UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

[  ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

For the transition period from                    to

 

Commission file number 001-38396

 

BIOFRONTERA AG

(Exact name of Registrant as specified in its charter)

 

 

(Translation of Registrant’s name into English)

 

Germany

(Jurisdiction of incorporation or organization)

 

Hemmelrather Weg 201

D-51377 Leverkusen Germany

Telephone: +49 (0)214 876 32-0

(Address of principal executive office)

 

Ludwig Lutter

Chief Financial Officer

Biofrontera AG

Hemmelrather Weg 201

D-51377 Leverkusen, Germany

Tel: +49 (0)214 873 3200, Fax: +49 (0)214 876 32-27

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing two

ordinary shares, nominal value €1.00 per share

  The NASDAQ Capital Market
Ordinary shares, nominal value €1.00 per share*   The NASDAQ Capital Market

 

* Not for trading, but only in connection with the registration of the American Depositary Shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

 

Indicate the number of outstanding shares of each of the issuer’s class of capital or common stock as of the close of the period covered by the annual report.

 

Ordinary shares, nominal value €1.00 per share: 47,747,515 as of December 31, 2020

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

If this report is an annual or transition report, indicate by check mark, if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes [  ] No [X]

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer [  ] Emerging Growth Company [X]

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [  ]

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP [  ]  

International Financial Reporting Standards as issued

by the International Accounting Standards Board [X]

  Other [  ]

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 [  ] Item 18 [  ]

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [  ] Yes [  ] No

 

 

 

 
 

 

TABLE OF CONTENTS

 

      PAGE
INTRODUCTION i
     
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ii
       
PART I      
       
Item 1.   Identity of Directors, Senior Management and Advisers 1
       
Item 2.   Offer Statistics and Expected Timetable 1
       
Item 3.   Key Information 1
       
Item 4.   Information on the Company 42
       
Item 4A.   Unresolved Staff Comments 68
       
Item 5.   Operating and Financial Review and Prospects 68
       
Item 6.   Directors, Senior Management and Employees 91
       
Item 7.   Major Shareholders and Related Party Transactions 106
       
Item 8.   Financial Information 110
       
Item 9.   The Offer and Listing 114
       
Item 10.   Additional Information 115
       
Item 11.   Quantitative and Qualitative Disclosures About Market Risk 126
       
Item 12.   Description of Securities Other than Equity Securities 128
       
PART II      
       
Item 13.   Defaults, Dividend Arrearages and Delinquencies 129
       
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds 130
       
Item 15.   Controls and Procedures 130
       
Item 16.   Reserved 131
       
Item 16A.   Audit Committee Financial Expert 131
       
Item 16B.   Code of Ethics 131
       
Item 16C.   Principal Accountant Fees and Services 131
       
Item 16D.   Exemptions from the Listing Standards for Audit Committees 132
       
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers 132
       
Item 16F.   Change in Registrant’s Certifying Accountant 132
       
Item 16G.   Corporate Governance 132
       
Item 16H.   Mine Safety Disclosure 134
       
PART III      
       
Item 17.   Financial Statements 135
       
Item 18.   Financial Statements 135
       
Item 19.   Exhibits 135

 

 
 

 

INTRODUCTION

 

Unless otherwise indicated, all references in this annual report to “Biofrontera”, “we”, “us”, or “company” refer to Biofrontera AG and its consolidated subsidiaries, Biofrontera Pharma GmbH, Biofrontera Bioscience GmbH, Biofrontera Neuroscience GmbH, Biofrontera Development GmbH and Biofrontera Inc. References in this annual report to “Maruho” refer to Maruho Co., Ltd., and references to “Maruho Deutschland” refer to Maruho Deutschland GmbH, Maruho’s wholly owned subsidiary. References in this annual report to “Cutanea” refer to “Cutanea Life Sciences, Inc.” and its then-wholly owned subsidiaries Demarc LLC and Dermapex LLC.

 

TRADEMARKS

 

We own or have rights to trademarks and trade names that we use in connection with the operation of our business, including our corporate name, logos, product names and website names. Other trademarks and trade names appearing in this annual report are the property of their respective owners. Solely for your convenience, some of the trademarks and trade names referred to in this annual report are listed without the ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor, to our trademarks and trade names.

