownership guideline). However, the total acquisition cost (including incidental acquisition costs) to be borne
by the management board member is limited per fiscal year to an amount equivalent to 25% of the target achievement bonus granted to him
for the previous fiscal year.
Employment
agreements of the Management Board members do not include a “change of control” clause.
Equity
Incentive Plans
2010
stock option program
The
exercise period for the last tranche of the 2010 stock option program ended on April 2, 2020. The options still exercisable as of December
31, 2019 (23,000 options) expired in the reporting period.
2015
stock option program
At
our annual general meeting held on August 28, 2015, our management board and supervisory board proposed a new share option program for
employees, which approved the initiative. Accordingly, our management board or, to the extent that the beneficiaries are management board
members, our supervisory board, was entitled until August 27, 2020 to issue up to 1,814,984 subscription rights to up to €1,814,984
of our company’s ordinary registered shares, whose exercise is tied to certain targets.
The
program has a total nominal value of €1,814,984 and a term of five years from the issue date, in other words, until August 27, 2020.
Eligibility for the 2015 share option program was granted to members of our management board and employees of our company as well as
to members of management bodies and employees of affiliates of Biofrontera AG. The granting of options is made without any payment being
provided in return.
In
accordance with the associated conditions, each subscription right that is granted entitles the beneficiary to acquire one new registered
no par value unit share in our company. The exercise price is equal to the arithmetical average (unweighted) of the closing prices on
the Frankfurt Stock Exchange in floor trading and in Xetra trading for our company’s shares on the ten trading days prior to the
issuing of the share. However, the minimum exercise price shall amount to the proportionate share of the company’s share capital
allocated to each individual no par value unit share, pursuant to Section 9 (1) of the German Stock Corporation Act (AktG).
The
options granted can only be exercised after expiry of a vesting period. The vesting period is four years from the respective date of
issue. A prerequisite for the whole or partial exercising of the options is that the following performance target is achieved:
Exercising
the options from a tranche is possible, if at the beginning of the respective exercise period, the price (hereinafter referred to as
the “reference price”) of one share in Biofrontera AG exceeds the exercise price by at least 20%, and a minimum reference
price of €5.00 is reached (hereinafter referred to as the “minimum reference price”). The reference price is equal to
the arithmetical average (unweighted) of the closing prices on the Frankfurt Stock Exchange in floor trading and Xetra trading for our
company’s shares between the 15th and the 5th stock market day (in each case inclusive) before the start of the respective exercise
window. The minimum reference price is adjusted in the following cases to align the specified performance target with changed circumstances:
|
■
|
In
the event of a capital increase from company funds being implemented by issuing shares, the minimum reference price is reduced by
the same ratio as new shares issued compared to existing shares. If the capital increase is implemented from company funds without
issuing new shares (Section 207 (2) Clause 2 of the German Stock Corporation Act [AktG]), the minimum reference price is not changed.
|
|
|
|
|
■
|
In
the case of a capital reduction, no adjustment of the minimum reference price is implemented, provided that the total number of shares
is not changed by the capital reduction, or if the capital reduction is connected to a capital repayment or purchase of treasury
shares. In the case of a capital reduction performed by consolidating shares without capital repayment and in the case of increasing
the number of shares with no associated change in capital (share split), the minimum reference rate increases in line with the capital
reduction or share split.
|
Other
adjustments to the minimum reference price are not implemented.
The
exercising of options is limited to the following time periods (hereinafter “exercise windows”), in other words, only declarations
of exercising of rights submitted to the Company within an exercise window will be considered:
|
a)
|
on
the 6th and subsequent 20 banking days after the date of the AGM (exclusive),
|
|
b)
|
on
the 6th and subsequent 20 banking days after the date of submission of the semi-annual or quarterly report or an interim statement
by Biofrontera AG (exclusive)
|
|
c)
|
in
the period between the 15th and 5th banking day prior to the expiration of the option rights of the respective expiration day (exclusively).
|
After
the vesting period, the options can be exercised up until the expiry of six years from the date of issue (exclusive). For the valuation
of the employee share options, we have assumed an average holding period of 5 years.
Any
claim by the beneficiaries to receive a cash settlement in the event of non-exercise of the options is invalid even in the event of the
existence of the above exercise prerequisites. An option may only be exercised if the holder has a current service or employment contract
with the Company or another Company affiliated with the Company or if the holder is a member of the Management Board or the management
team of another company affiliated with the Company.
In
the event of the exercising of a subscription right, the Company is generally and in specific cases permitted to choose between granting
the registered share in exchange for payment of the exercise price, or fulfilling its debt by paying a cash settlement to the holder
of the subscription right. The cash settlement per subscription right is equal to the difference between the exercise price per share
and the share price on the exercise date, minus due taxes and fees.
As
this stock option scheme entails share-based payment transactions in which the terms of the arrangement provide the Company with a choice
of settlement, the Company has decided, in accordance with IFRS 2.41 and IFRS 2.43, to recognize the transactions pursuant to the provisions
for equity-settled share-based payments (IFRS 2.10-29).
|
|
Tranche
1
|
|
|
Tranche
2
|
|
|
Tranche
3
|
|
|
Tranche
4
|
|
|
Tranche
5
|
|
|
Tranche
6
|
|
Number
of options issued
|
|
|
425,000
|
|
|
|
130,500
|
|
|
|
329,000
|
|
|
|
300,500
|
|
|
|
180,000
|
|
|
|
333,485
|
|
Date
of issue
|
|
|
18.04.2016
|
|
|
|
01.12.2016
|
|
|
|
28.04.2017
|
|
|
|
28.11.2017
|
|
|
|
07.05.2018
|
|
|
|
14.05.2019
|
|
Exercise
price
|
|
€
|
2.49
|
|
|
€
|
3.28
|
|
|
€
|
4.02
|
|
|
€
|
3.33
|
|
|
€
|
5.73
|
|
|
€
|
6.708
|
|
Adjusted
exercise price March 2018
|
|
€
|
2.25
|
|
|
€
|
3.04
|
|
|
€
|
3.78
|
|
|
€
|
3.09
|
|
|
|
-
|
|
|
|
-
|
|
End
of vesting period
|
|
|
18.04.2020
|
|
|
|
01.12.2020
|
|
|
|
28.04.2021
|
|
|
|
28.11.2021
|
|
|
|
07.05.2022
|
|
|
|
14.05.2023
|
|
End
of exercise window
|
|
|
18.04.2022
|
|
|
|
01.12.2022
|
|
|
|
28.04.2023
|
|
|
|
28.11.2023
|
|
|
|
07.05.2024
|
|
|
|
14.05.2025
|
|
Fair
value per option
|
|
€
|
1.00
|
|
|
€
|
1.30
|
|
|
€
|
1.56
|
|
|
€
|
1.48
|
|
|
€
|
2.35
|
|
|
€
|
2.55
|
|
Share
price volatility
|
|
|
50.59
|
%
|
|
|
49.00
|
%
|
|
|
47.00
|
%
|
|
|
46.00
|
%
|
|
|
47.00
|
%
|
|
|
47.30
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Share
price yield
|
|
|
2,31
|
%
|
|
|
7,00
|
%
|
|
|
7,50
|
%
|
|
|
7,60
|
%
|
|
|
7,60
|
%
|
|
|
7,60
|
%
|
Risk-based
interest rate
|
|
|
5.92
|
%
|
|
|
13.26
|
%
|
|
|
13.94
|
%
|
|
|
14.05
|
%
|
|
|
14.03
|
%
|
|
|
13.35
|
%
|
Fluctuation
rate
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
The
fair value of a stock option under this option program is determined on the basis of a Monte Carlo risk simulation. The pro rata amounts
are recognized ratably over the vesting period as personnel expenses and an increase in the capital reserves.
2015
stock option program
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Outstanding
at the beginning of the period
|
|
|
1,496,985
|
|
|
|
1,252,000
|
|
Granted
during the period
|
|
|
-
|
|
|
|
333,485
|
|
Forfeited
during the period
|
|
|
215,500
|
|
|
|
88,500
|
|
Exercised
during the period
|
|
|
260,000
|
|
|
|
-
|
|
Expired
during the period
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at the end of the period
|
|
|
1,021,485
|
|
|
|
1,496,985
|
|
Exercisable
at the end of the period
|
|
|
-
|
|
|
|
-
|
|
Range
of exercise prices for outstanding options
|
|
€
|
2.25
– 6.708
|
|
|
€
|
2.25
- 6.708
|
|
Weighted
average of remaining contractual life
|
|
|
35
months
|
|
|
|
44
months
|
|
Cost
during the period
|
|
€
|
293,000
|
|
|
€
|
360,000
|
|
Due
to the non-fulfillment of the exercise conditions, no options were exercisable as of December 31, 2020.
Stock
Appreciation Rights Program 2019
In
April 2019, our [management] board, with the approval of our supervisory board, established a stock appreciation rights plan under which
our company grants virtual or synthetic options (“stock appreciation rights” or “SARs”) entitling the “beneficiary”
to receive cash payments in accordance with the specific terms of the SAR plan. However, SARs do not confer any right to subscribe to
shares of our company. SARs may be issued to members of our management board, to members of the management of affiliated companies as
well as to employees of our company and affiliated companies (hereinafter collectively referred to as “beneficiaries”). The
exact number of beneficiaries and the number of SARs to be granted to them are determined by our management board. To the extent that
members of our management board are to receive SARs, our supervisory board alone is responsible for determining and deciding on the issue
of the SARs. In accordance with the SAR Plan, a maximum of 4,000,000 SARs may be issued until March 31, 2024, of which a maximum of 1,600,000
SARs may be granted to members of our management board and a maximum of 2,400,000 SARs to other beneficiaries. The SAR Plan sets the
dates for the payment of cash in connection with the SARs, unless there are legally binding regulations that conflict with the payout
for the beneficiary. In addition, the eligible party must meet certain conditions for the grant of SARs and must enter into a written
contract (“SAR Agreement”) with our company prior to exercise and delivery. Finally, SARs are subject to regulations on vesting
periods, expiry and forfeiture. In particular, the SARs may be exercised for the first time after a “vesting period” has
expired:
|
a)
|
The
vesting period for 15 % of the SARs granted on an issue date is one year after the issue date;
|
|
b)
|
The
vesting period for an additional 25% of the SARs granted on an issue date is two years after the issue date;
|
|
c)
|
The
vesting period for an additional 25% of the SARs granted on an issue date is three years after the issue date;
|
|
d)
|
The
vesting period for the remaining 35% of the SARs granted at an issue date is four years after the issue date.
|
After
expiry of the respective vesting period, SARs may be exercised until six years after the respective issue date, unless mandatory legal
provisions stipulate otherwise in individual cases. If the SARs have not been exercised by that date, they expire without replacement.
The beneficiary has no claim to payment if the SARs are not exercised on time and no further compensation will be granted.
SARs
may only be exercised as long as their holder is in an ongoing employment or service relationship with our company or with an affiliated
company or as a member of our management board.
SARs
may only be exercised if the reference price at the beginning of the respective exercise window exceeds the issue price by at least 20%.
Furthermore, the reference price must be at least as high as the MSCI World Health Care Index TR or a comparable successor index in the
time between the last trading day before the issue date and the 5th trading day before the beginning of the respective exercise window.
Upon
effective exercise of the SARs, our company is obligated, subject to certain adjustments, to make a payment (gross) for each SAR exercised
as follows: reference rate - base amount = payout amount per SAR (gross).
SAR
program 2019
|
|
December
31, 2020
|
|
Outstanding
at the beginning of the period
|
|
|
-
|
|
Granted
during the period
|
|
|
755,750
|
|
Forfeited
during the period
|
|
|
28,000
|
|
Exercised
during the period
|
|
|
-
|
|
Expired
during the period
|
|
|
-
|
|
Outstanding
at the end of the period
|
|
|
727,750
|
|
Exercisable
at the end of the period
|
|
|
-
|
|
Fair
value at the end of the period
|
|
€
|
183,000
|
|
Cost
during the period
|
|
€
|
183,000
|
|
The
fair value of a stock option under this option program is determined on the basis of a Monte Carlo risk simulation. The pro rata temporis
amounts are recognized ratably as personnel expense over the vesting period until the end of the blocking period and are reported under
other financial liabilities.
Share
Ownership by Members of our Supervisory Board and Management Board
Supervisory
Board
The
following table provides information with respect to ownership of our ordinary shares, options and convertible bonds for each of the
members of our supervisory board as of March 31, 2021, based on an aggregate of 56,717,385 shares outstanding as of such date.
Name
|
|
Shares
|
|
|
%
of Outstanding Shares
|
|
Jürgen Baumann
|
|
|
1
|
|
|
|
*
|
|
John Borer
|
|
|
-
|
|
|
|
-
|
|
Ulrich Granzer
|
|
|
-
|
|
|
|
-
|
|
Kevin Weber
|
|
|
|
|
|
|
*
|
|
Franca Ruhwedel
|
|
|
-
|
|
|
|
-
|
|
Reinhard Eyring
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1
|
|
|
|
*
|
|
Management
Board
The
following table provides information with respect to ownership of our ordinary shares and options for members of our management board
as of March 31, 2021, based on an aggregate of 56,717,385 shares outstanding as of such date.
Name
|
|
Shares
|
|
|
%
of Outstanding Shares
|
|
|
Options
|
|
Exercise
Price per Share(€)
|
|
|
Expiration
Date
|
Prof. Hermann Lübbert, Ph.D.
|
|
|
348,000
|
*
|
|
|
**
|
|
|
70,000 options
|
|
|
3.78
|
|
|
04/27/2023
|
|
|
|
|
|
|
|
|
|
|
80,000 options
|
|
|
5.73
|
|
|
05/06/2024
|
|
|
|
|
|
|
|
|
|
|
14,495 options
|
|
|
6.708
|
|
|
05/13/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
348,000
|
*
|
|
|
**
|
|
|
164,495 options
|
|
|
|
|
|
|
*
number of shares held together with Montserrat Foguet Roca, the wife of Prof. Hermann Lübbert, who serves as a senior employee of
our company responsible for regulatory affairs and manufacturing
**Less
than 1% of class.
Our
chief financial officer, Ludwig Lutter, does not hold any shares or options as of March 31, 2021.
As
of March 31, 2021, the aggregate number of our ordinary shares owned by current management board and supervisory board members amounts
to less than 1% of our outstanding ordinary shares as of such date.
Human
Capital Management
Biofrontera’s
success is directly linked to the commitment, engagement, and performance of its employees. As such, the long-term retention of our employees
is a key pillar for ensuring our company’s ongoing success. It is important that we not only attract and retain the best and brightest
diverse talent but also ensure they remain engaged and can thrive in an environment that is committed to helping them grow, succeed and
contribute directly to achieving our purpose. Biofrontera embraces diversity and equal opportunity in a serious way. We are committed
to building a team that represents a variety of backgrounds, perspectives, and skills. The more inclusive we are, the better our work
will be.
As
of December 31, 2020, the Biofrontera Group had 149 employees (previous year: 174) who were employed as follows:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Total
number of employees
|
|
|
149
|
|
|
|
174
|
|
Full-time
|
|
|
127
|
|
|
|
147
|
|
With
academic degree
|
|
|
22
|
|
|
|
27
|
|
By
business segments
|
|
|
149
|
|
|
|
174
|
|
Production
|
|
|
16
|
|
|
|
15
|
|
Research
and development
|
|
|
5
|
|
|
|
6
|
|
Clinical
and regulatory tasks
|
|
|
16
|
|
|
|
16
|
|
Marketing
and sales
|
|
|
60
|
|
|
|
73
|
|
Quality
management
|
|
|
7
|
|
|
|
9
|
|
Management,
business development, finance, HR and administration
|
|
|
45
|
|
|
|
55
|
|
By
countries
|
|
|
149
|
|
|
|
174
|
|
Germany
|
|
|
81
|
|
|
|
89
|
|
United
States
|
|
|
56
|
|
|
|
73
|
|
Spain
|
|
|
9
|
|
|
|
9
|
|
United
Kingdom
|
|
|
3
|
|
|
|
3
|
|
As
of December 31, 2020, 64% of our workforce was female compared to 63% as of December 31, 2019.
In
order to remain attractive as an employer in the competition for employees in the future, our company must continue to be in a position
to offer attractive compensation benefits and employment conditions in line with the market. This includes, among other things, the share-
or securities-based compensation under our employee option program and the compensation from our stock appreciation rights program.
None
of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.
We
consider the intellectual capital of our employees to be an essential driver of our business and key to future prospects. To attract
and retain a high-quality, experienced workforce, we offer a competitive mix of compensation and benefits for our employees, as well
as participation in equity programs. We are committed to helping our colleagues reach their full potential by rewarding both their performance
and leadership skills and by providing opportunities for growth and development.
As
a pharmaceutical company, we are subject to the highest standards to ensure quality of our drugs, which is maintained in particular through
the qualifications of our employees. We place particular emphasis on the qualifications and the necessary know-how of the employees.
Therefore, the annual expenditure on training and professional development as well as the number of training activities are key non-financial
metrics for us.
We
are committed to the health, safety, and well-being of our employees. In response to the COVID-19 pandemic, we implemented changes in
our business in March 2020 in an effort to protect our employees, and to support appropriate health and safety protocols.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The
following table sets forth information relating to the beneficial ownership of our ordinary shares as of March 31, 2020 by each person,
or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding ordinary shares.
The
number of shares beneficially owned by each entity, person, member of our supervisory board, member of our management board is determined
in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power
as well as any shares that the individual has the right to acquire within 60 days of March 31, 2021 through the exercise of any warrants
or other rights. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares owned by that person.
The
percentage of shares beneficially owned is computed on the basis of 56,717,385 shares outstanding as of March 31, 2021. Shares for which
a person has the right to subscribe within 60 days of March 31, 2021 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any
other person. There were 430,619 shares for which a person has the right to subscribe within 60 days of March 31, 2021. Additionally,
a person is considered to have the right to acquire shares which are subject to outstanding options and vested within 60 days of March
31, 2021, although such options may only be exercised in 4 annual exercise periods.
The
numbers of shares held by the shareholders on March 31, 2021, based on the most recent mandatory disclosures, are as follows:
Name
and address of beneficial owner
|
|
Beneficial
ownership
|
|
|
|
Number
of shares
beneficially
owned
|
|
|
Number
of options
exercisable
within 60
days
|
|
|
Fully
diluted
number of
shares
beneficially
owned
|
|
|
Fully
diluted
percentage
of
beneficial
ownership
|
|
5% and greater shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maruho Co.
Ltd., Osaka Japan(1)
|
|
|
13,399,965
|
|
|
|
—
|
|
|
|
13,399,965
|
|
|
|
23.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wilhelm Konrad Thomas Zours(2)
|
|
|
16,990,199
|
|
|
|
—
|
|
|
|
16,990,199
|
|
|
|
29.96
|
%
|
(1)
|
The
information is based on the announcements of holders of considerable holdings according to article 43 WpHG published on March 29,
2021. Maruho is deemed to be the owner of shares directly held by its controlled subsidiary, Maruho Deutschland, Düsseldorf.
Maruho Deutschland’s address is c/o Biofrontera AG, Hemmelrather Weg 201, 51377 Leverkusen, Germany.
|
|
|
(2)
|
The
information regarding the beneficial ownership of Wilhelm Konrad Thomas Zours is based on the voting rights notification according
to Article 40, Section 1 of the WpHG published on March 3, 2021. The voting rights through the chain of subsidiaries listed below
are attributed to Mr. Zours: DELPHI Unternehmensberatung AG, VV Beteiligungen AG, Deutsche Balaton AG, Deutsche Balaton Biotech AG,
Prisma Equity AG, Sparta AG, ABC Beteiligungen AG, AEE Ahaus-Enscheder AG, MARNA Beteiligungen AG, Youbisheng Green Paper AG, and
Strawtec Group AG (together “Deutsche Balaton Group”). The address for each company is Ziegelhäuser Landstraße
1, 69120 Heidelberg, Germany.
|
As
of March 31, 2021, there were 6,480 holders of record entered into our ordinary share register of which 6,201 are held by record holders
in Germany. The number of individual holders of record is based exclusively upon our ordinary share register and does not address whether
a share or shares may be held by the holder of record on behalf of more than one person or institution who may be deemed to be the beneficial
owner of a share or shares in our company. According to a recent look-through analysis as of March 18, 2021, (i) approximately 73% of
our outstanding shares (and ADS) are held by shareholders in Germany and (ii) approximately 9% of our outstanding shares (and ADS) are
held by shareholders in North America.
To
our knowledge, no other shareholder beneficially owns more than 5% of our ordinary shares. Under German law, shareholders of a public
company are required to notify the company and the German Federal Financial Supervisory Authority of the number of shares they own when
their percentage ownership reaches, exceeds or falls below certain threshold levels. German law does not require a shareholder to update
this information unless it again reaches, exceeds or falls below a notification threshold. As a result, we cannot be certain whether
the number of shares owned by the shareholders (other than the shareholders who are members of our supervisory board and management board)
listed above is accurate.
Our
company is not owned or controlled directly or indirectly by any government or by any corporation or by any other natural or legal person
severally or jointly. Our major shareholders do not have any special voting rights.
B.
Certain Relationships and Related Party Transactions
The
group of related parties is limited to the group of persons and companies described below. The group of key management personnel is limited
to the Management Board and Supervisory Board.
In
the context of the underlying holding structure, Biofrontera AG is responsible for the administrative and management tasks. Biofrontera
AG is also responsible for the financing of the currently still loss-making business areas, as it is a listed company and consequently
enjoys optimal access to capital markets.
Due
to the close cooperation between the Biofrontera Group companies, intercompany billing is applied, which is adjusted annually according
to requirements.
Maruho
Co, Ltd. Osaka, Japan (Maruho)
We
have the following agreements with Maruho, a pharmaceutical company based in Japan specializing in dermatology that is also an affiliate
of Maruho Deutschland, a significant shareholder of our company: The Share Purchase and Transfer Agreement, pursuant to which we acquired
Cutanea; a license agreement; a research and development agreement; and a sublease agreement. The following table provides revenue and
other information relating to these arrangements:
in
€ thousands
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Revenue
from research collaborations
|
|
|
493
|
|
|
|
686
|
|
|
|
129
|
|
Revenue
from license agreements
|
|
|
6,000
|
|
|
|
-
|
|
|
|
-
|
|
Income
from the reimbursement of costs by Maruho
|
|
|
659
|
|
|
|
6,215
|
|
|
|
-
|
|
Income
from subleases
|
|
|
33
|
|
|
|
34
|
|
|
|
34
|
|
Accounts
receivables
|
|
|
-
|
|
|
|
149
|
|
|
|
-
|
|
Purchase
price liability Cutanea (earn-out and start-up costs)
|
|
|
17,811
|
|
|
|
14,720
|
|
|
|
-
|
|
Other
liabilties
|
|
|
-
|
|
|
|
72
|
|
|
|
-
|
|
Acquisition
of Cutanea Life Sciences, Inc.
Under
the earn-out provisions of our Share Purchase and Transfer Agreement with Maruho in connection with the acquisition of Cutanea in March
2019, profits from the sale of Cutanea products will be shared equally between Maruho and Biofrontera until 2030. For further details,
please refer to the presentation under Note 11 “Other financial liabilities”. Furthermore, under the Share Purchase and Transfer
Agreement, Maruho agreed to provide an amount of up to $7.3 million as start-up financing for Cutanea’s redesigned business activities
(“Start-up Costs”). The outstanding Start-Up Costs were drawn down in full in fiscal year 2020 and are repayable to Maruho
by 2023. Furthermore, Maruho, pursuant to the Share Purchase and Transfer Agreement, reimbursed restructuring costs resulting from pre-contract
obligations in the current fiscal year.
License
and Supply Agreement
In
April 2020, Biofrontera signed an exclusive license and supply agreement with Maruho Co, Ltd, Osaka, Japan (Maruho) for the development
and commercialization of Ameluz® for all indications in East Asia and Oceania. The agreement has a term of 15 years from the start
of distribution in the countries covered by the agreement.
Under
the agreement, Maruho will receive exclusive development and marketing rights, including permission to sublicense Ameluz® in Japan,
China, Korea, India, Pakistan, Vietnam, the Philippines, Australia, New Zealand and surrounding countries and islands (the “Territory”).
Maruho is entitled, with the consent of Biofrontera, to conduct its own research and development under the terms and conditions of the
licensing agreement. Maruho will grant the Company a free and unlimited license for all results of such research and development activities
performed by Maruho for commercialization outside the Territory. Under the terms of the license agreement, Biofrontera will supply Ameluz®
to Maruho at cost plus 25%, while Maruho has the obligation to make commercially reasonable efforts to develop, register and market Ameluz®
in all countries within the Territory.
Under
the agreement, Maruho made a one-time payment of €6 million to Biofrontera AG. Further future payments will be due upon achievement
of certain regulatory and commercial milestones. Maruho will also pay royalties of initially 6% of net sales in the countries of the
Territory, which may increase to 12% depending on sales volume and will decrease in case of the introduction of generic products in these
countries.
Development
Agreement
In
July 2016, we entered into a collaboration and partnership agreement with Maruho. During phase 1 of this collaboration, in which the
feasibility of the product development was tested, Biofrontera and Maruho examined potential formulations for various branded generic
drugs in Europe. Stable formulations have been developed for some, but not for all active ingredients and combinations tested. Maruho
paid for all of the costs and expenses in connection with the research and development during phase 1. New intellectual property developed
during phase 1 will be jointly owned by both parties, and both parties have retained their respective ownership to pre-existing intellectual
property, such as Biofrontera’s patented nanoemulsion. We completed this initial phase in the first quarter of 2018. The initial
agreement with Maruho expired. On March 19, 2019, our company signed an agreement to continue its research collaboration with Maruho
for the development of branded generics. As part of the new project phase, Biofrontera has prepared the formulation of one of four active
ingredients investigated in an earlier project phase (phase 1) using Biofrontera’s nanoemulsion for entry into the clinical phase.
In 2020, the agreement on this phase of the research collaboration expired as planned and is currently not being continued. Biofrontera
has a right to use all research results. For more information, see “Business — Our Research and Development Plans —
Our Development Collaboration with Maruho.”
Share
Loan Agreement
In
order to facilitate the orderly closing of our follow-on offering of ADSs in the United States in February 2021 and because of timing
considerations related to the technical issuance and registration of new ordinary shares under German law, under the terms of a Share
Loan Agreement dated February 4, 2021, by and between Quirin Privatbank AG (acting as service provider for Biofrontera AG pursuant to
a separate mandate agreement) and Maruho Deutschland, Maruho Deutschland agreed to temporarily lend to Quirin Privatbank AG (acting as
our service provider) up to 8,969,870 ordinary shares (the “Borrowed Shares”) in connection with the initial deposit of ordinary
shares into our ADS program immediately prior to and concurrent with the consummation of the offering. Quirin Privatbank AG (acting as
our service provider pursuant to the mandate agreement) agreed to cause to be conveyed (pursuant to the Share Loan Agreement) to the
custodian for the ADS facility, and the custodian agreed to deposit such shares into the ADS program concurrently with or immediately
after the consummation of the offering. The registration of ordinary shares in Germany has been completed, and the share loan arrangement
has been fully unwound.
Employment
Agreements and Options Grants
We
have entered into employment agreements with, and granted options to, the members of our management board.
Employment
Agreement with Prof. Dr. Hermann Lübbert
We
entered into an employment agreement with Prof. Dr. Hermann Lübbert that provides that Prof. Dr. Lübbert will serve as our
chief executive officer and as the chairman of our management board and under which he is entitled to receive an initial annual base
salary of €390,000. We also agreed to contribute to the costs of private health, pension and long-term care insure, up to the maximum
allowable employer contribution in each case. Prof. Dr. Lübbert is further eligible to receive an annual target performance bonus
of €195,000, based on certain annual corporate goals and individual performance goals established annually by our supervisory board.
Prof. Dr. Lübbert’s total annual target bonus increases proportionately to up to 150% of the annual target performance bonus
if the corporate and individual goals are exceeded, as determined by our supervisory board. No bonus will be paid if our supervisory
board determines that the target achievement of the respective year was below 70%. Prof. Dr. Lübbert’s annual base salary
shall be increased to €440,000 upon the achievement of profitability.
The
employment agreement further provides that Prof. Dr. Lübbert shall be granted options to purchase ordinary shares from our employee
stock option plan. Prof. Dr. Lübbert must hold personally at least one ordinary share of Biofrontera for each option he has been
granted.
The
term of the employment agreement with Prof. Dr. Lübbert is until December 31, 2022.
Employment
Agreement with Ludwig Lutter
We
entered into an employment agreement with Ludwig Lutter that provides that Mr. Lutter will serve as our chief financial officer and a
member of our management board and under which he is entitled to receive an initial annual base salary of €270,000. Mr. Lutter is
further eligible to receive an annual target performance bonus of €135,000, based on certain annual corporate goals and individual
performance goals established annually by our supervisory board. Mr. Lutter’s total annual target bonus increases proportionately
to up to 200% of the annual target performance bonus if the corporate and individual goals are exceeded, as determined by our supervisory
board. No bonus will be paid if our supervisory board determines that the target achievement of the respective year was below 70%.
[The
employment agreement further provides that Mr. Lutter shall be granted options to purchase ordinary shares from our employee stock option
plan. Mr. Lutter must hold personally at least one ordinary share of Biofrontera for each option he has been granted, up to an aggregate
amount of €15,000 per annum.]
The
term of the employment agreement with Mr. Lutter is until February 29, 2024.
Transactions
with Family Members
Montserrat
Foguet Roca, the wife of our chief executive officer, Prof. Hermann Lübbert, serves as a senior employee of our company responsible
for regulatory affairs and manufacturing (“Prokurist”).
Dr.
Matthias Lübbert, the son of our chief executive officer, Prof. Hermann Lübbert, serves as an employee of our Company, with
the title “Clinical Trial Manager USA.”
Other
Related Party Transactions
During
2020, we received no additional advisory services from supervisory board member Dr. Ulrich Granzer. In the previous year Dr. Granzer
assisted the Company with key issues relating to the preparation of the applications for approval submitted to the regulatory authorities
in Europe and the U.S. During the fiscal year ending December 31, 2020, advisory services in the amount of €0 were provided by Granzer
Regulatory Consulting & Services (previous year: €1 thousand). The amounts stated here do not include statutory value added
tax at the current rate of 19%. The underlying consultancy agreement was approved with due consideration of the applicable legal and
regulatory framework.
ITEM
8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Our
consolidated financial statements are appended at the end of this annual report starting at page F-1, and form a part hereof.
Legal
Proceedings
DUSA
v. Biofrontera
In
March 2018, DUSA Pharmaceuticals, Inc. (“DUSA”) brought a lawsuit against Biofrontera AG and its subsidiaries before the
District Court of Massachusetts due to alleged infringement of its patents No. 9,723,991 and No. 8,216,289 by sales of BF-RhodoLED®
in the U.S. In July 2018, DUSA amended its complaint to add claims of trade secret misappropriation, tortious interference with contractual
relations, and deceptive and unfair trade practices. For these claims, DUSA has asserted damages for profits allegedly lost by DUSA or
alleged unjust enrichment for profits gained by Biofrontera from sales of the BF-RhodoLED® and Ameluz® in the United States.
Biofrontera’s
responses to the patent claims include that it does not infringe the DUSA patents and that the patents are invalid. With regard to the
non-patent claims, Biofrontera Group’s responses include that the information does not constitute trade secrets and that Biofrontera’s
actions do not constitute any violation of trade practices. With regard to DUSA’s claims for damages, Biofrontera Group’s
responses include that DUSA has not proven it is entitled to lost profits or unjust enrichment. Submission of expert reports and related
discovery regarding these claims finished in early December 2019. The parties filed motions for summary judgment and motions to exclude
certain expert testimony closing on February 18, 2020. The Court issued decisions on the motions on October 9, 2020, sending most issues
to trial.
The
Court has tentatively scheduled a jury trial starting in late November 2021. We expect the trial to proceed through December 2021. We
believe that these claims lack merit and Biofrontera intends to defend against them vigorously; however, Biofrontera cannot guarantee
that it will be successful. The Court largely denied a motion by DUSA for a preliminary injunction, but did order Biofrontera not to
use any documents, or documents derived from documents, that originated at DUSA.
In
addition, Biofrontera submitted petitions for inter partes review to the Patent Trial and Appeal Board (PTAB) seeking to have the patents
declared invalid. The PTAB issued decisions on February 26, 2019, finding a reasonable likelihood of success on invalidity arguments
for some claims, but nonetheless denying institution of the review petitions because the PTAB disagreed on the remainder of claims.
Biofrontera
has incurred, and may continue to incur, considerable expenses from defending its legal position, as it has hired attorneys in the U.S.
in addition to internal resources for defense. Due to the practices of the U.S. legal system, the costs incurred by Biofrontera would
not be reimbursed by the plaintiff even if Biofrontera were to achieve a favorable outcome in the proceedings.
Biofrontera
v. DUSA
In
2018, Biofrontera Inc. brought a lawsuit against DUSA in California Superior Court. Biofrontera Inc.’s complaint alleges that DUSA
engaged in unfair competition by providing excessive product samples to physicians and by using its distributor Foundation Care to inflate
product prices. After filing the lawsuit, DUSA stopped distributing its pharmaceutical products through this distributor (Foundation
Care), which was a key objective of Biofrontera when this lawsuit was filed. Biofrontera Inc.’s complaint also alleges that DUSA
engaged in tortious interference by making statements to third parties regarding the off-label use of its products. The court allowed
Biofrontera Inc.’s tortious interference claims to proceed to discovery. Given the unprecedented and unforeseen economic circumstances
caused by the spread of COVID-19, Biofrontera reevaluated its litigation strategy. Because Biofrontera was successful in stopping DUSA
from using Foundation Care, it decided at this time to stop prosecuting the case against DUSA in California state court and dismissed
those claims.
Biofrontera
v. Deutsche Balaton et. al.
On
June 11, 2018, Biofrontera filed a complaint in the United States District Court for the Southern District of New York against Deutsche
Balaton AG, Wilhelm Konrad Thomas Zours, Delphi Unternehmensberatung AG, VV Beteiligungen AG, ABC Beteiligungen AG, Deutsche Balaton
Biotech AG, and Axxion S.A., alleging violations of U.S. federal securities law and state common law in connection with actions taken
by the defendants during a tender offer for Biofrontera AG’s shares that were designed to defame Biofrontera and negatively impact
its share price. On October 1, 2018, Axxion was voluntarily dismissed from the litigation. On December 6, 2018, the remaining defendants
filed a motion to dismiss. The motion to dismiss was fully briefed on February 11, 2019. On July 8, 2019, prior to the court issuing
a decision on the motion to dismiss, Biofrontera amended its complaint to include additional allegations regarding the defendants’
tender offer that was the subject of the original complaint and allegations regarding a subsequent tender offer made by certain of the
defendants in 2019, including that defendants have committed continuing and new violations of U.S. federal securities law. On August
19, 2019, defendants moved to dismiss the amended complaint. The motion was fully briefed on November 8, 2019. On March 27, 2020, the
court issued a ruling granting in part and denying in part defendants’ motion to dismiss, permitting certain of Biofrontera’s
U.S. federal securities law claims to move forward. The court also ordered that the parties conduct jurisdictional discovery in connection
with all of the remaining claims and submit supplemental briefing on Biofrontera’s common law claims. On June 10, 2020, at the
parties’ request, the court stayed the litigation until November 10, 2020, so that the parties could mediate the issues raised
in the amended complaint as well as certain other disputes. In order to have sufficient time for the complex negotiations, the parties
mutually agreed to extend the original deadline of the stay from November 10, 2020 until the end of February 2021. On March 1, 2021,
at the parties’ request, the court granted an additional extension of the stay until April 15, 2021; and on, April 7, 2021, at
the parties’ request, the court granted a further extension of the stay until August 31, 2021. Deutsche Balaton AG, Wilhelm Konrad
Thomas Zours and DELPHI Unternehmensberatung AG are among our major shareholders.
In
June 2017, the Company was served with legal action for rescission and annulment by the shareholder Deutsche Balaton AG, claiming the
invalidity of certain resolutions of the annual general meeting of May 24, 2017. The claim was dismissed by the Cologne Regional Court
in December 2017. Following an appeal by Deutsche Balaton AG, the Cologne Higher Regional Court granted the appeal in November 2018.
In its ruling of September 22, 2020, the Federal Supreme Court of Germany overturned the judgment of the Cologne Higher Regional Court
and referred the case back to the Cologne Higher Regional Court for a new hearing and decision.
Deutsche
Balaton AG has further brought a claim for rescission and annulment against the negative resolutions of the annual general meeting of
July 11, 2018 regarding the proposed resolutions under agenda item 8 (conducting a special audit on the circumstances of the cooperation
with the (indirect) significant shareholder Maruho Co. Ltd. and its affiliated companies), agenda item 9 (decision on the assertion of
claims for damages against the members of the Management Board Prof. Dr. Lübbert and Schaffer as well as against Maruho Deutschland
GmbH and Maruho Co. Ltd. pursuant to Section 147 (1) AktG as well as the appointment of a Special Representative for the assertion of
these claims pursuant to Section 147 (2) AktG), Agenda Item 10 (conducting of a special audit on the circumstances of the capital increase
at the beginning of 2018 and the associated US listing) and Agenda Item 11 (Decision on the assertion of compensation claims against
the Management Board members Prof. Dr. Lübbert and Schaffer, against the Supervisory Board member Dr. John Borer as well as against
Maruho Deutschland GmbH and Maruho Co., Ltd pursuant to Section 147 (1) AktG and the appointment of a Special Representative for the
assertion of these claims pursuant to Section 147 (2) AktG due to the circumstances of the capital increase in February 2018 (including
the US listing and the US share placement). With regard to the above-mentioned agenda items 8 to 11, Deutsche Balaton AG also filed a
positive claim for a resolution to declare that it is to be recognized that the Annual General Meeting adopted the resolutions in accordance
with the resolution proposals published for this purpose. Furthermore, under agenda item 4 (Elections to the Supervisory Board), a positive
action for resolution was filed with the motion to declare that Mr. Mark Sippel had been elected to the Supervisory Board as successor
to Mr. Mark Reeth with effect from the end of the annual general meeting on July 11, 2018. An action for rescission and nullity was filed
against the resolution to reject the election of Mr. Sippel adopted at the annual general meeting. Deutsche Balaton AG withdrew the claims
with regard to the latter two matters in dispute.