 

PRESENTATION OF FINANCIAL INFORMATION

 

Unless otherwise indicated, the consolidated financial statements and related notes included in this annual report have been presented in euros, or €, and have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. None of the consolidated financial statements in this annual report were prepared in accordance with United States generally accepted accounting principles. For any of our subsidiaries that use a functional currency that is not euros, the assets and liabilities have been translated at the closing exchange rate as of the relevant balance sheet date (twelve months ended December 31, 2020: 1.2230 U.S. dollars to 1 euro; December 31, 2019: 1.1227 U.S. dollars to 1 euro; December 31, 2018: 1.1455 U.S. dollars to 1 euro), while the income and expenses have been translated at the average exchange rates (twelve months ended December 31, 2020: 1.1410 U.S. dollars to 1 euro; December 31, 2019: 1.1194 U.S. dollars to 1 euro; December 31, 2018: 1.1818 U.S. dollars to 1 euro) applicable to the relevant period. 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. Transactions realized in currencies other than euros 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 arising from such currency translations are recognized in income. See “Summary of Significant Accounting Policies — Translation of Amounts in Foreign Currencies” in the notes to our consolidated financial statements included elsewhere in this annual report for more information.

 

i

 

 

Certain information in this annual report is expressed in U.S. dollars. The noon buying rate of the Federal Reserve Bank of New York for the euro on March 31, 2021 was €1.00 to $0.9574. We make no representation that the euro or U.S. dollar amounts referred to in this annual report could have been converted into U.S. dollars or euros, as the case may be, at any particular rate or at all. See “Item 3.D. Key Information—Risk Factors — Our international operations may pose currency risks, which may adversely affect our operating results and net income.” All references in this annual report to “$,” “US$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “€” and “euros,” mean euros, unless otherwise noted. Throughout this annual report, references to ADSs mean American Depositary Shares or ordinary shares represented by ADSs, as the case may be.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report includes forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, in this annual report, including statements regarding our strategy, future operations, regulatory process, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. The words “believe”, “anticipate”, “intend”, “expect”, “target”, “goal”, “estimate”, “plan”, “assume”, “may”, “will”, “predict”, “project”, “would”, “could” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

You should read this annual report and the documents that we have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. While we have based these forward-looking statements on our current expectations and projections about future events, we may not actually achieve the plans, intentions or expectations disclosed in or implied by our forward-looking statements, and you should not place undue reliance on our forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions about us and accordingly, actual results or events could differ materially from the plans, intentions and expectations disclosed in or implied by the forward-looking statements we make. Factors that could cause such differences include, but are not limited to:

 

  our ability to achieve and sustain profitability;
     
  our ability to compete effectively in selling our products;
     
  our ability to expand, manage and maintain our direct sales and marketing organizations;
     
  our actual financial results may vary significantly from forecasts and from period to period;
     
  our estimates regarding anticipated operating losses, future revenues, capital requirements and our needs for additional financing;
     
  market risks regarding consolidation in the healthcare industry;
     
 

the willingness of healthcare providers to purchase our products if coverage, reimbursement and pricing from third-party payors for procedures using our products significantly declines;

 

  our ability to adequately protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
     
  our ability to market, commercialize, achieve market acceptance for and sell our products and product candidates;
     
  the regulatory and legal risks, and certain operating risks, that our international operations subject us to;
     
  the fact that product quality issues or product defects may harm our business;
     
  any product liability claims;

 

ii

 

 

  the progress, timing and completion of our research, development and preclinical studies and clinical trials for our products and product candidates;
     
  our expectations regarding the merits and outcomes of pending or threatened litigation including the lawsuit brought by DUSA Pharmaceuticals, Inc. (“DUSA”) against us before the District Court of Massachusetts claiming patent infringement, trade secret misappropriation, tortious interference with contractual relations and deceptive and unfair trade practices;
     
  the outbreak and impacts of the novel coronavirus (“COVID-19”) on the global economy and our business; and
     
  those risks listed in the sections of this annual report entitled “Risk Factors” and “Operating and Financial Review and Prospects” and elsewhere in this annual report.

 

Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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.

 

1

 

 

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

 

  The COVID-19 global pandemic has continued to negatively affect our sales and operations and may continue to do so.
  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.

 

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.
  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.
  Healthcare legislative changes may have a material adverse effect on our business and results of operations.
  To date, we have a relatively short history of sales of our products, primarily in Germany, and Spain and, in the United. States.
  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.
  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.
  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 U.S. market size for Ameluz® for the treatment of actinic keratosis may be smaller than we have estimated.
  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.
  If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.

 

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.

 

2

 

 

  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.

 

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.
  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.

 

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.
  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.
  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.

 

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.
  We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our ADSs less attractive to investors.
  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.
  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.
  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.
  Your rights as a shareholder in a German corporation may differ from your rights as a shareholder in a U.S. corporation.
  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.
  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.
  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.

 

3

 

 

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:

 

● delays, difficulties or postponement in enrolling and retaining patients in our clinical trials;

● 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;

● delays, difficulties or postponement in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

● diversion of healthcare resources away from the conduct of clinical trials unrelated to infectious diseases;

● interruption 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

● 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.