DELPHI
Unternehmensberatung AG, Heidelberg, filed an action for rescission and annulment against resolutions of the annual general meeting of
Biofrontera AG on July 1, 2019. The complaint is filed against the election of Prof. Dr. Franca Ruhwedel to the supervisory board and
against the resolution of the annual general meeting not to elect Wilhelm K.T. Zours to the supervisory board (agenda item 4 of the annual
general meeting). In addition, a positive action for a resolution was filed, according to which the court is to declare that Mr. Wilhelm
K.T. Zours was elected to the supervisory board. The lawsuit is also directed against the rejecting resolutions of the annual general
meeting under the Agenda item 7 (Resolution to conduct a special audit regarding the circumstances of the acquisition of Cutanea Life
Sciences, lnc. from Maruho), 8 (Resolution to conduct a special audit regarding the circumstances of the cooperation agreement dated
March 19, 2019 with the (indirect) significant shareholder Maruho Co. Ltd. regarding branded generics and regarding the extension of
indications and distribution of Ameluz®), 9 (Resolution on the assertion of claims for damages against the Management Board members
Prof. Dr. Lübbert and Schaffer and the appointment of a Special Representative to assert these claims in accordance with section
147 (2) AktG), 10 (Dismissal of the supervisory board member Dr. Ulrich Granzer, election of a new supervisory board member and election
of a substitute member for the newly elected supervisory board member), 11 (Dismissal of the supervisory board member Dr. John Borer,
election of a new supervisory board member and election of a substitute member for the newly elected supervisory board member) 12 (Amendment
of Article 13 of the Articles of Association (resignation from the supervisory board / dismissal from office)), 13 (Resolution on the
assertion of claims for damages against the Management Board members Prof. Dr. Lübbert and Schaffer and against Maruho Deutschland
GmbH and Maruho Co. Ltd. in accordance with section 147 (1) of the AktG and the appointment of a Special Representative for the assertion
of these claims in accordance with section 147 (2) of the AktG) and 14 (Cancellation of the resolution passed under agenda item 6 of
the annual general meeting held on 24 May 2017 (creation of authorised capital in the amount of €4 million with the option to exclude
shareholders’ subscription rights), creation of new authorised capital 2019 and amendment of the Articles of Association). With
regard to agenda items 7 to 14, the complaint was also filed for a positive decision by the court, according to which it should be stated
that the annual general meeting adopted the resolutions in accordance with the resolution proposals of Deutsche Balaton AG, partly in
the form of countermotions to these proposals submitted at the annual general meeting. The lawsuit is currently pending at Cologne Regional
Court under file number 82 O 75/19.
A
legal action for rescission and annulment was brought by ABC Beteiligungen AG, Heidelberg, against resolutions of the annual general
meeting of Biofrontera AG on May 28, 2020. The action for rescission and nullification is directed against the resolutions under agenda
items 6 (resolution on the increase of share capital against cash contributions with the granting of an indirect subscription right),
9 (removal of a Supervisory Board member and election of a new Supervisory Board member), 11 (Resolution on the performance of a special
audit on the circumstances of the lawsuit filed in the United States by the Company against Deutsche Balaton AG and other defendants),
12 (Resolution on the performance of a special audit on the circumstances of the withdrawal of the subscription offer for mandatory convertible
bonds) and 13 (Resolution on the authorization to issue mandatory convertible bonds and the creation of conditional capital with a corresponding
amendment to the Articles of Association). With regard to agenda items 9, 11, 12 and 13, a positive action for the adoption of a resolution
was also filed, according to which it should be recognized that the annual general meeting adopted the resolutions in accordance with
the resolution proposals published in this regard in the supplementary request of Deutsche Balaton AG. The lawsuit is pending before
the Cologne Regional Court under file number 82 O 53/20.With regard to agenda item 6 (resolution on the increase in capital stock against
cash contributions with granting of an indirect subscription right), an application for release was filed with the Cologne Higher Regional
Court on October 20, 2020. The Cologne Higher Regional Court granted the application for release on January 7, 2021. Subsequently, ABC
Beteiligungen AG and the Company declared the legal action for rescission and annulment to be settled to that extent.
Biofrontera
v. Automattic Inc.
Biofrontera
AG has applied for and obtained various preliminary injunctions against Automattic Inc., San Francisco, USA, at the Hamburg Regional
Court. Automattic Inc. is the operator of the portal WordPress.com, on which a (so far) unknown person published false and defamatory
allegations about Biofrontera AG and its management in a blog. Automattic Inc. has appealed the obtained preliminary injunctions. The
Hamburg Regional Court has now ruled on this appeal by Automattic Inc. in oral proceedings and confirmed the injunctions obtained almost
without exception. Automattic Inc. appealed against these rulings of the Regional Court. These appeal proceedings are currently pending
before the Hanseatic Higher Regional Court.
Dividend
Policy and Liquidation Proceeds
We
have never declared or paid any dividends on our ordinary registered shares. Under German corporate law, we currently have no ability
to pay dividends because of our past losses. If we were to earn annual net income, we currently plan to retain such annual net income
for the foreseeable future to finance business development and internal growth. In addition, our EIB credit facility generally restricts
the payment of dividends by us. We, therefore, do not anticipate paying dividends in the foreseeable future.
Under
German law, Biofrontera may pay dividends only from retained earnings (Bilanzgewinn) reflected in its unconsolidated financial
statements (as opposed to the consolidated financial statements for Biofrontera and its subsidiaries) prepared in accordance with the
principles set forth in the German Commercial Code (Handelsgesetzbuch) and as adopted and approved by the management board (Vorstand)
and the supervisory board (Aufsichtsrat). In determining the retained earnings that may be distributed as dividends, under our
articles of association, the management board and the supervisory board may allocate to earnings reserves (Gewinnrücklagen)
our remaining net income (Jahresüberschuss) for the fiscal year after deducting amounts to be allocated to legal and statutory
reserves and losses carried forward in whole or in part. An amount of more than half of the remaining net income may only be allocated
to earnings reserves, if the earnings reserves after allocation would exceed half of the registered capital.
Our
shareholders, in their resolution on the appropriation of retained earnings, may carry forward distributable retained earnings in part
or in full and may allocate additional amounts to earnings reserves. Profits carried forward will be automatically incorporated in the
retained earnings of the next fiscal year. Amounts allocated to the earnings reserves are available for dividends only if and to the
extent the earnings reserves have been dissolved by the management board when preparing the financial statements, thereby increasing
the retained earnings.
Our
shareholders may declare dividends at an ordinary general shareholders’ meeting, which must be held within the first eight months
of each fiscal year. Dividends approved at an ordinary general shareholders’ meeting are payable promptly after the meeting, unless
otherwise decided at the meeting. Because all of our ordinary shares are in book-entry form represented by one or more global certificates
deposited with Clearstream Banking AG in Frankfurt am Main, Germany, shareholders receive dividends through Clearstream Frankfurt for
credit to their deposit accounts.
Apart
from liquidation as a result of insolvency proceedings, Biofrontera may be liquidated (liquidiert) only with a majority of three-quarters
of the share capital present or represented at a shareholders’ meeting at which the vote is taken. In accordance with the German
Stock Corporation Act (Aktiengesetz), upon a liquidation of Biofrontera, any liquidation proceeds remaining after paying off all
of our liabilities would be distributed among the shareholders in proportion to the number of ordinary shares held by each shareholder.
Dividends
are subject to German withholding tax. See “Item 10.E—Taxation—Certain Material U.S. Federal Income and German Tax
Considerations — German Taxation of ADSs — Withholding Tax Refund for U.S. Treaty Beneficiaries”.
B.
Significant Changes
Except
as described below in this section, no subsequent events subject to mandatory reporting occurred after the balance sheet date.
Change
in the composition of the Management Board
On
February 2, 2021, our company announced a change in the composition of our management board. Effective March 1, 2021, Mr. Ludwig Lutter
was appointed as our new Chief Financial Officer (CFO) of Biofrontera AG. He takes over from Thomas Schaffer and is responsible for Finance,
Administration, Controlling and Human Resources within the Company. Thomas Schaffer left the Company on February 28, 2021, in order to
devote himself to new personal endeavors outside the Company. The change in the finance department was made as part of the succession
planning by the Supervisory Board and the Management Board already announced in summer 2020.
Successful
completion of the capital increase resolved on May 28, 2020
On
February 26, 2021, the Company announced the successful completion of the capital increase resolved by the annual general meeting on
May 28, 2020. In total, the Company issued 8,969,870 new ordinary shares, bringing their total number to 56,717,385 after registration
in the Commercial Register. The capital measure was fully placed, with the Company raising total gross funds of approximately €
24.7 million.
ITEM
9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our
ordinary shares have been listed on the Stock Exchange in Düsseldorf since 2006 and on the Frankfurt Stock Exchange under the ticker
symbol “B8F” since 2012. Since February 2018, our ADS have been listed on The NASDAQ Capital Market under the ticker symbol
“BFRA”.
B.
Plan of Distribution
Not
applicable.
C.
Markets
Our
ordinary shares have been listed on the Stock Exchange in Düsseldorf since 2006 and on the Frankfurt Stock Exchange under the ticker
symbol “B8F” since 2012. Since February 2018, our ADS have been listed on The NASDAQ Capital Market under the ticker symbol
“BFRA”.
D.
Selling Shareholders
Not
applicable.
E.
Dilution
Not
applicable.
F.
Expenses of the Issue
Not
applicable.
ITEM
10. ADDITIONAL INFORMATION
A.
Share Capital
Update
to Share Capital
As
of the date of this annual report, our registered share capital amounts to €56,717,385, divided into 56,717,385 no par-value ordinary
registered shares with a notional value of €1.00 per share. The shares were created according to German law.
Update
to Changes in Our Share Capital
In
January 2017, we issued convertible bonds which could be converted into shares. Insofar as shares are to be delivered as a consequence
of conversion of the bonds, we can issue these shares from Conditional Capital I (as defined in our articles of association).
In
January 2017, an increase of our share capital by €2,354,510 to €37,715,273 was registered pursuant to the conversion
of our warrant bonds into 1,603,050 of our ordinary shares, and the exercise of options from our convertible bond issued in 2009
(which was fully repaid upon maturity on December 31, 2016) into 751,460 shares. The 1,603,050 shares from the conversion of convertible
bonds were issued from Conditional Capital I, reducing the available Conditional Capital I proportionally. The 751,460
shares from the exercise of option rights were issued from Conditional Capital IV, reducing the available Conditional
Capital IV (as defined in our articles of association) proportionally.
In
February 2017, an increase of our share capital by €7,160 to €37,722,433 was registered pursuant to the exercise of
options from the warrant bond issued in 2009 into 7,160 of our ordinary shares. The 7,160 shares from the exercise of option rights
were issued from Conditional Capital IV, reducing the available Conditional Capital IV proportionally.
On
June 29, 2017, our share capital was increased by €693,995 to €38,416,428 pursuant to the conversion of our convertible
bonds into 693,995 of our ordinary shares. The 693,995 shares from the conversion of convertible bonds were issued from Conditional
Capital I, reducing the available Conditional Capital I proportionally.
In
August 2017, our share capital was increased by €75 to €38,416,503 pursuant to the conversion of convertible bonds into
75 of our ordinary shares. The 75 shares resulting from the conversion of convertible bonds were issued from our Conditional
Capital I, reducing the available Conditional Capital I proportionately.
In
December 2017, our share capital was increased by €325 to €38,416,828 pursuant to the conversion of convertible bonds
into 325 of our shares. The 325 shares resulting from the conversion of convertible bonds were issued from our Conditional
Capital I, reducing the available Conditional Capital I proportionately.
In
February 2018, the ADSs, of which each represents two of our ordinary shares, were listed on The NASDAQ Capital Market in the United
States and our share capital against cash capital contributions increased by €6,000,000 through issuing 6,000,000 new ordinary registered
shares from approved capital. Statutory subscription rights were granted to the shareholders. Any shares not subscribed by statutory
subscription rights were offered to investors in the United States in the form of ADSs. The subscription price per share amounted to
€4.00. The capital increase was fully placed. The net issue proceeds amounted to €21.6 million.
In
June 2018, our share capital was increased by €17,652 to €44,434,480 pursuant to the conversion of convertible bonds
into 17,652 of our shares. The 17,652 shares resulting from the conversion of convertible bonds were issued from our Conditional
Capital I, reducing the available Conditional Capital I proportionately.
In
June 2018, our share capital was further increased by €72,500 to €44,506,980 pursuant to the exercise of options from
our 2010 employee stock option program into 72,500 of our shares. The 72,500 shares resulting from the conversion of options were
issued from our Conditional Capital III, reducing the available Conditional Capital III proportionately.
In
July 2018, our share capital was increased by €2,694 to €44,509,674 pursuant to the conversion of convertible bonds
into 2,694 of our shares. The 2,694 shares resulting from the conversion of convertible bonds were issued from our Conditional
Capital I, reducing the available Conditional Capital I proportionately.
In
July 2018, our share capital was further increased by €63,500 to €44,573,174 pursuant to the exercise of options from
our 2010 employee stock option program into 63,500 of our shares. The 63,500 shares resulting from the conversion of options were
issued from our Conditional Capital III, reducing the available Conditional Capital III proportionately.
In
December 2018, our share capital was further increased by €59,500 to €44,632,674 pursuant to the exercise of options
from our 2010 employee stock option program into 59,500 of our shares. The 59,500 shares resulting from the conversion of options
were issued from our Conditional Capital III, reducing the available Conditional Capital III proportionately.
In
June 2019, our share capital was further increased by €5,500 to €44,638,174 pursuant to the exercise of options from
our 2010 employee stock option program into 5,500 of our shares. The 5,500 shares resulting from the conversion of options were
issued from our Conditional Capital III, reducing the available Conditional Capital III proportionately.
In
July 2019, our share capital was increased by €118,841 to €44,757,015 pursuant to the conversion of convertible bonds
into 118,841 of our shares. The 118,841 shares resulting from the conversion of convertible bonds were issued from our Conditional
Capital I, reducing the available Conditional Capital I proportionately.
In
August 2019, our share capital was further increased by €58,800 to €44,815,815 pursuant to the exercise of options from
our 2010 employee stock option program into 58,800 of our shares. The 58,800 shares resulting from the conversion of options were
issued from our Conditional Capital III, reducing the available Conditional Capital III proportionately.
In
October 2019, our share capital was further increased by €33,550 to €44,849,365 pursuant to the exercise of options
from our 2010 employee stock option program into 33,550 of our shares. The 33,550 shares resulting from the conversion of convertible
bonds were issued from our Conditional Capital III, reducing the available Conditional Capital III proportionately.
In
October 2020, our share capital was further increased by €260,000 to €45,109,365 pursuant to the exercise of options
from our 2015 employee stock option program into 260,000 of our shares. The 260,000 shares resulting from the conversion of options
were issued from our Conditional Capital V, reducing the available Conditional Capital V proportionately.
In
December 2020, our share capital was increased by €2,638,150 to €47,747,515 pursuant to the conversion of convertible
bonds into 2,638,150 of our shares. The 2,638,150 shares resulting from the conversion of convertible bonds were issued from our
Conditional Capital I, reducing the available Conditional Capital I proportionately.
In
February 2021, our share capital was increased by €8,969,870 to €56,717,385 pursuant to the preemptive rights offering of 6,301,866
ordinary shares to existing shareholders as well as a registered offering of any shares not subscribed by statutory subscription rights
to investors in the United States in the form of 1,334,002 American Depositary Shares (corresponding to 2,668,004 ordinary shares). The
subscription price per share amounted to €2.75. The capital increase was fully placed. The gross proceeds for the Company amounted
to €24.7 million.
B.
Memorandum and Articles of Association
On
February 23, 2018, our supervisory board adopted new articles of association to reflect the capital increase undertaken in connection
with our rights offering of ordinary shares in Germany and initial public offering of ADSs in the U.S. and other matters. Other than
changes to our share capital, these articles of association are substantially identical to the articles of association included as an
exhibit to this annual report.
On
December 12, 2018, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from our 2010 Employee Share Option Program as well as conversions from our 2016/21 and 2017/22 Convertible
Bonds
On
June 19, 2019, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from our 2010 Employee Share Option Program.
On
July 29, 2019, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from conversions from our 2017/22 Convertible Bonds.
On
August 28, 2019, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from our 2010 Employee Share Option Program.
On
October 10, 2019, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from our 2010 Employee Share Option Program.
On
October 7, 2020, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from our 2010 Employee Share Option Program.
On
December 2, 2020, our supervisory board further adopted new articles of association to reflect changes following the issue of new shares
based on exercise of options from conversions from our 2020/21 Convertible Bonds.
On
February 24, 2021, our supervisory board adopted new articles of association to reflect the capital increase undertaken in connection
with our rights offering of ordinary shares in Germany and offering of ADS in the United States.
See
the description of our articles of association contained in Exhibit 2.5 to this Form 20-F which sets forth a summary of certain provisions
of our articles of association as currently in effect.
C.
Material Contracts
For
descriptions of our material contracts please refer to the following sections of this annual report on Form 20-F: (i) “Item
4.B — Information on the Company — Business Overview — Commercial Partners and Agreements” and “—
Facilities” (with respect to our contracts with Frike Group and Midas and our leases in Leverkusen, Germany and Woburn, Massachusetts);
(ii) “Item 5.B—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Description of
Our Principal Financing Contracts” (with respect to our Finance Contract with EIB and the terms and conditions of Convertible
Bond II); (iii) “Item 6—Directors, Senior Management and Employees—Compensation of Management Board Members”
(with respect to our employment contracts with Prof. Hermann Lübbert , Thomas Schaffer and Ludwig Lutter); and (iv) “Item
7—Major Shareholders and Related Party Transactions” (with respect to our license and supply agreement with Maruho).
In
addition, on March 25, 2019, pursuant to the Share Purchase and Transfer Agreement, we announced that we acquired Cutanea from Maruho,
our significant shareholder. Cutanea markets AKTIPAK®, a prescription gel for the treatment of acne, and in November 2018
launched Xepi®, a prescription cream for the treatment of impetigo, a frequent bacterial skin infection (Staphylococcus
aureus or Streptococcus pyogenes). Pursuant to the Share Purchase and Transfer Agreement:
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Maruho
will provide an amount of up to $7.3 million as start-up funding for the business activities of Cutanea as operated by us (“Start-up
Costs”).
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We
acquired Cutanea for an initial purchase price of $1.00. A purchase price equaling the Start-up Costs effectively paid shall be payable
by us to Maruho by 2023. The profits from the sale of Cutanea products will be shared initially at 75% to Maruho an 25% to Biofrontera
until the Start Up Costs are repaid and then subsequently equally between Maruho and Biofrontera until 2030.