 

4

 

 

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:

 

  the timing, costs and results of clinical trials for our product Ameluz® or other products or potential products;
     
  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;
     
  the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or other litigation;
     
  the effects of competing technological and market developments;
     
  the cost and timing of completion of commercial-scale manufacturing activities;
     
  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
     
  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.

 

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.

 

5

 

 

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:

 

  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;
     
  increasing our vulnerability to adverse changes in general economic, industry and market conditions;
     
  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;
     
  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
     
  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.

 

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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:

 

● a covered benefit under its health plan;

 

● safe, effective and medically necessary;

 

● reasonable and appropriate for the specific patient;

 

● cost-effective; and

 

● 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.

 

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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.

 

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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:

 

  the demand for products, or for our product candidates, if we obtain regulatory approvals for them;
     
  our ability to set a price or obtain reimbursement that we believe is fair for our products;
     
  our ability to generate revenues and achieve or maintain profitability; and
     
  the level of taxes that we are required to pay.

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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.

 

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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:

 

  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;
     
  the potential and perceived advantages of our product candidates over alternative products or therapies;

 

  relative convenience and ease of administration;
     
  the effectiveness and compliance of our sales and marketing efforts;
     
  acceptance by major operators of hospitals, physicians and patients of our products or candidates as a safe and effective treatment;
     
  the prevalence and severity of any side effects;
     
  product labeling or product insert requirements of the FDA or other regulatory authorities;
     
  any Risk Evaluation and Mitigation Strategy that the FDA might require for our drug product candidates;
     
  the timing of market introduction of our products and product candidates as well as competitive products;
     
  the perceived advantages of our products over alternative treatments;
     
  the cost of treatment in relation to alternative products; and
     
  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.

 

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.

 

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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.

 

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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:

 

  product design and development;
     
  pre-clinical and clinical testing and trials;
     
  product safety;
     
  establishment registration and product listing;
     
  distribution;
     
  labeling, manufacturing and storage;
     
  pre-market clearance or approval;
     
  advertising and promotion;
     
  marketing, manufacturing, sales and distribution;
     
  relationships and communications with health care providers;
     
  adverse event reporting;

 

  market exclusivity;
     
  servicing and post-market surveillance; and
     
  recalls and field safety corrective actions.

 

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.

 

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The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

  our inability to demonstrate that our products are safe and effective for their intended uses or substantially equivalent to a predicate device;
     
  the data from our clinical trials may not be sufficient to support clearance or approval; and
     
  the manufacturing process or facilities we use may not meet applicable requirements.

 

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.

 

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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.

 

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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:

 

  identifying, recruiting, integrating, maintaining and motivating existing or additional employees;
     
  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
     
  improving our operational, financial and management controls, reporting systems and procedures.

 

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.

 

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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:

 

  differing regulatory requirements in foreign countries;
     
  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;
     
  unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
     
  economic weakness, including inflation, or political instability in particular foreign economies and markets;
     
  compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
     
  foreign taxes, including withholding of payroll taxes;
     
  foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
     
  difficulties staffing and managing foreign operations;
     
  workforce uncertainty in countries where labor unrest is more common than in Germany or the U.S.;
     
  potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;
     
  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.;

 

  production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
     
  business interruptions resulting from geo-political actions, including war and terrorism.

 

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.

 

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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:

 

  costs to defend litigation and other proceedings;
     
  a diversion of management’s time and our resources;
     
  decreased demand for our products;
     
  injury to our reputation;
     
  withdrawal of clinical trial participants;
     
  initiation of investigations by regulators;
     
  product recalls, withdrawals or labeling, marketing or promotional restrictions;
     
  loss of revenue;

 

  substantial monetary awards to trial participants or patients;
     
  exhaustion of any available insurance and our capital resources;
     
  the inability to commercialize our products; and
     
  a decline in our share or ADS price.

 

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.

 

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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.

 

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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:

 

  successful completion of further clinical trials;
     
  receipt of further regulatory approvals, including for the marketing of Ameluz® for additional indications and/or in additional countries;
     
  obtaining adequate reimbursement from governments and other third-party payors for Ameluz®;
     
  maintaining regulatory compliance for our contract manufacturing facility and sales force;
     
  manufacturing sufficient quantities in acceptable quality;

 

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  achieving meaningful commercial sales of our products;
     
  sourcing sufficient quantities of raw materials used to manufacture our products;
     
  successfully competing with other products;
     
  continued acceptable safety and effectiveness profiles for our products following regulatory approval and marketing;
     
  obtaining and maintaining patent and trade secret protection and regulatory exclusivity; and
     
  protecting our intellectual property rights.

 

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:

 

  maintaining and extending U.S., EU and/or other foreign regulatory approvals for our products;
     
  manufacturing commercial quantities of our products at acceptable costs;
     
  successfully commercializing our products, and
     
  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.

 

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:

 

  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;
     
  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;
     
  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;
     
  the cost of clinical trials for our products and product candidates may be greater than we anticipate;
     
  changes in government regulation or administrative actions may occur;
     
  the supply of materials necessary to conduct clinical trials of our products and product candidates may be insufficient or inadequate; and
     
  our products and product candidates may have undesirable adverse effects or other unexpected characteristics.

 

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:

 

  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;
     
  mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
     
  require us or our potential future collaborators to enter into a consent decree or permanent injunction;
     
  impose other administrative or judicial civil or criminal actions, including monetary or other penalties, or pursue criminal prosecution;
     
  withdraw regulatory approval;
     
  refuse to approve pending applications or supplements to approved applications filed by us or by our potential future collaborators;
     
  impose restrictions on operations, including costly new manufacturing requirements; or
     
  seize or detain products.

 

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.

 

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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:

 

  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;
     
  changes in a specific country’s or region’s political and cultural climate or economic condition;
     
  differing requirements for regulatory approvals and marketing internationally;
     
  difficulty of effective enforcement of contractual provisions in local jurisdictions;
     
  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;
     
  unexpected changes in tariffs, trade barriers and regulatory requirements;
     
  economic weakness, including inflation, or political instability;
     
  compliance with tax, employment, immigration and labor laws for employees traveling abroad;
     
  the effects of applicable foreign tax structures and potentially adverse tax consequences;
     
  foreign currency fluctuations, which could result in increased operating expenses and reduced revenue and other obligations incidental to doing business in another country;
     
  workforce uncertainty in countries where labor unrest is more common than in the U.S. or Germany;
     
  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;
     
  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;
     
  production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
     
  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.

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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.

 

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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.

 

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:

 

  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.
     
  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.
     
  By subscribing or purchasing ADSs an investor will not become a shareholder of the Company.

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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”.

 

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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:

 

  geographic expansion of Ameluz® sales worldwide, including by:

 

  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;

 

  expanding our sales of Ameluz® in other countries where it is an approved product by entering into arrangements with distribution partners;

 

  extension of the approved indications for Ameluz® photodynamic therapy, including by:

 

  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;
     
  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;
     
  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;
     
  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

 

  expanding our sales of Xepi® in the United States for treatment of impetigo by improving the market positioning of the product.

 

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:

 

  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
  the second step is activation of the photosensitizer by controlled exposure to a selective light source in the presence of oxygen.

 

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.

 

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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:

 

  the desired depth of penetration of the light into the target tissue; and
  the efficiency of the light in activating the photosensitizer.

 

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.

 

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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.

 

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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®.

 

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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.

 

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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.

 

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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.

 

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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:

 

  the efficacy from treatment with Ameluz® photodynamic therapy;
     
  the recurrence rates from treatment with Ameluz® photodynamic therapy;
     
  the ease of administration of our formulation for photodynamic therapy;
     
  the ability of our drug to provide both lesion- and field-directed treatment;
     
  the cost of our drug and the type and cost of our photodynamic therapy light device;
     
  the number of required doses;
     
  the cosmetic outcome and improvement of skin impairment; and
     
  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

 

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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);

 

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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®.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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:

 

  establishing establishment registration and device listings with the FDA;
     
  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;

 

  labeling statutes and regulations, which prohibit the promotion of products for uncleared or unapproved, or off-label, uses and impose other restrictions on labeling;
     
  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;
     
  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;
     
  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
     
  post-approval restrictions or conditions, including requirements to conduct post-market surveillance studies to establish additional safety or efficacy data.

 

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:

 

  untitled letters or warning letters;
     
  fines, injunctions, consent decrees and civil penalties;
     
  recall, detention or seizure of our products;
     
  operating restrictions, partial suspension or total shutdown of production;
     
  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;
     
  refusal to grant export approval for our products;
     
  criminal prosecution; and
     
  unanticipated expenditures to address or defend such actions.

 

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:

 

  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.
     
  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.
     
  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.
     
  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.

 

  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.
     
  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.
     
  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.

 

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:

 

  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.

 

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.

 

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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.

 

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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:

 

  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;
     
  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;
     
  federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
     
  federal Civil Monetary Penalties Law that prohibits various forms of fraud and abuse involving the Medicare and Medicaid programs;

 

  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;
     
  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
     
  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.

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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

 

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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.

 

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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.

 

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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.

 

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General and administrative expenses

 

General and Administrative Expenses
    Fiscal Year ended
December 31,
    Increase (decrease)  
    2020     2019     Amount     Percentage  
      € thousands (except percentages)