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Any
rights in Cutanea’s existing research and development activities originated from Maruho will remain with Maruho. Any other
rights in Cutanea’s other research and development activities will be transferred to Maruho during a transition time.
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Maruho
has further agreed to cover any ongoing expenses, which may be incurred in the first three months following the closing of the transaction.
Maruho will furthermore indemnify Biofrontera and Cutanea from liabilities of Cutanea relating to or arising from the period prior
to the closing.
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Cutanea
has assumed an exclusive license agreement from Ferrer International, S.A. (“Ferrer”) for the rights, duties and obligations
of Medimetriks Pharmaceuticals, Inc. (“Medimetriks”) under the License and Supply Agreement between Ferrer and Medimetriks
dated March 10, 2014, which grants the exclusive right to market and otherwise commercialize the products related to the compound ozenoxacin.
The agreement allows Cutanea to develop, make, have made, use, register, market, promote, sell, have sold, offer for sale and import
Ozenoxacin and pharmaceutical products containing ozenoxacin for treatment of topical bacterial infections in patients, more specifically
those with impetigo. Ferrer has agreed to a royalty payment scale with royalty percentages in the mid to high-single digits based on
certain levels of net sales of licensed products sold by Cutanea. In addition to the royalties, Cutanea is required to make certain payments
based on the achievement of sales milestones of up to $11 million to Ferrer in accordance with the exclusive license agreement. Under
the agreement, Cutanea has agreed to purchase all its requirements of trade units and samples of products containing ozenoxacin exclusively
from Ferrer or Ferrer’s appointee, and Ferrer has agreed that it will manufacture and supply to Cutanea, or cause to be manufactures
and supplied to Cutanea, all such trade units and samples. The agreement expires on the later of (i) the date that is twelve (12) years
following the launch date or (ii) twelve (12) years from the date of launch of the latest to launch of any new product as contemplated
by the license agreement.
D.
Exchange Controls
There
are currently no legal restrictions in Germany on international capital movements and foreign-exchange transactions, except in limited
embargo circumstances relating to certain areas, entities or persons as a result of applicable resolutions adopted by the United Nations
and the European Union. Restrictions currently exist with respect to, among others, Afghanistan, Belarus, Burma/Myanmar, Central African
Republic, Congo, Egypt, Eritrea, Guinea, Guinea-Bissau, Iran, Iraq, Ivory Coast, Lebanon, Liberia, Libya, North Korea, Russia, Somalia,
South Sudan, Sudan, Syria, Tunisia, Ukraine, Yemen and Zimbabwe.
For
statistical purposes, there are, however, limited notification requirements regarding transactions involving cross-border monetary transfers.
With some exceptions, every corporation or individual residing in Germany must report to the German Central Bank (Deutsche Bundesbank)
(i) any payment received from, or made to, a non-resident corporation or individual that exceeds €12,500 (or the equivalent in a
foreign currency) and (ii) any claim against, or liability payable to, a non-resident or corporation in excess of €5 million (or
the equivalent in a foreign currency) at the end of any calendar month. Payments include cash payments made by means of direct debit,
checks and bills, remittances denominated in euros and other currencies made through financial institutions, as well as netting and clearing
arrangements.
E.
Taxation
German
Taxation of ADSs
Scope
of Discussion
The
following is a general summary of the material German tax consequences for U.S. Holders (as defined below) of the ADSs. It does not purport
to be a complete analysis of all German tax considerations relating to the ADSs. It is based upon the laws in force and their interpretation
at the time of preparation of this annual report and is subject to any change in law or interpretation after such date, potentially having
retrospective or retroactive effect. It does not address the German tax consequences for Holders of the ADSs who are not U.S. Holders
(as defined below). Furthermore, it does not address the German tax consequences resulting from the ADSs being attributable to (1) a
permanent establishment outside of the U.S., or (2) a permanent representative outside of the U.S.
A
U.S. Holder in terms of this section on the German taxation of the ADSs is:
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a
resident of the U.S. in terms of the Agreement between the United States of America and the Federal Republic of Germany for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and to certain other Taxes as
of June 4, 2008 (Abkommen zwischen der Bundesrepublik Deutschland und den Vereinigten Staaten von Amerika zur Vermeidung der Doppelbesteuerung
und zur Verhinderung der Steuerverkürzung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen und einiger anderer
Steuern in der Fassung vom 4. Juni 2008, “Treaty”);
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who
is not subject to German unlimited tax liability by way of a German residence or habitual abode or, as the case may be, a German
registered seat or place of management;
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who
is the beneficial owner of the ADSs and any payments such as dividends under the ADSs; and
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who
is not subject to the limitation of benefits clause of the Treaty.
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In
particular because it is not possible to take into account the personal circumstances of prospective U.S. Holders, they should consult
their tax advisors as to the consequences under the tax laws of Germany resulting from acquiring, holding and disposing of ADSs and receiving
payments under the ADSs such as dividends.
German
Taxation of Dividends and Capital Gains
At
the time of preparation of this annual report, no decisions of German tax courts have been published that comprehensively outline the
treatment of ADRs or ADSs under German tax law. However, the German Federal Ministry of Finance has issued a circular dated May 24, 2013
(reference number BMF IV C 1 — S 2204/12/10003, “ADR Circular”) on the treatment of ADRs under German tax law. According
to the ADR Circular, Holders of ADRs are in general treated like the beneficial owners of the respective shares for German tax purposes.
It has to be noted, however, that the ADR Circular does not address ADSs and it is therefore not clear whether or not the ADSs fall within
the scope of the ADR Circular. If the ADS fall within the scope of the ADR Circular, U.S. Holders of the ADSs would be treated as if
they held the respective amount of ordinary shares and if they received dividends under the ordinary shares for German tax purposes.
Furthermore, U.S. Holders of the ADSs should note that the ADR Circular is not binding on German tax courts and it is unclear whether
a German tax court would follow the ADR Circular with respect to the German tax treatment of ADRs or ADSs. For the purposes of this section
on the German taxation of the ADSs it is assumed that the ADSs fall within the scope of the ADR Circular.
German
Taxation of Capital Gains of the U.S. Treaty Beneficiaries of the ADSs
The
company maintains its registered seat in Germany. As a consequence, capital gains resulting from the disposition of ADSs realized by
a U.S. Holder are treated as German source income and are subject to German limited tax liability (beschränkte Steuerpflicht)
if such U.S. Holder at any time within five years prior to the disposition directly or indirectly held ADSs, shares and/or other rights
representing together 1% or more of the company’s shares. If such Holder had acquired the ADSs without consideration, the previous
owner’s holding period and percentage of the holding would also be taken into account. However, U.S. Holders may invoke the Treaty
and, as a result, are not subject to German taxation on capital gains resulting from the disposition of ADSs.
Under
German law, disbursing agents are required to levy withholding tax on capital gains from the sale of shares or other securities held
in a custodial account. Disbursing agent in this context means a German bank, a financial services institution, a securities trading
enterprise or a securities trading bank (each as defined in the German Banking Act (Kreditwesengesetz) and, in each case, including
a German branch of a foreign enterprise, but excluding a foreign branch of a German enterprise) that holds the ADSs in custody or administers
the ADSs for the U.S. Holder or conducts sales or other dispositions and disburses or credits the income from the ADSs to the U.S. Holder
of the ADSs. Under German law, the obligation to withhold taxes on capital gains does not explicitly depend on the capital gains being
subject to German limited or unlimited taxation or on an applicable double taxation treaty permitting Germany to tax such capital gains.
However,
the German Federal Ministry of Finance has issued a circular dated January 18, 2016 (reference number BMF IV C 1 - S-2252 / 08 / 10004
:017, “Capital Income Circular”) due to its subpart XI taxes need not be withheld when the capital gains are not subject
to German taxation. The Capital Income Circular further states that there is no obligation to withhold such tax on capital gains even
if a U.S. Holder owns 1% or more of the shares. While the Capital income Circular is only binding on the tax authorities but not on the
tax courts, in practice, the disbursing agents nevertheless typically rely on the guidance contained in such circular. Therefore, a disbursing
agent would only withhold tax at 26.375% on capital gains derived by a U.S. Holder from the sale of ADSs held in a custodial account
in Germany in the unlikely event that the disbursing agent did not follow this guidance. In this case, the U.S. Holder should be entitled
to claim a refund of the withholding tax from the German tax authorities under the Treaty.
Taxation
of Dividends
Dividends
distributed by the company to a U.S. Holder under the ADS are subject to a German withholding tax of 25% plus 5.5% solidarity surcharge
thereon, resulting in an overall withholding tax rate of 26.375%.
However,
U.S. Holders may invoke the Treaty. Therefore, the German withholding tax may in general not exceed 15% of the dividends received by
U.S. Holders. A further reduction of the permitted withholding tax rate under the Treaty may apply depending on further requirements.
The excess of the total amount withheld over the maximum rate of withholding tax permitted under the Treaty is refunded to U.S. Holders
upon application (as described below under “Withholding Tax Refund for U.S. Treaty Beneficiaries”).
Withholding
Tax Refund for U.S. Treaty Beneficiaries
As
described above, U.S. Holders are entitled to claim a refund of the portion of the generally applicable 26.375% German withholding tax
on dividends that exceeds the permitted withholding tax rate under the Treaty. However, U.S. Holders should note that it is unclear how
the German authorities will apply the refund process to dividends paid under ADSs and ADRs. In general, any potential refund claim becomes
time-barred after four years following the calendar year in which the dividend is received.
Additionally,
such refund is subject to the German anti treaty shopping provision. In general, this rule requires that the U.S. Holder (in case it
is corporation, “U.S. corporate holder”) maintains its own administrative substance and conducts its own business activities.
In particular, a U.S. corporate holder has no right to a full or partial refund to the extent persons holding ownership interests in
the U.S. corporate holder would not be entitled to the refund had they received the income directly and the gross income realized by
the U.S. corporate holder is not caused by the business activities of the U.S. corporate holder, and there are either no economic or
other valid reasons for the interposition of the U.S. corporate holder, or the U.S. corporate holder does not participate in general
commerce by means of a business organization with resources appropriate to its business purpose. However, this shall not apply if the
U.S. corporate holder’s principal class of stock is regularly traded in substantial volume on a recognized stock exchange, or if
the U.S. corporate holder is subject to the provisions of the German Investment Tax Act (lnvestmentsteuergesetz).
U.S.
Holders claiming a refund of German withholding tax should in any case consult their tax advisors with respect to the refund procedure
as there is only limited guidance of the German tax authorities on the practical application of the refund procedure with respect to
the ADS.
German
Inheritance and Gift Tax (Erbschaft-und Schenkungsteuer)
As
the ADR Circular does not refer to the German Inheritance and Gift Tax Act, it is unclear whether or not the German inheritance or gift
tax applies to the transfer of the ADSs. However, if German inheritance or gift tax is applicable to ADSs, under German domestic law,
the transfer of the ordinary shares in the company and, as a consequence, the transfer of the ADSs would be subject to German gift or
inheritance tax if:
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the
decedent or donor or heir, beneficiary or other transferee (1) maintained his or her residence or a habitual abode in Germany or
had its place of management or registered seat in Germany at the time of the transfer, or (2) is a German citizen who has spent no
more than five consecutive years outside of Germany without maintaining a residence in Germany or (3) is a German citizen who serves
for a German entity established under public law and is remunerated for his or her service from German public funds (including family
members who form part of such person’s household, if they are German citizens) and is only subject to estate or inheritance
tax in his or her country of residence or habitual abode with respect to assets located in such country (special rules apply to certain
former German citizens who neither maintain a residence nor have their habitual abode in Germany);
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at
the time of the transfer, the ADSs are held by the decedent or donor as business assets forming part of a permanent establishment
in Germany or for which a permanent representative in Germany has been appointed; or
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the
ADSs subject to such transfer form part of a portfolio that represents at the time of the transfer 10% or more of the registered
share capital of the company and that has been held directly or indirectly by the decedent or donor, either alone or together with
related persons.
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Under
the Agreement between the Federal Republic of Germany and the United States of America for the avoidance of double taxation with respect
to taxes on inheritances and gifts (Abkommen zwischen der Bundesrepublik Deutschland und den Vereinigten Staaten von Amerika zur Vermeidung
der Doppelbesteuerung auf dem Gebiet der Nachlass-, Erbschaft-und Schenkungssteuern in der Fassung vom 21. Dezember 2000, “Inheritance
and Gift Tax Treaty”), a transfer of ADSs by gift or upon death is not subject to German inheritance or gift tax if the donor or
the transferor is domiciled in the U.S. in terms of the Inheritance and Gift Tax Treaty, and is neither a citizen of Germany nor a former
citizen of Germany and, at the time of the transfer, the ADSs are not held by the decedent or donor as business assets forming part of
a permanent establishment in Germany or for which a permanent representative in Germany has been appointed.
Notwithstanding
the foregoing, in case the heir, transferee or other beneficiary (i) has, at the time of the transfer, his or her residence or habitual
abode in Germany, or (ii) is a German citizen who has spent no more than five (or, in certain circumstances, ten) consecutive years outside
Germany without maintaining a residence in Germany or (iii) is a German citizen who serves for a German entity established under public
law and is remunerated for his or her service from German public funds (including family members who form part of such person’s
household, if they are German citizens) and is only subject to estate or inheritance tax in his or her country of residence or habitual
abode with respect to assets located in such country (or special rules apply to certain former German citizens who neither maintain a
residence nor have their habitual abode in Germany), the transferred ADSs are subject to German inheritance or gift tax.
If,
in this case, Germany levies inheritance or gift tax on the ADSs with reference to the heir’s, transferee’s or other beneficiary’s
residence in Germany or his or her German citizenship, and the U.S. also levies federal estate tax or federal gift tax with reference
to the decedent’s or donor’s residence (but not with reference to the decedent’s or donor’s citizenship), the
amount of the U.S. federal estate tax or the U.S. federal gift tax, respectively, paid in the U.S. with respect to the transferred ADSs
is credited against the German inheritance or gift tax liability, provided the U.S. federal estate tax or the U.S. federal gift tax,
as the case may be, does not exceed the part of the German inheritance or gift tax, as computed before the credit is given, which is
attributable to the transferred ADSs. A claim for credit of the U.S. federal estate tax or the U.S. federal gift tax, as the case may
be, may be made within one year of the final determination and payment of the U.S. federal estate tax or the U.S. federal gift tax, as
the case may be, provided that the determination and payment are made within ten years of the date of death of the decedent or of the
date of the gift by the donor. Similarly, U.S. state-level estate or gift taxes are also creditable against the German inheritance or
gift tax liability to the extent that U.S. federal estate or gift tax is creditable.
U.S.
Taxation of ADSs and Ordinary Shares
The
following is a general discussion of the material U.S. federal income tax considerations relating to the acquisition, ownership and disposition
of the ADSs and ordinary shares by a U.S. Holder (as defined below). The discussion below is based on the Internal Revenue Code of 1986,
as amended (“Code”), U.S. Treasury regulations promulgated thereunder, Internal Revenue Service (“IRS”) rulings
and pronouncements, and judicial decisions all as now in effect and all of which are subject to change or differing interpretations,
possibly with retroactive effect. This discussion is for general information only and does not address all of the potential U.S. federal
income tax considerations that may be relevant to a U.S. Holder with respect to the acquisition, ownership and disposition of the ADSs
and ordinary shares. Without limiting the generality of the foregoing, this discussion is limited to U.S. Holders that will hold ADSs
or ordinary shares as capital assets and does not address all the tax considerations applicable to a particular holder of ADSs or ordinary
shares in light of the holder’s circumstances or the effect of any special rules applicable to certain types of holders, including,
without limitation:
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financial
institutions, thrifts or mutual funds;
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insurance
companies;
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dealers
or traders in securities;
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persons
that will hold ADSs or ordinary shares as part of a hedging or conversion transaction or as a position in a straddle or other integrated
transaction for U.S. federal income tax purposes;
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persons
that have a functional currency other than the U.S. dollar;
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persons
that own (or are deemed to own) ADSs or ordinary shares representing 10% or more of our shares;
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regulated
investment companies, real estate investment trusts;
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personal
holding companies;
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tax-exempt
entities;
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tax-deferred
or other retirement accounts;
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persons
who hold ADSs or ordinary shares through pass-through entities, including partnerships and Subchapter S corporations;
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certain
former citizens or residents of the U.S.;
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persons
subject to special tax accounting rules as a result of any item of gross income with respect to our ADSs or ordinary shares being
taken into account in an applicable financial statement;
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persons
deemed to sell ADSs or ordinary shares under constructive sale provisions of the Code; or
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persons
holding ADSs or ordinary shares in connection with a trade or business conducted outside of the U.S.
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Finally,
the summary does not describe the effect of the U.S. federal alternative minimum, estate and gift tax laws on U.S. Holders or the effects
of any applicable state, local, or non-U.S. laws.
For
purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or ordinary shares that for U.S. federal income tax
purposes, is (1) an individual who is a citizen or resident of the U.S.; (2) a corporation, or other entity treated as a corporation
for U.S. federal income tax purposes, created or organized under the laws of the U.S., any state thereof or the District of Columbia;
(3) an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or (4) a trust, if it (i) is
subject to the primary supervision of a U.S. court and the control of one or more U.S. persons or (ii) has a valid election in effect
under applicable U.S. Treasury Regulations to be treated as a U.S. person. A “non-U.S. Holder” is a beneficial owner of the
ADSs or ordinary shares (other than an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not
a U.S. Holder.
If
a partnership (including an entity or arrangement, U.S. or non-U.S., treated as a partnership for U.S. federal income tax purposes) holds
ADSs or ordinary shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities
of the partnership. A holder of ADSs or ordinary shares that is a partnership, and partners in such partnership, should consult their
own tax advisors about the U.S. federal income tax consequences of acquiring, owning and disposing of the ADSs or ordinary shares.
This
discussion is for general information only and is not a substitute for an individual analysis of the tax considerations relating to the
acquisition, ownership or disposition of the ADSs or ordinary shares. Each prospective holder of ADSs or ordinary shares should consult
its own tax advisors regarding the U.S. federal, state and local or other tax considerations of acquiring, owning and disposing of our
ADSs or ordinary shares in light of their particular circumstances. U.S. Holders should also review the discussion under “—
German Taxation of ADSs” for the German tax consequences to a U.S. Holder of the ownership of the ADSs.
General
In
general and taking into account the earlier assumptions, for U.S. federal income tax purposes, a U.S. Holder of ADSs is treated as the
owner of the ordinary shares represented by such ADSs. Exchanges of ordinary shares for ADSs, and ADSs for ordinary shares, respectively,
generally will not be subject to U.S. federal income tax.
Distributions
Under
the U.S. federal income tax laws, and subject to the discussion below under “Additional U.S. Federal Income Tax Consequences—PFIC
Rules”, the gross amount of any distribution that is actually or constructively received by a U.S. Holder with respect to its
ordinary shares (including shares deposited in respect of ADSs) will be a dividend includible in gross income of a U.S. Holder as ordinary
income to the extent the amount of such distribution is paid out of our current or accumulated earnings and profits, as determined for
U.S. federal income tax purposes. To the extent that the amount of such distribution exceeds our current and accumulated earnings and
profits as so computed, it will be treated first as a non-taxable return of capital to the extent of such U.S. Holder’s adjusted
tax basis in its ADSs or ordinary shares, and to the extent the amount of such distribution exceeds such adjusted tax basis, will be
treated as gain from the sale of the ADSs or ordinary shares. If you are a non-corporate U.S. Holder, dividends paid to you that constitute
qualified dividend income will be taxable to you at a preferential income tax rate, provided that you hold our ADSs or ordinary shares
for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements.
If we are a PFIC (as discussed below under “Additional U.S. Federal Income Tax Consequences — PFIC Rules”), distributions
paid by us with respect to ADSs or ordinary shares will not be eligible for the preferential income tax rate. Prospective investors should
consult their own tax advisors regarding the taxation of distributions under these rules.
You
must include any German tax withheld from the dividend payment in the gross amount of the dividend paid even though you do not in fact
receive it. The gross amount of the dividend is taxable to you when you receive the dividend, actually or constructively. Dividends paid
on ADSs or ordinary shares generally will constitute income from sources outside the U.S. and such dividends will generally not be eligible
for the dividends-received deduction generally available to corporate U.S. Holders. The gross amount of any dividend paid in non-U.S.
currency will be included in the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the non-U.S. currency calculated
by reference to the exchange rate in effect on the date the dividend distribution is includable in the U.S. Holder’s income, regardless
of whether the payment is in fact converted into U.S. dollars. If the non-U.S. currency is converted into U.S. dollars on the date of
receipt by the depositary, in the case of ADSs, or the U.S. Holder, in the case of ordinary shares, a U.S. Holder generally should not
be required to recognize non-U.S. currency gain or loss in respect of the dividend. If the non-U.S. currency received is not converted
into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the non-U.S. currency equal to its U.S. dollar value on
the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the non-U.S. currency will be treated as ordinary
income or loss, and will generally be income or loss from sources within the U.S. for foreign tax credit limitation purposes. The amount
of any distribution of property other than cash will be the fair market value of the property on the date of the distribution, less the
sum of any encumbrance assumed by the U.S. Holder.
Subject
to applicable limitations that may vary depending upon a U.S. Holder’s circumstances, a U.S. Holder will be entitled to a credit
against its U.S. federal income tax liability for any German taxes withheld in respect of our dividend distributions not in excess of
the applicable rate under the Treaty. The limitations on claiming a foreign tax credit are complex and include, among others, computation
rules under which foreign tax credits allowable with respect to specific classes of income (e.g., such as “passive” or “general”
income) cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. In addition, the amount
of the qualified dividend income, if any, paid to a U.S. Holder that is subject to the reduced dividend income tax rate and that is taken
into account for purposes of calculating the U.S. Holder’s U.S. foreign tax credit limitation must be reduced by the rate differential
portion of the dividend. The rules governing foreign tax credits are complex. Prospective investors should consult their own tax advisors
regarding the availability and implications of foreign tax credits in light of their particular situation. In lieu of claiming a foreign
tax credit, U.S. Holders may elect to deduct all non-U.S. taxes paid or accrued in a taxable year in computing their taxable income,
subject to generally applicable limitations under U.S. federal income tax law. Prospective investors should consult their own tax advisors
regarding the availability and deductibility of non-U.S. taxes in light of their particular situation.
Sale,
Exchange or Other Disposition
Subject
to the discussion below under “Additional U.S. Federal Income Tax Consequences — PFIC Rules,” upon the sale, exchange
or other disposition of ADSs or ordinary shares, a U.S. Holder will generally recognize gain or loss for U.S. federal income tax purposes
in an amount equal to the difference between the U.S. dollar value of the amount realized from such sale, exchange or other disposition
and the U.S. Holder’s tax basis in such ADSs or ordinary shares. Such gain or loss generally will be capital gain or loss. Capital
gain of a non-corporate U.S. Holder recognized on the sale or other disposition of ADSs or ordinary shares held for more than one year
is generally eligible for a preferential income tax rate. The gain or loss will generally be income or loss from sources within the U.S.
for foreign tax credit limitation purposes. The deductibility of capital losses is subject to limitations.
A
U.S. Holder that receives non-U.S. currency on the sale or other disposition of ADSs or ordinary shares will realize an amount equal
to the U.S. dollar value of the non-U.S. currency on the date of sale (or, in the case of cash basis and electing accrual basis taxpayers,
the U.S. dollar value of the non-U.S. currency on the settlement date) provided that the ADSs or ordinary shares, as the case may be,
are treated as being “traded on an established securities market.” If a U.S. Holder receives non-U.S. currency upon a sale
or exchange of ADSs or ordinary shares, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such non-U.S.
currency will be ordinary income or loss, and will generally be income or loss from sources within the U.S. for foreign tax credit limitation
purposes. However, if such non-U.S. currency is converted into U.S. dollars on the date received by the U.S. Holder, a cash basis or
electing accrual U.S. Holder should not recognize any gain or loss on such conversion.
Redemptions
Depending
on the particular U.S. Holder, a redemption of ADSs or ordinary shares by us will be treated as a sale of the redeemed ADSs or ordinary
shares by the U.S. Holder or as a distribution to the U.S. Holder (which is taxable as described above under “— Distributions”).
Additional
U.S. Federal Income Tax Consequences
PFIC
Rules. Special adverse U.S. federal income tax rules apply to U.S. Holders owning shares of a PFIC. In general, if you are a U.S.
Holder, we will be a PFIC with respect to you if for any taxable year in which you held our ADSs or ordinary shares: (1) at least 75%
of our gross income for the taxable year is passive income (the “income test”) or (2) at least 50% of the value, determined
on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income
(the “asset test”). The determination of whether we are a PFIC will be made annually. We expect to be treated as a publicly
traded corporation for purposes of the PFIC rules with respect to the 2020 taxable year. In such case, the value of our assets for purposes
of the asset test will generally be determined by reference to the market price of our ordinary shares. Based on our current estimates
of expected assets and gross income for the year ended December 31, 2020, we do not believe we were a PFIC for the year ended December
31, 2020. However, fluctuations in the market price of our shares may cause us to become a PFIC for the 2020 taxable year or later taxable
years. In addition, the composition of our income and assets will be affected by how, and how quickly, we use our liquid assets. If we
were unable to deploy significant amounts of cash for active purposes, our risk of being classified as a PFIC would substantially increase.
Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after
the close of each taxable year, there can be no assurance that we will not be a PFIC for the 2020 taxable year or any future taxable
year.
Passive
income for purposes of the income test generally includes dividends, interest, royalties, rents (other than certain rents and royalties
derived in the active conduct of a trade or business), annuities and gains from the disposition of assets that produce passive income.
Any cash we hold generally will be treated as held for the production of passive income for the purpose of the PFIC test, and any income
generated from cash or other liquid assets generally will be treated as passive income for such purpose. If a non-U.S. corporation owns
at least 25% by value of the shares of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning
its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s
income. Although we do not believe that we are currently a PFIC, the determination of PFIC status is highly factual, determined annually,
and based on technical rules that are difficult to apply. Accordingly, there can be no assurances that we will not be a PFIC for the
current year or any future taxable year.
If
we were to be treated as a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition
of our ADSs or ordinary shares will depend on whether such U.S. Holder makes an election to treat us as a “qualified electing fund”
or “QEF” under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under Section 1296 of
the Code (a “Mark-to-Market Election”). A U.S. Holder who makes a QEF Election will be taxed currently on such U.S. Holder’s
pro rata share of our annual ordinary income and capital gains (each separately stated). We do not intend to furnish holders with the
information necessary to make a QEF Election. A U.S. Holder may make a Mark-to-Market Election if our ordinary shares or ADSs are “marketable
stock,” and would, as a result of such election, include as ordinary income the excess of the fair market value of such U.S. Holder’s
ADSs or ordinary shares at year-end over such U.S. Holder’s basis in those ADSs or ordinary shares. In addition, any gain recognized
upon a sale of ADSs would be taxed as ordinary income in the year of sale.
A
U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election (a “Non-Electing U.S. Holder”) would be
subject to special adverse tax rules with respect to (1) “excess distributions” received on our ADSs or ordinary shares and
(2) any gain recognized upon a sale or other disposition (including a pledge) of our ADSs or ordinary shares. A Non-Electing U.S. Holder
would be treated as if it had realized such gain and certain “excess distributions” ratably over its holding period for our
ADSs or ordinary shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together
with an interest charge in respect of the tax attributable to each such year. Special rules apply for calculating the amount of the foreign
tax credit with respect to “excess distributions” by a PFIC.
With
certain exceptions, a Non-Electing U.S. Holder’s ADSs or ordinary shares will be treated as stock in a PFIC if we were a PFIC at
any time during the U.S. Holder’s holding period for its ordinary shares or ADSs, even if we are not currently a PFIC.
Dividends
that a U.S. Holder receives from us will not be eligible for the special tax rates applicable to qualified dividend income if we are
treated as a PFIC either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates
applicable to ordinary income, or if an excess distribution treated as discussed above.
U.S.
Holders should consult their own tax advisors regarding the application of these rules to their investment in our ADSs or ordinary shares
and the elections discussed above.
Tax
on Net Investment Income. Certain U.S. Holders who are individuals, estate and trusts will be required to pay an additional 3.8%
tax on some or all of their “net investment income,” which generally includes their dividend income (including qualified
dividend income) and net gains from the disposition of our ADSs or ordinary shares. U.S. Holders should consult their own tax advisors
regarding the applicability of this additional tax on their particular situation.
Information
with Respect to Foreign Financial Assets. Owners of “specified foreign financial assets” with an aggregate value in excess
of certain thresholds may be required to file an information report with respect to such assets on their tax returns. “Specified
foreign financial assets” may include financial accounts maintained by foreign financial institutions, as well as the following,
but only if they are not held in accounts maintained by financial institutions: (1) stocks and securities issued by non-U.S. persons;
(2) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties; and (3) interests in foreign
entities. U.S. Holders are urged to consult their tax advisors regarding the application of this legislation to their ownership of the
ADSs and ordinary shares.
Information
with Respect to Interests in Passive Foreign Investment Companies (PFICs). If we were to be treated as a PFIC, owners of our ADSs
or ordinary shares (including, potentially, indirect owners) would be required to file an information report with respect to such interest
on their tax returns, subject to certain exceptions. U.S. Holders are urged to consult their tax advisors regarding the application of
these rules to their ownership of the ADSs and ordinary shares.
Backup
Withholding and Information Reporting. Backup withholding and information reporting requirements will generally apply to certain
payments to U.S. Holders of dividends on ADSs or ordinary shares. We, our agent, a broker or any paying agent, may be required to withhold
tax from any payment that is subject to backup withholding unless the U.S. Holder (1) is an exempt payee, or (2) provides the U.S. Holder’s
correct taxpayer identification number and complies with applicable certification requirements. Payments made to U.S. Holders by a broker
upon a sale of our ADSs or ordinary shares will generally be subject to backup withholding and information reporting. If the sale is
made through a non-U.S. office of a non-U.S. broker, however, the sale will generally not be subject to either backup withholding or
information reporting. This exception may not apply if the non-U.S. broker is owned or controlled by U.S. persons, or is engaged in a
U.S. trade or business.
Backup
withholding is not an additional tax. Any amounts withheld from a payment to a U.S. Holder of ADSs or ordinary shares under the backup
withholding rules can be credited against any U.S. federal income tax liability of the U.S. Holder, provided the required information
is timely furnished to the IRS. A U.S. Holder generally may obtain a refund of any amounts withheld under the backup withholding rules
that exceeds the U.S. Holder’s income tax liability by filing a refund claim with the IRS. Prospective investors should consult
their own tax advisors as to their qualification and procedure for exemption from backup withholding.
F.
Dividends and Paying Agents
Not
applicable.
G.
Statement by Experts
Not
applicable.
H.
Documents on Display
We
are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information
with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains an internet site that contains reports,
proxy and information statements and other information regarding issuers that file electronically with the SEC, including us, at http://www.sec.gov.
Our internet address is www.biofrontera.com.
You
may inspect and copy reports and other information filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with
the SEC. The address of that website is www.sec.gov.
With
respect to references made in this annual report to any contract or other document of Biofrontera, such references are not necessarily
complete and you should refer to the exhibits attached or incorporated by reference to this annual report for copies of the actual contract
or document.
I.
Subsidiary Information
Not
applicable
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In
the ordinary course of business, we are exposed to risks that may have an impact on our net assets, financial position and results of
operations. Please see note 15 (Reporting on Financial Instruments) to our consolidated financial statements for additional information.
Market
risk
In
general, Biofrontera’s market risk consists of foreign currency and changes in interest rates.
●
Foreign currency risk: As of the balance sheet date, the Biofrontera Group was exposed to foreign currency risks, in particular as a
result of the intercompany loan granted to the subsidiary Biofrontera Inc. Trade receivables arise to a greater extent than in the past
due to the business expansion in the USA and are regularly reviewed with regard to a potential default risk. Trade payables denominated
in foreign currencies are insignificant. The Company does not enter into any specific currency hedging transactions. Exchange rate fluctuations
are recognized in profit or loss.
Financial
assets and liabilities in foreign currencies amount to €7.8 million in the fiscal year ended December 31, 2020 (previous year: €29.1
million). An exchange rate-related change in the value of financial assets and financial liabilities denominated in foreign currencies
of +5% would result in a change in earnings of €0.4 million in the fiscal year ended December 31, 2020 (previous year: €1.5
million) in the income statement item “Other income and expenses”.
●
Interest rate risk: Interest rate risks exist for the purchase price liability for Cutanea to Maruho and the performance component of
the EIB loan. Otherwise, the interest rate risk is considered negligible, as the existing interest rate modalities for the relevant financing
of the Biofrontera Group can generally be adjusted to market conditions in the short to medium term. For the performance component, a
limit of 4% mitigates the market price risk. An interest rate-related change in the value of the purchase price liability of 1% would
result in a change in interest expense of €1.0 million in the fiscal year ended December 31, 2020 (previous year: €1.0 million).
Purchase
price risk
The
purchase price risk relates to the earn-out provisions in the Share Purchase and Transfer Agreement to acquire Cutanea. For instance,
the current uncertain business outlook due to the COVID-19 pandemic may also affect the future valuation of certain assets and liabilities
of the Company. Reduced sales of Xepi® may thus lead to a different assessment of the medium-term business and earnings outlook for
Xepi® and subsequently to a revaluation of the balance sheet value of such earn-out provisions. A change in the expected gains from
the sale of Xepi® of +5% (-5%) would result in a change in the purchase price liability of € +0.8 million (€ -0.8 million).
Credit
risk
Biofrontera
Group incurs a credit risk if transaction partners are unable to meet their obligations within the ordinary payment periods. The maximum
default risk on the balance sheet is represented by the book value of the respective financial asset. The development of receivables
is monitored in order to identify possible default risks at an early stage and initiate appropriate measures. Biofrontera’s financial
instruments bear minimal risk of default. No specific bad debt allowances were recognized on trade receivables in fiscal year 2020 (previous
year: €43 thousand). Cash and cash equivalents assets are invested with banks and insurance companies with adequate deposit protection.
All financial assets are due in the short term. As in the previous year, there are no material overdue financial assets for the fiscal
year ended December 31, 2020.
Liquidity
risk
Liquidity
risk refers to the inability to meet existing or future payment obligations as they become due. To ensure the ability to pay at all times
and to avoid financial shortages, Biofrontera has established a central cash management system that monitors liquidity requirements in
the short, medium and long term. Refinancing for all Group companies is mainly provided by Biofrontera AG.
Liquidity
is monitored and managed on the basis of short- and long-term corporate planning. Liquidity risks are identified at an early stage by
simulating various scenarios. Current cash and cash equivalents are recorded and monitored on a daily basis.
For
information on the (undiscounted) payments from financial debt due in the next few years and other financial liabilities, please refer
to the corresponding notes on this balance sheet item. All other financial liabilities are current and are expected to be settled within
one year.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not
applicable.
B.
Warrants and Rights
Not
applicable.
C.
Other Securities
Not
applicable.
D.
American Depositary Shares
The
Bank of New York Mellon, as depositary, registers and delivers ADSs. Each ADS represents two shares (or a right to receive two shares)
deposited with The Bank of New York Mellon SA/NV, as custodian for the depositary in Frankfurt. Each ADS also represents any other securities,
cash or other property which may be held by the depositary. The depositary’s office at which the ADSs will be administered is located
at 101 Barclay Street, New York, New York 10286. The Bank of New York Mellon’s principal executive office is located at 225 Liberty
Street, New York, New York 10286.
A
deposit agreement among us, the depositary and the ADS holders sets out the ADS holder rights as well as the rights and obligations of
the depositary. New York law governs the deposit agreement and the ADSs. A copy of the deposit agreement is incorporated by reference
as an exhibit to this annual report.
Fees
and Expenses
Persons
depositing or withdrawing shares or ADS holders must pay:
|
|
For:
|
$5.00
(or less) per 100 ADSs (or portion of 100 ADSs)
|
|
Issuance
of ADSs, including issuances resulting from a distribution of shares or rights or other property
Cancellation
of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
|
|
|
|
$.05
(or less) per ADS
|
|
Any
cash distribution to ADS holders
|
|
|
|
A
fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited
for issuance of ADSs
|
|
Distribution
of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders
|
|
|
|
$.05
(or less) per ADS per calendar year
|
|
Depositary
services
|
Registration
or transfer fees
|
|
Transfer
and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw
shares
|
|
|
|
Expenses
of the depositary
|
|
Cable,
telex and facsimile transmissions (when expressly provided in the deposit agreement)
Converting
foreign currency to U.S. dollars
|
|
|
|
Taxes
and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer
taxes, stamp duty or withholding taxes
|
|
As
necessary
|
|
|
|
Any
charges incurred by the depositary or its agents for servicing the deposited securities
|
|
As
necessary
|
The
depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the
purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting
those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect
its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry
system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable
(or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary
may generally refuse to provide fee-attracting services until its fees for those services are paid.
The
depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and
not as agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction
spreads, that it will retain for its own account. The revenue is based on, among other things, the difference between the exchange rate
assigned to the currency conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when
buying or selling foreign currency for its own account. The depositary makes no representation that the exchange rate used or obtained
in any currency conversion under the deposit agreement will be the most favorable rate that could be obtained at the time or that the
method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s obligations
under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is available upon request.
Depositary
Payments
From
time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and
maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary, or share revenue from the fees
collected from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency
dealers or other service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Shareholders
Biofrontera
AG
Opinion
on the financial statements
We
have audited the accompanying consolidated balance sheets of Biofrontera AG and subsidiaries (the “Company”) as of
December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes in shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, in conformity with International Financial Reporting Standards
as issued by the International Accounting Standards Board.
Basis
for opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We
have served as the Company’s auditor since 2007.
Düsseldorf,
Germany
April
12, 2021
Consolidated
financial statements as of December 31, 2020
Consolidated
balance sheet as of December 31, 2020 and 2019
Assets
in EUR thousands
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
|
(1
|
)
|
|
|
5,051
|
|
|
|
5,231
|
|
Intangible assets
|
|
|
(1
|
)
|
|
|
17,688
|
|
|
|
22,848
|
|
Deferred tax
|
|
|
(8
|
)
|
|
|
7,525
|
|
|
|
7,794
|
|
Total non-current assets
|
|
|
|
|
|
|
30,264
|
|
|
|
35,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(3
|
)
|
|
|
3,501
|
|
|
|
5,031
|
|
Other financial assets
|
|
|
(4
|
)
|
|
|
531
|
|
|
|
1,077
|
|
Cash and cash equivalents
|
|
|
(7
|
)
|
|
|
16,546
|
|
|
|
11,119
|
|
Total financial assets
|
|
|
|
|
|
|
20,579
|
|
|
|
17,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(2
|
)
|
|
|
4,673
|
|
|
|
4,065
|
|
Income tax
|
|
|
(6
|
)
|
|
|
5
|
|
|
|
4
|
|
Other assets
|
|
|
(5
|
)
|
|
|
869
|
|
|
|
1,195
|
|
Total other assets
|
|
|
|
|
|
|
5,547
|
|
|
|
5,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
26,126
|
|
|
|
22,491
|
|
Total assets
|
|
|
|
|
|
|
56,391
|
|
|
|
58,363
|
|
Equity
and liabilities
in EUR thousands
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Equity
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Subscribed capital
|
|
|
|
|
|
|
47,748
|
|
|
|
44,849
|
|
Capital reserve
|
|
|
|
|
|
|
123,493
|
|
|
|
118,103
|
|
Reserve from foreign currency conversion adjustments
|
|
|
|
|
|
|
1,866
|
|
|
|
(289
|
)
|
Loss carried forward
|
|
|
|
|
|
|
(152,709
|
)
|
|
|
(145,351
|
)
|
Loss for the period
|
|
|
|
|
|
|
(13,023
|
)
|
|
|
(7,358
|
)
|
Total equity
|
|
|
|
|
|
|
7,375
|
|
|
|
9,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial debt
|
|
|
(10
|
)
|
|
|
22,736
|
|
|
|
22,110
|
|
Other financial liabilities
|
|
|
(11
|
)
|
|
|
17,994
|
|
|
|
14,721
|
|
Total non-current liabilities
|
|
|
|
|
|
|
40,730
|
|
|
|
36,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
|
(12
|
)
|
|
|
1,623
|
|
|
|
4,196
|
|
Current financial debt
|
|
|
(10
|
)
|
|
|
1,139
|
|
|
|
1,212
|
|
Other financial liabilities
|
|
|
(11
|
)
|
|
|
90
|
|
|
|
99
|
|
Total financial liabilities
|
|
|
|
|
|
|
2,852
|
|
|
|
5,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
11
|
|
Other provisions
|
|
|
(13
|
)
|
|
|
3,042
|
|
|
|
3,495
|
|
Other liabilities
|
|
|
(14
|
)
|
|
|
2,392
|
|
|
|
2,565
|
|
Total other liabilities
|
|
|
|
|
|
|
5,434
|
|
|
|
6,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
8,286
|
|
|
|
11,579
|
|
Total equity and liabilities
|
|
|
|
|
|
|
56,391
|
|
|
|
58,363
|
|
Consolidated
statement of comprehensive income
in EUR thousands
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Sales revenue
|
|
|
(16
|
)
|
|
|
30,346
|
|
|
|
31,265
|
|
|
|
21,107
|
|
Cost of sales
|
|
|
(17
|
)
|
|
|
(3,536
|
)
|
|
|
(4,875
|
)
|
|
|
(4,451
|
)
|
Gross profit from sales
|
|
|
|
|
|
|
26,810
|
|
|
|
26,390
|
|
|
|
16,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development costs
|
|
|
(18
|
)
|
|
|
(4,789
|
)
|
|
|
(4,636
|
)
|
|
|
(4,427
|
)
|
General administrative costs
|
|
|
(19
|
)
|
|
|
(9,150
|
)
|
|
|
(16,275
|
)
|
|
|
(12,963
|
)
|
Sales costs
|
|
|
(20
|
)
|
|
|
(20,482
|
)
|
|
|
(28,856
|
)
|
|
|
(17,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Result from operations
|
|
|
|
|
|
|
(7,611
|
)
|
|
|
(23,377
|
)
|
|
|
(18,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest expenses
|
|
|
(21
|
)
|
|
|
(546
|
)
|
|
|
(245
|
)
|
|
|
(170
|
)
|
Interest expenses
|
|
|
(21
|
)
|
|
|
(2,534
|
)
|
|
|
(2,466
|
)
|
|
|
(1,614
|
)
|
Interest income
|
|
|
(21
|
)
|
|
|
411
|
|
|
|
127
|
|
|
|
24
|
|
Other expenses
|
|
|
(22
|
)
|
|
|
(3,836
|
)
|
|
|
(799
|
)
|
|
|
(332
|
)
|
Other income
|
|
|
(22
|
)
|
|
|
1,417
|
|
|
|
7,171
|
|
|
|
1,301
|
|
Other income from the PPA (Badwill)
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
14,812
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit/loss before income tax
|
|
|
|
|
|
|
(12,697
|
)
|
|
|
(4,777
|
)
|
|
|
(19,269
|
)
|
Income tax
|
|
|
(23
|
)
|
|
|
(326
|
)
|
|
|
(2.581
|
)
|
|
|
10,391
|
|
Profit/loss for the period
|
|
|
|
|
|
|
(13,023
|
)
|
|
|
(7,358
|
)
|
|
|
(8,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items which may in future be regrouped
into the profit and loss statement under certain conditions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation differences resulting from the conversion of foreign business operations
|
|
|
|
|
|
|
2,155
|
|
|
|
(286
|
)
|
|
|
(702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total profit/loss for the period
|
|
|
|
|
|
|
(10,868
|
)
|
|
|
(7,644
|
)
|
|
|
(9,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/diluted earnings per share
|
|
|
(24
|
)
|
|
|
(0.24
|
)
|
|
|
(0.16
|
)
|
|
|
(0.20
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
Consolidated
statement of changes in equity for each of the three years ended December 31, 2020, 2019 and 2018
|
|
|
|
Ordinary shares
|
|
|
Subscribed
capital
|
|
|
Capital
reserve
|
|
|
Reserve from
foreign currency
conversion adjustments (OCI)
|
|
|
Loss carried forward
Loss for the period
|
|
|
Total
|
|
|
|
|
|
Number of shares
|
|
|
in EUR thousands
|
|
|
in EUR thousands
|
|
|
in EUR thousands
|
|
|
in EUR thousands
|
|
|
in EUR thousands
|
|
Balance as of January 1, 2018
|
|
|
|
|
38,416,828
|
|
|
|
38,417
|
|
|
|
100,769
|
|
|
|
700
|
|
|
|
(136,505
|
)
|
|
|
3,381
|
|
Loss for the period
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,878
|
)
|
|
|
(8,878
|
)
|
Foreign currency conversion
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(702
|
)
|
|
|
-
|
|
|
|
(702
|
)
|
Total loss for the period
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(702
|
)
|
|
|
(8,878
|
)
|
|
|
(9,580
|
)
|
Capital Increase
|
|
|
|
|
6,000,000
|
|
|
|
6,000
|
|
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,000
|
|
Conversion from convertible bond 2016/2021
|
|
|
|
|
6,874
|
|
|
|
7
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Conversion from convertible bond 2017/2022
|
|
|
|
|
13,472
|
|
|
|
13
|
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
Conversion of stock options from the stock option program
|
|
|
|
|
195,500
|
|
|
|
195
|
|
|
|
433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
628
|
|
Costs of equity procurement
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,432
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,432
|
)
|
Increase in capital reserve from the stock option program
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262
|
|
Balance as of December 31, 2018
|
|
(9)
|
|
|
44,632,674
|
|
|
|
44,632
|
|
|
|
117,109
|
|
|
|
(2
|
)
|
|
|
(145,383
|
)
|
|
|
16,356
|
|
First-time application of IFRS 16
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
Balance as of January 1, 2019
|
|
|
|
|
44,632,674
|
|
|
|
44,632
|
|
|
|
117,109
|
|
|
|
(2
|
)
|
|
|
(145,351
|
)
|
|
|
16,388
|
|
Loss for the period
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,358
|
)
|
|
|
(7,358
|
)
|
Foreign currency conversion
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(286
|
)
|
|
|
-
|
|
|
|
(286
|
)
|
Total loss for the period
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(286
|
)
|
|
|
(7,358
|
)
|
|
|
(7,644
|
)
|
Conversion from convertible bond 2017/2022
|
|
|
|
|
118,841
|
|
|
|
119
|
|
|
|
429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
548
|
|
Conversion of stock options from the stock option program
|
|
|
|
|
97,850
|
|
|
|
98
|
|
|
|
207
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305
|
|
Costs of equity procurement
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Increase in capital reserve from the stock option program
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360
|
|
Balance as of December 31, 2019
|
|
(9)
|
|
|
44,849,365
|
|
|
|
44,849
|
|
|
|
118,103
|
|
|
|
(288
|
)
|
|
|
(152,709
|
)
|
|
|
9,955
|
|
Balance as of January 1, 2020
|
|
(9)
|
|
|
44,849,365
|
|
|
|
44,849
|
|
|
|
118,103
|
|
|
|
(288
|
)
|
|
|
(152,709
|
)
|
|
|
9,955
|
|
Loss for the period
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,023
|
)
|
|
|
(13,023
|
)
|
Foreign currency conversion
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,155
|
|
|
|
-
|
|
|
|
2,155
|
|
Total loss for the period
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,155
|
|
|
|
(13,023
|
)
|
|
|
(10,868
|
)
|
Conversion from convertible bond 2020/2021
|
|
|
|
|
2,638,150
|
|
|
|
2,638
|
|
|
|
5,179
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,817
|
|
Conversion of stock options from the stock option program
|
|
|
|
|
260,000
|
|
|
|
260
|
|
|
|
325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
585
|
|
Cost of equity procurement
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(407
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(407
|
)
|
Increase in capital reserve from the stock option program
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293
|
|
Balance as of December 31, 2020
|
|
(9)
|
|
|
47,747,515
|
|
|
|
47,748
|
|
|
|
123,493
|
|
|
|
1,867
|
|
|
|
(165,732
|
)
|
|
|
7,375
|
|
Consolidated
cash flow statement for each of the three years ended December 31, 2020, 2019 and 2018
in EUR thousands
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cashflows from operations
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
|
|
(12,697
|
)
|
|
|
(4,777
|
)
|
|
|
(19,269
|
)
|
Adjustments to reconcile loss before income tax to cash flow into operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
|
|
|
(57
|
)
|
|
|
36
|
|
|
|
(9
|
)
|
Financial result
|
|
|
|
|
2,669
|
|
|
|
2,658
|
|
|
|
1,784
|
|
Depreciation
|
|
|
|
|
5,333
|
|
|
|
3,156
|
|
|
|
754
|
|
Other non-current provisions
|
|
|
|
|
-
|
|
|
|
(1,545
|
)
|
|
|
1,545
|
|
Losses from disposal of assets
|
|
|
|
|
(85
|
)
|
|
|
386
|
|
|
|
5
|
|
Non-cash (income) and expenses
|
|
|
|
|
3,771
|
|
|
|
(15,334
|
)
|
|
|
(328
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
|
|
1,514
|
|
|
|
(673
|
)
|
|
|
(1,836
|
)
|
Other assets and income tax assets
|
|
|
|
|
871
|
|
|
|
3,044
|
|
|
|
(149
|
)
|
Inventories
|
|
|
|
|
(1,023
|
)
|
|
|
(148
|
)
|
|
|
368
|
|
Trade payables
|
|
|
|
|
(2,573
|
)
|
|
|
596
|
|
|
|
185
|
|
Provisions
|
|
|
|
|
(563
|
)
|
|
|
710
|
|
|
|
2,366
|
|
Other liabilities
|
|
|
|
|
(9
|
)
|
|
|
(21,003
|
)
|
|
|
1,150
|
|
Net cash flow used in operational activities
|
|
|
|
|
(2,849
|
)
|
|
|
(32,894
|
)
|
|
|
(13,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investment activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible and tangible assets
|
|
|
|
|
(774
|
)
|
|
|
(1,854
|
)
|
|
|
(513
|
)
|
Business combinations (incl. cash and start-up costs)
|
|
|
|
|
3,547
|
|
|
|
22,814
|
|
|
|
-
|
|
Proceeds from sale of intangible and tangible assets
|
|
|
|
|
100
|
|
|
|
93
|
|
|
|
2
|
|
Net cash flow used in investment activities
|
|
|
|
|
2,873
|
|
|
|
21,053
|
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issue of shares
|
|
|
|
|
7,914
|
|
|
|
-
|
|
|
|
24,000
|
|
Costs of equity procurement
|
|
|
|
|
(406
|
)
|
|
|
(3
|
)
|
|
|
(1,768
|
)
|
Proceeds from draw down of EIB loan
|
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
Proceeds from exercise of employee stock options
|
|
|
|
|
585
|
|
|
|
305
|
|
|
|
628
|
|
Leasing payments
|
|
|
|
|
(1,363
|
)
|
|
|
(1,183
|
)
|
|
|
-
|
|
Interest paid
|
|
|
|
|
(782
|
)
|
|
|
(664
|
)
|
|
|
(536
|
)
|
Net cash flows provided by financing activities
|
|
|
|
|
5,948
|
|
|
|
3,455
|
|
|
|
22,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
|
|
5,972
|
|
|
|
(8,386
|
)
|
|
|
8,329
|
|
Changes from exchange rate differences
|
|
|
|
|
(545
|
)
|
|
|
54
|
|
|
|
39
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
|
|
11,119
|
|
|
|
19,451
|
|
|
|
11,083
|
|
Cash and cash equivalents at the end of the period
|
|
(28)
|
|
|
16,546
|
|
|
|
11,119
|
|
|
|
19,451
|
|
Notes
to the consolidated financial statements as of December 31, 2020
Information
about the Company
Biofrontera
AG (www.biofrontera.com), registered in the commercial register of Cologne District Court, Department B under No. 49717, together
with its wholly owned subsidiaries Biofrontera Bioscience GmbH, Biofrontera Pharma GmbH, Biofrontera Development GmbH, Biofrontera
Neuroscience GmbH, all with head office at Hemmelrather Weg 201, 51377 Leverkusen, Germany, as well as the Spanish branch operation
Biofrontera Pharma GmbH sucursal en España based in Cornellá de Llobregat, and Biofrontera Inc., which is based
in Woburn, Massachusetts, U.S., research, develop and market dermatological products.
Summary
of significant accounting policies
Basis
for preparation of the consolidated financial statements
The
consolidated financial statements for Biofrontera AG for the financial year from January 1, 2020 to December 31, 2020 have been
prepared in accordance with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board
(IASB) and the interpretations of the International Financial Reporting Standards Interpretations Committee (IFRS IC) as issued
by the IASB, which are applicable on the balance sheet date.
The
consolidated financial statements are prepared on a going concern basis.
Biofrontera
AG is the parent company, which prepares consolidated financial statements for the group companies.
The
consolidated financial statements as of December 31, 2020 are presented in euros (EUR) or thousands of euros. Rounding differences
can arise in the tables due to commercial rounding.
On
April 12, 2021, the Management Board approved the consolidated financial statements for the financial year ending December 31,
2020 for publication and forwarding to the Supervisory Board.
Special
events in the 2020 financial year
Impact
of the COVID-19 pandemic
The
reporting year 2020 was defined by the impact of the coronavirus pandemic. In the reporting period from January 1 to December
31, 2020, Biofrontera was directly affected by the global coronavirus crisis from mid-March and had to accept lower sales figures
as a result, especially in the USA. Due to the down payment of the Japanese Maruho Co., Ltd. (Maruho), the fully placed convertible
bond 2020/2021 in August 2020, and cost-saving measures introduced at an early stage, the Company was able to successfully counteract
the negative effects on the sales side.
The
coronavirus crisis has led to a declining number of treatments and thus to sharp declines in sales, particularly in our most important
sales market, the United States. On March 20, 2020, i.e. shortly after the pandemic spread of the virus became known, the Company
therefore announced that it would take comprehensive preventive measures to reduce and control costs.
While
these cost reduction measures were in place, the Company was able to ensure full compliance with all medical and capital regulatory
requirements without interruption, as well as meeting all disclosure obligations at all times.
The
continued difficult business outlook due to the COVID-19 crisis has affected the valuation of certain assets and liabilities of
the Company. During the crisis, the sales strategy in the U.S. market has focused on our flagship product Ameluz® and the
envisioned re-launch to better position our in-licensed product Xepi® had to be delayed. The reduced sales of Xepi® have
led to a reassessment of the medium-term business and earnings prospects for Xepi® and thus to an impairment of the Xepi®
license in the first quarter of 2020. To a minor extent, inventories were written down as of December 31, 2020 due to an expected
expiration of shelf life. Beyond this, no significant risks have arisen in relation to financial instruments, in particular no
unusual bad debt events.
Subscription
offers for mandatory convertible bonds
The
issuance of up to 1,600,000 units of a 0.5% qualified subordinated mandatory convertible bond 2020/2024 and the issuance of up
to 1,600,000 units of a 1.00% qualified subordinated mandatory convertible bond 2020/2026, which were resolved on February 26,
2020, were withdrawn in March 2020 due to the turmoil on the capital markets caused by the coronavirus crisis and were not executed.
To
ensure liquidity in the short term, Biofrontera issued a 1.0% qualified subordinated mandatory convertible bond 2020/2021 in August
2020. The issuance was fully placed with gross proceeds of EUR 7.9 million. On November 12, 2020, the Company announced that it
would exercise its right to mandatory conversion in accordance with section 8 (2) of the bond terms and conditions, which was
subsequently implemented in the reporting year.
Taking
into account the capital measure carried out in February 2021 with gross issue proceeds of EUR 24.7 million, the Biofrontera Group
currently has sufficient liquidity to continue financing its business operations for at least 12 months.
Changes
in accounting standards
The
accounting policies applied are consistent with those applied on December 31, 2019, with the exception of the new and revised
standards and interpretations described below that were applied for the first time starting with the 2020 financial year.
Standard
|
|
Description
|
|
Mandatory application
|
|
Expected effects
|
Amendment to IAS 1
|
|
“Presentation of financial statements”
|
|
January 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IAS 8
|
|
“Accounting policies, changes in accounting estimates and errors” “Definition of material”
|
|
January 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 3
|
|
“Business combinations”
|
|
January 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 9
|
|
“Financial instruments”
|
|
January 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 7
|
|
“Financial instruments: Disclosures”
|
|
January 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IAS 39
|
|
“Financial instruments: Recognition and measurement”
|
|
January 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 16
|
|
“Leases”
|
|
June 1, 2020
|
|
No effects
|
|
|
|
|
|
|
|
Amendments to References to the Conceptual Framework
|
|
References to the Conceptual Framework
|
|
January 1, 2020
|
|
No effects
|
Future
changes in accounting standards
Biofrontera
has not implemented early adoption or does not intend to implement early adoption of the following standards, interpretations
and amendments to the set of regulations approved by the IASB:
Standard
|
|
Description
|
|
Mandatory application
|
|
Expected effects
|
Amendment to IFRS 3
|
|
“Business combinations” References to the Conceptual Framework
|
|
January 1, 2022
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 17
|
|
Insurance contracts
|
|
January 1, 2023
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 4 and IFRS 9
|
|
IFRS 4 “Insurance contracts”, postponement of the application of IFRS 9
|
|
January 1, 2021
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IFRS 4,7,9,16 and IAS 39
|
|
IFRS 9 “Financial instruments”, IFRS 4 “insurance contracts” IFRS 7 “Financial instruments: Disclosures”, IFRS 16 “Leases”, IAS 39 “Financial instruments: Recognition and measurement” Interest rate benchmark reform (phase 2)
|
|
January 1, 2021
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IAS 16
|
|
“Property, plant and equipment”: Revenues before the intended use
|
|
January 1, 2022
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IAS 1
|
|
“Presentation of financial statements” Classification of liabilities as current or non-current; disclosure of accounting policies
|
|
January 1, 2023
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IAS 37
|
|
“Provisions, contingent liabilities and contingent assets”: Adverse contracts - costs of contract fulfillment
|
|
January 1, 2022
|
|
No effects
|
|
|
|
|
|
|
|
Amendment to IAS 8
|
|
“Accounting Policies, Changes in Accounting Estimates and Errors”: Definition of accounting estimates
|
|
January 1, 2022
|
|
No effects
|
|
|
|
|
|
|
|
Annual Improvements to IFRSs
|
|
Annual improvements to IFRSs
Cycle 2018-2020
|
|
January 1, 2022
|
|
No effects
|
Basis
of consolidation
The
consolidated financial statements for the financial year ending December 31, 2020 include the financial statements of the parent
company, Biofrontera AG, and the subsidiary companies in which the parent has a direct majority of the voting rights. The following
companies have been included in the consolidated financial statements. The shareholdings are unchanged from the previous year:
|
1.
|
Biofrontera
Bioscience GmbH, Leverkusen, Germany, with a direct interest of 100%
|
|
2.
|
Biofrontera
Pharma GmbH, Leverkusen, Germany, with a direct interest of 100%
|
|
3.
|
Biofrontera
Development GmbH, Leverkusen, Germany, with a direct interest of 100%
|
|
4.
|
Biofrontera
Neuroscience GmbH, Leverkusen, Germany, with a direct interest of 100%
|
|
5.
|
Biofrontera
Inc., Woburn, Massachusetts, U.S., with a direct interest of 100%
|
The
basis for the consolidation of the companies included in the consolidated financial statements are the financial statements (or
HBII pursuant to IFRS) of these companies prepared for December 31, 2020 pursuant to uniform principles. The consolidated financial
statements as of December 31, 2020 have been prepared on the basis of uniform accounting policies (IFRS).
The
subsidiaries have been fully consolidated from the date of acquisition. The date of acquisition is the date when the parent company
obtained control of these subsidiaries. The subsidiaries are included in the consolidated financial statements until control over
these companies no longer exists.
All
intercompany receivables and liabilities as well as income and expenses were eliminated in the course of consolidation. Intercompany
results were eliminated.
Translation
of amounts in foreign currencies
The
consolidated financial statements as of December 31, 2020 have been prepared in EUR (or thousands of EUR), which is the functional
currency of all the German companies included in the consolidated financial statements and is the Group’s reporting currency.
For
subsidiaries with a functional currency that is the local currency of the country in which they have their registered office,
the assets and liabilities that are recognized in the foreign currency on the balance sheets of the foreign, economically independent
subsidiaries, are converted to euros applying the relevant period-end exchange rate (2020: 1.2230 USD/EUR, previous year 1.1227
USD/EUR). Income and expense items are translated applying the average exchange rates applicable to the relevant period (2020:
1.1410 USD/EUR, previous year: 1.1194 USD/EUR). The differences resulting from the valuation of equity at historical rates and
applying the period-end exchange rates are reported as a change not affecting profit or loss and carried directly to equity within
the other equity components (2020: EUR 2,155 thousand, previous year: EUR (286) thousand).
Transactions
realized in currencies other than EUR are reported using the exchange rate on the date of the transaction. Assets and liabilities
are translated applying the closing exchange rate for each balance sheet date. Gains and losses resulting from such translation
are recognized in the income statement as a loss in the amount of EUR (3,601) thousand (previous year: gain of EUR 324 thousand).
Application
of estimates
The
preparation of the consolidated financial statements for December 31, 2020 in accordance with IFRS required the use of estimates
and assumptions by the management that affect the value of assets and liabilities as reported on the balance sheet date, and revenues
and expenses arising during the financial year.
Main
areas of application for significant assumptions, estimates and the exercise of discretion arise for the following matters:
|
●
|
Fair
value measurement under IFRS 13 in relation to the determination of the fair value of the purchase price liability for Cutanea.
|
According
to the earn-out agreement of the purchase agreement for the acquisition of the shares in Cutanea Life Sciences, Inc. the profits
from the sale of the Cutanea products will be split equally between Maruho and Biofrontera until 2030. The expected annual purchase
price payments will be due depending on future profits generated from the sale of Xepi®. In determining the future purchase
price payments, management has to make assumptions and estimates about the future expected profits from the sale of Xepi®
as well as a determination of the cost of capital.
|
●
|
Assessment
of the recoverability of non-current assets
|
Biofrontera
is required to assess external and internal sources of information for non-current assets that are subject to amortization, based
on which possible indications of impairment or reversal of impairment can be identified. When assessing whether there are indications
of impairment or a reversal of impairment losses and - if such indications exist - when determining the fair values required in
this case as part of an impairment test, management must make assumptions and estimates about the expected future cash flows from
the use of the non-current assets and a determination of the cost of capital.
Biofrontera
is required to calculate the expected current income tax for each group company, as well as to assess temporary differences arising
from the different treatment of certain balance sheet items between the IFRS consolidated financial statements and the financial
statements prepared for tax purposes. Where temporary differences exist, these generally result in the recognition of deferred
tax assets and liabilities in the consolidated financial statements. Management must make assumptions and estimates when calculating
actual and deferred taxes. The recognition of deferred tax assets of Biofrontera AG is subject to higher requirements due to the
loss history. Deferred tax assets are only recognized if it can be substantiated that taxable profits will be generated in the
future and that it is then probable that the deferred tax item to be capitalized can be offset against future taxable profits.
In order to assess the probability of the future utilization of deferred tax assets, various factors have to be taken into account,
such as the earnings situation in the past and operational planning. If actual results differ from these estimates, or if these
estimates have to be adjusted in future periods, this could have an adverse effect on the Group’s net assets, financial
position and results of operations. If there is a change in the assessment of the recoverability of deferred tax assets, the recognized
deferred tax assets - in accordance with the original recognition - are to be written down through profit or loss or recognized
directly in equity, or impaired deferred tax assets are to be recognized through profit or loss or directly in equity.
|
●
|
Provisions
for litigation risks
|
Provisions
are recognized for pending legal proceedings on the basis of current estimates. The outcome of the legal proceedings cannot be
determined or is subject to uncertainties. In assessing the risks arising from litigation, management must make assumptions and
estimates as to whether and to what extent provisions for litigation risks should be recognized. Actual claims arising from legal
proceedings may therefore differ from the amounts accrued.
|
●
|
Estimates
in connection with financial instruments
|
Estimates
are made to determine fair values in connection with the measurement of the performance component of the EIB loans and the liabilities
from the stock appreciation program. The determination requires management to make assumptions regarding the valuation models
used as well as a determination of the cost of capital.
At
Biofrontera, research and development costs include expenses for clinical trials as well as for the granting, maintenance and
extension of approvals. For the approved drug Ameluz® as well as for the other research and development projects, with the
exception of the further development of the new BF-RhodoLED® XL red light lamp, research and development costs are recognized
as expenses in the period in which they are incurred. In the opinion of management, the criteria prescribed by IAS 38.57 for the
recognition of development costs as assets are not met due to the uncertainties associated with the development of new products
by the Biofrontera Group until approval in the target markets has been obtained and it is probable that future economic benefits
will flow to the Company.
The
BF-RhodoLED® XL red light lamp is a further development of the existing lamp, from which Biofrontera expects a future economic
benefit.
Estimates
are based on experience and other assumptions that are believed to be reasonable under the circumstances. They are reviewed on
an ongoing basis, but may differ from actual values.
Changes
in previous estimates due to the impact of the COVID-19 pandemic have occurred with regard to the valuation of the Xepi® license,
the purchase price payment from the earn-out agreement with Maruho and the EIB loan.
The
expected income from the sale of Xepi® and, consequently, the expected annual purchase price payments were reestimated as
of March 30, 2020, due to the current market situation influenced by the COVID-19 pandemic and resulting time shifts in the market
penetration of Xepi®. This resulted in an impairment of the Xepi® license and a reduction of the nominal amount of the
expected purchase price payment. As a result of the significant decrease in market capitalization in 2020, there was a reduction
in the performance component of the EIB loan recognized in income.
The
carrying amounts of the items affected by estimates can be found in the respective explanations of the items in the notes to the
consolidated financial statements.
Tangible
assets and leases
Pursuant
to IAS 16, tangible assets are recognized on the balance sheet at historical acquisition and production cost less scheduled depreciation.
Depreciation of tangible assets is generally applied straight-line over the estimated useful life of assets (generally three to
thirteen years). The main useful lives are unchanged:
|
■
|
IT
equipment 3 years, straight-line
|
|
■
|
Other
Fixtures and equipment 4 years, straight-line
|
|
■
|
Office
and laboratory facilities 10 years, straight-line
|
|
■
|
Laboratory
devices 13 years, straight-line
|
Low
value assets with purchase costs of between EUR 250 and EUR 1,000 have been booked to the year of acquisition as a single item
for the relevant year and are fully depreciated over five years.
Biofrontera
is a lessee mainly for buildings and vehicles used for operational and administrative purposes. The leasing liability to be carried
as a liability is calculated as the present value of the payments that are highly likely to be made to the lessee. They are updated
using the so-called effective interest method. The right of use of the underlying asset to be recognized in return is measured
at cost at the beginning of the lease. In addition to the lease payments, any initial direct costs of the lessee and dismantling
costs are included in the calculation. Incentive payments made by the lessor are deducted. The activated right of use is to be
depreciated on a scheduled basis and tested for impairment if there is any indication of impairment.
The
main useful lives of leases are determined by the term of the agreement and are as follows
|
■
|
Motor
vehicles 3 years, straight-line
|
|
■
|
Buildings
6 years, linear
|
Future
lease payments are to be discounted at the lessor’s imputed interest rate or, if this is not available, at the marginal
interest rate on the date of first application.
For
expenses from leases with a remaining term of no more than one year and from leases with a low value, Biofrontera has decided
to make use of the simplification of IFRS 16.6 and to treat the monthly leasing instalments unchanged compared with the accounting
according to IAS 17 immediately as income.
Intangible
assets
Purchased
software is recognized at cost less amortization applied straight-line over a three-year useful life.
Purchased
intangible assets consist of licenses and other rights. They are recognized at cost less accumulated amortization. These intangible
assets are capitalized as assets and generally amortized straight-line over an estimated useful life of between 4 and 12 years.
Intangible
assets under development relate to the further development of the BF-RhodoLED®. Furthermore, no development costs
are capitalized, as the requirements for the recognition of internally generated intangible assets are not met.
No
intangible assets exist with indefinite useful lives.
Borrowing
costs are not recognized as part of the purchase cost of the acquired assets but are instead expensed in the period in which they
arise, as the Group has no material qualifying assets in the meaning of IAS 23.5.
Impairment
of assets
The
Company tests non-current tangible and intangible assets for impairment when indications exist that the carrying amount of an
asset exceeds its recoverable amount. A possible impairment loss on assets held for use is determined by comparing its carrying
amount with the future cash flows expected to be generated by the asset. An impairment loss to be recognized is measured by Biofrontera
at the amount by which the carrying amount of the asset exceeds its recoverable amount.
Financial
assets
Financial
assets are recognized as assets in the event that Biofrontera has a contractual right to receive cash or other financial assets
from another party. Customary purchases and sales of financial assets are generally recognized on the settlement date. Financial
assets are allocated to the category “Held” and are valued at amortized cost. Non-interest-bearing or low-interest
receivables are recognized at cash value.
Impairment
of financial assets
Biofrontera
calculates the credit risk of trade receivables as the probability-weighted amount of the expected shortfall in payments compared
to the contractual payment claims. In addition to individual factors, the basis for estimating expected credit losses is the general
experience of collecting receivables in the past. The Company adjusts the fixed allowance rates derived from them, based on the
extent of aged receivables, in the event of significant changes in the economic environment.
Trade
receivables
Trade
receivables are reported at their nominal value. Any value adjustments are booked directly against the relevant receivable.
Cash
and cash equivalents
Cash
and cash equivalents include cash in hand, cheques and bank deposits with a term of up to three months at the time of acquisition,
as well as current financial assets. These are valued at amortized cost.
Non-financial
assets
Non-financial
assets are valued at cost.
Inventories
Raw
materials and supplies, as well as finished and unfinished goods, are recognized at the lower of cost or net realizable value.
Borrowing costs are not capitalized. Cost is calculated applying the first-in-first-out method (FIFO). A value adjustment is made
to the inventories on the balance sheet date if the net realizable value is lower than the carrying amount. BF-RhodoLED®,
which are carried for sales activities in the Company’s own inventory are recognized at a fixed value.
Financial
liabilities
Financial
liabilities include original liabilities, with the exception of the embedded derivative that was separated from the EIB loan (the
so-called performance component). Original liabilities are recognized if there is a contractual obligation to transfer cash or
other assets to another party. The initial recognition of original financial liability is at fair value. In subsequent valuations
of financial liabilities valued at amortized cost, any discounts between the amount received and the repayment amount are spread
over the term using the effective interest method.
The
financial liabilities of the performance component measured at fair value and the purchase price liability (earn-out) included
in other financial liabilities are allocated to the category “Financial liabilities at fair value through profit or loss”.
The
valuation of the purchase price liability from the earn-out agreement was based on term-specific cost of capital rates ranging
from 8.27% to 8.74% (previous year: from 9.39% to 9.53%).
Trade
payables
Trade
payables, as well as liabilities from current accounts and other liabilities are recognized at their redemption amount. Due to
their short-term nature, the reported carrying amount reflects the fair value.
Convertible
bonds
The
convertible bond is a so-called compound financial instrument, which must be divided into the components debt (bond) and equity
(conversion right) on initial recognition. The liability component (bond) must be recognized at its fair value at the time the
contract is concluded. The fair value is determined by discounting the contractually agreed future payments at an interest rate
customary for a comparable bond without conversion right. In this context, the default risk of the issuer must also be taken into
account. The equity component (conversion right) is calculated as the difference between the proceeds of the issue and the present
value of the liability (equity derivative, residual value method).
In
subsequent accounting for the convertible bond, a distinction is made as follows: The liability component is subsequently valued
at amortized cost using the effective interest method. The equity component is not subject to subsequent valuation.
EIB
loan with an embedded derivative requiring separation
The
loan contains three different interest components: 1) a variable interest component, entailing quarterly interest payments on
the outstanding amounts based on 3-month EURIBOR plus a risk premium; 2) a fixed component at 6% per annum which is due at term-end,
and 3) a performance component which is due at the term-end, and whose level is derived from the market capitalization of Biofrontera
AG but limited to a 4% per annum interest rate.
The
loan is carried forward at amortized purchase cost applying the effective interest method.
The
performance component represents a separable financial instrument in the form of an embedded derivative, which is measured at
fair value on each reporting date and is to be classified to a fair value hierarchy of level 3. The market capitalization at maturity
is the same as that of the measurement cut-off date, which is based on the 90 trade days preceding the measurement cut-off date.
The performance-based interest payment for the tranches received is calculated based on a notional participation rate in the market
capitalization (the so-called notional equity proportion). This is discounted to the valuation date applying a market interest
rate of 2.93% (previous year: 12.33%) for the 2017 EIB loan and 3.26% (previous year: 10.63%) for the 2019 EIB loan. The overall
valuation effect on the performance component resulting from the change in interest rates is immaterial.
Non-financial
liabilities
Non-financial
liabilities are carried at the repayment amount.
Provisions
Provisions
are formed if an obligation to third parties resulting from a past event exists and is likely to result in an outflow of assets
in the future, and if the effect on assets can be reliably estimated.
Stock
options
Stock
options (equity-settled share-based payments) are valued at the fair value on the date of granting. The fair value of the obligation
is capitalized as a personnel expense over the retention period. Obligations relating to cash-settled share-based payment transactions
are recognized as liabilities and are measured at the fair value on the balance sheet date. In the event that Biofrontera AG has
the right to choose between payment in cash or payment using shares when a right is exercised, an increase in the capital reserve
is initially performed pursuant to IFRS 2.41 and IFRS 2.43. The costs are recognized over the vesting period. The fair value of
both cash-settled and equity-settled share-based payment transactions is generally determined using a generally accepted valuation
model.
Stock
Appreciation Rights
The
obligations under Biofrontera’s stock appreciation rights program are cash-settled share-based payments that are recognized
at fair value. Changes in fair value during the term are recognized in profit or loss. The fair value is determined using internationally
recognized valuation techniques.
Income
tax
In
accordance with IAS 12, Biofrontera recognizes deferred taxes for valuation differences between IFRS valuation and tax law valuation.
Deferred tax liabilities are generally recognized for all taxable temporary differences.
The
recognition of deferred tax assets is subject to higher requirements due to the loss history. Deferred tax assets are only recognized
if there are substantial indications that future taxable profits will be generated and that the deferred tax item to be recognized
can be expected to be offset against future taxable profits.
The
carrying amount of deferred income tax assets is reviewed on each balance sheet date and reduced to the extent that it is not
probable that sufficient taxable profit will be available against which the deferred tax claim can be at least partially utilized.
Previously unrecognized deferred income tax assets are reassessed on each balance sheet date and are recognized to the extent
that it is probable from a current perspective that sufficient future taxable profit will be available to realize the deferred
tax asset.
Deferred
tax liabilities and deferred tax assets are offset if a right to offset exists, and if they are levied by the same tax authority.
Current
taxes are calculated on the basis of the Company’s taxable earnings for the period. The tax rates applicable to the respective
companies on the balance sheet date are used for this purpose.
Earnings
per share
In
accordance with IAS 33 “Earnings per Share”, earnings per share are calculated by dividing net consolidated income
by the weighted average number of outstanding shares during the year.
Revenue
recognition
The
Company recognizes as revenue all income from product sales and the granting of licenses. The completed customer contracts contain
only one performance obligation each. The Company is entitled to a fixed consideration for the products sold and licenses granted.
To the extent that obligations to take back expired goods have been agreed with customers, Biofrontera only recognizes revenue
to the extent that it is highly probable that it will be possible to realize this amount, taking into account the proportion of
products to be taken back as based on historical experience. The timing and amount of the revenues to be reported in the consolidated
income statement are determined by the extent to which Biofrontera transfers control of the products to be supplied or the rights
to be granted to the customers.
Most
of the revenues are generated by product sales. In accordance with respective local legislation concerning the marketing of pharmaceuticals
and medical products, Ameluz® is sold exclusively through pharmaceutical wholesalers or directly to hospitals in Germany,
as well as directly to pharmacies and hospitals in other European countries. In the U.S., Ameluz® is reimbursed as a so-called
“buy-and-bill drug” and consequently marketed directly to physicians.
Xepi®
is sold directly to specialty pharmacies in the USA. Sales are recognized net of sales deductions when ownership and control are
transferred to the customer. Sales deductions include expected returns, discounts and incentives such as payments made under patient
assistance programs. These rebates are estimated at the time of sale based on the amounts incurred or expected to be received
for the related sales.
Revenue
is recognized when the products are delivered to the respective customers.
In
addition, Biofrontera generates sales revenues within the framework of the research and development cooperation with Maruho Co
Ltd. Revenue is recognized over a specific period of time.
Down
payments received by Biofrontera for the conclusion of license agreements granting customers a right of use are realized on a
point-in-time basis.
In
the case of direct sales of BF-RhodoLED®, the delivered products and services on which amounts are owed are settled only after
complete installation has taken place. The installation service represents a pure ancillary service, as for legal reasons the
lamp may only be used by the customer once it has been installed. In the U.S., some lamps are made available to physicians in
return for a fee for an up to six-month evaluation period. A final decision to purchase does not need to be made until the end
of this period. The Company generated revenues from the monthly fees during the evaluation period, and from the sale of lamps.
Belixos®
is predominantly distributed through Amazon and pharmaceutical wholesalers. Revenue from Amazon sales is recognized after transfer
of control and payment by the customer. For sales to pharmaceutical wholesalers, revenue is recognized upon transfer of control.
Based on experience, return rights granted with the sale through Amazon are exercised by customers only in very few cases.
Revenue
is recognized net of sales-related taxes and sales deductions. For expected sales deductions, such as rebates and discounts, estimated
amounts are taken into account accordingly at the time of revenue recognition. The payment terms for Ameluz® include
short-term payment terms with the possibility of cash discounts.
Cost
of sales
The
cost of sales includes material costs for sold products, payments to third parties for services directly attributable to revenue
generation and product manufacturing, as well as directly attributable personnel expenses and depreciation, as well as proportional
overhead expenditures.
Research
and development expenses
Pursuant
to IAS 38, development costs are recognized as “intangible assets” under certain conditions. Research costs are recognized
as costs as they are incurred. Development costs are capitalized if the criteria of IAS 38.57 are fulfilled depending on the possible
outcome of development activities.
Research
and development costs relating to the drug Ameluz®, which has been approved in Europe and the U.S., and to the Company’s
other research and development projects, are consequently expensed in the period in which they are incurred. Intangible assets
under development relate to the further development of BF-RhodoLED®, as the recognition criteria of IAS 38.57 are fulfilled.
Notes
to the consolidated balance sheet
1.
Intangible and tangible assets
In
the 2020 financial year, impairment losses on tangible assets were recognized in the amount of EUR 0 thousand (previous year:
EUR 527 thousand) and on intangible assets in the amount of EUR 2,001 thousand (previous year: EUR 0 thousand). The impairment
losses on property, plant and equipment in the previous year were included in the cost of sales, and those on intangible assets
are also included in the cost of sales.
The
cost of short-term and low-value leases amounts to EUR 374 thousand (previous year: EUR 386 thousand). The income from a sublease
agreement amounts to EUR 33 thousand (previous year: EUR 34 thousand).
Intangible
assets include the marketing license for Xepi® acquired as part of the acquisition of Cutanea Life Sciences, Inc. on March
25, 2019 in the amount of EUR 16,720 thousand. The acquisition costs of the license amounted to EUR 23,604 thousand translated
at the acquisition date and will be amortized over a useful life of 139 months corresponding to the term of the license agreement.
Biofrontera
uses external and internal sources of information to evaluate at each reporting date whether there are any indications of impairment
or a reversal of impairment.
As
of March 31, 2020, an impairment loss of EUR 2,001 thousand was recognized on the value in use of EUR 21,981 thousand on the license.
Within the framework of the impairment in fiscal year 2020, term-specific cost of capital rates in the range of 8.87% to 9.07%
were used. A change in the expected profits from the sale of Xepi® of +5% (-5%) would result in a change in the impairment
of EUR 1,151 thousand; an increase or decrease in the weighted average cost of capital of 1% would result in a decrease in the
impairment of EUR 1,550 thousand and an increase in the impairment of EUR 1,696 thousand, respectively.
Due
to the COVID-19 pandemic, the planned re-launch to better position Xepi was prevented. The resulting reduced sales of Xepi®
have led to a reassessment of the medium-term business and earnings outlook. As of December 31, 2020, Biofrontera has not identified
any indication for impairment or reversal of impairment.
Tangible
and intangible assets are composed as follows:
Statement
of changes in non-current assets for 2020
in
EUR thousands
|
|
Purchase
and production cost
|
|
|
Accumulated
depreciation and amortization
|
|
|
Carrying
amounts
|
|
|
|
Jan.
01,2020
|
|
|
Currency
translation
|
|
|
Additions
|
|
|
Disposals
|
|
|
Dec.
31, 2020
|
|
|
Jan.
01, 2020
|
|
|
Currency
translation
|
|
|
Additions
|
|
|
Disposals
|
|
|
Dec.
31, 2020
|
|
|
Dec.
31, 2020
|
|
|
Jan.
01, 2020
|
|
Tangible
assets and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and business equipment
|
|
|
3,647
|
|
|
|
(46
|
)
|
|
|
548
|
|
|
|
(191
|
)
|
|
|
3,958
|
|
|
|
(2,492
|
)
|
|
|
18
|
|
|
|
(276
|
)
|
|
|
176
|
|
|
|
(2,574
|
)
|
|
|
1,385
|
|
|
|
1,155
|
|
Right-of-use
leasing properties
|
|
|
3,560
|
|
|
|
-
|
|
|
|
653
|
|
|
|
-
|
|
|
|
4,213
|
|
|
|
(505
|
)
|
|
|
-
|
|
|
|
(722
|
)
|
|
|
-
|
|
|
|
(1,227
|
)
|
|
|
2,986
|
|
|
|
3,055
|
|
Right-of-use
leasing tangible assets
|
|
|
1,612
|
|
|
|
-
|
|
|
|
166
|
|
|
|
-
|
|
|
|
1,778
|
|
|
|
(592
|
)
|
|
|
-
|
|
|
|
(505
|
)
|
|
|
-
|
|
|
|
(1,098
|
)
|
|
|
681
|
|
|
|
1,020
|
|
|
|
|
8,819
|
|
|
|
(46
|
)
|
|
|
1,367
|
|
|
|
(191
|
)
|
|
|
9,949
|
|
|
|
(3,589
|
)
|
|
|
18
|
|
|
|
(1,503
|
)
|
|
|
176
|
|
|
|
(4,898
|
)
|
|
|
5,051
|
|
|
|
5,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
and licenses
|
|
|
206
|
|
|
|
(2
|
)
|
|
|
25
|
|
|
|
(1
|
)
|
|
|
227
|
|
|
|
(190
|
)
|
|
|
2
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
|
(201
|
)
|
|
|
27
|
|
|
|
16
|
|
Right-of-use
assets
|
|
|
24,474
|
|
|
|
(2,138
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
22,336
|
|
|
|
(2,356
|
)
|
|
|
582
|
|
|
|
(3,816
|
)
|
|
|
-
|
|
|
|
(5,590
|
)
|
|
|
16,746
|
|
|
|
22,118
|
|
Intangible
assets under development
|
|
|
715
|
|
|
|
-
|
|
|
|
201
|
|
|
|
-
|
|
|
|
916
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
916
|
|
|
|
715
|
|
|
|
|
25,395
|
|
|
|
(2,140
|
)
|
|
|
226
|
|
|
|
(1
|
)
|
|
|
23,480
|
|
|
|
(2,546
|
)
|
|
|
584
|
|
|
|
(3,830
|
)
|
|
|
1
|
|
|
|
(5,791
|
)
|
|
|
17,689
|
|
|
|
22,849
|
|
|
|
|
34,214
|
|
|
|
(2,185
|
)
|
|
|
1,593
|
|
|
|
(193
|
)
|
|
|
33,429
|
|
|
|
(6,135
|
)
|
|
|
601
|
|
|
|
(5,333
|
)
|
|
|
177
|
|
|
|
(10,689
|
)
|
|
|
22,740
|
|
|
|
28,079
|
|
Statement
of changes in non-current assets for 2019
in
EUR thousands
|
|
Purchase
and production cost
|
|
|
Accumulated
depreciation and amortization
|
|
|
Carrying
amounts
|
|
|
|
Jan
01, 2019
|
|
|
Currency
translation
|
|
|
Additions
|
|
|
Change
of
consolidation
group
|
|
|
Disposals
|
|
|
Dec.
31, 2019
|
|
|
Jan.
01, 2019
|
|
|
Currency
translation
|
|
|
Additions
|
|
|
Disposals
|
|
|
Dec.
31, 2019
|
|
|
Dec.
31, 2019
|
|
|
Jan.
01, 2019
|
|
Tangible
assets and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and business equipment
|
|
|
4,104
|
|
|
|
2
|
|
|
|
1,294
|
|
|
|
1,340
|
|
|
|
(3,093
|
)
|
|
|
3,647
|
|
|
|
(3,309
|
)
|
|
|
(1
|
)
|
|
|
(482
|
)
|
|
|
1,300
|
|
|
|
(2,492
|
)
|
|
|
1,155
|
|
|
|
795
|
|
Right-of-use
leasing properties
|
|
|
1,768
|
|
|
|
-
|
|
|
|
1,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,560
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(505
|
)
|
|
|
-
|
|
|
|
(505
|
)
|
|
|
3,055
|
|
|
|
1,768
|
|
Right-of-use
leasing tangible assets
|
|
|
567
|
|
|
|
-
|
|
|
|
1,045
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,612
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(592
|
)
|
|
|
-
|
|
|
|
(592
|
)
|
|
|
1,020
|
|
|
|
567
|
|
|
|
|
6,439
|
|
|
|
2
|
|
|
|
4,131
|
|
|
|
1,340
|
|
|
|
(3,093
|
)
|
|
|
8,819
|
|
|
|
(3,309
|
)
|
|
|
(1
|
)
|
|
|
(1,579
|
)
|
|
|
1,300
|
|
|
|
(3,589
|
)
|
|
|
5,230
|
|
|
|
3,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
and licenses
|
|
|
446
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
(260
|
)
|
|
|
206
|
|
|
|
(427
|
)
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
258
|
|
|
|
(190
|
)
|
|
|
16
|
|
|
|
19
|
|
Right-of-use-assets
|
|
|
1,101
|
|
|
|
(69
|
)
|
|
|
92
|
|
|
|
23,604
|
|
|
|
(254
|
)
|
|
|
24,474
|
|
|
|
(1,035
|
)
|
|
|
5
|
|
|
|
(1,556
|
)
|
|
|
230
|
|
|
|
(2,356
|
)
|
|
|
22,118
|
|
|
|
66
|
|
Intangible
asset under development
|
|
|
267
|
|
|
|
-
|
|
|
|
448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
715
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
715
|
|
|
|
267
|
|
|
|
|
1,814
|
|
|
|
(69
|
)
|
|
|
560
|
|
|
|
23,604
|
|
|
|
(514
|
)
|
|
|
25,395
|
|
|
|
(1,462
|
)
|
|
|
5
|
|
|
|
(1,577
|
)
|
|
|
488
|
|
|
|
(2,546
|
)
|
|
|
22,849
|
|
|
|
352
|
|
|
|
|
8,253
|
|
|
|
(67
|
)
|
|
|
4,691
|
|
|
|
24,944
|
|
|
|
(3,607
|
)
|
|
|
34,214
|
|
|
|
(4,771
|
)
|
|
|
4
|
|
|
|
(3,156
|
)
|
|
|
1,788
|
|
|
|
(6,135
|
)
|
|
|
28,079
|
|
|
|
3,482
|
|
2.
Inventories
in EUR thousands
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Raw materials
|
|
|
1,557
|
|
|
|
893
|
|
Unfinished goods
|
|
|
390
|
|
|
|
201
|
|
Finished goods and products
|
|
|
2,727
|
|
|
|
2,971
|
|
Total
|
|
|
4,673
|
|
|
|
4,065
|
|
In
2020, inventories were written down by EUR 414 thousand (previous year: EUR 24 thousand).
The
finished goods and products include PDT lamps that are made available to doctors for a fee within the framework of a 6-month evaluation
phase of EUR 145 thousand (previous year: EUR 89 thousand).
3.
Trade receivables
Trade
receivables are mainly attributable to the sale of Ameluz®, the PDT lamp BF-RhodoLED®, Xepi® and the medical cosmetics
product Belixos®. It is expected that all trade receivables will be settled within twelve months of the balance sheet date.
Allowances
for doubtful accounts were made in the amount of EUR 36 thousand (previous year: EUR 43 thousand). As in the previous year, there
were no outstanding receivables on the balance sheet closing date that were not value-adjusted.
Of
the receivables, EUR 100 thousand (previous year: EUR 178 thousand) are attributable to finance leases for PDT-lamps.
4.
Other financial assets
Other
financial assets comprise mainly prepayments rendered for studies (EUR 220 thousand; previous year: EUR 359 thousand) and the
depositing of collateral, mainly for leasing property, credit cards and leasing vehicles in the amount of EUR 267 thousand (previous
year: EUR 300 thousand). As in the previous year, no individual value impairments were applied during the reporting year.
5.
Other assets
Other
assets mainly comprise of accruals and deferrals (EUR 817 thousand; previous year: EUR 1,113 thousand).
As
in the previous year, no individual value impairments were applied during the reporting year.
6.
Income tax
Income
tax reimbursement claims consist of claims for tax refunds relating to withheld capital gains tax, plus the Solidarity Surcharge
of EUR 5 thousand (previous year: EUR 4 thousand). Income tax liabilities relate to current income tax liabilities for fiscal
year 2020 in the amount of EUR 0 thousand (previous year: 11 thousand).
7.
Cash and cash equivalents
Cash
and cash equivalents relate to cash in hand, cheques, bank deposits and money deposits with a term of up to three months at the
time of acquisition amounting to a total of EUR 16,546 thousand (previous year: EUR 11,119 thousand).
8.
Deferred income tax
Deferred
tax assets amount to EUR 7,525 thousand (previous year: EUR 7,794 thousand) and relate to the deferred tax assets on losses carried
forward for Biofrontera Pharma GmbH.
The
reduction in deferred tax assets results from the use of the tax loss carryforwards of Biofrontera Pharma GmbH in the amount of
EUR 269 thousand (previous year: EUR 256 thousand). In the previous year, there was also a reduction in the trade tax rate of
the city of Leverkusen with effect of January 1, 2020 in the amount of EUR 2,350 thousand.
The
subsidiary Biofrontera Pharma GmbH has generated profits in the fiscal years 2019 and 2020 and it can be assumed that Biofrontera
Pharma GmbH will continue to generate positive results in the future and thereby utilize its tax loss carryforwards.
Further
deferred income tax on loss carryforwards incurred at Biofrontera AG in the amount of EUR 74 thousand (previous year: EUR 153
thousand) and at Biofrontera Inc. in the amount of EUR 0 (previous year: EUR 533 thousand) were capitalized to the extent that
they are offset by deferred tax liabilities in the same amount.
The
following table explains the generally existing deferred tax assets from tax loss carryforwards that have developed within the
Group:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
in EUR thousands
|
|
Loss carried
forward
|
|
|
Deferred
tax assets
|
|
|
Loss carried
forward
|
|
|
Deferred
tax assets
|
|
Corporation tax including Solidarity Surcharge
|
|
|
134,606
|
|
|
|
21,301
|
|
|
|
135,415
|
|
|
|
21,436
|
|
Business tax
|
|
|
118,599
|
|
|
|
10,377
|
|
|
|
120,692
|
|
|
|
10,561
|
|
U.S. corporation tax
|
|
|
32,172
|
|
|
|
8,365
|
|
|
|
23,616
|
|
|
|
6,140
|
|
Total
|
|
|
|
|
|
|
40,044
|
|
|
|
|
|
|
|
38,137
|
|
These
loss carryforwards have an unlimited carryforward period under current German law. In the USA, tax loss carryforwards can be carried
forward for 20 years when occurred until December 31, 2017 in the amount of EUR 8,595 thousand, and indefinitely when occurred
from January 1, 2018 in the amount of EUR 23,577 thousand (previous year: EUR 15,021 thousand).
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
in EUR thousands
|
|
Deferred tax assets
|
|
|
Deferred tax liabilities
|
|
|
Deferred tax assets
|
|
|
Deferred tax liabilities
|
|
Loss carried forward
|
|
|
7,824
|
|
|
|
-
|
|
|
|
8,568
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Intangible assets
|
|
|
789
|
|
|
|
(656
|
)
|
|
|
-
|
|
|
|
(620
|
)
|
-Tangible assets
|
|
|
-
|
|
|
|
(980
|
)
|
|
|
-
|
|
|
|
(1,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Receivables and other assets
|
|
|
15
|
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current and current financial liabilities
|
|
|
812
|
|
|
|
-
|
|
|
|
859
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Liabilities and other
|
|
|
-
|
|
|
|
(279
|
)
|
|
|
-
|
|
|
|
(54
|
)
|
Total
|
|
|
9,440
|
|
|
|
(1,915
|
)
|
|
|
9,470
|
|
|
|
(1,676
|
)
|
Netting of deferred tax assets and liabilities
|
|
|
(1,915
|
)
|
|
|
1,915
|
|
|
|
(1,676
|
)
|
|
|
1,676
|
|
As recognized on balance sheet
|
|
|
7,525
|
|
|
|
-
|
|
|
|
7,794
|
|
|
|
-
|
|
Deferred
taxes on losses carried forward are capitalized to the extent that there is substantial evidence that it is probable that future
taxable profit will be available against which the loss carryforwards can be utilized or if there is an equivalent level of deferred
tax liabilities. Due to the lack of predictability regarding future taxable profits with consideration of the loss history, the
remaining deferred tax assets deriving from loss carryforwards in the amount of EUR 32,220 thousand (previous year: EUR 29,569
thousand) and deferred tax assets in the amount of EUR 1,812 thousand (previous year: EUR 2,000 thousand) were not recognized
on the balance sheet, in accordance with IAS 12.34.
The
following provides a reconciliation between expected and actual reported income tax expense, with the output value being based
on the income tax rate of 24,575% (previous year: 32,45%) currently applicable to the Biofrontera Group.